Business context and reporting period
Entity and period: The supplied filing is Altus Midstream Company’s Form 10-Q for the quarter ended September 30, 2019—not a filing by Kinetik Holdings Inc. Altus (ticker ALTM) owned gathering, processing and transmission assets in West Texas and interests in Permian Basin pipelines. Its sole customer was affiliate Apache Corporation.
Comparisons with 2018 require caution: the business combination closed in November 2018, and the 2018 periods reflect different financing and cash-management arrangements.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $34.0 million | $25.4 million | $92.0 million | $50.1 million |
| Operating income (loss) | ($6.6 million) | $0.3 million | ($7.3 million) | ($14.8 million) |
| Net income (loss), including noncontrolling interests | ($8.2 million) | $19.2 million | ($8.0 million) | ($5.0 million) |
| Net income (loss) attributable to Class A shareholders | ($4.9 million) | $19.2 million | ($6.1 million) | ($5.0 million) |
| Adjusted EBITDA (non-GAAP) | $17.8 million | $5.8 million | $34.0 million | ($0.4 million) |
| Average gas throughput | 467 MMcf/d | 392 MMcf/d | 464 MMcf/d | 286 MMcf/d |
Revenue growth reflected higher throughput and, for the nine-month comparison, revised service rates. Operations and maintenance expense fell in Q3 but increased year to date; depreciation and accretion rose as assets entered service. The filing does not provide a clearly labeled operating-margin metric.
Cash flow and balance sheet: Nine-month operating cash flow was $39.4 million; investing cash outflow was $1.315 billion, including $307.0 million of capital expenditures and $1.008 billion for equity-method pipeline interests. Financing provided $828.3 million, including $611.2 million net preferred-unit proceeds and $235.0 million of revolver borrowings. Cash declined to $2.6 million from $449.9 million at year-end 2018. At September 30, total debt was $252.6 million, including a $17.6 million finance lease; revolver availability was $415.0 million under a $650 million commitment. Current assets of $50.0 million were below current liabilities of $56.4 million.
Preferred units carry a 7% quarterly distribution rate, rising to 10% after the fifth anniversary under specified terms. Holders have redemption and, after year seven or upon specified events, exchange rights; the redemption return is subject to an 11.5% IRR or 1.3x invested-capital threshold, whichever is greater, with specified adjustments. Altus elected to pay the approximately $11.0 million Q3 distribution in additional units.
Material changes versus the prior comparable period
- Q3 revenue increased 34% year over year, and nine-month revenue increased 84%; average throughput also rose substantially.
- Adjusted EBITDA improved, but GAAP results were affected by higher depreciation, a $9.3 million impairment, and a $3.8 million unrealized loss on an embedded derivative.
- Altus expanded its equity-method pipeline investments, reaching four exercised options and $1.095 billion in recorded interests by quarter-end.
- Cash declined sharply as capital spending and pipeline investments were funded; Altus also drew $235 million on its revolving facility.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow to exceed investment expenditures by year-end 2020, based on its current plan and assumptions. No specific revenue or earnings guidance was provided.
- Two of three planned 200 MMcf/d cryogenic trains were in service; the third was complete and expected to enter service in Q4 2019. Management expected depreciation to increase as plants entered service.
- GCX began full commercial service in late September 2019; EPIC was expected in service in January 2020 and Permian Highway Pipeline in early 2021. The remaining pipeline option could be exercised through January 31, 2020.
- Altus canceled a planned compressor-station project after processing expansion plans were deferred, recorded a $9.3 million impairment, and classified assets held for sale. After quarter-end, it received approximately $13 million from sales of certain assets.
- All service revenue came from Apache, under fee-based agreements with no minimum volume commitments. Apache’s production decisions and regional commodity prices can therefore affect volumes and revenue; Altus also has indirect exposure through customer activity and operating costs.
- Preferred-unit redemption and distribution terms, capital requirements for pipeline projects, debt covenants, and the company’s limited cash balance are material funding considerations. Management reported covenant compliance at quarter-end.
- No loss-contingency accruals were recorded and management reported no pending or threatened legal proceedings known at filing. Environmental regulation and liability remain risks; insurance does not cover all potential environmental losses.
Important facts for investors to verify
- Confirm the issuer: this filing is for Altus Midstream Company, not Kinetik Holdings Inc.
- Review Apache’s production plans and any progress diversifying the customer base, given the absence of minimum-volume commitments.
- Track cash generation, remaining pipeline funding needs, revolver use and covenant headroom against the year-end 2020 cash-flow outlook.
- Assess the preferred units’ cumulative distributions, redemption economics, potential dilution and restrictions on common-unit distributions.
- Verify the timing and economics of the third processing train, remaining pipeline projects and post-quarter asset-sale proceeds.