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A Midstream Turf Battle in New Mexico

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The Daley Note: August 11, 2023

Midstream competition is heating up in the northern Delaware Basin, where Kinetik Holdings (KNTK) is building a new pipeline to extend its reach.

Earlier this year, Kinetik announced plans to construct a rich gas pipeline extension 20 miles north into Lea County, NM. Volumes will be gathered on KNTK’s G&P “super-system” in West Texas, comprised of the Raptor and Alpine High systems with a combined 2.0 Bcf/d of processing capacity across five gas processing complexes. According to KNTK, the expansion is backed by a long-term gathering and processing agreement with a large-cap counterparty that includes a significant minimum volume commitment (see map).

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East Daley has tracked Kinetik since the company went public in February 2022, combining the former Altus Midstream with BCP Raptor, the owner of EagleClaw Midstream. We were bullish on the merger, which created the largest pure-play midstream company in the Permian Basin. Since forming the company, Kinetik has added new pipelines to interconnect the Raptor and Alpine High systems.

The addition of front-end amine treating at all KNTK processing facilities has allowed KNTK to expand into New Mexico, where the produced gas in the area is “off-spec” due to high CO2 and H2S content.

Kinetik currently forecasts it will exit 2023 at flows of ~1.6 Bcf/d on its Delaware super-system, which is in line with East Daley’s forecast in Energy Data Studio. Assuming the new 20-inch pipe into New Mexico will bring 200-250 MMcf/d onto the system, KNTK is well situated to handle additional volumes through spare processing capacity.

The additional volumes and margin from treating fees will add to Kinetik’s bottom line. Based on the KNTK Financial Blueprint, we estimate the company would see a 5% lift to Adj. EBITDA in the Midstream Logistics segment and a 3% increase to total EBITDA from the new project, assuming average volumes of 225 MMcf/d.

As a new G&P entrant into southern Lea County, Kinetik could siphon volumes from established G&P systems in the area. Given its location, the pipeline extension will most likely impact volumes from Targa’s (TRGP) Lucid system and EnLink Midstream’s (ENLC) Delaware system. Both gather substantial volumes from a diverse group of operators in southern Lea County, NM. - James Taylor


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