Kinetik Holdings Inc. (NASDAQ:KNTK) Q1 2024 Earnings Call Transcript

Kinetik Holdings Inc. (NASDAQ:KNTK) Q1 2024 Earnings Call Transcript May 9, 2024

Kinetik Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and thank you for attending the Kinetik First Quarter 2024 Results Call. My name is Elisa, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the call to our host Alex Durkee, Investor Relations. Alex, please go ahead.

Alex Durkee: Thank you. Good morning and welcome to Kinetik’s first quarter 2024 earnings conference call. Our speakers today are Jamie Welch, our President and Chief Executive Officer; and Trevor Howard, our Chief Financial Officer. Other members of our senior management team are also in attendance for this morning’s call. The press release we issued yesterday, the slide presentation and access to the webcast for today’s call [Audio Gap] remarks including the question-and-answer section will provide forward-looking statements and actual results could differ from what is described in these statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. We may also provide certain performance measures that do not conform to US GAAP.

We’ve provided schedules that reconcile these non-GAAP measures as part of our earnings press release. After our prepared remarks, we will open the call to Q&A. With that I will turn the call over to Jamie.

Jamie Welch: Thank you, Alex. Good morning, everyone and thank you for joining our call today. Kinetik had an exceptional start to 2024 with continued momentum throughout April and early May. We reported our first quarter results yesterday afternoon exceeding our own internal budget and positioning Kinetik for a strong year ahead. First quarter adjusted EBITDA was $234 million, a 25% increase year-over-year reflecting robust underlying volume growth and contributions from the Permian Highway Pipeline expansion and Delaware Link. We processed gas volumes of 1.53 billion cubic feet per day representing 13% growth year-over-year and down less than 1% quarter-over-quarter due to planned maintenance at several processing facilities Alpine High curtailments as a result of depressed Waha prices and winter weather in January.

During the quarter we completed our planned maintenance projects at our Diamond Cryo East Toya and Pecos Bend processing facilities. We opportunistically scheduled these projects ahead of the ramp in producer turn-in-line activity starting in March and the Lee County contract commencement on April 1. As a result of the massive bed change outs, we have improved our plant recoveries and system efficiencies. I would like to thank the operations team for their hard work and commitment to safety during this time. They did a phenomenal job ensuring safe operations and system reliability for our customers. More recently, we completed our system-wide front-end amine treating project with the installation at our Pecos Bend processing facility in April.

We can now offer enhanced blending and treating services across our system and accept gas that previously did not meet our gas quality specifications. As producers explore different benches such as the Avalon and Bone Spring and further expand the boundaries of the Delaware Basin. Treating and blending will become critical to manage the elevated levels of H2S and CO2 and Kinetik stands ready to support this next phase of growth out of the basin. As we shared during our February call we placed our gathering system expansion into Lee County, New Mexico in service on January 18 over two months ahead of schedule. The NVC-backed agreement went into effect on April 1 and we are currently receiving volumes well above that threshold. The expansion into Lee County combined with our enhanced treating and blending capabilities positions Kinetik to capture incremental market share in New Mexico.

Furthermore with the in-service of the PHP expansion in Delaware Link, we can now offer producers and integrated wellhead to Gulf Coast solution. With volatile and even negative natural gas prices at Waha since early March, it has been top of mind for producers to access premium priced natural gas markets particularly along the Gulf Coast which offers more price stability. Waha gas daily prices averaged negative $0.72 per MMBtu in the month of March and April. Many of our customers benefited handsomely during this period by having their gas sold at Gulf Coast markets rather than in-basin at the Waha Hub. As a reminder, Kinetik’s equity gas exposure shifted from Waha to the Gulf Coast following the in-service of the PHP expansion on December 1.

The depressed in-basin Waha prices had not only generated opportunities with Kinetik’s reserve PHP capacity, but have also further strengthened our partnerships with existing and new customers in need of egress out of the basin. We continue to forecast pressured in-basin pricing until additional pipeline capacity is placed in service. However, Kinetik and our customers are very well positioned with egress from the Permian to demand centers along the Gulf Coast. March was an important month for Kinetik shareholders, with the four quarter dividend payment on March 7, the core shareholders completed their commitment to reinvest their dividends. This commitment was important in that it enabled us to execute upon key financial priorities, such as fully redeeming the Series A preferred in 2022 and fund our elevated 2023 capital program.

It further demonstrated strong alignment with all stakeholders. Moving forward, we’re excited for all shareholders to now receive cash dividends starting with the first quarter dividend payment today. Subsequently, in March, we facilitated a secondary offering, which fully exited Apache’s remaining ownership in Kinetik. When combined with the prior secondary offering in December, we increased our public float to nearly $1.5 billion and quadrupled our average daily trading volume to nearly $30 million. We saw exceptionally high investor demand and participation in the secondary, and I want to thank our investors for their continued support and belief in the Kinetik story. And with that, I would now like to hand the call over to Trevor.

Trevor Howard: Thanks, Jamie. In the first quarter, we reported adjusted EBITDA of $234 million. For the quarter, we generated an adjusted distributable cash flow of $155 million and free cash flow was $108 million. Looking at our segment results, our Midstream Logistics segment generated an adjusted EBITDA of $143 million in the quarter, up 20% year-over-year, largely driven by increased processed gas volumes and enhanced marketing opportunities captured on our PHP capacity. Shifting to our Pipeline Transportation segment, we generated an adjusted EBITDA of $96 million, up 32% year-over-year and 12% quarter-over-quarter. Sequential growth within the segment was driven by three full months of contributions from Delaware Link and the PHP expansion.

To date, our commodity exposure pertaining to our equity volumes is approximately 50% hedged on average across commodities, with a higher hedge percentage on propane, butane and crude. Total capital expenditures for the quarter were $61 million, which was lower than our internal expectations as we completed the New Mexico gathering expansion and several planned maintenance projects in the quarter. Our leverage ratio for the credit agreement stands at 3.8 times. In addition to the series of steps taken in March, generating incremental value for shareholders, which Jamie touched on earlier, we also executed an accounts receivable securitization facility for $150 million in April. We used the proceeds from the AR facility to pay down our existing term loan A to $1 billion, allowing us to extend the maturity of the Term A an additional six months to December 2026.

Looking ahead, we continue to expect volatile commodity prices in 2024, especially for natural gas. As an industry, we collectively benefit from a more constructive natural gas price environment. However, Kinetik stands well positioned relative to its peers with capacity on PHP allowing us to provide access to Gulf Coast pricing to our customers and to continue to capture incremental marketing opportunities. Despite current gas prices, oil-directed producer activity remains unchanged on our system, and we have seen the return of activity at Alpine High following curtailed volumes in March in response to negative gas prices at the Waha Hub. We expect to see a step-up in volumes in the second quarter that continues through the remainder of the year, reflecting the completion of planned maintenance projects, the Mexico MVCs and customer development activity heavily weighted in the second and third quarters.

Before shifting to Q&A, I would like to share the significant progress we have made, on our sustainability initiatives. We entered into a first-of-its-kind agreement with Infinium, an industry leader in the production of synthetic eFuels to dedicate the sale of carbon dioxide captured from one of our processing complexes, for use as a feedstock in the production of ultra-low carbon eFuels using their proprietary process at Infinium’s project, Roadrunner. Notably there are, zero capital or operating cost to Kinetik, and this project will create another revenue stream for Kinetik. Our hope is that this partnership can serve as a model for others in the industry, and support broader decarbonization efforts. Throughout 2023 we made strong progress in our Scope 1 and Scope 2 greenhouse gas and methane emissions intensity reduction initiatives.

When compared to the 2021 baseline we have reduced greenhouse gas and methane emissions intensity by 12% and 34%, respectively. And we have now surpassed our 2030 methane emissions intensity reduction target of 30%, well ahead of schedule. Despite this early achievement, which required considerable financial and human capital investment we remain focused on furthering our sustainability efforts as a key pillar of Kinetik’s everyday operations. We look forward to providing even more detail this summer in our upcoming 2023 sustainability report. And with that I would like to open the line for Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Michael Blum with Wells Fargo. Your line is now open.

Michael Blum: Thanks. Good morning, everyone. I guess first question is just really on the full year guidance. In the press release you noted that, you sort of exceeded your internal forecast for Q1. So just wondering does that imply that you could be coming towards the higher end of that range?

Trevor Howard: Michael, good morning, very good question. Early days, we’re obviously just we’ve got — we’re just looking at even April numbers right now. And obviously things are trending well with respect to our overall guidance range. So I think we want to wait before making any statements about where we think we’re going to ultimately end up. We’ve got three quarters to go, one quarter down. I feel like it’s the end of the first quarter of a sports game. And we’ve got still a ways ahead of us. But things are really looking good, which is fantastic. And I just can’t complement the operations team more. They have done a hell of a job with all of the — I think I’m not sure if I spoke to you, but what we did say Michael, when we’ve spoken to a number of investors is, we had every reason to stub our toe in the first quarter.

Not that we didn’t communicate it, because we did all this maintenance or the most of that change outs. Here we saw some winter weather in January. But last time I checked that’s what winter’s all about. And we had negative pricing with Waha. So we had Apache curtailing some of the Alpine High volumes. You had a parade of factors, that would then give you a reason and cause to say, we didn’t hit, what we should have, because, and the short answer is we saw it, we took it and we kept going. And that’s a phenomenal — I think that is a phenomenal complement to the resilience of the business and the operational performance of the system.

Michael Blum: Okay. Great. No, that makes sense. And then, I just wanted to ask on GCX. Any updates there in terms of potential expansion just to level set up. I think at this point there’s no — the sales process is kind of on hold. And then kind of the broader question is you have an appetite to participate in some of these greenfield Permian gas takeaway projects that are sort of percolating? Thanks.

Jamie Welch: So as it relates on GCX on the expansion, I think we’ve been pretty consistent, saying that, we feel confident it’s going to happen. It was just a question of time. Yes, just for the audience, I would tell you just so everyone appreciates. Cash price today, Waha this morning, minus $3 folks, minus $3 bucks. So if that isn’t a drive for help from everyone to say, look, we need more egress capacity. I don’t know what is. As it relates to participation on the greenfield side, yes, we totally believe that we need more egress. I think we’ve seen a lot of the commentary from folks like Case at Diamondback and others. We got to get together and we got to fix this. We just got to because this is not fun for anybody. We’re in a very privileged position, and we recognize that because we have this PHP capacity, which is incredibly valuable.

Our customers appreciate it, new customers appreciate it, and it really helps us differentiate our services versus everybody else. And even saying that, we recognize we need, as an industry, to get behind — behind and coalesce behind the position that says we need more egress out of this basin because this will be one of the significant impediments we think, to the ultimate potential out of the Permian Basin.

Michael Blum: Thank you.

Operator: The next question comes from the line of Spiro Dounis with Citi. Your line is now open.

Spiro Dounis: Thanks, operator. Good morning team. Jamie, maybe if we could go back to the outlook for the rest of the year perspective, a lot of the year still left to go, but wondering if you could just put a finer point on some of the tailwinds you’re seeing that were not contemplated in the original guidance. I know Trevor talked about the Alpine High activity coming back. I imagine that was not foreseen. So curious how many of those sort of tailwinds are sort of adding up here?

Jamie Welch: So Spiro, thanks for that question. Good morning. Looking forward to seeing you on Tuesday. All right. As far as I would say, there are various components. When Trevor mentioned Alpine High coming back, that’s really just lifting the curtailment. I would say, it’s the operational performance that’s really been the tailwinds here. It’s the recoveries have been fantastic. If you recall, when we did this call at the end of February, we said we had a lot of plant maintenance we needed to do, most of bed change-outs. First time I think we had done it at Diamond. We had East Toya, we had Pecos Bend. We had it across the board. We had compressor maintenance. We had lots going on. Now that we’re through that, the recoveries have been fantastic.

They really have been fantastic. And so, [Audio Gap] because I really want to hop on operational performance and reliability, because that’s how you grow this business and I think we — our team, led by Matt Wall, have done a phenomenal job. So recoveries in particular, are tailwinds. I would say we’re seeing green shoots here and there, as Trevor mentioned, all directed drilling hasn’t changed. The only customer system that change behavior for negative gas prices was Alpine High, and that’s out there for the world to see. And it really — we haven’t missed a beat. And if anything, I think that reinforces the just the strength of the fundamentals of the business that we’ve got. And we’re above thresholds coming out of New Mexico, as far as volumes are concerned.

We’re doing really well.

Spiro Dounis: Got it. That’s great to hear. Second one, maybe just turning to market share. You talked about maybe 2 areas where you could see a little bit more gains there. One, was on the treating side, it sounds you’re able to accept a broader range of gas quality now. So first, curious if you’re seeing the volume impact from that just yet and how to think about the upside there? And then you also mentioned more customers or new customers on the egress side. I guess how much more room is there for you to gain on that side?