Energy MLP Indicators for the Week Ending August 7

(Continued from Prior Part)

The Henry Hub-Mont Belvieu fractionation spread fell to $7.02 per barrel for the week ending August 7, 2015. The spread was $7.73 per barrel in the previous week. The Henry Hub-Mont Belvieu fractionation spread measures the spread between Henry Hub natural gas and Mont Belvieu composite NGL (natural gas liquid) prices.

Natural gas recovered from a wellhead must be processed so that it meets specifications before it can be delivered for final use. In addition to natural gas, processing produces mixed NGLs. Then, these NGLs are separated through fractionation. The above graph shows the weekly fractionation spread over six weeks. The fall in the spread over the last year has negatively impacted most fractionating MLPs.

Midstream energy MLPs like Energy Transfer Partners (ETP), DCP Midstream Partners (DPM), Enbridge Energy Partners (EEP), MarkWest Energy Partners (MWE), and Tallgrass Energy Partners (TEP) are involved in the gathering and processing of natural gas. Energy Transfer Partners forms ~7.60% of the Alerian MLP ETF (AMLP).

Natural gas processing MLPs typically benefit when the fractionation spread is high. This means that NGL prices are high relative to natural gas. This is because of the “keep-whole” and “percent-of-proceeds” contracts that these companies enter into.

Keep-whole contracts are sensitive to commodity prices. Under keep-whole contracts, the processing company generally keeps a portion of the NGLs extracted through fractionation as payment. The company replaces the energy content of the NGLs that it has retained with natural gas. A fall in NGL prices, relative to natural gas prices, makes the spread less favorable for fractionating MLPs.

In percent-of-proceeds contracts, the MLP gathers and processes natural gas on behalf of producer customers. The residue gas and NGLs produced from the processing are sold on the market. The company then remits a pre-agreed percentage of these proceeds to the producer and retains the remainder. As a result, the prices of natural gas and NGLs affect MLPs’ revenue with these kinds of contracts.

Percent-of-proceeds contracts accounted for nearly half of the natural gas volume gathered by Targa Resources (NGLS) for 2014. These contracts account for nearly 85% of ONEOK Partners’ (OKS) Natural Gas Gathering and Processing segment’s total volumes. To learn more about ONEOK’s segments, read ONEOK Partners: How Gas Gathering, Processing Segment Makes Money.

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Browse this series on Market Realist:

• Part 1 - Last Week’s Rise in Natural Gas Prices: What It Means for MLPs
• Part 3 - Which MLPs Could Gain from the Rise in Ethane Prices Last Week?
• Part 4 - July 31 Week: Movement in Crude Oil Inventories Impacts MLPs