Kinetik Holdings (NYSE:KNTK) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
Kinetik Holdings reported the strongest financial results in its history, driven by exceptional operational execution and favorable commodity prices, leading to an upward revision of its full-year 2026 adjusted EBITDA guidance by $70 million at the midpoint.
Significant commercial momentum was highlighted, with increased activity across the Permian Basin and strategic investments such as the expansion of processing capacity at King's Landing 2, which will be completed ahead of schedule in mid-2028.
The company executed several commercial agreements to enhance market access, including securing additional firm residue gas access to Gulf Coast markets starting in 2027, supporting its integrated platform strategy.
Operational highlights included strong system-wide performance and optimization efforts, with the ECCC pipeline now in service and the acid gas injection and sour conversion project at King's Landing progressing on schedule.
Kinetik Holdings reported Q2 adjusted EBITDA of $281 million, with a year-over-year increase of 35% in Midstream Logistics EBITDA, and maintained a comfortable leverage range while increasing capital expenditures guidance to approximately $560 million.
Management expressed confidence in the company's long-term growth outlook, supported by strategic reinvestments, favorable market conditions, and continued acceleration of customer activity.
Full Transcript
OPERATOR
Hello everyone. Thank you for joining us and welcome to the Kinetik Holdings second quarter 2026 results. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Alex Durkee, Head of Investor Relations. Please go ahead.
Alex Durkee, Director of Investor Relations
Good morning and welcome to Kinetik Holdings' second quarter 2026 earnings conference call. Our speakers today are Jamie Welch, President and Chief Executive Officer, and Trevor Howard, Senior Vice President and Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements. Please refer to our SEC filings for a discussion of the risks that could cause actual results to differ materially. We will also reference certain non-GAAP financial measures.
Reconciliations can be found in our earnings materials and on our... With that, I will turn the call over to Jamie.
Jamie Welch, President and CEO
Thank you, Alex. Good morning, everyone. Kinetik Holdings delivered the strongest financial results in our history. Our performance was driven by exceptional operational execution, strong system performance, and a supportive commodity price environment. I'm proud of our team whose focus, discipline, and commitment to excellence continue to drive these results. Accordingly, we are updating our full-year 2026 adjusted EBITDA guidance upwards by $70 million at the midpoint, or 7%, reflecting the strong first half performance and confidence in the outlook for the remainder of the year.
Trevor will discuss the key drivers behind our guidance update in more detail shortly. The confidence embedded in our revised outlook is reinforced by what we're seeing across our footprint today. Customer development activity continues to build. Commercial momentum is the strongest it has been since our inception in 2022, and our team is executing at a very high level. Combined with improved market conditions, these trends position us well for a strong finish to 2026 and tremendous follow-through into 2027.
We are seeing broad-based momentum across our integrated gathering, processing, and downstream platform. Conditions across the Permian continue to improve as Waha pricing has recovered from the extreme dislocations experienced for the first five-plus months of this year, driving a step change in producer curtailments since mid-June. At the same time, the more constructive crude oil environment continues to support attractive development economics, and we're seeing a continuation of customer activity pull-forward across our footprint with some of that benefit to materialize in the second half of 2026.
Reflecting these trends, Permian rig count has increased 8% since February with over 60% of that growth coming from the Delaware Basin. Against this backdrop of accelerating activity and growing producer demand, we continue to proactively position our system for the next phase of development. In May, we reached FID on King's Landing 2. The message from customers has been crystal clear: incremental sour gas treating and processing capacity is needed to support their development plans.
As such, we elected to increase the processing capacity of KL2 by 50% to 300 million cubic feet per day. Since announcing the expansion, we have already purchased cryoprocessing, amine, and residue compression equipment, and the project is now expected to be completed in mid-2028, earlier than previously communicated. Upon completion, Delaware North sour gas processing capacity will exceed 700 million cubic feet per day and Kinetik Holdings' total system-wide gas processing capacity will surpass 2.7 billion cubic feet per day.
Importantly, we're already looking beyond KL2. This week, Kinetik Holdings' Board authorized procurement of long-lead equipment for the next stage of processing capacity expansion, proactively aligning our supply chain with accelerating customer demand. This positions us to manage equipment lead times, preserve development flexibility, and efficiently support the next phase of growth on our system. We have also sanctioned the commencement of work on expanding the capacity of ECCC.
Our willingness to materially reinvest in our business reflects not only the visibility we have into customer development plans, but also our conviction in the long-term growth outlook for the Permian Basin. To that end, the market continues to recognize the Permian's critical role in meeting future U.S. natural gas demand growth. With LNG exports, power generation, and data center development driving incremental consumption, the question has increasingly become where the gas will come from and how we will reach end market.
The Permian remains uniquely positioned to answer that call with more than 11 billion cubic feet per day of new basin egress capacity that has been sanctioned through 2029. Against this backdrop, Kinetik Holdings' integrated business is becoming increasingly valuable to customers seeking both reliable flow assurance and premium-priced market access. During the quarter, we executed several commercial agreements that further strengthened the value proposition of our Permian-to-Gulf Coast platform while expanding market access and optionality for both existing and future customers.
First, we secured incremental firm residue gas access to Gulf Coast markets beginning in 2027, providing customers with enhanced flow assurance and premium netback pricing. We also signed new residue gas and NGL transportation agreements supporting our Delaware North processing complexes, increasing operational flexibility and securing critical downstream capacity as activity and volumes continue to grow across our New Mexico business. These agreements are excellent examples of our broader strategy to reduce our customers' exposure to in-basin pricing volatility by expanding access to premium end markets.
More importantly, they reflect our differentiated approach to commercializing the value of Kinetik Holdings' integrated platform. Rather than competing solely on G&P services, we continue to leverage our downstream assets and market connectivity to deliver a comprehensive solution for producer customers. Operationally, our team executed very well during the quarter. A significant driver of our record results was sustained system-wide performance, reflecting both the strength of our operations and our continued focus on optimization opportunities across the system.
The ECCC pipeline has been placed into service, officially establishing that north-to-south connection across the western portion of our system between Eddy and Culberson Counties. Rich gas volumes on the pipeline are expected to increase throughout the balance of the year as King's Landing reaches full utilization. At King's Landing, the acid gas injection and sour conversion project continues to advance, with drilling operations well underway, and Phase 1 remains on schedule for in-service by year-end.
In Delaware South, Diamond Volt, our 40 megawatt behind-the-meter power generation project at Diamond Cryo, continues construction progress with in-service anticipated in the second quarter of 2027. Now, before I hand the call over to Trevor, I want to underscore how confident we are in Kinetik Holdings' position and long-term trajectory. The strategic investments we have made across our platform are delivering exactly as intended, strengthening our financial performance, expanding our commercial opportunity set, enhancing the value we provide to customers.
We're seeing the benefits of our integrated model come through in a meaningful way. Our assets are performing well, our team is executing with discipline, and the momentum across the business continues to accelerate as customer activity builds and the need for reliable, connected infrastructure becomes even more critical. Kinetik Holdings is uniquely positioned to deliver. We exit the second quarter with stronger earnings power, greater visibility, and a clear line of sight to continued value creation in 2027 and beyond.
And with that I will turn the call over to Trevor.
Matthew Sanderson, Executive Vice President and Chief Financial Officer
As Jamie highlighted, the second quarter was a record one for Kinetik Holdings. We reported adjusted EBITDA of $281 million, distributable cash flow of $195 million, and free cash flow of $105 million, reflecting strong execution across the business. Within Midstream Logistics, adjusted EBITDA increased 35% year over year to $205 million. Processed natural gas volumes were 1.74 billion cubic feet per day, flat year over year despite an estimated 250 million cubic feet per day of Waha price-related curtailments.
Results benefited from strong system operating performance, improved NGL recoveries and condensate yields, optimization opportunities, and lastly favorable commodity prices and spreads. Our Pipeline Transportation segment generated adjusted EBITDA of $83 million, down year over year primarily due to the divestiture of our equity interest in EPIC Crude. This was partially offset by year-over-year outperformance at Permian Highway Pipeline, supported by lower fuel costs and higher gross margin, and better-than-expected throughput volumes at Chinook.
At quarter end, leverage was 3.8 times and liquidity exceeded $1 billion, and we expect leverage to decline further by year end even with our elevated capital program. Importantly, we continue to operate comfortably within our targeted leverage range of 3.5 to 4 times while maintaining substantial flexibility to fund attractive growth projects and return capital to shareholders. Turning to guidance, we are substantially increasing our full-year 2026 adjusted EBITDA outlook to a range of $1.04 billion to $1.1 billion at the midpoint.
The revised outlook represents a 7% increase relative to our original guidance issued in February and approximately 15% growth year over year on a pro forma basis for the EPIC Crude divestiture. There are four primary drivers supporting our revised outlook. First, our volume expectations have improved meaningfully since our May outlook. At the time, we expected low- to mid-single-digit volume growth due to the elevated Waha price-related curtailments.
Since then, Waha pricing has normalized, curtailed volumes have returned to production more quickly than anticipated, and customer activity has continued to accelerate. As a result, we now expect mid- to high-single-digit volume growth year over year. Average curtailments are expected to decline to approximately 25 million cubic feet per day for the balance of 2026, and we expect to exit the year approaching 2.2 billion cubic feet per day of processed gas volumes, with no curtailments assumed in the fourth quarter.
Second, commodity prices remain favorable to our outlook. Updated guidance assumes forward market pricing as of July 28 and reflects a nearly 30% increase in WTI pricing and a nearly 20% increase in liquids pricing relative to commodity assumptions used in our original guidance in February, while Waha natural gas pricing remains well below our original assumptions. That impact has been offset by the significant Gulf Coast marketing gains realized in the first half of the year.
However, as Waha pricing has improved and basis differentials have tightened, we expect those marketing benefits to moderate in the second half of the year and be replaced by the return of curtailed volumes. We remain substantially hedged through year end at the top end of our targeted range of 40% to 80%, opportunistically adding incremental hedge protection in the second quarter and aligning with our rolling 12-month and 24-month targets. Third, operational execution across the system continues to exceed our expectations.
Strong plant and compression run times, higher NGL recoveries, increased condensate yields, and continued optimization efforts across our footprint are expected to provide ongoing benefit through the balance of the year. And lastly, our Pipeline Transportation segment continues to outperform our original forecast, supported by stronger basin activity, higher throughput volumes, and healthy margins across our pipeline businesses. As it relates to quarterly cadence, we expect adjusted EBITDA to be between $260 million to $270 million in the third quarter and $270 million to $280 million in the fourth quarter of this year, supported by increasing customer volumes across the system and ECCC utilization. We are also increasing our 2026 capital expenditures guidance, including maintenance capital, to approximately $560 million. The increase is primarily driven by several initiatives that we believe represent highly attractive investments for our shareholders. These include Kings Landing 2, additional optimization projects across our footprint, the purchase of compression equipment to address elongating lead times and an increasingly stretched supply chain, the acceleration of certain growth capital investments supporting customer development plans in late 2026 and early 2027, and right-of-way procurement for an expansion of ECCC. We have also started procuring long-lead equipment for our next cryo beyond Kings Landing 2, which positions us to better manage supply chain risk and preserve timing flexibility for our continued expected processing expansion. Turning to capital allocation, our growth-oriented philosophy remains unchanged. We continue to prioritize investing in high-return organic growth opportunities that strengthen our integrated platform and expand the earnings power of the business.
The increase to our capital expenditures guidance reflects the quality of the opportunities in front of us today and our conviction in our long-term outlook. Simply put, we believe elevated reinvestment today builds the earnings base that funds growing returns tomorrow. Alongside this reinvestment, we remain committed to a growing and well-covered dividend. In late July, we paid our second quarter dividend of $0.81 per share, with dividend coverage improving to approximately 1.5 times, up from 1.2x for full year 2025.
We expect coverage to continue to strengthen through the second half of the year and into 2027, supporting sustained dividend growth consistent with the framework we have publicly outlined. Operator, we can now open the line for questions.
OPERATOR
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star-one to raise your hand. To withdraw your question, press star-one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Spiro Dounis with Citi.
Spiro, your line is open. Please go ahead.
Spiro Dounis, Analyst at Citi
Thanks, operator. Good morning, everybody. Want to start on the processing capacity first. Just looking at that 2.2 Bcf/day exit rate, seems like you'll be knocking on the door of capacity and maybe even exceed it in 2027. Jamie, I think you referred to the flow-through there as tremendous. And so until KL2 comes online, seems like you might have to look into some offloads. So curious, are we thinking about that dynamic right as we head into '27, and maybe just any plans to deal with those excess volumes here?
Jamie Welch, President and CEO
Yes, Spiro. First off, good morning. I think it is certainly something that we look at and analyze on a weekly basis with the Ops engineering team, particularly with Matt Wall. We've got some projects underway where we're looking to rebuild center blocks of existing 200-a-day cryos to continue to increase and upsize capacity. I think there's more to come on those particular topics. So the idea comes in a couple of different flavors. One is what's the most you can get out of the existing footprint and system capacity today?
What could we do to improve it? Two, what offloads on an interim basis could we start to consider as we get further and further into 2026 and into 2027 that would basically bridge us. So both dynamics are in play and both dynamics are being analyzed. We are obviously quite excited that KL2 looks like it's going to be earlier than what we had previously communicated. That's a good thing. I don't—you shouldn't—I mean, when we're looking to shave time, we're looking at months and weeks.
We're not looking at, you know, moving it, you know, many months or a year or anything like that. And obviously to that vein we decided that, look, given the, on the supply chain side, given what we're seeing, it was important for us to get ahead of the next cryo, and whether that's in New Mexico or whether that's in Texas—and the location of that is to be, is TBD—we want to be ready and we want to make sure that we don't have any timing impediments to basically execute on that plan.
Spiro Dounis, Analyst at Citi
Got it. That's helpful color. Second question here, maybe just focusing on the operational outperformance. You called it out in the materials and the remarks here and appears to actually be a sizable contributor of some of the beat and raise going forward. So maybe just talk about what's suddenly driving this outperformance. Was this a specific initiative you guys have undertaken? Perhaps if possible, maybe put some numbers on it for us. And as we think about the go-forward here, is this something you expect to build on or we've kind of seen most of it already?
Jamie Welch, President and CEO
I think, Spiro, I want to maybe just take you back. When we first acquired Durango and talked about the acquisition, we identified that it was a system that needed remedial capital. It had a lot of—there were reliability issues, there were operational issues. It was an aged system that needed a refreshment. We have spent millions and millions on a concerted effort where we have replaced pipe, we have repaired pipe, we have repaired facilities, we have upgraded facilities, we have improved measurement, we have therefore improved reliability and run times.
Our FL&U—you know, basically fuel, lost and unaccounted for—reductions have been significant. Our recoveries improvements have been significant. This was all part of the grand plan. It's taken us two years to get here, which is not surprising. We obviously had Kings Landing in the interim, but it just took time. And now we look at the operational performance and we are seeing less of a marked dislocation between the operational recoveries and performance of the north versus what we have in the south.
We do a lot of low-pressure gathering and processing, as you well know. We're probably one of the biggest, if not almost the biggest, on the low-pressure side in the Delaware Basin. So compressor stations and the usage of fuel at the compressor stations—whether that's lean gas, which was a big initiative that Trevor and Ross, together with Matt, initiated several years ago where we converted stations from rich to lean so we were not burning NGLs—was an initiative that we rolled out in New Mexico.
And so we are doing things that at the end of the day continue to optimize our operational performance and improve. Obviously, we see that the overall system benefits, and you see them reflected in our financials.
Spiro Dounis, Analyst at Citi
Got it. It's great to hear, Jamie. I'll leave it there. Thanks, everyone.
OPERATOR
Your next question comes from the line of Jeremy Tonet with J.P. Morgan Securities LLC. Jeremy, your line is open. Please go ahead.
Jeremy Tonet, Analyst at J.P. Morgan
Hi, good morning. Just wanted to drill in a little bit more on these points if we could. Just wondering if you could tell us where volumes are currently in that 2.2 that you see. Is that a 4Q average, or is that like a December 31st number? Just trying to get the trajectory, I guess, of volumes from today to year-end as that propels into '27.
Jamie Welch, President and CEO
Good morning, Jeremy. Yeah, sure.
Trevor Howard (Senior Vice President and Chief Financial Officer)
Thanks. Jeremy, it's Trevor. If you go to page six, you can look at the far-right bar chart. It is a 4Q 2026 average. Is that approximately 2.2 Bcf a day? And then on the second part of your question, second quarter 2026 processed gas volumes were 1.74 Bcf a day. We did disclose that there were approximately 250 million cubic feet a day of curtailments on average in the quarter. And then on a go-forward basis, we estimate that there's 25 million cubic feet a day of curtailments for the second half of the year on average.
So if you take 225 million cubic feet a day of return volumes that were previously shut in and that 2Q 2026, that puts you at around 1.95, 1.96 Bcf a day is how I would bridge that question.
Jeremy Tonet, Analyst at J.P. Morgan
Got it. Thank you for that. And just coming back to system performance. Great to see everything coming together there and just wondering, I guess, how you think effective capacity for the plant stands right now versus kind of nameplate as we think about this volume growth, if it's going double digits into next year. Just how we think about that.
Jamie Welch, President and CEO
Look, Jeremy, it's Jamie. So I think as far as nameplate, you know, down south most of our existing cryos are 200 a day cryos, particularly for East Toyah, Pecos and even Pecos Bend. We obviously did the expansion at Diamond and so we get, you know, close, almost 720 million cubic feet a day out of those three cryos. So set another way, it's like 240 would be max that you could get, but you'd probably be sacrificing recoveries if you're sort of running it at that very top end.
I think we are looking at additional residue recompression, center block rebuilds, which should be able to get you close to 220, 230, I think is probably somewhere within that frame. I think Matt is on, he can sort of jump in here for the 200 a day cryos. And as you know we have, of those, we have five in the south. So if you can get 20 to 30, you're getting 100 to 150, or said another way, at the top end, 75% of another 200 a day cryo. Matt, you want to jump in there?
Matt Wall, Chief Operating Officer
Yeah, no, I think all that's fair. In general, I'd say through residue compression upgrades and then expander center section changeout, we can see an incremental 10 to 15% above nameplate on any of the cryos down south.
Jamie Welch, President and CEO
So that helps us, I think, Jeremy, in the context of what we're doing. And obviously we've been spending, you know, we obviously are focusing also on the north of what we can get out of those plants: Dagger Draw, Mount Jamar. Obviously Kings Landing will be running. We expect it will be at around 220 with the additional residue recompression. So I think we are maxing out our processing capacity. And as I said earlier on, in response to Spiro's question, we're also analyzing the probable and potential need for offloads in the short term sometime in ’27 in advance of having Kings Landing 2 come on in ’28.
Trevor Howard (Senior Vice President and Chief Financial Officer)
And Jeremy, just to clear one thing up, the 2.4 Bcf a day processing capacity that we disclosed, that's effective processing capacity as of today.
Jeremy Tonet, Analyst at J.P. Morgan
Got it. Thank you for that. And one last quick one. As it relates to produced water, I think it looks like it might be heading down a little bit. Just wondering what's happening with the water side. It seems like water is increasing overall for the basin. Just wondering, is this a mix shift in wells or anything else at play here?
Jamie Welch, President and CEO
I think at the end of the day it's as simple as we've got some large new projects and timing is impacting it. So I think it's more of a temporary situation. But I think there are some fairly large developments on the water side which will see volumes rise pretty materially.
Jeremy Tonet, Analyst at J.P. Morgan
Great, that's helpful. I'll leave it there. Thank you.
Jamie Welch, President and CEO
Thank you.
OPERATOR
Your next question is from the line of Teresa Chen with Barclays. Teresa, your line is open. Please go ahead.
Teresa Chen, Analyst at Barclays
Good morning. Thank you for taking my questions. Going back to the macro side of things, can you elaborate on your earlier comments on customer activity and tell us what you're observing in terms of producer behaviors at this point, commensurate with your updated comments on curtailments and volumetric guidance, as well as touch on the accelerated spend related to supporting customer developments into late 2026 contributing to higher capex guidance?
Are there specific areas you're observing this more than others? And as we exit 2026, any early thoughts on the directional trajectory of customer activity for 2027?
Jamie Welch, President and CEO
Teresa, thanks. Let me see if I can break it down as far as, let me deal with the macro. We're six months into a conflict with Iran. We're still, you know, literally we live day by day in the context of whether there's resolution and sort of the return to more normal times or whether there's not. We see, obviously, we see constructive overall commodity pricing. $75 is a very different place than 60 or something in the high 50s, which obviously was a time that we had to endure during 2025.
So we continue to see a lot of the smaller producers that have literally looked to capitalize, and we said this in our first quarter remarks back in May, that they have really accelerated activities. And so they are smaller maybe in size, but there are more of them, and particularly up both in the north and sort of areas in and around the south. We've seen that activity continue. As it relates to the pull-forwards, there were a lot of fairly large developments which were on the schedule and on the turn-in-line plans from our various producers that were pulled forward from mid-2027 or later in 2027 to early 2027 or in a couple of cases into late 2026. And so that activity is what obviously has created the need for additional well connects. I go back to the point of, absent only a few customers, it's all low pressure. So we are literally building to the CTB and therefore for us we're spending; with some of these pads you've got not just well connects but we have compressor stations and we have other things and other ancillary equipment, ancillary infrastructure that needs to be built. So that's really the genesis and the rationale and the reason for obviously some of the increase in the capital that we saw.
We're moving up from the top end of our range, which we told you when we FID KL2 that we were at the top end at 510. We're now saying approximately 560. So I think we see a lot of activity right now, and I think particularly in New Mexico that is remaining very much supreme as far as just the amount of activity and the depth of it. And even in the south we're seeing, obviously with more constructive Waha and the ability for people to use Gulf Coast egress, we're seeing increasing activity down south as well.
So we've got the best of both worlds.
Trevor Howard (Senior Vice President and Chief Financial Officer)
Yeah, I'd like to just emphasize Jamie's last point there. The capex pull-forwards that you see in 2026 for development that is later this year and then first quarter, second quarter of 2027 that we have to prepare for, that's really large-cap independent E&Ps in Delaware South. We are seeing an acceleration of activity in New Mexico as well. But that incremental capital that you're seeing in 2026 really is the Delaware South system. And that's just part of the reason for that, it's just timing for new builds to be planned for and get connected to the system in Texas.
It's, you know, one or two quarters faster than what you see up in New Mexico. So we are planning in New Mexico right now for second half of ’27; prospects look very good. But as it relates to 2026 capex, really that's a Delaware South phenomenon.
Teresa Chen, Analyst at Barclays
Thank you, that's very helpful. And then maybe on the cost side of things, can you update us and remind us where you are in terms of incremental savings related to your NGL recontracting activities? And also on the residue side of things, I believe you had entered into some short-term contracts back in November. Can you remind us when that rolled off and how that bridges into your recent capacity contracted beginning in 2027?
Jamie Welch, President and CEO
Okay. On the NGL side I think we said in May and certainly in February we have a pre-existing flexible solution. As we see some of our Delaware South contracts, two of which roll off over the remaining passage of this year, it gives us a lot of flexibility. The rates are obviously market and quite attractive. Most recently obviously we've been tackling the Delaware North. We announced that we just signed a contract that gives us a lot of flexibility as it relates to our three complexes up there: Dagger Draw, Altium, Art, Kings Landing.
Very attractive. Right. You know we're very happy with the flexibility it provides us going forward. So that's a, we feel like that's another box that's checked on our to-do list. As it relates to residue, what we contracted for last year doesn't roll off. That remains as it is and will going forward, and obviously that sort of stages into, I think into 2028, when we've got, I think it's either which comes on as the pipeline, and we have some capacity on that.
As relates to the newest capacity additions, they are supplemental because obviously you can imagine the first five and a half months of this year has been a crisis for anyone having to sell gas at Waha on such a negative basis and therefore everyone wanted to get out and they still do. And I think honestly, while there's a reprieve right now, which we're very glad for and we hope that that continues and we continue to see more egress capacity on the horizon, I think what we're all potentially missing is the amount of gas that we continue to see building from oil producers across the Permian Basin is just this rising tide that doesn't seem to abate and will not abate. Therefore, the prudent action for any producer is to have at least some or all of your residue pricing at Gulf Coast or a premium end market versus the whiplash that you get at Waha. So we've been supplementing our capacity stack and we will continue to do so because we have a, I would say, we continue to see that need from our customers.
Teresa Chen, Analyst at Barclays
Thank you very much.
OPERATOR
Your next question is from the line of Jackie Colitas with Goldman Sachs. Jackie, your line is open. Please go ahead.
Jackie Colitas, Analyst at Goldman Sachs
Hi. Thank you so much for the time. I think you touched on it a little bit, but just talking on guidance, you know, you recently raised full year reflecting a strong first half performance. As we look into the second half of the year, you outlined a transition where, you know, moderating marketing gains will be offset by the return of curtailed volumes. How do you think about the incremental upside from here to expectations? You know, what could bring you maybe closer to the upper end of that new guidance range and where you may be, you know, most conservative here?
Jamie Welch, President and CEO
Jackie, it's Jamie. I'll start this. And Trevor's penciling out already his thoughts. But I think, look, there's so many facets to our business. There's a macro facet, and I give Trevor and Jared a lot of credit because they did really look to capitalize on some of the incremental commodity price outperformance across the balance of this year with their hedging over the course of the second quarter. But there's still a portion that moves obviously.
Waha — are we going to stay at this level at sort of $1.90 or $2? Is it going to actually, is it going to return to the doldrums as we get into maintenance season come October or November, obviously, when we have a lot of the existing egress pipes go through their scheduled maintenance periods. How do we think about overall outperformance in the context of our underlying producers and their forecasts and how we risk them? Like there are so many aspects that go into our business that I think we try to navigate what we think is prudent and proper as we think about timing of pads, how a producer will bring a pad on, what the risking assumption versus their type curve that they will give us. So I don't know, Trevor, where you— I want to take this, but I think it's like we've given you the best available information that we have today. We are cognizant that we've obviously had a very solid first half and we're very pleased with the results and we want to continue to build on that as we go forward through the balance of this year.
Trevor Howard (Senior Vice President and Chief Financial Officer)
Yeah. The other thing that I would add is, to Jamie's point, look, we receive customer development plans and customer volume forecasts which we risk appropriately. To the extent that our customers accelerate timing relative to our expectations and what was outperformance, that is a source of outperformance that we have seen this year. I'd say another big one is the operational and system outperformance year to date. So far, to the extent that that continues, that is a source of upside risk to the forecast.
Jackie Colitas, Analyst at Goldman Sachs
That's very clear. I appreciate the color. And just as a follow up, you touched a lot on the strong commercial progress and accelerated customer growth leading to that incremental spending in '26 as you head into '27. How are you thinking about the run-rate capital in the near term in order to meet that customer demand in comparison to your previous commentary of 200 to 400 million run rate?
Jamie Welch, President and CEO
I think, Jackie, I've seen it from a lot of our peers and I would very much echo the following sentiment, which is we are seeing a new, I would say prudent paradigm on capital investment. And that really was the core of our revised capital allocation philosophy. And that we saw the need, you know, literally we had to press the advantage, we had to make the investments. The overall investment returns was so compelling that we saw a need to continue.
So what that means is, you know, this sort of level that we've got, 560, obviously, I think for this year. Yeah, we've, I think, been very clear, you know, in that $500 to $600 million range is, you know, very comfortable for us. And I think as we look forward, the nice thing about it is we can modify as needed based on activity levels. You know, you've got, you know, that's two cryos, right, in the context of how we think it. You know, one cryo every 18 months kind of thing.
That's how we sort of, I think, forecast it, at least on a longer-term basis right now based on the plans and forecasts that we see.
Jackie Colitas, Analyst at Goldman Sachs
I'll leave it there. Thank you so much.
OPERATOR
Your next question comes from the line of Keith Stanley with Wolfe Research. Keith, your line is now open. Please go ahead.
Keith Stanley, Analyst at Wolfe Research
Hi, good morning. Wanted to start and follow up on the volume outlook. So if you take the Q2 volumes and add back the curtailments, you're pretty close to 2 Bcf a day. So that's about 10% growth by the fourth quarter. Can you say where volumes are today on the system and just how much visibility and confidence you have on that ramp, which is pretty steep into year end?
Trevor Howard (Senior Vice President and Chief Financial Officer)
Yeah, sure. Keith, I'd point you to one of my earlier responses, which is we had 1.74 Bcf a day of processed gas volumes in the second quarter. If you normalize for the return of shut-ins of 250 million cubic feet a day and then back out the 25 million cubic feet a day of shut-ins that we expect in the second half of the year, we're in and around 1.96 Bcf a day as a kind of a bridge to where we are in the third quarter right now. As it relates to the second part of your question and getting from that 1.96 to approximately 2.2 Bcf a day, we have a ton of visibility into that.
We've been planning for several large packages in New Mexico for the better part of 12 to 18 months now that are starting to flow back. So we feel quite confident in being able to achieve that run rate in the fourth quarter of this year.
Keith Stanley, Analyst at Wolfe Research
Great, thanks. And then, Trevor, wanted to follow up on what you said earlier that if the optimization and system performance improvement continues, that would be an upside to your forecast and guidance. Is there any reason to think that you wouldn't continue to benefit from the performance improvements you've made in the system? Or is the uplift not as large if commodities are lower? Just how you're thinking about that and how it's baked into the outlook at this point?
Trevor Howard (Senior Vice President and Chief Financial Officer)
Yeah, that's a good question. I'll hit one of your last parts of the question, which is the unhedged portion, right. Obviously, because we have volumes that are out or exceeding expectations, those volumes that we've received in the first half of this year have been unhedged. So there is a margin component there. So I just wanted to hit that first. But as it relates to the $40 to $50 million of system performance in the full year of 2026, which is part of that blue part of that green wedge that you see on page six, you know, a substantial portion of that has been realized year to date.
There is a portion of that in the second half that we are forecasting, but not necessarily taking the outperformance that we've seen and then running with that on a go-forward basis. As it relates to the last part of your question in terms of where we could miss and why that would actually go away, I'll actually hand that off to Matt, our COO, so he can hit on that. And what are some of the operational items as to why we wouldn't experience the current run-rate recoveries that we've been seeing thus far?
Matt Wall, Chief Operating Officer
Yeah, probably an important thing to just talk on the ops performance is specifically as it relates to Delaware North. As Jamie mentioned, we did a lot of maintenance projects all the way across the system to improve recoveries, performance, et cetera. I think for the most part we've gotten to a point where we're going to plateau. I don't know that we'll see large gains from where we sit today, but I don't expect us to go backwards. I mean, I think that we'll continue to do what we've done to kind of get to the point where we're at on system performance and hold it there.
But for instance, on recoveries for heavier components, I mean, we've got to a point where I think is normal and I don't see us being able to go do projects to get incremental recovery barrels on heavy components.
Jamie Welch, President and CEO
Hey Matt, I was going to say, Matt, you and I talked about, sort of more on the heavy ends. I think where we've hit the optimization, we may still have some opportunities on the lighter end of the NGL barrel. But again, that's going to just take some more time and more focus and emphasis. You know, it's a constant refinement of a recipe for a chef. That's probably the way to describe it. It's never going to be perfect at first. You're going to refine it, refine it to make it better.
And I think that's what we're going to see, Keith, going forward.
Keith Stanley, Analyst at Wolfe Research
Good analogy. Thank you.
OPERATOR
Your next question comes from the line of Julian Dumoulin-Smith with Jefferies. Julian, your line is open. Please go ahead.
Patrick Burford, Analyst at Jefferies
G'day. This is actually Patrick Burford on the line for Julian today. Thanks for all your answers. There's been a lot of detail there that was very helpful. I just wanted to clarify maybe a little bit of the language. I think I've got in my notes here that your dividend policy was based around having that coverage ratio get back up to 1.6. And I think in your opening remarks you said that you got to 1.5 and it could grow from there. Is there likely to be any change in your dividend policy from that?
In the context of your comments about your comfort with a $500 to $600 million capex program a year and the free cash flow you've got going there?
Jamie Welch, President and CEO
Patrick, this is Jamie Welch. So the short answer is no. I mean, we're at 81 cents. We said we would grow at 3% to 5% per year on a base case and that once we got to 1.6 and above, we would start to see it grow in line with overall cash flow growth, which obviously would mean it's an outsized increase. So there's no risk whatsoever in the context of our base, nor a different approach at all relative to that, even with a—we, I think, assumed internally that the capital plan is sort of as we're seeing right now.
Matthew Sanderson, Executive Vice President and Chief Financial Officer
Yeah. The other thing that I would add to that is I think the bigger governor for us, at least in how we think about dividend growth, is probably leverage, and how capex influences that. Our leverage range is 3.5 to 4 turns. Our target's 3.5 turns. Last quarter we were at 3.8, so we're right in the middle of our stated range even with elevated capital budgets. I think in my prepared remarks we talked about how leverage is expected to continue to decrease throughout the balance of this year.
So very comfortable with where leverage sits, very comfortable with where dividend coverage sits, and no changes to our return-of-capital levers that we've outlined on page nine.
Patrick Burford, Analyst at Jefferies
Great, thank you. And then a second question was a little bit about further out along that capex timeline. I think it was Teresa's question, maybe. I think you talked about the ECCC will roughly double in size and before you said it wouldn't take too much capex to expand that. And you've got your new cryos that you mentioned. Are we looking at a two-year program with that elevated capex program or are you looking even further out, keeping it that high?
Trevor Howard (Senior Vice President and Chief Financial Officer)
Look, we're looking further out. I mean, like I had mentioned, New Mexico for the pads that we're bringing on right now we've been planning for 12 to 18 months. We're starting to plan for, or we've already made significant headway on planning for, the second half of 2027 program and then also starting into 2028. So we are really planning our business for 2028 and beyond. Kings Landing 2 is expected to come online summer of 2028. We announced that we have initiated procurement of long-lead items and equipment for the next cryo thereafter, which, if you just take the timing between when we announced the FID of Kings Landing and its in service, you know, it's around 24 months. So from here, we're already planning for additional processing capacity in the second half of 2028 or thereafter. So we, you know, with that and Jamie's comments, you know, in and around one cryo per year at $500 million to $600 million of total capital, growth capital is about $400 to $500 million per annum at those levels. You add a cryo to that, there's potential upside risk to that capex. But to answer your question, we're looking at 2027, we're looking at 2028, and we're already looking at 2029.
And to the extent that the macro holds and producer customers continue to keep showing us these volume forecasts that require additional processing capacity, you should expect capex to remain in and around these levels so long as we're building one cryo at a time.
Patrick Burford, Analyst at Jefferies
Perfect. Thanks very much for your time.
Trevor Howard (Senior Vice President and Chief Financial Officer)
No problem.
OPERATOR
Your next question comes from the line of Samya Jain with UBS. Samya, your line is open. Please go ahead. Just a reminder to unmute if you're muted. Samya. There are no further questions at this time. I will now turn the call back to Jamie Welch for closing remarks.
Jamie Welch, President and CEO
Thank you very much, everybody, for your time this morning. We wish you a great end of the summer. We'll be seeing you again on the circuit and with our next quarterly call in November.
OPERATOR
This concludes today's call. Thank you for attending. You may now disconnect.
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