Kinetik Holdings Inc. Q4 FY2023 Earnings Call

Good morning. Thank you for attending today’s Kinetik Fourth Quarter and Full Year 2023 Earnings Call. My name is Megan, and I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to Maddie Wagner with Kinetik. Please proceed.

Thank you. Good morning, and welcome to Kinetik’s fourth quarter and full year 2023 earnings as well as our full year 2024 guidance conference call. Our speakers today are Jamie Welch, our President and Chief Executive Officer, and Trevor Howard, our Chief Financial Officer. Other members of our senior management team are also in attendance for this morning’s call. The press release we issued yesterday, the slide presentation and access to the webcast for today’s call are available at www.kinetik.com. Before we begin, I would like to remind all listeners that our remarks, including the question-and-answer section, will provide forward-looking statements and actual results could differ from what is described in these statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. We may also provide certain performance measures that do not conform to U.S. GAAP. We provided schedules that reconcile these non-GAAP measures as part of our earnings press release. After our prepared remarks, we will open the call to Q&A. With that, I will turn the call over to Jamie.

Thank you, Maddie. Good morning, everyone. Thank you for joining our call today. Yesterday, we reported our fourth quarter 2023 results and provided our 2024 financial guidance. We look forward to discussing both in more detail with you this morning. Looking back on this past year, it can best be characterized as a relentless focus on execution. We executed upon several highly strategic growth projects, our financial priorities, and sustainability program, and more broadly speaking, our Kinetik vision. We also achieved record processed gas volumes each quarter and provided safe and reliable operating services to our customers. I want to take a moment to thank our team for all of their hard work and dedication over the past year. They remain focused on delivering projects on time and on budget with an unwavering commitment to safety and sustainability. Thank you. Starting with our financial results, we reported adjusted EBITDA of $228 million for the fourth quarter and $839 million for the full year. Achieving the middle of the revised guidance we provided in November and above the midpoint of our original guidance range. Full year 2023 capital expenditures were $531 million within our 2023 guidance range. We exited the year with processed gas volumes of 1.56 billion cubic feet per day in the month of December, and fourth quarter average processed gas volumes were 1.54 billion cubic feet per day, representing a more than 22% increase when compared to the fourth quarter 2022. After achieving our 2023 exit rate guidance of 1.5 billion cubic feet per day in April, we revised our exit rate guidance to 1.6 billion cubic feet per day. We exited the year with processed gas volumes just under our revised guidance due to a modest shift in producer turn-in-line schedules in the fourth quarter and a package of new gas curtailed because of elevated CO2 concentrations. To expand a little further, that producer brought online a large number of wells developing several benches. The shallower zones experienced elevated CO2 concentrations that did not meet the contractual gas quality specifications. The producer has been working to address the issue while gradually ramping up volumes as we complete our system-wide front-end amine treating project, which will allow us to accept a broader range of gas quality and provide treating and blending services to our customers, further expanding our margins. Treating is becoming increasingly important as producers develop these shallower benches, including the Bone Spring and Avalon, as well as step-out from what we know as the core of the Delaware Basin. In fact, with increasing gas quality issues associated with CO2 and H2S, treating is emerging as one of the most overlooked capacity constraints within the basin. With our system-wide treating and blending capabilities almost fully complete, we are uniquely positioned to support the next phase of basin growth. Looking back over the last couple of years, our gas volume growth rate has been approximately double the growth rate of the underlying Permian Basin, suggesting that Kinetik has significantly increased its gas processing market share in the basin. This is a testament to our system reliability, customer-first approach, and tailored service offerings. As I touched on earlier, we demonstrated strong operational execution over the past year. On October 1, we placed into service Delaware Link, a 1 billion cubic feet per day intra-basin residue gas pipeline. This pipeline connects our processing facilities directly to Waha, providing our customers with enhanced system reliability and flow assurance. On December 1, the 550 million cubic feet per day Permian Highway Pipeline expansion was placed in service. Then, most recently, we completed our gathering system expansion into New Mexico and began flowing volumes on January 18. The project was completed over 2 months ahead of schedule and under budget. Kinetik offers a differentiated service to New Mexico producers as we can provide flow assurance on a fully integrated solution from wellhead to premium Gulf Coast markets on wholly-owned or majority-owned infrastructure today. We’re excited about the opportunities to grow our business and footprint in New Mexico, which has been a part of our long-term vision. As a new entrant into this market, we already have a strong competitive advantage with available processing capacity today and treating and blending capabilities. Furthermore, we offer counterparty diversity on quality infrastructure to New Mexico producers. Looking ahead to 2024, we remain in a period of volatile commodity prices driven by economic uncertainty and geopolitical turmoil. Despite the announcement of the LNG permitting pause by the administration last month, our view remains that the demand pool to the U.S. Gulf Coast will continue to be significant as the LNG export infrastructure already under construction is slated to come online in 2025 through 2030. As the world continues to demand cleaner, lower cost, and more reliable sources of energy, natural gas will play a critical role as it offers lower emissions versus other traditional fossil fuels. The U.S. was a net exporter of 12.8 billion cubic feet per day of natural gas in 2023, representing nearly 100 million metric tons, which can provide roughly 720 billion kilowatt-hours of energy, or enough power for almost 100 million homes. With existing projects in the U.S., we expect to more than double that export amount by 2030. At Kinetik, we are proud to be a part of the value chain that delivers a cost-effective, reliable, and lower carbon energy solution. While Trevor will share more specific assumptions regarding our 2024 guidance, we have continued to take steps to further de-risk our balance sheet. Over 90% of our gross profit is sourced from fixed-fee contracts. We have hedged approximately 50% of our commodity-linked gross profit and we will continue to hedge our remaining 2024 and 2025 exposures as we see opportunities. The Permian is a well-class resource and remains one of the most prolific cost-competitive basins. Even at $70-barrel WTI, producer economics are advantaged supporting continued growth and development. In 2023, the EIA estimated that wellhead wet gas increased by approximately 3 billion cubic feet per day. Now, when applying a 30% fuel and shrink factor, we estimate the Permian residue supply increased by approximately 2 billion cubic feet per day. Now, I would remind the audience that due to changes in ethane gas spreads, trailing 12-month residue gas growth can swing materially from one month to the next. With Permian rig activity finding a floor at approximately 310 rigs for the last several months, which is nearly a 15% reduction from the peak reached in April 2023, we think that 2024 will struggle to keep pace with 2023’s production growth levels. Therefore, on an exit-to-exit basis, we expect Permian wellhead wet gas to grow approximately 1.5 to 2 billion cubic feet per day in 2024, which is mid- to high-single-digit percentage growth. According to the EIA, this past January, 118 billion cubic feet per day of natural gas was consumed in the United States alone, the most in any month on record, with forecasts expecting gas demand to grow upwards of 20% by 2030. We strongly believe that the Permian will continue to deliver and meet the world’s growing demand for crude oil, natural gas liquids, and natural gas. Opportunities exist across our footprint, including shallower formations like the Bone Spring and Avalon, and the deeper zones like the Wolfcamp C, Barnett, and Woodford Shale. We are encouraged by recent well results from these formations and zones. Now, before turning over the call to Trevor, I’d like to reiterate the significance of this year for Kinetik. Throughout 2023, we remained focused on our commitments and taking the necessary steps to position Kinetik for a robust 2024. We are extremely proud of what we have accomplished, and we are excited for what is yet to come on our growth journey. So stay tuned. And with that, I would now like to hand the call over to Trevor.

Thanks, Jamie. In the fourth quarter, we reported adjusted EBITDA of $228 million. For the quarter, we generated an adjusted distributable cash flow of $150 million and free cash flow was $77 million. Looking at our segment results, our Midstream Logistics segment generated an adjusted EBITDA of $146 million in the quarter, up 10% year-over-year. This was attributed to increased processed gas volumes. As a result, gas fee-based gross profit increased by 13%, despite lower commodity prices. Shifting to our Pipeline Transportation segment, we generated an adjusted EBITDA of $85 million, up nearly 7% quarter-over-quarter. Sequential growth within the segment was driven by one full month of contributions from Delaware Link and the PHP expansion. Total capital expenditures for the quarter were $95 million, with $61 million within our Midstream Logistics segment and $34 million at the Pipeline Transportation segment. For the full year, we reported adjusted EBITDA of $839 million, $569 million of distributable cash flow, and $60 million of free cash flow. Total capital expenditures for the year were $531 million within the guidance range provided last February. Midstream Logistics capital expenditures totaled $244 million at the bottom half of the guidance range. Pipeline Transportation capital expenditures were $287 million, above our range driven by cost increases related to the non-operated PHP expansion project. It is worth noting our total operated capital came in 5% below our internal estimates for the full year 2023. We exited the year with a 4 times leverage ratio per our credit agreement. In December, we took a series of steps to refinance a portion of our debt through $800 million of sustainability-linked senior notes due 2028 conducted in two separate transactions. The proceeds were used to pay down the existing Term Loan A facility and extend that maturity by 1 year to June 2026. Following the refinancing, nearly 100% of our interest rate exposure remains fixed. Also in December, we facilitated a secondary offering of 7.5 million shares by Apache, increasing our public float by just under 50%. Our public float now represents more than 15% of the total shares outstanding. On January 24, we declared a $0.75 per share quarterly dividend, $3 on an annualized basis to be paid on March 7. Kinetik’s Board of Directors made the decision to maintain the reinvestment level of Blackstone, I Squared, and management’s applicable fourth quarter dividend at 100%. However, following the fourth quarter dividend payment on March 7, all shareholders will receive a cash dividend. The agreement between Blackstone, Apache, and I Squared to reinvest their dividend expires on March 8, 2024. In 2023, we repurchased approximately 194,000 shares for $5.8 million in total. We have $94 million of remaining authorized capacity under our board-approved share buyback program. We will continue to evaluate opportunistic share repurchases to return value to shareholders while understanding the delicate balance with maintaining our public float. Moving to 2024 guidance, we estimate full year adjusted EBITDA in the range of $905 million to $960 million. The midpoint of $933 million implies adjusted EBITDA growth of approximately 11% year-over-year. In terms of each quarter’s contribution to full-year EBITDA, we expect 2024 to look comparable to 2023. Our recently completed projects drive growth at both the Midstream Logistics and Pipeline Transportation segments. Specifically, within the Midstream Logistics segment, our New Mexico gathering and processing contracts, fully supported by minimum volume commitments, came online early in January of this year. Additionally, we expect to see a full-year benefit to gas and produced water volumes attributed to the Permian Resources Incentive Agreement that started during the fourth quarter of last year. Coupled with our existing customers, we anticipate over 10% gas processed volume growth year-over-year, which outpaces expected basin growth. I would also note that with Waha prices remaining depressed and volatile, Apache is now planning for the next phase of Alpine High development activity in 2025. On a quarterly basis, we forecast first quarter 2024 volumes to be lower than fourth quarter 2023 as a result of molecular sieve bed change-outs at several processing facilities. Similarly to 2023, we will see a step-up in volumes beginning in the second quarter with customer development activity more heavily weighted in the second and third quarters of this year. In 2024, our Pipeline Transportation segment will benefit from full-year contributions from Delaware Link and the PHP expansion. To frame the full-year EBITDA contribution from Delaware Link, I’ll remind you that this project was roughly a 5 times billed multiple, and we saw one full month of EBITDA contribution in the fourth quarter of 2023 as volumes ramped due to the PHP expansion in service. Our forecast also calls for EBITDA growth at Shin Oak and EPIC Crude. The Pipeline Transportation segment is expected to contribute 40% of total Kinetik adjusted EBITDA in 2024, representing a 15% increase over the past 2 years. As Jamie touched on, commodity prices will continue to be choppy in 2024. However, we have and will continue to de-risk our earnings and balance sheet. Our 2024 guidance assumes approximately $76 per barrel for WTI, $2 per MMBtu for natural gas at the Houston Ship Channel Hub, and $0.60 per gallon for natural gas liquids. Approximately 10% of our 2024 expected gross profit is commodity-linked, comprised of contributions from natural gas or ethane, propane, and butane, as well as crude. To date, we are hedged approximately 50% on an average across commodities, with a higher hedge concentration on propane, butane, and crude. Turning to our capital expenditures guidance, we expect capital expenditures to be between $125 million to $165 million for the full year, including approximately $35 million of maintenance capital for the year, which is elevated because of the completion of multi-year compression overhauls. Our guidance reflects the return to a reduced capital program following the completion of last year’s growth projects and is slightly below our previously communicated expectations. Taking the midpoints of our 2024 adjusted EBITDA and capital expenditures guidance, this translates into nearly $450 million of incremental free cash flow before dividends year-over-year, marking a significant increase in Kinetik’s free cash flow generation. We remain focused on our capital allocation priorities and took meaningful steps in 2023 to strengthen our balance sheet and maintain financial flexibility. And with that, I would like to open the line for Q&A.

Thank you. Our first question comes from the line of Spiro Dounis with Citi. Your line is now open.

Thanks, operator. Good morning, everybody.

Good morning.

Jamie, I want to start with treating, if we could. You had mentioned being uniquely positioned there, and it sounds like that is becoming an emerging issue. So, I’m curious if you have any sense of lead time you have on some of your competition there and your ability to do that, and then when you might need to be in a position again to add even more treating capacity?

Good morning, Spiro. Look, treating is a great question. I’m glad, actually, we have maybe we’ll ask Matt, or sort of saunter over here to the mic. But I think, look, as far as treating is one aspect in the context of your front-end aiming and, obviously, your contact is in what you can take as far as, I would say, impurities in the gas stream. What is interesting for us is that it has taken almost 2 years since we first announced as part of the merger that we would install the system-wide treating. We already had it at Diamond. Obviously, we’ve rolled it out in the context of the rest of the system with Pecos Bend being the last to be done in early April. And so, other people have front-end; I mean, treating don’t get us wrong. I think what is interesting to us is, because of the breadth of our system, it’s as much blending as it is treating. We have a lot of sweet gas on our system, and therefore when you mix it all together, you obviously blend it down regarding the level of impurities. That obviously is helpful, certainly for our producers. So I don’t think it’s a case of we’re just more advanced than others. Others certainly have it. The fact is we’ve converted now a sweet system into a sour system, so we’re adding to that capacity. And, the fact that we already have open processing capacity available means that we can now take a much broader range of gas quality. I don’t know, Matt, if there’s anything else you want to add to that.

No, I think you hit the main points, really, it’s probably the broadness of the footprint and difference in gas quality from north to south really helps with the blending process.

So, Spiro, just on that point, in what I’ll call sort of Central Southern Reeves, it’s much, much sweeter. We don’t really see a lot of – not a whole lot of H2S. There are pockets and not a lot of CO2. We certainly are aware of it in the context of this. We’ve had discussions in Lea County, and as you heard in our prepared remarks, we started flowing on that pipeline, Pegasus on January 18. So we do know that we already see higher elevated levels of both H2S and CO2. Loving County, again, pockets. Eddy County, best we can tell, not so much. Not yet. And maybe that’s because it’s in the earlier stages than maybe what we’ve seen with Lea County.

Got it. Thanks for that. Second question, just going to capital return, Trevor, you’d mentioned an incremental $450 million of free cash flow. I suspect most of the excess there after the dividend probably ends up going to the balance sheet for now. But as you sort of look beyond this and sustainability and the growth of the free cash flow going forward, what are some of the guideposts you’re looking for to maybe start increasing that dividend again?

Thanks for the question, Spiro. So, yeah, just taking the guidance that we provided, and we do have in excess of $100 million of free cash flow after dividends that for right now we are earmarking for debt pay down. We’re currently at about 4 times leverage with a leverage target of 3.5 times. So, right now, given the landscape that we see in front of us in the deleveraging profile, we’re focused on moving the football down the field and get that to 3.5 times, which sets us up for an investment-grade upgrade. Honestly, that’s where we are right now. I think until we get to, I’d say a 3.5 times leverage ratio or closer or within earshot, raising the dividend, I’d say at this point in time is not in the – we’re not quite there yet. I think we do have the repurchase option. We have about $95 million of authorized levels remaining on that program. I think if we see dislocations in the stock, we can be a little bit more flexible with how we allocate the free cash flow after dividends. But right now, for our 2024 program, we’re going to keep the dividend flat at $3 a share.

And I think – Spiro, it’s Jamie. I think a couple of things. One is, we have a pretty healthy dividend; just look at our yield. I think that shouldn’t be lost on people. I give Trevor a lot of credit in the context of how we’ve managed the balance sheet. I think, if you just do simple arithmetic based on the guidance that we gave you. I think to the midpoint around 3.7 times on the balance sheet. If you look at the guidance range on the low-end, meaning you have the high level of EBITDA, low-end of capital, you have 3.6, you have 3.8 on the low end of guide on EBITDA and high-end capital. That’s a pretty good place to be, and I give them a lot of credit, because we are really getting within earshot of that 3.5 times target. To me, it’s not as much the target. It was the default position of putting a marker out there that said, it's investment-grade, right? Investment-grade is really the important component for this company as we look at our future and at the potential for us to continue to grow. There is obviously a durational element to capital that comes with investment-grade. You can begin to think about much longer maturities. You see a just basis point differential in the context, not just of cost to execute but also interest rate. The sum total says, you run it as investment-grade business; you get a lot more flexibility to do things, and that’s what you want to do. We’ve always used the 3.5 times as a sort of default in the context of giving people a numerical target to think about.

Thank you, Spiro. The next question will go to the line of Tristan Richardson with Scotiabank. Your line is now open.

Hey, good morning, guys. Just a question around G&P growth. Clearly, outgrowing the basin, you added a lot of new customers that will bring online volume in 2024. But certainly, you did note sort of decelerating, whereas in the growth in the basin overall, does this kind of change your timing in terms of how you think about how your capacity fills over time and maybe the need for additional infrastructure? I think we were all thinking exiting 2024 might have to start thinking about future infrastructure, but has that timing shifted just with the pace of growth you’re seeing?

No, Tristan, good morning. I think the short answer is the timing isn’t impacted at all. I think what is unique and different about our system is the breadth of it, as Matt intimated. We now, with the access into Lea County, have access into every pocket. I’m looking at Kris Kindrick. Other than Eddy County right now, we can access gas anywhere in the basin. That gives us a lot of shots on goal, if you will. Yes, we’re seeing a general macro of – we don’t expect the rate of pace of growth for 2024 as we did in 2023. I don’t think it changes our timing on how we think about the need for a processing plan and making a decision for an FID decision sometime in the second half of 2024. That is consistent with what we’ve told you for some time. I think we see good opportunities still to sell out the balance of our capacity. So that is what the commercial team is working on, and right now, we’re using the full extent and breadth of our system to maximize those opportunities.

And the other thing that I’d add to that, Tristan. It’s Trevor. Despite, I just say, decelerating growth, the growth is still pretty healthy. At the state line and north of the state line, it’s still extremely tight on processing. As long as that dynamic stays, we’re going to see opportunities to continue to gain market share in areas of the basin where we don’t have market share, given we do have that open space for processing today.

Helpful. Appreciate it. And then maybe just a quick follow-up as we think about to follow on the last question, the deleveraging tools available to you. Should we think about the processing volume growth that you talked about in 2024, new customers, the cadence of minimum volume commitments, and then obviously the pipeline logistics assets you brought online? Should we think of EBITDA growth from all of that work as really the primary deleveraging tool in the toolbox today?

Yeah, and I think, look, even capital, yeah, Matt and I, we start to think about of the $125 million to $165 million guide, $145 at the midpoint. There’s still a bunch of what we’ll call one-off projects, meaning, we still have $30-some million being allocated for the Pegasus lateral, the balance of the PB front-end amine treating. We’ve got elevated maintenance CapEx this year. I would say, look, I give Matt a lot of credit. He is managing this to make sure that this year, the system is running basically top decile. He wants run times at exceptionally high rates. He wants every plant giving recoveries, whether it’s in pure rejection or whether it’s in full recovery in the context of obviously thinking about your NGL barrel, and it’s running to peak perfection. So that’s why in the first quarter, as we pointed out both in our prepared remarks as well as in the press release, we mentioned that we’ve got the molecular sieve change-outs across that system. First time it happens for Diamond. I think it’s the first time since it came in service in 2018-2019, so it’s probably overdue, and we could see that the recoveries weren’t, I would say, at the level that we really, really knew that equipment could extract. We’re going to do it across the rest of the system, so PB, East Toyota, the rest of it. So between that and then on the compression side, we’ve got a lot of maintenance CapEx as well related to top ends and major overhauls because we own a lot of engines. Just like any turbine, you’ve got to undergo a major overhaul just like a car for service. So if you want to get run times up, particularly given I think they took a beating last summer, don’t you think? Most of our equipment last summer took a beating. We’ve got to get this done and we’re doing a lot of this in the first quarter.

Thank you, Tristan. Our next question comes from the line of Neel Mitra with Bank of America. Your line is now open.

Hi. Thanks for taking my question. I wanted to focus a little bit on the elevated CO2 levels that plagued you in the fourth quarter. I was wondering if that was kind of a one-off with the producer maybe looking at spacing tests? Or was it in the normal course of business? And what details you can provide? What benches you’re seeing where the CO2 content is especially high? And then, Jamie, you kind of alluded to this, but the different regions and where this is really a problem across the Delaware?

All right. Kris Kindrick and Trevor are the industry experts here sitting in this room regarding CO2 issues. I think in context, multiple benches done by this particular producer, it was an unexpected result that it was more elevated than they anticipated. I don’t think it was outside of the ballpark kind of thing, but it was more elevated than they anticipated. I don’t think there was much else to say in the context of – it wasn’t – I don’t know if it was spacing or anything else, honestly. I think it was just doing the multiple benches, and the blend of the two was just higher than they anticipated. I’m going to hand it over to Kris and Trevor.

Yeah, Neel, this is Kris. As Jamie said, this producer developed the same bench a few miles over and didn’t see these levels of CO2. So it may be a one-off. We’re able to take the CO2 today. It’s blending into our system and it’s increasing in volume. We are adding additional treating, as Jamie alluded to, we’ll have Pecos Bend amine on in April. So just one of the dynamics we’re seeing as these different benches are getting developed, Bone Spring and Avalon, we need to prepare for it because that’s what we’re seeing, right, Bone Spring and Avalon? That’s right. As these benches get developed, as an industry, we need to prepare for that.

And then, Neel, the last thing that I’d add on that, this is a 45-well package coming online within a couple of months from one receipt point. That’s a bit unique relative to how we typically see volumes come on the system. We don’t expect – we expect this to continue to be an issue just basin-wide. But with respect to our specific system, it was a little bit unique. Matt had talked earlier about just our blending capacities and capabilities. When you have 45 wells coming online from one part of the system, it can be a little difficult for both the operator midstream and upstream to handle that elevated level of unexpected CO2.

Got it. That’s really helpful. And I know you don’t want to speak on commercially sensitive information, but Jamie and Trevor and Kris, can you maybe just comment on geographically where this is a bigger issue? I think you alluded to it a little bit earlier, but the Avalon and the Bone Spring, specifically, is it the New Mexico, Delaware more so than the Southern Delaware and where we can see those different points?

Hey, Neel, it’s Jamie. Absolutely. Look, Lea County is fascinating in terms of understanding geology. It is the one area that we actually see that I’m aware of that we actually have specific treating companies that do shallow gas treating. That’s all they do. They take the shallow gas, they clean it, and literally redirect it and redeliver it back, whether it’s to the processor or to the customer. So, Lea County has more challenges from a gas quality standpoint. The further upward you go, the tougher it gets actually gets, meaning the more impurities there are and the more elevated the levels.

Thank you, Neel. Our next question comes from the line of Keith Stanley with Wolfe Research. Your line is now open.

Hi, good morning. I wanted to ask on GCX. I know you’re waiting for the expansion decision prior to considering monetizing the asset, but at this point what’s really the strategic rationale in still selling GCX? It seems like you’re getting pretty much to the leverage target by year-end, the DRIP’s done. It’s a quality asset; the expansion would give you a modest-sized growth opportunity in the pipeline segment. That might even actually help support ongoing dividend growth a little bit. So just how are you seeing the pros and cons at this point of selling GCX?

Keith, you just did a masterful job of the exact rationalization and discussion that happens internally here. It’s a tough one. If you got a lights-out offer at an FID of the expansion and lights-out, obviously, is far in excess of your trading multiple and what you thought their value was, then you might consider doing it. If you just went and sold it today and as Trevor would point out regularly, guys, selling this and paying down 6% debt, I’m not sure is selling something at like a 10 times which is implied of a 10% cash on cash yield and you’re paying down something at 6%. It’s very hard to explain how that actually makes any numerical sense or value enhancing sense to any stakeholder of this company, and it’s a very fair point. The fact that next week we finish the DRIP, it’s done. If we no longer have to have this discussion, which is something we all enjoy addressing, it means a lot for us. To us, there would have to be a compelling offer and an alternative use of proceeds that provides more value than simply paying down at a 6% debt.

That makes a lot of sense. Second question, I know you’re giving the 2024 outlook today, but thinking out a couple of years, how are you thinking about growth for the company beyond 2024? CapEx is very low, which is allowing you to do a lot of things, but you don’t have many new assets coming on. Do you see growth beyond this year? Is it basically just volume growth on existing acreage? Do you expect more growth from New Mexico? Or what are the opportunities you’re seeing for growth over the next several years?

I think, obviously, the initial growth is to sell out the balance of your open processing space. There will be underlying growth given the expense of the system, and there’ll be knabs and takes we see in the context of where we’re seeing those pockets. We put in the prepared remarks, I’m sure you heard what I said; Apache is now sort of a 2Q 2025 and beyond for turn-in-line. That’s a big change from where we were 12 months ago, which was they moved from the year-end of last year and moved it to the second half of 2024 in line, I’m looking at Kris with in-service right at Matterhorn. Obviously, the best laid plans of mice and men haven’t come to pass just given where our Waha gas prices are. There’s a big growth swing you know, given how gassy that particular area is because it’s just rich gas. Those are the building blocks in the context of just underlying growth. Looking out, Trevor has said this repeatedly, 2026 becomes a significant adjustment during the course of 2026 and the year-end 2026. On the NGL side, there is a big change in connection with our existing contracts with Lone Star. They themselves also create great opportunity and, obviously, a fairly attractive margin upside.

Thank you, Keith. Our next question comes from the line of Jeremy Tonet with JPMorgan. Your line is now open.

Hi, good morning.

Good morning. Tough of the day.

I just wanted to touch on the EBITDA trajectory into 2024. You gave color on contribution by quarter across the year before and also Alpine High. But just wanted to see, I guess, as we think about 2024 and looking forward, how you see, I guess, this ramp developing over time. Is there more of a back half weighting here? Just trying to get a sense for how things are evolving at this point, especially light of overall basin growth relative to maybe what’s happening in Alpine High?

Jeremy, good morning, and thank you for the question. As, I think, we’ve said consistently, and you cover so many stocks, it would be interesting to ask all the management teams. Our experience, and it may be unique or uniform across the sector is, 2Q, 3Q is when everyone gets to work. 1Q, I think, on the back of still not quite the freshness of Winter Storm Uri, but certainly the experience of Winter Storm Uri has probably kept people cautious because you don’t want to spend a fortune. People spend so much money developing these well pads and setups, and then a winter event happens, and bad things go wrong. Our view is 2Q, 3Q; you’re going to see our turn-in-line ramp-up. 4Q, I have my suspicions on 4Q. I consider it a period where producers have seen our performance and may decide to throw back on some turn-in-line.

Got it. That’s helpful there. Thanks. And then maybe pivoting a little bit to talk of higher CO2 here, and just wondering if you could take that one step further, I guess, in how you see Carbon Capture Utilization and Storage (CCUS) potentially evolving in the Permian and more specific to Kinetik and what role Kinetik might or might not have in CCUS going forward.

I think, Jeremy, the use of waste CO2, that’s how I’m going to describe it. I’m looking at Matt as we speak, is something that is very near and dear to but also front and center for him. Watch this space; we’re going to have some more news to share within the next 30 days related to things we’re doing. We definitely – yeah, I don’t think – I’m sorry, Jeremy, I don’t think we’ve got, we’ve sort of quite big enough for CCS. I’m looking at that, and we’ve looked at it; we’ve got, and there’s a slightly different angle that we’re looking at, again, full utilization of waste CO2, which is phenomenal, but a different application; I’m sort of thinking is the best way to describe it.

Thank you, Jeremy. Our next question comes from the line of Olivia Halferty with Goldman Sachs. Your line is now open.

Hi, good morning, thank you for taking our questions. I wanted to follow up on your comments regarding open processing capacity. Would you be able to share commentary on how pricing is trending on deals to take capacity on your open processing footprint? And then, more broadly, what other margin changes could we see on your existing footprint?

Thanks for the question. So we do have open space today. What we are seeing is that we are in still a greenfield environment, and so the deals we’re competing on, we’re seeing that other processors in the area are having to build processing in order to take on that gas, and so we’re still in a greenfield environment. Previously, when we announced the merger, we gave guidance on what we thought the EBITDA margin contribution per Mcf would be, and based off of the current environment, we’re not seeing any changes to that original guidance.

Okay. That makes sense. Thank you. And then just shifting a little bit to the CapEx budget, we saw a meaningful step down this year, even including elevated maintenance spend and remaining project spend. How should we think about run rate CapEx needs from here? And what could drive upside to the budget? And then just more broadly, how should we think about balancing upside to the CapEx budget with free cash flow generation?

Okay. So, Olivia, it’s Jamie. As it relates to run rate, a topic that is discussed a lot within these calls is, in fact, what is run rate. As we look out, I would say, let’s just take the midpoint of the $145 million. I think you can see that it covers growth in our existing system, even with accounting for planning any additional capital required for Apache, if they brought on stuff in Alpine High, that you may manage within $100 million. That includes maintenance, and I’m going to take you back. You’ve got to go back 2 years; we said $50 to $80. Obviously, that was enough for both maintenance and growth. The offset to that is if we do a processing plan there will be elevated in the context if we make a second half decision on FID. As it relates to the use of free cash flow, I think Trevor explained that. If we don’t see compelling opportunities, free cash flow goes to pay down leverage. That’s what we should be doing, and that’s how we’re going to continue to run the playbook. The good news is, it’s nice to have free cash flow and to actually have that conversation where every constituency has a voice and a role to play, and we decide as a team what makes the most value for this company.

Thank you, Olivia. There are currently no further questions registered. Thank you. We appreciate your time. I know March is a busy month. We’ll probably see many of you in March with your various conferences and stuff. We look forward to being in touch. Thank you. That concludes the Kinetik fourth quarter and full year 2023 earnings call. Thank you for your participation. I hope you have a wonderful rest of your day.