Kinetik Holdings Inc. (NASDAQ:KNTK) Q4 2023 Earnings Call Transcript
Kinetik Holdings Inc. (NASDAQ:KNTK) Q4 2023 Earnings Call Transcript February 29, 2024
Kinetik Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Thank you for attending today’s Kinetik Fourth Quarter and Full Year 2023 Earnings Call. My name is Megan, and I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to Maddie Wagner with Kinetik. Please proceed.
Maddie Wagner: Thank you. Good morning, and welcome to Kinetik’s fourth quarter and full year 2023 earnings as well as our full year 2024 guidance conference call. Our speakers today are Jamie Welch, our President and Chief Executive Officer; and Trevor Howard, our Chief Financial Officer. Other members of our senior management team are also in attendance for this morning’s call. The press release we issued yesterday, the slide presentation and access to the webcast for today’s call are available at www.kinetik.com. Before we begin, I would like to remind all listeners that our remarks, including the question-and-answer section 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 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.
Jamie Welch: Thank you, Maddie. Good morning, everyone. Thank you for joining our call today. Yesterday, we reported our fourth quarter 2023 results and provided our 2024 financial guidance. We look forward to discussing both in more detail with you this morning. Looking back on this past year, it can best be characterized as a relentless focus on execution. We executed upon several highly strategic growth projects, our financial priorities and sustainability program, and more broadly speaking, our Kinetik vision. We also achieved record processed gas volumes each quarter and provided safe and reliable operating services to our customers. I want to take a moment to thank our team for all of their hard work and dedication over the past year.
They remain focused on delivering projects on time and on budget with an unwavering commitment to safety and sustainability. Thank you. Starting with our financial results. We reported adjusted EBITDA of $228 million for the fourth quarter and $839 million for the full year. Achieving the middle of the revised guidance, we provided in November and above the midpoint of our original guidance range. Full year 2023 capital expenditures were $531 million within our 2023 guidance range. We exited the year with processed gas volumes of 1.56 billion cubic feet per day in the month of December, and fourth quarter average processed gas volumes were 1.54 billion cubic feet per day, representing a more than 22% increase when compared to the fourth quarter 2022.
After achieving our 2023 exit rate guidance of 1.5 billion cubic feet per day in April, we revised our exit rate guidance to 1.6 billion cubic feet per day. We exited the year with processed gas volumes at just under our revised guidance due to a modest shift in producer turn-in-line schedules in the fourth quarter and a package of new gas curtailed, because of elevated CO2 concentrations. To expand a little further, that producer brought online a large number of wells developing several benches. The shallower zones experienced elevated CO2 concentrations that did not meet the contractual gas quality specifications. The producer has been working to address the issue, while gradually ramping up volumes as we complete our system-wide front-end aiming treating project, which will allow us to accept a broader range of gas quality and provide treating and blending services to our customers further expanding our margins.
Treating is becoming increasingly important as producers develop these shallower benches, including the Bone Spring and Avalon, as well as step-out from what we know as the core of the Delaware Basin. In fact, with increasing gas quality issues associated with CO2 and H2S, treating is emerging as one of the most overlooked capacity constraints within the basin. With our system-wide treating and blending capabilities almost fully complete, we are uniquely positioned to support the next phase of basin growth. Looking back over the last couple of years, our gas volume growth rate has been approximately double the growth rate of the underlying Permian Basin, suggesting that Kinetik has significantly increased its gas processing market share in the basin.
This is a testament to our system reliability, customer-first approach, and tailored service offerings. As I touched on earlier, we demonstrated strong operational execution over the past year. On October 1, we placed in a service, Delaware Link, a 1 billion cubic feet per day intra-basin residue gas pipeline. This pipeline connects our processing facilities directly to Waha, providing our customers with enhanced system reliability and flow assurance. On December 1, the 550 million cubic feet per day Permian Highway Pipeline expansion was placed in the service. Then, most recently, we completed our gathering system expansion into New Mexico and began flowing volumes on January 18. The project was completed over 2 months ahead of schedule and under budget.
Kinetik offers a differentiated service to New Mexico producers as we can provide flow assurance on a fully integrated solution from wellhead to premium Gulf Coast markets on wholly-owned or majority-owned infrastructure today. We’re excited about the opportunities to grow our business and footprint in New Mexico, which has been a part of our long-term vision. As a new entrant into this market, we already have a strong competitive advantage with available processing capacity today and treating and blending capabilities. Furthermore, we offer counterparty diversity on quality infrastructure to New Mexico producers. Looking ahead to 2024, we remain in a period of volatile commodity prices driven by economic uncertainty and geopolitical turmoil.
Despite the announcement of the LNG permitting pause by the administration last month, our view remains that the demand pool to the U.S. Gulf Coast will continue to be significant as the LNG export infrastructure already under construction is slated to come online in 2025 through 2030. As the world continues to demand cleaner, lower cost, and more reliable sources of energy, natural gas will play a critical role as it offers lower emissions versus other traditional fossil fuels. The U.S. was a net exporter of 12.8 billion cubic feet per day of natural gas in 2023, representing nearly 100 million metric tons, which can provide roughly 720 billion kilowatt hours of energy, or enough power for almost 100 million homes. With existing projects in the U.S., we expect to more than double that export amount by 2030.
At Kinetik, we are proud to be a part of the value chain that delivers a cost-effective, reliable, and lower carbon energy solution. While Trevor will share more specific assumptions regarding our 2024 guidance, we have continued to take steps to further de-risk our balance sheet. Over 90% of our gross profit is sourced from fixed-fee contracts. We have hedged approximately 50% of our commodity-linked gross profit and we will continue to hedge our remaining 2024 and 2025 exposures as we see opportunities. The Permian is a well-class resource and remains one of the most prolific cost-competitive basins. Even at $70-barrel WTI producer economics are advantaged supporting continued growth and development. In 2023, the EIA estimated that wellhead wet gas increased by approximately 3 billion cubic feet per day.
Now, when applying a 30% fuel and shrink factor, we estimate the Permian residue supply increased by approximately 2 billion cubic feet per day. Now, I would remind the audience that due to changes in ethane gas spreads, trailing 12-month residue gas growth can swing materially from one month to the next. With Permian rig activity finding a floor at approximately 310 rigs for the last several months, which is nearly a 15% reduction from the peak reached in April 2023, we think that 2024 will struggle to keep pace with 2023’s production growth levels. Therefore, on an exit-to-exit basis, we expect Permian wellhead wet gas to grow approximately 1.5 to 2 billion cubic feet per day in 2024, which is mid- to high-single-digit percentage growth.
According to the EIA, this past January, 118 billion cubic feet per day of natural gas was consumed in the United States alone, the most in any month on record, with forecasts expecting gas demand to grow upwards of 20% by 2030. We strongly believe that the Permian will continue to deliver and meet the world’s growing demand for crude oil, natural gas liquids, and natural gas. Opportunities exist across our footprint, including shallower formations like the Bone Spring and Avalon, and the deeper zones like the Wolfcamp C, Barnett and Woodford Shale. We are encouraged by recent well results from these formations and zones. Now, before turning over the call to Trevor, I’d like to reiterate the significance of this year for Kinetik. Throughout 2023, we remain focused on our commitments and taking the necessary steps to position Kinetik for a robust 2024.
We are extremely proud of what we have accomplished, and we are excited for what is yet to come on our growth journey. So stay tuned. And with that, I would now like to hand the call over to Trevor.
Trevor Howard: Thanks, Jamie. In the fourth quarter, we reported adjusted EBITDA of $228 million. For the quarter, we generated an adjusted distributable cash flow of $150 million and free cash flow was $77 million. Looking at our segment results, our Midstream Logistics segment generated an adjusted EBITDA of $146 million in the quarter, up 10% year-over-year. This was attributed to increased processed gas volumes. And as a result, gas fee-based gross profit increased by 13%, despite lower commodity prices. Shifting to our Pipeline Transportation segment, we generated an adjusted EBITDA of $85 million, up nearly 7% quarter-over-quarter. Sequential growth within the segment was driven by one full month of contributions from Delaware Link and the PHP expansion.
Total capital expenditures for the quarter were $95 million, with $61 million within our Midstream Logistics segment and $34 million at the Pipeline Transportation segment. For the full year, we reported adjusted EBITDA of $839 million, $569 million of distributable cash flow, and $60 million of free cash flow. Total capital expenditures for the year were $531 million within the guidance range provided last February. Midstream Logistics capital expenditures totaled $244 million at the bottom half of the guidance range. Pipeline Transportation capital expenditures were $287 million, above our range driven by cost increases related to the non-operated PHP expansion project. It is worth noting our total operated capital came in 5% below our internal estimates for full year 2023.
We exited the year with a 4 times leverage ratio per our credit agreement. In December, we took a series of steps to refinance a portion of our debt through $800 million of sustainability-linked senior notes due 2028 conducted in two separate transactions. The proceeds were used to pay down the existing Term Loan A facility and extend that maturity by 1-year to June 2026. Following the refinancing, nearly 100% of our interest rate exposure remains fixed. Also in December, we facilitated a secondary offering of 7.5 million shares by Apache, increasing our public float by just under 50%. Our public float now represents more than 15% of the total shares outstanding. On January 24, we declared a $0.75 per share quarterly dividend, $3 on an annualized basis to be paid on March 7.
Kinetik’s Board of Directors made the decision to maintain the reinvestment level of Blackstone, I Squared and management’s applicable fourth quarter dividend at 100%. However, following the fourth quarter dividend payment on March 7, all shareholders will receive a cash dividend. The agreement between Blackstone, Apache and I Squared to reinvest their dividend expires on March 8, 2024. In 2023, we repurchased approximately 194,000 shares for $5.8 million in total. We have $94 million of remaining authorized capacity under our board approved share buyback program. We will continue to evaluate opportunistic share repurchases to return value to shareholders, while understanding the delicate balance with maintaining our public float. Moving to 2024 guidance, we estimate full year adjusted EBITDA in the range of $905 million to $960 million.
The midpoint of $933 million implies adjusted EBITDA growth of approximately 11% year-over-year. In terms of each quarter’s contribution to full-year EBITDA, we expect 2024 to look comparable to 2023. Our recently completed projects drive growth at both the Midstream Logistics and Pipeline Transportation segments. Specifically, within the Midstream Logistics segment, our New Mexico gathering and processing contracts, fully supported by minimum volume commitments, came online early in January of this year. Additionally, we expect to see a full-year benefit to gas and produced water volumes attributed to the Permian Resources Incentive Agreement that started during the fourth quarter of last year. Coupled with our existing customers, we anticipate over 10% gas processed volume growth year-over-year, which outpaces expected basin growth.
I would also note that with Waha prices remaining depressed and volatile, Apache is now planning for the next phase of Alpine High development activity in 2025. On a quarterly basis, we forecast first quarter 2024 volumes to be lower than fourth quarter 2023 as a result of molecular sieve bed change-outs at several processing facilities. And similarly to 2023, we will see a step-up in volumes beginning in the second quarter with customer development activity more heavily weighted in the second and third quarters of this year. In 2024, our Pipeline Transportation segment will have the full-year benefit from Delaware Link and the PHP expansion. To frame the full-year EBITDA contribution from Delaware Link, I’ll remind you that this project was roughly a 5 times billed multiple, and we saw one full month of EBITDA contribution in the fourth quarter of 2023 as volumes ramped with the PHP expansion in-service.
Our forecast also calls for EBITDA growth at Shin Oak and EPIC Crude. The Pipeline Transportation segment is expected to contribute 40% of total Kinetik adjusted EBITDA in 2024, representing a 15% increase over the past 2 years. As Jamie touched on, commodity prices will continue to be choppy in 2024. However, we have and will continue to de-risk our earnings and balance sheet. Our 2024 guidance assumes approximately $76 per barrel for WTI, $2 per MMBtu for natural gas at the Houston Ship Channel Hub, and $0.60 per gallon for natural gas liquids. Approximately 10% of our 2024 expected gross profit is commodity-linked, comprised of the following contributions, 25% from natural gas or ethane, 45% from propane and butane, and 30% from crude. To date, we are hedged approximately 50% on an average across commodities, with a higher hedge concentration on propane, butane, and crude.
Turning to our capital expenditures guidance, we expect capital expenditures to be between $125 million to $165 million for the full year, including approximately $35 million of maintenance capital for the year, which is elevated because of the completion of multi-year compression overhauls. Our guidance reflects the return to a reduced capital program following the completion of last year’s growth projects, and in fact is slightly below our previously communicated expectations. Taking the midpoints of our 2024 adjusted EBITDA and capital expenditures guidance, this translates into nearly $450 million of incremental free cash flow before dividends year-over-year, marking a significant increase in Kinetik’s free cash flow generation. We remain focused on our capital allocation priorities and took meaningful steps in 2023 to strengthen our balance sheet and maintain financial flexibility.
And with that, I would like to open the line for Q&A.
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