MLPs that specialize in gas gathering and processing have suffered the most pain in the midstream space, with the severe downdraft in the prices of natural gas and natural gas liquids (NGL) taking its toll on names that have direct exposure to commodity prices through percent-of-proceeds and keep-whole agreements.
Gas-processing plants separate NGLs—a heavier group of hydrocarbons that includes propane, butane and ethane—from the gas stream.
Fee-based agreements guarantee that the processor receives a volume-based payment; in these deals, any upside comes from an uptick in drilling activity and production.
Percent-of-proceeds contracts, on the other hand, grant the processor a portion of the natural gas and/or NGLs–an attractive proposition when commodity prices are on the rise, less so when prices plummet.
In a keep-whole deal, the processor receives all the NGLs removed from the stream and collects a volume-based fee for the natural gas. These arrangements generate the best returns when gas prices are low and NGL prices are elevated.
Depressed energy prices have already prompted producers to curtail their drilling activity and focus on their core acreage. At the very least, this headwind will reduce demand for expansions to gathering and processing systems and could lead to throughput declines in some areas.
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