Sunshine Through The NGL Gloom

he gloomy state of natural gas liquid (NGL) commodities has not been generating a tremendous amount of cheer and enthusiasm among market watchers. Ethane, butane and propane have been on a downward slide for months. The slowdown is costing companies hundreds of millions of dollars. It’s also causing worry among energy behemoths, which are setting up hedges and reevaluating financial outlooks in response to the softening commodities.

For example, weakening NGL prices prompted Enbridge Energy Partners L.P. to lower its financial outlook for 2012. It expects its EBITDA to be between Cdn$440 million and Cdn$470 million, less than its earlier outlook of between Cdn$510 million and Cdn$550 million.

“Given recent events in the natural gas and NGL commodities market, our natural gas business will face challenges over our near-term planning horizon,” said Enbridge Energy Partners President Mark Maki in a public statement.

Yet, in the face of this slump, a brighter picture is being painted for the future of NGLs, particularly in western Canada, where plays remain economically strong despite weakening natural gas and NGL prices. In fact, some industry executives say the liquid-rich gas industry is doing so well that it can actually afford to suffer a slowdown.

While dry gas and sour gas are already “pretty much in heavy decline,” as Pembina Pipeline Corp. President Mick Dilger put it, in some respects NGLs are still standing strong alongside conventional crude and the Alberta oil sands. They’re continuing to spur massive growth and investments, and all indications point to a healthy future. Even if commodity woes temporarily stunt the growth of NGL reservoirs, Dilger said that’s not necessarily a bad thing.

“A little bit of a slowdown is OK from our perspective,” Dilger said during the BMO Capital Markets’ North American Pipeline and Utilities conference in Toronto in June.

“We’re seeing pressures to find engineers and labor to build all these plants on time and on budget.” The company has numerous projects on the horizon. “If we could spread our Cdn$4 billion of unrisked projects over five years versus four, it wouldn’t be the worst thing.”

Natural growth

Pembina has experienced tremendous momentum over the past decade. During that time frame, it has seen a 500% total return and increased its dividends 4% a year. Moreover, $2 billion in dividends have been paid since the company’s inception. Pembina said it has increased its cash flow per share growth annually 9% over the past decade, too, and its capital appreciation has delivered about a 20% compound total rate of return including dividends.

“It’s a pretty good story,” said Dilger. “When I get asked during one-on-ones what I aspire to do in the future, it’s to keep doing what we’ve done in the past. That’s really where we’re focused. We’re very proud of that record.”

It is clear that investing in NGLs has paid off tremendously for the company. Pembina is now the sole transporter of crude in many of the regions in which it operates. It’s considered a leader in NGL gathering, the transporting of about half of the conventional crude in Alberta and 30% of the province’s NGLs.

“Every single major system we have is seeing growing production,” said Dilger. Pembina’s achievements extend into the world of gas services, a business it entered in 2009 as a pilot program to see whether the company could squeeze more NGLs from the gas stream.

“We’ve been pretty successful,” said Dilger. The company’s original acquisition was its Cutbank Complex, which later led to a deep-cut facility expansion. Pembina is currently constructing two more facilities of similar size and scope with hopes of bringing more NGLs to market. “We’re sneaking up on about a billion cubic feet a day of gross capacity with those two expansions,” Dilger said. “We’ve gone from being at a standstill to being a pretty meaningful player in the field gas services area.”

Looking back, he said there’s little the company would change about its presence in Alberta. It has operations in the Montney, Cardium, Deep Basin, Beaver Hill Lake and the Alberta oil sands. “If we had to build our systems again, we would put them in the same place,” said Dilger. “Our pipelines are right on top of all those historically prolific high-liquids gas areas oil systems, most of which have been reinvigorated with new drilling technology.”

High hopes ahead

Dilger was among a trio of panelists discussing NGL logistics during the BMO pipelines and utilities conference’s North American Opportunities in NGL Logistics segment. Fellow panelist David Smith, president and chief operating officer of Keyera Corp., said he, too, is seeing renewed interest within the sector. Smith is optimistic for the Duvernay deep shale, among several tight gas plays in Alberta.

“What I refer to as the next big thing is the Duvernay,” Smith said during the conference. Other liquids rich plays in the area include the Cardium, Montney and Glauconite. “These are some of the zones that are really driving the liquids rich development in Western Canada.”

The Western Canadian Sedimentary Basin plays have all the elements needed to help ignite new focus in the area, said Smith. They’re well understood geologically, have high liquids content and have access to processing and transportation capacities. Technological advancements are helping save money.

Those new technologies are improving the economics of the plays, while reaping the benefit of available processing and transportation capacities. “Companies like Keyera allow them to develop these areas without spending millions of dollars in new capital for the infrastructure required to bring them to market,” Smith said.

As one of the largest midstream operators in Western Canada, Keyera’s facilities focus on the western part of the basin. Keyera runs a fee-for-service gas gathering business, and its facilities include fractionation, storage, transportation and terminaling. Its NGL facilities are in the Edmonton and Fort Saskatchewan area, which is considered the hub for Western Canada’s liquids movements.

Smith said the company remains focused on the growing production of NGL developments in the area, even though there have been some reductions in certain plays. Slowdowns must be analyzed independently of one another, though, since each region is unique. Many of western Canada’s plays are maintaining their economic strength, despite the weakening of some commodities, said Smith.

“The break-even prices of some of these Western Canadian plays compare very favorably to many of the liquids rich plays you see in the U.S., so I’m quite optimistic about the long-term viability.”

Another factor affecting producer activity is the availability of cash flow.

“Most of the producers we talk to are suffering reduced cash flows in the current environment as a result of lower commodity prices, and they’re prudent enough to make sure that their expenditure activity stays within the available cash flow and the available funding they have,” Smith said. “For that reason primarily, we have seen some curtailment in activity. It’s my expectation that will perhaps cause a little bit of a slowdown in the development timetable in some areas.”

Recovery mode

NGL prices have been teetering in recent months, but that’s doesn’t mean they’re about to topple over completely. They may be struggling in the aftermath as some commodities continue recovering from a lengthy drought, said Spectra Energy Corp. chief financial officer Pat Reddy.

“As I’ve come to appreciate, one thing the market misses is that—up until recently when shale drilling really took off and wet gas production started to ramp up—we had been in a decade-long decline in the production of natural gas and associated NGLs,” Reddy told the conference.

“We’re just now getting to the point that we’re getting back to the shale production levels we saw a decade ago. In the meantime, demand has increased somewhat, and we’re seeing substitutions.”

It’s something Spectra Energy executives keep their eyes on, since the company’s joint venture with Phillips 66 and DCP Midstream LLC, the largest NGL producer in the U.S., is turning out more than 400,000 barrels per day. About 20% of Spectra Energy’s corporate EBITDA is sensitive to commodity pricing.

Propane is continuing to suffer depressed pricing after the U.S. was hit with the warmest winter in about a century. Propane stocks built up, while some of the major petrochemical plants went down for scheduled maintenance between January and April. Demand was lessened by unplanned outages, too. It all leaves Reddy foreseeing NGL in a tight spot over the next few years.

“It doesn’t take much on the supply or demand side to tip things over,” Reddy said. “Between now and the time the new pet-chem facilities in the Gulf are built—three years out— that supply-demand balance is going to be pretty tight. We’ll see some volatility, but we shouldn’t see a long-term degradation in NGL prices.”