Jordan Blum, editorial director, Hart Energy: We are here at SUPER DUG Conference & Expo in Fort Worth, Texas. I'm joined by Jamie Welch, the president and CEO of Kinetik. I think you're now the top Permian pure play midstream company. Is that accurate?
Jamie Welch, president and CEO, Kinetik: That's quite a mouthful, right?
JB: I love the alliteration.
JW: You're very flattering, but I believe you may be true with your facts.
JB: So we've got some new news with you all [Kinetik]. You all just acquired Durango Permian, the gathering system in New Mexico, mostly in New Mexico. In partnership with that, you all are selling your 16% stake in the Gulf Coast Express Pipeline to help pay for that. Can I get you to kind of take me through the rationale?
JW: Jordan, first off, thanks for having me. The Durango transaction we announced last Thursday [May 9],[we are] incredibly excited by this. For us, it is a further beachhead in the northern Delaware. We first put our toe in the water with what we call the Pegasus Trunk line, which takes us up into the heart of Lea County, Mexico, which we put into service January of this year. And we really see this magnetic force that's drawing us up there in large part based on all our customers of which we have like 30. We try to work out a really smart consideration structure for the transaction. So we're going to issue $450 million of equity for a start, and that's in two tranches. We end up with $150 million being issued at closing, which should be around sometime in June of this year and then another $300 million of July 1 of next year.
And then we have some cash. To come up with cash, one of the ideas was the GCX, so the Gulf Coast Express Pipeline. [It’s a] great pipeline and we're a 16% owner of it. We don't operate it. We're not a shipper on it. It's very different than our other intrastate pipeline investment, which is Permian Highway Pipeline, where we are the majority owner and we are a foundation shipper on that pipeline. So we looked at this and said, ‘this isn't really core.’ [It’s a] great asset, don't get me wrong, it has a really attractive valuation. A sale to another partner says it all as to obviously what the partners think about the quality of the asset. The valuation was too good to ignore. And so this is the age old we sold high and we bought or invested low. And that creates massive value accretion for the entire Kinetik complex. So whether you're a shareholder, a bondholder or a lender, you're going to look at this and say, ‘Wow, this really is pretty transformative for Kinetik.’
JB: Great. So just to go back a little bit, Kinetik is a little over two years old now, but obviously you existed before.
JW: It's not the household name you're thinking about?
JB: It’s getting there. [Kinetik was] formed through the combination of EagleClaw and Altus Midstream, you came on the EagleClaw side of things. Can I just get your take on how everything went down and just the really rapid growth you all have had?
JW: So you are right. Obviously, we had EagleClaw, you had Caprock, you had Pinnacle and you had Altus Midstream. I think our viewpoint was, it was a new day, a new name really to start to I think recognize the future for the company and our overall position, central Southern Reeves [County, Texas] as I said it’s a really interesting balance between heavily weighted on the oil directed drilling side, more on the sort of Caprock, EagleClaw, Pinnacle, and on the gas side Alpine High. Because at the end of the day, Alpine High is a significant potential gas play. Gas prices actually get out of the cellar then this has tremendous, I would say tremendous vig and lift as it relates to volumes. So the Kinetik name was something we came up and we really thought it sort of embodied the personification of the company. I mean, we have done so much as you've kindly pointed out, and I think we see our future as, ‘you've got to make hay while the sun shines’ and we see this is our time to shine. And we've really been very, I would say thoughtful, intentional, but very busy in the context of just growing our footprint.
JB: Great. So I know obviously natural gas prices are weak right now and you're bullish long-term. In terms of gas and oil, what do you see as the biggest takeaway on challenges in the Permian overall right now and where?
JW: Processing capacity for the longest period of time, pipeline capacity has…, don't we talk about it every month of every year. We talk about pipeline capacity. It's like we have nothing else to talk about. So let's talk about an oldie but a goodie. It's sort of like the solid gold topic du jour. Pricing capacity for a long period of time, it was very tight. We were fortunate that we had surplus with the merger with Altus, and therefore we really went about on a very accelerated basis to sell it out. Processing, in this last quarter, I think you've seen a number of plants being completed probably more in this quarter than any other year for, I want to say at least a handful of years, if not longer. And therefore that's becoming less of the constraint. The constraint now is blending treating, so as it relates to CO2, H2S and other inerts, but particularly nitrogen.
And I think this is now the newfound bottleneck and that is very real. I think one of the things we were fortunate to do, whether it was just good luck or otherwise, was to actually undertake as part of the merger to create Kinetik and we said, ‘We can see in our future that blending is going to become a bigger deal.’ Therefore we did this system-wide front end aiming treating, which we've now completed in April with papers, Ben. And so I think I just finished my session saying ‘we've seen CO2 5%, we've seen 2% nitrogen, and we've been able to blend it and treat it.’ And that's really important in the context of then making sure you've got egress on the downstream, both the NGL side and the residue side. So I think that's where your real issue is. And we'll always talk about pipelines because we've got nothing else better to do.
JB: Great. Thanks again so much for being here with us at SUPER DUG. We really appreciate it.
JW: Jordan, I am very, very thankful. So thank you very much.
JB: To read and watch more, please visit online at hartenergy.com.
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