Description

Worried about The Bubble? AI enthusiasm got you down? Worried the Houthi’s might sink your battleship? Just want a boring business that should churn out reasonable profits for the foreseeable future while you wait for better opportunities? Allow me to present Kinetic.

Kinetic is the only large, pure-play Permian midstream business. The company was created from the merger of Altus Midstream (APA’s captive pipeline) and Blackstone’s Raptor I and Raptor II G&P businesses. The company is still 50% owned by Blackstone (with another 21% owned by I Squared Capital); the public float is only ~16%. While ALTM was written up on VIC several years ago, this is the 1^st time KNTK has been written up.

The company has two business units: Midstream Logistics (about 60% of EBITDA, likely a bit less in 2024) and Pipeline Transportation (likely to rise modestly as a percentage in 2024).  Midstream is mostly Delaware Basin gas gathering and processing. Given the focus on oil production and prices, producers in the Delaware are pretty agnostic about gas prices and the average contract has almost a decade left and is secured with minimum volume commitments.

The Pipeline Transportation segment is comprised of several joint ventures: Gulf Coast Express (16% ownership), Permian Highway Pipeline (55.5% ownership), Shin Oak Pipeline (33%) and EPIC Crude Pipeline (15%), as well as two smaller wholly owned pipes: The Delaware Link and Kinetic NGL. Again, these are supported by long-term contracts with take-or-pay provisions.  To give you a sense of what we’re talking about: an expansion for the Permian Highway Pipeline was completed in December 2023 and is 100% sold out for 10 years (take-or-pay). The company has indicated that Gulf Coast Express is likely to be sold in the future, assuming reasonable pricing.

Kinetic is coming off a multi-year investment program in 2024 with Capex declining from roughly $540m to less than $150m. The company’s assets are fairly new and will not require substantial maintenance capex for several years.

The company anticipates over $1b in EBITDA in 2024 (2023 Q4 EBITDA was projected at $225-230m with several projects/expansions having been completed late in the quarter/early 2024, so in excess of $1b seems quite achievable). The company has indicated that once it hits ~3.5x debt/EBITDA it will seek to return more cash to shareholders (given debt of $3.6b the company is pretty much there already). Worth noting that the business hasn’t had any challenge raising capital, having just raised $800m of 4-and-a-half-year debt at 6.625%.

The company currently pays $3/year or about 8.9% and has previous indicated a goal of raising the distribution >5%/year going forward. The company does have a DRIP program that Blackstone, I Squared, and management participate in (As can you!), that provides a 3% discount on reinvested dividends, but the company has indicated that this quarter will be the last one they offer it, so this is more for historical interest (and explains the increased share count over the past year). The company does have a share repurchase authorization and has nibbled around the edges, but nothing substantial.

It's a pretty simple idea. In summation:

• The company is entirely focused on the Permian, with no operations outside of Texas/New Mexico.
• Debt seems pretty manageable.
• It has ~35 customers with all the major Permian players showing up (Exxon, Chevron, Oxy., etc.)
• 90% of revenue is fixed and has fairly long-duration contracts (~10% is exposed to commodity price, which it mostly hedges)
• I’d guess a rough estimate is that the company will have about $4.25-4.75 in FCF/share for 2024 – so call it 7.25-8x FCF.

This idea isn’t about to double or triple, but I anticipate you’ll get a reasonable return over several years and – as a kicker – you aren’t horribly exposed to hostile powers shooting missiles at your assets.

Catalyst

No imminent catalyst; time.