Q3 2023 Kinetik Holdings Inc Earnings Call
Good morning, everyone and welcome to the kinetic that quota Huntington see great results.
My name is Colorado.
On today's call.
This call will include a Q&A session to register your question. Please press Star followed by one on your kind of thank you Pat.
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I will now hand, the Kuwait, Sheila Hi, Marty <unk> head of Investor relations to begin.
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Thank you good morning, and welcome to your kinetics third quarter 2023 earnings Conference call here with me is our President and Chief Executive Officer, Jamie Welch as well as Trevor Howard Our Chief Financial Officer, Matt Walsh, Our Chief operating Officer, Steve Stellato, Chief accounting and administrative officer any pincheck are.
<unk> strategy Officer, Tod Carpenter, our general counsel, Chris Kendrick, our SVP of commercial and Tyler myeloma, our SVP of crude water and new energy ventures. 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.
May also provide certain performance measures that do not conform to U S. GAAP, we 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 J D.
Thank you Matti and welcome back.
Good morning, everyone and thank you for joining our call today, yes.
Yesterday, we reported our third quarter 2023 results, we achieved average gas processing volumes of 149 billion cubic feet per day, representing approximately 23% growth year over year.
We continue to set new company records for processed volumes with each successive quarter.
Despite the operational difficulties our industry faced with hot weather over this past summer and unfortunately for this past quarter, some unscheduled disruptions to basin takeaway capacity.
Interestingly, we achieved average processed volumes that exceeded 153 billion cubic feet per day in the month of September.
And we are now consistently knocking on the door of one 6 billion cubic feet per day, which is our exit rate guidance.
We remain on track to meet or exceed that target by year end.
Adjusted EBITDA increased 4% quarter over quarter in line with our forecast and street expectations.
Looking ahead to the remainder of the year, we expect sequential adjusted EBITDA growth in the fourth quarter at our midstream logistics segment.
Within our pipeline transportation segment. The other way linked commenced commercial in service on October 1st and we expect the startup of the PHP expansion on December 1st.
We are updating our 2023 adjusted EBITDA guidance range to $820 million to $860 million at the midpoint of the revised guidance range. This implies a fourth quarter annualized EBITDA exit rate over $900 million.
Our current forecast is at the top end of our 2023 capital expenditures range of $490 million to $540 million.
The good news is that this past quarter with free cash flow positive and we are past the peak capital about 2023 growth program.
In 2024, we anticipate a significant increase in free cash flow for a meaningful year over year, adjusted EBITDA growth, coupled with capital expenditures of less than $150 million.
We have made significant progress on our projects in 2023 capital program, Delaware Link, which began flowing gas in late September will serve as a useful service offering for our customers who value flow assurance and stable access to downstream markets.
Construction continued across the state line on our gathering expansion into Lea County, New Mexico.
In the quarter kinetic received right of way approval inclusive of the company's first permits with the Bureau of land management and the state of New Mexico.
Construction of the Texas portion of the line is largely complete and we have made very good progress on construction in Lea County.
Expansion, which is supported by multiyear agreements with minimum volume commitments remains ahead of schedule with expected in service in early 2024.
Once all three projects are in service, we will be able to offer customers in new Mexico are highly competitive solution to premium pricing along the Gulf coast on wholly owned or majority owned infrastructure.
We see Permian production growing to 30 billion cubic feet per day by 2030, which represents a 4% annual growth rate from today with the biggest challenges within the natural gas value chain being in basin, treating and processing constraints as well as the egress to the Gulf Coast.
Processing capacity in the Delaware remains tight and as such we see a great opportunity for future organic growth projects.
Our commercial team is actively pursuing a number of gathering and processing opportunities with existing and potential new customers, both in new Mexico and Texas.
We expect to provide updates in the near future as these commercial opportunities develop.
We are also glad that the uncertainty over potential expansion of Shin Oak is now past us.
We agree with enterprise products on a bullish stance towards the Permian. However, let me repeat what we have said before we are comfortable with the capacity lease arrangements that we have on Shin oak.
Our flexible and adequate for our continued growth.
We see no compelling reason for significant additional NGL investment in our pipeline transportation segment.
On the topic of Gtx, we have continued to work through the process of monetizing our stake.
We remain confident in a positive conclusion and at such time, we will report additional details.
2023 is an important year for our company.
Pending completion of our capital growth growth plan underscores our long term strategic vision of expanding our gathering footprint in the Delaware Basin.
We look forward to issuing full year 2024 financial guidance and sharing more regarding our plans to accelerate shareholder returns with our fourth quarter earnings in February.
And with that I would now like to hand, the call over to Trevor.
Thanks, Jamie we reported adjusted EBITDA of just over $215 million in the third quarter of 2023.
Looking at our segment results, our midstream logistics segment generated an adjusted EBITDA of $140 million in the quarter up 2% sequentially.
This was largely attributed to a modest sequential increase in processed gas volumes and strong gas fee based gross margin growth of 4%.
Despite an improvement in commodity prices elevated hedge gains realized in the second quarter resulted in flat margins on a sequential basis.
Regarding total fee based revenue growth, we continued our positive trajectory in the third quarter growing 13% year over year, representing highly attractive growth of our sustainable repeatable earnings.
Midstream logistics opex in the quarter was slightly higher than internal expectations driven by a prior period adjustment for Opex actually incurred in the first half of 2023 that was recognized in the third quarter.
We expect to return to lower per unit costs in the fourth quarter that are more in line with the second quarter of this year.
Shifting to our pipeline transportation segment, we generated an adjusted EBITDA of $79 million up 5% quarter over quarter <unk>.
Sequential growth within the segment was driven by lower realized cost of PHP higher margins at epic crude and an extra day in the quarter.
With 2023, largely behind US we are focused on de risking 2024 and beyond to date, we have hedged approximately 25% of our 2024 commodity linked gross profit exposure and we expect kinetics commodity linked gross profit exposure as a percentage of total gross profit decreased two 9% in <unk>.
24, as our new growth projects, which primarily carry minimum volume commitments are placed in service.
For the quarter, we generated an adjusted distributable cash flow of $148 million.
Total cash capital expenditures for the quarter were $134 million.
$75 million was within our midstream logistics segment and $59 million was at the pipeline transportation segment.
Midstream logistics Capex continues to track towards the midpoint of the range of $235 million to $265 million.
Taken together with disciplined cost control at Delaware Link, where we completed the project approximately 13% under budget.
Our operated Capex is tracking below budgeted estimates this year.
Switching segments pipeline transportation Capex is tracking above the guidance range of $255 million to $275 million driven by cost increases related to PHP that were previously disclosed earlier this year.
As Jamie mentioned third quarter free cash flow was $37 million.
The third quarter, Mark an inflection point for free cash flow, which has carried forward into the fourth quarter of 2023, and then into 2024.
Turning to the balance sheet kinetic exited the quarter with a four times leverage ratio.
On November one we declared a <unk> 75 per share quarterly dividend to be paid on November 20 <unk>.
Kinetics Board of directors made the decision to maintain the reinvestment level of Blackstone I squared Apache and management's applicable third quarter dividends at 100%.
Year to date, we have repurchased approximately 194000 shares for $5 $8 million, leaving $94 million of remaining authorized capacity for opportunistic share repurchase to offset issuance related to the drug.
And with that I would like to open the line for Q&A.
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We will now take our first question from Michael Blum from Wells Fargo.
Michael Your line is now open. Please go ahead.
Thanks, Good morning, everyone.
So.
It feels like I'm going to ask discretion, so I will.
Maybe anything you can say in terms of the progress being made on Gtx.
Where does that stand.
Any updates on timing.
So Michael good morning.
I think everyone on the phone probably is applauding you because you're asking the questions on the tip of the tongue as well look there would be nothing better from our vantage point to be able to announce a transaction, which we think creates.
That represents a full and fair value for the stake that we have and gtx given it's the prognosis for the expansion.
We are.
Confident that we will have a positive conclusion.
We have got timing wrong repeatedly so I am I am having to bite my tongue as far as promising when something would happen just to disappoint.
But it is something that we're actively trying to get across the finish line and I think from our vantage point.
That has us that has one track and then.
In the context of everything else, it's not obviously monopolizing everyone's time within the organization. The rest of the organization is doing what they're supposed to be doing which is.
Actually Sean.
During up and continuing to grow 2024 and beyond as far as the prospects for the business. So Unfortunately, that's all I can really say at this point, but you will be the you all will be the first to know as soon as we've got something to to communicate.
Alright, well I appreciate that.
Then I know youre, not giving 2004 guidance, but you did note the 900 million run rate for EBITDA for Q4 that you're you'll.
You'll be at so just wondering is there any seasonality to that and second just.
Any high level puts and takes we should think about as we move into 'twenty four.
On glad Mark will you raised that point, because its a very subtle nuance in our press release and for those that.
Like you and the other Youll research by the rent that follow the company as well as investors.
On the stock.
We had said to this point that the exit rate at the end of 2023 would be in excess of 900.
And that has now changed we are saying the fourth quarter EBITDA times by four will give you an excess of $900 million.
The nuance is we only have.
Likely one month's of PHP.
We do have Delaware link that started in service in October, but it really steps up with the PHP in service and so it's relatively moderate and modest as far as October November is concerned, but it obviously has a step change function. Once the expansion comes online. So there I think as far as 2012.
For I think we have said.
We are well aware of where consensus is we don't have any concerns as to where people have that when we look at consensus. We think the business is going from strength to strength just look at our volumes I think as I've said in the prepared remarks, we are in right now and have been now for.
Some time knocking on the door of one six Bcf a day, which is right at our exit rate assumption that we gave you back in February and we had 153 to four months of September.
And so everything seems to be.
Going according to plan and we see the variances in the vagaries of commodity prices given <unk> politics.
And the World we live in so I think that the fundamentals of the business remain incredibly Inc.
Incredibly robust.
Thank you.
Thank you Michael we will now take our next question from Tristan Richardson from Scotia Bank.
Your line is now open. Please go ahead.
Hey, good morning, guys.
Just thinking about the customers you've added throughout the year. This year, you talked about knocking on the door of the one six and then thinking about volumes coming online in early 2004 with your organic growth projects.
I know you've mentioned in the past considering an additional plant.
I'm just curious about what point, we see that decision being made.
Particularly as we see it.
A significant step down in Capex in 'twenty four.
Just as you look at your $2 billion of capacity start to get scarce.
It's a great question look.
Yes.
The short answer is.
<unk> 24, I feel lot com sort of giving you a tagline for them for an upcoming movie release, you should expect that we will have some real in depth discussion.
And with you and our investors around an FID decision for a new training.
We look at what's going on right now in the basin.
I would say in particular in new Mexico, we've been very consistent in saying, we think we need to move a plant probably closer to.
So the northern loving county up towards the Stateline, we think of that sort of makes the most amount of sense given the future that we see.
And so I think that's the timing and when we say $150 million or less I think the one thing everyone needs to appreciate on the phone is that we are very mindful that we say that with the potential with the likelihood of an expectation that we may have a deposit and may be one milestone.
That would have to be paid in the context of a new cryo that would be.
And that would fit within the bucket that we give you.
I think we're really managing on the basis of going back to our original roots and the original Cid.
Thesis of this merger, which is now cash flow conversion, we've broken the back of this 500.
$490 to $540 million of capital for this year and now we want to basically show the uplift over the last two years that we've been at this in the context of selling out that space. So we inherited.
Everyone, you 800 $900 million of open space that space is now probably less than 400.
And we're going to have basically start to see a lot more cash flow conversion, which is why we want to get on the front foot as it relates to capital allocation objectives and targets and talk about that for most of 2024.
That's great appreciate it Jamie and then.
<unk> mentioned.
Very happy with your capacity lease arrangements.
NGL downstream.
No.
A real compelling reason to invest in further expansion I'm curious as you look at either several solutions that have either been announced or are under construction today do you see potential for excess capacity in the basin over the next couple of years that outpaces production growth.
Okay.
Im looking at Trevor and any and I think we all believe that we are going to have more transportation capacity, then we will have supply.
And that that will probably in the near term who knows how long, we'll probably pressure TNF right. That's.
That's I think at our house view.
I appreciate it thank you guys very much.
Thank you Justin we will now take our next question from Neel Mitra from Bank of America.
Your line is now open. Please go ahead.
Hi, Good morning, I wanted to touch on the various NGL takeaway options.
And then are now available I believe you guys invested in Brandywine and you have a couple of TNF contracts that are well above market. So can you talk about the options you have.
To kind of pick and choose among the lines that you <unk>.
Transport your barrels off of and how you're set up to do that.
The timing as well to be able to have that optionality.
Sure. So Neal we have three outlets today.
<unk> grown pre and Shin oak.
Way that it works is that Lonestar has plant dedications, so things that.
Literally.
The volume that runs through those plants go to Lone star. It's a legacy contract very very similar to many other contracts that were done in the 2015 2016 timeframe and then you obviously have Shin oak, which was much more specific to diamond cryo because thats, obviously, the one outlet given Apache was expected to be one of the anchor customers of that pipeline win.
Originally conceived.
And then you have Grand Prairie.
So yeah.
Yes.
Pace of picking and choosing we basically follow what we have to in the context of the contracts that we have and following obviously.
The intent and the latter of those contracts as far as that's the way the volumes flow as far as going forward and the flexibility in a few years, we have the lonestar arrangements rolling off.
We have obviously, we have flexibility as we think about what we do next as far as our new plant and where that's located and what that May do so look I think we just manage it.
The context of.
The bundle of contracts in there and the.
The rights and responsibilities that we have.
Yeah.
Okay great.
And then second question on the.
The Gtx pipe.
Specifically on the transaction, but.
The fact that we have next decade.
<unk> gas 2000 2007 timeframe.
Can you just talk about how the Corpus Christi market has changed and.
Whether you see that as a short market even with the expansion.
Just wanted to see how you view that takeaway solution and where that market is going.
Okay.
Thanks for the question now this is Trevor.
So the market today down in Corpus Christi areas about six to six five Bcf a day.
With the NGL capacity expansion announcements.
Cheniere and then also with Rio Grande LNG and.
And continued pipeline export growth, we see that market gone from about six five to over 10 Bcf a day you do have some relief from Eagle Ford lines that are coming into the area and then we also do have the Whistler expansion that has come online.
Last quarter.
But youre talking anywhere between <unk> <unk> of growth from those proposed projects and completed expansions for over.
Four four Bcf a day plus of growth.
This assumes no further expansions at Cheniere is complex and then exclude the phase III. So we do see that market being structurally short gas.
And then there is a more interesting dynamic down the road.
As.
You see continued expansions along the Texas, Louisiana State line and theirs.
More market share grabbing for the Houston ship channel and Katie markets that will further isolate the south Texas market. So we do see that the premium market long term that does warrant further investment.
And then when you think about the supply push coming out of the Permian matched with demand pull down in Agua Dulce today, we see that being the preferred corridor for continued pipeline expansions.
<unk> side or on the Greenfield side.
Okay, great. Thank you very much.
Thank you.
Thank you now we will now take our next question from Jeremy Tonet from Jpmorgan Jeremy.
Jeremie. Your line is now open. Please go ahead.
Hi, good morning.
Good morning, Jeremy.
Just wanted to start off if I could and I realize I'm parsing questions have already been asked but as you look at the EBITDA trajectory going forward here.
A lot of focus has been on 2023 and I appreciate that the 2024 guidance not coming out until February but.
Is it at this point, you're just there's less visibility.
<unk> into the trajectory in 2024, and how those volumes might materialize.
Growth might materialize.
Kind of a waiting producer budgets or do you see it kind of more flatter in nature, just trying to get any color you're able to share as far as what youre able to see in 2024.
Volumes at this point.
Thanks, Jeremy for the question I think look the long and the short is we get updated turn in line activity from.
Pretty much every producer that we have the frequency can be.
As frequent as every month, sometimes it's.
Every quarter, sometimes it's twice a year it really depends it comes in all different shapes and sizes.
As far as what we see going out.
You typically plans can change and obviously these planned sometimes.
They oftentimes require board approval part of the capital budget, we want to have these things set in stone before we take them as being gospel and decide that we therefore, if this then we need to do that and so we just think from a prudency matter. It is better that we give you.
Your best available information.
We give you absolute clarity once we have absolute clarity, we know what our PDP stack looks like we know what's going to turn in line in the intervening period between today.
November 9th.
And February 14th or 15th right whenever we report so we're going to have a pretty good line of sight on that.
And then obviously, it's going to be for the balance things oftentimes change and I think we've we've learned probably the hard lesson early on that it's better to be safe than sorry, and to make decisions based on all available.
Information <unk> got fully capital approved budgets by company boards.
So as far as the trajectory is concerned just what we see we see we continue to see pretty decent.
And growth in our base sort of Reeves loving County business.
We obviously have the step up with new Mexico.
Of particular importance to you all the contracts with new Mexico start April one.
The only reason they start April one and yet our pipeline will be in service in probably mid January is because we need the front end and Amy trading because the gas quality changes as we've got as we go into new Mexico. So the contract date is really tied more to win the front end I mean <unk>.
<unk> will be done.
As opposed to anything else, but I think by and large you continue to see everything that we've ever said before pretty much every other service provider.
License getting gas you've got you've got really you continue to see lots of activity. We continue to see lots of privates pop up buying single sections.
We continue to see a lot a lot of activity against the backdrop of this commodity price environment.
Got it.
Helpful. There. Thank you and then just.
Wanted to touch base, the midstream industry as a whole we've seen.
Kind of a string of.
Consolidation measures across the space and just wondering how you view kinetics role.
Going forward here amidst this backdrop.
Against the publics.
Jeremy the short answer is look at the size of us versus the.
The larger peers that surround us so we are.
I suppose a minnow amongst wiles.
So to speak.
On the privates, yes, there are some private private companies out there, which is more than more like bolt on or tuck in acquisitions and to the extent that the sun the moon and the stars can align on a from a value proposition, yes, sure. If we thought that it was additive.
We are value creators I think we struggled to be value acquirers, because I think acquisitions by by definition oftentimes have a higher multiple associated with it going in.
In the context of value creation, that's what we've done organically all we've done like a.
Permian resources.
<unk> water slash gas incentive transaction, which we think is really it's all about the gas from our vantage point. So I think look at our role is look we don't control the future. We just continue to do what we can do.
And look consolidation is going to happen both on the upstream side and the midstream side and how we at what.
How we what role we have to play in that and how that affects us and win is obviously subject to spec it can be subject to anyone's subjective speculation.
Got it that's helpful I'll leave it there thanks.
Thank you Danny our next question comes from.
<unk> from Wolfe research.
Your line is now open. Please go ahead.
Hi, Thanks for taking my questions first just on the <unk> sale process.
In the event you don't sell the pipeline how are you thinking about the drip for 2024, and we still expect to drift to end with the Q4 dividend payment and when would that decision.
A really good question. So, yes, just Mike I want to be unequivocal the.
The drip regardless.
Could go no further than the February 24.
Dividend payment done its finished.
We don't need to talk about dividend reinvestment and if any longer.
And.
We will make a decision.
As late as possible in the context of trying to make sure we want to get something done. So we want to push to try to get resolution and get to a positive conclusion on gtx as quickly as we can.
We've got plenty of time now to play play forward. The interesting thing is we look at obviously in the context of our overall yes.
The strength of the business.
Is look we think this accelerates.
To us this is an acceleration of act of capital allocation.
Objectives and priorities, that's really the Janet Thats really the underlying reason for G. CSF.
And that's it.
It's nothing more nothing less the deleveraging story is phenomenal regardless of what we did we would be right.
Maybe just a.
A little north of that three five times by the end of next year even.
Front foot as far as capital allocation.
<unk> focus on deployment of the free cash flow that we create.
And obviously also thinking about the dividend increase.
Okay.
Thanks, that's very helpful and just on Shin Oak.
How much volume today is firm committed that has to flow on the quiet.
On committed volumes that could elect to move on to the other pipelines.
I don't really know I mean look as far as capacity leases on Shannon Apache is on China. There is some plant dedications from enterprise to go on Shannon.
Enterprise is Apache lease.
The question is better asked of enterprises to what flexibility they think they have.
Because I know, what we haven't I don't have full transparency or insight into the full contractual pitches.
Yes, Im happy to jump in here too.
Underlying contracts that support the volumes on Shin oak or a combination of.
Acres dedications plant dedications, and then committed volumes under the capacity leases and so we view the volumes across the pipeline today and going forward is quite sticky.
Great. Thanks, I'll leave it there.
Thank you back our next question comes from John Mackay.
From Goldman Sachs. John Your line is now open. Please go ahead.
Okay.
Hey, good morning, Thanks for the time.
Just wanted to go back to kind of the volume trajectory.
Quarter, you guys called out weather issues like everyone else, but volumes held up better than we've seen elsewhere. Just curious if you can kind of comment on did we see it.
Pushed to the right and completion activity have those have you fully caught up with this kind of close to $1 60, we're sitting at now.
That to kind of keep stepping up.
Or do we kind of need to wait for.
For the new Mexico contracts that kick in in April.
Okay.
I don't think it was necessarily a pushed to the right I just think it was more field conditions in the context of just dealing with eight.
And obviously as we said in our second quarter.
And I think a lot of our peer said the issue on heat was is multifaceted. It impacted produces it impacted the utilities and it impacted the service provide us anytime youre running mechanical equipment.
When it's consistently between 100 and 120 degrees Fahrenheit.
Things.
Prone to breaking down.
It's just it's just tough to keep everything running just given.
What you're dealing with.
So as far as pushing to the right from a turn in line activity.
Not really we didn't really see any changes in the context of.
Of shifts.
As far as development activity is concerned I think the catch up for US is when you have literally when you have wells that.
Where you might have an electrical outage and you might be down for an extended period of time, you're going to bring up bring up the wells. We did have some some changes in the context of.
You might have some workovers I think chevron wins when they recently acquired PDC came in they wanted to do some upgrades.
The overall some of the PDC pads to make them more consistent with their overarching.
Design and intent.
So I think look we continue to see good growth John Thats. The bottom line. The growth is still there you will obviously see.
Really nice growth when that when we start with a incremental contracts for new Mexico.
At the end of the first quarter of next year and between now and then I think youre going to continue to have decent solid growth in the intervening period.
Yes.
Yes that makes a ton of sense, maybe just a quick last one.
I appreciate all the conversation on gcs back and forth, but just looking more broadly thinking about kind of capital recycling is there anything else in the portfolio that.
Essentially on the documents that could make sense.
Yes.
Look I think.
Nothing that we're not aware of anything.
Someone.
We look at our assets, we look at where we think what the value they represent to us and if there is greater value to somebody else and we think it creates value for our stakeholders and we're always inclined to think about it and look at it.
But nothing that we.
We are actively working on.
Alright makes sense appreciate the time.
Thank you.
Thank you John.
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Alright, thank you.
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