Filing summary
Entity and period note: The supplied filing is Altus Midstream Company’s Form 10-K for the fiscal year ended December 31, 2018, filed February 28, 2019. It is not a Kinetik Holdings Inc. filing, and it reports full-year results rather than a standalone Q4 filing. The 10-K includes unaudited quarterly data; Q4 figures are identified below where available.
Business context and reporting period
Altus owns gathering, processing and transmission assets in the Permian Basin’s Alpine High area, with Apache Corporation as its only customer during the periods presented. The assets provide fee-based services, and Altus does not take ownership of the hydrocarbons. A November 9, 2018 business combination brought Apache’s Alpine High midstream entities and pipeline options into Altus. The transaction was accounted for as a reverse recapitalization, so historical results reflect Alpine High Midstream’s operations before closing and the combined business thereafter.
At year-end, the system included about 111 miles of gas gathering pipelines, 52 miles of residue gas pipelines and 26 miles of NGL pipelines; processing and treating capacity was 380 MMcf/d for rich gas and 400 MMcf/d for lean gas. Altus had one operating segment and no employees, relying on Apache under a services agreement.
Financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue and other | $78.4 million | $15.1 million |
| Midstream services revenue from Apache | $76.8 million | $15.1 million |
| Net loss before income taxes | $10.7 million | $11.5 million |
| Net loss including noncontrolling interest | $0.2 million | $18.6 million |
| Net loss attributable to Class A shareholders | $4.4 million | $18.6 million |
| Adjusted EBITDA (non-GAAP) | $7.8 million | $(5.5) million |
| Average gas throughput and processing | 333 MMcf/d | 69 MMcf/d |
| Operating cash flow | $0.7 million | $0 |
| Investing cash flow | $(175.1) million | $0 |
| Financing cash flow | $624.4 million | $0 |
For Q4 2018, unaudited quarterly data reports revenue and other of $28.3 million, pretax income of $4.0 million, and net income attributable to Class A shareholders of $0.6 million (about $0.004 per share). Standalone Q4 cash flow and margin figures are not provided in the filing text.
Revenue growth primarily reflected higher throughput as Apache increased Alpine High production. FY 2018 operating expenses were $89.1 million, including $53.9 million gathering, processing and transmission costs, $7.4 million G&A, $20.1 million depreciation and accretion, and $7.6 million taxes other than income. A conventional operating margin is not stated; operating expenses exceeded total revenue and other by $10.7 million before income taxes and tax benefits.
At December 31, 2018, cash and cash equivalents were $449.9 million; total assets were $1.86 billion; total liabilities were $130.5 million; and redeemable noncontrolling interest was $1.94 billion. Reported total equity was negative $213.7 million, substantially affected by the transaction’s redeemable noncontrolling interest accounting. No amounts were drawn on the revolving credit facility, and no letters of credit were outstanding.
Material changes, outlook and risks
- Apache contributed $628.2 million of cash to Altus Midstream at the business-combination closing. Altus also paid Apache $84.0 million for specified pre-closing capital expenditures. The 2018 financing inflow largely reflects the recapitalization transaction.
- Capital spending for midstream assets was expected to be approximately $325 million in 2019, $185 million in 2020 and $200 million in 2021, including three planned processing plants with combined capacity of about 600 MMcf/d. Management expected operating cash flow to exceed investment spending by year-end 2021; this is a forward-looking estimate, not a guarantee.
- Altus exercised its 15% Gulf Coast Express pipeline option in December 2018 for $91.1 million and estimated a further $175.3 million of 2019 contributions for its share of remaining construction. The filing anticipated about $1.6 billion of spending to exercise the remaining pipeline options and fund related capital needs, including about $1.3 billion in 2019 and $340 million in 2020. The EPIC option was exercised February 1, 2019, after year-end, for an anticipated approximately $52 million.
- The revolving credit facility had initial commitments of $450 million, rising to $800 million after specified performance and capital-raising conditions; it could be increased to $1.5 billion after that period. It matures in November 2023, subject to extension options, and contains restrictive covenants. Altus reported compliance at year-end.
- All current service revenue came from Apache, and agreements have no minimum volume or firm transportation commitments. Although fee-based contracts limit direct commodity-price exposure, lower prices or changes in Apache’s drilling plans could reduce throughput and revenue. Apache’s control of the upstream development, majority voting position, and approximately 76.9% limited-partner interest create customer concentration and governance risks.
- Other key risks include pipeline construction delays and cost overruns, the ability to finance and exercise options, reliance on Apache for operations and management, regional concentration in Alpine High, third-party pipeline availability, regulatory and environmental changes, and potential safety, weather, cyber and operational incidents. No pending or threatened legal proceedings were reported, and no loss-contingency accruals were recorded at year-end.
- Altus had not paid cash dividends and did not expect to do so in the foreseeable future. Apache could receive up to 37.5 million additional Class A shares if specified operational and stock-price targets are met, creating potential dilution.
Important facts for investors to verify
- Confirm the intended issuer: the provided filing is for Altus Midstream Company, not Kinetik Holdings Inc.
- Review the full audited statements and notes, especially the reverse recapitalization, redeemable noncontrolling interest valuation, tax benefit and resulting negative equity presentation.
- Assess Apache’s Alpine High production plans and actual throughput, given the sole-customer concentration and absence of minimum-volume commitments.
- Verify actual capital spending, funding availability, pipeline-option exercise costs and project timing against management’s forecasts.
- Review the credit facility’s conditions for increased commitments, covenant headroom and any subsequent borrowings, as well as potential dilution from Apache’s exchange rights, warrants and earn-out shares.