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US drillers keep focus on NGL production, export amid Q4'18 commodity price drop

Natural gas liquids production remains a key focus for many of the U.S.'s top shale drillers, even as low commodity prices weighed on company earnings in the fourth quarter of 2018.

After peaking at just above 50 cents per gallon towards the end of the third quarter of 2018, NGL prices took a deep plunge by the end of the year, almost returning to year-ago levels at about 30 cents per gallon at Mont Belvieu, Texas, benchmark pricing. NGL prices tend to track oil prices, which plummeted to below $55/barrel at Brent benchmark pricing as 2018 ended, from about $85/bbl just three months prior.

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The U.S. Energy Information Administration in an early 2019 note attributed the price volatility to record high production and slowing global economic growth, among other factors, following a sharp increase due to takeaway and supply constraints both in the U.S. and globally. For the first time since 2015, crude prices ended the year lower than where they started in 2018, the EIA said.

As a result, half of the 10 biggest U.S. oil and gas producers covered by S&P Global Market Intelligence saw decreases in their NGL prices, which fell by as much as 21%. Those whose prices did increase saw a 1% to 23% rise, compared to prices almost doubling in the previous quarters.

Still, some producers managed to overcome the pricing environment through a continued focus on NGL production, posting NGL revenues that were higher than year-ago levels by up to 36%. Permian Basin-focused drillers Apache Corp. and Encana Corp. led with the highest NGL revenue increases, followed closely by Southwestern Energy Co., the third-largest NGL producer in Appalachia. The increases came even as Encana and Southwestern's NGL prices remained relatively stagnant year over year.

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Many upstream companies have slashed capital spending for 2019, but for some, NGL production is still high on their priority list. For instance, Apache President, CEO and Director John Christmann in a Feb. 28 earnings call highlighted the company's focus on NGLs. As Apache drops its rig count in the Permian Basin, the producer plans to increase the percentage of its output comprising NGLs moving forward, leaning on its production in the liquids-rich Alpine High play.

Southwestern is also continuing to focus capital investment on its wet-gas-laden southwestern Appalachia acreage, aiming to grow average liquids production by 19% on a full-year basis.

NGL powerhouses Antero Resources Corp. and Range Resources Corp. are banking on growing export markets to take their production, as international exposure is anticipated to strengthen NGL pricing. Among all the producers in this analysis, Antero saw the biggest drop in NGL prices, but it still posted a 25% increase in NGL revenues year over year, even as other companies' NGL revenues fell — a testament to its status as the largest NGL producer in the U.S.

As the anchor shipper on Energy Transfer LP's Mariner East 2 NGL pipeline, Antero has said it expects to move nearly half of its projected 2019 NGL production out for export from the Marcus Hook hub in Pennsylvania.

"[I]f we keep the liquids at home, we know one price that it has been historically," Paul Rady, chairman and CEO of Antero, said during the company's fourth-quarter earnings call. "When we export out of the dock, there's a good uptick that equates to somewhere between $4 and $8 a barrel of NGL. So we know there's a price improvement."

Range has the early-bird advantage of capturing premiums to Mont Belvieu pricing, being the only producer with propane capacity on Mariner East 1, which began operations in 2016. Range also has capacity on Mariner East 2 beginning April 2020. "Additional outlets for NGL production are beneficial in providing stability to NGL price, especially during the summer where in-basin demand is low," Dennis Degner, senior vice president of operations at Range, said in a Feb. 26 earnings call.

According to Jefferies analysts, NGLs are expected to give Range a leg up in achieving free cash flow during the year, if it can deliver on its realization targets. "Despite a depressed gas market, [Range's] mature asset base … and NGL leverage should allow the company to generate [above $100 million] of [free cash flow] in 2019," analysts said in a Feb. 28 note.