8-K: Kinetik Announces $1 Billion Strategic Transactions and Divestiture of Gulf Coast Express Stake

Kinetik is set to acquire Durango Permian LLC, expand its operations in the Delaware Basin, and divest its interest in the Gulf Coast Express pipeline for a total of $1 billion in strategic transactions.

Summary

• Kinetik Holdings Inc. has agreed to acquire Durango Permian LLC for $765 million, consisting of cash and stock, with a potential $75 million earnout.
• The acquisition will significantly expand Kinetik's processing capacity by 420 million cubic feet per day and double its gathering pipeline mileage.
• Kinetik has also entered into a 15-year gas gathering and processing agreement with a major customer in Eddy County, New Mexico, requiring a $200 million capital investment through 2026.
• To fund these transactions, Kinetik will sell its 16% stake in the Gulf Coast Express pipeline for $540 million, approximately 10.4 times its expected 2024 EBITDA.
• The Durango acquisition includes $315 million in cash, 3.8 million shares of Kinetik Class C common stock at closing, and 7.7 million shares on July 1, 2025.
• The transactions are expected to be over 10% accretive to free cash flow per share starting in the second half of 2025.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook with strategic acquisitions and divestitures, expected accretion to free cash flow, and a focus on high-growth areas. The financial metrics and management commentary are also positive, indicating a strong strategic move.

Positives

• The Durango acquisition expands Kinetik's operations in the most active counties of the Permian Basin.
• The new Eddy County agreement provides a long-term revenue stream and enhances Kinetik's position in New Mexico.
• The GCX sale provides significant cash proceeds to fund the Durango acquisition and other capital investments.
• The transactions are expected to be accretive to free cash flow per share, with increasing accretion after 2025.
• Kinetik will gain full control of plant products, including residue gas and natural gas liquids, offering additional upside value.

Negatives

• The Durango acquisition includes a contingent consideration of up to $75 million tied to the capital cost of the Kings Landing project, which is subject to adjustment.
• Kinetik will need to invest an additional $78 million to complete the Kings Landing construction.
• The new Eddy County agreement requires a $200 million capital investment through 2026.

Risks

• The Durango acquisition is subject to customary closing conditions, including regulatory approval under the Hart-Scott-Rodino Antitrust Improvements Act.
• The Kings Landing project is still under construction and subject to potential cost overruns.
• The new Eddy County agreement requires a significant capital investment and may not achieve the anticipated returns.
• The GCX sale is subject to customary closing conditions and may not close as expected.

Future Outlook

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.

Management Comments

• 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, Kinetiks President & Chief Executive Officer.
• These actions efficiently and accretively recycle cash proceeds from a non-operated asset into highly strategic, operated assets.

Industry Context

These transactions reflect a trend of consolidation and strategic asset repositioning in the midstream sector, with companies focusing on core areas and high-growth opportunities. Kinetik's move to expand its presence in the Delaware Basin and divest its non-operated stake in GCX aligns with this trend.

Comparison to Industry Standards

• The GCX sale at 10.4 times 2024 expected EBITDA is a strong valuation, indicating a robust market for midstream assets.
• The Durango acquisition at 6.5 times 2024E EBITDA, stepping down to approximately 5.5 times EBITDA once Kings Landing is operational, is a reasonable valuation for a strategic asset with growth potential.
• The new Eddy County agreement with an anticipated 5 times run-rate EBITDA investment multiple is in line with industry standards for similar midstream projects.
• Kinetik's focus on the Delaware Basin is consistent with the industry's emphasis on high-growth areas with strong production potential.
• The use of a combination of cash and stock in the Durango acquisition is a common approach in midstream transactions, allowing for both immediate and long-term value creation.

Stakeholder Impact

• Shareholders are expected to benefit from the accretive nature of the transactions and the potential for increased capital returns.
• Employees may experience changes due to the integration of Durango and the expansion of operations.
• Customers will have access to expanded services and infrastructure in the Delaware Basin.
• Suppliers and creditors may see increased business opportunities with Kinetik's growth.

Next Steps

• Kinetik will close the Durango Acquisition in the second quarter of 2024.
• Kinetik will complete the construction of the Kings Landing processing complex by April 2025.
• Kinetik will begin providing gathering services under the new Eddy County agreement by year-end and processing services in the second quarter of 2025.
• Kinetik will close the GCX sale in the next few weeks.
• Kinetik will update its 2024 Adjusted EBITDA and Capital Expenditures Guidance following the close of the Durango Acquisition.

Key Dates

Keywords

Kinetik, Durango, Gulf Coast Express, GCX, Permian Basin, Midstream, Acquisition, Divestiture, Processing Capacity, Gas Gathering, EBITDA, Capital Investment, New Mexico, Delaware Basin