The Frack Spread -- Value Of NGLs Vs Natural Gas -- RBN Energy -- December 2, 2016

Mountains out of ant hills: $7,000,000. Over ten years. One thousand jobs.  $7,000/worker. $700/worker/year. $1.92/worker/day. Yup, that's the "corporate welfare," as many call it, that Carrier got. The state of Indiana is going to get significantly more back from each of those workers than $700/worker/year. The average family pays $1,530 in Indiana income taxes.  An employed worker will not be collecting welfare. And that's just the beginning. And someone not losing his/her job is priceless.

Active rigs:

	12/2/2016	12/02/2015	12/02/2014	12/02/2013	12/02/2012
Active Rigs	39	64	189	192	182

RBN Energy: The frack spread remains painfully low, but help is on the way.

The frac spread—the difference between the value of a typical basket of NGLs and the price of natural gas, in $/MMBtu—has averaged a paltry $2.28 for the past two years, by far the longest period of depressed NGL values since the start of the Shale Revolution. That’s bad news for natural gas processing economics, which are most favorable when NGL prices are strong and natural gas prices are weak. But things are about to get a lot better. Today we consider the currently low frac spread, what it means for natural gas producers and processors, and why a big turnaround may be in the offing.

The frac spread (short for “fractionation spread”) and its kissing cousin, the NGL-to-crude ratio, have been frequent topics in the RBN blogosphere, and for good reason. From the beginning, an underlying principal of RBN’s analysis of drill bit hydrocarbons (gas and liquids produced at the wellhead) has been our belief that the relationships between crude oil, natural gas and natural gas liquids (NGLs) have become far more important in the Shale Era than they were a generation ago. Now, what happens in oil markets impacts gas and NGL markets, and vice versa.

The NGL-to-crude ratio is a weighted average of OPIS/Mont Belvieu NGL prices divided by CME/NYMEX front month crude oil futures. The NGL mix that we use to calculate the ratio is 42% ethane, 28% propane, 11% normal butane, 6% isobutane, and 13% natural gasoline.

For many years the NGL-to-crude ratio averaged about 60%, staying within a 50%-to-70% range most of the time, and rising to a frothy 76% in September 2011.

But, as we’ve discussed often, rapidly growing natural gas production and increasingly oversupplied market conditions depressed natural gas prices in the early days of the Shale Revolution, which gave producers the incentive to shift their attention and resources toward “wet” gas shale areas that produced significant volumes of NGLs. The resulting NGL supply growth crushed NGL prices, which pushed the NGL-to-crude ratio down to a new plateau: since 2012 the ratio has averaged just over 40%, and even the collapse in oil prices since mid-2014 hasn’t changed the ratio much. (As of November 30, 2016, with NGL prices up in sympathy with the new OPEC deal, it stood at just 45.4%.)

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The Market

On a day in which the market is down -- one of the very few down days in the Trump rally -- and a trivial day at that, down only 30-some points, how many new highs, new lows? NYSE:

• new highs, 76: BHI, HP, UPS,
• new lows, 66