Kinetik Holdings (KNTK -1.10%) is a relatively new company. It formed earlier this year when Altus Midstream combined with BCP Raptor Holdco, the parent company of Eagle Claw Midstream. The combination created a larger-scale midstream company focused on the oil-rich Delaware Basin.
Here's a closer look at the company and why dividend investors might want to put it on their watchlist.
Drilling down into Kinetik Holdings
Kinetik Holdings operates a diversified midstream business in the Delaware Basin. The company has extensive natural gas, crude oil, and water gathering infrastructure and is the largest natural gas processor in the region, with 2 billion cubic feet per day of capacity. It also owns interests in four key pipelines from the Permian Basin to the Gulf Coast:
- Permian Highway (natural gas)
- Gulf Coast Express (natural gas)
- Shin Oak (natural gas liquids)
- EPIC (crude oil)
The midstream logistics business supplies about 65% of its earnings, while its pipeline transportation segment provides the other 35%.
The midstream company's assets produce stable income. Roughly 85% of its earnings come from fee-based agreements. That provides Kinetik Holdings with steady cash flow to pay its dividend, which currently yields 8.2%. The company covered its dividend payment with cash flow by a comfortable 1.5 times in the first quarter, enabling it to retain cash to strengthen its balance sheet and fund expansion projects. Many of its large institutional investors participated in the company's dividend reinvestment program, allowing it to retain even more cash for balance sheet improvement and expansion.
What's ahead for Kinetik Holdings
Kinetik Holdings has several ways to grow in the future. It has spare processing capacity, enabling it to capture higher volumes as they materialize. In addition, the company and its partners are working on several projects to expand pipeline capacity and support the production growth of their customers.
Kinetik and its partners, Kinder Morgan (KMI -0.41%) and ExxonMobil (XOM -0.79%), recently made a final investment decision (FID) to expand the Permian Highway Pipeline. Kinder Morgan operates the pipeline and expects to complete the expansion by next November, adding about 550 million cubic feet per day of capacity. The project will consist primarily of adding new compression, making it a low-cost and high-return expansion opportunity. Given its 53.3% share, Kinetik will fund the majority of the capital to complete the project, entitling it to receive a similar percentage of the associated incremental cash flow. Meanwhile, Kinder Morgan and Exxon will fund the remainder based on their 26.7% and 20% respective interests in the pipeline.
Kinetik is also a partner on another Kinder Morgan-operated gas pipeline, Gulf Coast Express, which is evaluating a similar expansion. That company is exploring a potential 570 million cubic feet per day capacity expansion, which it's targeting to finish by the end of next year if the partners secure enough customer commitments. Kinetik owns a 16% interest in that pipeline, meaning it would fund that portion of the capital commitment while receiving a similar share of the associated incremental income.
Meanwhile, there's the potential for volume growth on the Shin Oak Pipeline operated by Enterprise Products Partners (EPD 0.81%). That pipeline's initial phase started service in early 2019, suppling NGLs from the Permian Basin to Enterprise's Mont Belvieu hub. Kinetik's predecessor Altus acquired a stake in that pipeline later that year. Enterprise finished the project near the end of 2019, doubling its capacity to 550,000 barrels per day, leaving room for future volume growth.
Those three expansion opportunities represent significant growth potential for Kinetik. The company estimates that it could grow its pipeline transportation earnings by more than 25% if all three come to fruition.
In addition, the company has ample spare processing capacity to support growing volumes as production increases in the Delaware Basin. That could supply it with even more incremental earnings in the future with a minimal capital investment needed to handle those volumes.
Because of that embedded growth potential, Kinetik believes it can start increasing its dividend by 5% annually beginning next year. Meanwhile, it sees its balance sheet steadily improving as its earnings expand and it reduces debt. Kinetik sees its leverage ratio achieving its 3.5 times target next year, positioning it to achieve an investment grade credit rating, enabling it to borrow money at more attractive terms.
Becoming an attractive option for income-seeking investors
Kinetik Holdings offers investors a high-yielding dividend. That payout is becoming less risky as the company and its partners move forward with needle-moving expansion projects, and Kinetik makes progress on improving its balance sheet. However, more risk-averse investors might want to put Kintek on their watch list until it achieves its leverage target and puts its payout on an even firmer foundation.