Kinetik Holdings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Kinetik is an integrated Permian Basin midstream company providing gathering, processing, transportation, and related services, and holds interests in pipeline joint ventures.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $281.0 million | $257.2 million |
| Operating income | $27.3 million | $19.1 million |
| Net income, including noncontrolling interests | $4.3 million | $21.4 million |
| Net income attributable to Class A shareholders; diluted EPS | $1.4 million; $(0.06) | $3.9 million; $0.10 |
| Adjusted EBITDA (non-GAAP) | $187.5 million | $140.8 million |
| Cash provided by operating activities | $119.6 million | $98.4 million |
Revenue rose 9%, primarily on higher gathering and processing service revenue; service revenue increased 29% to $103.4 million. Product revenue was nearly flat at $173.8 million, as lower commodity prices were offset by higher sales volumes. Operating margin was approximately 9.7% of revenue, versus 7.4% in the prior-year quarter. Comparability is limited: 2022 results include the legacy ALTM business only from February 22, 2022, following the reverse-merger transaction.
Debt, liquidity, and investment
- March 31 cash was $2.0 million. Gross debt was $3.537 billion and debt net of issuance costs was $3.512 billion, up from $3.369 billion net at year-end 2022. Debt comprised a $2.0 billion term loan, $1.0 billion of 2030 notes, and $537 million drawn on a $1.25 billion revolver.
- Available committed borrowing capacity was $713 million. The company reported compliance with its debt covenants.
- Investing cash outflow was $246.5 million, including $125.0 million for a midstream asset/incentive-agreement acquisition, $58.7 million contributed to the PHP expansion, and $58.9 million of property, plant, and equipment expenditures. Financing cash inflow was $122.5 million, mainly net revolver borrowings.
- Quarterly interest expense was $69.3 million, versus $26.8 million. Management attributed much of the increase to interest-rate swap valuation marks, with the balance reflecting refinancing-related debt and higher interest rates. The company had $2.25 billion of interest-rate swaps scheduled to take effect May 1, 2023, fixing rates at 4.38%–4.49% through May 31, 2025.
Changes, outlook, and risks
- Adjusted EBITDA increased 33% to $187.5 million. Midstream Logistics adjusted EBITDA rose 16% to $119.2 million; Pipeline Transportation rose 79% to $72.3 million, primarily reflecting pipeline interests and ownership changes acquired in the 2022 transaction. The adjusted EBITDA measure is non-GAAP.
- Management said it expects operating cash flow and pipeline distributions to exceed capital expenditures and planned quarterly dividends over the next 12 months, based on current assumptions, including the reinvestment agreement. It expects existing capital resources to fund anticipated investment needs over that period. No specific full-year financial guidance is provided in the supplied filing text.
- The Delaware Link Pipeline was under development, with completion expected in Q4 2023; it was estimated at approximately 40 miles and 1.0 Bcf/d capacity. The company also cited the PHP expansion and recently acquired midstream infrastructure as capital priorities.
- The board authorized up to $100 million of Class A share repurchases; 81,862 shares were repurchased for $2.4 million during the quarter. A $0.75 per-share dividend and $0.75 per-unit distribution were declared after quarter-end, payable May 17, 2023.
- Key exposures include commodity-price volatility, producer activity and throughput, variable-rate debt, inflation, supply-chain constraints, counterparty credit risk, and regulatory or environmental developments. Management estimated that a 10% interest-rate increase would have raised quarterly consolidated interest expense by approximately $60.8 million, before considering mitigating effects.
- The company is pursuing $19.6 million in outstanding receivables related to Winter Storm Uri litigation and had recorded no allowance. Management reported no accrued loss contingencies and no known unprovided environmental claims with a material impact. The new $60 million incentive and acceleration agreement is subject to performance milestones and potential refund with monetary penalties if milestones are missed.
Important facts for investors to verify
- How much of the year-over-year earnings and cash-flow movement reflects acquired operations, interest-rate swap marks, and other non-cash or non-recurring adjustments.
- Debt maturity, revolver availability, covenant headroom, and the cash cost of interest after the swaps became effective.
- Delivery of PHP expansion and Delaware Link projects, associated spending, and expected contribution to volumes or earnings.
- Whether operating cash flow and pipeline distributions support planned capital expenditures, dividends, and repurchases under lower commodity prices or tighter credit conditions.
- Outcome and collectability of the $19.6 million Winter Storm Uri receivables, and performance and refund terms of the $60 million incentive agreement.