Filing identity and reporting period
Important mismatch: The supplied filing is Altus Midstream Company’s Form 10-K for the fiscal year ended December 31, 2020, not a filing for Kinetik Holdings Inc. or a standalone 2020 fourth quarter. The financial results below are annual 2020 figures, compared with 2019, unless stated otherwise.
Business context
Altus owns gathering, processing and transmission assets in West Texas and equity interests in four Permian Basin pipelines. Its business is substantially dependent on Apache Corporation, which is both its principal customer and majority owner of the operating partnership. Apache holds 76.9% of Altus Midstream LP; Altus Midstream Company holds approximately 23.1% and controls the partnership’s general partner.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $148.4 million | $135.8 million |
| Operating income (loss) | $61.6 million | $(1,285.8) million |
| Net income (loss), including noncontrolling interests | $80.5 million | $(1,338.9) million |
| Net income (loss) attributable to Class A shareholders | $1.6 million | $(369.7) million |
| Adjusted EBITDA (non-GAAP) | $191.2 million | $86.3 million |
| Average natural-gas throughput | 499 MMcf/d | 509 MMcf/d |
| Cash provided by operating activities | $164.3 million | $76.3 million |
| Cash and cash equivalents at year-end | $24.2 million | $6.0 million |
| Total debt at year-end | $624.0 million | $405.8 million |
| Available committed borrowing capacity | $176.0 million | $404.0 million |
Midstream services revenue from Apache was $144.7 million; third-party product sales contributed $3.7 million. The filing reports no gross margin. Operating margin was approximately 41.5%, calculated from reported operating income and revenue; it should be viewed in light of equity-method earnings and the substantial prior-year impairment charge. Cash used in investing activities was $338.4 million, including $30.0 million of infrastructure capital expenditures and $327.3 million of contributions to pipeline interests. Cash increased by $18.2 million during 2020.
Altus had an $800 million unsecured revolving credit facility maturing in November 2023, with two one-year extension options. Its year-end leverage ratio was below 4.00:1.00, versus a 5.00:1.00 covenant limit, and the company reported compliance with the facility. A 1 percentage-point increase in interest rates was estimated to raise annual interest expense by approximately $6.3 million.
Changes versus 2019
- Revenue increased $12.6 million, driven principally by higher rich-gas throughput following the commissioning of three processing trains, partly offset by lower lean-gas throughput. Average throughput nevertheless declined by 10 MMcf/d.
- Operations and maintenance expense fell $17.9 million, primarily due to operating efficiencies and lower labor, supplies and equipment-rental costs. General and administrative expense rose $2.9 million, reflecting higher Apache service fees under the COMA.
- Net results improved sharply, primarily because 2019 included $1.3 billion of impairments following Apache’s reduction in Alpine High development plans. 2020 included a further $1.6 million impairment on power generators.
- Income from equity-method pipeline interests increased to $58.7 million from $19.1 million. GCX and Shin Oak contributed earnings; EPIC reported a loss, while PHP was commissioning and began service in January 2021.
- Adjusted EBITDA rose to $191.2 million from $86.3 million. This non-GAAP measure includes the company’s share of pipeline earnings and excludes significant items; it is not equivalent to operating cash flow.
- Debt increased $218.2 million, while available borrowing capacity fell $228.0 million. Cash from operations rose to $164.3 million.
Outlook, risks and unusual items
- Management expected 2021 cash flow to be positive, with minimal capital needs for existing midstream assets, approximately $30 million of further pipeline contributions (primarily PHP), and distributions from pipeline interests. It stated that available resources were expected to support the planned quarterly dividend, while warning that COVID-19 and throughput projections remained uncertain.
- The board declared a $1.50-per-share Class A dividend, payable March 31, 2021. The related partnership distribution was $1.50 per common unit, totaling $24.4 million; Apache was entitled to approximately $18.8 million.
- Apache’s Alpine High drilling and investment plans are central to volumes and revenue. Service agreements have no minimum-volume commitments, and substantially all midstream-services revenue is from Apache. COVID-19-related curtailments and downtime affected 2020 volumes: Apache shut in approximately 70 MMcf/d in Q2, residue-pipeline downtime reduced throughput by approximately 40 MMcf/d, and Q4 price-related curtailments reduced it by approximately 26 MMcf/d.
- The $36.1 million 2020 unrealized derivative loss related to an embedded exchange option in the Series A Preferred Units; the related liability was $139.0 million at year-end. The Preferred Units carry a 7% annual distribution rate, increasing to 10% after the fifth anniversary and under specified events, and have senior distribution and liquidation rights. Their exchange and redemption terms could constrain distributions or dilute common shareholders.
- Other notable obligations include a three-year power contract with estimated minimum payments of $5.4 million in 2021, $4.7 million in 2022 and $3.6 million in 2023, subject to actual usage. The company reported no loss-contingency accruals and no known pending or threatened legal proceeding expected to materially affect its financial position, results or liquidity.
- Principal risks include Apache concentration and control, lower commodity prices or production, pipeline utilization and operating risks, access to capital, variable-rate debt and the LIBOR transition, environmental and regulatory requirements, and the possibility of further asset impairments. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation because Altus qualified as an emerging growth company.
Most important facts for investors to verify
- Confirm the issuer and reporting period: this is Altus Midstream Company’s FY2020 10-K, not a Kinetik Holdings filing or a Q4-only report.
- Assess Apache’s current Alpine High development plans, production volumes, creditworthiness and the absence of minimum-volume commitments.
- Review the $624 million revolver balance, remaining availability, covenant headroom, interest-rate exposure and debt maturity/extension terms.
- Examine the Preferred Units’ distribution, redemption and exchange provisions, including the $139.0 million embedded-derivative liability and potential dilution.
- Test the assumptions behind the 2021 cash-flow and dividend outlook, including PHP operations, pipeline distributions, remaining capital contributions and the declared dividend.
- Evaluate pipeline-level performance, especially EPIC’s losses, PHP’s post-year-end start-up, and whether equity-method earnings translate into distributable cash.