Filing identity and reporting period
The supplied filing is Altus Midstream Company’s Form 10-Q for the quarter ended March 31, 2020, filed May 7, 2020. It is not a Kinetik Holdings Inc. filing; investors should confirm the intended company and filing before relying on this summary.
Altus owned gathering, processing and transmission assets in West Texas and equity interests in four Permian Basin pipeline ventures. Apache Corporation was its only significant customer and generated substantially all midstream revenue.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Midstream revenue | $40.8 million | $33.8 million |
| Operating income | $18.6 million | $4.2 million |
| Net income (loss), including noncontrolling interests | $(26.8) million | $5.7 million |
| Net income (loss) attributable to Class A shareholders | $(9.9) million; $(0.13) per diluted share | $1.1 million; $0.01 per diluted share |
| Adjusted EBITDA | $46.5 million | $12.1 million |
| Net cash provided by operating activities | $51.5 million | $10.1 million |
Revenue increased about 20%, and operating margin was approximately 45.7%, versus 12.5% in the prior-year quarter. Adjusted EBITDA is a non-GAAP measure; the filing cautions that it should not be considered in isolation or as a substitute for GAAP results.
Cash, debt and liquidity
At March 31, 2020, cash was $19.3 million, total debt was $468.0 million, and available committed borrowing capacity was $332.0 million under an $800 million revolving facility maturing in November 2023, subject to extension options. Debt was $405.8 million at December 31, 2019. The company reported covenant leverage below 4.00x, against a 5.00x maximum, and was in compliance with its credit agreement.
Q1 investing cash outflow was $97.6 million, including $19.1 million of capital expenditures and $82.8 million of contributions to equity-method ventures. Financing provided $59.4 million, including $72.0 million of revolver borrowings and $11.8 million of finance-lease payments. Operating cash flow included $21.0 million of distributions from equity-method interests; it should not be read as solely cash generated by the core midstream business.
Material changes and unusual items
- Average natural-gas throughput increased to 577 MMcf/d from 564 MMcf/d; average processed volumes were 572 MMcf/d versus 564 MMcf/d. Revenue growth was attributed mainly to higher rich-gas throughput following the 2019 start-up of three processing trains.
- Operations and maintenance expense fell to $10.6 million from $16.4 million, primarily due to operational efficiencies after the transition to the centralized Diamond cryogenic complex. General and administrative expense rose to $4.2 million from $3.0 million.
- A $62.0 million noncash unrealized loss on the preferred-unit embedded derivative drove the consolidated net loss. The derivative liability rose to $164.9 million; management attributed the valuation change mainly to macroeconomic factors associated with COVID-19. The derivative is a Level 3 fair-value estimate.
- Equity-method income rose to $16.3 million from $0.3 million, mainly reflecting income from Gulf Coast Express and Shin Oak. The company contributed $82.8 million to these investments, chiefly for Permian Highway Pipeline construction.
- The company recorded a $0.7 million current tax benefit associated with a net-operating-loss carryback under the CARES Act. It elected to pay the approximately $11.4 million preferred-unit distribution for the quarter in additional preferred units in May 2020.
- In Q4 2019, Altus recorded a $1.3 billion impairment of midstream infrastructure after Apache materially reduced funding for Alpine High. No impairment was recorded in Q1 2020; the prior impairment reduced Q1 2020 depreciation expense compared with Q1 2019.
Outlook, risks and contingencies
Management expected PHP to enter service in early 2021 and stated that it expected cash flow to exceed capital expenditures by Q1 2021, with future capital requirements then expected to be minimal. These projections were described as dynamic and subject to material change. The company expected 2020 infrastructure spending to be primarily maintenance, with remaining major investment needs related chiefly to PHP.
COVID-19, the resulting demand and commodity-price shock, and Apache’s production and development decisions could reduce throughput, pipeline utilization, cash flows and distributions. Altus had no minimum-volume commitments in its Apache service agreements and depended heavily on Apache as its customer. Third-party contracting could diversify volumes, but management said market conditions had slowed that activity. Other risks include variable-rate debt, customer credit exposure, potential limits on equity-method distributions, preferred-unit distribution priority, and the possibility that lenders could terminate commitments or accelerate debt following specified defaults. The filing reported no material litigation or environmental claims known to management and no accruals for loss contingencies.
Important facts for investors to verify
- Confirm whether the intended filing is Altus Midstream’s Q1 2020 10-Q or a Kinetik Holdings filing.
- Assess Apache’s current production plans, the status and economics of Alpine High, and the extent of Altus’s continuing customer concentration.
- Verify actual PHP start-up timing, remaining capital contributions, and whether projected cash-flow breakeven was achieved.
- Review revolver borrowings, available capacity, covenant leverage and compliance, including the effect of lower cash flows or reduced pipeline distributions.
- Track the preferred units’ distributions, redemption terms and embedded-derivative valuation, which contributed materially to reported volatility.