Business context and reporting period
Important identification mismatch: The request names Kinetik Holdings Inc., but the supplied filing is Altus Midstream Company’s Form 10-K for the fiscal year ended December 31, 2019, filed March 16, 2020. This summary describes the supplied filing, not a Kinetik filing. The filing reports a full fiscal year, not a standalone 2019 fourth quarter.
Altus owns gathering, processing and transmission assets in West Texas’s Alpine High area and minority interests in four Permian-to-Gulf Coast pipeline projects. Apache Corporation was its sole customer in the periods reported and held a 76.9% interest in Altus Midstream LP. Altus had no employees; Apache provided operating and administrative services.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $135.8 million | $76.8 million |
| Operating loss | $1,285.8 million | $12.2 million |
| Net loss, including noncontrolling interests | $1,338.9 million | $0.2 million |
| Net loss attributable to Class A shareholders | $369.7 million; $4.93 per share | $4.4 million; $0.03 per share |
| Adjusted EBITDA | $86.3 million | $7.8 million |
| Cash provided by operating activities | $76.3 million | $0.7 million |
Revenue rose $59.0 million, primarily due to higher throughput from Apache’s drilling activity in late 2018 and the first half of 2019. Average gas throughput and processing volumes increased to 509 MMcf/d from 333 MMcf/d. Adjusted EBITDA improved with higher revenue and $29.3 million of EBITDA attributable to equity-method interests. Reported operating and net losses were dominated by impairments.
Revenue was entirely affiliate midstream-services revenue. The resulting operating margin was sharply negative after impairments; before the impairment charge, the filing does not present a directly comparable adjusted operating margin. Adjusted EBITDA was approximately 63.6% of revenue in 2019 versus 10.2% in 2018; this is a non-GAAP measure and is not equivalent to operating margin or cash flow.
At year-end, cash was $6.0 million, total debt was $405.8 million (including a $9.8 million finance lease), and available committed revolver capacity was $404.0 million. The $800 million unsecured revolver had $396.0 million drawn, matures in November 2023 subject to extension options, and had a leverage ratio below 4.00:1.00; the company reported compliance with its covenants. Cash declined from $449.9 million at year-end 2018. Investing cash outflow was $1,503.7 million, mainly capital expenditures and pipeline interests; financing cash inflow was $983.5 million.
Altus raised $611.2 million net in 2019 from preferred-unit issuance. Those units carry a 7% annual distribution rate, rising to 10% after the fifth anniversary under specified terms, and rank ahead of common units for distributions and liquidation. Preferred distributions may be paid in kind through 2020.
Material changes and unusual items
- Apache notified Altus in its fourth-quarter 2019 planning review that it would materially reduce planned Alpine High investment; after disappointing development-pad performance and prevailing gas and NGL economics, Apache had no future drilling plans there at the filing date.
- Altus recorded $1.3 billion of fourth-quarter impairments on gathering, processing and transmission assets, reflecting lower expected throughput. It also recorded a $9.3 million third-quarter impairment on a cancelled compressor-station project. The impairment valuations relied on management assumptions, including forecast throughput, rates, costs and discount rates.
- 2019 depreciation and accretion expense was $41.5 million, up from $20.1 million. Management expected depreciation in 2020 to be lower following the impairments.
- Altus’s equity-method pipeline interests totaled $1,258.0 million at year-end. GCX and Shin Oak were in service; EPIC entered initial service in February 2020; PHP was under construction and expected to enter service in early 2021. Altus estimated approximately $300 million of additional pipeline capital contributions during 2020.
- The Salt Creek NGL pipeline option was not exercised and expired March 2, 2020.
- A $8.5 million unrealized loss related to an embedded derivative associated with the preferred units was recorded in 2019. Altus also recorded a $135.0 million valuation allowance against deferred tax assets.
Outlook, risks and contingencies
Management expected midstream infrastructure capital needs to be limited in 2020 and 2021, apart from pipeline investment obligations, and believed existing capital resources would cover remaining pipeline construction. Based on its plan and assumptions, management expected operating cash flows to exceed capital expenditures by year-end 2020. These expectations are subject to substantial uncertainty.
Key risks include dependence on Apache and Alpine High, no minimum-volume commitments in the Apache contracts, concentration of operations in one region, and the possibility of further throughput declines or impairment. Fee-based contracts limit direct commodity-price exposure, but lower commodity prices can reduce producer drilling and volumes. Other risks include floating-rate debt, construction costs and delays, minority interests in third-party-operated pipelines, regulatory and environmental requirements, and reliance on Apache for employees and services. Apache’s most-favored-nation and consent rights may also constrain third-party contracting.
The filing reported no material pending or threatened legal proceedings known to the company and no accrued loss contingencies at December 31, 2019. It disclosed environmental, safety, permitting and litigation risks generally, with no identified unprovided environmental claim expected to materially affect financial position, results or liquidity. Altus had not paid cash dividends.
Important facts for investors to verify
- Confirm the issuer and filing: the supplied document is Altus Midstream Company’s 2019 10-K, not a Kinetik Holdings Inc. filing.
- Review the impairment assumptions and the sensitivity of asset values to Apache’s reduced Alpine High plans, future production and throughput.
- Assess Apache’s drilling intentions, customer concentration, contract volume protections (none are minimum commitments), and progress in attracting third-party customers.
- Verify the estimated $300 million 2020 pipeline contribution requirement, project timing and whether the expected funding and cash-flow outlook were achieved.
- Review liquidity after the sharp fall in cash, revolver utilization, covenant headroom, variable-rate exposure and preferred-unit distribution/redemption obligations.
- Consider potential dilution and priority claims from preferred-unit exchange rights, Apache’s redeemable common units, warrants and up to 37.5 million contingent earn-out shares.