Kinetik Holdings Inc. 2026 Q2 Earnings Call

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 am 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 five-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, 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 2. 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 KL2 by 50% to 300 MMcf/d. 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. Upon completion, Delaware North sour gas processing capacity will exceed 700 MMcf/d, and Kinetik's total system-wide gas processing capacity will surpass 2.7 Bcf/d. Importantly, we're already looking beyond KL2.

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 Bcf/d 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 net-back 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 G&P 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. 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're seeing the benefits of our integrated model come through in a meaningful way.

Our assets are performing well, our team is executing with discipline, 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 exit the second quarter with stronger earnings power, greater visibility, and a clear line of sight to continued value creation in 2027 and beyond. 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 Chinook. At quarter end, leverage was 3.8 times, 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 4 times, 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-$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 four 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.