Kinetik Holdings Inc. — Q3 2023 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2023. Kinetik is a Permian Basin midstream company providing gathering, processing, transportation and water-disposal services, and holds interests in pipeline ventures. The 2022 comparison is not fully comparable: Kinetik’s accounting predecessor acquired ALTM in February 2022, so legacy ALTM results are included only after the transaction closed.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $330.3m | $325.2m | $907.5m | $918.0m |
| Operating income | $38.4m | $45.8m | $103.1m | $105.5m |
| Net income, including noncontrolling interests | $43.1m | $49.4m | $119.1m | $202.3m |
| Net income attributable to Class A shareholders | $15.6m | $14.9m | $42.0m | $25.2m |
| Adjusted EBITDA (non-GAAP) | $215.3m | $212.4m | $610.8m | $561.1m |
| Net cash from operating activities | — | $405.6m | $453.2m |
Q3 revenue rose 2%; operating income fell 16% and consolidated net income fell 13%. Nine-month revenue declined 1%, operating income 2%, and consolidated net income 41%, while Adjusted EBITDA increased 9%. Operating margin was approximately 11.6% in Q3 versus 14.1% a year earlier, and 11.4% for 9M versus 11.5%. Class A diluted EPS was $0.21 for Q3 and $0.57 for 9M, compared with $1.04 and $1.24, respectively; the prior-period comparison includes a $32.9m preferred-unit redemption accounting benefit in the EPS calculation.
Q3 growth in product revenue reflected higher NGL and condensate sales volumes, partly offset by lower prices; service revenue decreased. For 9M, lower commodity prices reduced product revenue, while higher service revenue—particularly from water assets—partly offset the decline. Equity-method earnings increased 22% to $146.8m for 9M, reflecting a full nine months of ownership of pipeline investments in 2023 versus a shorter period in 2022, as well as higher investee profitability.
Operating cash flow decreased $47.7m year over year. Investing used $582.6m, mainly for capital spending, the PHP expansion, and the 2023 midstream acquisition. Financing provided $170.7m, principally from net revolver borrowings. Capital expenditures for property and equipment were $245.8m; intangible asset expenditures were $15.1m.
Debt, liquidity and capital allocation
- September 30 debt principal was $3.63bn: $2.0bn term loan, $1.0bn senior notes due 2030, and $630m drawn on a $1.25bn revolving facility. Debt net of issuance costs was $3.61bn; cash was only $0.1m.
- Available committed borrowing capacity was $620m. The company reported compliance with its debt covenants.
- Interest expense was $45.0m in Q3 and $130.4m for 9M, up 11% and 41%, respectively. Interest-rate swaps fix rates on $2.25bn of floating-rate debt through May 2025; $2.25bn of $2.63bn floating-rate debt was hedged at quarter-end.
- Cash dividends and distributions were $58.6m during 9M; $263.8m of distributions/dividends were reinvested in Class A shares under the reinvestment arrangement. The company repurchased 194,174 shares for $5.8m during the first half, with no Q3 repurchases.
Outlook, risks and unusual items
- Management stated that operating cash flow, pipeline distributions and remaining borrowing capacity were expected to cover planned capital expenditures and quarterly dividends over the next 12 months. No numerical full-year guidance was provided.
- The company acquired water-gathering and disposal assets for $65m and paid $60m under an incentive and acceleration agreement. That agreement relates to near-term development milestones beginning in October 2023 and is subject to refund and a monetary penalty if milestones are not met.
- Management maintained a full valuation allowance against its federal net deferred tax assets, citing cumulative losses. It said achieving three-year cumulative profitability for 2023 could support releasing some or substantially all of the allowance, producing a significant tax benefit; any release is uncertain.
- Key risks include commodity-price and producer-activity volatility, higher rates on unhedged variable-rate debt, counterparty credit risk, and uncertainty from geopolitical and economic conditions. A 10% increase in interest rates was estimated to have increased 9M interest expense by approximately $194.1m, as presented in the filing’s sensitivity disclosure.
- The company is pursuing collection of $19.6m in receivables related to Winter Storm Uri litigation; it recorded no allowance. No environmental claims expected to materially affect its financial position, results or liquidity were identified, and no loss-contingency accruals were recorded.
- All public and private warrants expired November 9, 2023 without exercise. A $0.75-per-share Class A dividend and $0.75-per-unit distribution were declared after quarter-end, payable November 22, 2023.
Important facts for investors to verify
- Assess comparability of 2022 results given the February 2022 reverse merger and the different periods of ALTM and pipeline-investment ownership.
- Review cash generation against capital investment and distributions, given $0.1m of cash, $620m of available revolver capacity and significant 9M investing outflows.
- Confirm the performance and refund terms for the $60m development incentive agreement and progress on the PHP expansion and Delaware Link Pipeline, which entered commercial service in October 2023.
- Monitor interest costs after the swaps expire in May 2025, debt-covenant compliance, and management’s assessment of deferred-tax-asset realizability.
- Track the outcome and collectability of the $19.6m Winter Storm Uri receivable claims, and any changes to commodity exposure, customer volumes or hedging.