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Appalachian drillers expect 2016's NGL revenue spike to be just the beginning


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Appalachian drillers expect 2016's NGL revenue spike to be just the beginning

Big independent Appalachian shale producers posted substantial increases in their natural gas liquids revenue in 2016 and are looking at further gains in 2017 and 2018 as oil-linked NGL prices continue to improve and new midstream projects knit the Utica and Marcellus shales into U.S. and international markets.

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Appalachian wet gas newcomers such as CONSOL Energy Inc., Southwestern Energy Co., Gulfport Energy Corp. and Antero Resources Corp. are forecasting gains from 17% to 85% in NGL revenues for 2017. Longtime Appalachian players, including Marcellus Shale pioneer Range Resources Corp., are also anticipating better revenues from what was a low-priced product not worth separating from the stream of natural gas coming from the well.

In 2015, ethane, propane and butane, which are commodities linked to the price of crude oil, had prices so low that producers could not cover the costs of processing them out of the natural gas stream. But with an uptick in crude prices starting in 2016, gas liquids, once predicted to be the most valuable part of Appalachian shale production, came back into the money. Appalachian producers resumed stripping NGLs out of the gas stream and selling them to chemical and plastics manufacturers in markets as diverse as the Gulf Coast, Canada and, increasingly, overseas.

"NGL exports just shy of last month's all-time highs," analysts at energy investment bank Tudor Pickering Holt & Co. said April 2. "Total NGL exports were 1.4 million barrels per day in Jan. 2017, just off last month's record but still +155,000 [year over year]. This means 35% of gross NGL production was exported in the month, a step up from 31% a year ago."

Asia is taking the bulk of the exported propane and ethane, at 43%, followed by Canada at 18% and Europe at 17%, the Tudor Pickering Holt analysts said. "With plenty of spare capacity for both ethane and propane, exports will likely march higher in 2017," they said. And new demand from the U.S. East Coast and Europe is likely to help fuel NGL production growth in Appalachia.

Enterprise Products Partners LP was the first mover in taking Appalachian liquids out of the mountains with its Appalachia-to-Texas Express, or ATEX, line, which opened in 2014 taking 125,000 barrels per day from Ohio and Pennsylvania to the chemical complexes and export docks along the Gulf Coast. But ATEX may soon be eclipsed by Sunoco Logistics Partners LP's Mariner East family of pipelines, which are already operating with more slated to come online this year.

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In Appalachia, Range led the way for exports to Europe, becoming an anchor shipper on the Mariner East 1 pipeline to the Marcus Hook export terminal outside Philadelphia for onward shipment to European chemical and plastics factories.

"The terminal has been a factor in the Marcellus/Utica [NGL] market for the past two years or so, but nothing like what is on the horizon," RBN Energy analyst Ron Gist said in an April 2 research note. "The company currently is building the 275 Mbbl/d Mariner East 2 pipeline (from Scio, Ohio to Houston, Pa. and from there to Marcus Hook) that is expected to come online as soon as the third quarter of this year. Mariner East 2 itself is expandable to 450 Mb/d, and Sunoco Logistics has indicated that it may install a parallel pipe (dubbed Mariner East 2X) capable of transporting another 250 Mbbl/d, bringing the total potential of the Mariner East system to a whopping 770 Mbbl/d."

With 100% of Antero's dry gas production hedged at $3.63 for 2017, gas liquids represent the biggest potential upside to the company. After increasing NGL revenues 64% in 2016, Antero is telling analysts it will grow that production segment 65% in 2017 and an additional 59% in 2018, to just over $1.1 billion.

"Rising [NGL] exposure increasingly links cash flows to the higher-value oil barrel than natural gas" for Antero, Guggenheim analyst Subash Chandra told his clients March 16. "High value NGL growth also provides commodity price exposure which is otherwise lacking, with 100% and 75% of natural gas volumes hedged in 2017 and 2018, respectively. All four of [Antero's] Marcellus rigs are working the liquids-rich window (1,300 Btu)."

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Meanwhile, Range, the original Marcellus driller, is on track to post double-digit percentage gains in NGL revenue in 2017 and 2018 at even better pricing and with the addition of new leases it bought in Louisiana in September.

"We have a full year of transportation on the Mariner East pipeline, providing us better netbacks to international markets with the optionality of domestic sales if it makes sense seasonally," Range CEO Jeff Ventura told analysts on the company's Feb. 23 conference call. "We'll have a full year of our north Louisiana NGLs, which are well located and received Mont Belvieu [Texas] pricing. Overall NGL pricing has improved relative to [West Texas Intermediate crude] on improved supply-demand fundamentals."