The Next Chapter: $1 Billion of Strategic, Accretive Northern Delaware Transactions and Divestiture of its 16% Interest in the Gulf Coast Express Pipeline

Rhea-AI Summary

Kinetik Holdings Inc. (NYSE: KNTK) announced a series of strategic transactions worth $1 billion, including the acquisition of Durango Permian for $765 million, the divestiture of its 16% interest in Gulf Coast Express pipeline for $540 million, and a new agreement in Eddy County, New Mexico. The acquisition expands processing capacity, doubles pipeline mileage, adds over 60 new customers, and enhances Kinetik's position in the Delaware Basin. The transactions are expected to be over 10% accretive to free cash flow per share starting in the second half of 2025. Kinetik aims to reinvest proceeds efficiently and accretively into strategic assets.

Positive

• Acquisition of Durango Permian expands operations in Eddy and Lea Counties, New Mexico, enhancing Kinetik's position in the Permian Basin.

• Transactions increase processing capacity by 420 million cubic feet per day, double gathering pipeline mileage, and add over 60 new customers.

• Agreement with a large customer in Eddy County strengthens Kinetik's presence in New Mexico and provides access to economic areas in the Delaware Basin.

• Divestiture of 16% equity interest in GCX for $540 million helps achieve a 3.5x leverage target and is expected to be accretive to free cash flow per share.

Negative

• Approximately $78 million of net capital expenditures are required to complete Kings Landing construction.

• The Durango Acquisition initial set-up valuation is approximately 6.5 times 2024E EBITDA, stepping down to approximately 5.5 times EBITDA once Kings Landing is operational.

Insights

Financial Analyst

Kinetik's acquisition of Durango and the divestiture of its Gulf Coast Express Pipeline interest are strategic maneuvers that can reshuffle the company's asset portfolio towards a more focused midstream operation in the Delaware Basin. The financial structure, with a mixed cash and equity consideration for the acquisition and a cash-only sale of the pipeline interest, suggests a liquidity management approach aimed at balancing immediate cash outflows with future commitments. The reported EBITDA multiples for both transactions are within industry norms and the anticipated 10% accretion to free cash flow per share post-2025 indicates a positive outlook for profitability. The strategic positions post-acquisition, particularly regarding control of plant products, could enhance Kinetik's competitive edge in system optimization and contract negotiations.

Energy Sector Analyst

By focusing on the Delaware Basin, Kinetik is tapping into one of the most active and prospective regions for oil and gas in the United States. The doubling of gathering pipeline mileage and processing capacity through the Durango Acquisition directly amplifies Kinetik's operational scale and customer base. This expansion, coupled with the long-term agreements like the New Eddy County Agreement, ensure stability and growth potential. However, the integration risks and execution of the Kings Landing project, which is a significant part of the expansion plan, are critical to achieving the forecasted financial benefits. Investors should monitor the progress of the construction and the subsequent operational efficiencies that Kinetik expects to gain.

Market Research Analyst

The strategic shift towards deepening Kinetik's presence in the Delaware Basin aligns with broader market trends where companies aim to consolidate assets in core operational areas for efficiency and scale. From a market perspective, the transaction strengthens Kinetik's profile as a pure-play midstream company, which could attract investors looking for focused exposure in this sector. Factor in the long-term agreements, this could signal to the market a vote of confidence in Kinetik's operational capabilities and growth trajectory. The incremental EBITDA from the new assets and potential improvements in margins through optimized systems could outpace the industry's more stagnant growth patterns.

In a series of transactions:

• Kinetik agreed to acquire Durango Permian LLC (“Durango”), which expands its operations in Eddy and Lea Counties, New Mexico, the most active counties in the Permian Basin (“Durango Acquisition”). The Durango Acquisition increases Kinetik’s processing capacity by 420 million cubic feet per day, doubles gathering pipeline mileage, and adds over 60 new customers, many of whom are private, including one of the most active producers in the Delaware Basin.
• Kinetik executed a new 15-year low-pressure and high-pressure gas gathering and processing agreement with one of its largest customers, which has a substantial presence throughout Eddy County (“New Eddy County Agreement”).
• These transactions significantly enhance Kinetik’s position in New Mexico, providing new access to highly economic and active areas of the Delaware Basin, and reinforce Kinetik’s value proposition as a pure-play midstream company across the entire Delaware Basin.
• As one funding source for the Durango Acquisition and capital for the New Eddy County Agreement, Kinetik has agreed to sell its 16% equity interest in Gulf Coast Express pipeline (“GCX”) to an affiliate of ArcLight Capital Partners LLC (“GCX Sale”) for $540 million, or approximately 10.4 times 2024 expected EBITDA.
• Consideration for the Durango Acquisition includes approximately $315 million of cash (excluding any contingent consideration) and 11.5 million Kinetik Class C common stock issued to the owner of Durango in two installments (3.8 million shares at closing and 7.7 million shares on July 1, 2025).
• On closing of these transactions, Kinetik’s 3.5x leverage target is achieved.
• The transactions are expected to be over 10% accretive to free cash flow per share starting in the second half of 2025, with the level of accretion increasing thereafter, which coincides with an expected acceleration of capital returns to shareholders.

HOUSTON & MIDLAND, Texas--(BUSINESS WIRE)-- Kinetik Holdings Inc. (NYSE: KNTK) (“Kinetik” or the “Company”) today announced it has entered into a series of agreements under which Kinetik will (i) acquire Durango for an aggregate $765 million of cash and equity with up to $75 million of contingent consideration tied to the capital cost for the Kings Landing complex (“Kings Landing”), which is currently under construction, (ii) provide low-pressure and high-pressure natural gas gathering and processing services under a newly executed, 15-year agreement with a large existing Kinetik customer in Eddy County, New Mexico, an approximately $200 million capital investment through 2026, and (iii) divest its 16% equity interest in GCX for 100% cash for a total of $540 million.

“Following on from our tremendous success with our recent Lea County, New Mexico system expansion, we are delighted to now announce this series of strategic transactions that further our expansion into New Mexico and significantly increase our footprint across the Northern Delaware Basin,” said Jamie Welch, Kinetik’s President & Chief Executive Officer.

“The Durango Acquisition and New Eddy County Agreement together represent approximately $1 billion of new investment. The structure for the Durango Acquisition has approximately 60% upfront consideration with 40% of the consideration deferred until July 2025, which is after the expected Kings Landing in-service date. Following the Durango Acquisition and the expected completion of Kings Landing, Kinetik will own and operate over 2.4 billion cubic feet per day of processing capacity, entirely in the Delaware Basin, and approximately 4,600 miles of pipelines across eight counties. Proceeds from the GCX Sale and the aggregate issuance of $450 million of Kinetik Class C shares, in two installments, will be reinvested into projects at a mid-single digit EBITDA multiple. These actions efficiently and accretively recycle cash proceeds from a non-operated asset into highly strategic, operated assets. Additionally, the Durango Acquisition and New Eddy County Agreement offer full control of plant products including more than 350 million cubic feet per day of residue gas and well over 60,000 barrels per day of natural gas liquids, providing significant additional upside value via system optimization, modifications to existing commercial contracts, and integration with our Pipeline Transportation segment.”

Durango Acquisition

Kinetik will acquire Durango with the following forms of consideration and consideration terms:

• Upfront Consideration: $315 million cash consideration and approximately 3.8 million shares of Kinetik Class C common stock (and its subsidiary, Kinetik Holdings LP, will issue corresponding common units) to Durango Midstream, LLC, an affiliate of Morgan Stanley Energy Partners (“Durango Seller”) at transaction closing, expected in June 2024. The Kinetik stock issued at closing will be subject to a 364-day lock-up period.
• Deferred Consideration: Kinetik will issue an additional 7.7 million shares of Kinetik Class C common stock (and its subsidiary, Kinetik Holdings LP, will issue corresponding common units) to the Durango Seller on July 1, 2025.
• Contingent Consideration: Up to $75 million contingent consideration tied to the actual capital cost of Kings Landing, subject to adjustment for any costs in excess of Durango management’s budget. Any contingent consideration would be paid in cash within three months after the Kings Landing in-service date.

Durango’s assets, located in Eddy, Lea and Chaves Counties, New Mexico, include approximately 2,400 miles of gas gathering pipelines and approximately 220 million cubic feet per day of processing capacity. Durango is currently constructing Kings Landing, a new 200 million cubic feet per day greenfield processing complex in Eddy County, New Mexico, which is expected to be completed in April 2025, increasing Durango’s processing capacity to 420 million cubic feet per day. Kinetik estimates an additional $78 million of net capital expenditures required to complete Kings Landing construction. Kinetik expects Durango’s current assets generate $75 million of Adjusted EBITDA in 2024, in-line with Adjusted EBITDA generated in 2023. The initial set-up valuation for the Durango Acquisition is approximately 6.5 times 2024E EBITDA, stepping down to approximately 5.5 times EBITDA once Kings Landing is operational. The transaction is expected to close in the second quarter of 2024 following satisfaction of customary closing conditions, including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”).

New Eddy County Agreement

Kinetik entered into a 15-year agreement to provide low-pressure and high-pressure gas gathering and processing services with one of its largest existing customers, which has a significant presence in Eddy County, New Mexico. Kinetik will construct low-pressure and high-pressure gathering infrastructure, which is expected to be approximately $200 million of aggregate capital through 2026. Kinetik anticipates an approximately 5 times run-rate EBITDA investment multiple. The contract will commence at year-end, starting with gathering services and extend to processing services starting in the second quarter of 2025.

GCX Sale

Kinetik entered into a definitive agreement to divest and directly transfer its 16% equity interest in GCX to an affiliate of ArcLight Capital Partners LLC for a total expected sale price of $540 million in cash. The purchase price is comprised of $510 million in upfront cash and an additional $30 million deferred cash payment due upon a final investment decision on a capacity expansion project. The transaction does not require HSR approval and is expected to close in the next few weeks.

2024 Guidance

Kinetik expects to update its 2024 Adjusted EBITDA and Capital Expenditures Guidance following the close of the Durango Acquisition.

Conference Call and Webcast

Kinetik will host a conference call Thursday, May 9, 2024 at 3:30 pm Central Daylight Time (4:30 pm Eastern Daylight Time) to discuss the strategic transactions. To access a live webcast of the conference call, please visit the Investors section of Kinetik’s website at www.ir.kinetik.com. A replay of the conference call will also be available on the website following the call.

Investor Presentation

An updated investor presentation will be available under Events and Presentations in the Investors section of the Company’s website at www.ir.kinetik.com.

About Kinetik Holdings Inc.

Kinetik is a fully integrated, pure-play, Permian-to-Gulf Coast midstream C-corporation operating in the Delaware Basin. Kinetik is headquartered in Houston and Midland, Texas. Kinetik provides comprehensive gathering, transportation, compression, processing and treating services for companies that produce natural gas, natural gas liquids, crude oil and water. Kinetik posts announcements, operational updates, investor information and press releases on its website, www.kinetik.com.

Forward-looking statements

This news release includes certain statements that may constitute “forward-looking statements” for purposes of the federal securities laws. Forward-looking statements include, but are not limited to, statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “seeks,” “possible,” “potential,” “predict,” “project,” “prospects,” “guidance,” “outlook,” “should,” “would,” “will,” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. These statements include, but are not limited to, statements about the Company’s future business strategy and other plans, expectations, and objectives for the Company’s operations, including statements about strategy, synergies, expansion projects and future operations, and financial guidance; return of capital to shareholders and the timing thereof; the Company’s leverage and financial profile; and the consummation of the Durango Acquisition and GCX Sale and timing thereof, the funding for the Durango Acquisition and capital required under the New Eddy County Agreement, expected results of the transactions discussed herein, including reinvestment in new projects and the returns thereon. While forward-looking statements are based on assumptions and analyses made by us that we believe to be reasonable under the circumstances, whether actual results and developments will meet our expectations and predictions depend on a number of risks and uncertainties which could cause our actual results, performance, and financial condition to differ materially from our expectations. See Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023. Any forward-looking statement made by us in this news release speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement whether as a result of new information, future development, or otherwise, except as may be required by law.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240509676041/en/

Kinetik Investors:

(713) 487-4832 Maddie Wagner

(713) 574-4743 Alex Durkee

www.kinetik.com

Source: Kinetik Holdings Inc.

FAQ

What is the total worth of the strategic transactions announced by Kinetik Holdings Inc.?

Kinetik Holdings Inc. announced strategic transactions worth $1 billion, including the acquisition of Durango Permian and the divestiture of its 16% interest in Gulf Coast Express pipeline.

What is the stock symbol of Kinetik Holdings Inc.?

The stock symbol of Kinetik Holdings Inc. is KNTK.

What is the purpose of the New Eddy County Agreement?

New Eddy County Agreement aims to provide low-pressure and high-pressure gas gathering and processing services in Eddy County, New Mexico, to strengthen Kinetik's presence in the region.

What is the expected impact of the transactions on free cash flow per share starting in the second half of 2025?

The transactions are expected to be over 10% accretive to free cash flow per share starting in the second half of 2025.

What is the main focus of the Durango Acquisition?

The Durango Acquisition focuses on expanding Kinetik's processing capacity, pipeline mileage, and customer base in Eddy and Lea Counties, New Mexico.