We all have read thousands of articles about the natural gas and the oil prices so I decided to move again off the beaten path and write an article about the oil liquids associated with the oil and the natural gas. In addition, I thought to capture some companies with a significant natural gas liquids production that impacts their top and bottom line significantly. However two clarifications are necessary here. Firstly the natural gas liquids include condensate, butane, propane and ethane. Secondly i have to separate liquefied petroleum gas from liquefied natural gas that both Cheniere Energy (LNG) and the JV from BP Plc (BP)/Exxon Mobil (XOM)/ConocoPhillips (COP)/TransCanada (TRP) are going to export from their plants in Louisiana and in Alaska respectively. The link for this new project in Alaska that adds pressure on the liquefied natural gas export projects is here.
So the liquefied natural gas is mostly methane which is temporarily cooled in order to liquefy the gas. The liquefied natural gas must be refrigerated to a cryogenic temperature of about (-260F) in order to liquefy the gas and stays at or slightly above atmospheric pressure. The liquefied petroleum gas is a mixture of propane and butane, which is stored in a pressurized container and is stored at room temperature. Butane and propane have a higher critical point, and therefore pressurization is sufficient to liquefy the fuel.
Condensate and butane are the most valuable liquids while propane is weaker and ethane is the weakest part of the liquids market. Condensate typically trades at a premium to West Texas Intermediate crude. Condensate, which is similar to a light oil and can be used to transport bitumen, is a key part of the liquids game. However the propane prices have been rebounding lately and the future of the propane gets more and more bright as the demand for propane in several key markets (China, India) has risen more than expected while the supply from the traditional sources (Middle East, Iran, Venezuela) has been hit by several issues like operational problems and production disruptions according to Reuters.
In addition, if the upcoming winter is normal, this will lead to a major increase in propane demand. What is also of further interest for the U.S. and Canada based companies however is the upcoming major export expansions. For instance, DCP Midstream Partners (DPM) will activate its 150K natural gas liquids products pipeline from Conway to Mont Belvieu in Q2/2013, thus effectively linking the natural gas liquids to world demand, and away from the limited regional market we are stuck with for the time being. So I believe that propane prices in the U.S. will rally sharply in 2013 until they balance with the international prices which means that propane could be back to $50 a barrel much faster than anyone can estimate now.
The main liquids-rich areas of North America
Alberta Montney and Eagle Ford shale of Texas are the primary liquids-rich areas of North America currently. The Duvernay and the Niobrara formations may prove to be two more plays with a strong liquids rich potential. Niobrara formation lies in Colorado/Wyoming and it has seen some good results lately altough it is still at the very early stages of its development. Duvernay lies directly to the south-east of the Alberta Montney and dozens of companies have flocked there since 2009, spending more than $3-billion on land and drilling about 34 wells to date. Yet opinions on the play's potential remain dramatically different. The Duvernay may be as big to Alberta as was the Leduc discoveries of the 1940s according to the exploration manager of Yoho Resources (OTC:YOHOF).
Let's see now some producers with a significant liquids-rich portion as part of their total production. If the liquids-rich pricing keeps getting better during the next months as expected, the companies below will benefit significantly:
1) Talisman Energy (TLM) produced 430,000 boepd approximately in Q2 2012. The liquids portion (oil and natural gas liquids) was 161,000 bbl/d or 37% of the total production. The company does not provide an exact figure about the natural gas liquids portion (oil excluded) in its Q2 2012 report but this part is estimated to be approximately 15% of the total production by year end based on the latest corporate presentation to the institutions. The natural gas liquids production got a boost primarily from the wells in Eagle Ford shale. Actually its liquids-rich Eagle Ford production averaged 13,800 boepd in Q2 2012 from 2,700 boepd one year ago. Talisman trades with PBV =1,3. It also trades 4x its funds from operations (FFO) annualized and the long-term debt/FFO annualized ratio is 1,2.
2) Rosetta Resources (ROSE) produced 33,500 boepd in Q2 2012. The year-over-year increase was driven by Eagle Ford shale production growth, which averaged approximately 32,200 boepd for the second quarter of 2012, up from 21,600 boepd for the same period in 2011. Total liquids production for the second quarter reached all-time high levels, averaging 19,700 bbl/d and total liquids now represent 59% of total production, up from 46% a year ago and 52% from the first quarter of 2012. The natural gas liquids portion (oil excluded) represents 35% of the total production. Rosetta trades with PBV=3. It also trades 7x its funds from operations annualized and the long-term debt/FFO annualized ratio is 2.
3) Magnum Hunter (MHR) produced almost 13,000 boepd in Q2 2012 and exited Q2 2012 with 50% oil and liquids production mix. It expects to exit 2012 in excess of 18,000 boepd with an approximate production mix of 60% oil and liquids. The natural gas liquids (condensate included) portion is projected to be higher than 15% of the total production of 18,000 boepd. Magnum trades with PBV =1,1. It also trades 7x its funds from operations annualized and the long-term debt/FFO annualized ratio is 6.
4) Forest Oil (FST) produced approximately 55,000 boepd in Q2 2012 and 20% of its total production is natural gas liquids (condensate included). Forest trades with PBV =1,5. It also trades 3x its funds from operations annualized and the long-term debt/FFO annualized ratio is 6.
5) Angle Energy (OTCPK:ANGZF) produced 15,600 boepd in Q2 2012 with more than 30% out of it to be natural gas liquids (condensate included). Angle trades at the main Toronto board. The company trades with PBV = 1. It also trades 4,5x its funds from operations annualized. Its long-term debt/FFO annualized ratio is 2,5.
6) Terra Energy (OTC:TTRHF) also trades at the main Toronto board and it is a natural gas producer with a small liquids-rich production currently. Its current production is 5,500 boepd (~ 80% natural gas) and it trades with PBV=0,15. However Terra Energy is a study case for those who believe the huge potential of the liquids-rich Montney land in Alberta. Resolute fund dumped some million shares in August and September, driving the pps much lower than 40 cents where it was hovering for months during 2012, according to sedar.com.
However there is one recent major development that the manager of Resolute fund obviously missed but it can change Terra Energy future. The Canadian International Oil company hit a big Montney well of 4,000 boepd (predominantly oil) at Karr/Gold Creek in and around T66R3W6 location few days ago. A high rate liquids-rich well this far north in the basin would confirm that the liquids rich/oil window is continuous from Kakwa to Karr. See here for more.
Terra Energy has over 130,000 net acres of Montney land currently for sale and in addition the company has about 50,000 net acres in the townships surrounding this oily well with Montney and Duvernay rights. Terra has also three sections (pdf) very close to this well.