Kinetik Holdings Inc. (NASDAQ:KNTK) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Hello, everyone, and welcome to the Kinetik First Quarter 2023 Earnings Call. My name is Chach, and I’ll be the coordinator for this conference. After the presentation, there will be a Q&A session [Operator Instructions] And now I will hand over to Maddie Wagner, Director of Investor Relations, to begin. Please go ahead.

Maddie Wagner : Thank you. Good morning, and welcome to Kinetik’s First Quarter 2023 Earnings Conference Call. Here with me is our President and Chief Executive Officer, Jamie Welch, as well as Matt Wall, our Chief Operating Officer; Steve Stellato, our Chief Accounting and Administrative Officer; Tod Carpenter, our General Counsel; Trevor Howard, our VP of Finance; and Chris Kendrick and Tyler Mylan, 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 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.

Jamie Welch : Thank you, Maddi. Good morning, everyone, and thank you for joining us today. As the degree of interest in the Kinetik story increases, we have decided to shift our approach to our quarterly calls. We will be more selective with our prepared commentary to avoid unnecessary repetition with our press release and accompanying earnings presentation. Our goal with this change is to be respectful of your time and emphasize more of an open forum with the broader leadership team, which we hope leads to a more interactive and informative Q&A session. So let me get started. Yesterday, we reported first quarter 2023 adjusted EBITDA of $187.5 million, in line with our internal budget. Beginning in March, we saw a ramp-up in activity and volumes across our system.

To put things into perspective, most of our turn-in-line activity in any year and certainly after winter storm Yuri occurs during late first quarter and continues through the third quarter. We expect 70% of our new wells connected to the system in 2023 to occur during the 6-month window from March through August. Today, gathered and processed natural gas volumes are at all-time record highs. In April, we processed an average of 1.52 billion cubic feet per day, representing a 21% increase over the equivalent fourth quarter 2022 volumes. We expect sustained momentum throughout the year, supported by an active customer base and our performance from recent wells connected to the system. We are certainly seeing rising GORs across our system, indicating that the basin is getting gassier.

To succinctly frame our situation, we exceeded our 2023 exit rate guidance of 1.5 billion cubic feet per day of processed volumes in April and currently expect to exit 2023 at 1.6 billion cubic feet per day of processed volume. This new exit rate represents a year-on-year increase of over 25%. In late March, we closed on a small acquisition of a midstream infrastructure system in Reeves County, supported by a new 20-year agreement with one of our largest customers. The $65 million acquisition represents a less than 4x EBITDA multiple right out of the gate. We also executed a win-win incentive agreement with the customer, accelerating additional near-term drilling activity on dedicated acreage for gas processing and produced water services. The material revenue uplift from this incentive program will effectively start in 2024 and results in less than a 4x setup multiple.

As Kinder Morgan remarked last week, we are making progress on the PHP expansion. However, due to supply chain constraints for certain components and materials, the expected in-service date has been delayed to December 2023. During the first and second quarters, we have actively hedged our 2023 and 2024 commodity exposure. As of March 31, 94% of our remaining 2023 gross profit is from fixed fee contracts and hedges. We now anticipate achieving the high end of our 2023 EBITDA guidance of $800 million to $860 million, even with the delay in service of the PHP expansion. Our exit rate for 2023 is now well over $900 million of annualized EBITDA and our EBITDA step change from 2023 to 2024 remains intact. Our 2023 capital expenditures are trending towards the upper end of our guidance range, due principally to the accelerated producer activity requiring additional compression to support these higher volumes.

We are continuing to evaluate portfolio monetization opportunities, particularly our stake in Gulf Coast Express pipeline as a means to accelerate the achievement of our capital allocation priorities. A potential monetization of GCX would have an immediate impact to the DRIP, accelerate the achievement of our 3.5x leverage target and allow us to pull forward the point at which we return capital to shareholders. On the operations front, our team has done an exceptional job ensuring flow assurance and reliability for our customers while keeping operating costs down. Despite higher-than-expected volumes and continued materials and labor cost inflation, remaining 2023 operating expenses are right in line with internal expectations from our budget in February.

In April, we placed the Diamond Cryo expansion in service. The project was both on budget and on time. Now our installed processing capacity exceeds 2 billion cubic feet per day. Our gathering system expansion into Lea County, New Mexico is proceeding as planned. The project is on budget and on schedule and should be in service in January 2024, well ahead of the expected contract start date of April 1. We are currently in commercial discussions with several New Mexico producers and are excited about the potential near-term opportunities. We will continue to provide more commercial and operational updates related to our New Mexico activities as they occur. Delaware Link, our 30-inch residue gas pipeline to Waha is on budget and on schedule. We are targeting an in-service date in October.

And with that, I’d like to hand the call over to Trevor Howard, our VP of Finance.

Trevor Howard : Thanks, Jamie. We reported pro forma adjusted EBITDA of $187 million in the first quarter of 2023. Looking at our segment results, our Midstream Logistics segment generated an adjusted EBITDA of $119 million in the quarter. As Jamie mentioned, we saw a ramp-up in volumes beginning in March, and we have seen meaningful growth in April, which will benefit our second quarter and full year results. Shifting to our Pipeline Transportation segment, we generated an adjusted EBITDA of $72 million, up 4% year-over-year. Growth within the segment was driven by volume and margin expansion at Shin Oak and Epic crude as well as the receipt of a tariff settlement at GCX. Throughout the quarter, we de-risked and strengthened our balance sheet.

Through our commodity hedging program, we reduced our remaining 2023 commodity linked gross profit to 6%, down from 10% when we initiated 2023 guidance. Next, from a capital investment standpoint, total capital expenditures for the quarter were $121 million, which is approximately 23% of expected capital expenditures in 2023. $49 million was within our midstream logistics segment and $72 million was at the Pipeline Transportation segment. For the quarter, we generated an adjusted distributable cash flow of $127 million and free cash flow of $26 million. Turning to the balance sheet. Kinetik exited the quarter with a 4.0x leverage ratio. Furthermore, we swapped a significant portion of our floating interest rate exposure to fixed in March. In total, since our comprehensive refinancing last June, we have executed $2.25 billion of fixed rate swaps for the May 2023 through May 2025 period.

Our average swap rate implies an attractive 6.1% average cost of debt across our bank facilities and our 2030 senior notes. Currently, only 8% of our total current debt is exposed to floating interest rates. On April 19, we declared a $0.75 per share quarterly dividend to be paid on May 17. This represents a dividend coverage ratio of approximately 1.2x for the full quarter. During the first quarter, we opportunistically repurchased approximately 82,000 shares for $2.4 million under the previously announced $100 million repurchase program. The repurchase Kinetik shares will partially offset share issuances under the DRIP. Turning to our sustainability initiatives. I am pleased to share that we have made significant progress. We reduced our 2022 Scope 1 and Scope 2 greenhouse gas emissions intensity by 8% as compared to 2021.

Similarly, we reduced our Scope 1 and Scope 2 methane emissions intensity by 13% year-over-year in 2022. This was achieved in part through our LiDAR program, compressor blowdown best practices and new equipment installations. As a direct result of our emissions intensity reduction efforts and corporate diversity initiatives, we achieved our sustainability-linked financing framework performance targets for 2022, which will result in interest savings beginning in July 2023. And with that, I would like to open the lines for Q&A.

Q&A Session

Operator: [Operator Instructions] The first question today comes from Spiro Dounis from Citi. Please go ahead.

Operator: The next question on the line is from Tristan Richardson from Scotiabank. Please go ahead.

Operator: The next question is from Indraneel Mitra from Bank of America.

Operator: The next question is from Keith Stanley from Wolfe Research. Please go ahead.

Operator: [Operator Instructions] The next question is from Robert Mosca from Mizuho Securities. Please go ahead.

Operator: We have no further questions. So I’ll hand back to Jamie to conclude.

Jamie Welch : Thank you very much for your time. I know it’s — everyone’s slammed right now just given the announcements on earnings from everybody. So we look forward to seeing you at EIC in the next couple of weeks. Thank you.

Operator: This concludes today’s call. You may now disconnect your lines, and enjoy the rest of your day. Thank you.