Kinetik Holdings Inc. (KNTK) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Kinetik's Second Quarter 2026 Results. [Operator Instructions] I will now hand the conference over to Alex Durkee, Head of Investor Relations. Please go ahead.

Good morning, and welcome to Kinetik's Second Quarter 2026 Earnings Conference Call. Our speakers today are Jamie Welch, President and Chief Executive Officer; and Trevor Howard, Senior Vice President and Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements. Please refer to our SEC filings for a discussion of the risks that could cause actual results to differ materially. We will also reference certain non-GAAP financial measures. Reconciliations can be found in our earnings materials and on our website. With that, I will turn the call over to Jamie.

Thank you, Alex. Good morning, everyone. Kinetik delivered the strongest financial results in our history. Our performance was driven by exceptional operational execution, strong system performance and a supportive commodity price environment. I'm proud of our team whose focus, discipline and commitment to excellence continue to drive these results. Accordingly, we are updating our full year 2026 adjusted EBITDA guidance upwards by $70 million at the midpoint or 7%, reflecting the strong first half performance and confidence in the outlook for the remainder of the year. Trevor will discuss the key drivers behind our guidance update in more detail shortly. The confidence embedded in our revised outlook is reinforced by what we're seeing across our footprint today. Customer development activity continues to build. Commercial momentum is the strongest it has been since our inception in 2022, and our team is executing at a very high level. Combined with improved market conditions, these trends position us well for a strong finish to 2026 and tremendous follow-through into 2027. We are seeing broad-based momentum across our integrated gathering, processing and downstream platform. Conditions across the Permian continue to improve as Waha pricing has recovered from the extreme dislocations experienced for the first 5-plus months of this year, driving a step change in producer curtailments since mid-June. At the same time, the more constructive crude oil environment continues to support attractive development economics, and we're seeing a continuation of customer activity pull forward across our footprint with some of that benefit to materialize in the second half of 2026. Reflecting these trends, Permian rig count has increased 8% since February, with over 60% of that growth coming from the Delaware Basin. Against this backdrop of accelerating activity and growing producer demand, we continue to proactively position our system for the next phase of development. In May, we reached FID on Kings Landing II. The message from customers has been crystal clear. Incremental sour gas treating and processing capacity is needed to support their development plans. As such, we elected to increase the processing capacity of KLII by 50% to 300 million cubic feet per day. Since announcing the expansion, we have already purchased cryo processing, amine and residue compression equipment, and the project is now expected to be completed in mid-2028 earlier than previously communicated. On completion, Delaware North sour gas processing capacity will exceed 700 million cubic feet per day and Kinetik's total system-wide gas processing capacity will surpass 2.7 billion cubic feet per day. Importantly, we're already looking beyond KLII. This week, Kinetik's Board authorized procurement of long lead equipment for the next stage of processing capacity expansion, proactively aligning our supply chain with accelerating customer demand. This positions us to manage equipment lead times, preserve development flexibility and efficiently support the next phase of growth on our system. We have also sanctioned the commencement of work on expanding the capacity of ECCC. Our willingness to materially reinvest in our business reflects not only the visibility we have into customer development plans but also our conviction in the long-term growth outlook for the Permian Basin. To that end, the market continues to recognize the Permian's critical role in meeting future U.S. natural gas demand growth. With LNG exports, power generation and data center development driving incremental consumption, the question has increasingly become where the gas will come from and how we will reach end markets. The Permian remains uniquely positioned to answer that call with more than 11 billion cubic feet per day of new basin egress capacity that has been sanctioned through 2029. Against this backdrop, Kinetik's integrated business is becoming increasingly valuable to customers seeking both reliable flow assurance and premium priced market access. During the quarter, we executed several commercial agreements that further strengthen the value proposition of our Permian to Gulf Coast platform while expanding market access and optionality for both existing and future customers. First, we secured incremental firm residue gas access to Gulf Coast markets beginning in 2027, providing customers with enhanced flow assurance and premium netback pricing. We also signed new residue gas and NGL transportation agreements supporting our Delaware North processing complexes, increasing operational flexibility and securing critical downstream capacity as activity and volumes continue to grow across our New Mexico business. These agreements are excellent examples of our broader strategy to reduce our customers' exposure to in-basin pricing volatility by expanding access to premium end markets. More importantly, they reflect our differentiated approach to commercializing the value of Kinetik's integrated platform. Rather than competing solely on GMP services, we continue to leverage our downstream assets and market connectivity to deliver a comprehensive solution for producer customers. Operationally, our team executed very well during the quarter. A significant driver of our record results was sustained system-wide performance, reflecting both the strength of our operations and our continued focus on optimization opportunities across the system. The ECCC pipeline has been placed into service, officially establishing that north to south connection across the western portion of our system between Eddy and Culberson counties. Rich gas volumes on the pipeline are expected to increase throughout the balance of the year as Kings Landing reaches full utilization. At Kings Landing, the acid gas injection and sour conversion project continues to advance with drilling operations well underway and Phase 1 remains on schedule for in-service by year-end. In Delaware South, Diamond Volt, our 40-megawatt behind-the-meter power generation project at Diamond Cryo continues construction progress with in-service anticipated in the second quarter of 2027. Now before I hand the call over to Trevor, I want to underscore how confident we are in Kinetik's position and long-term trajectory. The strategic investments we have made across our platform are delivering exactly as intended, strengthening our financial performance, expanding our commercial opportunity set and enhancing the value we provide to customers. We are seeing the benefits of our integrated model come through in a meaningful way. Our assets are performing well. Our team is executing with discipline and the momentum across the business continues to accelerate. As customer activity builds and the need for reliable connected infrastructure becomes even more critical, Kinetik is uniquely positioned to deliver. We exited the second quarter with stronger earnings power, greater visibility and a clear line of sight to continued value creation in 2027 and beyond. And with that, I will turn the call over to Trevor.

As Jamie highlighted, the second quarter was a record one for Kinetik. We reported adjusted EBITDA of $281 million, distributable cash flow of $195 million and free cash flow of $105 million, reflecting strong execution across the business. Within Midstream Logistics, adjusted EBITDA increased 35% year-over-year to $205 million. Processed natural gas volumes were 1.74 billion cubic feet per day, flat year-over-year despite an estimated 250 million cubic feet per day of Waha price-related curtailments. Results benefited from strong system operating performance, improved NGL recoveries and condensate yields, optimization opportunities and lastly, favorable commodity prices and spreads. Our Pipeline Transportation segment generated adjusted EBITDA of $83 million, down year-over-year, primarily due to the divestiture of our equity interest in EPIC Crude. This was partially offset by year-over-year outperformance at Permian Highway Pipeline, supported by lower fuel costs and higher gross margin and better-than-expected throughput volumes at Shin Oak. At quarter end, leverage was 3.8x and liquidity exceeded $1 billion, and we expect leverage to decline further by year-end, even with our elevated capital program. Importantly, we continue to operate comfortably within our targeted leverage range of 3.5 to 4x while maintaining substantial flexibility to fund attractive growth projects and return capital to shareholders. Turning to guidance. We are substantially increasing our full year 2026 adjusted EBITDA outlook to a range of $1.04 billion to $1.1 billion. At the midpoint, the revised outlook represents a 7% increase relative to our original guidance issued in February and approximately 15% growth year-over-year on a pro forma basis for the EPIC Crude divestiture. There are 4 primary drivers supporting our revised outlook. First, our volume expectations have improved meaningfully since our May outlook. At the time, we expected low- to mid-single-digit volume growth due to the elevated Waha price-related curtailments. Since then, Waha pricing has normalized, curtailed volumes have returned to production more quickly than anticipated and customer activity has continued to accelerate. As a result, we now expect mid- to high single-digit volume growth year-over-year. Average curtailments are expected to decline to approximately 25 million cubic feet per day for the balance of 2026. And we expect to exit the year approaching 2.2 billion cubic feet per day of processed gas volumes with no curtailments assumed in the fourth quarter. Second, commodity prices remain favorable to our outlook. Updated guidance assumes forward market pricing as of July 28 and reflects a nearly 30% increase in WTI pricing and a nearly 20% increase in liquids pricing relative to commodity assumptions used in our original guidance in February. While Waha natural gas pricing remains well below our original assumptions, that impact has been offset by the significant Gulf Coast marketing gains realized in the first half of the year. However, as Waha pricing has improved and basis differentials have tightened, we expect those marketing benefits to moderate in the second half of the year and be replaced by the return of curtailed volumes. We remain substantially hedged through the year-end at the top end of our targeted range of 40% to 80%, opportunistically adding incremental hedge protection in the second quarter and aligning with our rolling 12-month and 24-month targets. Third, operational execution across the system continues to exceed our expectations. Strong plant and compression run times, higher NGL recoveries, increased condensate yields and continued optimization efforts across our footprint are expected to provide ongoing benefit through the balance of the year. And lastly, our Pipeline Transportation segment continues to outperform our original forecast, supported by stronger basin activity, higher throughput volumes and healthy margins across our pipeline businesses. As it relates to quarterly cadence, we expect adjusted EBITDA to be between $260 million to $270 million in the third quarter and $270 million and $280 million in the fourth quarter of this year, supported by increasing customer volumes across the system and ECCC utilization. We are also increasing our 2026 capital expenditures guidance, including maintenance capital to approximately $560 million. The increase is primarily driven by several initiatives that we believe represent highly attractive investments for our shareholders. These include Kings Landing II, additional optimization projects across our footprint, the purchase of compression equipment to address elongating lead times and an increasingly stretched supply chain, the acceleration of certain growth capital investments supporting customer development plans in late 2026 and early 2027 and right-of-way procurement for an expansion of ECCC. We have also started procuring long lead equipment for our next cryo beyond Kings Landing II, which positions us to better manage supply chain risk and preserve timing flexibility for our continued expected processing expansion. Turning to capital allocation. Our growth-oriented philosophy remains unchanged. We continue to prioritize investing in high-return organic growth opportunities that strengthen our integrated platform and expand the earnings power of the business. The increase to our capital expenditures guidance reflects the quality of the opportunities in front of us today and our conviction in our long-term outlook. Simply put, we believe elevated reinvestment today builds the earnings base that funds growing returns tomorrow. Alongside this reinvestment, we remain committed to a growing and well-covered dividend. In late July, we paid our second quarter dividend of $0.81 per share with dividend coverage improving to approximately 1.5x, up from 1.2x for full year 2025. We expect coverage to continue to strengthen through the second half of the year and into 2027, supporting sustained dividend growth consistent with the framework we have publicly outlined. Operator, we can now open the line for questions.

[Operator Instructions] Your first question is from the line of Spiro Dounis with Citi.

I want to start on the processing capacity first. Just looking at that 2.2 Bcf a day exit rate, it seems like you'll be knocking on the door of capacity and maybe even exceed it in 2027. Jamie, I think you referred to the flow-through there as tremendous. And so until KLII comes online, it seems like you might have to look into some offload. So curious, are we thinking about that dynamic right as we head into '27 and maybe just any plans to deal with those excess volumes here?

Yes, Spiro, I think it is certainly something that we look at and analyze on a weekly basis with the ops engineering team, particularly with Matt Wall. We've got some projects underway where we're looking to rebuild center blocks of existing 200 a day cryos to continue to increase and upsize capacity. I think there's more to come on those particular topics. So the idea comes in a couple of different flavors. One is what's the most you can get out of the existing footprint and system capacity today? What could we do to improve it? Two, what offloads on an interim basis could we start to consider as we get further and further into 2026 and into 2027, that would basically bridge us. So both dynamics are in play and both dynamics are being analyzed. We are obviously quite excited that KLII looks like it's going to be earlier than what we had previously communicated. That's a good thing. I don't -- you shouldn't -- I mean, when we're looking to shave time, we're looking at months and weeks. We're not looking at moving it many months or a year or anything like that. And obviously, to that vein, we decided that, look, given the -- on the supply chain side, given what we're seeing, it was important for us to get ahead of the next cryo. And whether that's in New Mexico or whether that's in Texas and the location of that is TBD, we want to be ready, and we want to make sure that we are -- we don't have any timing impediments to basically execute on that plan.

Got it. That's helpful color. Second question here, maybe just focusing on the operational outperformance. You called it out in the materials and the remarks here, and it appears to actually be a sizable contributor to some of the beat and raise going forward. So can you just talk about what's suddenly driving this outperformance? Was this a specific initiative you guys have undertaken? Perhaps if possible, maybe put some numbers on it for us. And as we think about the go forward here, is this something you expect to build on? Or are we kind of see most of it already?

I think, Spiro, I want to maybe just take you back. When we first bought -- acquired Durango and talked about the acquisition, we identified that it was a system that needed remedial capital. It had a lot of -- there was reliability issues, there were operational issues. There was -- it was an aged system that needed a refresh. We have spent millions and millions on a concerted effort where we have replaced pipe, we have repaired pipe. We have repaired facilities. We have upgraded facilities. We have improved measurement. We have, therefore, improved reliability and run times. Our FLNU, basically fuel lost and unaccounted for reductions, have been significant. Our recoveries have improvements have been significant. This was all part of the grand plan. It's taken us 2 years to get here, which is not surprising. We obviously had Kings Landing in the interim, but it just took time. And now we look at the operational performance, and we are seeing less of a marked dislocation between the operational recoveries and performance of the north versus what we have in the south. We have undertaken -- yes, we do a lot of low-pressure gathering and processing, as you well know. We're probably one of the biggest, if not almost the biggest on the low-pressure side in the Delaware Basin. So compressor stations and the usage of fuel at the compressor stations, whether that's lean gas, which was a big initiative that Trevor and Ross, together with Matt initiated several years ago, where we converted our stations from rich to lean, so we were not burning NGLs, was an initiative that we rolled out in New Mexico. And so we are doing things that we -- that at the end of the day, continue to optimize our operational performance and improve. Obviously, we see the overall system benefits and you see them reflected in our financials.

Your next question comes from the line of Jeremy Tonet with JPMorgan Securities LLC.

Just wanted to drill in a little bit more on these points, if we could. Just wondering if you could tell us where volumes are currently in that 2.2 that you see, is that a 4Q average? Or is that like a December 31 number? Just trying to get the trajectory, I guess, of volumes from today to year-end as that propels into '27.

Yes, sure. Thanks, Jeremy. It's Trevor. If you go to Page 6, you can look at the far right bar chart. It is a 4Q 2026 average is at approximately 2.2 Bcf a day. And then on the second part of your question, second quarter 2026 processed gas volumes was 1.74 Bcf a day. We did disclose that there was approximately 250 million cubic feet a day of curtailments on average in the quarter. And then on a go-forward basis, we estimate that there's 25 million cubic feet a day of curtailments for the second half of the year on average. So if you take 225 million cubic feet a day of return volumes that were previously shut in in that 2Q 2026 number, that puts you at around 1.95, 1.96 Bcf a day is how I would bridge that question.

Got it. And just coming back to system performance, great to see everything coming together there. And just wondering, I guess, how do you think effective capacity for the plant stands right now versus kind of nameplate as we think about this volume growth if it's going double digits into next year, just how we think about that?

Well, Jeremy, it's Jamie. So I think as far as nameplate, down south, most of our existing cryos are 200 a day cryos, particularly for East Toyah, Pecos and even Pecos Bend. We obviously did the expansion at Diamond. And so we get close to almost 720 million cubic feet a day out of those 3 cryos. So said another way, it's like 240 would be max that you could get. But you'd probably be sacrificing recoveries if you're sort of running it at that very top end. I think we are looking at additional residue recompression, center block rebuilds, which should be able to get you between close to 220, 230, I think, is probably somewhere within that frame. I think Matt is on. He can sort of jump in here for the 200 a day cryos. And as you know, we have -- of those, we have 5 in the south. So if you can get 20 to 30, you're getting 100 to 150 or said another way, at the top end, 75% of another 200 a day cryo. Matt, do you want to jump in there?

Yes. No, I think all that's fair. In general, I'd say through residue compression upgrades and then expand or intersection changeouts, we can see an incremental 10% to 15% above nameplate on any of the cryos down south.

So that helps us, I think, Jeremy, in the context of what we're doing. And obviously, we've been spending -- we obviously are focusing also on the north of what we can get out of those plants, Dagger Draw, Maljamar, obviously, Kings Landing will be running. We expect it will be at around 220 with the additional residue recompression. So I think we are maxing out our processing capacity. And as I said earlier on in response to Spiro's question, we're also analyzing the probable potential need for offloads in the short term sometime in '27 in advance of having Kings Landing 2 come on in '28.

And Jeremy, just to clear one thing out, the 2.4 Bcf a day of processing capacity that we disclosed, that's effective processing capacity as of today.

Got it. And one last quick one as it relates to produced water. I think it looks like it might be heading down a little bit. Just wondering what's happening with the water side. It seems like water is increasing overall for the basin. Just wondering, is this a mix shift in wells or anything else at play here?

I think at the end of the day, it's as simple as we've got some large new projects and timing is impacting it. So I think it's more of a temporary situation. But I think there are some fairly large developments on the water side, which will see volumes rise pretty materially.

Your next question is from the line of Theresa Chen with Barclays.

Going back to the macro side of things, can you elaborate on your earlier comments on customer activity and tell us what you're observing in terms of producer behaviors at this point, commensurate with your updated comments on curtailments and volumetric guidance as well as touch on the accelerated spend related to supporting customer developments into late 2026 contributing to higher CapEx guidance. Are there specific areas you're observing this more than others? And as we exit 2026, any early thoughts on the directional trajectory of customer activity for 2027?

Theresa, thanks. Let me see if I can break it down. As far as -- let me deal with the macro. We're 6 months into a conflict with Iran. We're still -- literally, we live day by day in the context of whether there's resolution and sort of the return to more normal times or whether there's not. We see -- obviously, we see constructive overall commodity pricing. $75 is a very different place than $60 or something in the low -- in the high 50s, which obviously was a time that we had to endure during 2025. So we continue to see a lot of the smaller producers that have literally looked to capitalize, and we said this in our first quarter remarks back in May, that they have really accelerated activities. And so they are smaller maybe in size, but there are more of them and particularly both in the north and sort of areas in and around the south, we've seen that activity continue. As it relates to the pull forwards, we have -- there were a lot of fairly large developments which were on the schedule and on the turn-in-line plans from our various producers that were pulled forward from mid-2027 or later in 2027 to early 2027 or in a couple of cases into late 2026. And so that activity is what obviously has created the need for additional well connects. I go back to the point of so much of what we do, absent only a few customers is all low pressure. So we are literally building to the CTB. And therefore, for us, we're spending with some of these pads, you've got not just well connects, but we have compressor stations, and we have other things and other ancillary equipment that we -- ancillary infrastructure that needs to be built. So that's really the genesis and the and the reason for, obviously, some of the increase in the capital that we saw and we're moving up from the top end of our range, which we told you when we FID KLII that we were at the top end of $510 million. We're now -- we're saying approximately $560 million. So I think we see a lot of activity right now. And I think, particularly in New Mexico, that is remaining very much supreme as far as just the amount of activity and how the depth of it. And even in the South, we're seeing, obviously, with a more constructive Waha and the ability for people to use Gulf Coast egress, we're seeing increasing activity down south as well. So we got the best of both worlds.

Yes. I'd like to just emphasize Jamie's last point there, the CapEx pull forward that you see in 2026 for development that is later this year and then first quarter, second quarter of 2027 that we have to prepare for. That's really large-cap independent E&Ps in Delaware South. We are seeing an acceleration of activity in New Mexico as well. But that incremental capital that you're seeing in 2026 really is the Delaware South system. And that's just part of the reason -- part of the reason for that is just timing for new wells to be planned for and get connected to the system. In Texas, it's 1 to 2 quarters faster than what you see up in New Mexico. So we are planning in New Mexico right now for second half of '27. Prospects look very good. But as it relates to 2026 CapEx, really, that's a Delaware South phenomenon.

That's very helpful. And then maybe on the cost side of things, can you update us and remind us where you are in terms of incremental savings related to your NGL recontracting activities? And also on the residue side of things, I believe you had entered into some short-term contracts back in November. Can you remind us when that rolls off and how that bridges into your recent capacity contracted beginning in 2027?