Kinetik Holdings Inc

Hello, everyone, and thank you for joining the Kinetics Second Quarter 2022 Results Call. My name is Darius, and I will be moderating your call today. Before handing over to your host, Maddy, I would like to remind you that if you would like to ask a question during a Q&A session, please press star-follower-1 on your telephone keypad. And I have the pleasure of handing over to Maddy Wagner, your host. Please go ahead, Maddy.

Thank you. Good morning, everyone, and welcome to Kinetic's second 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 Stilato, our CAO, Todd Carpenter, our GC, Trevor Howard, our VP of finance, and Chris Kendrick and Tyler Milam, our VPs of commercial. The press release we issued yesterday, the slide presentation, and access to the webcast for today's call are available on our website at 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. Thank you for joining us. In my prepared remarks this morning, I'll reference from time to time various pages of the presentation. For those of you following along or have not had the opportunity to do so, just go on to www.kinetic.com. Following a strong first quarter, we've continued to deliver solid results, outperforming our original guidance. We've achieved a number of our operational and financial goals thus far and have executed upon various strategic value-added growth opportunities. We reported our second quarter 2022 results yesterday and look forward to sharing them with you this morning. in addition to providing a few more recent business highlights that occurred following the second quarter close. Following our robust second quarter results and updated business outlook, we have revised our 2022 guidance hire for both EBITDA and capital expenditures to reflect additional producer development, new commercial agreements, and new capital projects such as the PHP expansion. Similar to our first quarter earnings results, many of the figures today will be reported on a pro forma basis, assuming the business combination between our predecessors, BCP and Altus, closed on January 1st of this year. We believe it is more reflective of our actual results and provides our investors with more meaningful information and helps to reconcile our 2022 four-year guidance. So let's begin with a few recent highlights. On slide three, We reported a pro forma adjusted EBITDA of $208 million for the second quarter, representing a 24% increase year over year and a 9% increase quarter over quarter. This is largely attributed to an increase in volumes and margins across both the midstream logistics and pipeline transportation segments. We processed nearly 1.2 billion cubic feet per day this quarter, representing a 7% increase year-over-year and approximately a 5% increase quarter-over-quarter. In June, we completed our comprehensive $3 billion refinancing and retired all of our legacy Altus and BCP debt facilities. Our newly issued senior notes, term loan A, and revolving credit facility are 100% sustainability linked. In fact, Kinetic is now the first and only North American midstream company to link 100% of its debt capital financings to sustainability initiatives. Our refinancing was an important step in simplifying our capital structure and improving our financial transparency. Following the close of the second quarter, we fully redeemed the outstanding balance of the Series A Preferred which in turn completed our overall capital structure simplification. We have provided our updated organizational structure on page four for your reference. We have continued to identify and execute on a number of strategic organic growth opportunities within both of our midstream logistics and pipeline transportation segments. We, along with our partners, Kinder Morgan and Exxon, reached a final investment decision on the PHP capacity expansion in June. The 550 million cubic feet per day expansion is 100% sold out with 10-year take or pay transportation agreements and is expected to be in service by November 1st, 2023. Capital spend will begin this year and is now reflected in our revised capital expenditures guidance. Following the in-service of the expansion, Kinetics ownership in PHP will increase to over 55%. The PHP expansion is an important catalyst for our one BCF per day Delaware Link residue gas pipeline to be completed and in service in 2023. We look forward to providing more updates on these exciting projects over the next year. Last week, Enterprise announced the Chinook NGL pipeline initial capacity expansion of up to 275,000 barrels per day achieved through pipeline looping and pump station modifications. The capacity is expected to be online by the first half of 2024. We also look forward to providing more detailed updates about this expansion project in the quarters to come with our partner, Enterprise. During the second quarter, Gulf Coast Express Pipeline announced an open season to solicit commitments for an expansion project that would increase GCX's transportation capacity by nearly 570 million cubic feet per day. With our partners, Kinder Morgan, DCP Midstream, and an affiliate of Arclight, we are continuing to secure interested customers for the possible expansion, which would provide takeaway capacity necessary for facilitating continued natural gas production growth sourced in the Permian. As we have previously shared, these exciting pipeline expansion announcements are highly capital efficient and will help to address the near-term takeaway constraints facing the Permian Basin and meet the demand needs along the Gulf Coast and overseas markets. For context, Permian natural gas volumes are expected to exceed 16 billion cubic feet per day by year end, an increase of over 1 BCF per day for this year alone. And Permian NGL volumes are likely to grow by over 300,000 barrels per day by 2025. Moving on to our midstream logistics segment, we're excited to report positive recent developments with our customers and their development activities. Apache recently completed drilling operations of its sixth well pad on its DXL acreage in Central Reeves County, which is committed for gas gathering and processing to Kinetic beginning November 1st of this year. The rig has now been relocated to Alpine High to develop its five well bonsai pad, marking Apache's return of development to the area since 2019. Following up on very encouraging well results from the Willow State, which was completed and turned to sales in early 2021, Apache plans to maintain a two-rig program shared between the Northern Alpine High and its Texas-Delaware position for the foreseeable future. As previously disclosed, we have executed a number of new gathering and processing agreements with large cap and private Permian producers that begin later this year and in early 2023. These new agreements will provide steady, attractive gas process volume growth in the fourth quarter. Year-to-date, we have executed nine new long-term gas gathering and processing agreements, four of which are with new customers we previously had no business with. Additionally, we have executed numerous amendments on other agreements, either adding acreage, increasing volume, or securing long-term residue gas and NGLs for downstream commitments. In a basin where processing capacity is tight, we see great value in having spare processing capacity available today that highlights the value of our operating leverage. We continue to receive inbounds from customers interested in accessing our spare capacity at Diamond Cryer and the legacy BCP facilities. We view the continued customer consolidation in the Permian Basin as a positive for us as our customers' balance sheets and acreage positions strengthen, cost of capital and access to capital significantly improves, and consolidation offers us an opportunity to optimize legacy agreements to the current needs of our new customers. We expect to see incremental development activity on our dedicated acreage following the merger of Colgate and Centennial, and look forward to strengthening our partnership with a merged entity. Most recently, Apache announced their acquisition of tuck-in properties in the Texas Delaware with an inventory of undrilled locations. Much of that acreage is already dedicated to us long term for all three streams, gas, crude, and water. This is just another example of how we can grow alongside our customers as they enhance their acreage portfolios. We published our 2021 ESG report on July 21st. I encourage you to take a look if you've not already done so, as it highlights a number of achievements made by both Altus and Eagle Claw over the last year. Moving to page five of our slides, we've presented a summary of our second quarter financials. We reported a pro forma adjusted EBITDA of $208 million. We generated an adjusted pro forma distributor cash flow of $170 million and free cash flow of $127 million. On July 20th, we declared a 75 cent per share quarterly cash dividend pro forma the June two for one stock split. This represents a pro forma dividend coverage ratio of 1.7 times. Free cash flow generated during the period was used to redeem 75,000 units of the Series A preferred, excluding the PIC preferred units. The remaining outstanding balance was redeemed in early July with cash and borrowings on our then undrawn revolver. The accelerated redemption results in immediate cash savings to Kinetic. Additionally, it completed our capital structure simplification and streamlined our internal quarterly processes with no negative impact to our overall credit ratings. We exited the quarter with a 3.7 times leverage ratio and remain on track to achieving our long-term leverage target of 3.5 times. Pro forma the revolver draw to fully redeem the Series A preferred, quarter end leverage is 4.3 times. On page six, we provided our segment specific adjusted EBITDA contributions. Midstream logistics EBITDA was $141 million, up 47% year-on-year. This was primarily driven by increased volumes and favorable commodity prices. Gas process volumes increased 7% year-over-year due to modest growth by producers, top dedications effective in 2022, and the annualization of new contracts that began in the second half of 2021. Crude volumes grew 15% year-over-year, while produced water volumes decreased by 3%, as a result of increased producer recycling by our largest customer. Approximately 70 new wells for which we provide midstream services were turned to sales in the second quarter. Our pipeline transportation second quarter EBITDA was $71 million, relatively flat year over year. However, we continued to see volume growth on Chinook this past quarter. Now let's shift our focus to our guidance on slides eight and nine. After two strong quarters, we are revising our guidance higher to reflect a number of factors, including volume outperformance, commodity prices, higher synergies, newly executed gas gathering and pricing agreements, and the PHP expansion. Our updated 2022 EBITDA guidance range is now $820 to $840 million, up from our original EBITDA guidance range of $770 million to $810 million. representing a $40 million increase or 5% at the midpoint. This was driven by new large gathering and processing agreements, including the two large-scale agreements previously announced in May, volume growth on our JV pipes, commodity prices, and synergy realization. Our new commercial agreements are conservatively expected to increase our EBITDA by approximately $15 million this year. Both of the new agreements announced in May will begin flowing in the fourth quarter. Increased volumes on our JV pipes translate to an additional $10 million this year, and synergy in commodity price outperformance represents an incremental $25 million increase. So this roughly $50 million increase is offset by a $10 million reduction associated with selective volume underperformance. Several legacy contracts did not meet volume expectations due to inclement weather and record high temperatures in West Texas in May and June. Approximately half of the actual underperformance was associated with our crude and water segments. Relating to the gas volume underperformance, these contracts were primarily POP, which further reduced our commodity exposure benefit as well. Our original guidance presented in February assumed a crude price of $84.88 and a natural gas price of $3.95. Over the past six months, commodity prices have been favorable with WTI averaging over $100 per barrel and Waha averaging $5.50 per MMBTU. Our revised guidance now reflects strip pricing as of August 4th for August through December of this year, which implies a remaining crude price of $86.65, $6.90 for natural gas, and $38.25 for NGLs. We are currently working on reducing our remaining commodity exposure for this year. As expected, we've seen inflationary cost pressures compared with our expectations at the beginning of this year when providing guidance. However, I am proud of the work done by our whole team, especially our operations team led by Matt Wall, to reduce costs where possible, to offset cost inflation in lubes and cams, labor, and repair and maintenance activities. Despite inflation running at levels not seen since the 1980s, we expect full year operating expenses to be $2 million greater than budget, representing only a 1% increase. I would also add that much of this increase is associated with the two new high pressure gas gathering and processing agreements that were not contemplated when developing our original budget. It is also worth noting that all of our gas gathering and processing agreements do have annual contract escalators in place, which does help offset these inflationary pressures. In addition to our EBITDA guidance, we are revising our 2022 capital guidance upwards. Our updated capital guidance range is now $280 to $300 million in total. It is worth noting that our prior guidance reflected capital solely for our midstream logistics segment. When we reflect only the midstream logistics segment, our new range is $170 to $190 million. representing a $42.5 million increase at the midpoint, $33 million of which is directly associated with new capital projects and contracts that were not contemplated at the beginning of this year. If excluded, our CapEx would be in line with our original February guidance. The revision reflects the incremental $25 million required to construct the infrastructure supporting new long-term gas gathering and processing agreements. Approximately $8 million for the 120 million cubic feet per day Diamond Cryo processing expansion, which is expected to be in service first quarter of next year. Early capital spend associated with Delaware Link and some pull forward of Alpine High GMP equipment surplus relocation projects. Delaware Link is our 1 billion cubic feet per day residue gas pipeline That will connect our asset in Central Reeves County directly to Waha and PHP. This project will be fully subscribed and in service ahead of the PHP expansion. We will be providing more details in coming quarters. Our original capital guidance provided in February did not contemplate or include any pipeline transportation capital. Now that we have reached the final investment decision on PHP, Our pipeline transportation capital spend is estimated to be $110 million for this year, as we expect this spend to occur in the second half of this year. We will ensure that expansion capacity is fully online and inspected by November 1st of next year, and the capital calls for 2022 represent approximately 35% to 40% of Kinetic's capital commitment. I would now like to move to slide 11 and provide an update on our integration efforts following the merger in February. After completing our accounting, IT, and HR transition in May, our engineering and operations team have been focused on executing upon our system integration projects. The super system interconnect began flowing gas on June 22nd. This project was both on time and on budget. The pipeline connects the legacy ALTIS and BCP systems and allows us to move 500 million cubic feet per day bidirectionally. As we increase the processing capacity at Diamond and Corio in the first quarter of next year, this connection will allow us to utilize the full available capacity at Diamond and harness the value of our system's operating leverage in the currently tight processing market. We are underway with our compressor relocation projects. We've already replaced roughly 15,000 horsepower of rental compression with surplus equity-owned units and are on track to relocate an additional 17,000 horsepower by year-end. We're in the detailed engineering and design phase to install surplus front-end amine treating equipment at East Toya, Pakers Bend, and Pakers Complexes, and have begun procuring the necessary long-lead equipment. These projects are estimated to be in service next summer and will allow us to expand our service offerings to gas treating as well as to receive a wider range of gas with respect to gas quality specifications. This in turn will enable us to extend our footprint into regions of the Permian Basin with higher H2S and CO2 concentrations. On page 13, I would like to pivot to our capital allocation priorities and near-term financial goals. As I mentioned earlier, we completed our comprehensive $3 billion refinancing, providing us with a fully unsecured capital structure. In addition to our $2 billion of debt and $1 billion of notes, we have $1.25 billion five-year revolving credit facility in place. We received initial credit ratings from Moody's, S&P, and Fitch, the places on track to achieving our financial goal of investment grade ratings in 2023. In July, we redeemed the outstanding balance of our Series A preferred, executing our redemption goal almost six months ahead of schedule. We declared a 75 cent per share quarterly dividend, performing the June stock split, which will be paid on August 17th. Over the next 18 months, we are confident in our ability to achieve a three and a half times leverage target and secure investment grade ratings, which would now complete our original financial targets laid out in October 2021 when we first announced the BCP and Altus merger. On slides 14 and 15, I would like to commend the Altus and Eagle Corps teams for their achievements in 2021 with respect to our ESG initiatives. We published our 2021 sustainability report on July 21st, highlighting the achievements of our predecessors, and I encourage you to take a moment to review. On a pro forma basis, we reduced our Scope 1 and Scope 2 emissions by 16% between 2020 and 2021. The reduction in our Scope 2 emissions was largely driven by migrating BCP's purchase power to 100% renewable sources in April 2021. We will look to migrate Altus assets to renewably sourced energy to further reduce future Scope 2 emissions. The company was awarded GPA Midstream's Perfect Record Award for no lost time incidents in 2021 and realized a 55% reduction in preventable motor vehicle accidents year over year. I'm extremely proud of our company's commitment to the environment and the communities in which we live and operate. Sustainability is core to Kinetic, and it is woven into every detail of our business, from operations to finance. The oil and gas produced in the United States continues to be the cleanest and most responsibly sourced We are blessed with an abundance of natural resources in the US and recognize that we can drive positive change throughout our industry as we look to meet the global energy needs and demands. As Kinetic, we represent energy for change. Through the first half of 2022, I'm extremely proud of what we've been able to accomplish as Kinetic. We have executed upon a number of our operational, commercial, and financial goals, all while remaining committed to sustainability, and creating value for our shareholders. Thank you all again for your continued support and for joining us this morning. And with that, I'll turn the call back over to Maddie.