Since the end of 2011 prices for natural gas liquids (NGLs) have fallen sharply from about 65% of the WTI crude price to below 50% of the WTI price in the second quarter. The forecast pricing for NGLs continues weak through the first half of next year.
Fitch Ratings looked at 10 midstream companies with significant NGL processing capability with an eye toward the companies’ credit ratings. The companies or public companies with subsidiaries in the group were DCP Midstream LLC (NYSE: DCP), DCP Midstream Partners LP (NYSE: DPM), Energy Transfer Partners LP (NYSE: ETP), Enterprise Products Partners LP (NYSE: EPD), MarkWest Energy Partners LP (NYSE: MWE), OGE Energy Corp. (NYSE: OGE), Regency Energy Partners LP (NYSE: RGP), Spectra Energy Corp. (NYSE: SE), Energy Transfer Equity (NYSE: ETE), Western Gas Partners LP (NYSE: WES), and Williams Partners LP (NYSE: WPZ).
Fitch expects NGL processors with facilities near liquids-rich basins to continue to benefit from increased volumes even as prices drop. The reason, of course, is that processors have only limited commodity risk and producers are essentially forced to send produced NGLs somewhere because it’s cheaper than storing them. Those processors with higher commodity risk, such as DCP Midstream LLC, have reasonable hedges in place to offset NGL price declines.
Fitch also noted that master limited partnerships have moved their operations more toward a fixed-fee model, which has tended to make the processors less dependent on producer volumes.
As a group, all but three of the companies get a ‘stable’ outlook from Fitch. Two exceptions are Energy Transfer Partners and Western Gas Partners, both with a ‘negative’ outlook. ETP is knocked down for its “aggressive acquisition and organic growth activities,” while Western Gas is a concern due to volume risk. Williams nabs a ‘positive’ outlook from Fitch due to drop-down agreement with Williams Companies Inc. (NYSE: WMB) that will switch Williams Partners’ output from ethane to ethylene, which is selling for higher prices.
One other note: dividend yields from these companies ranges from 2.9% at OGE to 8.5% at ETP, with the MLPs paying the most. A dividend bubble could be forming at firms paying out around 6% or more.
Fitch expects growth to continue among the NGL processors, provided the industry is not hit hard by further price declines relative to WTI crude. With crude prices as volatile as they are, careful hedging could make a difference in the companies’ financial performance as well.
The full report from Fitch Ratings is available here.