Company Overview and History
Kinetik Holdings Inc. (KNTK) is an integrated midstream energy company that provides comprehensive gathering, transportation, compression, processing, and treating services for natural gas, NGLs, and crude oil in the Permian Basin. The company has a strategic footprint across the core of the prolific Delaware Basin, with assets and operations that have expanded significantly over the past decade.
Kinetik Holdings Inc. was originally formed in 2019 through the business combination of Altus Midstream Company and assets from Apache Corporation. In 2020, the company faced significant challenges due to the COVID-19 pandemic and low commodity prices, recording over $1 billion in impairment charges and net losses as drilling activity and production volumes declined. To strengthen its financial position, Kinetik issued $280 million in new equity capital and renegotiated its debt agreements. As market conditions improved in 2021, Kinetik returned to profitability, generating $1.5 million in net income for the year. The company optimized its asset base by divesting non-core assets and reinvesting capital into strategic growth projects in the Permian Basin. In 2022 and 2023, Kinetik experienced a period of strong operational and financial performance, growing its gathering and processing throughput volumes and benefiting from higher commodity prices. The company also divested its 16% stake in the Gulf Coast Express pipeline in 2024 for over $500 million in cash proceeds.
Business Segments
Kinetik's operations are organized into two reportable segments - Midstream Logistics and Pipeline Transportation. The Midstream Logistics segment encompasses the company's gas gathering and processing, crude oil gathering and stabilization, and produced water gathering and disposal services. The Pipeline Transportation segment consists of Kinetik's equity interests in three major Permian Basin pipeline entities, providing access to various markets along the U.S. Gulf Coast.
The Midstream Logistics segment operates under three primary service offerings: gas gathering and processing, crude oil gathering, stabilization and storage services, and produced water gathering and disposal. This segment includes over 3,900 miles of low and high-pressure steel pipelines located throughout the Delaware Basin, including over 2,300 miles of gas pipeline acquired through the Durango Acquisition. The segment also operates over 570,000 horsepower of compression capacity. Gas processing assets are centralized at seven processing complexes with system-wide front-end amine treating capability of 6.5 MMcf/d and total cryogenic processing capacity of approximately 2.2 Bcf/d as of the current period, with an additional 200 MMcf/d of capacity expected to come online once the Kings Landing Project is completed in early 2025.
The crude oil gathering, stabilization and storage services segment has centralized assets at the Caprock Stampede Terminal and the Pinnacle Sierra Grande Terminal. The system includes approximately 220 miles of gathering pipeline and 90,000 barrels of crude storage capacity. The water gathering and disposal business operates over 360 miles of gathering pipeline and approximately 580,000 barrels per day of permitted disposal capacity.
The Pipeline Transportation segment consists of equity investment interests in three Permian Basin pipelines that provide access to various points along the U.S. Gulf Coast, as well as the company's Kinetik NGL and Delaware Link Pipelines. The equity method investments include a 55.5% equity interest in Permian Highway Pipeline LLC (PHP), a 33.0% equity interest in Breviloba, LLC (Breviloba), and a 27.5% equity interest in Epic Crude Holdings, LP (EPIC).
The Kinetik NGL Pipelines consist of approximately 96 miles of NGL pipelines connecting the company's East Toyah and Pecos complexes to Waha, including the 20-inch Dewpoint pipeline spanning over 40 miles, and the 30-mile, 16-inch Brandywine Pipeline connecting to the Diamond Cryogenic complex. This NGL pipeline system has a capacity of approximately 560 MBbl/d. The Delaware Link Pipeline is a 40-mile, 30-inch diameter pipeline with an initial capacity of approximately 1.0 Bcf/d that provides additional transportation capacity to Waha. This project reached commercial in-service in October 2023.
Strategic Expansion
In 2024, Kinetik further expanded its footprint in the Northern Delaware Basin through the $845 million acquisition of Durango Permian LLC. This strategic transaction added over 2,300 miles of gathering pipelines, 570,000 horsepower of compression capacity, and 200 MMcf/d of processing capacity to Kinetik's operations. The Durango assets are now fully integrated into Kinetik's Midstream Logistics segment, driving strong financial and operational synergies.
Financials
Kinetik's financial performance has been robust, with the company reporting net income of $386 million and Adjusted EBITDA of $634 million for the full year 2023. The company's leverage ratio stood at 3.2x as of the end of the third quarter of 2024, well within its target range of 3.5x. Kinetik has continued to maintain a disciplined approach to capital allocation, funding growth projects while also returning capital to shareholders through a growing dividend.
In the third quarter of 2024, Kinetik reported net income of $83.7 million, a 94% increase year-over-year. Adjusted EBITDA for the quarter was $265.7 million, a 23% increase compared to the same period in 2023. These strong results were driven by the successful integration of the Durango assets, continued operational excellence across the Midstream Logistics segment, and favorable market dynamics in the Pipeline Transportation segment.
For the full year 2023, Kinetik reported revenue of $1.26 billion, net income of $386.45 million, operating cash flow of $584.48 million, and free cash flow of $254.93 million. In the most recent quarter (Q3 2024), the company achieved revenue of $396.36 million, net income of $83.65 million, operating cash flow of $214.13 million, and free cash flow of $314.26 million. The company reported a 20% increase in total revenues and a 94% increase in net income compared to Q3 2023, driven by higher natural gas residue volumes sold, increased gathered and processed gas volumes, and the addition of the Durango acquisition in June 2024.
For the three months ended September 30, 2024, the Midstream Logistics segment accounted for $394.2 million, or 99.5%, of Kinetik's total operating revenue, with the remainder coming from the Pipeline Transportation segment. Segment Adjusted EBITDA for Midstream Logistics was $173.6 million, or 65.3% of the company's total Segment Adjusted EBITDA. The Pipeline Transportation segment contributed $8.9 million, or 2.3%, of Kinetik's total operating revenue, and Segment Adjusted EBITDA of $96.1 million, or 36.2% of the company's total Segment Adjusted EBITDA.
Outlook and Guidance
Based on the company's year-to-date performance and positive outlook, Kinetik recently increased its full-year 2024 Adjusted EBITDA guidance range to $970 million to $1 billion, up from the previous range of $940 million to $980 million. This revised guidance represents a 3% increase at the midpoint versus the previous guidance range and year-over-year growth approaching 20%. The company also tightened its 2024 capital expenditures guidance to $270 million to $290 million, demonstrating its commitment to disciplined spending and capital allocation.
Kinetik expects its Midstream Logistics segment to continue seeing year-over-year processed gas volume growth in the high teens. The Lea County MVC step up and margin expansion for gathering, treating, and processing services commenced in November 2024. The company anticipates the startup of gathering services at its Eddy County project in December 2024.
Strategic Initiatives
One of Kinetik's key strategic initiatives has been the ongoing efforts to connect its Northern and Southern Delaware Basin systems. In the third quarter, the company announced the construction of a new large-diameter, high-pressure pipeline to transport sweet gas volumes from Eddy County, New Mexico to Culberson County, Texas. This project will leverage Kinetik's existing processing capacity, providing greater operational flexibility and enabling the company to optimize its asset utilization across the combined system.
Sustainability Efforts
Kinetik has also made significant progress on its sustainability initiatives, including the approval of its Measurement, Reporting, and Verification (MRV) Plan by the EPA for three acid gas injection wells at its Maljamar and Dagger Draw processing facilities. This achievement positions the company to economically benefit from the CO2 it is currently capturing and sequestering through 45Q tax credits, further advancing Kinetik's decarbonization efforts.
Liquidity and Capital Structure
As of September 30, 2024, Kinetik's debt-to-equity ratio stood at approximately 2.0x. The company had $20.44 million in cash and $730.4 million of available capacity on its $1.25 billion revolving credit facility. Kinetik's current ratio and quick ratio were both 1.39, indicating a strong short-term liquidity position.
Conclusion
Overall, Kinetik's solid financial performance, strategic growth initiatives, and commitment to sustainability position the company as a leading midstream energy player in the Permian Basin. With a strong asset base, diversified service offerings, and a focus on operational excellence, Kinetik is well-equipped to capitalize on the robust activity and growth trends in its core markets. The company's recent operational achievements, including record-breaking quarterly results and increased guidance, demonstrate its ability to execute on its strategic plan and deliver value to shareholders. As Kinetik continues to integrate its recent acquisitions and optimize its asset base, it is poised for continued growth and success in the dynamic Permian Basin midstream sector.