It seems that the advanced drilling techniques sweeping across the nation may be a little too advanced. As the E&P industry has applied hydraulic fracturing to numerous shale plays and older legacy fields, a surge of energy has been released. That has created the age old problem of too much supply and not enough demand.
And as with all good commodities, when this issue occurs we get a steep drop in prices.
While the historic plunge in dry natural gas has been well-documented by the financial media, the producers of wet gas are also see issues with prices for the various natural gas liquids associated with their production. Prices for a key NGL — ethane — have plunged over the last two years and now sit at decade lows. That has crimped for profits producers that rely heavily on wet gas for their earnings.
However, the price plunge doesn’t have to be a total loss for investors. There are plenty of opportunities in the firms that are drinking up these low NGL prices.
Lowest Since 2002
Natural gas liquids are essentially a group of hydrocarbons — which include ethane, propane, and butane — that are often found alongside traditional dry natural gas or methane. And just like dry gas and shale oil, these hydrocarbons can be stimulated upwards via fracking quite efficiently.
Which is part of the problem.
As fracking has taking hold, supplies of ethane — the most prominent NGL — have surged. The Energy Information Administration’s latest Short-Term Energy Outlook estimates that the U.S. will see a 3.4% increase in average daily NGL production this year. This will push production up to a record 2.48 million barrels per day.
End users simply can’t handle that much production and currently “reject” about 200,000 barrels of ethane per day back into the gas supply. However, that has its limits as well. And with no real ways to take up the excess supply, prices for ethane have plunged about 70% over the last two years. That has dropped prices down to lows not seen since 2002.
Given the falling NGL prices, the luster is certainly starting to fade for wet gas producers like Range Resources (RRC) or Linn Energy (LINE). Yet, for those firms that rely on ethane for feedstocks, the shine is getting all the brighter.