Kinetik Holdings Inc

Hello, everyone, and welcome to the Kinetic First Quarter 2022 Earnings Call. My name is Seb, and I'll be the operator for your call today. There will be an opportunity for Q&A, and if you wish to ask a question, please press star 1 on your telephone keypad, or if you wish to remove your question, please press star 2. I will now hand the floor over to Maddy Wagner to begin. Please go ahead.

Thank you. Good morning, everyone, and welcome to Kinetics' first quarter 2022 earnings conference call. Here with me is our President and CEO, Jamie Welch, as well as Matt Wall, our COO, Annie Pinchik, our Chief Strategy Officer, Steve Stellato, our CAO, Todd Carpenter, our GC, Trevor Howard, our VP of Finance, and Chris Kendrick and Tyler Milan, our VPs of Commercial. The press release we issued yesterday, the slide presentation, and access to the webcast for today's call are available at our website, www.kinetic.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'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, Maddie. Good morning, everyone. Thanks for joining us. Thank you for your continued support of and interest in Kinetic. I'm pleased to be here this morning to review our first quarter 2022 achievements. This call today is an important milestone for us as it marks Kinetic's inaugural results as a combined publicly traded company following the Altus and BCP business combination in February. We reported our first quarter 2022 results yesterday afternoon and I plead to share them with you this morning. It is worth highlighting that many of the figures today will be reported on a pro forma basis, assuming the business combination closed on January 1st of this year. We believe that is more reflective of our actual results and provides our investors and others with more meaningful information and helps to reconcile our 2022 full year guidance. On slide three, let's start with a few highlights. We reported pro forma adjusted EBITDA of $191 million for the first quarter. This represents a 17% increase year over year, normalized for winter storm URI, driven by increased volumes across both the midstream logistics and pipeline transportation segments, as well as higher commodity prices. Processed gas volumes increased 9% year over year, averaging 1.11 BCF per day this quarter. In April, we announced the PHP capacity expansion open season, and anticipate an upcoming similar announcement on Gulf Coast Express. Both pipeline expansions are highly capital efficient and will help to address the near-term natural gas takeaway constraints facing the Permian Basin. We're excited to work with Kinder Morgan and our other partners to be a part of this solution on behalf of our E&P customers. We had a successful quarter executing our capital allocation priorities outlined back in February. During the first quarter, we redeemed approximately 25% of the Series A preferred, and we remain on track to redeem the outstanding balance by year end. This is a key step towards cleaning up the legacy Altus capital structure and achieving investment grade ratings in 2023. we will look to undertake our comprehensive refinancing this quarter, which will materially improve our current inefficient capital structure and financial transparency. On page four of our earnings slides, let's take a closer look at our financials for the first quarter. We reported pro forma adjusted EBITDA of $191 million. As mentioned, this represents a 17% increase year over year, normalized for the effects of winter storm Yuri in February 2021. We generated adjusted pro forma distributable cash flow of $145 million and free cash flow of $119 million. On April 21st, we declared $1.50 per share quarterly cash dividend, which is $6 per share on an annualized basis. That represented a pro forma dividend coverage ratio of 1.5 times. Free cash flow generated during the period was used to redeem 53,000 units of the Series A preferred at quarter end. This was in addition to 15% of the preferred being redeemed immediately prior to closing of the business combination. Our leverage ratio exited the quarter at four times, and we remain focused on achieving our leverage target of 3.5 times. We are confident in our ability to achieve our financial goals and capital allocation priorities to achieve investment grade ratings in 2023. In March, Apache successfully closed on the sale of 4 million Kinetic shares. The secondary equity offering more than doubled our public float, and Kinetic's average daily trading volume has doubled from pre-offering levels as well. The public now owns 11% of total outstanding Kinetic shares. In connection with the sale, the first $100 million of proceeds received by Apache is earmarked for Alpine High development activity over the next 24 months. Apache has guided to a single rig program in the Alpine High beginning in summer of 2022. after the completion of its drilling operations in the DXL area, which, commencing November 1st, is also dedicated to Kinetic for long-term high-pressure gas gathering and processing services. Looking at segment-specific EBITDA contributions on page 5 of the earnings slides, midstream logistics EBITDA was $124 million, up 22% year-over-year when normalised for Winter Storm URI. This was primarily driven by increased volumes across all three commodities, gas, oil, and water. Gas process volumes were up 9% year over year and exceeded gas gathered volume growth due to several top dedications which began on January 1st. Crude volumes modestly grew and produced water volumes grew by 7%, largely driven by a new volume tranche dedication beginning in March 2022. Importantly, approximately 80 new wells were turned to sales in the first quarter, more towards the back end of the first quarter than on the front end, meaning January, early February. And those 80 new wells, we provide midstream services. Our pipeline transportation EBITDA was $70 million, up 24% year over year. This growth was largely due to record volumes on both Chinook and Epic Crude this past quarter, as well as the reversal of Winter Storm URI-related expenses in 2021 at PHP. Chinook's throughput volumes in the first quarter were just shy of 500,000 barrels per day, a record quarter for the pipeline. Given the strong volume growth on Chinook, the operator Enterprise may look to optimize pipeline hydraulics to further increase the pipeline capacity to over 600,000 barrels per day, allowing for future growth. Epic Crude also continues to improve its performance by shipping a record 500,000 barrels per day as its shipper customers seek to access the premium Corpus Christi markets. Based on our forecast, we expect to exceed the high end of our 2022 guidance range provided in February. As a reminder, our 2022 guidance included an EBITDA range of $770 to $810 million and CAPEX including maintenance and growth of $125 to $150 million. We will look to revise upwards our guidance this quarter and provide an update at or before our second quarter results call. Moving on to operations, our capital projects continue to be on budget and on time. We have locked in the majority of our capital costs for this year, largely insulating 2022 operating and capital costs from higher inflation levels widely seen across the economy. We have also inflation escalators with our customers in our gathering and processing agreements that allow us to absorb future cost pressures we may experience. Turning to slide nine, I would like to provide an update on our Altus and EagleClaw integration efforts. We have made significant progress since closing, integrating both assets and personnel. The Super System Interconnect pipeline, which connects the legacy Altus and legacy BCP systems, is on track to be in service by late June. This will provide us with the ability to move 500 million cubic feet a day of rich gas bidirectionally and allow us to use latent capacity at the Diamond Cryo Complex. This project is ahead of schedule and on budget. We will look to begin replacing system-wide rental compression with legacy Altus-owned compressor units throughout the year. A number of locations representing 37,000 horsepower have been identified for this year alone. Additionally, we're in the detailed engineering and design stages to install the legacy Altus-owned amine treating units at the front ends of the BCP processing complexes, East Toya, Pecos Bend, and Pecos. This allows us to expand our service offerings to gas treating, as well as receive a wider range of gas with respect to gas quality specifications. Since the closing, we have already locked in a number of integration-related cost savings. The Apache and Altus Construction Operations and Maintenance Agreement was terminated at closing, resulted in $9 million of annual cost savings. We're in the process of implementing operational best practices at Diamond Cryo and across our broader gathering system, and that will harvest additional cost efficiencies. And finally, we completed our back office transition, including IT, HR, and accounting earlier this month, and terminated the Apache Transition Services Agreement on April 30th. As part of our integration efforts, we are looking to implement our Eagle Claw ESG best practices at the Altus assets. We will green the legacy Altus facilities and source electricity from renewable energy sources. In April 2021, we did exactly that. We moved Eagle Claw's processing complexes to 100% renewable energy sources and have realized a large reduction in scope to emissions. We will look to achieve similar results when we transition the Altus assets over to a new renewable energy sourced electricity agreement later this year. And on the topic of ESG, we will be publishing our 2021 sustainability report this summer. Our 2021 greenhouse gas emissions data was not readily available at the time that Altus released its full year 2021 results. So we would like to take a moment to share our success from last year on slide 11 of the earnings presentation. We have made great progress in reducing our scope one and scope two emissions. Between 2019 and 2021, we have seen a 41% reduction in absolute greenhouse gas emissions. This was largely driven by compression optimization. Future Scope 2 emissions will be significantly reduced once Altus facilities are migrated to renewably sourced energy. We are committed to achieving net zero emissions by 2050 and strive to be good stewards of the environment, the communities in which we operate, and our industry. I would now like to pivot and share a few updates on our tremendous recent commercial successes on slide seven of the earnings presentation. Starting with our midstream logistics segment, we signed two new high pressure gas gathering and processing agreements with large cap investment grade counterparties. These agreements will contribute 360 million cubic feet a day of volume and are supported by approximately 300 million cubic feet a day of minimum volume commitments. The full financial impact of these contracts will be reflected in 2023. However, they will provide a nice upswing in the fourth quarter as we exit 2022. Expected volumes from the new agreements represent 45% of our 800 million cubic feet a day of latent processing capacity that we had highlighted and clearly demonstrates the intrinsic and extrinsic value of available processing capacity in today's environment. We have consistently said that Delaware basin processing capacity appears to be much tighter than may be appreciated by the market. Labor constraints and significantly longer than normal lead times for new processing equipment only exacerbate processing capacity tightness, making our latent processing capacity that much more valuable. Having sold out 45% of our latent capacity in two months, which surprised even us, it has meant that we have now accelerated plans to expand our diamond cries processing capacity by 120 million cubic feet a day by adding additional residue compression. This capacity expansion is low risk. and is expected to cost approximately $12 million. That represents 80% less than the equivalent cost of adding greenfield processing capacity today. Following the completion of the expansion in the first quarter of 2023, our processing capacity will increase to over 2 BCF a day. This diamond cryo expansion is a highly efficient capital project and will allow us to refill our operating leverage. And certainly, before people ask, yes, we've already started engineering work to analyze what additional capacity we can get from every other processing train on our system. So today we know that we will have at least 600 million cubic feet a day of pro forma remaining processing capacity. Therefore, we remain uniquely positioned to meet new and existing customers' needs and support continued future growth. Turning to Apache-related activity, our new 10-year high-pressure gathering and processing agreement with Apache for their DXL acreage in central Reeves County begins November 1st of this year. Apache will be turning to sales a new six-well pad in the third quarter. Apache's fourth rig dedicated to the Delaware Basin will be moving from DXL to Alpine High this summer to resume drilling activity following the successful Willow State and Mohican Wells brought online in the first half of 2021. Given current commodity prices, it is realistic to expect more upside from Apache-related activity. Turning to our pipeline transportation segment, we announced, along with Kinder, the binding open season for the Permian Highway pipeline expansion, providing nearly 650 million cubic feet a day of incremental capacity. Additionally, we expect to announce a similar open season for an expansion of the Gulf Coast Express pipeline. These two pipelines combined will provide over 1.2 BCF a day of new incremental capacity from the Permian to the Gulf Coast. Both PHP and GCX expansions will likely come online in the second half of 2023. We view these brownfield expansions, which add additional compression capacity and involve limited pipeline construction, as the quickest and most cost-effective solutions to address the natural gas takeaway constraints in the basin. Given the current troubling world events and resulting additional need for U.S.-sourced energy, we see the Permian as uniquely positioned. As such, We're excited to be a part of the solution to address the critical future call to support our European allies. What is quite astounding is the significant impact from the additional EBITDA contributions from potential PHP and GCX expansions, together with the expected volume upside to Chinook's capacity. Those projects alone will increase our pipeline transportation segment EBITDA by over 25%. As a result, the pipeline transportation segment would then represent 40% of our total EBITDA. As you can see, we really have hit the ground running, had a strong quarter delivering results and setting up Kinetic for future long-term success. In closing, I'm extremely proud of what Kinetic has been able to accomplish this quarter. I want to thank all the hard work and effort by our employees. This success is because of you. I also want to commend them for their commitment and dedication to continued safe and reliable operations. I look forward to sharing more results with all of you in the future. And now I'll turn the call back over to Maddie.