Business context and reporting period
Altus Midstream Company (Nasdaq: ALTM), not Kinetik Holdings Inc., is the registrant named in this Form 10-Q, for the quarter ended June 30, 2020. Altus owns Permian Basin gathering, processing and transmission assets and equity stakes in four pipeline ventures. Apache Corporation controls the business and was substantially all of Altus’s customer base and revenue source.
Financial and operating performance
Amounts below are in millions of dollars unless stated otherwise. Quarterly comparisons are for the three months ended June 30; six-month comparisons are year over year.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $31.6 | $24.1 | $72.4 | $58.0 |
| Operating income (loss) | $11.7 | $(4.9) | $30.4 | $(0.7) |
| Net income (loss), including noncontrolling interests | $17.7 | $(5.5) | $(9.1) | $0.2 |
| Adjusted EBITDA (non-GAAP) | $43.6 | $4.1 | $90.2 | $16.2 |
| Average natural gas throughput (MMcf/d) | 434 | 363 | 505 | 463 |
Revenue increased 31% in Q2 and 25% in the first half, primarily as processing capacity from three trains placed in service starting in 2019 supported higher throughput. Operating margins were approximately 37% in Q2 2020 versus negative 20% in Q2 2019, and 42% versus negative 1% for the first half. Lower operating and depreciation costs also contributed to the improvement. Apache shut in about 70 MMcf/d in Q2 amid weak commodity prices; pipeline downtime temporarily reduced throughput by about 40 MMcf/d, with those volumes subsequently restored.
Despite consolidated Q2 income, the loss attributable to Class A shareholders was $0.3 million, or $0.07 per share, after preferred-unit and Apache noncontrolling-interest allocations. For the first half, the Class A loss was $10.1 million, or $2.70 basic and $2.84 diluted per share. A $72.6 million first-half unrealized loss on the preferred-unit embedded derivative was a major factor in the consolidated loss; it was a fair-value item, not an operating cash outflow. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
Cash flow, debt and liquidity
For the first six months, operating cash flow was $86.8 million, compared with $21.7 million a year earlier. Investing cash use was $175.3 million, including $154.4 million of pipeline equity contributions and $26.5 million of capital expenditures; financing provided $84.4 million, including $97.0 million of revolver borrowings. Cash fell $4.1 million to $1.9 million.
At June 30, debt was $493.0 million, up from $405.8 million at year-end. The $800 million revolving facility had $307 million of available committed capacity and matures in November 2023, subject to extension options. Altus reported compliance with its covenants and a leverage ratio below 4.00x, against a 5.00x maximum. The company had no upcoming debt maturities. Equity-method investments totaled $1.408 billion, up from $1.258 billion at year-end.
Outlook, risks and notable items
- Management expected operating cash flow to exceed capital expenditures by Q1 2021 and anticipated PHP entering service in early 2021, after which capital needs were expected to be limited. PHP construction and start-up timing remain important assumptions.
- COVID-19 and energy-market uncertainty could further affect Apache production, throughput, pipeline utilization, capital availability and results. Altus has no minimum-volume commitments in its Apache service agreements and is pursuing third-party business; management said market conditions had slowed that effort.
- Altus’s fee-based contracts limit direct commodity-price exposure, but production decisions by Apache and other customers create indirect exposure. A 1 percentage-point increase in interest rates would have added approximately $1.2 million of quarterly interest expense at the reported debt level.
- Preferred units carry an 11.5% internal-rate-of-return-based redemption price; their embedded derivative liability was $175.5 million at June 30. The preferred-unit temporary-equity balance was $592.6 million.
- Altus recorded no asset impairments in the first half of 2020; this follows a $1.3 billion infrastructure impairment in Q4 2019 after Apache reduced Alpine High funding. The company reported no loss-contingency accruals and no known material environmental claims. A Sierra Club suit challenges permits for PHP; Altus holds a minority interest in that project.
- A 1-for-20 reverse stock split took effect June 30, 2020, and per-share and share data were retroactively restated. A July 27 amendment to the related-party lease permits termination for premises Apache sells, with a proportional rent reduction if only part is sold.
- No specific financial guidance was provided. Management cautioned that the pandemic’s duration and impact remained uncertain.
Most important facts for investors to verify
- Confirm the filing belongs to Altus Midstream Company, rather than Kinetik Holdings Inc., before using it for company analysis.
- Track Apache’s production, shut-ins and share of Altus revenue, as well as progress in signing third-party customers.
- Verify PHP’s construction, start-up, capital requirements and expected distributions, together with operating performance at the other pipeline investments.
- Review revolver availability, covenant headroom, debt growth, and restrictions on distributions, including those imposed by the preferred units and pipeline ventures.
- Assess the assumptions behind the preferred-unit derivative valuation and the effect of the Q4 2019 impairment on asset carrying values and depreciation.