Investing in quality midstream energy stocks is a proven strategy on Wall Street. One major benefit of investing in midstream companies is that revenue and cash flows are predictable compared to oil exploration and production companies. The majority of a midstream company's revenue is typically fee-based, making them relatively immune to fluctuations in commodity prices.
Here is one standout midstream play from the natural gas space, Kinetik Holdings (KNTK), that also offers shareholders a tasty dividend yield of 7.7%. Up 16.7% so far in 2024, let's see if the stock is still a good buy at current levels.
An Overview of Kinetik Holdings Stock
Valued at $5.87 billion by market cap, Houston-based Kinetik Holdings (KNTK) is a pure-play, Permian-to-Gulf Coast midstream company operating in the Delaware Basin. It provides gathering, transportation, compression, processing, and treating services for companies that produce natural gas (NGK24), natural gas liquids (NGLs), crude oil (CLK24), and water. Moreover, it has equity interests in four long-term contracted pipelines transporting natural gas, NGLs, and crude oil from the Permian Basin to the Gulf Coast.
Kinetik is the leading gas processor in the Delaware Basin, with 2 billion cubic feet per day of capacity and over 1,400 miles of operated pipelines. It has secured long-term contracts for gas, crude, and water midstream services from multiple providers in the Delaware Basin. In terms of processing capacity, Kinetik is the third-largest natural gas processor in the Delaware Basin, and the fourth-largest across the Permian Basin.
Trading 62% below all-time highs, Kinetik is a longer-term laggard on the charts, having trailed the market significantly since its IPO in May 2017. Let’s see if the mid-cap energy stock can continue to stage a comeback in 2024.
How Did Kinetik Holdings Perform in Q4?
In Q4 of 2023, Kinetik reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $228 million, while the figure is much higher at $838.8 million in the last 12 months.
Its distributable cash flow stood at $149.7 million in Q4, and it paid shareholders dividends of $44.73 million, indicating a payout ratio of just over 30%. So, Kinetik has enough room to allocate capital towards growth projects, reduce debt, and target accretive acquisitions.
Despite an uncertain macro environment in 2023, Kinetik reported record volume growth, as processed gas volumes surged by 22%. In the last year, the company has meaningfully increased gas treating capabilities at its processing facilities.
In 2023, Kinetik invested $531.2 million in capital expenditures, which was within its guidance range. With the completion of its 2023 growth projects and capital program, Kinetik expects to increase free cash flow by $450 million year-over-year. A widening cash flow base may translate to higher dividend payouts in the next 12 months. It currently pays shareholders a quarterly dividend of $0.75 per share, indicating a yield of 7.72%.
In 2024, Kinetik forecasts capital expenditures between $125 million and $165 million, with EBITDA between $905 million and $960 million. The midpoint EBITDA guidance indicates a growth rate of 11% year over year.
Kinetik expects low double-digit growth of gas processed volumes this year. It also expects 90% of gross profit from fixed-fee contracts showcasing the resiliency of its earnings.
What Is the Target Price for KNTK Stock?
Out of the 12 analysts covering KNTK stock, five recommend “strong buy,” one recommends “moderate buy,” and six recommend “hold.” The average target price for KNTK stock is $38.80, which is nearly flat with its current trading price. The Street-high target sits just overhead at $41.
Notably, RBC just started coverage of Kinetik at “Outperform” on Monday with a $40 price target, indicating roughly 3% expected upside. In a note to clients, RBC analyst Elvira Scotto said KNTK looks well-positioned for meaningful free cash flow growth this year - and given the consolidation trend among midstream players, RBC thinks the Permian-focused company could also be a logical acquisition target, as well.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
