Kinetik Holdings Inc. Q2 FY2024 Earnings Call

Good morning. Thank you for joining today's Kinetik Second Quarter 2024 Results Call. My name is Jennifer and I will be your moderator. All lines will be muted during the presentation, and there will be a chance for questions and answers at the end. I will now hand the call over to Maddie Wagner, Director of Investor Relations. Maddie, please go ahead.

Thank you. Good morning and welcome to Kinetik's Second Quarter 2024 earnings 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, and thank you for joining our call today. I am pleased to share this past quarter's results with you this morning, as well as provide an update on integration activities following the Durango acquisition. First, I would like to thank our team for their tremendous efforts over the past few months as we closed both the GCX divestiture and Durango acquisition, began integrating Durango personnel and assets, battled the summer heat in the Permian, and recovered from Hurricane Beryl in Houston. The team has done a fantastic job, so thank you. In May, we announced several highly strategic transactions, expanding our footprint into the Northern Delaware Basin, diversifying our geographic footprint and customer base, strengthening our balance sheet, and ultimately advancing Kinetik's long-term strategic vision. At the beginning of June, we closed the GCX divestiture, and at the end of June, we closed the Durango acquisition, representing the two largest transactions since our merger in 2022. These announcements quickly followed the in-service of our organic gathering expansion into Lea County at the beginning of the first quarter. For context, we had zero operations in the New Mexico-Delaware Basin a year ago, and today nearly 20% of our volumes are sourced from New Mexico. As I've mentioned over the past few months since announcing these deals, producers are very excited that Kinetik has expanded north and is now investing the much-needed capital to keep up with producers' demand for treating and processing. The commercial team has been highly active with both current and prospective customers in New Mexico, and the growth opportunities we see are plentiful. As such, we have sanctioned pre-FID work scope and long lead critical path items for Kings Landing II, which would double the processing capacity at the Kings Landing Processing Complex. We have also advanced our subsurface and permitting workstreams for an acid gas injection well that enables an important treating solution for natural gas containing high levels of H2S and CO2 at Kings Landing. By undertaking these scopes of work today, we will accelerate the timeline from formal FID to in-service by nearly two quarters. This is a significant new development for our Northern Delaware business and the customers that we serve in the region. Announced alongside Durango in May was our 15-year low-pressure and high-pressure gathering and processing agreement with a large existing customer with acreage in Eddy County that offsets the Durango system. More recently, Kinetik expanded gathering, treating, and processing services with one of our largest customers in Lea County. This amendment, which will go into effect in the fourth quarter of this year, increases the existing MVC and expands overall margin. The Durango acquisition, the new Lea County amendment, and the previously announced long-term gas gathering and processing agreement in Eddy County represents approximately $1 billion of strategic investment at a low- to mid-single-digit adjusted EBITDA multiple and significantly enhances our position across the entire Delaware Basin. In May, we developed a 100-day plan to close and integrate Durango's assets and personnel. I am very pleased to report that the transition has been seamless. We have already identified several process and system improvements that have begun generating value and we have developed a robust integration plan that includes preventative maintenance, facility upgrades, and capacity expansions to existing infrastructure at the Dagger Draw Process and Complex. Following closing, we immediately took over project management responsibilities for all growth and maintenance capital projects. Construction is progressing well on the 200 million cubic feet per day Kings Landing I and that remains on schedule with an expected in-service date in April of next year. We are also mid-construction on a 20-inch pipeline running across the Durango system. That will provide connectivity to Kings Landing upon in-service and greatly improve system hydraulics. Additionally, we began deferred maintenance projects to elevate operations to Connecticut's safety and environmental standards. We have also welcomed over 70 talented employees to the Connecticut team. The feedback we have received from new employees has been positive and they are enjoying the function-based structure and management of our operations team. Turning to our results, in the second quarter we processed gas volumes of 1.58 billion cubic feet per day representing 7% growth year-over-year, despite wellhead volume curtailments in response to Waha Hub pricing which averaged approximately 140 million cubic feet per day. Second quarter adjusted EBITDA was over $234 million, a 13% increase year-over-year, reflecting new volumes from the MVC-backed agreements in Lea County and improved commodity margins as well as contributions from the expansion of PHP and Delaware Link. This was partially offset by price-related gas volume curtailments and only two months of contribution from GCX. For context, if we closed Durango contemporaneously with the sale of GCX, Kinetik's second quarter adjusted EBITDA would have increased to almost $238 million. With the successful completion of the Durango and GCX transactions, we are revising upwards our prior 2024 guidance to reflect the underlying strength of our business as well as the impacts of the transactions. Trevor will discuss this in more detail momentarily. I'm incredibly impressed by our team's focus and execution over the past few months. Their dedication and attention to detail allowed for both transactions to close on time and has resulted in a swift integration process. And now with that, I'd like to hand the call over to Trevor.

Thanks, Jamie. In the second quarter, we reported adjusted EBITDA of $234 million. For the quarter, we generated distributable cash flow of $163 million, and free cash flow was $105 million. Looking at our segment results, our midstream logistics segment generated an adjusted EBITDA of $148 million in the quarter, up 7% year-over-year. Largely driven by improved commodity margins, increased process gas volume, and continued marketing benefits on our PHP capacity despite the wellhead volume curtailment that persisted throughout the quarter. Shifting to our pipeline transportation segment, we generated an adjusted EBITDA of $94 million, up 25% year-over-year. This increase was driven by contributions from the PHP expansion and Delaware Link, with only two months of contributions from GCX. Total capital expenditures for the quarter were $38 million. Our leverage ratio for our credit agreement stands at 3.4 times, below our leverage target of 3.5 times. As Jamie mentioned earlier, we are revising upwards both our 2024 adjusted EBITDA and capital expenditures guidance to reflect earnings outperformance throughout the first half of the year and the successful completion of the Durango acquisition and GCX divestiture. We now estimate full year 2024 adjusted EBITDA in the range of $940 million to $980 million, a 3% increase at the midpoint versus the previous guidance range midpoint, and implies over 14% growth year-over-year at the midpoint. Specifically within the midstream logistics segment, we now expect process gas volume growth in the high teens. Our new growth expectations are inclusive of six months of Durango's existing business, which includes approximately 200 million cubic feet per day of process gas volume from the Maljamar and Dagger Draw facilities. We expect the existing Durango volume to nearly double with the in-service of the 200 million cubic feet per day Kings Landing Cryo in April of next year. Additionally, the Lea County MVC increase in margin expansion for gathering, treating, and processing will contractually begin in November. Our pipeline transportation segment will no longer reflect contributions from GCX following the divestiture. However, we expect the segment will continue to experience strong year-over-year growth throughout the remainder of the year with the full-year benefits from Delaware Link and the PHP expansion. We have modestly updated our commodity outlook for the remainder of the year. Our revised guidance assumes approximately $77 per barrel for WTI, $2 for MMBtu for natural gas at the Houston Ship Channel Hub, and $0.60 per gallon for natural gas liquids. Today, approximately 13% of our remaining 2024 expected gross profit is directly influenced by commodity prices, which is primarily associated with Kinetik's equity volumes. Currently, our direct commodity link exposure is sourced from the following components: approximately 30% natural gas or ethane, 30% propane and methane, and 40% crude. As we mentioned during our Durango acquisition announcement call, with certain provisions of some of the Durango contracts, we retain ownership of the common stack. Therefore, WTI will represent a greater contribution of our direct commodity link gross profit going forward. Turning to our capital expenditures guidance, we now expect capital expenditures to be between $260 million and $300 million for the full year. This increase reflects capital for the construction of Kings Landing I, pre-FID work for Kings Landing II, and an associated acid gas injection well, the new and amended long-term gathering and processing agreements in Eddy and Lea Counties, and capital for integration and growth and maintenance costs associated with the existing Durango business. For context, roughly $100 million of the guidance increase is capital associated with Durango. The remainder of the increase is driven by new projects in New Mexico that have been announced since issuing our full year 2024 CapEx guidance in February. In fact, the projects included in our initial 2024 CapEx guidance are trending approximately 5% below budgeted costs. Our operations and commercial teams have done a tremendous job so far by optimizing scope and reducing construction costs where possible. We remain highly focused on our disciplined capital allocation approach. Our priorities are aligned with our strategy, which enables us to allocate capital to the highest return opportunities to maximize shareholder value. And with that, I would like to open up the line for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question comes from Michael Blum with Wells Fargo. Michael, your line is now open.

Thanks. Good morning, everyone. I wanted to talk about the change in CapEx, specifically the $100 million related to Durango. I wanted to just provide a little more color. Should we think of that as growth capital that's earning a return? Is that maintenance? What is in that $100 million?

Good question, Michael. So $100 million should be filled in this context. It is growth capital, so it includes Kings Landing I. It is growth capital as it relates to, we talk about the 20-inch backbone pipeline across the system, which will allow for, obviously, additional volumes to be connected that will then obviously be used to fill up Kings Landing I, and some of this pre-FID and long lead critical path items that we've got sanctioned for Kings Landing II. So that is the bucket. If I was going to think about sort of remedial maintenance, it's probably $5 million of that amount. And maintenance is probably an equivalent amount on top of that. So that's pretty small.

Okay. Got it.

The increase is notable, Michael. It's in relation to the starting figures of 125 and 165. Throughout the conference circuit this spring, we discussed the Eddy County announcement, which involves a gross spend of $200 million, broken down as 50 million for this year, 100 million for next year, and 50 million into 2026. I consider the Eddy County initiative and the new Lea County amendment, which includes some capital expenditure, to be positive developments. If we take 145 million as the midpoint of the original range and simply add 50 million, it aligns well. Additionally, regarding everything related to Durango, Kings Landing 1, and some growth capital as well as the pre-FID expenditure, that's approximately 9.8 million. This should meet the targets you're aiming for. We take a considerable amount of time to ensure that every dollar invested is expected to yield a clear return for our overall business. We were very deliberate about setting our guidance this year, and while we’re excited about the growth opportunities, we remain focused on ensuring that we generate a positive free cash flow.

Got it. Thanks for all that. And then maybe a related question, since you're spending on Kings Landing 2, I know you're calling it pre-FID, but how should we think about timing for when that plan could be in-service?

So there is a bunch of items. I would say any decision on a new processing plan, from inception to completion in-service, is probably a two-year undertaking. There are items, and it's not necessarily just ordering a Cryo box from UOP Honeywell, but there are switchgear, there are transformers, there's a lot of associated kit that have very long-lead items. So what we wanted to do was get ahead of that. If we were going to think out into the future of an in-service date, you would be looking at the beginning of third quarter '26.

Got it. Thank you so much.

Thank you. Our next question comes from the line of Jeremy Tonet with JP Morgan. Jeremy, your line is now open.

Hi, good morning.

Good morning, Jeremy.

Thanks for all the detail today. I just wanted to go to New Mexico a little bit more. Now that Durango has settled, I just wondered if you could provide a bit more color on what you see the landscape there. We've seen, I think, some private equity consolidation there. And just if you could update us, I guess, on the competitive landscape, the opportunities set there, that would be very helpful? Thanks.

We are very enthusiastic about the opportunities in New Mexico. Interestingly, it includes not only the northern Delaware basin but also the shelf area, which has not received much attention over the years. Numerous smaller producers hold positions in that area, and they require a processing outlet despite the quality of the rock being good. The opportunities are more abundant than we anticipated, leading us to expedite our plans for pre-FID expenditures on Kings Landing II. We project that Kings Landing I will reach full capacity sooner than expected. Regarding Durango, we maintain a processing capacity of 200 million cubic feet a day. Our projections show that once we bring on Kings Landing in April 2025, we expect EBITDA to increase significantly, from 70 to 75 million to nearly 150 million. We also plan to expand Dagger Draw and make some enhancements to Kings Landing I. We aim to boost our inlet capacity from 200 million cubic feet a day to about 500 million by the end of next year and up to 700 million by 2026. The margins remain stable due to a lack of infrastructure, which creates demand for treating and low-pressure connections for smaller producers. We are genuinely excited about the tremendous opportunity we've identified.

Got it. That's very helpful. Thank you. And I want to touch on one of the points you brought up there as relates to Permian egress in general. Just wondering updated thoughts on that given recent announcements. And also, I think having that capacity in Permian Highway was certainly a help in the quarter. And just wondering, I guess, how you think about that over the balance of the year? How much help would that provide having that capacity? And when do you think that kind of fades away?

I'll start by addressing the last part. We noted that one of the investors in Matterhorn mentioned the potential in-service date in September during yesterday's call. I'm sure you are more informed on that discussion than I am. This development will be beneficial, although it's not a complete solution, just a step forward. It should provide support for Waha, although I can't recall a time in the past nine years where we've experienced such persistent weakness there. Currently, we are still seeing a negative $0.04. That's surprising. From our perspective and that of our customers, Kris Kindrick can provide more insights on this, our clients have been very satisfied as they’ve managed to secure Gulf Coast pricing. Despite the struggle with the Houston shipment and some volatility linked to Freeport and other factors, customer satisfaction remains high. This has been a key advantage for us. Our Durango customers are particularly interested in Gulf Coast pricing, which presents us with an opportunity to deliver that benefit in the northern part of the Delaware region, where they have traditionally relied on EP Permian pricing. While we anticipate that the overall benefits may decline somewhat with Matterhorn coming into play, it’s clear that we’re still facing negative figures. We improved from negative 23 or 24 to negative four, yet we are still in the negative. It’s evident that demand for gas continues to rise, and we still need more egress solutions for the Permian region. Our customers will remain satisfied, and so will we given the capacity we have available.

Got it. That's helpful. Thank you.

Thank you. Our next question comes from the line of Tristan Richardson with Scotiabank. Tristan, your line is now open.

Hi. Good morning, guys. Jamie, you noted the high teens growth across your footprint, which includes Durango and the Lea County, MVCs. Can you talk about the better outlook you're seeing in the base business? Is this all just higher growth in New Mexico? Is this efficiencies, completion efficiencies, GORs? Just maybe kind of curious what you're seeing in the base business across Delaware?

Think of it this way. It should be evident from my earlier comments that 20% of our gas now comes from New Mexico, starting in January 2025. This marked a significant change with a substantial increase from New Mexico. Additionally, Durango contributes to this as it is an existing business. What I take the most pride in regarding our company is that for a long time, we engaged with you and investors to discuss the potential of projects like Alpine High. We previously had 140 million cubic feet per day from Alpine High. When you combine that with our processing capacity of 1.58 billion cubic feet per day, we exceed 1.7 billion cubic feet per day for our business, which is impressive. Keep in mind that this is before we factor in Durango, which will begin contributing in the second half of this year. We have a total inlet capacity of 2 billion cubic feet per day. Overall, our base business has seen some growth; it's not extraordinary, but it is not insignificant either compared to the game-changing potential we see in New Mexico.

That's helpful context. And then you noted in the first 100 days, seeing some of these small expansion upgrade opportunities that would be a Dagger Draw or the 20-inch line. Should we think of these opportunities as part of that 5.5 times 2025 you talked about when you announced the deal? Or could these opportunities be incremental to that? And maybe is it a way to think about these opportunities?

So Tristan, I think you think about the magnitude, right? I do think on the basis of the stair step that I laid out as far as inlet expansion at Durango, if 200 represents a 70, 75 base and 400, which is the addition of Kings Landing I gives you a base that when sold out, looks like 150. And then you're later the next year because we have it in our numbers and you have it as part of the Eddy County capital that we gave you, you go to 500. Then that's obviously going to add you another almost $40 million. And then you're thinking about a Kings Landing II. That would add you a potential another 70 to 75 million on top. This is, I mean, five times is how we thought about on the basis of, yes, that 150, 160 of EBITDA, and you've got, you bought, you paid with stock and with cash and with capital deployed, you've got eight plus $100 million of total consideration. And that's how you do the simple math. We're talking about things that drive the returns significantly greater than that set up basis that I just outlined.

That's super helpful. Appreciate it. Thank you guys.

Thank you. Our next question comes from the line of Spiro Dounis with Citi. Spiro, your line is now open.

Thank you, operator. Good morning, team. To start with, my first question is about the asset mix going forward. In light of Durango and some new opportunities, it seems like your focus will shift more towards a GMP asset base. I'm curious whether you are looking to enhance your pipeline transport exposure to keep pace and maintain an integrated profile.

I think Spiro is already aware, but as we mentioned, you have an interesting choice to make. Looking at our forecast, we could team up with various players who have projects for egress and consider taking an equity stake, similar to what Targa did with Blackcomb. We could have taken on a similar role. We have been consistently communicating that we are focused on shorter-term conversion cycles for capital deployment. In other words, we aim to avoid deploying capital and waiting two and a half years, or any extended timeframe, before starting to see cash flow. We want to ensure that deployment and cash flow occur in a much shorter timeframe. We are observing this on an intrabasin basis. Delaware Link continues to be a strong contributor to our overall business. We see it in our Kinetik NGL business. We are exploring other opportunities to achieve this. These opportunities involve shorter builds, they are smaller in scale, have a shorter duration, and provide immediate cash flow, which supports the base business. We are mindful of maintaining that mix. Moving forward, we aim for a GMP uplift of 65-35, which is where we initially started as a pro forma merged company with Kinetik back in 2022, and we hope to build it up again. Therefore, we are looking for opportunities that will help us keep that mix balanced.

Got it. Understood. Helpful color. Second question, just wanted to quickly go back to free cash flow and how to think about the outlook. Jamie, in response to an earlier question, I think you said you're highly focused on being free cash flow positive. I think for '24, we can get there. That seems like a pretty easy lift. I guess, as you think out of the '25, with all these projects coming, obviously a high-class problem to have, but do you still think that's something sort of durable out over a multi-year basis from here?

Yes, I think, look, when you think about what we've got going forward, right? I think, Spiro, you and I have talked about this with Trevor and Maddie and Alex from time to time. Our overall base business, when we think about '25, is our base business, meaning the legacy business, is probably $100 million of capital for '25. And then you've got, obviously, the Eddy County expansion, which I said, that 200 million split 50, 150. And then, obviously, you've got the balance of Durango. And I really do think we're going to try that to manage from a capital deployment standpoint, how we think about managing it relative to, obviously, the EBITDA profile. We do see, obviously, really good top-line growth, 14% year-on-year to the midpoint, I think it is. I think you've heard me say before, I would challenge you to find another company where I can look out the next several years and think about an EBITDA growth. '25, '26 now, '27 at sort of a double-digit rate, that is hard to do. You can't do it forever. You can do it for a time. But that's the strength that we see when you add in Durango and you look at our base business and some of the changes, such as the NGL contract changes that happened in '26, and obviously, partial benefit, '27 full benefit, there's lots of things going on. And so, we will think about that top-line growth and how that allows us to, obviously, then think about our overall capital deployment. So I do think '25, you still see the positive free cash flow. As we mentioned, we put it in the press release, I think pro forma, the second half of '25, what, 10% increase in free cash flow per share as a result of the Durango transaction. So I do think it's very much the blueprint.

Great. That's helpful color. Jamie, I'll leave it there. Thanks.

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

Hi, good morning. Following up a little bit on the importance of positive free cash flow for you, how are you thinking about when you could restart dividend growth for the company since you're a capital leverage target, but obviously having a lot of growth opportunities accelerating?

Keith, good morning. Nice to hear from you. You're very consistent on the dividend. You get the prize. I think we have talked to you at length on the dividend, and it is not lost on us that we have had a lot of support and patience in shareholders. Honestly, I look at the picture and believe that we can manage both from a growth standpoint within our capital growth so that everyone wins. So I think as we've always said, you need to be thoughtful as to exactly the increase you would think about, but I think it is manageable. And so, I would say nearer term, not longer term as to an action.

Great. That's helpful color. Second question, can you just maybe give an update on the importance of eventually connecting the legacy Kinetik and Durango footprints, what it would add for you and how you're thinking about doing that, whether it's building or potentially through transactions?

Really good question. So we've said, every commercial opportunity has to stand on its own merit. And if we see opportunities, whether we're going to Eddy County and thinking into Lea County, that give us an opportunity either to connect to the existing Pegasus lateral, which is the one that goes up into Lea County, ultimately how that connects ultimately to Durango, and then we think about how we then think about Eddy County. We will engage in conversations with producers. We're not going to build just for the sake of building. We will only build to the extent that there's a compelling commercial underwritten proposition that justifies and warrants the connection.

Thank you. Our next question comes from the line of Theresa Chen with Barclays. Theresa, your line is now open.

Good morning. Following the FID and eventual in-service of Kings Landing II, how much runway does that give you, given the growth outlook you have for the acreage? And can you talk about additional opportunities beyond that and how that ties into your view of runway CapEx on an annual basis going forward?

Really good question, Theresa. I would say, we are seeing obviously a sight line for overall production growth up in the Northern Delaware and the shelf that would support a Kings Landing II development. As I mentioned at the outset, what's fascinating about that particular area is that the drill bit is handicapped by processing capacity. Can't flare. You really need a solution on the gas side, and so it makes for a very challenging, I think, proposition for producers. So our sight line certainly sees us through a KL2. Does it go on beyond that? I think it's too early to tell. We sit here now, and we are 40 days into owning Durango. Admittedly, we had six-plus weeks as we went through the FTC process, and we engaged in some conversations with customers, but really the engagement has started in earnest over the last sort of six-plus weeks. And it's not just processing capacity, right? Because as I mentioned, one of the things that we're really focused on is we can build processing, but we need egress. Egress comes in the form of two flavors, residue and NGL. Anne Psencik would tell you up there, you've got telescopic pipelines that are pretty much all full. It's not really a great outcome. You've got some challenges. You really just have TW. You've got EPNG. You've got EE. There are challenges on each of those because of how full they are and how full they run. So I think there's a lot of things that have gone into some of the early decisions and some of the, I would say, early analysis on Kings Landing II. So line of sight, TBD, sort of watch this space over time, and we can keep you apprised on how you're seeing. Now the interesting thing when we go down south is, I know everyone focuses on AI and gas growth and what this all means. The thing that I probably didn't complete in my statement is what makes me proudest about where we sit now is, I really feel like Alpine High isn't even in the vernacular of this company anymore. And all the growth that we see, there's nothing predicated on Alpine High. If Alpine High just stays as it is, it doesn't make a difference to us. If it grows significantly because there's a call on gas with gas prices, well, that's going to have an impact as well because as we know, it's in a highly gassy area. So I really do think that's a pretty interesting change, not subtle, pretty significant and profound for the company as a whole.

Thank you so much.

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

Hi, good morning. I wanted to kind of understand the run rate CapEx or how we should be thinking about it now that the business has changed so much. Obviously, it's lifted with the Durango acquisition, but we have possible Kings Landing II, other additions. Just when you think about the GMP spending going forward, is there some number that we should try to put in there as a good run rate, understanding that things are constantly changing?

I wish I could say it was straightforward, but it's a bit more complex and varies over time. We're currently in the process of building a Cryo and have begun the preliminary work on a second one. It's not typical for a company of our size to consider expanding capacity in this way; usually, you’d see more cyclical peaks and valleys. For this year, at 2.80, I believe, as Trevor mentioned, we should be cautious when assessing our overall percentages. It seems reasonable to anticipate a range between 200 million and 400 million dollars, though I recognize that's quite broad, and I apologize for the lack of exactness. That said, the peak could be one figure, while the lower end might be around 200 million, which I think is a decent estimate. We’ve projected our base business for next year at about 100 million. This includes well connections, maintenance capital, and various enhancements like looping and compression, indicating growth in that number. The base business is significant but more established. In terms of Durango, the 20-inch pipeline is quite beneficial. It has more low-pressure areas, which may mean a greater capital requirement for smaller producers. Therefore, if our base business is 100 million, once we’ve developed the processing capacity, Durango might even bring in an additional 50 to 100 million considering well connections and looping.

Neel, this is Kris. To add to that, I want to highlight that we're seeing much higher margins in Durango as well, which means that every dollar invested there is expected to yield a greater return.

Yes, if we have an average on a dollar, like a buck 10 MCF, you're looking at a 50% increase on that margin, right, up there in the north, and that's obviously because you're packaging everything, compression, treating, gathering, processing, and so that's obviously very, very attractive. And treating, I know we've spent a lot of time talking about treating. Treating is, I think, one of the real, real focuses for our producers just given the dispersion of gas quality that they find.

Okay, perfect, appreciate the color. My second question is around the base business in the Southern Delaware. Jamie, you were alluding to the fact that Waha is still negative and probably will be until Matterhorn comes online. Given that a lot of your producers have roughly 50-50 oil and gas splits in that basin, have you seen any curtailments, any wells that are delayed, being turned in line such that once Matterhorn comes in line, that you see kind of a surge in growth for the last four months of the year?

I believe that Apache is the main factor concerning broad-based curtailments, particularly regarding Alpine High, both in rich and lean contexts. The delayed completions relate mostly to Callan, but those delays weren't due to gas prices; they stemmed from an acquisition and the customary pause after closing a transaction where one assesses everything. I do not feel there has been any negative impact on us. We're still experiencing solid turn-in-line activity, and as mentioned in our materials, we expect a full return to service in the fourth quarter for Apache Alpine High volume. This will be advantageous since we managed to navigate the financial impact we faced in the second quarter. It's impressive how well the business is performing, given that we met consensus despite the timing mismatch between the closing of Durango at the end of June and the GCX deal at the beginning of June. We only missed one month of the pipeline transportation segment, yet we still achieved our consensus estimates.

Neel, this is Kris. It's worth noting, too, a large percentage of our customers move their gas on PH and are exposed to different gas markets, so they aren't as exposed to Waha, which is another benefit that we provide our customers. So, another reason why we're not seeing the impact to a large majority of our customers.

Right. Right. Great. Appreciate all the colors.

Thanks Neel.

Thank you. Our next question comes from the line of Jackie Colitis with Goldman Sachs. Jackie, your line is now open.

Hi. Good morning. Thank you for taking my question. Just wanted to have another follow-up on New Mexico. So, you were able to realize an uplift on your system there prior to MVCs that started in April and May. Just more broadly, where do you see New Mexico trending from here? And do you expect to see upside from that new amendment in Lea County prior to the fourth quarter?

So, Jackie, the new amendment on the Lea County MVC will begin in November of this year, so you won't see any benefits before then. Building strong customer relationships is essential. This discussion is more about our treatment capabilities than anything else, and I realize we may be reiterating this point. Matt Wall and the operations team have performed exceptionally well, managing elevated levels of CO2, nitrogen, and H2S. We’ve had a strong initial performance regarding our blending and treating operations. When it comes to New Mexico, I genuinely believe it's the key narrative for our company. While we have a solid base that offers great blend stock due to its sweetness and some excellent customers, true significant growth in our system's volumes and financial margins comes from New Mexico. Looking ahead, we anticipate another 200 million cubic feet per day as our inlet capacity once Kings Landing I is operational in April next year, and we expect it to reach full capacity rapidly. We'll be increasing from 400 to 500, and as we've previously discussed regarding Dagger Draw, we'll include some additional recompression and move the 60-day Cryo there. This will be very beneficial for the producers in that region. Simply put, if you only look at the expansions in inlet capacity, it's all about New Mexico right now. This aligns with what we observe from our producers and their capital allocations, and we are committed to providing the necessary services they require.

Great. I appreciate it. As a follow-up, as your processing capacity increases, do you anticipate reaching a point where you will have enough NGLs to consider building your own NGL assets in the future?

The short answer is, look, we could all aspire to different things, but the reality is, when you're dealing with, relative to what I'll call the enterprises, targets, transfers, one-oaks of the world, the size of their asset base between Bellevue and, obviously, their long-haul pipelines into the basin are such that we could never compete and we would never contemplate thinking about competing. We don't have an export capacity. We think we can do things contractually, which we've done. As far as we have a diversification of NGL service providers, which is obviously a net benefit. We've got great relationships. We own a portion of Shin Oak. So, we think that we can participate and give that vertically integrated value chain an optionality to our customers, but no, we're not going to get into the NGL business and that's just beyond, I think that's beyond our wallet.

Got it. Thank you so much. Appreciate the time.

No problem. Thank you, Jackie.

Thank you. There are no questions registered at this time, so I will pass the call back to Jamie Welch for any closing remarks.

Thank you, everyone. We're really excited, as you could probably tell a really solid quarter, really excited about the outlook for the business and enjoy the rest of your summer. I no doubt we'll see some of you next week and then we'll start it back up in the fall, straight after Labor Day. So, reach out if there are any questions and thank you for your time this morning.

That concludes today's call. Thank you for your participation. You may now disconnect your line.