Kinetik Holdings Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Kinetik is a Permian Basin midstream company providing gathering, processing, transportation and produced-water services, with additional pipeline investments. Comparisons are with Q1 2023 unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change / context |
|---|---|---|---|
| Operating revenue | $341.4 million | $281.0 million | Up 21%; product revenue rose 36% to $236.6 million, while service revenue declined 1% to $102.2 million. |
| Operating income | $26.1 million | $27.3 million | Down 4%. Operating margin was approximately 7.6%, versus 9.7%. |
| Net income, including noncontrolling interests | $35.4 million | $4.3 million | Higher primarily alongside improved equity-method earnings and favorable interest-rate swap marks. |
| Net income attributable to Class A shareholders | $11.6 million | $1.4 million | Reported basic and diluted EPS were $0.12 versus $(0.06); the EPS calculation includes participating securities. |
| Adjusted EBITDA | $233.6 million | $187.5 million | Up 25%; non-GAAP measure. Growth included stronger pipeline investment earnings and new capacity. |
| Operating cash flow | $153.7 million | $119.6 million | Up $34.1 million. |
| Investing cash flow | $(62.0) million | $(246.5) million | Lower outflow, reflecting no repeat of the prior-year $125 million acquisition and lower pipeline investment contributions. |
| Financing cash flow | $(86.5) million | $122.5 million | Included $47.0 million of net revolver repayments and $39.5 million of cash dividends and distributions. |
Product revenue growth reflected higher natural-gas residue volumes sold and realized prices, along with higher NGL and condensate prices. Cost of sales rose 33% to $153.7 million, partly offsetting revenue growth. Operating expenses increased 21% to $43.4 million; general and administrative expenses rose 24% to $34.1 million, mainly due to share-based compensation. Equity earnings from unconsolidated affiliates increased 30% to $60.5 million, with PHP capacity expansion a key contributor.
Balance sheet, debt and liquidity
- At March 31, cash was $9.8 million; total assets were $6.45 billion and total liabilities were $3.80 billion.
- Long-term debt was $3.547 billion before financing costs and $3.517 billion net on the balance sheet, compared with $3.594 billion gross at year-end 2023. Debt included a $1.2 billion term loan, $1.8 billion of senior notes and $547 million drawn on the revolving facility.
- Available committed borrowing capacity was $690.4 million. The company reported compliance with its debt covenants at quarter-end.
- Cash paid for interest, net of capitalized amounts, was $57.1 million, up from $36.7 million. Interest expense reported in earnings fell to $47.5 million from $69.3 million, substantially reflecting favorable swap settlements and fair-value movements; higher realized interest rates partly offset the reduction.
- Property, plant and equipment expenditures were $58.0 million; intangible expenditures were $2.2 million. The filing does not present a single GAAP operating-margin or free-cash-flow measure beyond the figures above.
Material changes and developments
- Midstream Logistics Segment Adjusted EBITDA increased 20% to $143.0 million. Pipeline Transportation Segment Adjusted EBITDA increased 32% to $95.5 million, supported by PHP’s expanded capacity placed in service in December 2023 and Delaware Link entering service in October 2023. Segment Adjusted EBITDA is non-GAAP.
- Gas gathered and processed volumes increased year over year, while service revenue was nearly flat. Product revenue and cost of sales both increased with commodity prices and sales volumes.
- The company paid $0.75 per Class A share and per Common Unit for the quarter. A further $0.75 dividend and distribution was declared after quarter-end, payable May 9, 2024. The dividend and distribution reinvestment agreement terminated March 8, 2024; $74.2 million was reinvested in shares during Q1 under that agreement.
- After quarter-end, an April 2 accounts-receivable securitization facility with a $150 million initial limit was established. Its proceeds, together with cash, repaid term-loan borrowings, reducing the remaining term-loan balance to $1.0 billion and extending its maturity to December 8, 2026.
- On May 9, the company agreed to acquire Durango Permian for approximately $765 million, subject to customary conditions including HSR approval. Consideration includes $315 million cash, common units and equivalent Class C shares issued at closing and in 2025, and a potential $75 million cash earnout tied to the Kings Landing project.
- Also on May 9, the company agreed to sell its 16% interest in GCX for $540 million: $510 million cash, subject to adjustments, plus a potential $30 million earnout. Both transactions were expected to close in Q2 2024. Management expected GCX proceeds to fund the Durango cash consideration; if Durango closes first, it expected to use revolver borrowings.
Outlook, risks and contingencies
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management stated that expected operating cash flow, pipeline distributions and remaining credit capacity should exceed capital expenditures and planned quarterly dividends over the next 12 months. It expects existing resources to fund planned infrastructure and pipeline spending.
- Key exposures include commodity-price volatility, producer activity and throughput, interest rates, customer and counterparty credit, environmental and regulatory requirements, extreme weather and geopolitical and broader economic uncertainty. Product sales are directly exposed to commodity prices. The company uses commodity hedges and fee-based arrangements where appropriate.
- Interest-rate swaps totaling $1.70 billion in notional value fixed rates on 97% of floating-rate debt through May 31, 2025, at swap rates of 4.38% to 4.48%. Exposure to variable rates remains, and rates beyond the hedge period could raise financing costs.
- Commodity derivatives had a net fair-value liability of approximately $13.2 million at March 31. Q1 commodity-hedge activity included a $15.3 million unfavorable fair-value adjustment; interest-rate swaps recorded a $13.3 million favorable fair-value adjustment and $4.0 million in cash settlements.
- The filing reports no accrued loss contingencies or litigation reserves. The company is pursuing $11.6 million of receivables in litigation and awaiting settlement of $8.0 million tied to prior Winter Storm Uri litigation; no allowance was recorded. It reported no known environmental claims expected to materially affect its financial position, results or liquidity.
- A $4.2 million loss on asset disposals was recorded in Q1. Share-based compensation was $22.6 million, versus $17.5 million a year earlier. These items, hedge adjustments and other specified items are among the adjustments used in non-GAAP performance measures.
Important facts for investors to verify
- Whether the Durango acquisition and GCX sale closed as expected, their final consideration and funding, and any impact on leverage and distributions.
- Post-quarter debt balances, securitization facility usage and availability, and compliance with financial covenants.
- Underlying service volumes, product prices and cost-of-sales trends, separating commodity pass-through effects from durable fee-based performance.
- Cash generation and pipeline distributions relative to capital spending, debt service and the $0.75 quarterly dividend and distribution.
- Commodity and interest-rate hedge positions, related cash settlements and potential earnings and cash-flow sensitivity after swaps expire.
- Collection status of the $19.6 million of disputed or unsettled receivables and any material change in litigation or environmental exposure.