8-K: Kinetik Holdings Completes Acquisition of Durango Midstream, Enhancing Delaware Basin Footprint

Kinetik Holdings Inc. finalized its acquisition of Durango Permian LLC, funded by the divestiture of its Gulf Coast Express pipeline stake, significantly expanding its Delaware Basin operations.

Summary

• Kinetik Holdings Inc. has completed the acquisition of Durango Permian LLC for approximately $765 million.
• The purchase price included $315 million in cash, 3.8 million common units in Kinetik Holdings LP (OpCo), and an equivalent number of Class C common stock shares at closing.
• An additional 7.7 million OpCo units and Class C common stock shares will be issued on July 1, 2025.
• Durango is also eligible for a $75 million earnout contingent on the Kings Landing gas processing complex becoming operational, subject to reductions based on actual capital costs.
• The acquisition was funded by the proceeds from the sale of Kinetik's 16% stake in the Gulf Coast Express pipeline.
• The company's leverage ratio is now 3.4 times following the closing of the acquisition and divestiture.
• Kinetik will update its 2024 guidance with its second quarter 2024 financial results release.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to the completion of a strategic acquisition that enhances Kinetik's market position and reduces leverage. The company is also providing liquidity options to the seller. There are some risks and uncertainties, but the overall tone is optimistic.

Positives

• The acquisition significantly enhances Kinetik's footprint in the Delaware Basin.
• The transaction is immediately deleveraging, reducing Kinetik's leverage ratio to 3.4 times.
• Durango will have a board observer seat, providing valuable insight and alignment.
• The registration rights agreement provides Durango with liquidity options for their shares.

Negatives

• The $75 million earnout is contingent on the Kings Landing project, which introduces uncertainty.
• Durango is subject to a lock-up period of approximately one year, restricting immediate sales of their shares.

Risks

• The Kings Landing project's completion and associated costs could impact the final earnout payment.
• The lock-up period restricts Durango's ability to sell shares for approximately one year.
• The company's updated 2024 guidance will be released with the second quarter results, which introduces uncertainty.

Future Outlook

Kinetik will update its 2024 guidance with its second quarter 2024 financial results release, reflecting the impact of the Durango acquisition and GCX divestiture.

Management Comments

• Kinetik has significantly enhanced its overall Delaware Basin wide footprint.
• The GCX divestiture and Durango acquisition are immediately deleveraging.

Industry Context

This acquisition reflects a trend of consolidation in the midstream sector, particularly in the Permian Basin, as companies seek to expand their infrastructure and market presence. Kinetik's move to divest its stake in GCX to fund this acquisition is a strategic shift towards focusing on its core operations in the Delaware Basin.

Comparison to Industry Standards

• The acquisition of Durango Midstream for $765 million is a significant transaction in the midstream sector, comparable to other recent acquisitions in the Permian Basin.
• The leverage ratio of 3.4 times is within the range of acceptable leverage for midstream companies, but it will be important to monitor how this evolves.
• The lock-up period of approximately one year is a standard practice in such transactions to ensure stability and prevent immediate market disruption.
• The registration rights agreement is a common feature in acquisitions involving private equity sellers, allowing them to monetize their investment over time.

Stakeholder Impact

• Shareholders will benefit from the enhanced market position and reduced leverage.
• Employees may see new opportunities as the company expands its operations.
• Customers will have access to a broader range of services in the Delaware Basin.
• Suppliers may see increased demand for their products and services.

Next Steps

• Kinetik will file a registration statement within 180 days for the resale of Class A common stock.
• Kinetik will update its 2024 guidance with its second quarter 2024 financial results release.
• The Kings Landing project will be monitored for its impact on the earnout payment.

Key Dates

Keywords

acquisition, Durango Midstream, Kinetik Holdings, Delaware Basin, midstream, registration rights, underwritten offering, leverage ratio, Gulf Coast Express, Kings Landing