Professional Documents
Culture Documents
bfollowill@tudorpickering.com
(713) 333-2995
Dave Pursell
dpursell@tudorpickering.com
(713) 333-2962
Anson Williams
awilliams@tudorpickering.com
(713) 333-2951
2
Part I – An Overview
Frequently overlooked, the midstream industry is
a critical link to turn raw natural gas into usable
Midstream Overview products.
Natural gas is comprised of two parts - a light gas
component and a heavier liquids component. The
light gas consists of methane, while the liquids
Dry or
Marketable consist of ethane, propane, n-butane, iso-butane
Gas and natural gasoline. These natural gas liquids
(NGLs) are used in the petrochemical industry, as
Processing refinery blend-stock, in home heating, and in
Interstate
Wet Gas Plant
Pipelines many other common applications.
Gathering
Onshore and Most wellhead gas does not meet the quality
Offshore Wells Raw NGL standards required by interstate pipelines, so it
Mix must be processed, removing contaminates and
Petrochemical
the heavier components (propane+).
Industry
Normal Butane After the NGLs and contaminants are removed,
what’s left is marketable gas (or dry gas),
Isobutane
consisting of methane with some ethane. That
Ethane Refineries gas is then ready to be delivered to interstate gas
Fractionator Propane pipelines.
Natural gasoline The raw NGLs are then sent to large fractionators
Finished NGLs to break the stream into usable components
(ethane, propane, etc.).
Industrial/
Heating
The typical NGL “barrel” looks like this: We stress: propanes and heavier components
(propanes+), make up ~60% of the NGL stream, and
have to come out of the wet gas produced from the
wellhead. Pipeline specs mandate it.
4
What Drives Midstream Economics?
Commodity
There are lots of ways to make money
Contract Structure Sensitive? through the midstream value chain.
While most are fee-based, processing is
Gathering Fee N usually commodity sensitive.
Processing Fee N Since processing involves converting
Keep Whole Y
MMBtus from a gaseous form to a combo
of liquids and gas, non fee-based
Percent of Proceeds Y processing economics are dictated by the
spread between the price of gas and the
Raw NGL Pipelines Fee N
price of NGLs (the “frac spread”).
Finished NGL Pipelines Fee N
Fractionation Fee N
Low gas prices/High NGL prices =
Favorable processing economics
Storage Fee N (Btus worth more taken out of gas stream)
5
Frac Spreads – The Midstream Economic Bellweather
Gulf Coast Frac Spread (45% Ethane)
Frac spreads, like refiners’ crack
$12
$10
spreads or power producers’ spark
$8
2008
spreads, are a measure of gross margin.
$6 It is the delta between the cost of gas
7-yr High
(processing input) and its value in NGL
$/mmbtu
$4
($6)
7-yr Low
These spreads are an industry
n b ar r ay n Ju
l g pt t v c bellweather when watching processing
Ja Fe Ap Ju Au Se Oc No De
economics.
M M
00
01
02
03
04
05
06
07
08
19
20
20
20
20
20
20
20
20
20
$/mmbtu
650
Mbpd
$4
600 Gas supply then increases, gas
$2
550
$0
prices go down, feedstock becomes
500
450 Cold winter and
Gas price spikes
following -$2
cheaper, and markets correct.
gas price spike Katrina/Rita
400 -$4
If frac spreads go negative, most
processors have “conditioning
9
8
9
0
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ethane Production Monthly Average Frac Spread language,” which allows them to at
least cover costs.
Source: EIA/DOE, Tudor, Pickering, Holt & Co.
7
Market for Processing is Self-Correcting
Fewer
NGL prices
NGLs are
increase
processed
Ethane economic
Gas supply decreases to process – more
ethane produced
Imports
10%
Petrochemicals
Gasoline 55%
Gas blending
processing 25%
73%
Top U.S. Gas Processors The table to the left shows the major U.S. gas
Processing
processors. Gas processing represents only one
segment of the midstream value chain.
Stock Capacity % of
Company Symbol MMcf/d U.S. Total E&P companies used to be the primary owners
DCP Midstream LLC SE/COP/DPM 13,117 21% of gas processing plants, in order to support
Enterprise Products Partners LP EPD 4,666 8% their E&P operations. In the 1990s, companies
Williams Cos. WMB/WPZ 4,376 7%
began selling off midstream assets to focus on
Targa Resources Private/NGLS 4,341 7%
their core E&P business.
BP PLC BP 4,163 7% The industry consolidated further as pure
Crosstex Energy LP XTEX 2,936 5% “midstream” plays developed. In 2008, the
Aux Sable Liquid Products LP EEP/FCE.UN/WMB 2,200 4% top ten gas processors held two-thirds of U.S.
ONEOK OKS/OKE 1,751 3% processing capacity (excluding Alaska).
Enbridge Energy Partners LP EEP 1,470 2%
MLPs now dominate the space, as midstream
Kinder Morgan Energy Partners LP KMP 1,293 2% earnings are perceived to provide a certain
ExxonMobil Corp. XOM 1,195 2% degree of stable, reliable cash flows,
CDM Max LLC Private 1,100 2% especially when exposure to the frac spread is
Copano Energy LLC CPNO 1,058 2% minimized.
Chevron Corp. CVX 854 1%
Total 44,520 72%
Source: Oil and Gas Journal 2008, Tudor, Pickering, Holt (Excludes Alaska)
10
U.S. NGL Production by Region (2007)
Gas processors describe natural gas
as “rich” (wet) or “lean” (dry),
depending on the amount of heavy
4.9% recoverable components contained.
(87 Mbpd)
A very rich gas may contain 5-6
1.1%
gallons of recoverable liquids per
(20 Mbpd)
12.1% mcf (gpm). A lean gas usually
(216 Mbpd) 12.3% contains 1 gpm or less.
3.6% (219 Mbpd) Deepwater Gulf of Mexico (GoM) gas
(64 Mbpd) can have 4+ gpm, compared with 1-
10.2% 1.5 gpm for the GoM shelf and 2-3
(182 Mbpd) 36.0% gpm on the Texas Gulf Coast. West
(641 Mbpd) 14.5% Texas gas is also very rich.
(258 Mbpd) Coal bed methane gas is essentially
5.4% free of NGLs and is comprised of only
(97 Mbpd) methane, water and sometimes CO2.
U.S. Gas Processing Plants There were 539 gas processing plants and
32 fractionators operating in the U.S. as of
January 1st, 2008.
About 33% of U.S. gas processing capacity is
located along the Gulf Coast. But the bulk
of new adds are planned for the Rockies
(currently 11% of capacity) and Ark/La/TX
(20% of current capacity).
About 80-85% of fractionation takes place
along the Gulf Coast; the NGLs are
produced close to the primary end-users –
petrochemical companies.
The average gas processing plant is getting
larger and more efficient.
Source: EIA/DOE
12
Getting NGLs to Market
There are 2 major U.S NGL
trading hubs and 2 Canadian
hubs: Mont Belvieu, TX;
Conway, KS; Edmonton/Fort
Saskatchewan, Alberta; and
Sarnia, Ontario.
NGL pipelines transport NGLs
from producing fields to these
hubs, where they are stored,
fractionated, and/or distributed
for end use.
Mont Belvieu, the largest of
these hubs, is located on the
Texas Gulf Coast where there is
the highest concentration of
petrochemical, storage,
pipeline, fractionation, and
refinery infrastructure.
Given its strategic location,
Mont Belvieu is considered the
price setter for North American
NGL markets.
Source: Canadian NEB, edited for changing ownership & new pipelines proposed
13
U.S. Petrochemical Plants
Puget Sound
Marathon
Lyondell BP Sunoco CVX
Sunoco
Sunoco Sunoco
Lyondell Ineos
Sunoco
Ineos
CVX Motiva
El Dupont WMB
LA Refining
BASF
Motiva
Huntsman
Alon
Lyondell
TX Eastern
Valero
Citgo
Sasol BRPC
Flint Hills XOM XOM
EPD WMB
Lyondell Marathon
Valero Dow
Lyondell
Ineos Murphy
Westlake
Formosa Dow Shell
CVX
Lyondell Valero Louis Dreyfus
CVX Marathon
Javelina Dow Ineos
Citgo
Flint Hills
MarkWest
Source: ICIS Plants & Projects Database, Company Press Releases, Tudor, Pickering, Holt
14
Part II – Summary and Historic Trends
The first section of this primer discussed four drivers of Midstream profitability:
U.S. gas production
NGL supply
NGL demand
Relationship between price of gas, crude oil, and NGLs
This section reviews the historic trends of each of these drivers. With the recent collapse in commodity prices and
economic conditions, everything has been turned on its head. While historic trends aren’t always indicative of
where things are headed, the perspective should be helpful. Part III of this primer (p. 25) tackles where we think
things are headed.
In the meantime, a brief summary of historical trends:
U.S. gas production: On the rise, +9% ytd after years of stagnant production. But, rig count is falling (and
with it, we hope, production).
NGL supply: Also on the rise, albeit at a slower pace than gas production as NGL yields have fallen
(movement to leaner onshore gas production from richer offshore).
NGL demand: Until quite recently, on the rise amid strong worldwide economies and a weak U.S. dollar.
Recently…in the tank.
Relationship between gas, crude oil and NGLs: Midstream economics are most favorable when gas trades at
a discount to crude oil on a mmbtu basis and when NGLs trade at a high percent of crude oil price.
Historically NGLs have traded at 65-70% of crude oil, but the recent economic turmoil has pushed NGLs
down to ~45% of crude oil. Historically natural gas has traded at a 6:1 ratio (crude:gas). Over the past
couple of years, with the spike in crude, that ratio expanded to as high as 14:1. With the recent decline in
crude, the ratio is back to ~10:1.
15
U.S. Gas Production – On the Rise
EIA-914 Gross U.S. Natural Gas Production Data
After stagnant/declining
production since 1997, U.S.
65 20% domestic production has been on
18%
the rise since mid-2006, driven by
60
a step change in gas prices, above
16%
Production (Bcf/d)
55 $6/mcf.
14%
50 Biggest increases in Texas (Barnett
12%
45
Shale) and the Rockies (Piceance,
10%
Powder River Basin and Green
40 8% River Basin), tempered by declines
35 6% in New Mexico and the GoM.
Excluding 2 months of
Se 5
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No 5
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No 6
Ma 7
No 7
Ma 8
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06
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05
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07
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l- 0
l- 0
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l- 0
0
0
p-
p-
p-
v-
v-
v-
y-
y-
y-
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r-
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Ma
Ma
Ma
Ja
Ja
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Independence Hub downtime (at
Total Production Onshore Production Offshore as % of Total Production
almost 1 bcf/d), GOM production
year-to-date is +0.6% y/y.
Change in Gross U.S. Nat Gas Production
YTD Change
Region Thru Aug
Texas 16.0%
Wyoming 11.4%
New Mexico -3.0%
Oklahoma 4.2%
Louisiana 4.3%
Other 12.6%
Onshore Total 10.9%
GoM -3.2%
Total 9.0%
Source: EIA/DOE
16
NGL supply growing at a slower rate…
U.S. Monthly NGL Production (Jan '01- Aug '08) Since early 2001, U.S. gas production is
+0.2%/yr on average.
2,100 During the same period, NGL
1,900 production is -0.9%/yr on average.
1,000 bpd
8
0
0
n-
n-
n-
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n-
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n-
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Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
More recently, with the surge in U.S.
Source: EIA/DOE and Tudor, Pickering, Holt & Co. drilling, natural gas production is +9.0%
while NGL production is +5.2% (year-to-
date vs. ’07).
17
… driven by lower NGL yields
Annual U.S. Historical NGL Yield (1970-2007) NGL yields (measured in
Declining GPM or gallons of liquids
1.30 NGL yields
per mcf) have been
1.25
1.20 declining since 1982.
gal/Mcf
1.15
1.10
The shift to drilling in
1.05 lower GPM/leaner gas
1.00 resource plays has
0.95
influenced the decline in
yield.
70
73
76
79
82
85
88
91
94
97
00
03
06
19
19
19
19
19
19
19
19
19
19
20
20
20
Declines have also
Monthly U.S. Historical NGL Yield (Jan '01 to Aug '08)
occurred despite adding
Leaner onshore more “deep cut”
1.60 production
1.50
cryogenic processing.
gal/Mcf
1.40
1.30
1.20
1.10
01
02
03
04
05
06
07
08
1
Ja 2
Ja 3
Ja 6
Ja 7
8
l -0
l -0
l -0
l -0
l -0
l -0
l -0
l -0
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n-
n-
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Ju
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Ju
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Ju
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Ja
Ja
Ja
Historical Price
Optional to Relationship to
Component % Use Process? Crude
2000-2003: 51%
Ethane 40-45% Petrochemical feedstock Yes 2004-2007: 46%
2008 YTD: 37%
2000-2003: 75%
Petrochemical feedstock,
Propane 25-30% Partially 2004-2007: 69%
heating & fuel
2008 YTD: 60%
Petrochemical feedstock, 2000-2003: 87%
Normal Butane 5-10% fuel, gasoline blending, No 2004-2007: 82%
propellant 2008 YTD: 71%
Petrochemical feedstock, 2000-2003: 92%
Isobutane 10% gasoline blending, No 2004-2007: 85%
refrigerant, propellant 2008 YTD: 73%
2000-2003: 97%
Petrochemical feedstock,
Natural Gasoline 10-15% No 2004-2007: 96%
gasoline blending
2008 YTD: 89%
VCM PVC
Ethylene dichloride Vinyl chloride monomer Polyvinyl chloride
Other Uses
30%
Ethylene is the simplest alkene and the most widely produced organic compound in the world. 97% of
ethane is used for ethylene production.
About 50% of ethylene is polymerized into polyethylene. This polymer is used most commonly to form
lightweight packaging products (i.e. shopping bags) from low-density polyethylene (LDPE) and as a medium
for injection molding (to make products like plastic containers) from high-density polyethylene (HDPE).
Medicines
Cosmetics
Cumene Nailpolish remover
Butanols Construction
Residential/Commercial (solvents) 27%
Heating % Transportation
24%
Cooking Propylene Oxide %
21%
40% 6% 6% % Furniture/Bedding
% % % 8%
%
Propylene is the second simplest alkene and is most commonly produced as a byproduct in ethylene production.
About 62% of propylene is polymerized into polypropylene. This polymer is most commonly used as a medium for
injection molding (for plastic products like containers) and in the fibers market (i.e. carpeting, textiles).
Propane demand has two seasonal offsets. Residential/commercial demand (40% of total) peaks during the winter
heating season and troughs in the summer. Petrochemical demand (49%) peaks during the summer when propane
prices are lower, as the petrochemical industry switches between feedstocks depending upon price.
94
95
96
97
98
99
00
01
02
03
04
05
06
07
2007 and 2008 saw a big pick-up in
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
loadings, driven by strong world-
AAR Weekly Chemical Car Loadings wide economies and a weak U.S.
dollar.
38,000
10-Yr High
The sharp fall-off in 2H’08 reflects
36,000 the immediate impact of Hurricane
2008
34,000
Ike, which slammed into the heart of
part of the Gulf Coast petrochemical
32,000
sector. But more than a month
Car Loadings
20,000
n
c
t
v
r
b
ay
ar
p
n
Oc
Ap
De
No
Ja
Au
Fe
Ju
Se
M
WTI ($/bbl)
12
10 $80
crude/NGLs in order to have an economic
incentive to convert the btus from a gaseous form
8 $60 to a liquid form. Generally, crude forms the
6
$40
ceiling while natural gas forms the floor.
4
$20 Processing economics have directionally improved
2
over the past 10 years, as crude traded at higher
- $0 and higher premiums to nat gas.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
NGL prices are mainly influenced by the price of
Crude/Gas Ratio WTI ($/Bbl) crude oil, as NGL feedstocks compete most
directly with crude oil-based feedstocks such as
naphtha and heating oil.
NGL Basket as Percent of Crude Price
NGLs trade near parity with oil on a heat content,
140% $160 or Btu basis. However, on a volume basis, they
have historically traded at about 65-70% of crude
120% $140 oil.
$120
100% More recently, with the decline in crude oil prices
NGLs as % of Crude
24
Part III – What is Changing?
What a difference a few months make! This summer, the midstream industry was experiencing record frac spreads,
rig count was at record highs, and massive investment was planned to increase ethylene and propylene capacity.
There was mounting concern that the U.S. would not be able to absorb the incremental ethane coming on as a
result of the surge in drilling and de-bottlenecking of NGLs via new pipelines. But there were also a number of
petrochemicals looking to expand, driven by a weak U.S. dollar and strong worldwide economies.
Slam on the brakes and put it in reverse. Fracs spreads have fallen from $10+ to negative; ethane is trading at 25%
of crude and NGLs 45%; petrochemical plants are idling across the globe; ethylene prices have fallen below
US$350/MT in Asia from highs of US$1,650 this summer; and while we haven’t seen it in scale yet, we expect to see
major projects cancelled/postponed. It’s about as ugly as it gets.
Fortunately, as we discussed earlier, this business is cyclical, which means rig count/gas production will fall.
Processors will reject ethane. Ethane, ethlyene and propylene inventories will fall. And we’ll start the up cycle
again.
This downcycle may last a little longer than others because of the potential depth of this recession and the amount
of new NGLs coming online – the result of both higher production and NGL debottlenecking due to the completion of
NGL take-away pipelines.
As a result, for our Midstream companies, for the next couple of years we are modeling that NGLs trade at ~50% of
crude oil (vs. historic 65-70% and 45% currently).
When we first looked at the amount of new ethylene and propylene capacity coming online, it was worrisome (39%
increase if everything done, but almost all outside the U.S.). We’re now assuming that only plants currently under
construction are completed, resulting in 3.5%/yr average growth in ethylene/propylene capacity worldwide through
2012.
25
Worldwide NGL Production Still on the Rise,
While U.S. Contribution Continues to Decline
Global Annual NGL Production 1970-2007
10,000 80%
8,000 60%
1,000 bpd
6,000
40%
4,000
2,000 20%
0 0%
70
73
76
79
82
85
88
91
94
97
00
03
06
19
19
19
19
19
19
19
19
19
19
20
20
20
Global Production % U.S.
8,500 35%
8,000 30%
1,000 bpd
7,500
25%
7,000
6,500 20%
6,000 15%
1
04
07
8
1
02
03
04
05
06
07
08
l-0
l-0
l-0
l-0
l-0
l-0
0
l-
l-
n-
n-
n-
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Ju
Ju
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Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
40,000
30,000
20,000
10,000
0
2007 2008 2009 2010
Source: Oil and Gas Journal 2008, Company Press Releases, Tudor, Pickering, Holt
27
New NGL Pipelines
The U.S. NGL system has been, and will
be, further de-bottlenecked via the
completion of several key NGL
pipelines.
EPD’s MAPL line was completed earlier
this year and OKS’ Overland Pass line
began ramping up in early October.
Arbuckle (also OKS) should be
completed by Q1’09.
Overland Pass
(OKS) 110,000 bpd All the pipes won’t be full from the
beginning. Overland Pass will somewhat
cannibalize MAPL, but that simply
relieves MAPL’s fully utilized facility.
All told, these pipelines have the
Arbuckle (OKS) capacity to allow an increase in NGL
160,000 bpd
supply by 18%.
MAPL Expansion
(EPD) 50,000 bpd Further expansion is possible. OKS has
been planning to expand Overland Pass
by 145,000 bpd by 2010, but we would
not be surprised to see that pushed out
a little. Arbuckle is expandable by
50,000 bpd with additional pump
stations
Source: Canadian NEB, edited for changing ownership & new pipelines proposed
28
Changing Dynamics: Ethylene & Propylene
Source: ICIS Plants & Projects Database, Company Press Releases, Tudor, Pickering, Holt
29
Changing Ethylene Dynamics by Region
Planned Ethylene Capacity Under Construction (tonnes/yr)
Existing Global Ethylene Capacity (2008) Global Ethylene Capacity After Adds (2012)
Africa Africa
SAM Australia
SAM 0.8% Australia 0.7%
E Europe 3.5% 0.4%
3.9% 0.4% E Europe
4.5% NAM
NAM 4.1%
23.5%
Middle East 27.0%
Middle East
13.5%
19.2%
W Europe
19.6% W Europe
Asia/Pac Asia/Pac
17.2%
30.3% 31.5%
Source: ICIS Plants & Projects Database, Company Press Releases, Tudor, Pickering, Holt
30
Changing Propylene Dynamics by Region
Planned Propylene Capacity Under Construction (tonnes/yr)
Existing Propylene Capacity (2008) Global Propylene Capacity After Adds (2012)
Africa
Africa
E Europe SAM SAM 0.5% Australia
3.4% 0.6% E Europe 3.4% 0.1%
3.8% Australia
0.1% 3.3%
NAM
Middle East NAM Middle East 25.7%
5.9% 29.5% 9.7%
W Europe
W Europe
21.5%
18.7%
Asia/Pac Asia/Pac
35.3% 38.6%
Source: ICIS Plants & Projects Database, Company Press Releases, Tudor, Pickering, Holt
31
NGL Supply Outlook
Global & North American NGL Production (Jan '01 - Aug '08)
10,000
There are two ways to look at NGL supply –
domestically and on a global basis
NGL Production (mbpd)
8,000
01
02
03
04
05
06
07
08
09
c-
c-
c-
c-
c-
c-
c-
c-
c-
c-
should stem the rate of NGL production growth.
De
De
De
De
De
De
De
De
De
De
Global (ex/NAM) North American (NAM) Global On a global basis, NGL production is clearly on the
rise, growing at a CAGR of 5% since 2000
(excluding North America) and 3% including North
U.S. Monthly Gas & NGL Production (Jan '01- Aug '08) America. Going forward, most of the incremental
production is destined for in-country use, primarily
2,800 65 petrochemical, to feed new plants.
2,600 63
NGL Production (mbpd)
61 Gas Production (Bcf/d) The risk to the U.S. NGL industry is over-building
2,400
2,200 59 of worldwide ethylene and propylene plants,
2,000
57 resulting in cheap exports, and a decline in the
55 U.S. petrochemical industry. With the recent
1,800
53
1,600 economic meltdown, the risk of overbuilding has
51
1,400 49
been greatly reduced.
1,200 47
1,000 45
Ja 1
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8
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02
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Ju 4
Ju 5
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07
08
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l-0
l-0
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l-0
0
0
n-
n-
n-
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Storage
Industrial & Other
End-Users
38
Frac Spread – Sum of the Parts is Worth More Than the Whole
Step 1: Calculate the NGL value ($/MMBtu). Multiply component prices by
the heat content and composition of the gas. Frac spread is the difference
between the value of the
processed NGLs and the value of
A B C D =[D*A] the equivalent btus of gas input
into the processing plant.
=[A*B]
Frac spreads are negatively
correlated with gas prices (gas
Assumed Conversion Weighted NGL Price Composite goes up, fracs go down) and
Mix Factor Average ($/gal) positively correlated with NGL
($/gal) prices (NGLs go up, fracs go up).
(MMBtu/Gal)
Frac spreads are volatile and
Ethane 45% 0.0664 0.0299 $0.490 $0.221 usually seasonal – narrowing with
higher gas prices during the
Propane 30% 0.0916 0.0275 $1.248 $0.374 winter.
Iso butane 5% 0.0997 0.0100 $1.480 $0.074
Step 3: Subtract natural gas price from composite NGL price: $11.84 – Gas Price = Frac Spread
Step 4: Adjust spread for transportation, operating costs, and plant processing fuel.
40
Analyst Certification:
We, Becca Followill, Dave Pursell and Anson Williams, do hereby certify that, to the best of our knowledge, the views and opinions in
this research report accurately reflect our personal views about the company and its securities. We have not nor will we receive direct
or indirect compensation in return for expressing specific recommendations or viewpoints in this report.
________________________________________________________________________________________________________
Important Disclosures:
The following analysts were involved in creating or supervising the content of this message; Becca Followill, Dave Pursell, and Anson
Williams. None of these analysts (or members of their household) have a long or short position in the securities mentioned in this
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