The Daley Note: May 2, 2023
Recovered ethane volumes are down sharply in the Williston Basin, and forward prices indicate ethane recovery could stay muted through the year. East Daley Analytics sees risk in particular for ONEOK (OKE) from Bakken market dynamics, reflected in our below-consensus Financial Blueprint outlook for the company.
Ethane recovery in the Williston is 20% below 2022 levels through the first two months of 2023, according to the latest Energy Information Administration (EIA) data. The EIA reports NGL plant production by purity product, and we can use the Minnesota-Wisconsin-North Dakota-South Dakota sub-PADD data as a proxy for Bakken NGL production. January and February data show ethane production was only 97 Mb/d from the region, 20% below the average of 121 Mb/d in 2022.
Oil and gas production took a hit in the Bakken from Winter Storm Elliot in December 2022. Although pipeline samples indicate production quickly recovered to November levels, ethane recovery in January and February was still down by 28% and 18%, respectively. The decline corresponds to a collapse in Mont Belvieu ethane prices; February 2023 prices were down 38% Y-o-Y, and the average strip price (~$0.22/gal) at Mont Belvieu is currently 53% below the 2022 average of ~$0.47/gal (see figure).
The Williston ethane market is being squeezed by two forces. First, Rockies natural gas prices have been relatively strong, drawn higher by a cold regional winter and a premium West Coast market. As a result, ethane often has been more valuable sold as part of the natural gas stream. Second, Permian production has been steadily growing, creating more regional supply competition.
Given ethane comprises ~50% of the wellhead NGL barrel, lower recovery can be a significant drag on total NGL volumes. Total NGL volumes in the Bakken were only 397 Mb/d in February, down 12% vs a peak of 450 Mb/d in September 2022. Ethane accounted for most of that decline.
Lower ethane recovery will mainly impact ONEOK, the dominant NGL midstream company in the basin. Data from 4Q22 indicates volumes dropped 10% Q-o-Q on OKE’s Elk Creek and Bakken NGL pipelines, which translated to a $10MM decline in EBITDA (a 1% impact drag on quarterly EBITDA).
ONEOK plans to report 1Q23 earnings after the market close on Tuesday (May 2). In the latest OKE Financial Blueprint, East Daley is 3% below Street consensus for FY2023. While OKE still has plenty of growth across its asset base, the lack of ethane recovery in the region may continue to be a drag on EBITDA. — Ajay Bakshani, CFA Tickers: OKE.
1Q23 Earnings Previews Now Available in Energy Data Studio
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