NGL Prices

[dan_s]

Midstream Energy: NGL Outlook: Presentation Summary
Tom Abrams – Morgan Stanley
September 22, 2016 12:32 PM GMT

NGL Outlook: Presentation Summary

Peter Fasullo of En*Vantage offered an update of the NGL
cycle with a focus on ethane and propane. Near-term negatives
from inventories and depressed exports; longer-term positives
from growing petchem demand and export capacities.

While Mr. Fasullo continues to see stronger NGL markets later this decade, his
commentary was more cautious overall than six months ago. Ethane continues
to have the best supply/demand outlook because of new petchem demand and
the need for prices to rise to attract those molecules to market. Ethane
inventories are a near-term issue. Propane's outlook is more balanced with a
plateau of supply and additional domestic PDH demand expected to be met with
reduced swing demand from exports should prices rise too aggressively. Propane
inventories are also relatively high and export volumes are flagging in the third
quarter leaving current fundamentals soft. If gas strengthens this winter more
than crude, margins for processors will likely remain challenged.

Ethane should rebalance in 2018-2020 with upward pressure on pricing.
Increased ethane extraction in 2Q16 combined with high ethylene plant outages,
drove U.S. ethane inventories to record levels. Mr. Fasullo believes ethane
extraction capacity will peak in 2017, while new ethane crackers and additional
exports increasing ethane demand significantly by 2019. Project delays and
operational issues are important variables in the outlook. Mr. Fasullo sees
ethane pricing at a $0.25-$0.30/gallon premium to the equivalent pricing for gas
to incentivize needed ethane extraction later this decade.

For propane, the picture is less clear. Propane export economics are challenged,
and export volumes have declined recently with some cargo cancellations to the
important Asian market. Mr. Fasullo believes normal winter draws coupled with
healthy exports would be necessary to avoid high inventories next spring.

Further, a cold winter in the US would need to be matched with a cold winter in
Asia and Europe to prevent compression of the export spread. In the long-term,
Mr. Fasullo sees slack between propane supply and demand. He expects supply
to plateau in 2017 and additional PDH demand still leaving propane available for
export. Pricing should be capped as a result so as to maintain exports.

With the supply push story for NGLs fading, impacts for midstream favor
integrated operators over G&Ps. Mr. Fasullo sees producers more selective with
long-term commitments and new processing plants. He doesn't see many new
long haul NGL pipelines or additional fractionation absent higher crude prices.
Stocks with NGL exposure include Overweight rated OKE, Equal-weight rated
OKS, EPD, TRGP and MPLX, and Underweight rated DPM.
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I do not expect NGL prices to get back to where they were in 2014, but we've definitely seen the low for this cycle. For example, SM Energy averaged $33.81/bbl for their NGLS in 2014. In the first quarter of 2016 they averaged $13.54/bbl. In Q2 they averaged $15.61/bbl. For SM, I am forecasting NGLs at $18.00/bbl in Q4 and $20.00/bbl in 2017. A cold winter could push prices higher in 2017. - Dan

[dan_s]

Wall Street starting to see what's coming: Stifel (9-22-2016): "For Henry Hub, we are raising our 4Q16 to 4Q17 outlook by $0.25/MMBtu and, in turn, are raising our FY17 average price to $3.35/MMBtu from $3.10/MMBtu."

All of my forecast models assume $3.25/MMBtu for 2017.