Q2 2023 Kinetik Holdings Inc Earnings Call
Good morning, everyone and welcome to the kinetics second quarter 2023 results. My name is chats and I'll be coordinating your call today. During the presentation. You can register to ask a question by pressing star one on your telephone keypad. If you change your mind based press.
Also I'd like to make your question now.
Now like to hand, you over to Matti Wagner to begin Marty. Please go ahead.
Thank you good morning, and welcome to kinetics second quarter 2023 earnings Conference call here with me is our President and Chief Executive Officer, Jamie Welch as long as not wall, our Chief operating officer, Steve Stellato, Chief accounting and administrative officer, any Ping Zhang our chief strategy.
The officer, Trevor Howard, our VP of finance, and Chris Kindred and Tyler Myeloma RV piece of commercial the press release, we issued yesterday, the slide presentation and access to the webcast for today's call are available at Www Dot kinetics Dot com before we begin I would like to remind all listeners that our.
Remarks, including the question and answer section, we 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 Matti and good morning, everyone and thank you for joining our call today, yes.
Yesterday, we reported second quarter 2023 results in line with our internal budget and slightly better than consensus estimates.
So the build off the momentum of our first quarter.
Following record processed gas volumes in April we continued to experience volume strength during the quarter processing, an average of 1.48 billion cubic feet per day, and setting a new company record for quarterly processed gas volumes.
This represents approximately 10% growth quarter over quarter and is attributed to the elevated development activity that typically occurs throughout the second and third quarters combined.
With encouraging produce the well results.
During may and June are processed gas volumes were impacted by record high temperatures experienced in west Texas.
The extreme heat affected produces utilities and service providers alike as they work tirelessly to maintain their mechanical equipment run times and overall production.
In fact, this past June in West, Texas was the hottest in over 10 years with temperatures consistently exceeding 100 degrees for the month.
Our operations team has gone above and beyond battling this summer heat, while endeavoring to ensure smooth and reliable service for our customers.
Therefore, despite the weather related challenges, we still had a record quarter, thanks to our operations team.
We remain on track to meet or exceed 2023 exit rate guidance of $1 6 billion cubic feet per day.
This is predicated on a constantly growing customer base step ups in contractual volume commitments, appearing this summer and the commencement of new contracts later this year.
As we enter the second half of the year 2023, adjusted EBITDA continues to trend towards the high end of our guidance range of 800 million to $860 million.
We forecast sustained growth quarter over quarter, primarily driven by midstream logistics volume growth and the commercial in service of Delaware link and the PHP expansion in the fourth quarter.
By year end, our annualized adjusted EBITDA should be well over $900 million.
Our operations team has continued to lead by example, and as a result, our unit operating expenses are expected to decline throughout the remainder of the year and come in below budget.
Additionally.
Current commodity pricing forecast indicate an improved outlook in the second half of the year as compared to the first.
2023 capital expenditures are expected to be at the top end of our guidance range, largely driven by incremental capital spend on PHP.
It is worth noting on midstream logistics and Delaware link capital spin is tracking at the low end of our guidance.
2020 for free cash flow outlook remains robust as we anticipate significant adjusted EBITDA growth year over year, coupled with capital expenditures below $150 million.
Moving to our growth projects, Delaware Link is ahead of schedule construction is progressing well and we are now targeting mechanical completion in September and commercial in service on October one.
Once in service, Delaware link will directly connect three of our processing facilities to one providing enhanced system reliability and flow assurance to our customers.
Progress continues on the PHP expansion and the project remains on track for an expected in service of December 2023.
New Mexico gathering system expansion into Lea County is on schedule and is expected to be mechanically complete in January with the gathering and processing agreement now underpinning that project.
<unk> is the beginning of April .
During the second quarter, we executed a gas gathering and processing agreement with a new customer in Lea County.
Supported by our multi year minimum volume commitment.
The contract is expected to commence following the in service of the pipeline in early 2024.
We continue to have constructive commercial discussions with several new Mexico produces both existing relationships and several new to kinetics and we're excited about the opportunities to grow our business in the northern Delaware.
Following the in service of Delaware link.
The HB expansion and the new Mexico gathering expansion, we will be able to provide a highly competitive integrated wellhead to Gulf coast solution to new Mexico produces the residue gas and natural gas liquids.
Moving to the Texas side of the Delaware Basin, we identified a handful of commercial opportunities, particularly with private producers and.
In the second quarter, we executed several gas gathering and processing agreements with new customers that have plans to bring on incremental production later this year and additional development next year.
Our commercial team has done a terrific job building partnerships with new customers and Meanwhile, growing our existing relationships.
We have grown our customer base by over 25% following our merger last year and today, our midstream logistics customer count stands at over 35.
We also want to congratulate chevron and the closing with PDC acquisition.
And look forward to working more closely with them as a major customer within our midstream logistics segment.
Finally, we released our 2022 sustainability report last week.
Tony has made meaningful progress advancing our sustainability initiatives of the past year.
Highly encourage you to take a look at the report if you have not yet done so.
Im proud of the progress that we made in 2022 and look forward to a continued improvement and achievements.
With that I'd like to now hand, the call over to Trevor Howard VP of finance.
Thanks, Jamie we reported adjusted EBITDA of $208 million in the second quarter of 2023.
Looking at our segment results, our midstream logistics segment generated an adjusted EBITDA of $138 million in the quarter up 15% quarter over quarter.
This was largely attributed to strong processed gas volume growth in the quarter.
Regarding the segments fee based revenue growth the second quarter of 2023 was up 10% versus the second quarter of 2022.
As Jamie mentioned earlier operations and the rest of the kinetic team have done a tremendous job managing costs, despite difficult operating conditions and inflationary pressures.
The second quarter Midstream logistics Opex came in 3% below budget and we expect these lower realized cost to carry through in the third and fourth quarters.
By the end of 2023, we anticipate unit cost per Mcf to decrease by approximately two pennies from the second quarter as Opex is effectively flat and volumes continue to increase.
Together, we estimate unit costs decreased 8% year over year.
Shifting to our pipeline transportation segment, we generated an adjusted EBITDA of $75 million up.
<unk>, 6% year over year.
Growth within this segment was driven by volumes and margin expansion at the Shin oak and epic crude pipelines.
We remain highly focused on de risking our future earnings potential and our balance sheet.
During the second quarter, we reduced our remaining 2023 and commodity linked gross profit two 5% and we will continue to opportunistically hedge our remaining 2023 exposure.
We have also shifted our focus to Derisking 2024 and beyond.
To date, we have hedged over 20% of our 2024 commodity going to gross profit exposure.
Much of which took place in July as the market rallied and we were selling into strength.
It is worth noting that in 2024, we expect kinetics commodity linked gross profit as a percent of total gross profit to decrease by approximately 10% to 9%.
Our new growth projects, which primarily carefully carry minimum volume commitments are placed into service later this year and early next.
On floating interest rates, we have approximately 90% of our total debt capital either fixed or swapped at fixed rates at least June of 2025.
While we continue to Opportunistically derisk, our balance sheet. We are currently comfortable with our fixed to floating rate mix.
Next from a capital investment standpoint, total capital expenditures for the quarter were $195 million.
$65 million was within our midstream logistics segment and $130 million was that the pipeline transportation segment.
We have seen tremendous capital cost control and the midstream logistics segment.
Which offsets some of the cost increases on our non operated pipeline side.
For the quarter, we generated an adjusted distributable cash flow of $144 million and turning to the balance sheet kinetic exited the quarter with a four one times leverage ratio.
On July 20th we declared a <unk> 75.
Per share quarterly dividend to be paid on August 16th.
During the quarter, we opportunistically repurchased approximately 112000 shares for $3 $3 million under the previously announced 100 million repurchase program.
Year to date, we have repurchased approximately 194000 shares for $5 $8 million, leaving $94 million of remaining authorized capacity for share repurchase.
The repurchase KN Teekay class a shares partially offset share issuances under the second quarter drip in August and with that I would like to open the lines for Q&A.
Thank you Trevor if you'd like to ask a question. Please press star followed by one on your telephone keypad now as a courtesy to others on the call. The Asa you limit your questions to one question and one follow up and then return the call key if you have additional questions.
Our first question comes from Sara.
Goodness from Citi. Please go ahead.
Thanks, operator, good morning, everybody.
First question, maybe just to start with the growth in some of your available capacity going forward. It sounds like a lot of commercial momentum so.
I know in the past you've alluded to the potential to expand on the processing side. It sounds like that was further away I just want to get an update on where that stands now and when you think further downstream from there do you have enough downstream capacity right now to facilitate all of its commercial momentum.
Yeah.
So spiro good morning, Thank you.
Look as far as on the processing side I still think as we look at our processing stack going forward that a decision in the second half of 2024 is the prudent decision point for a new processing facility that would then put it in service.
Likely towards at the end the earliest at the end of 'twenty five obviously, depending upon supply chain logistics and everything else in the world at that point in time.
Maybe at the latest it would be the very beginning of 2026.
We have we have enough capacity as it relates to Ngls and the latitude and flexibility that we have as well as obviously with.
Capacity on.
Capacity on PHP, So I think we feel pretty come come.
Both comfortable and confident of what we see right now as far as on the on the customer side going forward and I think that it's not going to change two things. It is not going to change how we think about capex for next year, because even within that 150. We've made the assumption that we will have at least as a positive and probably one milestone payment.
For a box and that would still keep us at the end of the at or under the $1 50 level.
And I think.
As far as the rate of pace of growth that we see if it continues to accelerate we can obviously revisit where obviously you try to get everything possible whatever out of our existing footprint and as you know we were successful expanding diamond cry about 120. So I think the guys will Matt and his team will try to get everything possible at a toy.
Tiger Pecos Bend that.
They are able to do and still maintain high levels of recoveries and obviously tremendous customer service.
Got it helpful color. Thanks, Jamie second one maybe just go into the Gtx.
You are still exploring sale, there and I think a lot of sort of expected maybe a potential deal would close by now, but I know that last discussion. It sounds like <unk> is now exploring an expansion to that pipeline, which was not originally in the plan I suppose I'm curious how much of that is sort of impacting the sales process now.
So it's a really good question Spiro as it relates to <unk>. So yes, we are in the second round, we have a number of parties that are moving through the process.
And youre right as evidenced by Kinder Morgan's discussion on the most recent conference call where they.
Resumed the topic of an expansion of <unk> I think in part that comes with following the successful <unk> of.
Next decade, LNG and I think the absolute certain realization that youre going to have almost 12, five Bcf a day go into Ecuador, say and you've only got six Bcf a day or six five Bcf a day of capacity to get there. So the incremental need is I think quite high.
The likelihood this get gets done I think is also pretty high as an owner and as a responsible owner of <unk> and responsible to our shareholders.
Job to try to get the highest price, including the value for the expansion.
We believe much like Kinder Morgan that it is highly likely to eventuate in the near term.
Yeah.
Got it helpful color as always thank you everybody.
Thanks.
The next question on the line is from Neel Mitra from Bank of America. Please go ahead.
Hi, Thanks for taking my question I wanted to touch on capital allocation going forward I know the goal is to ultimately get to investment grade as well as turn off the drip so.
Just wanted to understand kind of the order of events here. So it sounds like gcs is still very much on the table there is likely going to be some sort of expansion.
That's probably holding up some things and then after that.
Do we look to turn off the drip first or do we look to keep the drip to get to investment grade then turn off the drip I am just trying to understand which one is the priority first.
Turning to investment grade or turning off the equity.
<unk>.
Well.
Thats a really good question and it's something we discuss a lot internally. So obviously the the element obviously, you're gtx maximizing the value, particularly with the likelihood of the expansion of.
Of that particular pipeline.
We intend to reduce to at least the minimum level if not terminate.
For the remainder of its existing term, which would be two quarters third quarter and fourth quarter of this year.
And I think our viewpoint is that the business remains even more robust than we expected.
And we do not see a need to continue to have the worrying about the dividend reinvestment plan in order to achieve three and half times leverage target, which we think is a controllable outcome investment grade is somewhat out of our control because we are reliant on three two or three other parties to obviously make determination.
<unk> and our overall credit from a credit standpoint, so we within our control we know what we need to do and I think it will be.
As we think about the business right now it is.
Stronger than we anticipated both for 2023 being at that high end of guidance and 24 being a significant step change as far as EBITDA is concerned. So I think we get a lot of conviction that the dividend reinvestment plan will no longer be required and I think Trevor if I'm not mistaken.
We get through this third quarter with cash flow positive all the way through from there on out.
Yes, that's exactly right so as Jamie mentioned, turning off the drip or reducing the drip meaningfully or turning it off for the third and fourth quarter dividend payments.
Is.
Is the plan and we intend to delever with excess free cash flow beginning in the fourth quarter of this year in 2024 until we hit that three five times leverage target.
And then thereafter.
A mix of repurchase and dividend growth.
Okay.
Okay, great. Thank you and then maybe a broader macro question.
Sounds like.
On the crude side.
But there were some just basin wide processing constraints because of the heat and we've heard some commentary that.
Some oil producers.
Delayed completions or even shut in some wells during the second quarter.
Due to midstream constraints because of the heat we've had here in Texas did.
Did you see any of that with your producers or your underlying growth such that there is a spike in the second half of the year.
Assuming that we get some relief in here in the third quarter.
Trevor you want to you want to take that.
Yeah, absolutely so we definitely saw.
Our business is not immune to that.
Higher temperatures that we experienced.
In June and then also in July , but what I would say is is that as we think about where we were when we last spoke with our first quarter earnings in May.
As we think about the second half of this year, we don't really anticipate any changes to our overall volumes for the full year.
And while it wasn't included in our press release or slides.
I would like to reiterate that we still are expecting to be.
Tracking towards one six Bcf a day of excess processed gas exit process gas volumes in 2023, so no change to the business.
That we see at this point in time.
Okay. Thank you.
Our next question is from Robert Moskow from Mizuho. Your line is now open.
Hi, good morning, everyone.
I wanted to ask around your Capex expectation for next year and I understand that.
It gives and included in that or expansion of Shin oak, but does that estimate more like a bare bones estimates.
Any perspective growth projects I.
I guess I'm, just trying to tease out how you can step down to that level.
And what's currently budgeted.
So Robert it's Jamie So good question I think if you go breakdown, obviously, our overall guidance Ryan.
So for this year in midstream logistics, it was $2 35 to $2 65.
The lion's share of that $2 35 to 65 on top of what we considered to be regular growth so to us maintenance growth.
We'll be done with obviously with most of our integration Capex, maybe theres a theres a.
Very very small amount for the balance of the PV treating that's got to happen in the very very beginning of 'twenty four but.
At 235, $2 65, which was our guidance.
A lot of it related to new Mexico that will be done as far as the capital was concerned or I would say, 90% of it would be done.
We don't have another Delaware link on.
On a chart.
Right now on a go.
<unk> Board, we don't have another PHP expansion that of itself was $2 55 to $2 75, So Robert when we look at it we say is not bare bones.
We just had a lot of one off very large one off items PHP expansion was one off.
<unk> link.
Mexico expansion.
Taking this all the way up into the interior of Lea County.
They are not.
Things that we anticipate every year and when we think about our overall step up in forecast.
That obviously.
We don't have anything other than what we've got right now, we obviously had the east toy trading that's already online we've got PB coming on at the very beginning of next year Thats. The remainder I think of the integration Capex that we identified as part of the merger and so 150.
As I mentioned 150 actually has.
Decent sized growth.
Obviously there is.
There is a component of it related to Apache in one in that second half and literally since the June onwards, when we expect that the alpine high.
<unk> will basically be tuned in line there is some incremental capital there.
<unk>.
We also can afford a deposit sort of a milestone payment in the context of a new cryo. So.
150, we think has more than enough room in the context of our continued growth.
That's really helpful. Jamie.
And maybe also a follow up on that capital return outlook I think it sounded like that three five times leverage is kind of a precondition before you can introduce more buybacks and dividend growth is that the right way to think about it.
And how early could we expect that to happen. It sounds like the majority of the Ccs proceeds will be used to address the address.
So I think our viewpoint is it in 2024, we will certainly.
Our expectation is to meet the three five times leverage target.
Some point during the year, whether it's at the year end or whether it's sort of 12 months from now.
Let's just continue to in fact count the precincts as we look at the overall forecast for the year, but as I said the forecast.
Day by day gets stronger.
Any <unk> in the us.
<unk> done a great job on that on the come out on the hedging side. So as you could see we've really tried to get ahead of that and we've got over 20% of our total exposures.
Hedged out through 'twenty four.
So I think it's.
It's going to be in 2024.
Exact precision tell you exactly what's the date that we actually going to hit that milestone.
Got it thanks for the time everyone.
No problem.
Our next question is from Tristan Richardson from Scott to your Bank. Please go ahead.
Hi, Good morning, guys just looking at your slides you can you talk a little bit about your EBITDA target of $1 billion, maybe some of the things that need to happen to achieve that target and then does that on the asset base you have today with Delaware linked PHP in new Mexico, and or does it presume.
Additional infrastructure like a processing plant you've been talking about.
Short answer is interesting.
It assumes same store sales so its taking what you have and obviously in the context of our existing asset footprint and actually seeing that be out to maximize.
The overall cash flow profile that we can actually.
Harvest of that footprint.
It doesn't involve an incremental processing train.
That would obviously just be over and above that.
Target, but this is sort of the target that we've got out there that we want to think about in the context of 2024, I mean, we see what consensus is sort of in the $9 50 range will sort of there are 900950 I think it is it is from an EBITDA and obviously, we realize there are some things I think Matt and the operations team has done a great job as I said there.
The commercial teams doing a great job.
There is a really good prospect with some solid fundamentals that we can achieve our target. So that's our goal.
And Thats, how we think about it so it doesn't involve anything.
Necessarily further.
I appreciate it and then maybe just can you talk a little bit about the contracting environment in New Mexico. You noted that there is some early discussions with potential new relationships maybe just.
The landscape from a standpoint of Eddie.
<unk> being buttoned up or there are large packages still to be had maybe just what youre seeing in new Mexico.
Sure Chris <unk> do you guys want to jump on it.
Yes, Tristan this is Chris Kendrick.
Thanks for the question and then I'll.
Chime in so.
We've seen in Mexico is a great growth opportunity in our rig count exceeds.
What we're seeing in Texas.
We've been successful filling up the 20 inch line and see some growth out there, both with new and existing customers.
Reminds us of the Texas, Delaware circa five or six years ago. There is still a lot of opportunity surprisingly and the reason we got out there in the first place there are some constraints and so we feel optimistic about the continued growth and we will continue to pursue those opportunities toddler anything to add on your side.
Yes, Tristan thanks for the question as well.
Miller.
Only thing I'd add is just evidenced through what we announced this quarter with some additional success, we the pipeline isn't even in service yet and we are seeing the need and customers are kind of putting their pen where their mouth is.
Sure.
For being able to execute on those so.
Hey, tuned as we're excited about the area for sure.
Great. Thank you guys very much.
No problem. Thanks.
Our next question is from Keith Stanley from Wolfe Research. Please go ahead.
Hi, good morning.
First just a quick follow up when you say the gtx sale you'd look to turn off the drip or go to the minimum level for Q3 and Q4 can you just remind us what the minimum level of the drip is.
20% Okay.
8% Okay.
And then second follow up on.
New Mexico.
Is there any is there any way or any any disclosure you can give on a sense of how much volume you've either contracted on that new Mexico pipeline at this point or any rough sense or way to think about how much incremental volume you expect on the system from that line coming on next year and then through 2025.
Really good question, let me.
We might have to just think about how to do that given within this within our disclosures we've not talked about the <unk>.
If you recall Keith I think in some of our previous interactions we've talked about.
It was $80 million to $90 million in like a four times less than a four time to build so that gave you a sense that was the original underwriting obviously it has now got better.
The new NBC that we have is about 20% of this of the size of the one that obviously underpinned with the anchor so that's still a decent size and but we know that the anchor was critical to expansion.
We'll think about how to.
Get that disclosure out there so that you guys get a better sense, because I do understand that obviously from our standpoint, we're pretty excited about it and we want to make sure that.
We can communicate it effectively.
Got it thank you.
The next question is from Jeremy Tonet from Jpmorgan. Please go ahead.
Hi, good morning.
Hi, Jeremy.
Just wanted to come back I guess to the EBITDA trajectory outlook here again as he talked about December 2023 over $900 million. There and then I think you've referenced 950 <unk>.
Street consensus for 'twenty, four and just wanted to see how should we be thinking about that is that kind of like it stair steps into 900 run rate and this slight growth over there in the 952024 for the street.
Consensus makes sense or just wanted to make sure I understood correctly there.
Well I think what we've said is yes, its well over its well over 900 right. So let's just start with that.
And then I referenced the $949 50, I think is.
Where consensus is and consensus I suppose the easiest way to say it doesn't trouble us.
And then Jeremy just jumping in there with respect to cadence regarding cadence. Unlike 2023, where you saw where we had.
Trough quarter was <unk> and then we stair step to a run rate.
By the time that we get to the fourth quarter I'd say.
As we think about 2024.
It's pretty flattish from there and so there are some puts and takes when you look at the commodity price curves and whatnot, but I'd say by and large it's not like what we saw in 2023, where you had this stair step quarter over quarter sequentially.
Yes.
Got it that's helpful. Thank you and then.
Just wanted to turn to the business for a second here and if you could discuss some of your largest third party NGL pipeline and Frac commitments and when some of those might start to expire and once they expire would you seek to build your own frac or look for other ways to maximize value of that long NGL position.
Yes, sure. So we have we have.
Let's see shorter term arrangements on the NGL side with Lone Star.
Plant dedications, the east toward the end of the Pecos Bend.
They roll off in 2026.
As it relates to tiger or it's a longer dated contract out into the early 2000, Thirty's and I think thereabouts.
Sort of similar timeframe I think for the enterprise relationship that we have on Shin oak.
And so it's clear to me that.
Yes, we'll think about what to do on how to maximize the value for produces because at the end of the day, It's obviously youll.
Our business is keyed off.
The attractiveness of the netback.
For our customers, but in the near term the only thing to play for in the next several years will be sort of that.
Lone Star Roll off and then we'll sort of work out any will then work out what makes sense as far as investment opportunities.
We I think our viewpoint is look we've got we've got enough on our plate to get through now we can worry about that at a later point obviously, we wait for further updates on exactly what is what will not happen with Shin Oak, we've got enough capacity on Shin oak that makes it that we are comfortable as far as what we've got.
Moving on from an NGL standpoint, both now and going forward. So.
I think we are open to outcome, we'll see what happens and see what comes our way if it's particularly attractive and compelling then we'll think about it but for now it's not built into our base plan at all.
Got it thank you kindly.
Yeah.
We have no further questions on the question Keith and I will now conclude today's conference. Thank you all for joining you may now disconnect your lines and enjoy the rest of your day.
Okay.
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Yes.
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