Filing summary: Altus Midstream Company, Form 10-Q
Entity note: The supplied filing is for Altus Midstream Company (ticker ALTM), not Kinetik Holdings Inc. It covers the quarter and nine months ended September 30, 2020, and was signed November 5, 2020.
Business context and reporting period
Altus owns gas gathering, processing and transmission assets in West Texas’s Permian Basin, serving primarily Apache Corporation’s Alpine High production under fee-based agreements. It also holds minority interests in four pipeline ventures: Gulf Coast Express, EPIC Crude, Permian Highway Pipeline (PHP), and Shin Oak. Apache held approximately 76.9% of Altus Midstream LP’s common units. The company reported one operating segment.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $40.2 million | $34.0 million | $113.2 million | $92.0 million |
| Operating income (loss) | $18.9 million | $(6.6) million | $49.4 million | $(7.3) million |
| Net income (loss), including noncontrolling interests | $29.3 million | $(8.2) million | $20.2 million | $(8.0) million |
| Net income (loss) attributable to Class A shareholders | $2.3 million | $(4.9) million | $(7.8) million | $(6.1) million |
| Adjusted EBITDA (non-GAAP) | $52.9 million | $17.8 million | $143.1 million | $34.0 million |
| Average natural gas throughput | 531 MMcf/d | 467 MMcf/d | 514 MMcf/d | 464 MMcf/d |
Revenue growth reflected higher throughput as processing capacity came online, plus $1.3 million of third-party product sales in Q3. Operations and maintenance costs fell from the prior-year periods, chiefly due to operating efficiencies and lower labor and equipment costs. Q3 depreciation and accretion also declined following the 2019 asset impairments. For the nine-month comparison, a $76.1 million unrealized loss on a preferred-unit embedded derivative materially weighed on results; it was a noncash fair-value item.
Operating cash flow was $137.4 million for the first nine months of 2020, versus $39.4 million a year earlier. Investing cash outflow was $301.3 million, including $286.2 million of equity-method pipeline contributions; financing provided $159.8 million. Cash declined by $4.0 million to $2.0 million. At September 30, debt was $580.0 million, up from $405.8 million at year-end 2019; the $800 million revolver had $220 million of committed capacity available. The company reported covenant compliance and a leverage ratio below 4.00:1.00, against a 5.00:1.00 maximum.
Assets totaled $1.76 billion, including $1.52 billion in equity-method interests. Current liabilities were $16.5 million. The filing does not provide a conventional gross or operating margin measure; the reported operating income and revenue imply an operating margin of approximately 47% for Q3 2020.
Material changes versus prior comparable periods
- Q3 revenue rose 18% year over year; nine-month revenue rose 23%. Natural-gas throughput increased in both comparisons.
- Operating results improved from losses to income in both comparisons. Adjusted EBITDA increased to $52.9 million for Q3 and $143.1 million for the first nine months.
- Equity-method income rose to $14.3 million in Q3 and $47.5 million for nine months, mainly reflecting contributions from GCX and Shin Oak.
- Debt increased by $184 million from December 31, 2019, while available revolver capacity fell from $404 million to $220 million.
- Capital spending on Altus’s own midstream infrastructure was $29.5 million for nine months, compared with $307.0 million a year earlier; pipeline equity contributions remained significant.
Outlook, commentary, risks and unusual items
- Management expected PHP to enter service in early 2021 and projected positive cash flow after startup, with future capital needs expected to be minimal. These were expectations, not guaranteed outcomes.
- Management said existing gathering and processing capacity was sufficient for contracted Apache volumes and potential third-party customers, while the pandemic had slowed pursuit of third-party opportunities.
- Apache had shut in about 70 MMcf/d in Q2 amid weak commodity prices; a separate residue-pipeline moisture issue reduced throughput by about 40 MMcf/d. The affected volumes were back online at the start of Q3.
- Apache was the principal customer, and its service agreements had no minimum-volume commitments. Lower Apache production or limited third-party contracting could reduce revenue and cash flow.
- COVID-19, commodity-market weakness, customer and counterparty credit risk, pipeline performance, and access to capital remained risks. Most service fees were not directly commodity-price-linked, but production and drilling decisions were indirectly exposed to commodity prices.
- The preferred-unit embedded derivative was a Level 3 fair-value liability of $179.0 million. Its valuation was sensitive to unobservable assumptions, including Altus’s imputed interest rate; the nine-month unrealized loss was $76.1 million.
- Preferred units were recorded at $600.4 million and had a stated redemption price of $812.5 million under the applicable 1.3-times invested-capital measure. Preferred distributions and redemption rights can constrain cash available to common holders.
- A Sierra Club suit challenged Army Corps permits for PHP-related dredging and sought injunctive relief. Altus held a minority interest in PHP; the filing reported no other known pending or threatened proceeding expected to materially affect the company.
Most important facts for investors to verify
- Confirm the issuer: this is Altus Midstream’s 2020 third-quarter filing, not a Kinetik Holdings filing.
- Track PHP’s construction, startup timing, final capital requirements and the expected effect on cash generation.
- Monitor Apache production, throughput volumes, the absence of minimum-volume commitments, and progress securing third-party customers.
- Review debt levels, revolver availability, covenant headroom, interest-rate exposure and preferred-unit distribution obligations.
- Assess the embedded derivative’s valuation assumptions and the potential cash, dilution and priority effects of preferred-unit redemption or exchange.
- Review pipeline venture distributions and the status and potential operational impact of the PHP permitting litigation.