Kinetik Holdings Inc. quarterly report, Q2 FY2021

Business context and reporting period

Entity mismatch: The supplied filing is Altus Midstream Company’s Form 10-Q for the quarter ended June 30, 2021, not a filing identified as Kinetik Holdings Inc. It covers the three and six months ended June 30, 2021; the company’s shares traded as ALTM. Altus owns Permian Basin gathering, processing and transmission assets and equity interests in four pipeline ventures. Apache is its principal customer and controls 76.9% of Altus Midstream LP’s common units.

Financial performance and liquidity

Q2 operating margin was approximately 38.2% (operating income divided by revenue), compared with approximately 37.0% a year earlier. Six-month operating margin was approximately 38.2%, versus approximately 41.9%. Adjusted EBITDA is a non-GAAP measure and includes the company’s proportionate pipeline-venture performance; it should not be read as a substitute for GAAP earnings or cash flow.

• Cash flow: Six-month operating cash flow was $101.1 million, compared with $86.8 million in 2020. Investing cash use was $11.3 million versus $175.3 million, reflecting much lower pipeline equity contributions. Financing cash use was $38.9 million; cash increased $50.9 million to $75.1 million.
• Debt and liquidity: Debt was $657.0 million at June 30, up from $624.0 million at year-end 2020. The company reported $141.0 million of available committed borrowing capacity and a leverage ratio below 4.00x, in compliance with its credit agreement. The unsecured revolving facility matures in November 2023, with two one-year extension options.
• Other balance-sheet items: Equity method interests were $1.554 billion. The Preferred Unit redeemable noncontrolling interest was $617.2 million; its associated embedded derivative liability was $124.5 million. The Apache redeemable noncontrolling interest was $863.1 million.

Material changes versus prior comparable periods

• Q2 revenue rose 12.6%; six-month revenue fell 3.7%. Affiliate midstream-service revenue increased modestly in Q2 but declined $8.4 million for the first half, primarily because of lower Apache throughput. Third-party product sales contributed $3.1 million in Q2 and $5.7 million year to date, with corresponding product costs.
• Average natural-gas throughput was 447 MMcf/d in Q2, up from 434 MMcf/d; the six-month average was 442 MMcf/d, down from 505 MMcf/d.
• Operations and maintenance expense declined $2.2 million in Q2 and $5.4 million year to date, mainly following the transition to the centralized Diamond cryogenic complex and related efficiency and staffing changes. Six-month ad valorem taxes increased $0.8 million.
• Reported earnings benefited materially from fair-value movements in the Preferred Unit embedded derivative: a $31.0 million Q2 gain and $14.5 million first-half gain, versus losses of $10.6 million and $72.6 million in the comparable 2020 periods. Income from equity method interests increased, in part because Permian Highway Pipeline began service in January 2021.
• The company revised prior-period financial statements for an immaterial warrant-accounting error, changing warrants from equity accounting to liability accounting, and also corrected an immaterial equity-method income error. Comparative 2020 figures shown here are revised.

Outlook, risks, contingencies and unusual items

• Management expected 2021 cash from operations, reduced infrastructure spending and pipeline distributions to exceed capital expenditures and planned quarterly dividends. It estimated remaining 2021 pipeline equity contributions of $5 million to $7 million and minimal spending on existing infrastructure. Projections remained dynamic; no revenue or earnings guidance range was provided.
• Management cited continuing uncertainty from COVID-19 and related economic conditions. Apache’s production and the company’s ability to win third-party business are key drivers; Apache service contracts have no minimum-volume commitments. Nearly all midstream-service revenue is fee-based, but commodity prices can indirectly affect customer development, throughput and operating costs.
• Altus recognized an estimated $9.7 million power credit in the first half, including $2.5 million in Q2, related to contract underutilization during elevated electricity prices following the Texas freeze. The credit offsets future power payments.
• The revolving facility requires leverage of no more than 5.00x and restricts distributions under specified conditions. The company reported compliance and leverage below 4.00x at quarter-end. Variable-rate debt exposes it to higher interest costs; management estimated a 1 percentage-point rate increase would add approximately $1.7 million to annual interest expense.
• No material pending litigation, unprovided environmental claims or accrued loss contingencies were reported. Environmental, customer-credit, pipeline distribution and bank-lender risks remain.
• Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2021 because of a material weakness involving accounting for complex financial instruments, including warrants. Remediation procedures were implemented but had not operated long enough to be considered effective.

Most important facts for investors to verify

• Confirm the intended issuer: this document is Altus Midstream Company, not Kinetik Holdings Inc.
• Assess Apache concentration, production trends, contract terms without minimum volumes, and progress on third-party customer growth.
• Separate recurring operating performance and cash generation from embedded-derivative and other fair-value gains, power credits, and equity-method results.
• Review debt capacity, leverage covenant headroom, distribution restrictions, floating-rate exposure and the Preferred Units’ redemption and distribution terms.
• Track whether management’s warrant-accounting control remediation is tested and the material weakness is formally remediated.
• Check the revised comparative statements and related disclosures when evaluating year-over-year performance.