Today it was the price for propane in Edmonton, Alberta, that fell into subzero readings and not the temperature. The market however, will continue to operate as there are options for producers to deal with the negative pricing situation.
Edmonton propane is priced on a spread basis to Conway, Kan. Given the strong propane production in Alberta and limited propane take-away options, that spread has been valued with Edmonton 40cts under Conway. Traders have been waiting for the moment when Edmonton prices could see a negative value, and that happened this morning when Conway propane anys hit a low of 39cts/gal.
Sources said negative pricing will not be disruptive to the producers in Alberta. One source in Alberta said the producers have a variety of choices to deal with the negative prices. One is to keep a price floor at zero and not recognize the negative price. The second is to store the propane until prices rise, which might not be practical if there is not enough space to handle the excess volume.
The third option would be to try to get the discount spread to Conway to tighten, but that would have to be a concerted effort among producers, traders and customers and would likely be hard to accomplish.
One trader in Canada said the producers will not pay their customers to take the product and will expect the buyers to just pay any freight costs.
Another strategy to deal with situation is to actually recognize the subzero price and account for that in the total value of their NGL stream. A source noted that producers often sell their propane to midstream firms and will deduct the negative propane value from the butane and natural gasoline revenue that they will receive.
A source in California -- which is a delivery point for Edmonton propane -- basis and expects the market to fall further as there is a supply glut in the summer filling season.
The bottom line is that it seems as the summer heats up, the prices for propane in Edmonton will continue to melt.
Natural gas liquids distribution and sales was the strongest performer for JP Energy Partners in the first quarter, and refined products terminals and storage was the weakest.
JP Energy's NGL business more than doubled its first-quarter earnings from a year ago, and crude oil pipelines and storage was slightly stronger. Crude oil supply and logistics also doubled its earnings, but refined products terminals and storage was the only business segment to register lower year-on-year earnings.
Adjusted EBITDA for the NGL distribution and sales segment was $12.1 million for the first quarter of 2015, compared to $5.3 million for the first quarter of 2014.
The increase was primarily due to a $6.9 million increase in adjusted gross margin as a result of an increase in sales volumes from the expansion of the company's customer base as well as an increase in the average sales margin of NGL and refined products from more favorable market conditions.
Adjusted EBITDA for the crude oil pipelines and storage segment was $5.5 million for the first quarter of 2015, compared to $5.0 million for the first quarter of 2014.
The increase was primarily due to a $0.6 million increase in adjusted gross margin as a result of significantly increased volumes from the expansion of the Silver Dollar Pipeline System in the fourth quarter of 2014.
Adjusted EBITDA for the crude oil supply and logistics segment was $2.0 million for the first quarter of 2015, compared to $0.7 million for the first quarter of 2014.
The increase was primarily due to a $1.9 million increase in adjusted gross margin in the Permian Basin related to the expansion of the Silver Dollar Pipeline System in the fourth quarter of 2014. This was partially offset by higher operating expenses and lower margin per barrel due to the competitive environment.
Adjusted EBITDA for the refined products terminals and storage segment was $2.8 million for the first quarter of 2015, compared to $4.9 million for the first quarter of 2014.
The decrease was primarily due to a $2.2 million decrease in adjusted gross margin from lower volumes and realized prices for refined products sold.
JP Energy's total adjusted EBITDA was pegged at $15.2 million for the first quarter of 2015, compared to $8.5 million for the first quarter of 2014.
The partnership also reported net income of $0.7 million for the first quarter of 2015, compared to a net loss of $8.6 million for the first quarter of 2014.
Distributable Cash Flow was $13.3 million for the first quarter of 2015, resulting in a distribution coverage ratio for the quarter of 1.11x.
"Our first quarter performance demonstrated the diversity of our operating platform as our NGL business benefited from the lower commodity price environment, and even though rig counts fell significantly across all of the major shale plays due to lower crude oil prices, we still experienced increased volumes through our crude oil gathering platform," said J. Patrick Barley, CEO of JP Energy.
"In addition, we also announced three expansions in the first four months of this year; two organic opportunities to expand and improve our Silver Dollar pipeline and an accretive acquisition in the NGL segment. We will continue to execute our business strategy and we look forward to building on the success of the first quarter," he said.
A conundrum now facing the propane market is when production will actually begin to decline.
The drop in energy commodity prices has slashed the U.S. rig count by half since the beginning of the year. According to Baker Hughes, U.S.-wide rig count has gone from 1,811 at the beginning of January to 905 as of May 1.
Yet, propane production shows no sign of abating. The Energy Information Administration reported that refiner and gas plant propane production reached 1.666 million b/d for the week ending May 1, the second highest on record.
Smoothing out that number over a four-week average basis, propane production hit 1.6 million b/d as of May 1, the 11th highest recorded. The week ending Sept. 19, 2014, saw four-week average production hit the same level.
Given that the propane market has entered its traditional season of inventory builds, the production growth threatens to cause propane inventories to surge through the summer. Some forecasts suggest that U.S.-wide propane inventories could be around 80 million bbl by the end of summer, up from roughly 67 million bbl currently.
The drop in rig counts, while indicative of fewer new wells being drilled, has failed to materialize into any substantial change in NGL production. Indeed, many producers are suggesting that there will be almost no change in NGL production for the year. Part of the problem may stem from the backlog of drilled-but-uncompleted wells, which will be brought on as prices improve. As that backlog gets worked down, it could keep propane production fairly steady through 2015.
Despite rig counts dropping by half since the beginning of the year, many producers have yet to report a commensurate drop in NGL production. Several producers reported growing or at least flat NGL production in their most recently completed quarter.
Anadarko Petroleum reported first-quarter 2015 NGL production of 143,000 b/d, compared to 129,000 b/d in the fourth quarter. Devon Energy reported first- quarter 2015 NGL production of 139,000 b/d, compared to 141,000 b/d in the fourth quarter of 2014.
Moreover, these firms see almost no change in NGL production for this year. Anadarko, which produced 116,000 b/d of NGLs for all of last year, provided guidance that U.S. production would still be 119,000 to 123,000 b/d for 2015. Devon, which produced 132,000 b/d of NGLs in the U.S. last year, forecast that 2015 production will still be in the ballpark of 128,000 to 134,000 b/d.
The drop in rig counts and still-strong propane production "doesn't jibe," said one trader. "It implies a backlog of wells getting connected to gathering systems."
EOG Resources reported first-quarter NGL production of 77,400 b/d, compared to 79,700 b/d for all of 2014. EOG said that it anticipates production won't bottom out until the second or third quarter after deferring completion on drilled-but- uncompleted wells.
But EOG said it doesn't need a significant recovery in prices before completing those wells becomes profitable. EOG said WTI would need to stabilize around $65 before it would bring additional wells on line.
As such, EOG anticipates a U-shaped recovery in production. Based on its most recent guidance for 2015, EOG says its overall NGL production for 2015 would see a range of outcomes, from a 15% drop to 68,000 b/d or a 10% increase to 88,000 b/d.
EOG is not the only company that is banking drilled-but-uncompleted wells for any improvement in prices. In fact, the backlog of such wells might be growing, according to John Spears, president of research firm Spears & Associates. It estimated that there was a backlog of 4,000 drilled-but-uncompleted wells as of the end of 2014. That is out of a total of 45,000 wells drilled over the course of last year.
Spears says that the backlog of drilled-but-uncompleted wells may now be about 5,000. About 3,000 of those are wells that operators have opted to delay completion until economics improve. This "discretionary" backlog could be brought on throughout the year as prices improve, according to Spears.
As a result of this backlog, several traders say they are going to be watching production growth numbers more closely for any indications as to when the market might turn.
Speaking about the most recent inventory growth figures, "I will not be surprised at all if this trend continues through summer," said one propane trader. "We have yet to see any changes in production."
The spring revival in crude oil prices has not exactly spread to natural gas liquids, which have been mostly flat relative to WTI. NGLs, such as propane and normal butane, appear to be more driven by seasonal tendencies.
A Citi Research report points to a falling NGL-to-WTI price ratio as a possible indication that NGLs could, to some extent, decouple from crude and largely miss out on the oil recovery.
As oil prices have climbed in the past month, prices of propane, butane, isobutane and pentane-plus stayed relatively flat. Mont Belvieu NGL prices as a basket to Brent or WTI have not kept pace with oil: the NGL-to-WTI price ratio, estimated at 44% when WTI sank to a multi-year low of $43/bbl, dipped to 36% as of last week, Citi observed.
The June WTI contract settled at a five-month high of $60.93/bbl on May 6.
Citi estimates an NGL basket price of 50cts/gal at Mont Belvieu and 45cts/gallon at Conway, assuming the following NGL mixes: ethane at 43%, propane at 28%, butane at 9%, isobutane at 7% and pentane-plus at 13%.
The current scenario raises the question among the researchers as to whether NGLs, long hailed as a boon to natural gas production economics, may turn out to be a drag.
Part of the impact on the NGL-to-WTI price ratio could be from seasonal factors: it's typical for propane demand to drop off sharply in the spring as the heating season ends. Demand also fades for normal butane, which is used mainly for unleaded gasoline blending in the winter.
Other fundamentals are bearish. Natural gas production continues to exceed stagnant domestic demand, while low oil prices have placed downward price pressure on NGL light ends in international markets to stress export arbitrages, Citi said.
Citi believes that U.S. producers face a weaker NGL pricing environment at present, despite the current run-up in oil prices. Midstream companies that have percent-of-proceeds (POP) in their contracts may see the impact of low prices on their financial performance, it says.
"Such low prices could have important impacts on producer profitability (and) production growth trajectory, as well as midstream economics and development," it said.
Forward NGL swaps on the New York Mercantile Exchange saw a fresh inflow of commercial interest across the board, as well as a slight strengthening in speculative stakes in most products, according to the most recent Commodity Futures Trading Commission (CFTC) data.
The biggest move was seen in the Mt. Belvieu TET (LST) propane swap, where commercial length expanded by 2,341 contracts to 61,311 contracts and short positions rose by 2,036 contracts to 54,797 contracts, according to the CFTC's Commitments of Traders report for the week ended April 28. Speculative short positions firmed by 516 contracts to 7,867 contracts, while fund length grew by 223 contracts to 1,343 contracts.
In NYMEX Mt. Belvieu non-LDH (or non-TET) swaps, commercial positions rose fairly evenly, with longs up 880 contracts to 11,077 contracts and shorts up 845 contracts to 11,398 contracts. Just five contracts of noncommercial length exited the market, to a total of 306 contracts. Speculative shorts remained at zero on the week.
The Conway propane swap saw commercial length grow by 164 contracts to 9,162 contracts and shorts expand by 22 contracts to 8,800 contracts. Eight contracts of speculative length exited last week, sending the total stake to zero. Short positions by funds, however, grew by 142 contracts to 735 contracts.
Mt. Belvieu normal butane swaps saw market interest expand across the board. On the commercial side, length grew by 1,204 contracts to 18,925 contracts and shorts expanded by 1,271 contracts to 19,529 contracts. Speculative positions were fairly balanced, with longs up 312 contracts to 2,560 contracts and shorts up 112 contracts to 2,069 contracts.
Small shifts were seen in Mt. Belvieu natural gasoline, where commercial length grew by 313 contracts to 10,896 contracts and shorts expanded by 428 contracts to 10,039 contracts. Speculative shorts liquidated 110 contracts to 885 contracts, while the long side was unchanged at 105 contracts.
The CFTC's most recent report for the week ended April 28 also detailed positions in Mt. Belvieu ethane swaps, which were not included in the previous week's report. As with other NGL swaps, the vast majority of market interest was on the commercial side, with 17,833 long contracts and 18,043 short contracts. There were no noncommercial shorts, while speculative length was just 90 contracts.