Colorado’s Niobrara play has the best NGL economics today, says KeyBanc’s Deckelbaum.
As prices for NGLs (natural gas liquids) decline, whose going to start feeling the pinch first? “Looking at possible slowdowns, we see the most risk for the Cana/Woodford and Eagle Ford (wet-gas-window) plays,” in terms of percent of production that is wet gas, says David Deckelbaum, senior E&P research analyst for KeyBanc Capital Markets.
Production from each play is roughly 30% NGLs. “At $90 (oil) and (as NGLs are getting) 40% of WTI, if NGL pricing comes down to 30% or so, the Cana and wet portion of the Eagle Ford become marginal at best,” Deckelbaum says. The third-ranked play would be the wet-gas window of the Marcellus, which produces 22% NGLs.
“A year ago, when you were at about 55% WTI, you were getting about $2.50 an Mcf equivalent uplift for having NGLs in your gas stream. We think that has compressed today to about a buck.” So, at the Nymex price for natural gas, “instead of getting $2.70, you’re getting about $3.70.” A year ago, at the Nymex prices for oil and gas, producers may have been getting more than $5.50.
Deckelbaum addressed attendees at a KeyBanc-sponsored industry program in Houston recently. He and fellow senior E&P analyst Jack Aydin cover some 34 oil and gas producers with roughly $140 billion in market capitalization, ranging from $200 million to $13 billion.
The best wet-gas play today is the Niobrara in the Wattenberg Field in Colorado, he says. “It has the best economics in the entire U.S. It’s tough to get some (acreage) positioning there, but we’ve seen some very reasonable acreage valuations…You can still lease at attractive pricing, compared with the returns you can get.”
Deckelbaum suggests that NGL producers hedge the heavier portions of the NGL barrel. “Consider hedging some of your propane…To some extent, we believe the lack of hedging reflects the attitude that some of this (down-pricing) is seasonal, that it’s going to be short lived, but I think we’ve all lived through attitudes like that before with natural gas-where we waited for a cold winter or a hot summer and it doesn’t do enough to really work down that excess supply.”
Demand for ethane is some 900,000 barrels a day while supply has grown to some 1 million a day. “We should see bringing on another 50,000 barrels a day of demand, but we still see a situation where we’re going to be oversupplied on the ethane side.”
Hedging is the best solution, he concludes. “Propane is a product you can hedge effectively. Hedging is at least something that many of our best-in-class names hedge well over 50% of production.”
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