Waha's Worst Nightmare, Kinetik's Best Quarter: The Long Game Begins
Record adjusted EBITDA meets a contract renaissance in New Mexico, setting the stage for a 2027 rebound.
KNTK · Earnings Call · 2026-05-07
Section 1: The Quarter That Was: Record Earnings Against an Unthinkable Backdrop
Despite the unprecedented negative pricing at Waha, Kinetik's midstream logistics segment delivered a record $179 million in adjusted EBITDA, up 12% year-over-year on essentially flat volumes. CFO Trevor Howard explained the mechanism: “Spread-based marketing gains have more than offset approximately 170 million cubic feet per day of Waha price-related production shut-ins, converting what would have been a volume headwind into a margin tailwind.” — Trevor Howard, Senior Vice President and Chief Financial Officer · 2026-05-07 That offset was powered by the Gulf Coast takeaway capacity secured late last year and the marketing gains from wider basis differentials. The company has hedged roughly 50% of its transport spread exposure for 2026, providing a cushion against the new lows that Waha has tested. Jamie Welch noted with a mix of disbelief and resolve: “It is interesting that we sit here in May and we have only had Waha being in positive territory-greater than zero-for 13 days; six days were attributed to Winter Storm Fern. Excluding Winter Storm Fern, seven days, and we are now in the fifth month of the year.” — Jamie W. Welch, President and Chief Executive Officer · 2026-05-07 This operational resilience, however, does not come without cost. The company now forecasts low- to mid-single-digit volume growth for the year, reflecting an average of 220 MMcfe/d of curtailments—up from a prior assumption of 100 MMcfe/d. "In conclusion, the reduction in volume growth expectations is driven by our assumptions on price-related shut-ins which are temporary in nature," Trevor said.Section 2: The New Mexico Renaissance: Contracts That Reshape the Future
Beyond the quarter, the most impactful news lies in the commercial front. Kinetik completed a significant contract amendment with a large existing customer in New Mexico, expanding dedicated acreage by roughly 25% and extending terms through 2039. As a result, approximately 75% of legacy Durango gas processing volumes have been amended in the past four months. This marks a strategic shift toward sour conversion and a potential King's Landing 2 expansion. Jamie Welch emphasized the importance of the sour gas project: "We have received all required approvals from the BLM and the NMOCD, allowing us to proceed with the AGI and sour gas conversion project for the full 20 million cubic feet per day of Total Acid Gas capacity." The project, when complete, will enable the system to handle elevated H2S and CO2 levels across all three Delaware North complexes, with total operational TAG capacity of 26.5 MMcfe/d. The company is also capitalizing on in-basin power demand with a zero-capEx interconnection to the Pecos Power Plant. “We signed a zero CapEx interconnection with Pecos Power, connecting our Delaware Link residue gas pipeline to the Pecos Power Plant in Reeves County,” — Jamie W. Welch, President and Chief Executive Officer · 2026-05-07 Jamie noted. This is a template for monetizing existing infrastructure without new capital. These actions are not just about the present. As Jamie said, "The message from customers has been clear. Incremental sour gas treating and processing capacity is a necessity to support their development plans in New Mexico." The commercial momentum is building toward an FID on King's Landing 2, with a 2026 timeline possible.Section 3: The 2027 Setup: Deferred Revenue, Higher PDP Base, and the Long Game
Perhaps the most compelling narrative is the setup for 2027. The 220 MMcfe/d of curtailments are not lost volumes but deferred revenue. Jamie explained: “It is deferred revenue. That volume will show up, and in the meantime, we have found a bunch of value in the form of these marketing revenues that have ensured we met our financial guidance and created a net windfall for our stakeholders.” — Jamie W. Welch, President and Chief Executive Officer · 2026-05-07 The higher PDP base entering 2027, combined with NGL contract resets and the full-year benefit of the sour gas project, sets the stage for a powerful rebound. Trevor added: "It makes it easier to grow in 2027 because the PDP base starting off in January 2027 will be higher." This aligns with the company's long-term growth framework, which has historically targeted a 10% EBITDA CAGR. In a prior quarter, Jamie had stated: “We have a trajectory that is on the incline over the course of this year and towards the back end of the year, the coverage ratio is right around 1.5x. And while we won't talk specifically about 2027, we think the setup is tremendous.” — Jamie Welch, President and Chief Executive Officer · 2026-02-26 The company's confidence is also reflected in its capital allocation. With leverage at 3.9x and a healthy free cash flow profile, Kinetik is funding its growth without compromising shareholder returns. The record quarter came despite a GAAP revenue decline of 8% year-over-year, a reminder that adjusted EBITDA and GAAP numbers can diverge significantly in a commodity-hedged business. Revenue fell to $410M, but free cash flow swung up 282% quarter-over-quarter to $77M, underscoring the cash-generative nature of the marketing gains.Jamie's enthusiasm is palpable, but it is grounded in the concrete steps taken: contract extensions, sour-gas capacity, and a visible path to Gulf Coast pricing. As new egress capacity comes online—over 5 Bcf/d by early 2027 and another 6 Bcf/d by 2028-2029—the Permian's gas will find a home, and Kinetik's PDP base will be ready to capitalize. In conclusion, Kinetik's first quarter of 2026 was a masterclass in managing through adversity. The company turned a negative Waha environment into a record quarter, while simultaneously reshaping its portfolio for the future. The year ahead may still be choppy, but the foundation for 2027 is being laid with precision.The sun, the moon, and the stars are aligning for a very strong and positive year post-2026.