Q1 2022 Kinetik Holdings Inc Earnings Call
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Hello, everyone and welcome to <unk>.
Quarter 2020 earnings call my.
My name is Brad and I'll be the operator for your call correct.
There will be an opportunity for Q&A and have yourself question. Please press star.
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Working with us to remove your question. Please.
I will now hand, the floor over to Matthew Walker.
But again please go ahead.
Thank you good morning, everyone and welcome to genetics first quarter 2022 earnings Conference call here with me is our president and CEO , Jamie Welch as well as Matt Walsh, our CFO , Andy <unk>, our Chief strategy Officer, Steve Stellato, our CEO Tod Carpenter our GC.
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 our website www Dot kinetics dot com before we begin I would like to remind all listeners that our remarks.
<unk> the question and answer section, we will provide forward looking statements and actual results could differ from what is described in these statements.
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 Matt Good morning, everyone. Thanks for joining us. Thank you for your continued support of and interest in kinetic.
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 kinetics and noble results as a combined publicly traded company following the altice in BCP business combination in February .
We reported our first quarter 2022 results yesterday afternoon and are pleased to share with you. This morning.
It is worth highlighting that many of the figures today will be reported on a pro forma basis.
The business combination closed on January 1st 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 2022 full year guidance on slide three 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 here driven by increased volumes across both the midstream logistics and pipeline transportation segment as well as higher.
Commodity prices.
Processed gas volumes increased 9% year over year, averaging 111 Bcf per day this quarter in.
In April we announced the PHP capacity expansion open season, and anticipate an upcoming similar announcements 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're 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 Altra is capital structure.
And achieving investment grade ratings in 2023.
We will look to undertake a comprehensive comprehensive refinancing this quarter, which will materially improve our current inefficient capital structure and financial transparency.
On page four of our earning 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 here in February 2021, we generated adjusted pro forma distributable cash flow of $145 million.
And free cash flow of $119 million.
On April 20, <unk>, we declared a $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 one five times.
Free cash flow generated during the period was used to redeem 53000 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 four times and we remain focused on achieving our leverage target of three five times.
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 kinetic shares the secondary equity offering more than doubled our public float and kinetics average daily trading volume has doubled from pre offering levels as well the public now owns 11% of total.
Outstanding kinetic 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 DSL area, which commencing November 1st is also dedicated to kinetic for long term high pressure gas gathering and processing services.
Yeah.
Looking at segment specific EBITDA contributions on page five of the earnings slides midstream logistics EBITDA was $124 million up.
Up 22% year over year when normalized for winter storm here. This was primarily driven by increased volumes across all three commodities gas oil and water gas processed volumes were up 9% year over year and exceeded gas gathered volume growth due to several top.
<unk>, which began on January one.
Crude volumes modestly grew and produce water volumes grew by 7% largely driven.
Even 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 .
And those 80, new 80, new wells.
Wells that we provide midstream services.
Our pipeline transportation EBITDA was $17 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 here related expenses in 2021 at PHP Chinooks throughput volumes in the first quarter were just shy of 500000 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 600000 barrels per day, allowing for future growth.
Epic crude also continues to improve its performance by shipping a record 500000 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 about 2022 guidance range provided in February .
As a reminder, our 2022 guidance included an EBITDA range of 772 $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 cost for this year largely in <unk> 2022, operating and capital costs from higher inflation levels widely seen across the economy. We are also inflation escalators with our customers in our gathering and processing agreements that allow us to.
Zorba future cost pressures, we may experience.
Turning to slide nine I would like to provide an update on our altice and Eagle pool integration efforts.
We have made significant progress since closing integrating both assets and personnel.
<unk> system interconnect pipeline, which connects the legacy Altice 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 Altice owns compressor units throughout the year.
A number of locations representing 37000.
<unk> power had been identified for this year alone. Additionally.
Additionally, we are in the detailed engineering and design stages to install the legacy.
Altice owned amine treating units at the front end of the BCP processing complexes East Toya Pecos Bend and take it.
This allows us to expand our service offerings to guests trading 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 altice construction operations and maintenance agreement was terminated at closing resulted in $9 million of annual cost savings were in the process of implementing operational best practices at Diamond Cryo and <unk>.
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 Eagle claw ESG best practices at the Altice assets, we will green the legacy altice facilities and source electricity from renewable energy sources.
In April 2021, we did exactly that we moved Eagle claws processing complexes to 100% renewable energy sources and have realized a large reduction in scope two emissions. We will look to achieve similar results when we transition the altice assets over to a new.
Renewable energy source of electricity agreement later this year.
And on the topic of ESG, we will be publishing our 2021 sustainability report this summer.
2021 greenhouse gas emissions data was not readily available at the time that altice 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 one and scope two emissions between 2019 and 2021, we have seen a 41% reduction in absolute greenhouse gas emissions. This was largely driven by compression optimization few.
Future scope, two emissions will be significantly reduced once altice facilities migrated to renewables source 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 seven of the earnings presentation.
Starting with our midstream logistics segment, we signed two 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.
However, they will provide a nice upswing in the fourth quarter as we exit 2022.
As expected volumes from the new agreements represent 45% of.
800 million cubic feet, a day of lightened 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.
The 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 al lightened processing capacity that much more valuable.
<unk> sold out 45% of our latent capacity in two months, which surprised even us.
It is meant that we have now accelerated plans to expand our diamond cryo 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 two 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, a new 10 year high pressure gathering and processing agreement with Apache for their DSL acreage in Central Reeves County begins November 1st of this year Apache will be turning to sales a new six well pad in the third quarter.
Apache's fourth rig dedicated to the Delaware basin will be moving from DSL 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 commodity current commodity prices.
Is it realistic to expect more upside from Apache related activity.
So 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 two pipelines combined will provide over one two bcf a day of new incremental capacity from the Permian to the Gulf Coast, both PHP in Gcs 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 resulted 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 coal to support our European allies.
What is quite astounding, it's a significant impact from the additional EBITDA contributions from potential PHP and Gtx expansions together with the expected volume upside to <unk> 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.
<unk> had a strong quarter delivering results and setting up kinetic for future long term success, Inc.
In closing I'm extremely proud of what kinetic is being able to accomplish this quarter I want to thank all of 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 share.
Being more results with all of you in the future and now I'll turn the call back over to Matti.
Jamie would you. Please open the line for Q&A.
Of course as a reminder, if you would like to ask a question. Please press star one on your telephone keypad now oil prices start to withdraw your question.
Our first question comes from Arizona from Credit Suisse. Please go ahead.
Thanks, operator, good morning team.
Jamie I want to start with the cryo expansion we could.
Sounds like you guys are spot on the acceleration there so are we.
Given all of that.
As you all have and even if I look at slide seven so you still have a lot of capacity in their 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.
Good morning, Thanks for the question. So let me explain I think.
We knew that the Diamond Cryo expansion was the 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 lightened processing capacity in two 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 timeframe, which.
We thought originally this would take us three to five years.
We could be sitting here in 12 months to 18 months from now and we could be fully sell that.
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 makes extenuate. The timeframes already we know that the long lead items have gone from about 26 weeks to 40 weeks today that increases youre looking at a year just to get on incremental <unk>.
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 with our conversations are driven by the fact that we have all this excess capacity and others just dumped.
And so we want to capitalize on that and we think that that's a yes.
Create tremendous value for all of our stakeholders.
Got it okay.
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 achieving.
Achievable on a $12 million cost so that's fine, but I guess you also have the two 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 are you thinking about funding some of this growth.
Yes.
And I think as it relates to.
The pipeline transportation segment is a little different than obviously on the gathering and processing side. So if we <unk>.
<unk> 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 of the pipeline transportation side, it's fair to say.
Our blended multiple around five five times is what you should be looking at so when you think about again against our long range forecast.
<unk> only got two multiple points relative to our overall leverage threshold that we announced talking about and so I think spiro as.
You and I have discussed before I think there.
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 lock step with the ratable spend.
And I think that's going to be ideally suited to something that obviously.
Can continue to keep step with those.
Obviously, the spending profile as it relates to the gathering side I think.
We're in the midst of evaluating what the incremental amounts out whether its we had some aging constructions.
We have some eight and construct.
Benefit from some customers, which basically give us capital.
We had some other.
Elements of our overall gathering and processing growth capital that as interchangeable. So we actually we will focus on the capital resulting from the.
The connection for one of these new product 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 were going to see a significant increase in the overall spend.
The most important thing for the audience.
Biggest spend on the G&P business is processing.
And we've got that in spite so these incremental well connects short laterals and connections really don't amount to a significant amount of capital to be deployed.
Got it that's helpful color I'll leave it there thanks Jamie.
Thanks.
Our next question comes from David <unk> from Mizuho. Please go ahead.
Good morning, everyone, Jim maybe if I can just start off with the guidance raise without the guidance raise.
Maybe you saw can you just talk about.
What sort of factors are I guess.
Has it been to raise guidance right now, especially not only do so after <unk> in terms of adjusting guidance just sort of the gives and takes about maybe some items you're looking for.
For visibility before you do that.
Sure. So I think Tom gave it.
A multitude of factors.
Is first off we want to get the PHP and Gtx.
Done.
They are pretty significant, particularly given that we own majority control of PHP.
That's that.
Of its size at 650 million cubic feet a day.
Youre going to be dealing with something that is probably close to 450 $500 million of.
Total spend so that's a big one and how that actually is going to be spent in the timeframe and exactly what that looks like as far as the shape of spending that's important <unk> would also fall within that category. The next thing is we want to get the <unk>.
Refinancing done.
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 we're 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 pricings 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 here's a guide raise and then coming back the next quarter, and saying Oh and by the way, we've just gtx and PHP and Theres. Some other things we've been working on we wanted to do it all on the on the base of the second quarter because.
By then we think everything we will know we will have we will be able to do it we'll be able to do it thoughtfully and we'll be able to make sure that we effectively communicated to the market.
Thanks, Jamie appreciate that and then maybe if I could just follow up on PHP can you just talk to within the broader context of making sure your customers kind of have that.
Residue takeaway capacity.
Our confidence in all of these processing additional contracts with your customers do indeed have the egress and then we'll Connecticut itself I guess be taking any capacity either on PHP or gtx facilitate customer customers getting out of the basin.
So let me start with your loss.
Question first at 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.
Take out additional capacity with the expansion on Gtx, we are not a ship it today, but our intention is that we will be a ship of pro forma the expansion.
So we are working through that it is.
Critically important, particularly as we look at the diff going out and the magnitude of it 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.
Multiple <unk>.
Multiple terrorist Gtx NPH paid.
Thanks, Jamie if I could just squeeze in one last one given I guess.
Better growth than you expected more going on I'm just wondering.
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 its changed at all I think it is.
A conversation topic that's ongoing.
With Blackstone May obviously, you 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 are dealing with a lot of things right now so I think <unk>.
Sensation thats ideally suited to the back half of the year.
Okay.
Thanks sure.
Our next question comes from Neel Mitra from Bank of America. Please go ahead.
Hi, good morning, I wanted to.
I understand the cadence of growth for the 360 million cubic feet a day.
Agreement.
Are we starting from in late 'twenty, two 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.
Shin Oak interconnection that would give you better TNF fees versus what youre getting.
From other Interconnects.
Legacy <unk> systems.
So Neil good morning. Thank you for the question. So the short answer is the actual shape of the.
Cost of the new contracts that we announced the two 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 hit 360 by mid next year.
Okay. So I very so it start high and just goes higher.
As far as Shin Oak is concerned.
Look we have we have lone star we have drawn pre we have.
<unk> is connected to diamond.
And obviously, we've got the ability to move volumes.
<unk>, we own a third of it now.
Now, which obviously is attractive given the ramp so I think that.
That to US is just another outlet and another option and alternative for customers versus everything else.
Got it and then I wanted to switch the pipeline section.
You noted your an anchor shipper on <unk>.
HP.
And 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 blowout kind.
Kind of every two years or do you plan to sleep that to customers.
And then what percentage of the Piper you're holding.
So on the original.
Pipeline.
$400 million.
Cubic feet a day, we had.
Lee will sleeves slashed assigned slash syndicated however, you'd like to what.
What ever.
Would you like to use.
To various customers and we had actually said.
<unk> reach back in to our customers and each of them have been allocated either on a basket or an outright assignment.
Some of the capacity.
So that is available for all of our customers whether it is <unk>.
Terra whether it is EOG, whether it is diamondback, whether its colgate 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 to in fact take up some of the expansion capacity.
And make sure that we continue to keep a van.
Billable 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 sleeve.
The capacity to customers, but do you want to hold some of it to yourselves. So you can push them equity barrels from Midland to the Gulf coast win when spreads widen.
Yes, with our equity gas means that being gas associated with that.
With the small component of PRP 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 Electus those people that want Gulf coast pricing as part of the weighted average sales price for revenue, we treat ourselves the exact same.
Wei.
We don't we're not looking to capital I will make this.
Our marketing business from our standpoint, this is a customer directed.
Sure.
Segment of our business.
Got it and if I can just squeeze one more in is there any update on <unk> III. It seems like these expansion projects will be a band aid and will need greenfield projects pretty soon so.
Update on timing.
FY being the project and whether you'll participate at all in the first place.
Short answer on <unk> III is I think you've got to get through PHP and the gtx expansions that will bring one point over one two bcf a day of capacity to the pending by the second half of 2023 as it relates to two P three or whether it relates to energy transfer as 42 inch.
Pipeline, all enterprises potential pipeline or than any number of other projects out there I think there is room for several.
Not just one.
All of which obviously just needs 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 see to people need to get a better.
Handle and I suppose we need to see that we need to see value for money from a REIT standpoint relative to the build cost today, which is obviously far greater than it was back in 2017, when we saw gcs get announced and 2018, when you saw PHP and Whistler get announced.
Okay. That's great color. Thank you very much.
As a reminder for any further question. Please press star one on your telephone keypad.
We have no further questions on the call. So I will hand, the floor back dramatically.
Thank you thanks, everyone for joining us this morning.
That will conclude our call.
Thank you all for joining Beacon I think first quarter 2022 earnings call. You may now disconnect your lines.
Okay.