On Friday, JPMorgan (NYSE:JPM) analyst Jeremy Tonet upgraded Kinetik Holdings Inc. (NASDAQ:KNTK) from Neutral to Overweight and increased the price target to $40 from $38. The analyst cited Kinetik's attractive asset positioning and the elimination of its dividend reinvestment plan (DRIP) as key factors contributing to a favorable near-term setup for the company.
Kinetik Holdings, a full-service midstream operator with a focus on the Delaware Basin, is known for its large processing positions in the Permian Basin, as well as its stakes in significant gas takeaway pipelines, such as the Permian Highway Pipeline and Gulf Coast Express, and the Shin Oak NGL pipeline. These assets provide clear downstream integration advantages, setting Kinetik apart from its small to mid-cap peers and enhancing its cash flow stability.
Since JPMorgan initiated coverage of Kinetik in 2022, the firm has been cautious, citing a relatively full valuation and the dilutive effects of the DRIP. However, Kinetik's outlook has improved, with expectations of low double-digit natural gas growth and low single-digit crude growth in 2024, anticipated to underpin strong EBITDA growth.
The Permian Basin's natural gas logistics needs are viewed as particularly attractive, with Kinetik well-positioned to benefit from this trend. The company's valuation has grown more appealing, with Permian growth leading to greater multiple compression compared to its peers. The conclusion of the DRIP, combined with lower capital expenditures and new leverage to top-tier New Mexico acreage, has improved Kinetik's risk/reward profile.
Kinetik's leverage ratio is expected to trend toward approximately 3.5x debt/EBITDA by the end of 2024, reducing the urgency to sell its stake in the Gulf Coast Express pipeline. Management has indicated a more opportunistic approach to asset sales, potentially after pipeline expansion to achieve a better sale multiple. However, not selling the asset is also considered a satisfactory outcome.
JPMorgan's analysis places Kinetik favorably on multiple metrics and notes that industry consolidation trends could present an upside risk to the company's shares. Kinetik could be an attractive acquisition target for larger midstream companies seeking to expand in the Permian. CEO Welch has expressed openness to high-value acquisition offers, given the company's premier positioning in the region. With these considerations, JPMorgan has revised its price target and rating for Kinetik Holdings.
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