Investing in Natural Gas: Why Natural Gas Liquids Matter

Oil and gas companies usually provide an operational update which contains a breakdown of their production weighting for a recently drilled well or for an entire quarterly production. For example: In the fourth quarter of 2010, Angle’s production increased to exit the year at over 13,500 boe/d, with a mixture of approximately 60% natural gas, 30% NGLs (natural gas liquids) and 10% light oil. The mixture can also be described as 60% gas and 40% liquids. Notice how 1 barrel of NGLs is considered to be equivalent to one barrel of crude oil equivalent (Boe).

What are NGLs?

When natural gas comes out of the reservoir, it is not always in a pure gaseous state i.e. dry gas. The natural gas can often contain a number of other constituents in the fluid flow known as natural gas liquids. The NGLs are normally a combination of ethane, propane, butane and condensates which are light hydrocarbons that condense out of the fluid flow at the surface when the pressure and temperature fall from those in the reservoir. To put it simply: liquids rich natural gas (wet gas) is a combination of natural gas fluids associated with dry gas production. Natural gas production is measured in mmcf/d (xx million cubic feet per day) while NGL yield is measured in bbl/mmcf and NGL production in bbl/day (barrels per day).

The following table taken from Rosetta Resources provides a great overview of NGLs:

natural gas liquids

Clearly, the more liquids a company produces the more revenue it earns on its natural gas production especially when there’s a lot of condensates involved (C5+). It can almost double the $/mmcf received in certain cases as we can see from Yangarra Resources’ economic model for a liquids rich natural gas well:

yangarra-liquids-rich-wellNGL vs. LNG

Do not mix these 2 acronyms as they are completely different. Natural Gas Liquids are the liquid components extracted from the gas production (discussed above). On the other hand, Liquefied Natural Gas is the dry gas, mostly methane, in a liquefied state because it makes it easy to transport in bulk quantities instead of trying to move natural gas in its gaseous state at elevated pressures.

Final Thoughts

The short term outlook for natural gas prices is unfavorable yet several companies still budget for liquids rich natural gas drilling. Obviously, the cash flow from wet gas can be as good as oil in some cases. If you are investing in natural gas for the long run, look for companies with liquids rich resource plays as they will be able to survive the current low prices and return handsome profits to shareholders once NG prices turn around. If these companies are able to pay a dividend it’s even better as you get paid to wait.

Who is your favorite wet gas producer?