Q3 2024 Kinetik Holdings Inc Earnings Call
After our prepared remarks, we will open the call to Q&A with that I will turn the call over to Jamie.
Thank you Alex good morning, everyone. Thank you for joining our call today.
We have a lot to get through so let's get started.
Yesterday, we reported our third quarter results.
We logged kinetics single best quarter as a public company in terms of adjusted EBITDA, which was an increase of 23% year over year.
We also processed gas volumes of 171 billion cubic feet per day, representing 15% growth year over year.
As many of you are aware negative gas prices persisted at the Oaxaca hub with the gas daily price, averaging negative $1 per mcf for the quarter.
So.
The outperformance that we achieved is even more impressive when you take into account the nearly 170 million cubic feet per day of wellhead gas volume curtailed on our system due to pricing.
In September we partnered with Diamondback energy to acquire an additional equity interest in epic crude bringing kinetics total ownership to 27, 5%.
This was the much needed first step in a series of transactions to support continued growth and strengthen the financial profile of the pipeline.
Diamondback has now committed approximately 33% of the overall capacity of the pipeline on a.
Long term basis.
Kinetic itself is also now finalizing a long term transport agreement with epic.
The announcement represents a change in scope where we were initially contemplating a plant relocation to one of our Delaware North processing sites.
Now that we fully understand the gas quality specs of existing PDP.
and new development on our northern system, this new pipeline is a far better solution across all aspects, operations, commercial and financial.
starting with operations.
The new pipeline will initially increase Delaware North access to processing capacity by 150 million cubic feet per day versus the originally contemplated 60 million cubic feet per day increase with the plant relocation.
On the commercial side, not only can we access more processing capacity for Delaware North, but this solution allows us to move lower margin sweet gas south and replace those volumes with higher margin sour gas.
On the financial side, the new pipeline does not represent an increase in CapEx. The new connector pipeline has already been underwritten and supported by our announced Eddy Counting, Gathering and Processing project.
Today's announcement is the first step of several that unlocks significant value for our shareholders and customers.
When announcing the Durango acquisition earlier this year, we said that connecting our North and South systems was a highly important strategic objective for the company.
Today, I'm exceptionally proud of our team and excited for our customers with this new pipeline announcement.
Our commercial team has also been very active with Karen and Prospective customers up north to commercialize the build-out and expansion of the King's Landing Processing Complex with Cryo II, following our decision to purchase long-lead critical path components.
Given the need for additional processing capacity in the region, supported by exceptional reservoir quality and producers' well economics, we plan to take FID on King's Landing 2 as soon as possible to enable producers to further develop the resource in that area.
with an internal goal to achieve at least the top end of this revised EBITDA range.
Annualized Third Quarter Adjusted EBITDA actually puts us above our objective.
So, what was once a medium-term EBITDA target is now within immediate reach. And I'm incredibly proud of what our team has accomplished so far this year to make this a reality.
2024 also marks a year of strong execution on our capital allocation framework with achievement of our leverage target, pursuit of strategic and accretive growth projects, and likely our adjusted EBITDA target of $1 billion.
Our performance year-to-date and increased confidence in Kinetic's outlook underscored the Board of Directors' decision to raise the quarterly cash dividend to $3.12 on an annualized basis.
Looking ahead.
We remain committed to a balanced capital allocation approach that provides both flexibility for organic and inorganic growth opportunities.
As well as continued acceleration of returns to shareholders through annual rateable dividend growth and opportunistic share repurchases.
So with all of that, I'd now like to hand the call over to Trevor to discuss the financial results and revised guidance in more detail.
Trevor: Thanks, Jamie. In the third quarter, we reported adjusted EBITDA of $266 million. For the quarter, we generated distributable cash flow of $184 million, and free cash flow was $165 million, increasing more than threefold year over year.
Trevor: Following substantial maintenance overhauls at several Delaware South trains in the spring, we have seen our cryos perform exceptionally well, contributing to our bottom line out performance. Average gas process volumes were 1.71 billion cubic feet per day across the system.
Trevor: Shifting to our pipeline transportation segment, we generated an adjusted EBITDA of 96 million dollars, up 22% year-over-year. This year-over-year increase was driven by contributions from the PHP expansion and Delaware Link and our increased ownership in Epic Crew.
Trevor: Chinook experienced volume growth and margin expansion in the quarter, while PHP posted stronger marketing margins and low fuel costs due to low Waha natural gas prices.
Trevor: Total capital expenditures for the quarter were $59 million. Our leverage ratio per our credit agreement stands at 3.2 times below our target leverage of 3.5 times.
Speaker Change: As Jamie mentioned, we are revising upwards our 2024 adjusted EBITDA guidance.
Trevor: We now estimate full-year 2024 adjusted EBITDA in the range of $970 million to $1 billion, a 3% increase at the midpoint versus the previous guidance range and year-over-year growth that approaches 20%.
Trevor: In our midstream logistics segment, we continue to expect year-over-year process gas volume growth in the high teens.
Trevor: The Lee County MVC Step-Up and Margin Expansion for Gathering, Treating, and Processing Services commenced this month, and we anticipate the start-up of gathering services at our Eddie County project in December.
Trevor: And that's, you know, whether you're using your acid gas injection wells, which obviously, which we have three, that obviously provides, you know, both incremental opex, but obviously incremental margin for us.
Thank you.
Perfect.
Speaker Change: The second question, you've made a lot of progress with your partners on EPIC.
Trevor: to see in order for you to open season and expansion. And if you were to do so, what would be the timing of it if we were to get through some of those steps?
Speaker Change: So, I think as far as on the EPIC expansion, it's a topic that comes up all the time, both with the partners and with the management team.
You're right. There are a series of
Speaker Change: We, ourselves, are going to take a modest amount of transport space on that pipeline, which will obviously be advantageous for our crew-gathering customers.
Speaker Change: So I think what it requires is you will see the decision to expand manifest itself in the MEH, really the MEH diff.
Speaker Change: and the amount of commercial success to replace the shorter-term buy-sells with again medium and longer term firm contracts.
Speaker Change: Because buy-sells will always be there that typically the domain of the marketers of which there are many The mercurial is the gun boards the trappies, etc. They will always want
Speaker Change: available access, particularly available access to a export market and obviously Corpus is ideally situated for many different reasons to do so.
Speaker Change: Even more so now, I think they're actually finishing the phase two of the dredging with the Board of Corpus Christi right now, which will obviously be ideal as it relates to overall drafts and therefore what we can actually load and unload.
Speaker Change: and the size of vessels that we can get in. So I do think, look, it's not a question of if.
on the expansion. It's a question of when.
Speaker Change: Perfect. Thank you for the time. I appreciate all the answers.
http://TheBusinessProfessor.com
Speaker Change: The next question is from the line of Michael Bloom with Wells Fargo. You may proceed.
Thanks. Good morning, everyone.
Speaker Change: Can you expand a little? Can you just expand on the factors that drove the outperformance this quarter? How much of that beat was was marketing on the on the Waha spreads or other factors and how sustainable that is into into 2025?
Speaker Change: If you recall back when we did the very first call for the year for our year-end 2023 results and our guidance that we initiated for 2024, we talked a lot about the increase in maintenance capital that we were actually spending for this.
Current Year
Speaker Change: In large part, it was both related to compressor top-end, so overhauls, as well as changing out multiple beds.
Speaker Change: which are really almost like those silica beads that you find when you get any package whether it's from Amazon or anything else. It's basically a, it's like an absorption or drying agent. So we changed those out in the context, I think, of Diamond, Matt Walzon. I think it was the first time since those trains had gone in service.
Speaker Change: The overall performance on recoveries across the system as a result of the multiple bed change-outs has been exceptional.
Speaker Change: We operate a business with a contract portfolio that has fixed recoveries.
whether you're in rejection or in recovery.
and therefore the outperformance drops to our bottom line.
Speaker Change: and I can just say the operations guys have really done an exceptional job and that was a I would say just given the size of the two BCF a day and the multi complexes that you're dealing with that our performance is a meaningful contributor
Yes.
Speaker Change: We had open space, we always said this, we had open space on PHP in large part, we took incremental space on the expansion.
that obviously over time as our customers increase production.
Speaker Change: We've benefited in the first part of this year because of the very large spreads.
Speaker Change: However, don't lose sight of this, we will always have PHP space.
and when WAHO goes really really negative
Speaker Change: You know, between Matt and Annie and Chris Kendrick and the commercial team, we run our plants in full recovery because you basically change the ethane from being in the natural gas stream into the NGL stream.
Speaker Change: If that creates incremental space, because we own this PHP space, this is all ours.
Speaker Change: You know between what Chris Evans and Annie and Chris Kendrick and Tyler and Trevor and Ross They all do is we look to optimize that space
Speaker Change: We look at this multiple times a day. We look on a predictive basis. We look on a then current day basis. We are always looking to optimize, working in conjunction with operations.
Speaker Change: So I do think that they are certainly two of your contributors. OPEX was an exceptional performance.
Yeah.
Speaker Change: I think we obviously had the benefit also of one quarter of Durango.
So that obviously helped
Speaker Change: And then obviously on the pipeline transportation side, we had multitudes. When everyone's running in recovery because you have negative WAHA, well, Chinook is running literally at, I would say, probably above capacity.
Speaker Change: I mean, there is literally it is running so full, it's almost going to burst.
Speaker Change: Not literally, don't take that figuratively, but just in the context of just it's running completely full. Then in the context of PHP, where it, from a fuel standpoint, and Chris Kendrick can tell you this, from a fuel standpoint, it prices at Waha.
Speaker Change: So if WAHA is incredibly negative, your fuel cost, when you think about your rate plus fuel to the pipeline, is lower.
Speaker Change: So you have great outperformance. And then obviously at the back end, we had the increase in Epic Crew. So I wanna say it's a multitude of factors. It's not just one, but this is the benefit of having a really diversified business.
Speaker Change: where there are so many compensating factors that things can look better, you know, we can optimize our system as we see conditions present themselves.
Speaker Change: Perfect. Thanks for that, Jamie. Maybe, I know you're not giving 25 guidance today, but maybe you could just speak to the trajectory of CAPEX for next year. What is that going to look like? And maybe some of the building blocks to get there. Thanks.
Speaker Change: So I think, Michael, I think we've talked to you and talked to other analysts and investors. We've said, look, think about it from a, you know, if you're going to think about it over a range 250, 400, that sort of range. And we said, look, as you think about next year, you'd be the upper end of that range.
Speaker Change: That may also be the case, depending upon the timing on King's Landing as well, into 26, and that's King's Landing 2, right? So this is the pre-FID work, long-league critical path items that we've done.
Speaker Change: should be 10, 12 plus percent. That's how you think about it. And that's without, as Trevor would tell me, breaking a sweat, and he's a good runner, so he doesn't sweat that much.
Speaker Change: So, it's, I really do think that it's a context of the business is really, really designed for a tremendous inflection and growth.
Speaker Change: from here on out. So you've got that top line growth. And I think we continue to have the very
focus, cost discipline on the capital side.
Thank you.
No problem.
Speaker Change: Thank you, Michael. The next question comes from Jackie Coletas with Goldman Sachs. Please go ahead.
Jackie Coletas: Hi, good morning. Thank you so much for taking my questions. First, I just want to start on the pipeline connector. So is there an optionality to expand that beyond the 150 MCF a day announced? And how has, you know, future connectivity impacted commercial conversations from here? And beyond that pipeline connector, are there other connections that you can build or potentially buy from here to further connect the North and South Delaware systems?
Speaker Change: On the connector side, greater than 150 that we can basically get on the on the Eddy County, but that can grow.
Speaker Change: Which is the question you asked. We can increase that with additional boost compression at the Sierra Grande site to have that in excess of between 260 and 300 million cubic feet a day drawing.
Speaker Change: That's a big deal. You know, I really, I got to say, I know that this may have surprised people. We've been talking about the desire to connect Durango, the north to the south and creating that super system.
Jackie Coletas: And I really do think between, you know, the overall team here did a phenomenal job, engineering, ops.
Jackie Coletas: construction to come up with a plan that said, yeah, rather than move at idle 60 day cryo Why don't we do this?
Jackie Coletas: It's gonna cost the same You've already budgeted for it. It's already in your numbers in the Eddy County project
Jackie Coletas: and it actually creates the connectivity. And so when these guys go and talk to Newborn, Spur, all these other customers we've got on the North and we say, bingo, not only capital investment but we now can take incremental volumes.
Jackie Coletas: So, I feel like this proposition, we knocked down the first of the big pillars, which was Connect on the West.
Jackie Coletas: This is what this does. It's a massive game changer for this company. It's a massive game changer for our customers. And it really puts us in a position now to emphasize, okay, on the Lee County side, much more sour gas as we know.
Jackie Coletas: Where are the connections? How do we think about it? We said we would analyze connecting on the basis of new commercial opportunities.
Jackie Coletas: So, we're keeping, you know, basically, we are continuing hard at work to finalize commercial opportunities that will ultimately result in us connecting on the Lee County side. So that would be on the east. And then you will have your super system.
Jackie Coletas: and that will be a very, that will be unique. It will be unique amongst our peers.
Jackie Coletas: and I think it will really provide us so much flexibility.
Jackie Coletas: And Jaggi, this is Chris. I think one other thing we didn't hit on is, you know, we expect King's Landing 1 to fill up pretty quickly, so we wanted to make sure we had an outlet for our customers as they continue to grow this pipeline. Is that answer? Because we can get it on quickly.
Jackie Coletas: And second, this goes through an area where we're going to see significant gas growth over the next five years. So we think there's additional commercial upside where this pipeline will traverse. So strategically, it makes a lot of sense for Kinetic. And so we're excited to provide this.
Jackie Coletas: to connect the systems. And it would be fair to say, as I look at Chris and the team, what goes into Durango is a mix of sweet and sour. You have both.
Jackie Coletas: So what you've really done here is you have you have the combined elements this gives you the opportunity to separate them
which is much more complicated.
Speaker Change: Right, and it's not a case that anybody can go and treat and process sour gas if you don't have the right infrastructure.
Jackie Coletas: And you can obviously permit and build the right infrastructure, but it takes time. And you've probably heard that in the context of whether it was Jim Teague talking about pinyin, you know, multiple years to get this done. So what we looked at our business when we said, Hey, look, there's a bunch of sweet here.
Jackie Coletas: If we could separate that sweep through Eddy County down into Colbeson and bring it south,
Jackie Coletas: We leave more sour gas treating and processing up in the Durango system, which is, as I said, the more complicated, it's higher margin in the context of all the services that we have to provide. It really is a tremendous...
Speaker Change: Thank you. I appreciate the color there. And then just pivoting a little bit, we can, you know, you talked about it a little bit before the amendment mentioned some hedging in the year into 25. But you know, you're able to benefit on open PHP capacity again, and some benefits on continued Walhalla softness. You know, what is your view on the commodity price environment for the fourth quarter and 25? And how quickly do you expect pricing to recover? And on those commodity swings, you know, what is your timing expectations for the return of those Alpine high volumes?
Speaker Change: Okay, so you referenced 4th quarter 25, I think you meant 4th quarter 24, just to confirm?
Speaker Change: So the short answer is, cash today for WIHR is negative 95 cents. Hey, welcome to the third quarter again. It's same old, same old. Interestingly enough, December is $1.20 right now, positive, positive $1.20.
Jackie Coletas: That's more than enough to bring the alpine high volumes back on. You can listen to the alpine I'm sure the Apache call in a couple of hours or an hour and a half or whatever it is But that's more than enough. This is all PDP, right? There's no new development in the context of Alpine high at this point
Jackie Coletas: So I think our viewpoint is the basin is tight. So let's frame what tight means. We're going through some maintenance on PHP through 19th to 20th. I'm looking at at Kendrick.
Matterhorn is full.
Full, like 2 BCF a day?
and we have negative Waha prices.
Jackie Coletas: What does that tell the audience about how tight this basin is?
Speaker Change: The overall lower decline curves, the increasing GORs that we're seeing, this gas needs ERAS.
Speaker Change: and so I think WAHA is going to remain challenged. Yeah, you've got Blackcomb, you've got the GCF expansion.
Speaker Change: Maybe the transfer team get over the finish line with warrior run You all of this is going to be needed just given the continued growth that we see On the gas side the net beneficiaries, of course in a weaker gas price environment on a hub basis
Jackie Coletas: are the integrated NGL plays because everyone's running in full recovery.
Jackie Coletas: as much as you can and trying to evacuate the ethane in the form of their NGL.
Jackie Coletas: So, I think our viewpoint is, look, we, in our updated guidance, we said, look, it would be December, you'd start to see the return of the alpine high volumes.
Jackie Coletas: I think our viewpoint is that gas prices will bounce around. I do think we'll see some...
Jackie Coletas: Positive Waha pricing. It's not. It's still a pretty big dip. I'm looking at Annie relative to the ship and pub.
It's crazy. Like a buck 20, buck 25. So there's plenty of money from the optimization standpoint to be made.
Jackie Coletas: And, you know, as I said, that's what the team does. Like we optimize this business every day, working with the ops guys to come up with the right, you know, formula.
Jackie Coletas: It's still a good day for, I would say, almost universally for all of our producers.
Jackie Coletas: Look at the efficiencies they continue to drive. Look at the reductions in DNC costs. If they can get their overall
Lowe down and keep that managed $70 as far as the WTI price I think is a good day at the office for them.
Jackie Coletas: So, we feel pretty jazzed up by what's going on around us and particularly as it relates to not just right now for 24, but as we look out into 25 and beyond.
That's it for me. Thank you so much. Appreciate it.
Speaker Change: Thank you. The next question is from Milan of Berk, Census Bureau, with Wolf Research. You may proceed.
Speaker Change: Thanks for taking my questions. Just firstly, any impressions you have on the potential setback rules being considered in New Mexico and sort of how you're thinking about potential impacts for the Durango assets?
Speaker Change: I am so glad you asked this question because there is so much misinformation out there.
So what?
Speaker Change: I saw this Reuters article, much like I'm sure many of you, I think everyone believed that this was some proposed legislation, that's not it at all.
Speaker Change: This is all about the New Mexico Legislative Finance Committee undertaking an economic study. An economic study, impact to the state, regarding the cost.
of Potential Setbacks.
So let's frame that for a second.
Speaker Change: The LFC study is the first time on record that publicly everyone's addressed there is a true, legitimate, real, significant cost of potential setbacks.
Speaker Change: Look, our view is, unlike in other states where you've seen discussions on setbacks, there are a multitude of factors here that says it's different here, and here's why.
Speaker Change: Oil and gas sector represents as far as percentage to the overall state coffers budget 50%.
Speaker Change: Oil and gas is the largest single employer in the state of New Mexico.
is more than two times the state average median income.
Four workers.
Speaker Change: You do not have that legislative process at all in New Mexico. So groups of citizens that have a mechanism where they gather all these signatures to change the state's constitution does not exist in New Mexico.
Speaker Change: It is clear in all the conversations that we've had, and particularly now with the White House administration changing, effective in January.
Speaker Change: The Democratic leadership and the governor will not support setback legislation. There is virtually no path.
Speaker Change: to any bill, even if it eventuated. And as I said, right now it is a study.
Speaker Change: And so our viewpoint, along with Permian Resources, EOG, Oxy, Conoco, and all of the other large oil and gas producers is
We really think that this is, this is just misinformation.
I, you know, I could say fake news, but it's, you know, in the context of how it's positioned.
But it is a study and it's the first time people got to see
Speaker Change: It has shocked a lot of politicians and regulators as to the potential impact that any type of framework could have on their overall state budgets and their overall finances.
Speaker Change: So, hopefully that answers the question, but I think, look, I listened to Tom Jordan last week at Katerra, he did a great job, I think we feel like this is not a story.
Thanks. Thanks for that.
Speaker Change: Just for my follow-up, understanding that the dividend bond marked a positive inflection point for the company, how should we think about further dividend growth given 2025 is shaping up to be a higher capex year?
Speaker Change: Look, I think our viewpoint is that, as we said in the prepared remarks, the capital allocation will be balanced.
Speaker Change: annual rateable dividend growth so this was in the third quarter of November you know do you think about it towards this time next year
Speaker Change: about it earlier than that in the context of, you're right, we're going to have a large capital budget, we're going to have great growth on the EBITDA side. But I do think that, yeah, when we say annual rateable,
Speaker Change: Trevor is a man of his words. He means what he says. It's annual rateable and you know, we will continue to grow it on a thoughtful methodical basis
Thanks for the time.
No problem.
Speaker Change: The next question is from the line of Jeremy Tonnet with JPMorgan. You may proceed.
Good morning, guys. This is Dr. Neddy. I'm for Jeremy.
Speaker Change: First I want to start with a clarifying question. I believe it was 170 million cubic feet per day curtailed in 3Q, and I think I might have heard 100 curtailed as of now, but I just wanted to clarify whether those volumes have returned or not.
Speaker Change: No, no, no, I think you were hearing that. We said 100 million cubic feet per day curtailed on Durango.
Speaker Change: It's where we started, you know, we said, listen, we had 100 million cubic feet a day when we first announced the transaction, it's still there. We had a growing duck inventory, it's still there. That's what we were talking about in the context of the reason that King's Landing 1 needs to be on and in service as quickly as it can.
Speaker Change: Yes, yeah, those aren't price related shut ins, we refer to them as shut ins, not necessarily curtailments. They're not price related. It is associated with the lack of processing capacity at Delaware North. Yeah, because it's full, right? I mean, we run full every day on Durango.
Speaker Change: Whereas the 170 that we referred to refers to price-related curtailments.
Speaker Change: generally in Delaware, predominantly in Delaware South, and just to just to highlight, that is Wellhead and that is a gross number, so it's a bit inconsistent, it's a bit different than a number that is reported by one of our other customers.
Speaker Change: Perfect, thank you. And then switching gears, just given some of the industry consolidation, wanted to see updated thoughts that you guys have on Kinetic's role against this landscape.
Speaker Change: I, I, we, we swim, we swim with the largest fishes around and we're not that big. So, yeah, look, consolidation is, it's going to continue. We all know that it's going to continue in the upstream space. It's going to continue in the midstream space.
You know, I think we realized that that that
Speaker Change: Our overall destiny and future is not necessarily for ours to control.
Understood. Thank you.
Speaker Change: Thank you. There are currently no questions registered. So as a reminder, it is star one to ask a question.
For more information, visit www.fema.gov
so
Speaker Change: There are no additional questions when we get this done. I'd like to pass the conference back over to our management team for any further remarks.
Speaker Change: Thanks everyone for your time this morning. I know it's a busy time with everyone reporting, so I appreciate it. We'll see you shortly with the various tour dates that are coming up and the various conferences to go to year-end, and we look forward to continuing our discussions. Thanks. Bye-bye.
Speaker Change: Thank you all. That concludes today's conference call. We appreciate your participation. We hope you all have a wonderful day and you may now disconnect your line.