Kinetik Holdings Inc

Good morning and thank you for attending the Kinetic third quarter 2022 results call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to queue for a question on today's call, you can do so by dialing star one on your telephone. I would now like to pass the conference over to your host, Maddie Wagner with Kinetic. Thank you. You may proceed.

Thank you. Good morning and welcome to Kinetic's third quarter 2022 earnings conference call. Here with me is our President and CEO, Jamie Welch, as well as Matt Wall, our COO, Annie Pencik, our Chief Strategy Officer, Steve Stellato, our CAO, Todd Carpenter, our General Counsel, Trevor Howard, our VP of Finance, and Chris Kendrick and Tyler Milam, our VPs of Commercials. The press release we issued yesterday, the slide presentation, and access to the webcast for today's call are available at www.kinetics.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 to 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, and thank you for joining us today. We reported our third quarter 2022 results yesterday afternoon, and I'm pleased to share with you this morning that we reported a record quarter with respect to both processed gas volumes and adjusted EBITDA. In this first year post-merger, we have continued to improve quarter over quarter across all facets of our business. as we realize integration synergies, optimize our system, and grow customer relationships. Having grown 1.5 billion cubic feet per day through the end of September, the Permian Basin remains on track to grow natural gas volumes by 2 billion cubic feet per day, exit to exit in 2022, with consultants expecting another 2 billion cubic feet per day of growth in 2023. Drilling down further, we estimate that the Delaware Basin accounts for well over half of total Permian supply growth. Moving a bit further downstream, we are beginning to see tightness at the long-haul residue gas transport outlets earlier than expected. In October, approximately 1.3 billion cubic feet per day of takeaway capacity was taken offline for routine maintenance, which resulted in Oaxaca moving into a negative price territory. a stark reminder of the 2017 to 2020 Waha basis collapse. This recent event reinforced to us a few things. First, Permian natural gas takeaway appears to be fairly balanced, and Waha pricing is volatile when utilization rates are this high. This point is further reinforced when looking at northbound natural gas volumes, historically viewed as a transport avenue of last resort, which in September and October hit levels not seen since the in-service of Permian Highway pipeline almost three years ago. As expected, the immediate supply response is already underway, with Permian processes largely switching plants into recovery. With the takeaway supply-demand equation fairly balanced, further supply growth will likely only exacerbate discounted Waha prices. Second, the event highlighted how critical it is to differentiate ourselves from our peers by offering our customers integrated solutions. Even in the face of inflation and weaker commodity prices, the Permian Basin continues to grow and supply both the US and the world's energy needs. The Permian rig count has remained steady at roughly 340 to 350 rigs since May, despite a 20% reduction to WTI crude since then. In the third quarter, we, Kinetic, averaged approximately 17 rigs on our system and had approximately 70 wells turned to sales. We have continued to see a steady ramp of activity over the course of this year. In a basin where processing capacity and pipeline egress to the Gulf Coast are becoming tighter, Kinetic stands apart. As mentioned earlier, we are able to offer our customers processing capacity today and an evacuation route for residue gas to the Gulf Coast. As we move into 2023 and beyond, this only becomes more meaningful. Similar to our first and second 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. On page three, moving to our recent highlights, we reported a record adjusted EBITDA of $212.4 million for the third quarter. This was driven by increased gas volumes across our midstream logistics segment, and stronger than expected contributions from our pipeline transportation segment. Two previously announced gas gathering and processing agreements with large cap investment grade counterparties began on October 1st. Also, beginning November 1st, we commenced our new gathering and processing dedication with Apache for its DXL acreage in central Reeves County. We have continued to identify both organic and inorganic growth opportunities. Year to date, we have added six new customers to our system, representing a 20% increase in overall customer count. In the third quarter alone, we added three new private customers. Not only have we added new customers, but we have expanded our relationships with existing ones. As I just mentioned, we have established relationships with several new private producers along our system. This is a net positive for us as these producers will pull inventory forward, accelerating development on our system into 2023. These teams have proven track records and we look forward to being part of their emerging growth story. In September, we acquired Brandywine NGL. This acquisition affords Kinetic greater control over system NGLs and provides interconnectivity to downstream natural gas liquids outlets. Kinetic NGL, a 250,000 barrel per day intrabasin NGL pipeline system, is comprised of the Dewpoint and Brandywine assets. It is wholly owned and operated by Kinetic. Progress continues on the 550 million cubic feet per day expansion of PHP. The required compression equipment has been secured and pre-construction activities are well underway to secure construction contractors, land, and other associated materials. The project remains on schedule to be in service by November 1, 2023. On page four, in the third quarter, we achieved a new quarterly record for gas process volume at 1.2 billion cubic feet per day, representing a 4% increase year over year. Crude volumes gathered were approximately flat year over year at 67,000 barrels per day, although we benefited from 25 wells turned in line on our crude system in the third quarter that drove an 8,000 barrel a day increase in October over those third quarter average levels. Water gathered volumes were down approximately 11%, quarter over quarter, simply due to producer recycling in July from our largest customer. The Diamond Cryo expansion of 120 million cubic feet per day of incremental capacity is on schedule for completion in the first quarter of next year. We have procured the long lead time equipment and kicked off construction. In June, we completed the Super System interconnect, connecting the legacy BCP and Alta systems. The interconnect has allowed us to access latent capacity at Diamond Cryer and utilize the SRX technology available at Diamond Cryer to further enhance our NGO recoveries, achieving up to 99% ethane recovery. An additional benefit to the system interconnect and latent capacity is that we were recently able to temporarily bring several BCP facilities offline to perform routine maintenance. without curtailing any processed gas volumes for our customers. This year, we will have replaced or avoided the addition of 32,000 horsepower of rental compression with 10 company-owned surplus compression units. Annualized, this translates to over $5 million of annual operating expense savings. In 2023, we will harvest additional synergies with the installation of owned surplus front-end aiming treating equipment at the BCP complexes and continued compression relocation projects. Still on page four, on financials, we reported adjusted EBITDA of $212.4 million. We generated distributable cash flow of $158 million and free cash flow of $34 million. On October 19th, we declared a 75 cent per share quarterly cash dividend pro forma the June two for one stock split, representing a dividend coverage ratio of 1.5 times. We exited the quarter with a four times leverage ratio and remained confident in our ability to achieve a long-term leverage target of 3.5 times. Our total capital expenditures for the quarter were $145 million. $84 million of which was associated with the pipeline transportation segment. On page four, we have provided some segment specifics. Our midstream logistics segment generated adjusted EBITDA of $137.5 million in the third quarter. Year over year, that segment pro forma adjusted EBITDA is up 25%. In the third quarter, we realized our full 2022 EBITDA synergy target of $25 million. This was achieved three months ahead of schedule, and as a result, we're increasing our 2022 Synergy Capture Guidance to over $30 million, as shown on page seven. Shifting to our pipeline transportation segment, we had a record quarter and beat our internal expectations. We generated an adjusted EBITDA of $78.7 million in the quarter. Moving to pages five and six, the strong third quarter and the fourth quarter outlook gives us confidence to reiterate our adjusted EBITDA and capital expenditure guidance. Our adjusted EBITDA guidance is $820 to $840 million, with $830 million at the midpoint. Over the course of this year, we have realized adjusted EBITDA growth quarter over quarter. In the fourth quarter, we have a number of new gathering and processing agreements commencing. Our two previously announced gathering and processing agreements with large cap investment grade parties commenced on October 1st, and our Apache DXL agreement started last week on November 1st. There are also several other new contracts with private producers that have or are about to commence. We will continue to further capture additional integration and cost synergies. Offsetting the sequential improvements in EBITDA is slightly weaker natural gas and NGL prices. A capital expenditure guidance remains unchanged at $280 to $300 million. This includes $170 to $190 million of midstream logistics capital and $110 million of pipeline transportation capital. Our projects are both on budget and on schedule and are insulated from the inflationary environment as long lead time equipment and materials have been secured. Within our pipeline transportation segment, the $110 million guidance includes our total funding commitment to the PHP expansion for this year, the Brandywine acquisition, and early spend on Delaware Link. Our producer customers are currently in their budgeting season. And as a result, we will provide our 2023 EBITDA and capital expenditure guidance in February when we report our fourth quarter and full year 2022 results. If you go to page nine, I'd like to provide a few updates before we move to Q&A. As we previously announced, we completed our comprehensive $3 billion refinancing in June. Most recently, we have locked in a fixed rate on our term loan aid to May 2023. Specifically, $2 billion, the full amount of our term loan aid bank facility, is now fixed at a SOFA rate of 4.45%. And from May of 23 through May of 25, a billion dollars is fixed at a SOFA rate of 4.46%. These actions taken together reduce our floating rate exposure to less than 15% of total current debt outstanding, to May of next year, and then approximately 40% thereafter through the maturity of the term loan A. We just marked the one-year anniversary of our merger announcement. We commemorated this event at the New York Stock Exchange on October 24th with members of management and the board at the opening bell ceremony. Looking back, we have remained steadfast and committed to executing upon the financial goals and strategy presented a year ago. We completed our 2022 capital allocation goals earlier this year, and we remain confident in achieving our 3.5 times leverage target and securing investment grade ratings by year end 2023. Thank you again for your continued support and for joining us this morning. And with that, I'd like to open the lines for Q&A.