Kinetik Holdings Inc (KNTK) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Altus Midstream Company First Quarter 2021 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your first speaker today. Mr. Patrick Cassidy, please go ahead.

Good afternoon, and thank you for joining us on Altus Midstream Company's First Quarter Financial and Operational Results Conference Call. We will begin the call with an overview by Altus Midstream's CEO and President, Clay Bretches; and Ben Rodgers, CFO, will summarize our financial performance and outlook.

Our prepared remarks will be approximately 10 minutes in length, with the remainder of the call allotted for Q&A. Remarks during the call may also refer to the Altus Midstream investor presentation, which can be found on our investor relations website at altusmidstream.com/investors.

On today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the investor presentation posted yesterday on the investor relations website previously noted.

Finally, I'd like to remind everyone that today's discussions will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the investor presentation on our website.

With that, I'll turn the call over to Clay.

Good afternoon, and thank you for joining us today for Altus Midstream's first quarter 2021 conference call. We entered the year with very positive momentum and have been able to maintain this as we've advanced into the second quarter.

Yesterday, we issued our earnings release, and we're on track to meet or exceed the midpoints of the performance we guided to last November, even with the severe freezing weather we all endured in February and the other challenges related to our business. I'm especially pleased with the execution of our team, and I will note a few of the milestones accomplished during the first 3 months of this year. This was our first quarter with all 4 JV pipelines in service. We also achieved our first full quarter in which we were free cash flow positive. Operating costs decreased for the 7th consecutive quarter, and Altus paid its first cash dividend in March.

Altus is a unique midstream competitor. We are a pure-play Permian Basin to Gulf Coast midstream company. We own equity interest in 4 premier long-haul pipelines that transport oil, gas and natural gas liquids out of West Texas. Complementing this, we operate state-of-the-art gathering and processing assets, which provide cleaner, more efficient product recoveries. These drive improved netbacks and are aligned with the industry's increasing focus on ESG initiatives.

We have a proven record of exceptional execution, as our results during the first quarter further demonstrate. A major event during the quarter was the February freeze that disrupted our operations and JV assets over a 9-day period. While the harsh weather tested facilities and field crews, broadly speaking, the favorable impacts offset the unfavorable. Ben will address guidance in his remarks, but I will note that we expect no material negative impact on our annual adjusted EBITDA guidance range as a result of the winter storm.

As noted in previous investor calls, Altus has a fixed-price power contract that affords us the option to shed load and sell excess power back to the grid. During the storm, Altus was able to sell power, generating incremental income that offset lower throughputs in our assets and operations. Impacts from the storm were temporary, and the pipelines were quickly brought back to pre-storm service levels. All 4 JV pipes and the gathering and processing facilities are newly built with experienced operators. The quality of these assets and expertise of the crews working them also helped to mitigate the negative impacts of the storm.

Before moving on to the business review, I want to acknowledge the many individuals who did an impressive job keeping operations online in particularly difficult weather conditions. And I recognize they conducted this essential work while dealing with their own challenging circumstances at home.

In our gathering and processing business, volumes during the first quarter were supported by the addition of 2 newly completed wells at Alpine High. Apache is scheduled to complete 5 more wells this quarter, some of which will begin flowing back later this month.

Operating costs decreased for the 7th consecutive quarter, which is especially impressive given the overtime incurred responding to the harsh weather conditions. A portion of these cost savings is related to timing where we have accelerated expenses to take advantage of lower pricing. Last quarter, we pulled forward, scheduled maintenance and pre-bought supplies and chemicals, reducing our burden at the start of this year. We also benefited from lower contractor costs.

Our operations teams have been very successful converting many of our fixed cost to variable costs. We continue to pursue the third-party business, though the environment is still somewhat subdued with lower activity levels across the Permian Basin. Conversations are ongoing with both public and private equity backed E&P operators as well as other midstream companies. We're also working deals with Apache outside of Alpine High. This includes providing compression at other fields in the Delaware Basin and identifying additional opportunities for expanding services with our sponsor.

Looking ahead to the remainder of the year, our focus areas will be capturing new business, optimizing our assets and continuing to build on our strong ESG culture. We are optimistic that demand for oil and gas products will continue to strengthen, which should support measured increases in drilling and completion activity in the Permian Basin. Altus Midstream's significant growth capital obligations are behind us, and the company is in a strong position to generate meaningful free cash flow. Our business is becoming more straightforward, with upside potential from both our G&P assets and liquids pipelines through increased utilization.

Earlier this week, Altus' Board of Directors declared a dividend of $1.50 per share, payable at the end of June to shareholders of record on May 28. Our unique combination of long-haul pipelines and gathering and processing assets provide substantial support for our dividend, which offers one of the most attractive yields compared among our midstream peers today.

I will turn the call over to Ben.

Thank you, Clay. In my prepared remarks, I will review Altus Midstream's financial performance for the first quarter, including the financial impact of the February freeze and our updated guidance for 2021. As noted in the press release issued yesterday, Altus reported net income including non-controlling interest of $22 million for the first quarter. Adjusted EBITDA was $65 million, and growth capital expenditures were approximately $21 million. Net income, including noncontrolling interest, was lower by approximately $17 million related to an unrealized embedded derivative loss for the quarter, which reflects a technical accounting revaluation of the embedded derivative in our preferred units for the period.

Gathered volumes for the quarter averaged 436 million cubic feet per day, of which approximately 72% was rich gas. Volumes for the first quarter were impacted by weather-related curtailments, which were partially offset by the 2 additional well hookups at Alpine High during the quarter. All the weather-related shut-ins were brought back online before the end of February.

Our first quarter results also include the initial contributions from the Permian Highway natural gas pipeline, which entered service on January 1, 2021. However, distributions generally lag a month, so this quarter's results reflect only 2 months of distributions from PHP, one of which was lower due to the weather impacts of winter storm, Uri. Both PHP and Gulf Coast Express are fully supported by shippers' minimum volume commitments, and we expect steady contributions from them going forward.

For Altus, the financial impact of the storm was immaterial. Across our 4 JV pipes and our G&P system, the negative impact to net income before taxes and adjusted EBITDA was approximately $500,000. Negative impacts from lower volumes across all assets, including pipeline imbalances, were almost fully offset by the benefit of our power contract that Clay discussed.

I would also like to commend the commercial and operations team for their achievements before and during the storm. Results are an outcome of preparation, and from contracting strategies that provide flexibility and mitigate risks to the execution in the field necessary for maintaining our operations in severe conditions, they did an excellent job.

I'll move on now to our outlook for 2021. We've provided updated guidance in the investor presentation posted to the Altus website yesterday, and I want to highlight items. Our gathered volume outlook has been adjusted upwards and is now 370 million to 410 million cubic feet per day. This reflects the encouraging early performance of the 2 new wells brought online at Alpine High during the first quarter and the addition of 5 more wells that Clay noted earlier. Higher G&P volumes have a positive effect on our outlook for adjusted EBITDA. Therefore, we are raising the low end of our guidance range to $240 million from $230 million, increasing the midpoint to $255 million for the year.

Following the start-up of Permian Highway, our growth capital obligations are minimal, and we remain on track with our previous annual guidance estimate of $30 million to $40 million. Altus has a strong liquidity position. Our revolver is committed through November of 2023, though we foresee no need to access capital. We continue to focus on the balance sheet with priorities on addressing the preferred and supporting our strong dividend payout.

Operator, that concludes our prepared remarks, and we can now move on to Q&A.

(Operator Instructions) Your first question today comes from the line of Spiro Dounis with Credit Suisse.

This is Chad on for Spiro. Just starting off, Clay, I believe you've previously alluded to some potential growth opportunities coming later this year. Sounds like that may still be the case based on your prepared remarks, but could we see any of those projects you mentioned coming in the next few months or being announced in the next few months? Just wondering how we should think about timing with some of those opportunities.

Yes. Thanks for the question, Chad. And with regard to the growth opportunities, we do believe that those are something that are very feasible. I do believe just from a timing standpoint, we'd be looking at the second half of the year rather than the next 2 months. A lot of that will stem from operators that are starting to increase their activity in and around the Delaware Basin. We think that some of the mandates -- some of the regulatory mandates that we'll see with regard to methane and flaring are going to benefit Altus greatly not only in the last half of this year but going into 2022 as well.

So the fact that we are structured the way that we are with the new plant, state-of-the-art facilities, a lot of ESG adds that you can see on our investor presentation, but we really do have some great additions to that plant that don't exist in many of the other, particularly older plants in the Permian Basin, we think that, that is something that's really going to be helpful and beneficial to Altus in the future.

So that's something second half of 2021, going into 2022, especially when we start seeing these mandates materialize or what we believe to be mandates that will be coming from EPA as well as the Railroad Commission with regard to flaring. So we think that's going to create some opportunities for us.

Okay. That's clear. And then I guess just sticking with the growth opportunities, could you provide any kind of detail on what CapEx could look like from these opportunities? Are these -- sounds like there may be a little bit smaller spend kind of complementary projects, but is there anything in there that could be more significant CapEx?

When you take a look at what we're talking about in terms of CapEx, it's going to be connection CapEx. Because we have excess capacity in the plants, we have 660 million cubic feet per day of processing capacity, we're processing right now between 340 million to 360 million cubic feet per day through our rich system. We have plenty of capacity in our lean system, over 200 million cubic feet per day of excess capacity. So either -- if it's lean gas or rich gas, the opportunities to bring that gas in there is really just going to be pipeline lays to either producers or other midstream operators in the area. So I guess to answer your question, we're not talking about big capital expenditures. What we're talking about doing is utilizing excess capacity that we have in our lean gas and rich gas processing systems.

And one more clarifying point there on top of that. We think of it as well in terms of kind of build multiple of projects, and a lot of what we're seeing are very attractive build multiples, kind of in the low to mid-single-digits, which will be accretive for our shareholders.

(Operator Instructions) Your next question comes from the line of James Carreker with U.S. Capital Advisors.

Do you happen to have the contribution that PHP made in Q1, just as we think about what that could look like going forward?

Not specifically, James. It's going to have some noise in it from Q1 as we mentioned because of the winter storm impacting flows and imbalances, quite frankly, across many of the pipes in Texas, including GCX and PHP. We haven't disclosed the specifics around that but fully expect it to normalize in Q2 through 4 and even beyond, barring any other kind of force majeure events out there.

Okay. So I mean you'll disclose the distributions you got in the 10-Q, I imagine, but you're saying that even taking that up and grossing it up for a third monthly payment would still not reflect really what its ongoing earnings will be because you had that storm impact.

That's right.

Okay. And is there any early indications on how the 2 completed ducts are performing? How long have those been flowing? And any kind of IP rates or 1-month production rates so far?

No. Apache talked about that on their call this morning, about the fact that the 2 ducts that were completed earlier this year in Alpine High and they have 5 more. And we even mentioned that in the script earlier as far as those will be completed in the month of May, and we'll even have some of them flowing. But there has not been any discussion on the results of the 2 that have already been completed from Apache. So that's not something that we can comment on ourselves. But we expect to have more information and expect that Apache will disclose some of that in further discussions on Alpine High.

Well, one reason I ask is because with the 2 ducts completed plus 5 more in Q2, I just -- it seems like that would have led to maybe a little bit higher revision of the throughput guidance. So any other things that are going on there to offset what would be those added volumes?

Yes, so good question. And let me say this as far as our guidance, we're being very conservative. So what you're not seeing is a lot of upside baked in from those ducts and the performance thereof. So stand by on that. We'll try to provide some more color on that in the months ahead, but we're waiting on Apache to make that disclosure before we get out in front of that. But what you're not seeing in the guidance, if you will, is a lot of upside baked in for those ducts.

Okay. And then maybe final question for me. I think Apache did allude to a non-core Permian asset sale on their call, but it didn't sound like it was related to Alpine High. Is that your understanding as well?

That is correct.

(Operator Instructions) And there are no further questions in queue at this time. I will now turn the call back to CEO, Clay Bretches, for any closing remarks.

Thank you for listening to our call today. I'd like to leave you with the following closing thoughts about Altus Midstream. We entered 2021 with significant momentum and this continues. Signs of economic improvement are out there as more people get vaccinated and business activity picks up across all sectors. We see potential with new wells contributing to our G&P business, the potential for third-party volumes and increased utilization on our joint venture liquid pipelines. We have the capability to provide Permian Basin operators a range of midstream solutions with a focus on ESG performance. It should be noted that our updated guidance does not include upside associated with this optimism.

Lastly, Altus is well positioned to achieve its financial and operational goals in 2021. This supports our objective of returning capital to shareholders, and I am pleased we will deliver our second quarterly dividend payment next month.

Operator, that concludes our call. I will turn it over to you.

And this concludes today's conference call. We thank you for your participation. You may now disconnect.