Kinetik Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited. Kinetik is a Permian Basin midstream company providing gathering, processing, transportation and related services, and holds interests in Permian pipeline entities. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $296.2 | $335.6 | $577.2 | $592.8 |
| Operating income | $37.5 | $40.6 | $64.7 | $59.7 |
| Net income, including noncontrolling interests | $71.7 | $131.4 | $76.0 | $152.8 |
| Net income attributable to Class A shareholders | $25.0 | $6.4 | $26.5 | $10.3 |
| Adjusted EBITDA (non-GAAP) | $208.0 | $207.9 | $395.5 | $348.7 |
| Operating cash flow | Not provided by quarter in the filing text | $231.0 | $268.9 |
- Q2 service revenue was $102.6 million, essentially flat year over year; product revenue fell 17% to $191.4 million, mainly reflecting lower commodity prices. Six-month service revenue rose 13% to $206.0 million while product revenue declined 10% to $365.3 million.
- Q2 operating income declined 8%; six-month operating income increased 8%. Q2 and six-month net income including noncontrolling interests fell 45% and 50%, respectively. Prior-year results included substantial gains on an embedded derivative and, in 2022, a debt-extinguishment loss; these unusual items affect comparisons.
- Adjusted EBITDA was flat in Q2 and up 13% for the first six months. Management attributed the six-month increase primarily to higher contributions from equity-method pipelines and the full-period inclusion of legacy Altus assets in 2023.
- Cash and cash equivalents were $2.2 million at June 30, down from $6.4 million at year-end 2022. Total debt was $3.65 billion gross ($3.63 billion net of applicable issuance costs), compared with $3.40 billion gross at year-end. Available committed borrowing capacity was $587.4 million.
- Six-month investing cash outflow was $447.9 million, including $160.2 million of property and equipment spending, $14.0 million of intangible-asset spending, $154.7 million of equity-method investment contributions, and $125.0 million paid for the 2023 acquisition. Financing provided $212.7 million, largely from net revolver borrowings of $255.0 million.
- Equity in earnings of unconsolidated affiliates was $49.6 million in Q2 and $96.1 million for six months. Interest expense was $16.1 million in Q2, down 36%, but $85.4 million for six months, up 64%.
Material changes and comparability
- Lower commodity prices drove the product-revenue decline; increased NGL and condensate volumes partly offset it. Higher gathered and processed volumes supported six-month service revenue growth but also contributed to higher operating expenses.
- Six-month operating cash flow decreased $37.9 million year over year. Investing outflow increased $378.8 million, mainly due to the PHP expansion contribution, higher capital spending and the midstream acquisition.
- Interest expense increased for the six-month period due to higher debt obligations following the June 2022 refinancing and higher variable rates, partly offset by interest-rate swap valuation effects. Comparisons are also affected by 2022 refinancing-related and embedded-derivative items.
- Comparability is affected by the February 2022 reverse-merger transaction: the 2022 statements include legacy ALTM results only from February 22, 2022. The filing cautions that 2022 comparisons do not represent a full year of combined operations.
Outlook, risks and contingencies
- No quantified company-wide earnings or revenue guidance is provided in the supplied filing text. Management said cash from operations and pipeline distributions are expected to exceed capital expenditures and planned quarterly dividends over the next 12 months, based on current assumptions.
- Management expected the Delaware Link Pipeline to be completed in Q4 2023; on completion, it was estimated to be about 40 miles with approximately 1.0 Bcf/d capacity. The company also cited PHP expansion and other infrastructure spending as 2023 capital priorities.
- Interest-rate exposure remains material: $2.25 billion of $2.65 billion in floating-rate debt was hedged through May 2025 with swaps. Management warned that higher rates beyond the hedge term could increase costs and affect debt service, capital spending and distributions. The filing’s sensitivity disclosure estimates a 10% interest-rate increase would have increased consolidated interest expense by approximately $126 million for the quarter; investors should confirm the sensitivity’s stated basis and interpretation.
- Commodity-price declines, producer activity and throughput, customer and counterparty credit, inflation, tighter credit conditions, project execution, and weather, regulatory and environmental events are identified risks. The company uses commodity swaps and interest-rate swaps but did not elect hedge accounting for its derivative contracts.
- The company was in compliance with debt covenants at June 30, 2023. It reported no off-balance-sheet arrangements and no accrued loss contingencies. It is litigating to collect $19.6 million of receivables related to Winter Storm Uri; no allowance was recorded. The 2023 $60 million incentive and acceleration agreement payment is subject to performance milestones and refund with a monetary penalty if milestones are not met.
- The board authorized up to $100 million of share repurchases; $5.8 million had been spent in the first six months. The company paid a $0.75-per-share dividend and subsequently declared another $0.75 dividend payable August 16, 2023. Reinvestment holders were set to reinvest 100% of 2023 distributions and dividends under the described arrangement.
Most important facts for investors to verify
- Whether lower commodity prices and changing product mix continue to pressure product revenue, and whether volume growth translates into service-fee growth.
- PHP expansion and Delaware Link project timing, total remaining capital requirements, and expected returns.
- Revolver availability, debt levels and covenant headroom, including the effect of rates after the May 2025 swap expiry.
- Cash conversion and the sustainability of dividends and distributions given low cash balances and elevated investment spending.
- Collection status of the $19.6 million Uri-related receivables and compliance with milestones and refund terms under the $60 million incentive agreement.
- Adjusted EBITDA is a non-GAAP measure; assess its reconciliation and limitations alongside GAAP earnings and cash flow.