Executive Summary / Key Takeaways

• Strategic Transformation vs. Operational Reality: Kinetik has assembled a comprehensive Delaware Basin midstream platform with 4,300+ miles of pipeline and 2.4 Bcf/d of processing capacity, but the past four quarters have been marred by execution missteps, including delayed Kings Landing commissioning and repeated guidance cuts that have eroded management credibility.

• Northern Delaware as the Growth Engine: The Durango acquisition and Kings Landing complex position Kinetik to capture disproportionate growth in New Mexico's sour gas-rich Northern Delaware, but this requires flawless execution on complex infrastructure that the company has so far struggled to deliver on schedule.

• Waha Price Volatility Exposes Structural Fragility: Despite 83% fee-based revenues, Kinetik remains vulnerable to Waha hub price swings, with negative pricing in October 2025 forcing 20% volume curtailments and revealing operational inflexibility that larger, more diversified competitors can better absorb.

• Capital Allocation Signals a Defensive Pivot: The $500 million share repurchase authorization reflects management's conviction that the stock is undervalued in the low-$40s, but also indicates a more cautious growth posture with less than $50 million of committed growth capex for 2026, suggesting uncertainty about producer activity.

• Niche Moat in a Giant's Game: Kinetik's pure-play Delaware focus and integrated water/gas services create a defensible niche against larger midstream players, but its smaller scale, higher leverage (3.9x net debt/EBITDA), and commodity exposure make it a higher-risk, higher-reward bet on basin-specific growth.

Setting the Scene: The Delaware Basin Specialist

Kinetik Holdings, founded in 2017 and headquartered in Houston, has built its entire existence around one of the most prolific and challenging natural gas basins in North America. Unlike diversified midstream giants that span multiple basins and product streams, Kinetik has made a deliberate strategic choice to become the indispensable infrastructure provider in the Delaware Basin, particularly in the rapidly developing Northern Delaware region of New Mexico. This focus creates both opportunity and vulnerability that defines the investment thesis.

The company's business model rests on three integrated pillars: gas gathering and processing, crude oil logistics, and produced water disposal. What appears on paper as a traditional midstream rollup reveals itself as a carefully constructed ecosystem. Kinetik operates over 4,300 miles of steel pipelines, more than 630,000 horsepower of compression, eight processing complexes with 2.4 Bcf/d of cryogenic capacity, and 580,000 barrels per day of water disposal capacity. This infrastructure doesn't just transport molecules; it solves the Delaware Basin's unique challenge of handling high volumes of associated gas and produced water alongside crude production.

The strategic rationale crystallized in February 2022 with the Kinetik Holdings Inc. merger, which created the holding company structure and set the stage for aggressive expansion. The June 2024 Durango Permian acquisition for $785.7 million represented the boldest move yet, thrusting Kinetik into the Northern Delaware's sour gas territory. This wasn't merely geographic expansion—it was a bet on the future of sour gas processing, a technically complex service where Kinetik could build a moat. The subsequent Barilla Draw bolt-on for $175.5 million in January 2025 added complementary gathering assets, while the Kings Landing complex in Eddy County, New Mexico, was designed to anchor the company's processing capacity in the region.

Technology, Products, and Strategic Differentiation: The Sour Gas Moat

Kinetik's competitive differentiation lies in its ability to handle the Delaware Basin's increasingly sour gas composition—a technical capability that larger competitors often avoid due to complexity and capital intensity. The company's eight processing complexes include specialized treating facilities for hydrogen sulfide (H2S) and carbon dioxide (CO2) removal, services that command premium rates and create high switching costs for producers. This isn't just pipeline capacity; it's chemical engineering embedded in midstream infrastructure.

The Kings Landing complex exemplifies this strategy. Commissioned in September 2025 after frustrating delays, the facility adds crucial cryogenic processing capacity in New Mexico and serves as the foundation for the company's sour gas ambitions. Management's decision to advance the acid gas injection (AGI) project ahead of a potential Kings Landing 2 expansion reveals their conviction that sour gas treating will be the differentiator in the Northern Delaware. The AGI project, expected in service by late 2026, will enable Kinetik to take high levels of H2S and CO2 at all its Delaware North complexes, meaningfully increasing total asset gas capacity.

This technical focus creates a double-edged sword. While it builds a defensible moat against generalist competitors like Energy Transfer (ET) or Targa Resources (TRGP), it also concentrates risk in a specialized infrastructure that requires perfect execution. The delays in Kings Landing commissioning—originally expected in late June 2025 but not reaching full commercial service until September—demonstrate how operational hiccups in complex facilities can derail financial performance and erode producer confidence.

The company's water management capabilities provide another layer of differentiation. With 370 miles of water pipeline and 580,000 barrels per day of disposal capacity, Kinetik offers producers an integrated solution that reduces logistics costs in a basin where water cuts can exceed four barrels per barrel of oil. This service isn't just ancillary; it's a critical component of the Delaware Basin economics that larger players often treat as an afterthought.

Financial Performance & Segment Dynamics: Volume Growth Meets Margin Compression

Kinetik's third-quarter 2025 results tell a story of strategic progress masked by operational and commodity headwinds. Total operating revenue of $461.6 million grew 17.1% year-over-year, driven by the Durango and Barilla Draw acquisitions and increased gathered gas volumes (up 15% to 307.1 MMcf/day) and processed volumes (up 11% to 188.6 MMcf/day). Yet adjusted EBITDA declined 12.8% to $151.4 million, revealing the core tension in the business: volume growth isn't translating to profit growth.

The Midstream Logistics segment, representing over 99% of operations, shows this dynamic clearly. While service revenue remained flat at $103.3 million despite volume increases—due to Kinetik functioning as agent rather than principal on some volumes—product revenue surged 23% to $357.6 million. This product revenue, however, exposes Kinetik to commodity price volatility. NGL and condensate prices fell 10% and 12% respectively, while natural gas residue prices rose 67% but on 21% lower volumes. The net result: cost of sales jumped 63% to $235.4 million, driven by higher volumes and the fair value adjustment to the Kings Landing earn-out contingent liability.

Operating expenses tell a similar story of growth without efficiency. Expenses rose 36% to $76.1 million, with $5.5 million from Durango operations and Kings Landing start-up, $6.3 million from Barilla Draw, and $8.4 million from utility cost inflation. This $0.10 per Mcf increase in unit costs year-over-year reflects both scale-up inefficiencies and the challenge of retaining compression units for new development areas originally planned for release.

The Pipeline Transportation segment provides a stabilizing counterweight, generating $95.5 million in adjusted EBITDA from equity investments in PHP, Shin Oak, and EPIC (before its October sale). This segment's 92% contribution from equity method investments offers stable, fee-based cash flows that partially offset the Midstream segment's volatility. The sale of EPIC Crude for $504.2 million in October 2025, while removing a growth asset, strengthened the balance sheet and reduced leverage.

Outlook, Management Guidance, and Execution Risk: The Credibility Challenge

Kinetik's guidance revisions throughout 2025 represent a crisis of confidence that management is now attempting to address through what CEO Jamie Welch calls a "fundamental reset." The original 2025 adjusted EBITDA guidance of $1.09-1.15 billion was first cut to $1.03-1.09 billion in Q2, then slashed to $965 million-1.005 billion in Q3. Welch's candid admission that "our reputations and credibility are in question" acknowledges the severity of the situation.

The guidance cuts stem from four primary factors: Kings Landing's slower-than-anticipated start-up ($20 million negative impact), sustained commodity price volatility ($30 million impact from Waha price declines exceeding 50% since February), direct and indirect impacts of lower prices on producer activity ($50 million combined), and the EPIC Crude sale affecting Q4. The company now expects full-year adjusted EBITDA at the low end of the revised range, with fourth-quarter annualized run-rate approaching $1.2 billion if Kings Landing ramps as planned.

Management's response involves forensic analysis of forecasting assumptions, including evaluating AI tools and machine learning, and aggressive cost reduction across all segments. The commitment to reduce controllable costs while maintaining less than $50 million of committed growth capital in 2026 signals a defensive posture, prioritizing balance sheet strength over aggressive expansion.

This pivot makes strategic sense given Waha price volatility and uncertain producer activity, but it also suggests the company is entering a period of slower organic growth.

The long-term thesis remains intact: Kinetik aims for 10% adjusted EBITDA CAGR through 2029, supported by contractual step-ups, Barilla Draw processing contributions starting in 2028, and potential Kings Landing 2 expansion. However, the path to this growth now appears more dependent on producer activity recovery and successful sour gas infrastructure execution than on market share gains.

Risks and Asymmetries: What Could Break the Thesis

The most material risk facing Kinetik is Waha hub price volatility and its disproportionate impact on a basin-concentrated operator. While larger competitors like Energy Transfer and Targa Resources can absorb regional price weakness through diversified assets, Kinetik's Delaware Basin focus means that when Waha prices turned negative in October 2025, the company faced 20% volume curtailments across its system. This exposure exists despite 83% fee-based revenues because product sales and producer activity remain sensitive to price signals. The company's mitigation efforts—securing additional Gulf Coast transport capacity starting in 2028—help but don't eliminate this structural vulnerability.

Execution risk on complex sour gas infrastructure represents the second major threat. The Kings Landing delays demonstrate that Kinetik's technical moat requires flawless operational delivery. The acid gas injection project, while strategically sound, involves regulatory approvals, complex engineering, and significant capital. Any misstep could delay the company's ability to convert Kings Landing 1 into a full sour gas plant and undermine the Northern Delaware growth thesis.

Leverage remains a concern, with net debt of $4.15 billion representing 3.9x the midpoint of revised 2025 EBITDA guidance.

While the company refinanced its credit facilities in May 2025, extending maturities to 2028-2030, the floating rate exposure on $2.11 billion of debt means each 1% rate increase costs $21.1 million annually. This financial leverage amplifies both upside and downside, making the company more vulnerable to EBITDA shortfalls than less-levered peers.

Competitive pressure from larger players could erode Kinetik's niche. Targa Resources' scale (8.3 Bcf/d processing capacity) and integrated NGL logistics, Energy Transfer's vast pipeline network, and Western Midstream (WES)'s Occidental (OXY)-affiliated volumes all represent formidable competitors with lower cost of capital and greater diversification. While Kinetik's sour gas expertise provides differentiation, a major new treating facility from a larger competitor could commoditize this advantage.

Valuation Context: Pricing a Basin-Specific Bet

At $36.89 per share, Kinetik trades at an enterprise value of $6.57 billion, representing 12.6x the midpoint of revised 2025 adjusted EBITDA guidance ($985 million). This multiple sits at a premium to Energy Transfer's 8.0x and roughly in line with Targa Resources' 12.1x, despite Kinetik's smaller scale and higher execution risk.

The valuation metrics reveal a company in transition. The price-to-operating cash flow ratio of 3.7x appears attractive, but the 17.3x price-to-free cash flow reflects heavy capital intensity.

The 8.4% dividend yield, while generous, consumes significant cash flow with a payout ratio exceeding 760% of earnings, indicating the dividend is funded by debt and asset sales rather than sustainable free cash flow.

Comparing Kinetik to its direct competitors highlights both opportunity and risk. Targa Resources trades at 24.4x earnings with 20.2% operating margins and 8.5% ROIC, reflecting its scale and integrated NGL value chain. Energy Transfer offers a 7.9% dividend yield with more modest 10.8% operating margins but benefits from massive scale and diversification. Western Midstream, with 46.1% operating margins and 9.0% dividend yield, demonstrates the profitability potential of basin-focused operations but benefits from Occidental-affiliated volumes.

Kinetik's negative book value (-$27.70 per share) and high debt-to-equity ratio (1.61x) reflect the capital-intensive nature of midstream infrastructure and recent acquisition activity. While not uncommon in the sector, these metrics limit financial flexibility compared to less-levered peers.

The $500 million share repurchase authorization, with $321.7 million remaining as of Q3 2025, provides a valuation floor but also signals that management sees better returns in buying back stock at these levels than in aggressive growth investments. This capital allocation shift suggests the market may be pricing in too much pessimism about the company's long-term Delaware Basin position.

Conclusion: A High-Conviction Bet with High Execution Risk

Kinetik Holdings has assembled a strategically valuable midstream platform in the heart of the Delaware Basin, with technical capabilities in sour gas treating that create a defensible niche against larger, more diversified competitors. The company's integrated gathering, processing, and water disposal services solve real problems for producers in a basin where infrastructure constraints limit development.

However, the past four quarters have demonstrated that strategic positioning alone is insufficient. Execution missteps on Kings Landing commissioning, repeated guidance cuts, and vulnerability to Waha price volatility have eroded credibility and highlighted the risks of basin concentration. Management's "fundamental reset" and pivot to defensive capital allocation reflect a recognition that the company must first rebuild trust before pursuing aggressive growth.

The investment thesis hinges on two variables: successful ramp-up of Kings Landing and sour gas infrastructure to capture Northern Delaware growth, and stabilization of Waha pricing or development of sufficient takeaway capacity to insulate volumes from regional price swings. If Kinetik can execute on these fronts while maintaining its leverage below 4x, the current valuation offers meaningful upside as EBITDA approaches the targeted $1.2 billion annualized run rate.

For investors, Kinetik represents a higher-risk, higher-reward play on Delaware Basin growth than larger midstream peers. The company's niche moat is real, but so are its execution challenges and commodity price exposure. The $500 million buyback authorization suggests management believes the market has over-discounted these risks, but only flawless operational delivery and favorable commodity pricing will validate that conviction.