Bullish, 8.8%-Yielding Kinetik Holdings Stock Has 25% Upside
KNTK Stock Bullish on Industry Tailwinds
There wasn’t much talk about crude oil when we entered 2023 and fears of a recession were putting pressure on oil prices. In April, West Texas Intermediate crude oil hit a low of $63.57 per barrel.
Fast-forward to today, and oil demand is at record highs, fears of a recession have been receding, and production has been cut by the Organization of the Petroleum Exporting Countries Plus (OPEC+). Oil prices have climbed to $90.00 per barrel and analysts are calling for them to hit $100.00 in the fourth quarter. In some parts of the world, oil prices are already in excess of $100.00 per barrel.
And that suits Kinetik Holdings Inc (NYSE:KNTK) just fine. Kinetik Holdings is a midstream energy company with operations in the Texas Delaware Basin. Most people probably aren’t familiar with the company, and that’s because it changed its name and began trading under a new stock ticker in February 2022.
Kinetik Holdings was born out of the merger of Altus Midstream Company, a pure-play Permian-to-Gulf Coast midstream energy company, with BCP Raptor Holdco LP, a privately owned midstream energy company that operated in the Delaware Basin. (Source: “Altus and EagleClaw Announce All-Stock Business Combination; Creates a Leading Pure-Play Permian Integrated Midstream Company With a Capital Return Focus,” Kinetik Holdings Inc, October 21, 2021.)
The merger created one of the largest midstream energy companies in the Delaware Basin. The new company is also the second-largest natural gas processor in the Delaware Basin and the fourth-largest processor in the Permian Basin. (Source: “Investor Presentation: August 2023,” Kinetik Holdings Inc, last accessed September 20, 2023.)
The company has more than 2.0 billion cubic feet per day (Bcfpd) of processing capacity and 90,000 barrels of crude storage capacity. It manages more than 760,000 barrels per day of water injection capacity and serves almost 850,000 dedicated acres.
Approximately 30 producers rely on Kinetik for its midstream services, including Chevron Corporation (NYSE:CVX), ConocoPhillips (NYSE:COP), Diamondback Energy Inc (NASDAQ:FANG), and Exxon Mobil Corp (NYSE:XOM).
Kinetik Holdings Inc’s diverse customer base helps it generate reliable cash flow. About 90% of its 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA) are expected to come from natural gas midstream services, while about 95% of its 2023 gross profit is expected to come from fee-based agreements and hedges.
The company’s built-in fee escalators help protect it against inflation. Moreover, its average contract life is around 10 years with no near-term expirations.
During the second quarter, Kinetik Holdings Inc successfully executed several new gas gathering and processing agreements. One of these new commercial agreements, which is with a Lea County, New Mexico customer, includes a minimum volume commitment. This new multiyear agreement is expected to commence in the first quarter of 2024 after the company’s New Mexico system expansion goes into service.
Record Quarterly Processed Gas Volumes
In August, Kinetik announced that it had generated second-quarter net income of $71.7 million, adjusted EBITDA of $207.9 million, and distributable cash flow of $144.0 million. Those solid results were primarily fueled by increased volumes in the company’s Midstream Logistics and Pipeline Transportation segments. (Source: “Kinetik Reports Second Quarter 2023 Financial and Operating Results,” Kinetik Holdings Inc, August 7, 2023.)
Within the Midstream Logistics segment, the company’s processed gas volumes increased by 10% quarter-over-quarter to a record-high 1.48 million cubic feet per day (MMcfpd). That was despite record temperatures that affected the ability of producers, utilities, and service providers to maintain equipment run times and production.
“Building off the momentum of a strong first quarter and our announced entry into New Mexico, we are pleased to report our second quarter 2023 results,” said Jamie Welch, Kinetik Holdings Inc’s CEO and president. (Source: Ibid.)
Welch said the company’s outlook is “tracking towards the high end of [its] 2023 Adjusted EBITDA Guidance Range and at the top end of [its] 2023 Capital Expenditures range. In addition, the Free Cash Flow outlook for 2024 remains robust as significant year-on-year Adjusted EBITDA growth is coupled with less than $150 million of expected Capital Expenditures.”
High Dividend Yield & Coverage Ratio of 1.3x
Kinetik Holdings Inc’s reliable cash flow helps the company provide investors with equally reliable dividends. The company’s most recent dividend (which was paid in August) was $0.75 per share, for a current yield of 8.76%.
The company’s payout is safe; its second-quarter dividend coverage ratio was 1.3. That means Kinetik Holdings had enough net income to pay its dividend 1.3 times.
The higher the dividend coverage ratio, the better. A high ratio shows that a company can pay a similar or higher dividend. A low dividend ratio, especially one below 1.0, suggests that a company’s dividend isn’t safe.
Bullish Kinetik Holdings Stock Has 24% Upside Potential
Kinetik Holdings Inc’s share price faced industry pressure in the opening months of this year, but it has taken off since late spring. As of this writing, KNTK stock is up by :
- 4.3% over the last three months
- 19.5% over the last six months
- 12% year-to-date
- 4.5% year-over-year
Solid gains, but conservative Wall Street sees even sunnier days ahead for Kinetik Holdings stock. Analysts have provided a 12-month share-price target of $38.86 to $43.00 per share. This points to potential gains in the range of approximately 12% to 25%.
Chart courtesy of StockCharts.com
The Lowdown on Kinetik Holdings Inc
Kinetik Holdings is a leading pure-play Permian midstream energy company with a growing business footprint and ownership in four major Permian-to-Gulf Coast pipelines. Its diverse customer base provides stable earnings and cash flow, with about 95% of its expected 2023 gross profit to come from fee-based agreements. All of this helps support KNTK stock’s growing, high-yield dividends.
The future certainly looks bright for Kinetik Holdings Inc (and dividend hogs who invest in it) as the company expands its system footprint, grows its volume base, and continues to report commercial success.