Kinetik Holdings Inc

NYSE:KNTK

Earnings Call Analysis

Kinetik Revamps Strategy with Strategic Investments

In the second quarter, Kinetik achieved robust growth with an adjusted EBITDA of $234 million, marking a 13% increase year-over-year, driven by higher gas volumes and improved commodity margins. Strategic investments of approximately $1 billion in the Delaware Basin, including the Durango acquisition and Lea County amendments, are expected to bolster their position, projecting 14% year-over-year growth in 2024 EBITDA to a range of $940 million to $980 million. The company also anticipates a significant uptick in gas processing volumes, nearly doubling with the operational Kings Landing Cryo facility by April next year【4:0†source】【4:1†source】.

Kinetik's Strategic Growth Moves

In the recent earnings call, Kinetik's leadership detailed significant strategic transactions that are set to redefine its business landscape. The successful acquisition of Durango and the divestiture of GCX represent pivotal moments for the company, allowing expansion into the northern Delaware Basin. With nearly 20% of volumes now sourced from New Mexico—a region previously untouched by Kinetik—a robust opportunity for growth is developing as the company ramps up its capacity.

Strong Financial Performance

Kinetik reported impressive financial figures for the second quarter, posting an adjusted EBITDA of $234 million, a year-over-year increase of 13%. The positive trend is attributed to rising processed gas volumes and improved commodity margins. Additionally, the company's distributable cash flow reached $163 million, further highlighting its strong cash generation capabilities. Free cash flow also remained healthy, amounting to $105 million for the quarter.

Enhanced 2024 Guidance

The strong performance has prompted Kinetik to revise its full-year 2024 guidance upwards. The company expects adjusted EBITDA to fall within the range of $940 million to $980 million, an increase of approximately 3% from previous projections. This implies over 14% year-over-year growth at the midpoint. Key contributors to this optimistic forecast include continued growth in processed gas volumes—projected to increase in the high teens—especially following the integration of Durango's production.

Investment in Infrastructure

As part of its growth strategy, Kinetik plans to increase capital expenditures for 2024 to between $260 million and $300 million, an increase largely attributed to the Durango acquisition. This investment includes the construction of the Kings Landing I processing facility and preparatory work for Kings Landing II, aimed at doubling processing capacity. This proactive capital allocation ensures Kinetik can meet the anticipated demand from producers in New Mexico.

Market Conditions and Cash Flow Strategy

The company is well-positioned to navigate the variable commodity pricing landscape, with a revised commodity outlook suggesting an average of $77 per barrel for WTI oil, $2 per MMBtu for natural gas, and $0.60 per gallon for natural gas liquids. Approximately 13% of Kinetik's expected gross profit in 2024 will be influenced by these commodity prices. Importantly, Kinetik emphasizes maintaining a focus on generating free cash flow, projecting a 10% increase in free cash flow per share post-Durango acquisition by the second half of 2025.

Excitement for New Mexico Opportunities

Kinetik executives expressed enthusiasm about the growth potential in New Mexico, highlighting strong demand from smaller producers who require processing and treating solutions. Enhanced service offerings and capacity expansion in this region are anticipated to drive additional revenues and profit. The next phase for Kinetik is to leverage these projects, ensuring they align with organic growth and meet the market's needs effectively.

Conclusion: A Promising Outlook

With strategic acquisitions, robust financial performance, and a clear focus on capital allocation, Kinetik is positioned for substantial growth. Investors can anticipate a strong trajectory for revenue and profitability supported by increased processing capabilities and a commitment to improving cash flow. The management team’s confident outlook reflects their belief in Kinetik's ability to capitalize on emerging opportunities, particularly in areas like New Mexico.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. Thank you for attending today's Kinetik's Second Quarter 2024 Results Call. My name is Jennifer, and I'll be your moderator today. [Operator Instructions]

I would now like to pass the conference over to Maddie Wagner, Director of Investor Relations. Maddie, please proceed.

[Maddie Wagner, executive]

Thank you. Good morning, and welcome to Kinetik's Second Quarter 2024 Earnings Conference Call. Our speakers today are Jamie Welch, our President and Chief Executive Officer; and Trevor Howard, our Chief Financial Officer. Other members of our senior management team are also in attendance for this morning's call.

The press release we issued yesterday, the slide presentation and access to the webcast for today's call are available at www.kinetik.com.

Before we begin, I would like to remind all listeners that our remarks, including the question-and-answer section, will provide forward-looking statements and actual results could differ from what is described in these statements.

These statements are not guarantees of future performance and involve a number of risks and assumptions. We may also provide certain performance measures that do not conform to U.S. GAAP. We've provided schedules that reconcile these non-GAAP measures as part of our earnings press release. After our prepared remarks, we will open the call to Q&A.

With that, I will turn the call over to Jamie.

[Jamie Welch, executive]

Thank you, Maddie. Good morning, everyone, and thank you for joining our call today. I am pleased to share this past quarter's results with you this morning, as well as provide an update on integration activities following the Durango acquisition.

First, I would like to thank our team for their tremendous efforts over the past few months as we closed both the GCX divestiture and Durango acquisition, began integrating Durango personnel and assets. Battled the summer heat in the Permian and recovered from Hurricane Beryl in Houston. The team has done a fantastic job. So thank you.

In May, we announced several highly strategic transactions, expanding our footprint into the northern Delaware Basin, diversifying our geographic footprint and customer base, strengthening our balance sheet and ultimately advancing Kinetik's long-term strategic vision.

At the beginning of June, we closed the GCX divestiture, and at the end of June, we closed the Durango acquisition, representing the 2 largest transactions since our merger in 2022. These announcements quickly followed the in-service of our organic gathering expansion into Lea County at the beginning of the first quarter.

So for context, we had zero operations in New Mexico Delaware Basin a year ago, and today, nearly 20% of our volumes are sourced from New Mexico. As I've mentioned over the past few months, since announcing these deals, producers are very excited that Kinetik has expanded north and is now investing the much-needed capital to keep up with producers' demand for treating and processing.

The commercial team has been highly active with both current and prospective customers in New Mexico, and the growth opportunities we see are plentiful. As such, we have sanctioned pre-FID work scope and long-lead critical path items for Kings Landing II, which would double the processing capacity at the Kings Landing processing complex. We have also advanced our subsurface and permitting work streams for an acid gas injection well that enables an important treating solution for natural gas containing high levels of H2S and CO2 at Kings Landing.

By undertaking these scopes of work today, we will accelerate the timeline from formal FID to in-service by nearly 2 quarters. This is a significant new development for our northern Delaware business and the customers that we serve in the region.

Announced alongside Durango in May was our 15-year low pressure and high pressure gathering and processing agreement with a large existing customer with acreage in Eddy County that offset the Durango system.

More recently, Kinetik expanded gathering, treating, and processing services with one of our largest customers in Lea County. This amendment, which will go into effect in the fourth quarter of this year, increases the existing NVC and expands overall margin.

The Durango acquisition, the new Lea County amendment, and the previously announced long-term gas gathering and processing agreement in Eddy County represents approximately $1 billion of strategic investment at a low to mid-single digit adjusted EBITDA multiple and significantly enhances our position across the entire Delaware Basin.

In May, we developed a 100-day plan to close and integrate Durango's assets and personnel. I am very pleased to report that the transition has been seamless. We have already identified several process and system improvements that have begun generating value, and we have developed a robust integration plan that includes preventative maintenance, facility upgrades and capacity expansions to existing infrastructure at the Dagger Draw processing complex.

Following closing, we immediately took over project management responsibilities for all growth and maintenance capital projects. Construction is progressing well on the 200 million cubic feet per day Kings Landing I and that remains on schedule with an expected in-service date in April of next year. We are also mid-construction on a 20 inch pipeline running across the Durango system that will provide connectivity to Kings Landing upon in-service and greatly improve system hydraulics.

Additionally, we began deferred maintenance projects to elevate operations to Kinetik's safety and environmental standards. We have also welcomed over 70 talented employees to the Kinetik team. The feedback we have received from new employees has been positive, and they are enjoying the function-based structure and management of our operations team.

Turning to our results. In the second quarter, we processed gas volumes of 1.58 billion cubic feet per day, representing 7% growth year-over-year despite wellhead volume curtailments in response to Waha Hub pricing, which averaged approximately 140 million cubic feet per day.

Second quarter adjusted EBITDA was over $234 million, a 13% increase year-over-year, reflecting new volumes from the NVC-backed agreements in Lea County and improved commodity margins, as well as contributions from the expansion of PHP and Delaware Link. This was partially offset by price related gas volume curtailments and only 2 months of contribution from GCX.

So for context, if we closed Durango contemporaneously with the sale of GCX, Kinetik's second quarter adjusted EBITDA would increase to almost $238 million. With the successful completion of the Durango and GCX transactions, we are revising upwards our prior 2024 guidance to reflect the underlying strength of our business, as well as the impacts of the transactions. Trevor will discuss this in more detail momentarily.

I'm incredibly impressed by our team's focus and execution over the past few months. Their dedication and attention to detail allowed for both transactions to close on time, and has resulted in a swift integration process.

And now with that, I'd like to hand the call over to Trevor.

[Trevor Howard, executive]

Thanks, Jamie. In the second quarter, we reported adjusted EBITDA of $234 million. For the quarter, we generated distributable cash flow of $163 million and free cash flow was $105 million.

Looking at our segment results, our Midstream Logistics segment generated an adjusted EBITDA of $148 million in the quarter, up 7% year-over-year, largely driven by improved commodity margins, increased processed gas volumes, and continued marketing benefit on our PHP capacity despite the wellhead volume curtailments that persisted throughout the quarter.

Shifting to our Pipeline Transportation segment, we generated an adjusted EBITDA of $94 million, up 25% year-over-year. This increase was driven by contributions from the PHP expansion and Delaware Link and with only 2 months of contributions from GCX. Total capital expenditures for the quarter were $38 million. Our leverage ratio for our credit agreement stands at 3.4x below our leverage target of 3.5x.

As Jamie mentioned earlier, we are revising upwards both our 2024 adjusted EBITDA and capital expenditures guidance to reflect earnings outperformance throughout the first half of the year and the successful completion of the Durango acquisition and GCX divestiture. We now estimate full year 2024 adjusted EBITDA in the range of $940 million to $980 million, a 3% increase at the midpoint versus the previous guidance arrangement point and implies over 14% growth year-over-year at the midpoint.

Specifically, within the Midstream Logistics segment, we now expect processed gas volume growth in the high teens. Our new growth expectations are inclusive of 6 months of Durango's existing business, which includes approximately 200 million cubic feet per day of processed gas volumes from the Maljamar and Dagger Draw facilities. We expect the existing Durango volume to nearly double with the in-service of the 200 million cubic feet per day Kings Landing Cryo in April of next year.

Additionally, the Lea County NVC increase in margin expansion for gathering, treating, and processing will contractually begin in November. Our pipeline transportation segment will no longer reflect contributions from GCX following the divestiture. However, we expect this segment will continue to experience strong year-over-year growth throughout the remainder of the year, with the full year benefits from Delaware Link and the PHP expansion.

We have modestly updated our commodity outlook for the remainder of the year. Our revised guidance assumes approximately $77 per barrel for WTI, $2 per MMBtu for natural gas at the Houston Ship Channel hub, and $0.60 per gallon for Natural Gas Liquids.

Today approximately 13% of our remaining 2024 expected gross profit is directly influenced by commodity prices, which is primarily associated with Kinetik's equity volumes. Currently, our direct commodity linked exposure is sourced from the following components: Approximately 30% natural gas or ethane, 30% propane and butane, and 40% crude.

As we mentioned during our Durango acquisition announcement call, with certain provisions of some of the Durango contracts, we retain ownership of the condensate. Therefore, WTI will represent a greater contribution of our direct commodity linked gross profit going forward.

Turning to our capital expenditures guidance. We now expect capital expenditures to be between $260 million to $300 million for the full year. This increase reflects capital for the construction of Kings Landing I, pre-FID work for Kings Landing II and an associated acid gas injection well, the new and amended long-term gathering and processing agreements in Eddy and Lea Counties and capital for integration and growth and maintenance costs associated with the existing Durango business.

For context, roughly $100 million of the guidance increase is capital associated with Durango. The remainder of the increase is driven by new projects in New Mexico that have been announced since issuing our full year 2024 CapEx guidance in February. In fact, the projects included in our initial 2024 CapEx guidance are trending approximately 5% below budgeted costs.

Our operations and commercial teams have done a tremendous job so far by optimizing scope and reducing construction costs where possible. We remain highly focused on our disciplined capital allocation approach. Our priorities are aligned with our strategy, which enables us to allocate capital to the highest return opportunities to maximize shareholder value.

And with that, I would like to open up the line for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Michael Blum with Wells Fargo.

[Michael Blum, analyst]

I wanted to talk about the change in CapEx, specifically the $100 million related to Durango. I'm wondering if you can just give -- provide a little more color. Should we think of that as growth capital that's earning a return, is that maintenance? What is in that $100 million?

[Jamie Welch, executive]

So -- good question, Michael. So $100 million should be thought of in this context. It is growth capital, so it includes Kings Landing I. It is growth capital as it relates to, we talk about the 20-inch backbone pipeline across the system, which will allow for, obviously, additional volumes to be connected, that will then obviously be used to fill up Kings Landing I. And some of this pre-FID and long-lead critical path items that we've got sanctioned for Kings Leading II. So that is the bucket.

There is a -- if I was going to think about sort of remedial maintenance, it's probably $5 million of that amount. And maintenance is probably an equivalent amount on top of that. So it's pretty -- that's pretty small. And think of the increase, honestly, Michael, that's about -- relative to the $125 million, $165 million, and I'm sure everyone would like sort of the -- maybe the bridge. So $125 million, $165 million is where we started life.

We said, as we've gone through the entire conference circuits -- conference circuit over the course of the spring, we said, listen, with the Eddy County announcement, $200 million gross spend, think of it as $50 million, $150 million. $50 million for this year, $100 for next year and $50 million into 2026. That still, I think I would put the Eddy County and the new Lea County amendment, which has got a little bit of capital, that's a good number. So take your $145 million sort of being the midpoint of the original range and say, just add $50 million.

And then for the -- all the Durango stuff that we've talked about, Kings Landing I, some growth capital as well as now the pre-FID spend. Think of that as $90 million to $100 million. And that should get you right on the number you guys are looking for.

As you know, we do -- we spend so much time agonizing over making sure we look at every invested dollar and making sure that it's earning a clear return for our overall business. And we were very mindful when we set up our guidance this year. We obviously have had the opportunity for -- to grow the business, which is incredibly exciting. And we are very, very focused on making sure we are free cash flow positive.

[Michael Blum, analyst]

And then maybe a related question. Since you're spending on King landing II, I know you're calling it pre-FID, but how should we think about timing for when that plan could be in-service?

[Jamie Welch, executive]

So there is a bunch of items. I would say any decision on a new processing plant from inception to completion in-service is probably a 2-year undertaking. There are items, and it's not necessarily just ordering a cryo box from UOP Honeywell. But there is switch gear, there are transformers, there's a lot of associated kit that have very long-lead items. So our -- what we wanted to do was get ahead of that. If we were going to sort of think out into the future of an in-service date, you would be looking at beginning of third quarter of '26.

[Operator]

Our next question comes from the line of Jeremy Tonet with JPMorgan.

[Jeremy Tonet, analyst]

Just wanted to kind of go to New Mexico a little bit more. Now that Durango has settled, just wondering if you could provide a bit more color on what you see the landscape there. We've seen, I think, some private equity consolidation there. And just if you could update us, I guess, on the competitive landscape, the opportunities there, that would be very helpful.

[Jamie Welch, executive]

Sure. So as we've talked before and as we've talked with investors and your peers, we are incredibly excited by the opportunity set that we see in New Mexico. Ironically, it is not just the Northern Delaware as you think about the Northern Delaware Basin, but it's also the shelf. And the shelf is, I think, probably a somewhat of a forgotten area that over time just hasn't got any particular attention or focus. But there seems to be a lot of smaller producers that have positions that would like to -- that see that the rock quality is very good, and they just need a processing outlet.

So said a different way, the opportunity set is more plentiful than we could have ever imagined. As such, that has accelerated our decision-making on wanting to get to do the pre-FID expenditures on Kings Landing II, because we can now see in our forecast that Kings Landing II will be -- Kings Landing 1 will be fully sold out sooner than we ever could have imagined.

And as you also know, Jeremy, yes, we were very clear when we announced Durango. You have 200 million cubic feet a day of actual process -- inlet processing capacity. And that's how we run. It's pretty static, $70 million, $75 million of EBITDA, as we said on our call back when we announced it in May, same-store sales, if you will, relative to the 2023 numbers. We bring on Kings Landing, April 2025 and you see that increase from that $70 million, $75 million to almost $150 million of EBITDA run rate from that point forward.

And as you also -- we've also talked to people, we are going to expand Dagger Draw. We've got some expansion. We can expand a little bit Kings Landing I. We will bring an idle cryo that we've got that we'll actually go and add. We've got to work through takeaway on the residue side. We'll obviously work out what we're doing on the NGL side. But I think we very quickly will get from a 200 baseline of inlet today to probably the latter part of next year, we'll have 500 million cubic feet a day of processing capacity.

And then into 2026, and you think about that statement on the third quarter, you'd be at $700 million. And the overall margins, we see are pretty consistent even today, just given the lack of infrastructure, there's a need for treating, there's a lot of components, there's a lot of low-pressure connections for some of the smaller producers, less high-pressure connects up there than what we typically see, I would say, on our base business. So I do think it's a pretty -- it's a -- I think we've just found a phenomenal opportunity that we just couldn't be more excited about.

[Jeremy Tonet, analyst]

And I want to touch on one of the points you brought up there as it relates to Permian egress in general. Just wondering, updated thoughts on that, given recent announcements. And also, I think having that capacity in Permian Highway was certainly a help in the quarter. I'm just wondering, I guess, how you think about that over the balance of the year? How much help would that provide having that capacity? And when do you think that kind of fades away?

[Jamie Welch, executive]

So I'll answer the last part first. Obviously, we saw, I think, one of the investors in Matterhorn talked about the potential in-service in September, if I recall from -- on yesterday's call. You guys would know better than I because I'm sure you were on that call. And that obviously is going to be a big help. But it's -- I think it's not the panacea, but it's a step in the right direction. I think that will certainly help Waha.

I cannot recall a period over the last 9 years, where we have seen consistently this level of weakness from Waha. I'm looking around the table here, but I don't think I've ever seen -- I mean, in September, we still have a week today, negative $0.04, Anne? Is that where we are? Negative $0.04, negative $0.04. That's crazy. The PHP from our vantage point and from our customers, I mean, Chris Kendrick can talk about this. I was going to call him Cricket, which is his fan favorite.

But it's -- our customers could not be happier because they have been able to get Gulf Coast pricing. And even with the weakness in that Houston ship, and that's been a little bit, I think, followed a little bit of volatility around the up and downs of Freeport, amongst other reasons. But I think they have been very, very happy. I think it has been, obviously, one of the differentiators for us. It's the reason that we continue.

The Durango customers are all want Gulf Coast pricing. And so we see an opportunity to give that benefit up there, up the northern end of the Delaware, where they've really been starved and very much focused on a traditionally an EP Permian price. So I think -- we think that probably the net benefit fades to some extent with obviously Matterhorn. But as evidenced, you had the comment yesterday of in-service of Matterhorn and we're still negative. We were negative 23% or 24% and now negative 4%, but we're still negative.

So I would say it's certainly -- you continue to have a lot more gas, and we continue to need a lot more egress solutions for the Permian. And our customers will remain very happy and so are we with all the space that we have.

[Operator]

Our next question comes from the line of Tristan Richardson with Scotiabank.

[Tristan Richardson, analyst]

Jamie, you noted the high teens growth across your footprint, which includes Durango and the Lea County NVCs. Can you talk about the better outlook you're seeing in the base business? Is this all just higher growth in New Mexico? Is this efficiencies -- completion efficiencies, GORs, just maybe kind of curious what you're seeing in the base business across the Delaware?

[Jamie Welch, executive]

So think of it this way. I think it should be telling in my earlier commentary, 20% of our gas now comes from New Mexico. When did that start? January of 2025. Bingo. It was like the lights went on and we had a massive infusion coming out of New Mexico. And obviously, Durango adds to that because it's an existing business.

I think our base business, what's really -- the proudest thing about what I can see for this company is that for so long, we would engage with you and with investors and talk about the promise and prospect of something like Alpine High. Alpine High, we had 140 million cubic feet a day and maybe some of the other questions that are going to follow. If you go and just take that on top of our 1.58 Bcf a day of processing capacity, we're over 1.7, right? Over 1.7 inlet against -- for our business. That's pretty staggering.

And remember, that is before you really take Durango, right? Durango doesn't show up, if you will, until the second half of this year. And we have 2 Bcf a day of total inlet capacity. So I would say our base business has been pretty -- it's kind of -- there's some growth. It's not spectacular, but it's not -- it's nowhere near we think is game-changing and landscape impacting as what we see with New Mexico.

[Tristan Richardson, analyst]

And then you noticed in this -- you noted in the first 100 days seeing some of these small expansion upgrade opportunities, it be it Dagger Draw the 20-ish line? And should we think of these opportunities as part of that 5.5x 2025, you talked about when you announced the deal? Or could these opportunities be incremental to that? And maybe is it a way to think about -- these opportunities?

[Jamie Welch, executive]

So Tristan, I think you think about the magnitude, right? I do think on the basis of the stair-step that I laid out as far as inlet expansion at Durango. If 200 represents a $70 million, $75 million base, $400 million, which is the addition of Kings Landing I, gives you a base that when sold out looks like 150. And then you'll lay that the next year because we have it in our numbers and you have it as part of the Eddy County capital that we gave you. You go to 500, then that's obviously going to add you another almost $40 million. And then you're thinking about a Kings Landing II, that would add you a potential of another $70 million to $75 million on top.

This is a -- I mean 5x is how we thought about on the basis of, hey, yes, about $150 million, $160 million of EBITDA and you've got -- you bought -- and you paid -- with stock and with cash and with capital deployed, you've got $8-plus hundred million of total consideration, and that's how you do the simple math. We're talking about things that drive the returns at significantly greater than that setup basis that I just outlined.

[Operator]

Our next question comes from the line of Spiro Dounis with Citi.

[Spiro Dounis, analyst]

Maybe to start, first question is just on the acid mix going forward. Following Durango and some of these opportunities that are coming out now, it sounds like it's going to swing you really more towards a G&P acid base. And so just curious, is there appetite on your part to have that pipeline transport exposure maybe keep pace so you can maintain that an integrated profile?

[Jamie Welch, executive]

I think, Spiro, it is. But as we've mentioned, you have an interesting decision to make, right? We have more -- we have -- as we look at our forecast, we could obviously join forces with a number of players that have projects for egress and think about taking an equity stake, much like obviously, Targa just did with -- obviously with Blackstone. We could have played that role almost the same.

I think what we've been consistently telling you is we are focused on shorter dated conversion cycles on deployment of capital. In other words, don't deploy capital in then 2.5 years or 30 months or 26 months or whatever the time frame is before you start to see cash flow, try to make it, obviously, the deployment and the cash flow receipt within a much shorter space of time. That we could see on an intra-basin basis.

So Delaware Link continues to be something that we really -- has been a really strong contributor to our overall business. We see it on our Kinetik NGL business. We're looking for other opportunities as to how we can do that. They are shorter builds from a -- they're smaller in scale, shorter duration and immediate cash flow, and obviously, they help the base business.

So we are mindful of keeping that mix. Is it going forward with obviously the GMP uplift, 65-35, which is sort of, I think, where we first started life as a pro forma merged company with Kinetik back in 2022, maybe for the -- and we'd like to build it up again. So we're looking for opportunities that continue to allow us to keep that mix balanced.

[Spiro Dounis, analyst]

Second question, just wanted to quickly go back to free cash flow and how to think about the outlook. Jamie, in a response to an earlier question, I think you said you're highly focused on being free cash flow positive. I think for '24, we can get there. That seems like a pretty easy lift. I guess as you think out the '25 with all these projects coming, obviously high-class problem to have, but do you still think that's something sort of durable out over a multiyear basis from here?

[Jamie Welch, executive]

Yes. I think, look, we -- when you think about what we've got going forward, right, I think that, Spiro, you and I have talked about this with Trevor and Maddie and Alex from time to time. Our overall base business when we think about '25 is our base business, meaning the legacy business is probably $100 million of capital and -- for '25. And then you've got, obviously, the Eddy County expansion, which I said that $200 million split, $50 million, $150 million. And then obviously, you've got the balance of Durango. And I really do think we're going to try that to manage from a capital deployment standpoint, how we think about managing it relative to, obviously, the EBITDA profile.

We do see, obviously, really good topline growth, 14% year-on-year to the midpoint, I think it is. Yes, I think you've heard me say before, I would challenge you to find another company where I can look out the next several years and think about an EBITDA growth, 25%, 26% now, 27% at sort of a double-digit rate. That is hard to do. You can't do it forever. You can do it for time. But that's the strength that we see when you add in Durango and you look at our base business and some of the changes such as the NGL contract changes that happened in 26 and obviously, partial benefit, 27 full benefit. There's lots of things going on.

And so we will think about that topline growth and how that allows us to obviously then think about our overall capital deployment. So I do think '25, you still see the positive free cash flow as we mentioned, we put it in the press release, I think pro forma in the second half of this -- second half of '25, about 10% increase in free cash flow per share as a result of the Durango transaction. So I do think it's very much the blueprint.

[Operator]

Our next question comes from the line of Keith Stanley with Wolfe Research.

[Keith Stanley, analyst]

Following up a little bit on the importance of positive free cash flow for you. How are you thinking about when you could restart dividend growth for the company since you have a leverage target, but obviously, having a lot of growth opportunities accelerating?

[Jamie Welch, executive]

You're very consistent on the dividend. You are -- you get the price. I think we have talked to you at length on the dividend, and it is not lost on us that we have had a lot of support and patient in shareholders. Honestly, I look at the picture and believe that we can manage both from a growth standpoint within our capital growth so that everyone wins.

So I think you -- as we've always said, you need to be thoughtful as to exactly the increase you would think about, but I think it is manageable. And so it is, I would say, nearer term, not longer term as to an action.

[Keith Stanley, analyst]

Second question, can you just maybe give an update on the importance of eventually connecting the legacy Kinetik and Durango footprints, what it would add for you? And how you're thinking about doing that, whether it's building or potentially through transactions?

[Jamie Welch, executive]

Really good question. So we've said every commercial opportunity has to stand on its own merit. And if we see opportunities, whether we're going into Eddy County and thinking into Lea County, that give us an opportunity either to connect to the existing Pegasus lateral, which is the one that goes up into Lea County, whether it ultimately -- how that connects to ultimately to Durango and then we think about how we then think about Eddy County. We will engage in conversations with producers.

We're not going to build just for the sake of building. We will only build to the extent that there's a compelling commercial underwritten proposition that justifies and warrants the connection.

[Operator]

Our next question comes from the line of Theresa Chen with Barclays.

[Theresa Chen, analyst]

Following the FID and eventual in-service of Kings Landing II, how much runway does that give you given the growth outlook you have for the acreage? And can you talk about additional opportunities beyond that and how that ties into your view of run rate CapEx on an annual basis going forward?

[Jamie Welch, executive]

Really good questions, Theresa. I would say, we are seeing obviously a sightline for overall production growth up in the Northern Delaware and the shelf that would support a Kings Landing II development. As I've mentioned at the outset, what's fascinating about that particular area is that the drill bit is handicapped by processing capacity. [Indiscernible], you really need a solution on the gas side. And so it makes for a very challenging, I think, proposition for producers.

So our sight line certainly sees us through a KL II. Does it go on beyond that? I think it's too early to tell. I -- we sit here now, and we are 40 days into owning Durango. Admittedly, we had 6-plus weeks as we went through the FTC process and we engaged in some conversations with customers. But really, the engagement has started in earnest over the last sort of 6-plus weeks. And so -- and it's not just processing capacity, right? Because as I mentioned, one of the things that we're really focused on is we can build processing, but we need egress. And egress comes in the form of 2 flavors, residue and NGL.

And Anne Psencik would tell you up there, you've got telescopic pipelines. They're pretty much all full. It's not really a great outcome. You've got some challenges. You really just have TW, you've got EPNG, you've got EE. There are challenges on each of those because of how full they are and how full they run. So I think there's a lot of things that have gone into this -- some of the early decisions in some of the, I would say, early analysis on Kings Landing, II. So line of sight sort of TBD, sort of watch this space over time, and we can keep you apprised on how you're seeing.

The interesting thing when we go down south is, I know everyone focuses on AI and gas growth and what this all means. The thing that I probably didn't complete in my statement is what makes me proudest about where we sit now is I really feel like Alpine High isn't even in the vernacular of this company anymore. And all the growth that we see really isn't -- there's nothing predicated on Alpine High.

If Alpine High just stays as it is, it doesn't make a difference to us. If it grows significantly because there's a call on gas with gas prices, well, that's going to have an impact as well because as we know, it's in the highly gassy area. So I really do think that's a pretty interesting change, not subtle, pretty significant and profound for the company as a whole.

[Operator]

Our next question comes from the line of Neel Mitra with Bank of America.

[Indraneel Mitra, analyst]

I wanted to kind of understand the run rate CapEx or how we should be thinking about it now that the business has changed so much. Obviously, it's listed with the Durango acquisition, but we have possible Kings Landing II other additions. Just when you think about the G&P spending going forward, is there some number that we should try to put in there as a good run rate, understanding that things are constantly changing?

[Jamie Welch, executive]

I'd love to tell you that it was that easy. And obviously, it is more, I think, it has ebbs and flows. And obviously, you're not necessarily going to be as it is, we're building a cryo now. So obviously -- and we've started some -- the pre-FID work on a second cryo. That's probably -- that's not necessarily the norm that you -- that a company of our size would be considering to look at process -- building processing capacities on a sequential basis. And you might have more of a peak and then a trough.

So as it relates to this year at 280, I think you've heard from us with Trevor that look, I think if we were going to -- and you got to be very careful as you sort of think about our overall percentages, and how you think about it. But you've got something that's probably $200 million to $400 million kind of. I think it's a good -- that's a -- I know that's a really wide range, and I apologize, but it's hard to give you any real precision because you don't really know. But that's the sort of amount that I think you would be -- peak would be one thing, $200 million would be another. I really do think that's pretty good.

As I said, our base business, our base business next year, we thought about $100 million. And yes, that's got well connects and that's got maintenance capital in it, and that's got some looping, it got some compression. So you've got growth in that number. And that base business is a pretty big business, but it's more mature, right? It's more mature and built out.

My sense is with Durango, the 20 inch goes a long way. There's a lot more low pressure, which would be more -- which should be, I'm looking at Kendrick, more higher capital burden, right, the smaller producers. So I think if base business is $100 million, maybe on a -- once you've got the processing capacity, maybe you're looking at $50 million to $100 million for just -- for like a Durango, just given well-connects looping, other things.

[Chris Kendrick, executive]

Neel, this is Chris. Just piggybacking on that too. I don't want to be lost in the group that we're seeing much higher margins up in Durango too. So dollar capital invested up there is going to return a higher amount, so.

[Jamie Welch, executive]

Yes, it's like if we have an average on our dollar, it's like about 10 Mcf, you're looking at a 50% increase in that margin, right, up there in the north. And that's obviously because you're packaging everything, compression, treating, gathering, processing. And so that's obviously very, very attractive. And treating -- I know we've spent a lot of time talking about treating. Treating is, I think, one of the real, real focuses for our producers just given the dispersion of gas quality that they find.

[Indraneel Mitra, analyst]

My second question is around the base business in the Southern Delaware. Jamie, you were alluding to the fact that Waha is still negative and probably will be [indiscernible] when it comes online. Given that a lot of your producers have roughly 50-50 oil and gas lifts in that basin, have you seen any curtailments, any wells that are delayed being turned in line such that once Matterhorn comes in line that you see kind of a surge in growth for the last 4 months of the year?

[Jamie Welch, executive]

As far as broad-based curtailments, I think Apache is really the whole story, and that's really Alpine High, both rich and lean. I would say, delayed completions, [indiscernible] would probably be the ones as far as -- but they weren't delayed because of gas prices, they were delayed because of an acquisition. And I think just the typical pause that you have after you close a transaction and you sort of want to assess everything. I don't sense that there's been any impact on us. We continue to see good turn-in-line activity.

And I think as we indicated in our materials, we'll have a full return to service in the fourth quarter, obviously, the Apache up on high volumes. So I think that will obviously be a benefit because we weathered through that impact financially in through -- in the second quarter. And we -- I look at it and say, it was pretty amazing how good the business is running on the basis that we made consensus. And we had a mismatch between our closing of Durango, which was the end of June and the GCX deal, which was the beginning of June. So I kind of only had -- we had 1 month missing out of the pipeline transportation segment as well, and yet we still hit the consensus estimate.

[Chris Kendrick, executive]

Neel, this is Chris. It's worth noting, too a large percentage of our customers move their gas on PHP and are exposed to different gas markets. So they aren't as exposed to Waha, which is another benefit that we provide our customers. So another reason why we're not seeing the impact to a large majority of our customers.

[Operator]

[Operator Instructions] our next question comes from the line of Jackie Koletas with Goldman Sachs.

[Jacqueline Koletas, analyst]

Just wanted to have another follow-up on New Mexico. So you were able to realize an uplift on your system there prior to NVCs that started in April and May. Just more broadly, where do you see New Mexico trending from here? And do you expect to see upside from that new amendment in Lea County prior to the fourth quarter?

[Jamie Welch, executive]

So Jackie, the new amendment on the Lea County NVC will start, I think it's kind of November of this year. So you won't see a benefit before November. Great customer relationship makes all the sense in the world. It's really a discussion driven around treating more so than just about anything else. And I think we've been probably a broken record on this point. We've really -- Matt Wall and the operations team have done a phenomenal job. And we've taken elevated levels of CO2 and even we've seen nitrogen and obviously H2S. So we've really, really had a -- I think, a really strong out of the gate showing on what we've been able to do on the blending and treating side.

As far as New Mexico from here, honestly, I think it's the story. I think it's the story for this company, right? I mean, we've got a nice base, don't get me wrong, and that provides great blendstock given its suite. We've got some great customers. But if you're looking for significant stair-step changes in the context of the growth on our system with volumes and obviously financial margin that's created, New Mexico is the story.

And so what that looks like going forward, as I said, we will see another 200 million cubic feet a day. That will be our inlet capacity when we finish Kings Landing 1 and expected in-service April of next year. We expect it to be full pretty quickly. We're already going to go from 400 to 500. We've talked about Dagger Draw some additional recompression and moving 60-day cryo that we have that we're going to move up there. So that's going to be, I think, another blessing for the producers up there.

So you can see, just look at it just -- if you just measure it on nothing more than just the inlet capacity expansions. The whole -- it's all about New Mexico right now. And that obviously is consistent with what we see with our producers and how they're deploying and allocating capital. And obviously, we will be right there with them to provide the needed services that they're looking for.

[Jacqueline Koletas, analyst]

And just as a follow-up, so as you grow your -- as your processing grows, do you get to a critical mass where you think you'll have enough NGLs where you'd want to build your own NGL assets over time?

[Jamie Welch, executive]

The short answer is, look, we could all aspire to different things but the reality is when you're dealing with relative to what I'll call the enterprises, targets, transfers, one-offs of the world, the size of their asset base between Bellevue and obviously, their long-haul pipeline into the basin as such that you never -- we never could -- we never compete and we would never contemplate thinking about competing. It just -- it's not -- we don't have an export capacity. We think we can do things contractually, which we've done. As far as we have a diversification of NGL service providers, which is obviously a net benefit. We've got great relationships. We own a portion of Shin Oak.

So we think that we can participate and give that vertically integrated value chain and optionality to our customers. But no, we're not going to get into the NGL business. And that's just beyond -- I think that's beyond our wallet.

[Operator]

There are no questions registered at this time. So I will pass the call back to Jamie Welch for any closing remarks.

[Jamie Welch, executive]

Thank you, everyone. We're really excited, as you can probably tell. A really solid quarter, really excited about the outlook for the business. And enjoy the rest of your summer. No doubt we'll see some of you next week. And then we'll start it back up in the fall straight after Labor Day. So reach out if there are any questions, and thank you for your time this morning.

[Operator]

That concludes today's call. Thank you for your participation. You may now disconnect your lines.