Kinetik Holdings Raises EBITDA Guidance; Unique Energy, High Dividend Yield Story

Kinetik Holdings Inc. (NASDAQ: KNTK) earlier this week reported solid 2Q 2022 results, including US$127 million of free cash flow generated in the quarter, and boosted its full-year 2022 pro forma adjusted EBITDA projection to US$820-US$840 million from US$770-US$810 million.  

Kinetik is an energy company which owns minority stakes in four natural gas, natural gas liquids and oil pipelines — two of which are located in the U.S. Permian Basin and are underpinned by very attractive, long-term take-or-pay contracts — as well as a growing midstream gas business. (Altus Midstream and BCP Raptor Holdco, LP merged in mid-February 2022 to form Kinetik.)

The unique aspect of Kinetik is that it affords an investor energy industry exposure as well as providing one of the highest dividend yields (7.8%) of any U.S. stock. Furthermore, because of Kinetik’s free cash flow position and its structure — its midstream contracts have limited commodity sensitivity and, as noted above, its main pipeline investments benefit from long-term transportation agreements — the company seems likely to boost its dividend over the next few years. Indeed, in Kinetik’s 2Q 2022 investor presentation, management re-affirmed its intention to recommend that the Board increase its US$3.00 annual dividend payout by at least 5% in early 2023.

In 2Q 2022, Kinetik processed natural gas volumes of 1.16 billion cubic feet per day (Bcf/d), allowing its Midstream Logistics unit to record adjusted EBITDA of US$141 million. The company’s Pipeline Transportation segment recorded $US71 million of adjusted cash flow. After adjusting out parent company expenses, Kinetik’s 2Q 2022 adjusted EBITDA was US$208 million.

(in thousands of US $, except for shares outstanding)June 30, 2022March 31, 2022
Adjusted EBITDA$207,919 $140,790 
Capital Expenditures($47,971)($31,210)
Free Cash Flow$127,048 $94,334 
Cash – Period End$5,319 $17,646 
Debt- Period End$3,000,000 $2,983,749 
Shares Outstanding (Millions)135.0132.5

In late June 2022, Kinder Morgan, Inc. (NYSE: KMI), the operator and 26.7% owner of the Permian Highway Gas Pipeline (PHP), reached a final investment decision to expand the capacity of the 2.1-Bcf/d pipeline by 0.55 Bcf/d. Like the original pipeline capacity, the expansion is supported by ten-year, commodity price-insensitive contracts. Kinetik currently owns a 52% stake in the pipeline and will own 55% of the total capacity when the capacity expansion is completed around November 2023.

The key takeaway from this project is Kinetik could realize around US$45 million of incremental EBITDA from expanding PHP’s capacity. Since Kinetik is valued at an enterprise value-to-EBITDA multiple of around 9x, that US$45 million could translate into about US$400 million of incremental equity value, equivalent to about US$3.00 in the company’s share price.

Little-known Kinetik could represent an interesting candidate for a yield-oriented portfolio. Its dividend yield seems far too high for its risk level and growth potential. Also, it is an energy stock where a significant portion of its cash flow is insulated from commodity fluctuations.

Kinetik Holdings Inc. last traded at US$39.16 on the NASDAQ.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Views expressed within are solely that of the author. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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