Investing in top-tier midstream energy stocks has been a favored strategy on Wall Street, offering a level of predictability in revenue and cash flows compared to oil exploration and production counterparts. Among these, Kinetik Holdings (NYSE:KNTK), a notable player in the natural gas sector, stands out with a dividend yield of 7.7% and a 16.7% increase in its stock value in 2024. Let’s delve into whether Kinetik remains a promising investment at its current valuation.
An Overview of Kinetik Holdings Stock
Kinetik Holdings (NYSE:KNTK), valued at $5.87 billion by market cap, is based in Houston and specializes in midstream operations connecting the Permian Basin to the Gulf Coast, specifically in the Delaware Basin. Its services include gathering, transportation, compression, processing, and treating of natural gas, natural gas liquids, crude oil, and water. The company also holds equity interests in four long-term pipelines serving as vital conduits for energy products from the Permian Basin to the Gulf Coast.
Kinetik dominates as the leading gas processor in the Delaware Basin, boasting significant processing capacity and an extensive pipeline network spanning over 1,400 miles. With secured long-term contracts for midstream services, it holds a pivotal position in gas, crude, and water transportation services in the Delaware Basin and ranks among the top natural gas processors in the broader Permian Basin.
Despite trailing considerably since its IPO in May 2017 and currently trading 62% below its all-time highs, Kinetik exhibits potential for resurgence in the mid-cap energy sector.
Performance Highlights from Q4
In Q4 of 2023, Kinetik reported adjusted EBITDA of $228 million, contributing to a robust figure of $838.8 million over the last 12 months. Its distributable cash flow amounted to $149.7 million in Q4, with dividends paid out totaling $44.73 million, reflecting a conservative payout ratio of just over 30%. This financial position allows Kinetik ample flexibility to invest in growth initiatives, deleverage, and pursue strategic acquisitions.
Despite economic uncertainties in 2023, Kinetik achieved record volume growth, particularly in processed gas volumes, which surged by 22%. The company has significantly enhanced its gas-treating capabilities at processing facilities over the past year.
Looking ahead, Kinetik forecasts continued capital expenditure between $125 million and $165 million in 2024, alongside EBITDA expectations ranging from $905 million to $960 million. These projections suggest an 11% year-over-year growth rate in EBITDA, underpinned by anticipated low double-digit growth in gas processed volumes and resilient earnings from fixed-fee contracts, which are expected to contribute 90% of gross profit.
Target Price and Analyst Sentiment
Among the 12 analysts covering KNTK stock, five recommend a “strong buy,” one suggests a “moderate buy,” and six advocate a “hold.” The average target price for KNTK stock stands at $38.80, almost mirroring its current trading price. Notably, RBC initiated coverage on Kinetik with an “Outperform” rating and a $40 price target, anticipating approximately 3% upside potential. RBC analyst Elvira Scotto highlighted Kinetik’s promising prospects for free cash flow growth in the near term and suggested that its focus on the Permian Basin could attract acquisition interest amid industry consolidation trends.
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