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U.S. natural gas producers, long under the cloud of soft prices, are losing a rare silver lining. The likes of Chesapeake Energy and Devon Energy have been able to sell so-called natural gas liquids like propane and ethane to provide crucial cash flow for investment. But in the last year, prices for these products have tumbled by nearly half.

Time was, companies saw natural gas liquids as an unwanted byproduct of gas drilling. Yet as the price of natural gas has crumbled to less than a quarter its 2008 peak, the liquids have provided a lifeline. As of June, 2011, propane fetched around $64 (U.S.) a barrel. Prices like that allowed the companies to keep investing. Chesapeake, for one, has spent money to produce more natural gas liquids and money-spinning crude oil to offset its former heavy reliance on gas.

But total U.S. production of natural gas liquids has surged by around a quarter since 2009, according to the Energy Information Administration. Partly as a result, propane prices have roughly halved over the past year, to $33 a barrel last month.

It's a significant problem for Chesapeake in particular, already struggling with cash flow problems and a furor over its governance. In the first quarter of 2012, Chesapeake got more than half its $1.2-billion of unhedged production revenue from liquids. Some of that is from oil, but more than half the liquids revenue came from propane and its ilk, Argus Research estimates.

Already in the first quarter of 2012, Chesapeake's liquids fetched on average only about 70 per cent of the price of West Texas Intermediate crude, down from an average of about 90 per cent in 2009. For its part, Devon has seen gas liquid realizations tumble from some 50 per cent of the WTI price in 2007 to around 34 per cent in the first quarter of this year. And the trend looks set to continue. The average price of propane was more than 20 per cent lower in the second quarter than in the first.

Not all gas firms will suffer to the same extent. For instance, about 85 per cent of the liquid output of SandRidge Energy is old-fashioned crude oil, according to Morningstar. But second-quarter earnings at Devon and embattled Chesapeake, due in early August, are likely to show the propane pain.

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