Oct 3 - With supply continuing to outstrip demand, low prices on natural gas liquids (NGLs) are weighing on midstream processors' profitability. Fitch Ratings believes slowing NGL demand and lingering price weakness is likely to pressure profitability throughout the balance of 2012 and into 2013.
With that said, we do not expect ratings to be immediately affected by fluctuating NGL prices. Business line diversity, management of contract mix, and/or active hedging programs should help keep leverage and coverage metrics within our current ratings expectation for most issuers. In the near to intermediate term, we expect that NGL producers with open price exposure will see pressure on cash flow and earnings.
Ethane prices remain weak (but again, off of 2Q lows), and we expect that will continue to weigh on NGL prices. However, with seasonality taken into consideration, a normal to colder winter and the coming on line of export facilities should provide some support to propane prices that will help support composite NGL pricing.
We expect NGL prices will see a fair amount of volatility over the next two to three years as NGL production is expected to remain strong and demand will fluctuate seasonally, affected by weather, planned (or unplanned) cracker maintenance, and other factors. Petrochemical companies have announced plans for expansions and new builds of cracking facilities that will help in the longer term (2016 and beyond) to better balance supply and demand.
While NGL prices have come back slightly for the third quarter 2012 from second quarter 2012 lows, pricing volatility remains in focus and adds uncertainty to the mix. Still, we believe the current production focus on liquids-rich opportunities underpins a need for gathering, processing and transportation infrastructure. The supply/demand dynamic for NGLs, particularly ethane and propane, has moderated but is expected to grow as a wave of new light feedstock steam crackers are set to be built in North America.
For additional information on this and other related topics, please see our reports, "Impact of Lower NGL Prices on Midstream Processors," "Pipelines, Midstream and MLP Stats Quarterly - Second Quarter 2012," "Dark Side of the Boom: Shale-Driven Chemical Expansions May Dent Balance Sheet Flexibility," and "Marcellus Shale Report: Midstream and Pipeline Sector - Challenges/Opportunities" available at
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. All opinions expressed are those of Fitch Ratings. (New York Ratings Team)