A widely used fuel with 74% of gasoline’s energy content is currently trading at 20% of gasoline’s wholesale price.

That’s a great deal for industrial and residential users of propane, which touched a 13-year low of just 31 cents a gallon a week ago at Mont Belvieu, Texas, the main U.S. fractionation hub.


Source: U.S. Energy Information Administration

Consumers’ gain will be the loss of liquids-rich natural gas producers and processors suddenly sitting on near-record stockpiles and pining for the polar vortex days of early 2014, when propane topped out just shy of $1.70 a gallon.

That unusually cold U.S. winter taxed supplies already depleted by strong crop-drying demand the prior fall as well as rising U.S. exports of propane and butane.

Those mostly temporary factors briefly overwhelmed the huge increase in supply of propane and butane from the newly developed U.S. shale fields, where liquids-rich gas is often a byproduct of crude oil production. Gas processing plants separate natural gas liquids from the gas stream, and fractionators then split those NGLs into liquefied petroleum gases (LPG) like propane and butane.

As a direct consequence of the domestic shale boom, production of propane and its key derivative propylene from U.S. gas plants has roughly doubled over the last five years. In March, the last month for which the numbers are available, it was up 23% from a year earlier.


Source: EIA

Meanwhile, of course, the wet corn and icy air that caused so much propane to be burned in 2013/14 are long gone. And propane exports, which more than doubled between 2012 and 2014, have eased up recently, possibly because naphtha derived from discounted crude has stopped losing market share to LPG in the petrochemical industry. To make matters still worse, heavy Texas rains have recently disrupted propane exports from Houston and further limited the already scarce storage at Mont Belvieu.

The resulting near-record inventory of stored propane, at nearly 79 million gallons, is a bit below the record high above 81 million barrels last fall. But that’s a misleading comparison, because supplies tend to peak in the fall ahead of the winter heating season and bottom out in the spring. The chart below, from Reuters energy columnist John Kemp (and not including the increase in supplies reported on June 10), highlights the growing glut of propane relative to the seasonal norm.


The good news is that the Texas flooding problems are temporary, and also at this point that propane prices are seasonal and highly volatile. The bad news is that increased U.S LPG output is here to stay, because a lot of it is a byproduct of crude drilling that remains profitable.

And while the 79 million barrels of stored propane is dwarfed by the 470 million barrels of crude commercially stored in the U.S., the propane glut is actually much larger than the surplus of crude based on their respective rates of domestic consumption.

By the end of this week Mont Belvieu spot propane had rebounded above 41 cents a gallon. But there’s no guarantee that it won’t head back lower again if burgeoning supply overwhelms dwindling storage capacity. We’re near the seasonal low for demand and +can expect propane stocks to continue to build well into October.

A prolonged NGL slump at this week’s lows would certainly hurt the bottom line of producers and processors. But it’s unlikely to have significant effect on second-quarter results because NGL prices in April and much of May were in line with the first quarter’s average.

Most drillers are no longer all that reliant on the NGL uplift anyway. Net NGL sales accounted for roughly 5% of the total at EQT (NYSE: EQT) in the first quarter. Devon Energy’s (NYSE: DVN) NGL sales were approximately 9% of its first-quarter total.

The impact on the leading NGL processors is also likely to be muted. Targa Resources Partners (NYSE: NGLS) along with its general partner Targa Resources (NYSE: TRGP) is probably more exposed than most as a big gas processor and fractionator deriving up to 35% of its margin from percentage-of-proceeds deals. By the end of the first quarter Targa had hedged 30% of its remaining 2015 NGL exposure.

Its larger rival Enterprise Products Partners (NYSE: EPD) is more diversified and better protected by fee-based contracts accounting for some 85% of its margin. And while the remaining 15% would feel the bite of lower NGL prices, that pain would be offset somewhat by continued growth of export traffic from its expanded Houston terminal, a trend that would also benefit Targa’s nearby exports hub.

Meanwhile, Enterprise is benefiting from the increased demand for NGL storage, building up its capacity to move Marcellus liquids south to the Gulf Coast and planning a propane dehydrogenation (PDH) plant that would convert this cheap feedstock into value-added propylene.

On balance, the NGL glut looks like a manageably modest near-term drag for most midstream processors. But it also underscores the growing logistical and market dislocations created by the shale boom that will require new midstream infrastructure.

While midstream processors have no choice but to take the long view, two outperformers in our portfolios will be rooting for those dislocations and the NGL slump to persist as long as possible.

AmeriGas Partners (NYSE: APU) is the leading U.S. propane distributor, and as such fares best when low wholesale prices boost demand and give it more leeway to expand its margins. Even though its first- quarter volumes were down 6% as a result of this year’s warmer winter, EBITDA still increased 3% thanks to fatter margins and lower operating expenses. AmeriGas has returned 22% since we recommended it 15 months ago, and still yields 7.8%. Buy APU below $51.

AmeriGas general partner UGI (NYSE: UGI) is a Pennsylvania gas utility and pipeline operator that’s invested heavily in European propane distribution businesses in recent years. It operates in the U.K., France, Benelux, Scandinavia and Central and Eastern Europe, where lower propane prices will give the fuel even more of an advantage over heating oil. UGI has returned 3% since we recommended it in April, and yields 2.5%. Buy UGI below $45.