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Rising NGL prices entice Appalachian drillers to wade further into liquids

Spurred by escalating natural gas liquids prices, some Appalachian producers plan to give their 2017 revenue a boost by stripping more NGLs out of their production streams and selling them separately, a decision supported by NGL revenue upturns in the first quarter's results.

The revenue spikes gained momentum in 2016, with several Appalachian players booking significant returns from NGLs as a result of escalating liquids prices, which are linked to crude oil rather than dry gas.

Major Appalachian producers bumped up their NGL production year over year in the first quarter of 2017, and their NGL revenue more than doubled in that period, according to an S&P Global Market Intelligence analysis.

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Leading the Appalachian pack is Antero Resources Corp., which is working to grow NGL production to about 150,000 barrels per day by 2020. The company saw NGL price realizations exceed the high end of its 2017 guidance range in the first quarter, validating its move to continue ramping up NGL production.

"The outperformance we've seen over the quarter, most notably around liquids production, plays a prominent role in our long-term strategy as it boosts our production and price realizations," Antero CFO Glen Warren said on a May 9 earnings call.

NGLs such as ethane, propane and butane are used as feedstocks for the chemical industry and plastics manufacturing, as well as fuel.

NGLs have to be removed from the gas production stream at processing plants and then sold separately. The processing plant charges a fee for the service that, in recent years, has not been returned by selling low-priced liquids, so Appalachian drillers left the liquids in the gas stream. In trade terms, those liquids have been rejected.

EQT Corp. executives acknowledged these processing costs as part of the game, but the company is still banking on wet gas as realizations associated with transportation and marketing costs go up.

EQT in February acquired about 85,000 acres in liquids-rich development areas in the Marcellus Shale and drilling rights on 44,100 net Utica Shale acres. "With our recent consolidation efforts focused on, [or] ended up being, more wet gas, and as we reconfigure our future development plans to take advantage of those acquisitions, we are now forecasting to be wetter than we otherwise were," CEO Steven Schlotterbeck said on an April 27 earnings call.

As NGL prices go up, companies can diversify their revenue sources instead of relying solely on gains from dry gas in Appalachia, which consistently trades at a discount to the benchmark Henry Hub price. According to MUFG Securities analysts, increased demand from new petrochemical crackers starting up in 2017 and 2018 resulted in higher commodity prices for ethane, while rising global demand and higher U.S. export volumes contributed to higher propane prices.

S&P Global Platts analysts projected that the second-strongest production growth through 2020 would be in Appalachia, exceeded only by production in the Permian Basin of West Texas. The analysts see NGL prices soaring by 38% over the next two years.

"Bentek's bullish crude outlook, and expectation for propane to relink with crude as it becomes a global commodity, results in the rest of the NGL barrel trending higher," the analysts said in a May 23 note. Bentek is a trade name of S&P Global Platts Analytics.

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Besides Mariner East 2, Antero Resources has an ethane firm transportation contract on the ATEX pipeline and a supply agreement to Royal Dutch Shell plc's ethane cracker. Overall, Antero Resources' NGL takeaway capacity will be 111,500 bbl/d, said Paul Rady, CEO of Antero Resources. "This is an important project for Antero, as it will allow us to export our growing liquids production to international markets and receive Mont Belvieu-plus pricing at the terminal," Rady said.To diversify their end markets, producers are also capitalizing on new NGL pipelines. The largest, Mariner East 2 from the southwest Marcellus to the Philadelphia suburb of Marcus Hook for further export to European markets, is scheduled to come online later in 2017. Antero Resources is an anchor shipper on Mariner East 2, with a commitment of 61,000 bbl/d.

Range Resources Corp. was the pioneer shipper on Mariner East 1 and now sells NGLs to European chemical makers. The company has 20,000 bbl/d on Mariner East 1 and expects to branch out its global exports "to wherever the best market is," CFO Roger Manny said at the Global Energy and Infrastructure Conference on May 10.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.