Kinetik Holdings Inc (KNTK) 2022 Q1 法說會逐字稿

Hello, everyone, and welcome to the Kinetik's First Quarter 202 Earnings Call. My name is Seb, and I'll be the operator for your call today. (Operator Instructions)

I will now hand the floor over to Maddie Wagner to begin. Please go ahead.

Thank you. Good morning, everyone, and welcome to Kinetik's First Quarter 2022 Earnings Conference Call. Here with me is our President and CEO, Jamie Welch; as well as Matt Wall, our COO; Anne Psencik, our Chief Strategy Officer; Steve Stellato, our CAO; Todd Carpenter, our GC; Trevor Howard, our VP of Finance; and Kris Kindrick and Tyler Milam, our VP of Commercial.

The press release we issued yesterday, the slide presentation and access to the webcast for today's call are available at our website, www.kinetik.com.

Before we begin, I would like to remind all listeners that our 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 U.S. 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.

Thank you, Maddie. Good morning, everyone. Thanks for joining us. Thank you for your continued support of and interest in Kinetik. I'm pleased to be here this morning to review our first quarter 2022 achievements.

This call today is important -- an important milestone for us as it marks Kinetik's inaugural results as a combined publicly traded company following the Altus and BCP business combination in February. We reported our first quarter 2022 results yesterday afternoon and are pleased to share them with you this morning. It is worth highlighting that many of the figures today will be reported on a pro forma basis, assuming the business combination closed on January 1 of this year. We believe that is more reflective of our actual results and provides our investors and others with more meaningful information and helps to reconcile our 2022 full year guidance.

On Slide 3, let's start with a few highlights. We reported pro forma adjusted EBITDA of $191 million for the first quarter. This represents a 17% increase year-over-year, normalized for Winter Storm Uri, driven by increased volumes across both the midstream logistics and pipeline transportation segments as well as higher commodity prices. Processed gas volumes increased 9% year-over-year, averaging 1.11 Bcf per day this quarter.

In April, we announced the PHP capacity expansion open season and anticipate an upcoming similar announcement on Gulf Coast Express. Both pipeline expansions are highly capital efficient and will help to address the near-term natural gas takeaway constraints facing the Permian Basin. We are excited to work with Kinder Morgan and our other partners to be a part of this solution on behalf of our E&P customers.

We had a successful quarter executing our capital allocation priorities outlined back in February. During the first quarter, we redeemed approximately 25% of the Series A Preferred, and we remain on track to redeem the outstanding balance by year-end. This is a key step towards cleaning up the legacy Altus capital structure and achieving investment-grade ratings in 2023. We will look to undertake our comprehensive refinancing this quarter, which will materially improve our current inefficient capital structure and financial transparency.

On Page 4 of our earnings slides, let's take a closer look at our financials for the first quarter. We reported pro forma adjusted EBITDA of $191 million. As mentioned, this represents a 17% increase year-over-year, normalized for the effects of Winter Storm Uri in February 2021. We generated adjusted pro forma distributable cash flow of $145 million and free cash flow of $119 million. On April 21, we declared $1.50 per share quarterly cash dividend, which is $6 per share on an annualized basis. That represented a pro forma dividend coverage ratio of 1.5x.

Free cash flow generated during the period was used to redeem 53,000 units of the Series A Preferred at quarter end. This was in addition to 15% of the Preferred being redeemed immediately prior to closing of the business combination. Our leverage ratio exited the quarter at 4x, and we remain focused on achieving our leverage target of 3.5x. We are confident in our ability to achieve our financial goals and capital allocation priorities to achieve investment-grade ratings in 2023.

In March, Apache successfully closed on the sale of 4 million Kinetik shares. The secondary equity offering more than doubled our public float and Kinetik's average daily trading volume has doubled from pre-offering levels as well. The public now owns 11% of total outstanding Kinetik shares. In connection with the sale, the first $100 million of proceeds received by Apache is earmarked for Alpine High development activity over the next 24 months. Apache has guided to a single rig program in the Alpine High beginning in summer of 2022, after the completion of its drilling operations in the DXL area, which commencing November 1, is also dedicated to Kinetik for long-term high-pressure gas gathering and processing services.

Looking at segment specific EBITDA contributions on Page 5 of the earnings slides. Midstream logistics EBITDA was $124 million, up 22% year-over-year when normalized for Winter Storm Uri. This was primarily driven by increased volumes across all 3 commodities, gas, oil and water. Gas processed volumes were up 9% year-over-year and exceeded gas-gathered volume growth due to several top dedications, which began on January 1. Crude volumes modestly grew and produced water volumes grew by 7%, largely driven by a new volume tranche dedication beginning in March 2022. Importantly, approximately 80 new wells were turned to sales in the first quarter. More towards the back end of the first quarter than on the front end, meaning January, early February. So -- and those 80 new wells we provide midstream services.

Our pipeline transportation EBITDA was $70 million, up 24% year-over-year. This growth was largely due to record volumes on both Shin Oak and EPIC Crude this past quarter as well as the reversal of Winter Storm Uri related expenses in 2021 at PHP. Shin Oak's throughput volumes in the first quarter were just shy of 500,000 barrels per day, a record quarter for the pipeline. Given the strong volume growth on Shin Oak the operator enterprise may look to optimize pipeline hydraulics to further increase the pipeline capacity to over 600,000 barrels per day allowing for future growth. EPIC Crude also continued to improve its performance by shipping a record 500,000 barrels per day as its shipper customers seek to access the premium Corpus Christi markets.

Based on our forecast, we expect to exceed the high end of our 2022 guidance range provided in February. As a reminder, our 2022 guidance included an EBITDA range of $770 million to $810 million and CapEx, including maintenance and growth of $125 million to $150 million. We will look to revise upwards our guidance this quarter and provide an update at or before our second quarter results call.

Moving on to operations. Our capital projects continue to be on budget and on time. We have locked in the majority of our capital costs for this year, largely insulating 2022 operating and capital costs from higher inflation levels widely seen across the economy. We have also inflation escalators with our customers in our gathering and processing agreements that allow us to absorb future cost pressures we may experience.

Turning to Slide 9. I would like to provide an update on our Altus and EagleClaw integration efforts. We have made significant progress since closing integrating both assets and personnel. The super-system interconnect pipeline, which connects the legacy Altus and legacy BCP systems is on track to be in service by late June. This will provide us with the ability to move 500 million cubic feet a day of rich gas bi-directionally and allow us to use latent capacity at the Diamond Cryo complex. This project is ahead of schedule and on budget.

We will look to begin replacing system-wide rental compression with legacy Altus owned compressor units throughout the year. A number of locations representing 37,000 horsepower have been identified for this year alone. Additionally, we're in the detailed engineering and design stages to install the legacy Altus owned amine treating units at the front end of the BCP processing complexes, East Toyah, Pecos Bend and Pecos. This allows us to expand our service offerings to gas treating as well as receive a wider range of gas with respect to gas quality specifications.

Since the closing, we have already locked in a number of integration-related cost savings. The Apache and Altus Construction, Operations and Maintenance Agreement was terminated at closing, resulted in $9 million of annual cost savings. We're in the process of implementing operational best practices at Diamond Cryo and across our broader gathering system, and that will harvest additional cost efficiencies.

And finally, we completed our back office transition, including IT, HR and accounting earlier this month and terminated the Apache Transition Services Agreement on April 30.

As part of our integration efforts, we are looking to implement our EagleClaw ESG best practices at the Altus assets. We will green the legacy Altus facilities and source electricity from renewable energy sources. In April 2021, we did exactly that. We moved EagleClaw's processing complexes to 100% renewable energy sources and have realized a large reduction in Scope 2 emissions. We will look to achieve similar results when we transition the Altus assets over to a new renewable energy-sourced electricity agreement later this year.

And on the topic of ESG, we will be publishing our 2021 sustainability report this summer. Our 2021 greenhouse gas emissions data was not readily available at the time that Altus released its full year 2021 results. So we would like to take a moment to share our success from last year on Slide 11 of the earnings presentation. We have made great progress in reducing our Scope 1 and Scope 2 emissions. Between 2019 and 2021, we have seen a 41% reduction in absolute greenhouse gas emissions. This was largely driven by compression optimization. Future Scope 2 emissions will be significantly reduced once Altus facilities are migrated to renewably sourced energy. We are committed to achieving net zero emissions by 2050 and strive to be good stewards of the environment, the communities in which we operate and our industry.

I would now like to pivot and share a few updates on our tremendous recent commercial successes on Slide 7 of the earnings presentation. Starting with our midstream logistics segment. We signed 2 new high-pressure gas gathering and processing agreements with large cap investment grade counterparties. These agreements will contribute 360 million cubic feet a day of volume and are supported by approximately 300 million cubic feet a day of minimum volume commitments. The full financial impact of these contracts will be reflected in 2023. However, they will provide a nice upswing in the fourth quarter as we exit 2022.

Expected volumes from the new agreements represent 45% of our 800 million cubic feet a day of latent processing capacity that we had highlighted and clearly demonstrates the intrinsic and extrinsic value of available processing capacity in today's environment. We have consistently said that Delaware Basin processing capacity appears to be much tighter than may be appreciated by the market. Labor constraints and significantly longer than normal lead times for new processing equipment only exacerbate processing capacity tightness, making our latent processing capacity that much more valuable.

Having sold out 45% of our latent capacity in 2 months, which surprised even us. It has meant that we have now accelerated plans to expand our Diamond Cryo's processing capacity by 120 million cubic feet a day by adding additional residue compression. This capacity expansion is low risk and is expected to cost approximately $12 million. That represents 80% less than the equivalent cost of adding greenfield processing capacity today. Following the completion of the expansion in the first quarter of 2023, our processing capacity will increase to over 2 Bcf a day. This Diamond Cryo expansion is a highly efficient capital project and will allow us to refill our operating leverage.

And certainly, before people ask, yes, we've already started engineering work to analyze what additional capacity we can get from every other processing train on our system. So today, we know that we will have at least 600 million cubic feet a day of pro forma remaining processing capacity. Therefore, we remain uniquely positioned to meet new and existing customers' needs and support continued future growth.

Turning to Apache-related activity. Our new 10-year high pressure gathering and processing agreement with Apache for the DXL acreage in Central Reeves County begins November 1 of this year. Apache will be turning to sales a new 6-well pad in the third quarter. Apache's fourth rig dedicated to the Delaware Basin will be moving from DXL to Alpine High this summer to resume drilling activity following the successful [Willow State] and [Mohican Wells] brought online in the first half of 2021. Given current commodity prices, it is realistic to expect more upside from Apache-related activity.

Turning to our pipeline transportation segment, we announced along with Kinder, the binding open season for the Permian Highway pipeline expansion, providing nearly 650 million cubic feet a day of incremental capacity. Additionally, we expect to announce a similar open season for an expansion of the Gulf Coast Express pipeline. These 2 pipelines, combined will provide over 1.2 Bcf a day of new incremental capacity from the Permian to the Gulf Coast. Both PHP and GCX expansions will likely come online in the second half of 2023. We view these brownfield expansions, which add additional compression capacity and involve limited pipeline construction as the quickest and most cost-effective solutions to address the natural gas takeaway constraints in the basin.

Given the current troubling world events and result in additional need for U.S.-sourced energy, we see the Permian as uniquely positioned. As such, we are excited to be a part of the solution to address the critical future call to support our European allies. What is quite astounding is the significant impact from the additional EBITDA contributions from potential PHP and GCX expansions, together with the expected volume upside to Shin Oak's capacity.

Those projects alone will increase our pipeline transportation segment EBITDA by over 25%. As a result, the pipeline transportation segment would then represent 40% of our total EBITDA. As you can see, we really have hit the ground running, had a strong quarter delivering results and setting up Kinetik for future and long-term success.

In closing, I'm extremely proud of what Kinetik has been able to accomplish this quarter. I want to thank all the hard work and effort by our employees. This success is because of you. I also want to commend them for their commitment and dedication to continued safe and reliable operations. I look forward to sharing more results with all of you in the future.

And now I'll turn the call back over to Maddie.

Thank you, Jamie. Seb, would you please open the lines for Q&A?

(Operator Instructions) Our first question comes from Spiro Dounis from Credit Suisse.

Jamie, I want to start with the cryo expansion, if we could. Something that you guys were spiked by the acceleration there so are we, just given all that latent capacity you all have. And even if I look at Slide 7, you actually still have a lot of capacity in there left to fill. So curious how we should be reading the decision to expand so quickly. Curious what your commercial team is telling you about what's remaining from here?

So let me explain. I think -- we knew that the Diamond Cryo expansion was the single largest potential expansion across our entire processing fleet. It's relatively modest cost. We have a lot of commercial activity. I think we surprised ourselves. When you sell out almost half your latent processing capacity in 2 months following the closing of the merger, what it tells you is you better have additional processing capacity on hand because the level of activity and the number of conversations we've got going with customers and others with respect to that capacity could see it all filled up on a much more accelerated time frame, which we thought originally, this would take us 3 to 5 years. We could be sitting here in 12 to 18 months from now, and we could be fully sold out.

So I think we want to be ready -- it's really important to be ready. The long lead times, we think that continued supply chain disruptions may extenuate the time frames already, we know that the long leader items have gone from about 26 weeks to 40 weeks today. That increases, you're looking at a year just to get on incremental revenue -- sales compression. And so we thought for $12 million, it's better to be safe than sorry in the current environment because I think our success is the fact that our conversations are driven by the fact that we have all this excess capacity and others just don't, and so we want to capitalize on that. And we think that that's -- it's going to create tremendous value for all of our stakeholders.

Got it. Okay. Yes. That's helpful color. Switching gears a bit and just thinking about funding a lot of this new growth coming forward. It sounds like this cryo project, very sort of achievable on a $12 million cost, so that's fine. But I guess you also have the 2 Permian gas pipelines potentially coming. And then maybe any sort of associated gathering that goes along with this processing. So curious, as you look forward, you're obviously in the middle of refinancing now, how you're thinking about funding some of this growth?

I think as it relates to the pipeline transportation segment, it's a little different than, obviously, on the gathering and processing side. So with FID, PHP and GCX there will be a period of 15 to 18 months that obviously we've got the spend related to that particular investment. Those projects, I think on the pipeline transportation side, it's fair to say our blended multiple around 5.5x is what you sort of be looking at. So when you think about against our long-range forecast, you've only got 2 multiple points relative to our overall leverage threshold that we are now talking about.

And so I think, Spiro, as you and I have discussed before, I think there are multiple means and approaches to get that incremental equity out, whether it's in the form of thinking about the DRIP into 2023, whether it's thinking about an at-the-money program for some modest amount because we want this equity over time to be in lockstep with the ratable spend. And I think that's going to be ideally suited to something that obviously can continue to keep step with that obvious little spending profile.

As it relates to the gathering side, I think we're in the midst of evaluating what the incremental amounts are, whether it's -- we have some aid in constructions. We have some aid in construct benefit from some customers, which basically give us capital. We have some other elements of our overall gathering and processing growth capital that is interchangeable. So we actually will focus on the capital resulting from the connection for the -- for one of these new contracts, and we can defer some of the other capital that we had planned because the emphasis will be on this particular area as opposed to another particular area.

So it's always dynamic. And I don't think we're going to see a significant increase in the overall spend as the most important thing for the audience -- the biggest spend on a G&P business is processing. And we've got that in space. So these incremental well connects, short, laterals and connections really don't amount to a significant amount of capital to be deployed.

Our next question comes from Gabe Moreen from Mizuho.

If I can start off with the guidance raise, about without the guidance raise, if I determine maybe as such. Can you just talk about what sort of factors are -- I guess you're hesitant to raise guidance right now officially and only do so after 2Q in terms of adjusting guidance, just sort of that gives and takes about maybe some items you're looking for visibility before you do that?

Sure. So I think, it's a multitude of factors. It is, first off, we want to get the PHP and GCX, FIDs done, right. They are pretty significant, particularly given that we own majority control of PHP. We -- that -- of its size at 650 million cubic feet a day, you're going to be dealing with something that is probably close to $450 million, $500 million of total spend. So that's a big one. And how that actually is going to be spent and over the time frame and exactly what that looks like as far as the shape of spending, that's important. GCX would also fall within that category.

The next thing is we want to get the refinancing done, right. The next thing is with the refinancing, we are planning to put in place a hedging program in the context of making sure that we've got things locked down as we look at the overall commodity price curve and where we see opportunities and where we like the overall pricing picture in front of us on the commodity side.

We have some other things on the commercial side that are being worked on. We wanted to take all of this into the second quarter and say, okay, now we know all the precincts have reported. This is everything we can possibly -- there will still be things going on, but the magnitude of what we're dealing with will be like no other. So rather than saying, well, here's a guide raise and then coming back to next quarter and saying, oh, and by the way, with this FID, GCX and PHP, and there are some other things we've been working on. We wanted to do it all on the basis of the second quarter because by then, we think everything we will know we'll have, we'll be able to do it, we'll be able to do it thoughtfully, and we'll be able to make sure that we effectively communicate it to the market.

I appreciate that. And then maybe if I could just follow up on PHP. Can you just talk within the broader context of making sure your customers kind of have that residue takeaway capacity, your confidence in all these processing additional contracts that your customers do need to have that egress and then will Kinetik itself, I guess, be taking any capacity either on PHP or GCX, I guess, facilitate customers getting out of the basin?

So let me start with your last question first. Yes and yes. We -- as you already know, we are an anchor shipper on PHP today. We will continue to make sure that we take out additional capacity with the expansion. On GCX, we are not a shipper today, but our intention is that we will be a shipper pro forma the expansion. So we are working through that. It is incredibly important, particularly as we look at the DRIP going out and the magnitude of the DRIP going out into 2023 that we have that egress.

And I think we can categorically say that we do have the egress capacity for our customers that makes our service offering, we think more unique than others. It differentiates what we provide versus competitors. So I think we've got that, and we'll continue to have more of it going forward with multiple turns, GCX and PHP.

And if I could just squeeze in one last one. Given, I guess, better growth than you expected more going on. I'm just wondering where the Grand Prix potential dropdown kind of fits in your order of priorities at this point, whether that's changed at all in the last couple of months?

No, I don't think it's changed at all. I think it's a conversation topic that's ongoing with Blackstone. They obviously have to make a decision as to when they think it's the right time to potentially harvest that investment. It has been a great investment. And from our standpoint, they know that we're dealing with a lot of things right now. So I think it's a conversation that's ideally suited to the back half of the year.

Our next question comes from Neel Mitra from Bank of America.

I wanted to understand the cadence of growth for the 360 million cubic feet a day agreement. Where are we starting from in late '22 and at what point do you expect to fully ramp to the full 360?

And then just as a follow-on to that, are there other reasons for the Diamond expansion such as Shin Oak interconnection that would give you better team FPs versus what you're getting from other interconnects from the legacy yield cost systems?

So the short answer is the actual shape of the new contracts that we announced, the 2 new large cap investment grade counterparties. They actually start I would say about 85% of the 360 starts almost immediately at the end of this year, fourth quarter 2022 and then it hits 360 by mid next year. So a very, so it starts high and just goes higher.

As far as Shin Oak is concerned, look we have Lone Star. We have Grand Prix. We have Shin Oak. Now Shin Oak is connected to Diamond. And we -- obviously, we've got the ability to move volumes on Shin Oak. We own 1/3 of it now, which obviously is attractive given the ramp. So I think the -- that to us is just another outlet and another option, an alternative for customers versus everything else.

Got it. And then I wanted to switch to the pipeline section. You noted you're an anchor shipper on PHP. And I wanted to understand a little bit more detail around that. Do you plan to hold the capacity and kind of play the marketing game because it seems we have Permian blowouts kind of every 2 years? Or do you plan to squeeze that to customers? And then what percentage of the pipe are you holding?

So on the original pipeline, we are 400 million cubic feet per day. We had squeezed/assigned/syndicated however, you'd like to -- whatever word you'd like to use, to our various customers. And we had actually -- so we reached back into our customers, and each of them have been allocated either on a basket or an outright assignment of some of the capacity. So that is available for all of our customers, whether it is [Caetera], whether it is EOG, whether it is Diamondback, whether it's (inaudible), all of them have this available to them. And that's where we find ourselves today.

It's still too early to talk about the expansion since we're on the binding open season. But as I said, we're intending to, in fact, take up some of the expansion capacity and make sure that we continue to keep available access downstream, particularly as we now have more and more volume on our system and more and more customer desire and need for egress to Gulf Coast markets.

Got it. So just so I understand, you typically want to squeeze the capacity to customers. But do you want to hold some of it to yourselves so you can push some equity barrels from Midland to the Gulf Coast when spreads widen.

Yes, with our equity gas, that being gas associated with the small component of PHP contracts, yes, we treat ourselves on our equity -- with our equity gas the same way as we treat all of the other customers in the basket of PHP electives. Those people that want Gulf Coast pricing is part of their weighted average sales price for residue, we treat ourselves the exact same way. We don't -- we're not looking to capitalize or make this -- it's not a marketing business from our standpoint. This is a customer-directed segment of our business.

Got it. And if I can just squeeze one more in. Is there any update on P3. It seems like these expansion projects will be a band-aid and will need greenfield projects pretty soon. So update on timing of FID and that project and whether you'll participate at all in the first place.

Short answer on P3 is I think you get to get through PHP and the GCX expansions. That will bring over 1.2 Bcf a day of capacity to the Permian by the second half of 2023. As it relates to P3 or whether it relates to energy transfers 42-inch pipeline or enterprises potential pipeline or any number of other projects out there I think there's room for several, not just one, all of which obviously just need to be commercialized.

I personally think that we'll be talking about commercialization of these projects towards the end of next year as opposed to any time in between -- because you need some large anchor customers to get it done. And I think we need to -- people need to get a better handle. And I suppose we need to see value for money from a rate standpoint relative to the build cost today, which is obviously far greater than it was back in 2017 when we saw GCX announced and 2018 when you saw PHP and then Whistler got announced.

(Operator Instructions) We have no further questions on the call. So I will hand the floor back to Maddie.

Thank you. Thanks, everyone, for joining us this morning. That will conclude our call.

Thank you all for joining the Kinetik First Quarter 2022 Earnings Call. You may now disconnect your lines.