A few years ago, natural gas storage was one of the hottest segments of midstream infrastructure development. But along came shale, then oversupply, then depressed prices. The forward curve flattened out, killing off new storage development projects and putting a lot of financial pressure on those companies that own or lease storage capacity. But recently things have shifted, at least part of the way back to the good ole days. The summer/winter spread currently sits at $0.63/MMBtu (April 7, 2016), the highest level since 2012, and up significantly from the past years average of around $0.30/MMBtu. Midstream companies with available storage should be able to lock in higher prices compared to past years. In today’s blog, we look at the situation now facing natural gas storage operators and show how recent shifts in the market may affect their returns.
Before we go on, we need to point out that this blog addresses company level data. This analysis provides a context for our market assessment, and should not be viewed as investment advice. RBN is not an investment advisor, nor do we endorse the purchase or sale of any particular security or make any other market recommendations.
In February 2014 Boardwalk Pipeline Partners (BWP) stunned the market by slashing their distribution ~80% sending the units tumbling approximately 50% in a single day. In their conference call management cited the adverse market for natural gas storage and parking (short-term storage) as one of the main reasons for the distribution cut. Looking back into BWP’s financials confirms management’s comments. Storage and parking revenue declined approximately $40 million a year from 2013 to 2015. Average rates per Mcf of storage at BWP’s Bistineau storage facility were cut from $0.99 per year in 2010 to a paltry $0.15 in 2014. Boardwalk was not alone in feeling the pain from the weak storage market. Niska Gas Storage Partners, a pure play storage operator in North America, saw their units tumble approximately 90% at the end of 2014. Storage and optimization revenues for the company were down over 50% for fiscal year 2015 compared to 2014. Even more diversified midstream companies felt some of the pain. Crestwood, Spectra, Kinder Morgan, and many others have seen natural gas storage revenues fall significantly over the past few years.
Valuing natural gas storage capacity can be a complex exercise. There are many variables that need to be considered such as regional prices, storage type (depleted reservoir, aquifer, salt), cyclability (maximum frequency of injections and withdrawals), competition, liquidity, contract length, and vintage (contract age). In addition, different storage users will value storage differently based on their needs and ultimate end use. There are a number of methods used to put a value on storage capacity. We will focus on the most simplistic of those methods, called intrinsic valuation (see I will Survive – Making Money with Natural Gas Storage in the Shale Era). In most competitive markets this is the largest driver of storage value and the intrinsic value this year is much improved over the last few years.
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