Kinetik Holdings Inc. Q2 FY2025 Earnings Call

Good morning everyone, and thank you for being here for Kinetik's Second Quarter 2025 Results Call. My name is Carly, and I will be leading today's call. Now, I will turn it over to our host, Alex Durkee. Please go ahead.

Thank you. Good morning, and welcome to Kinetik's Second Quarter 2025 Earnings Conference Call. Our speakers today are Jamie Welch, President and Chief Executive Officer; and Trevor Howard, Senior Vice President and 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've 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, Alex. Good morning, everyone, and thanks for joining our call today. Kinetik's second quarter results reflect our resilience and relentless focus on execution as we navigated through macroeconomic uncertainty and global geopolitical pressures. I am proud of what our team accomplished despite the noise that has continued to persist. During the quarter, we made significant progress across our portfolio of capital growth projects. Starting with Kings Landing, commissioning of the complex commenced in June and has continued. Through the next 6 weeks, we will be fully testing and starting up the front-end amine plant, and we expect to have the necessary electric power to also fully load the facility. Taken together, we expect to ramp to full commercial in-service by late September. In speaking with our producer customers in New Mexico, we continue to build conviction on just how highly economic the rock formation is in Northern Eddy and Lea Counties. However, much of the associated gas carries substantially higher CO2 and H2S content. To support further development of the resource play, we have filed a permit for an acid gas injection well at Kings Landing to sequester the growing levels of CO2 and H2S. Lead times for specialty equipment and materials can be upwards of a year, so our team has been prudent in identifying these items to jump start this process. We expect to receive approval to proceed by year-end. Upon in-service of the AGI well at Kings Landing, Kinetik's total acid gas or TAG capacity is expected to more than triple and further position us to be a best-in-class gas gatherer, treater and processor with a differentiated service offering in Northern Eddy and Lea Counties. We look forward to sharing more as we progress this opportunity. To support the conversion of Delaware North to a primarily sour gas system, ECCC pipeline is a critical component to move sweet-rich gas from New Mexico to Texas and free up additional processing capacity in New Mexico. Construction has started, and we expect it in service in the first half of 2026. The proposed scope includes restarting our Sierra Grande processing facility and adding boost compression there. We have the ability to increase ECCC's throughput capacity to approximately 300 million cubic feet per day for sweet gas, with system looping in Texas. Looking ahead, the investments we have made and continue to make across our system provide a multiyear earnings tailwind through the end of this decade. First, Kings Landing is our beachhead position in the Northern Delaware. Our conviction continues to grow regarding expanding our footprint and volumes around this complex. Our commercial team has been very active advancing some really exciting opportunities. And with much of the pre-FID work for a processing expansion at Kings Landing behind us and permitting for acid gas injection in progress, commercialization of an expansion and sour gas conversion remains on track. Our low and high-pressure build-out in Eddy County continues to perform better than expected with well results exceeding expectations. Customers and other active producers continue to add inventory in the area, increasing the project’s earnings potential and duration. Acquired earlier this year, the Barilla Draw gas and crude gathering systems are performing well and are expected to contribute to earnings growth throughout the decade. Additionally, well connects in Lea County in the second half of this year will contribute additional volume increases. So based on the current estimates and with continued commercial success, we expect that additional processing capacity besides Kings Landing 2 is likely to be needed inside the next 18 months as our Delaware South processing capacity is fully utilized with the ECCC pipeline. We also remain focused on optimizing our cost structure. In the past few years, we have experienced and managed meaningful cost inflation, especially with electricity and leased compression. And while we think the worst of it is behind us, it underpins our conviction to pursue the behind-the-meter power generation opportunity in Reeves County and the owned compression solution over the next several years. Both projects would compete for capital and provide long-term structural solutions to offset these inflationary pressures. So before I turn the call over to Trevor to discuss second quarter results, I want to reiterate the opportunity set in front of us today. Our organic and inorganic growth pursuits over the past 1.5 years have positioned the company for accelerating growth as we head into 2026. We continue to expect fourth quarter 2025 annualized adjusted EBITDA of approximately $1.2 billion, which represents 24% growth year-over-year. And this is just the beginning of a very bright multiyear earnings growth and free cash flow generation outlook that presents a compelling investment opportunity for existing and future shareholders. So with that, I'll now turn the call over to Trevor.

Thanks, Jamie. In the second quarter, we reported adjusted EBITDA of $243 million. We generated distributable cash flow of $153 million and free cash flow was $8 million. Looking at our segment results, our Midstream Logistics segment generated an adjusted EBITDA of $151 million in the quarter, up 3% year-over-year on increased processed gas volumes from our Northern Delaware assets. This year-over-year increase was mostly offset by lower commodity pricing and higher OpEx, both of which I will cover in more detail shortly. Shifting to our Pipeline Transportation segment, we generated adjusted EBITDA of $97 million, up 3% year-over-year, which benefited from an increased ownership in EPIC and modest outperformance at PHP. The year-over-year increase was partially offset by no contributions from Gulf Coast Express following the sale of that stake in the second quarter of 2024. Total capital expenditures for the quarter were $126 million. With the updated in-service timing for Kings Landing and the other impacts I just mentioned, we are revising our 2025 adjusted EBITDA guidance range to $1.03 billion to $1.09 billion. Now I will walk through each of the impacts in more detail and the implications to guidance. First, we revised our full year processed gas volume growth assumption from 20% in February to mid-teens to reflect the shift in timing of the Kings Landing start-up and modest delays in producer development activity. For the remainder of the year, we expect a meaningful ramp in processed gas volumes driven by the full commercial in-service of Kings Landing in late September and step-up in contributions from the Barilla Draw, Carlsbad and Lea County volumes by year-end. We anticipate exiting 2025 with processed gas volumes at approximately 2 billion cubic feet per day. Second, we have seen significant commodity price volatility since setting our initial guidance in February, creating a headwind in the second quarter and a change in our assumptions on market forward pricing. On a weighted average basis, our revised guidance assumes a 10% decline in commodity prices versus our original guidance in February. Marking to market realized pricing and forward pricing, we estimate this decline to represent an approximately $20 million impact versus our original adjusted EBITDA guidance. At current commodity prices, approximately 35% of our direct exposure is tied to the price of WTI, 20% to the price of natural gas, 25% to the price of LPGs and the remaining 20% to basis and commodity price spreads. We have significant hedges in place for the remainder of 2025 and a robust hedging program for 2026 and 2027. Moving on, operating costs continue to persist in the Permian. We have seen substantial cost inflation across lease compression and electricity, two of our largest operating expense line items. Year-over-year unit cost per Mcf increased by approximately $0.10 in the quarter. With the commissioning and the start-up of Kings Landing, unit cost per Mcf are expected to modestly step down as volumes come online. On a full year basis, we anticipate unit cost to be up approximately $0.06 year-over-year in 2025. While much of this increase was expected and included in our original guidance, we have experienced higher-than-budgeted operating costs as well as the need to retain lease compression units for new areas of development that we originally planned to release. Taken together, these impacts led us to revise 2025 adjusted EBITDA guidance approximately 5% lower to $1.06 billion at the midpoint. Importantly, as Jamie discussed earlier, we continue to expect a meaningful acceleration in adjusted EBITDA growth through the remainder of the year and to reach annualized adjusted EBITDA of approximately $1.2 billion in the fourth quarter. Turning to capital guidance, we are tightening our range to be within $460 million to $530 million, given our heightened visibility at this point in the year. We anticipate CapEx to be concentrated in the third quarter with the timing of Kings Landing completion and construction of ECCC pipeline. That said, we now expect nearly 60% of 2025 capital to be spent in the second half and nearly 45% in the third quarter alone. Before I open up the line for Q&A, I will touch briefly on our finance-related objectives. At the end of May, we completed a total refinancing of our bank debt, extending maturities on the Term Loan A and revolving credit facility. Our leverage ratio per our credit agreement stands at 3.6x at the end of the second quarter. We also repurchased $173 million of Kinetik Class A common stock since May, representing nearly 2.5% of our outstanding shares at an average share price of approximately $43. Our share repurchase program reflects our commitment to delivering value to shareholders, and I'm enthusiastic about utilizing it in light of the disconnect we see between the market price and intrinsic value of Kinetik stock. Our finance-related objectives provide the framework to maximize shareholder value via our multiyear earnings growth and strong balance sheet, bolstered by strategic and accretive investment opportunities, annual dividend increases and opportunistic share repurchases. I am excited with the progress that we have made in the quarter and look forward to delivering even more value to shareholders in 2025 and beyond. And with that, we can open up the line for Q&A.

Our first question comes from Jeremy Tonet from JPMorgan.

Just wanted to start off, if we could here. If we look at the exit rate for 2025 for 4Q there, just wondering if you could walk through the building blocks that get you there and the confidence level of exiting the year in that $1.2 billion run rate.

Sure, that's a very valid question. When we break down the $1.2 billion, consider it as $300 million for the quarter. We recorded $243 million in the second quarter. As Trevor mentioned, we've already faced many of the operating cost impacts related to high electricity prices and increased compression leasing. To move from $243 million, you can expect a bit of APA non-curtailment, possibly in the fourth quarter. We already experienced that in the second quarter. The main contributors will be Kings Landing and Durango, along with some additional volumes. We've seen some volume shifts from the third quarter to the fourth quarter, which has slightly moderated the overall growth rate in volume. Our exit rate remains strong, though the delay in moving that volume to the fourth quarter means we won't see the same flow-through for this calendar year. Those are the key components to consider. Everything else remains largely the same, and my confidence level is high. At Kings Landing, we've taken a careful approach to ensure the plant is running smoothly and managing the separation of sour and sweet gas. Previously, all gas was directed to Dagger Draw or Miyajima, and now we need to create space for sour gas at those facilities while sending less sour gas to Kings Landing. Although we have the front-end amine system, we still lack an AGI, which means we can't effectively handle very sour gas at this facility. We've been thorough in our process, which may have taken longer than anticipated. We're probably a bit over-optimistic about the timeline for reframing the gas plumbing. However, my confidence level is now very high. We understand the gas situation well, and while it's been a bit frustrating to start slower than expected, as we progress into the end of this year, I believe we'll come out stronger.

Got it. Just wanted to pivot to buybacks, a good amount in the second quarter. Is this a rate that we can expect to continue here? Just wondering if you could provide more color on what that cadence could look like?

I think it depends on where our stock price is. We find the stock in the low 40s to be very attractive. As a result, our approach this past quarter has been more aggressive, starting back in May. We will take cues from the market, and we evaluate our capital allocation strategy. We assess where we see fundamental value in the stock and where we feel confident investing. Therefore, we will remain responsive to what we observe in the market.

Our next question comes from Spiro Dounis from Citi.

I want to start with NGL re-contracting, if we could. I think it's more of a 2026 tailwind, but curious if some of the NGL pipeline operators are eager to negotiate early and make sure some of those volumes stay on the system. In other words, could we see that recontracting tailwind maybe coming earlier than expected?

Spiro, that's a great question. As we know, Enterprise anticipates starting up in the fourth quarter. With Enterprise, Targa, Transfer, ONEOK, DCP, and MPLX, we now have a larger group of NGL integrated players than ever before. There's a cautious optimism regarding growth in the basin, but with a significant amount of capacity to fill, we're observing some interesting overall trends and rates from various NGL service providers. You're correct; we have two contracts expiring next year. One will transition to Targa, while the other remains open for decision. In 2027, we will begin with Kings Landing once we hit the two-year in-service mark, followed by a series of expirations leading into the end of the decade and other contractual changes. I genuinely believe we'll be poised to take advantage of these opportunities. We've consistently maintained that stance, and we'll see how it unfolds. This is a favorable time for us, given the available product and the considerable capacity in the marketplace, with many eager to fill that capacity.

Got it. That's helpful, Jamie. Second question, switching gears to Kings Landing 2, and I apologize if I missed it in some of the prepared remarks, but can you describe maybe what inning you're in there as you think about progressing towards FID and how we should think about some of the gating items? And sort of in that context, I think you talked about 18 months is when you need it. Any sense on whether or not you could use offloads to sort of bridge that and push that CapEx out a little further?

I think we're mixing some metaphors here. The 18 months mentioned relates to processing capacity in Texas, which is separate from anything we plan to do with Kings Landing 2. For Kings Landing 2, there are key components to address. One is related to commercial aspects, and the other two involve acid gas injection since the plant needs to be sour, which requires a longer lead time for permitting and equipment sourcing. The third factor is electricity, which poses more challenges in New Mexico compared to Texas. When you ask about our current stage, if reaching a final investment decision, or FID, is considered the end of the ninth inning, we are about halfway through our overall work. We've already submitted the permit application for the acid gas injection and are making good progress on electricity. The commercial team has been engaged for quite some time, and we have significant customers interested in the Durango system. With the success of Kings Landing 1, we believe these customers will gain confidence and start investing in development programs sooner rather than later. We have multiple work streams progressing, and we expect everything to align before the end of the year.

And Spiro, this is Kris. I wanted to jump in quickly on the comment on offloads. We're always going to look at optimizing our portfolio with capital and offloads. And that's why ECCC is so important. It allows us to get south where we have a number of more economic offload options. So, we'll continue to look at all those as options to optimize the portfolio.

Our next question comes from Michael Blum from Wells Fargo.

I wanted to start with a macro question on the fundamentals. So, I guess we're seeing some Permian midstream players maintain guidance and tell us that basically producer activity is unchanged. And then we have others that are tweaking guidance lower like yourself and pointing to a weaker fundamental macro. So, I just want to get your take on what's going on from a macro perspective and then, of course, what's going on in your neck of the wood specifically?

Sure. Michael, we're observing a few things. As a Permian pure play, we don't have any other basins to diversify into, so we can’t offset any declines in the Permian with gains in other areas like Haynesville. When we look at our major customers, such as PR, EOG, and Katera, most of them have not changed their rig schedules. In fact, PR's performance on their wells has surpassed their expected metrics. They might shift well pad operations from the third to the fourth quarter or into early 2026, but this doesn’t alter their guidance or perception of the rock quality. In fact, it suggests that conditions are better than they expected. Similar to many of us, they might be reconsidering their capital investments in light of their stock prices, thinking about how to manage their budgets while still meeting their overall production targets. In Texas, while we've consistently noted that there’s still some activity, areas like Barilla Draw are now considered, although this activity balances out previous operations from Permian Resources. Texas isn't as prime as the ultra Tier 1 areas we still observe in New Mexico, which remains appealing for various reasons, including costs and administration. It’s often a good strategy to pivot back to Texas since it's so dynamic and capable of quick production increases. Therefore, I wouldn't interpret the current situation as a significant slowdown in overall activity; it’s more about timing. We're seeing good quality results that meet or exceed our expectations. Carlsbad, a key PR location, has shown exceptional performance, and Barilla Draw has also been solid. We're optimistic about our prospects and anticipate that we will catch up, facing some headwinds this year regarding commodity pricing and operational costs. Trevor, do you have anything to add?

Yes. The one thing that I'd add, thanks for the question, Michael, is from where we sit from the beginning of the year, prior to the $10, $15 sell-off in WTI is we're not seeing much of a change to the second half of 2026. What I would say is that, Jamie had mentioned there's been some shifting of timing and some pads, both north and south. A lot of them what we're finding is actually not necessarily for noneconomic reasons in terms of the primary driver, sure, WTI goes into it. But what we're actually seeing is that what we need to do as a company is to get in front of our customers with infrastructure to facilitate the upcoming development plans that we're seeing up in Delaware North. And that's why getting ECCC completed is critical, as Kris had mentioned earlier, we pointed to a potential expansion of that pipeline, FIDing sometime in 2026. We've talked about Kings Landing 2. And really, I'd say that's what we're extremely focused on in terms of getting that across the finish line with an FID because there is no real change to, I'd say, as we think about a broader portfolio of Delaware North plus Delaware South, what we're really seeing from where we were at the beginning of the year. If anything, we've actually seen a bit of an acceleration in certain areas that's offsetting some of the, I'd say, timing shifts or delays that we're seeing elsewhere.

Okay, understood. That's a very helpful perspective, and I appreciate it. The other question I wanted to ask is about the prepared remarks. If I heard and understood correctly, it seems like the gas is actually becoming even more sour than you anticipated. I’m trying to understand if this presents a potential upside for you, whether that allows you to raise the treating fee or if it means you will see higher volumes under the existing fee. I just want to know if there's any upside potential there.

Michael, you're correct. The gas is indeed becoming more sour. Specifically, the first and second Bone are particularly sour. The only way to effectively manage that gas is through acid gas injection. By implementing acid gas injection at Kings Landing, we expect to significantly increase our tag capacity for treated acid gas, positioning us as one of the largest in New Mexico regarding tag capacity. This will provide an economically attractive return depending on various factors. We're making substantial additional investments in infrastructure to facilitate the treatment and processing of that gas. Therefore, while it is indeed more sour, there is potential for increased rates and fees based on the level of sourness.

Our next question comes from Brandon Bingham from Scotiabank.

I wanted to go back to the building conviction in Northern New Mexico that you guys have discussed. And just if you could provide any incremental detail around some of the commercial momentum or just anything you're seeing up there that's really helping you build that conviction in the area and how that might kind of translate into any potential KL2 FID timing?

Yes, of course. Brandon, it's Jamie. I'll let Kris and Trevor add their thoughts. We have several customers from Durango, notably Spur and Newborn, who are eager to invest additional capital in drilling and require infrastructure, as Trevor mentioned. Kings Landing 1 is straightforward; they want us to proceed with the AGI because they see significant potential in the rock formations, particularly First Bone and Second Bone, which contain appealing sour gas. They are very interested in pursuing this. At the moment, we are working hard to meet our customers' needs. However, Kris Kindrick would likely agree that we may not be able to move quickly enough to fully satisfy them since they are ready to invest immediately, while establishing the necessary infrastructure will take more time than that.

Yes, Brandon, this is Kris, kind of echoing on what Jamie said, there's a lot of activity in front of us, probably more so than we've seen in the last 2 years. And Jamie hit on New Mexico. But even in Texas, we're seeing opportunities. And now with ECCC online next year. We look at this as one combined system where we're introducing volumes across the system. So, it's a huge growth opportunity across the majors, the independents, the private producers. 2026 is going to be an exciting year and not just for new packages of gas, but there's some big developments on our existing acreage in '26 that we'll need to accommodate. So, it's an exciting time, and the team is doing a good job tackling these commercial prospects.

Okay. Great. And then maybe I wanted to kind of touch on Epic a little bit. If there's any updates there, maybe around timing of distributions or just how you're thinking about it in general as one of your partners in it has discussed that it's comfortably up for sale if they need to or it's something that they're willing to sell. So just kind of any updates on Epic and anything you can share there?

Sure. Regarding the distributions, I believe the first one is going to partners this month, and that's been authorized and approved, which is great. The business is performing very well. When considering our various partners, particularly our largest customer in the pipeline, the asset has both intrinsic and extrinsic value for us as a company. If someone approaches us with a value proposition that meets or exceeds our expectations, we would be unwise not to take advantage of it. We're focused on creating value for our stakeholders, so if an attractive offer comes in, we're not overly attached to this asset. Since it’s a non-operated stake, it’s not as critical to our business as some other components. Trevor, do you have anything to add?

Nothing to add to that. I think you hit it.

Our next question comes from Theresa Chen from Barclays.

On the topic of TAG capacity and the TAG market in general, with one of your midstream competitors announcing entry into sour gas treating recently via an acquisition in what seems like a similar area of service as your footprint. How do you think about competition within this space evolving over time?

Thanks for the question, Theresa. It's a relevant point. With MPLX acquiring Northland, they are now part of the landscape. Historically, this space has been more about enterprise acquiring Pinion, ourselves, and Targa with Red Hills, all part of the Lucid complex. There's definitely enough volume and development opportunities for numerous players. I believe we will see the sour gas market, particularly in terms of CO2 and H2S, experience significant growth rather than decline, which suggests that the market is expanding. Thus, I think there is space for everyone. However, entering this industry takes time. This was a key consideration for enterprise when they acquired Pinion, as they recognized it would require three years to establish themselves. We've always maintained a forward-looking perspective, noticing that sour gas was set to be significant. The acquisition of Durango provided us with an entry point that we've leveraged. I do expect the market to keep growing. I think those with existing infrastructure will find it a highly appealing business, while others might seek ways to enter the market.

Understood. And within your own organization, given the commodity price volatility and the impact that it's had year-to-date, how has your hedging strategy evolved, if at all? How do you view the impact of either absolute prices or spreads as we go through the next few months of 2025 and into 2026? And would you expect the net impact to be maybe more muted next year versus this year? How should we think about this?

Yes. Thank you for the question, Theresa. What I would say is that the year-over-year impact from '24 to '25 on pricing is approximately $20 million. So, when we entered the year, we thought it was going to be flat on a year-over-year basis. And as we have disclosed relative to our original guidance, it's about a $20 million headwind. What I would say is that, I'd say, we're more active and we're reaching further out relative to, I'd say, historical norms to try to, I'd say, levelize these year-over-year impacts on margins on the commodity side. So, as we look forward into 2026, I would expect it to be relatively flat in terms of an impact on a year-over-year basis.

Our next question comes from Keith Stanley from Wolfe Research.

Wondering if you could give any early thoughts on where you see CapEx kind of evolving over the next couple of years. There's a lot of growth you're talking about with KL2, maybe another plant in Texas, AGI capacity, power plant. Just how do you see CapEx kind of evolving next year and into 2027?

That's a great question, Keith. Trevor and I spend a lot of time thinking about this topic because we realize that, given the size of our company, we can't pursue everything we want. We've mentioned before that we aspire to be a company with a $5 billion EBITDA rather than just over $1 billion. We're focusing on where to allocate our capital and the timing of that investment. If you ask us, we'd say there’s significant value in expanding ECCC, which can be done cost-effectively. Kings Landing 2 is crucial, especially when paired with acid gas injection, as it generates higher-margin gas. We also need to consider what our plans are for Texas and whether there will be offloading for a while. This is a discussion we have with our commercial team about managing our overall capital strategy. We've consistently mentioned that around 25% to 30% of EBITDA should be viewed in the context of our overall capital allocation for reinvestment, recognizing that while the percentage may not be exact, it offers a general idea.

Yes, that's right. And a little bit more elevated in years in which we're building plants. But what I would say is, as Jamie pointed out in the beginning, in terms of just our financial profile, with the opportunity set that we have being top to bottom east to west in the Delaware Basin is we've got a lot of opportunities that we look at, and it allows us to be a little bit more patient and diligent in picking the right lanes for us to allocate capital towards.

Our next question comes from Jackie Koletas from Goldman Sachs.

Just a little bit on that point on capital allocation. With higher operating cost inflation, how are you thinking about the cost reduction plan effort, the compression deployment and behind-the-meter power and the timing of potentially implementing those projects, especially balancing out potential spending on those growth opportunities that you mentioned?

So Jackie, we approach it this way. Regarding compression, you have the option to gradually introduce it. You might place an order today, but those compression units likely won't arrive for 50 to 60 weeks. It’s primarily a timing issue. If you need something urgently, within six months for a low-pressure connection, and don’t have existing compression to modify, you will likely need to lease from a compression service provider. Matt Wall, Trevor, and I have agreed to make deposits for additional compression that will come in '26 and '27. This strategy is very cost-effective compared to other options and offers better uptime. We’ve also seen improved reliability, and our company now has sufficient compression resources to maintain these units. Managing compression differs from a power plant since you must decide the size of the plant at the outset. We are also exploring options due to our desire to control power costs. We have been approached by external parties, particularly with new generation projects planned in Texas. Currently, we have a fixed price fixed block sourced from a retail electric provider, giving us time to manage and shield against any cost inflation impacting our bottom line. Our focus is on prudent management, as we have historically done. The initial benefits from the compression effort will likely become evident around '27, but those will be incremental.

Got it. I appreciate the color there. And then just as a follow-up, wondering if you could provide us an update just on your appetite for bolt-on M&A, how you're seeing valuations trending today? And if there are any other opportunities similar to Barilla Draw.

We will look at everything. I think our viewpoint is that overall multiples have gone up. I think recent deals prove that. I think we look at that in conjunction with where our stock price is, and we say, well, it's not really the right time to think about doing something aggressive on the M&A standpoint. And if we've got capital to deploy, we'd much prefer to go deploy it in building a new Kings Landing 2 plant or an acid gas injection well that would be a low single-digit multiple. And we've got literally all the conviction to go and get it to basically get it commercialized and done. So, I would say we are more focused on organic at this point. That is, of course, not to say that we will exclude looking at inorganic, but it would have to be incredibly compelling.

Our next question comes from Saumya Jain from UBS.

So, you've had a greater CapEx allocated towards Delaware North, especially Kings Landing versus Delaware South. But now with Birla draw contributions and ECCC pipeline under construction, do you see potential in further rolling out Delaware South more? I guess, could you expand on the different opportunities you're seeing in the North versus South longer term and how you're considering the CapEx split in the future?

I appreciate the question. The increased investment in Delaware North reflects the level of activity there and the current lack of infrastructure compared to other regions. The ECCC project really adds a new dimension to our business, as it allows us to transport sweet gas from New Mexico to Texas. While we have some capabilities for treating gas, our capacity for handling very sour gas is more restricted in South Texas. As New Mexico continues to be a hub of activity for our producers, that's where most of our capital will be focused. Eventually, we may need to build additional processing facilities in Texas, which would require more capital expenditure. We're going to adjust our investments based on what we observe from our producers and where opportunities arise.

Got it. You mentioned that producer development plans were delayed until 2026. Could you elaborate on what we should anticipate regarding producer activity in the latter half of the year and the main factors influencing that? Additionally, could you clarify how sensitive your growth outlook is to basin-level growth specifically?

Trevor, do you want to jump in on that?

Yes. I'll refer back to some comments that Jamie made earlier this year as we consider our position in the second quarter compared to the exit rate of $1.2 billion. With Kings Landing coming online, it is a major driver of both volume and earnings growth. We've observed a shift as producers evaluated their TIL schedules, and some uncertainty regarding the timing of Kings Landing has caused adjustments over the past couple of quarters. We're starting to notice significant developments in our Delaware North area, particularly in Carlsbad and around Kings Landing, as well as on the shelf. Jamie highlighted earlier that we're seeing substantial developments in Delaware South, especially in the Barilla Draw area, as we approach the end of 2025 and into 2026. In terms of basin-level growth, we include a page in our monthly investor presentation that tracks our performance back to 2021, showing that we've consistently outperformed overall basin-level growth, and we believe that trend will continue, especially with Kings Landing coming online. This situation is relatively unique for us compared to Kinetik, representing nearly 10% of our total processing capacity growth in just one quarter. While growth has been somewhat flat compared to overall basin growth, we expect our performance, which has been strong from 2021 to 2024, to rebound significantly.

And Saumya, this is Kris. Just hitting back on something Trevor hit on. Each customer is different on why they're delaying. Some of them are optimizing rig schedules. Some are testing reservoir properties. But the rock is still great rock, and we're excited about what's on the table in 2026. There's some large packages, and there's going to be some good development there. So again, each customer is different, and there's different reasons for the delays.

We currently have no further questions. So, I'd like to hand back to Jamie Welch for any further remarks.

Thank you, everyone, for your time this morning. We know it's a very busy time in the quarter, and we look forward to catching up with you soon. Thanks very much.

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.