Cypress Environmental Partners, L.P.
Q1 2018 Earnings Call Transcript

Published: 11 May 2018

[Operator:]

Good morning ladies and gentlemen. Thank you very much for joining today’s Cypress Energy Partners First Quarter Earnings Conference Call. [Operator Instructions] And next, I will turn the call over to Mr. Richard Carson. Go ahead please.

[Richard Carson:]

Thank you. Hello, and welcome to the Cypress Energy Partners' first quarter 2018 investor conference call. I am Richard Carson, the Senior Vice President and General Counsel. With us today are Pete Boylan, our Chairman and CEO; and Jeff Herbers, our Vice President and Principal Financial & Accounting Officer. We released our first quarter 2018 financial results and posted the press release on our Web site, cypressenergy.com. In the press release, you will find an important disclaimer regarding forward-looking statements. This disclaimer is an essential component of our remarks and it's important that you review it. Also included in the press release are various non-GAAP measures that we have reconciled to financial measures under Generally Accepted Accounting Principles. Those reconciliations appear towards the end of the press release. With that, I will turn the call over to Pete.

[Pete Boylan:]

Good morning. Thanks, Richard. Thank you for joining us today and your interest in our Company. I would like to thank our dedicated employees for their hard work that combined with improving market conditions in our industry lead to solid first quarter results. Commodity prices ultimately impact all of us, regardless of the type of assets you own, the services you offer, or the contracts you have with clients. $65 to $70 oil has been much better for all of us. We provide essential midstream services with approximately 96% of our revenue and approximately 79% of our EBITDA in the first quarter coming from pipeline inspection and integrity, mission critical required services. Our primary focus remains growing and diversifying our inspection and integrity service customer base and pursuing additional PIPE water midstream projects. During the first quarter, we continue to make nice progress with our two new service lines started from scratch in 2017, and plan to further expand our mechanical integrity group with some new customer awards. Earlier this week, we completed the sale of our recently rebuilt Orla Texas facility for $8.25 million. The sale of this facility provided additional capital that we used to reduce the outstanding balance on our revolving credit facility and will enable us to focus our efforts on operations in the Bakken where we have substantially more scale as the Orla facility was our only remaining facility in Texas. Because of the fire last year that struck this facility, it contributed very little cash flow over the last 15 months to the partnership. Our saltwater disposal business is now exclusively concentrated in North Dakota and the Bakken and is currently benefiting from a combination of higher oil prices, the completion of the DAPL pipeline that benefits our customers, and substantial new investment by private equity backed E&P companies in the region who have plans to invest in drilling and completing new wells. The rig count has more than doubled from the bottom of the downturn and permit growth has been strong. We've also begun to benefit from the January 2018 completion of the two new pipelines we built into one of our facilities as demonstrated with our volumes and our average rate per barrel of revenue, despite some challenging weather in the first quarter in North Dakota that impacted truck traffic and production. Our Grassy Butte facility that was damaged in July of 2017 with a lightning strike and fire that is covered under insurance, should reopen this quarter, further improving our volumes and earnings. As we discussed last summer -- our last quarter, we obtained commitments for a new 3-year credit facility with our existing bank group to replace the current credit facility that expires at the end of this year that’s significantly reducing our leverage. Since our last conference call, one additional bank has committed to join the facility and remain in discussion with a few others. The new $90 million credit facility has a $20 million accordion for a total of $110 million. After we refinanced under the new credit facility, our debt will be approximately 44% or $60 million less that will generate interest savings in excess of $3.3 million per year. And also have us down at a very attractive leverage level. The new revolving credit facility will have customary covenants including a maximum leverage ratio 4x adjusted EBITDA and a minimum interest coverage ratio of 3x. We believe we will be able to expand this facility when we find an attractive accretive acquisition opportunity given our much better credit metrics post closing. As previously outlined during our last earnings release, we also obtained a commitment from an affiliate of CEH, to purchase up to $50 million of equity in the form of a convertible preferred private investment and public equity investment otherwise known as PIPE to complete refinancing of the credit facility. Last quarter we also announced that we’ve retained a financial advisor to shop the market determine -- to determine if more favorable PIPE terms could be obtained from an independent third-party and to explore strategic alternatives to determine if any more attractive transformational opportunities exists. We’ve completed the first phase of this process and the process is advancing towards the next round of discussions. We did not receive a more favorable PIPE proposal, however, we were presented with a few other strategic alternatives that we plan to fully evaluate. We hope to complete this process during the second quarter of 2018. Regardless of the outcome of these discussions, we will substantially lower our leverage which will in turn significantly reduce our interest expense, improve our distributable cash flow and position us to increase the size of our credit facility when we find a suitable acquisition opportunity. It is possible we may close the PIPE in the refinancing, while we evaluate the strategic alternatives with the right to redeem it on favorable terms. We previously believe the terms of this PIPE were more attractive than what we could have received from unaffiliated third parties. The strategic alternatives process market check has indeed confirmed us believe and by completing the sale of our Orla facility on favorable terms we’ve been able to further strengthen our balance sheet and reduce the size of the PIPE that was required by our banks to close the refinancing. The Conflicts Committee of our Board of Directors and it's legal and financial advisors negotiated the terms of the PIPE to ensure fairness of this related party equity investment and that work was followed by the market check. Based upon our current analysis and improving operating results, we believe we can support the current distribution post conversion of the PIPE, if not earlier redeem. We also believe we can potentially grow the distribution in the next 12 months if our business continues to improve, or we complete an acquisition or strategic alternatives transaction. In 2016 and '17 our sponsor provided substantial support of our credit facility at no charge to our unitholders, reconfirming the fact that it's interest are fully aligned with our unitholders because of our approximately 64% ownership and the partnership. During the first quarter of '18, no sponsor support was required as we maintain compliance with our financial ratio covenants in our credit agreement through the improving EBITDA generated from our operations. We believe that our business will continue to strengthen in 2018 as is customary with the seasonal elements of our operations. As a result, our coverage ratio should meaningfully improve as well versus the seasonally low first quarter. For our Pipeline Inspection segment, revenue of the U.S operations were approximately 20% higher first quarter of '18 than first quarter of '17, while revenues from our Canadian operations were lower. I'm pleased with our focus on margins and our success diversifying our business away from the lower margin Canadian business, that is also less tax efficient for the partnership. We continue to believe that our Pipeline Inspection and Integrity Service segments will have additional opportunities over the next several years due to the aging of North America's existing pipeline infrastructure, increasing regulatory requirements and the continued energy sector economic rebound and growth in new projects. We continue to invest in organic growth as evidenced with the start of our mechanical integrity and ILI support service product lines. Our team also remains intensely focused on growing our maintenance and integrity service offerings, margin improvement, working capital efficiency and managing and increasing our distributable cash flow. As noted in the last quarter, we continue to be less interested in gross inspector headcount on basic inspection services and more focused on our mix of customers lines of business, return on capital and margins. Revenue from our 51% owned Integrity Services segment was materially higher in the first quarter of 2018 compared to the same quarter a year-ago, as our utilization rate significantly improved. We continue to bid on numerous upcoming opportunities and remain focused on winning more of these bids in an ongoing effort to increase our volume and backlog. We are off to a solid start in 2018 with Brown hydrotesting as a result of our strong backlog entering the year. I'm pleased with the progress our team has made over the last nine months with some additional changes and focus I believe that this division tends to be substantially larger and more profitable. Revenue of our Water Services segment was 34% higher in the first quarter compared to the same period a year-ago. We made solid progress despite the top winner in the Bakken that impacted many. We've also begun to enjoy the effects of the energy recovery on $70 plus oil. Rig count has doubled permits of increase and E&P economics have improved with both these higher prices and better takeaway alternatives. Most E&P companies remain highly interested in piping their water whenever possible. In January, we connected the two pipelines with five large well pads into one of our existing facilities and we have recently agreed to a deal for another pipeline into one of our other facilities that previously did not have pipe water. Approximately 50% of our water is currently piped and we plan to grow this amount. We continue to examine and evaluate accretive opportunities consistent with previously stated goals on diversification. If the MLP markets and investor fund flows remain challenged, holdings and its affiliates remain willing to deploy capital to assist us in acquiring attractive assets that maybe larger than what we can currently acquire independently, we plans offer those assets to us as dropdown opportunities. That is also possible that one of the strategic alternative opportunities provides us with an exciting growth opportunity. Investor sentiment toward energy is finally beginning to improve and the underlying macro trends and $70 oil remain very supportive. MLPs, however, still remain under some pressure, but we remain cautiously optimistic. This will also change as a result of the stronger commodity prices, better operating results that will lead to improved performance for all of us to provide essential midstream services. At this time, I’d like to introduce Jeff Herbers, who can walk you through some of our other financial highlights.

[Jeff Herbers:]

Thank you, Pete. Adjusted EBITDA for the first quarter was $3.3 million, $2.9 million of which is attributable to our common unitholders and $0.4 million of which is attributable to the noncontrolling interest owners that owned 49% of our hydrostatic testing subsidiary. Distributable cash flow for the first quarter was $0.9 million. During the quarter, we paid $1.8 million of cash for interest and incurred $0.1 million of maintenance capital expenditures. I’ve provided this non-GAAP financial information to further help our investors understand our performance. Our net income in the first quarter was $1 million. The net income was comprised of $0.7 million attributable to our common unitholders and $0.2 million attributable to noncontrolling interest. In addition to these highlights, I would also note our leverage ratio as calculated under our existing credit facility was 3.5x compared to a maximum of 4x, and our interest coverage ratio was slightly above the minimum of 3x. Our cash position was $26.1 million at the end of the quarter. The headcount of our U.S operations was 19% higher in the first quarter of 2018 than in the first quarter of 2017. In total, we sent an average of 1,030 inspectors per week to the field for the first quarter of 2018 compared to 1,083 in the first quarter of 2017, a decrease of 4.9%. In 2017, we elected not to lower pricing with a significant customer in Canada which led to a decrease in our active inspector workforce in Canada of over 200 inspectors per week. We disposed of 3.1 million barrels of saltwater during the first quarter of 2018 at an average revenue per barrel of $0.82 compared to 2.8 million barrels during the first quarter of 2017 at an average revenue per barrel of $0.68. This 11% increase in volume which occurred despite the 2017 fire at our Grassy Butte facility in the January 2018 sale of our Pecos Texas facility, reflects our progress in the Bakken. The increase in revenue per barrel is due in part to the new gathering system at one of our facilities and due in part to management fees generated from a transition services agreement related to the sale of our Pecos facility. The water and environmental services business generated a gross margin percentage of 57.8% in first quarter of 2018 with nominal maintenance capital expenditures, which is very attractive. During the first quarter, 95% of our water volume came from produced water and piped water represented 49% of our water volume. As commodity prices continue to improve and drilling and completion activities increased, we expect to have significant operating leverage with our current cost structure and we anticipate minimal maintenance capital expenditures as volumes increase. Our saltwater disposal facilities were utilized at approximately 25% of their capacity in Q1 2018. As activity has continued to pick up in the Bakken, we should see some meaningful benefits. Our Integrity Service segments revenues were $4.4 million during the first quarter of 2018 compared to $0.7 million during the first quarter of 2017. Gross margin was $1.2 million during the first quarter of 2018 compared to a margin loss of $0.2 million during the first quarter of 2017. Our strong backlog entering 2018 helped fuel first quarter results. On a consolidated basis, maintenance capital expenditures for the first quarter were less than $150,000 reflecting the attractive business model we have in our portfolio of businesses that all have limited maintenance capital expenditure requirements. This remains a key differentiator for us versus virtually all other MLPs. Our growth capital expenditures were primarily driven by our pipelines. And with that, I will turn the call back over to Pete.

[Pete Boylan:]

Thanks, Jeff. We are pleased to report some significant improvement in our core operations relative to the first quarter of 2017, continuing our steady recovery from the downturn. I'm also pleased that we have several potential opportunities we continue to explore from our strategic alternatives process. We hope to bring this to a conclusion this summer and ideally prior to the end of the second quarter if possible. In the interim, we will likely execute a refinancing plan that will significantly delever our balance sheet. I for once certainly didn't anticipate the possibility of $70 oil this year and I can assure you that we are benefiting from this great development. Higher prices, rig counts should continue to benefit our customers and in turn Cypress. While we continue to look at acquisition opportunities and the strategic alternatives, our management team continues to focus on pursuing the hundreds of other clients that can utilize our services that we don't currently work for today. Our CapEx like business model really benefits our MLP compared to so many other MLPs that have heavy CapEx requirements. As demonstrated with our prior financial support and the favorable terms of the PIPE offered to the partnership, our sponsors approximately 64% ownership and CELP continues to fully aligns our interest with our minority investors. We truly appreciate your interest and investment, valuable time and your continued support of our partnership. Our Board, management, and employees also remain committed to working hard to grow our company, while maintaining a focus on long-term unitholder value through a disciplined approach to growth. I remain proud of our employees for their dedication and continued focus on maintaining our solid safety record. Operator, with that we may now begin taking questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Mike Guire [ph]. Go ahead please.

[Unidentified Analyst:]

Yes, I wonder if you could talk a little bit more about the backlog and kind of maybe the position coming out of December versus the position coming out of March, and I guess how you see that backlog working through as -- the summer months around us?

[Pete Boylan:]

Good morning, Mike. I assume you're speaking to the integrity Brown hydrotesting or you talking about the business as a whole?

[Unidentified Analyst:]

I would say both, that would be great.

[Pete Boylan:]

Okay. So in the business as a whole, often times budgets aren't set by our customers until early in Q1 and projects really began moving in earnest in Q2, Q3 and early Q4. Some of its weather-related, some of its just getting everybody lined up because we're frequently only one cog [indiscernible]. But we’ve been awarded some very nice work as you know because of confidentiality agreements with our clients. We aren't able to disclose information on our customer on specific basis, but activity has been very good. I think you saw last year we or -- one of the right to service negotiated MSAs with 40 new customers, we continue that adding several new customers in the first quarter. We are in negotiations on a bunch of MSAs with additional new customers. So we feel pretty good about the backlog in the funnel. One thing we can't control -- that our clients can't control, especially with new construction is delays can occur because of permitting. And so, we certainly felt that some last year, we've seen that some this year, but this new administration that came in a couple of years ago was -- materially improve that, but you still have some hand-to-hand combat at the state level that can delay things. There is -- for example, one material project that I can't name that we thought would have started quite some time ago and because of some issues in that particular state, it continues to get delayed. On the hydrotesting integrity front, our backlog was dramatically higher [indiscernible] the year of 500% plus and our revenues were of equal increase over the prior year, and we have to make a bunch of changes in how we want about doing things as I mentioned really proud of the progress the team has made and I’m confident that we're still in the early innings of what’s possible, that business did over $20 million of revenue before the downturn and in '17 it only did $10 million. We have a tremendous number of bids outstanding and that business has less predictability in terms of timing. We have the range of extremes were sometimes we are awarded a job nine months in advance and assuming no delays or contractor not running into problems, [indiscernible] the producer postponing it or whatever, you have good visibility. And other times we can get a call 10 days before they need a large team out in the field to complete hydrotest and somebody else can't perform or they change their mind and want to give it to us. So we get some positive surprises as well that pop up in that business. But business has been very good. We’re chasing some big opportunities that could further build that backlog. So hopefully that provides you a little color given I can't go name specific with our terms of our agreements with our clients.

[Unidentified Analyst:]

No, that’s very helpful. And then maybe on the inspectors and the availability, can you talk about, I guess, what you’re seeing in wage rates with the correlation of oil increasing significantly, are you seeing a rise in the cost of wages there or availability there?

[Pete Boylan:]

That's a great question. Thanks for asking. So the -- when the downturn happened, not only was there material less work, there were ton of inspectors out of work looking for work and wages generally went down. And as you know the business model for certainly basic inspection is a day rate plus various per diem nontaxables and you get a markup on the taxable portion of it. You don't get a markup on the nontaxable portion of it. We have over 16,000 inspectors in our database and we have literally hundreds of them calling seeking work with us, and if we happen to be fortunate to have the contract and haven't won a piece of work whether it's maintenance and integrity or new construction, they’re constantly trying to get hired to have an opportunity to work on that project. So we have seen, especially, in the Permian basin and in a few other tight markets in the Northeast, some material wage pressure and shortage of inspectors willing to work at the lower historic rates. And so that’s actually benefiting us and we've had several clients of ours, especially in the Permian come to us and say we want the best people that have these credentials, and if we have to pay a little more we're happy to pay a little more. And so we’ve raised rates in situations that had warrant [ph] the same and of course make more profit in those situations.

[Unidentified Analyst:]

Great. Thanks very much.

[Pete Boylan:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Patrick Wang. Go ahead please.

[Patrick Wang:]

Hey, good morning, Pete and Jeff. Can you tell us anything more about the strategic alternatives you touched on earlier?

[Pete Boylan:]

Hi. How are you?

[Patrick Wang:]

I’m very good.

[Pete Boylan:]

Great. Of course, we’ve got confidentiality agreements with all those, so I can't give you names as you would appreciate. But we ran a very extensive process with the well-known investment bank, talk to over 60 different prospects, provided confidential information to over a dozen of them, as you might imagine, the range of alternatives was wide from somebody simply looking at the PIPE that we've offered to delevered to others interested in a total capital solution to yet others interested in investing equity and huge amount of dry powder or wanting to fund acquisitions of the holding company to dropdown and share in the GP and so forth. To prove strategic alternatives where somebody would have valuable MLP eligible assets that they would like to bring into our structure. In one case, somebody that’s got a very diverse group of assets, they really like the composition of our portfolio and they got yet a different idea. So you have a range of potential permutations as I mentioned in my prepared remarks. Nobody was willing to offer a PIPE as attractive as my partner and our affiliates PIPE to delever. But we do have a variety of interesting alternatives that we will continue to evaluate.

[Patrick Wang:]

Okay. Got it. Yes, thanks. I appreciate the color there. And then just moving down to the Permian, do you inspection business on any of those upcoming pipelines? And related to that with the rise in oil on top of the already busy pipeline structure outlook, do you see any step change opportunities for inspection?

[Pete Boylan:]

Yes, we are super busy. I forgot what the number is, but in our hydrotesting division, over half of the work in the first quarter was in the Permian. We are looking at setting up field office there and staging crews. Obviously, there's some technical expertise when you’re pressuring that PIPE to its maximum bursting test, you just don’t want to hire anybody and there's a lot of people hiring anybody out there. But we think there's going to be a ton of work there. We are doing a lot of work already at TIR both in the maintenance and integrity side, the mechanical integrity side, the staking and the NDE, the other higher margin. And then, of course, there's just a boom of basic inspection work and we are pretty excited about some awards that we’ve received. Some of those projects are happening now, some of them will be kicking off here in the next couple of quarters. So [technical difficulty] about the opportunities we have in front of us.

[Patrick Wang:]

All right. I appreciate the color. I will turn it back. Thanks.

[Pete Boylan:]

Thank you.

[Operator:]

Thank you. Our next question coming from Brian Butler. Go ahead please.

[Brian Butler:]

Hi. Good morning. Thank you for taking my questions. Can you guys hear me?

[Pete Boylan:]

Hi, Brian.

[Brian Butler:]

Okay, great.

[Pete Boylan:]

Yes, how are you doing?

[Brian Butler:]

Very good. First one just on the saltwater disposal, you had mentioned on the call about the rate being higher at the $0.82 from some internal changes. Can you give a little color just on kind of what the general rate in the market is in the Bakken and how that’s trended, and how much that benefited you guys as well as kind of what you’re seeing from any kind of capacity rationalization in the markets you serve?

[Pete Boylan:]

Sure. The -- there's a lot of things going on at there, all good for a change is we went from 200 plus rigs at its peak and a 11 to a drop of 25. And as a result of that, there was a staggering amount of supply relative to demand for disposal. There was a price war that went on for many, many years that seems to have subsided. There is a floor and some cases we and others have been able to improve pricing it. Of course, there's in a neighborhood by neighborhood basis unlike the Permian and other thing that’s attractive. And the Bakken is there's always been and continues to be differential pricing between flow back, which of course has skim oil recovery opportunity and produced water. Where in the Permian basin those are priced equally and much lower, generally speaking. So you’ve got that dynamic going on and during the downturn, especially with the takeaway capacity before [indiscernible] came online, the net batch for the producers weren't that great. So there wasn't a ton of new water as these private equity guys have come in and bought up acreage and are drilling and completing that a lot more activity than there's been and as a result there's more water to get long-term vis-à-vis pipeline and produced water, but there is also the completion opportunity. We are also seeing finally material increases and the completion technologies. It's not uncommon in the Permian now for us to see 600,000 or 700,000 barrels of fresh used on a big completion, where the Permian or with the Bakken well is not long ago, still down in a 150,000 barrels, we're seeing some people do 300,000 and talking about growing from their intensities of these completions which moves kind of everything off to hydrocarbon and the water cut earlier in the life of the well is suppose delayed. We also have the pipeline economics kicking in, so those cap expenditures we spent building those pipelines into one of our facilities, in addition to the disposal rate, we now get a transport fee under a long-term contract with an acreage dedication. So part of the lift in the rate per barrel is those economics kicking in. We did do a management transition services agreement, so there was a brief bump associated with that. And we have a nice management contract on a facility up there, that we developed and built and we own 25% of it. Our partners own 75% of it and that could be an opportunity to acquire that someday if we wanted to as well. So it's all of those variables that are contributing to the bump in rate.

[Brian Butler:]

Okay, great. That’s helpful. And on that kind of now you’re seeing the bump in rate and you’re now focused more on the more efficient Bakken, how should we think about kind of the gross profit margin from 20 -- from first quarter going forward you’re at 56%, 57%, I mean, is that kind of the slower -- in the slower period and we should be thinking it moving -- higher and kind of that what pace?

[Pete Boylan:]

Boy, I love these questions you’re asking, because it gives me an opportunity to explain what people often forget. And there is a substantial fixed cost component to these businesses, your real estate taxes, your insurance, your base electrical load, your regional management, your safety programs, your reporting obligations etcetera. Once you cover those fixed cost, your incremental cash flow, the incremental barrel of water that drops is huge. And we have always focused on like so many of our competitors on owning the land, fee simple with no royalty or I would say probably 90% of the SWD operators don't own the land, they’ve got an onerous lease and they’ve given away 10% to 15% of the gross off the top to some surface owner. So I would say that we're likely at a floor and we actually had some bad luck. We had to replace a couple of electrical lines in the first quarter at one of the facilities that we had a kind of a one-time bump from the same circumstances, pressured margins. But with these things only at a 25% utilization, they can generate some tremendous incremental free cash flow because once we got to that magic threshold, it's a little incremental electricity, it's a little incremental chemicals, but that's about it. And it happens to be going into a well that doesn't have a royalty, you're not having a 10% to 15% driving on the gross.

[Brian Butler:]

Great. And just to be clear, you guys have kind of -- are you at that threshold, right?

[Pete Boylan:]

Yes.

[Brian Butler:]

Okay. And then on the inspection and the integrity piece, can you give a little color just on the -- I guess, the industry as a whole when you think about the projects that are coming to market, how much of that is deferred projects that had been pushed out versus kind of new business? And if there is any remaining deferred, how much more of that kind of still is out there in that market?

[Pete Boylan:]

So, good question. Its all of the above. We still see a lot of projects that got deferred during the downturn. You just can't kick that came down the road forever, you got to deal with it. You’re required to under law [ph] and being approved operator. And so many MLPs, in particular customers, have been under [indiscernible] for the last couple of years with their own challenges on cash flow and coverage ratio, and CapEx funding and so forth. So we see a really strong amount of maintenance work that's going to get done and is getting done for the foreseeable future. We also have this bucket of big projects that we were awarded. They got held up in permitting or held up in litigation, maybe they got the FERC permit, but they’re still in hand-to-hand combat at the state level with various [indiscernible] away issues. So that’s really beginning to take off in a positive way and we’ve been awarded some nice work that’s yet to come in front of us. And then, lastly, you got these new customers that we’ve never worked for and we have this range of possibilities that sometimes we can call on a customer for years before they finally agreed to bring in a new vendor relative to the incumbent sponsor and new MSA, run you through the whole EHS safety and approval process to set you up to work for them. And even when you do all that, you’ve got to persuade project managers and chiefs, some engineers to use you versus somebody else. And it typically starts with just a handful of inspectors could be NDE, could be basic inspection, could be IOI [ph] support, but 5 to 10 can grow to 20, it can grow to 30, it can grow to 50. And our mission and goal is to go penetrate those thousand plus customers that we’ve never worked for, get their MSA in place, start with two or three or five guys do a great job, and it takes off from there. And so we're seeing that. And the flipside of that painful process would be some existing vendor had a mistake, may be their safety record collapses, may be they do something wrong, forged documents or records and the owner that [technical difficulty] them, fires them, they have an immediate need, they do an RFP, we’ve been calling on him, we are on the list, they know we’ve got blue-chip client base and reputation, and they hire us and we get in there right away. And in some cases, let's say there were 20 inspectors working for a competitor that had a safety problem or an insurance problem, we might immediately pick up that contract and all 20 of those inspectors because they're already out there working on that clients infrastructure. So you've got these different flavors of business development and growth.

[Brian Butler:]

Got it. Great. Thank you very much for taking my questions.

[Pete Boylan:]

Thank you.

[Operator:]

Thank you. Our next question coming from Ethan Bellamy. Go ahead please.

[Ethan Bellamy:]

Hey, guys. Pete, in the past you’ve been kind enough to walk us through rough range of flow back and disposal rates in the Permian and the Bakken. Could you do that again please?

[Pete Boylan:]

Sure. Good morning. How are you, Ethan?

[Pete Boylan:]

I’m good.

[Ethan Bellamy:]

Yes. So in the Permian I think things bottomed at $0.35, no differential pricing. And there were some irrational people that when you look at the royalty they were paying and what it takes to run one of these things they weren't making any money, they were just buying barrels and disposal. There's a windfall for the producer. That’s kind of gone. There's still some guys in the 40s depending upon the ZIP Code in the neighborhood and how overbuilt it is or isn't. I think that most people were trying to get $0.50 in the Permian, but again there is some neighborhoods that are just so crowded that you're still in the 40s. Up in the Bakken, you’ve got a completely different dynamic. The neighborhood still matters. There are still some neighborhoods that are overbuilt. Everybody, of course, wants to get trucks off the road and pipe the water, but I would say flow back is anywhere from $0.75 to $1. If somebody is going to really give you a long, long runway of completions, you might discount it from there in return for getting their produced water, and so flow back pricing is more variable and depends upon the neighborhood and what their options and alternatives are. And as you know most of the time, I would say the substantial majority of the time the flow back is received via truck because most people don't want to put flow back into their produced water gathering systems. On the produced water front, I would say at the low up there and there is a higher cost structure, maybe it got down to $0.40 for some people that never had a chance to make money. Generally $0.45 was low. We are seeing price increases again depending upon the neighborhood. So I'd say it's probably $0.50 to $0.60 unless you happen to be in real crowded area where there is a lot of alternatives for the producer. So hopefully that helps a little bit.

[Ethan Bellamy:]

Yes. That’s excellent. Thank you. On the inspection business, really big picture. How do you assess the competitive landscape as a whole? Was there degradation in either the absolute number of inspectors who maybe [indiscernible] something else to do with [indiscernible] or with the number of people lining up with the pipeline companies and the utilities to bid the work?

[Pete Boylan:]

Yes, that’s a tough question to give a simple answer to, but I'll try. So unlike pressure pumping and fracking and haulers and truck drivers and all of that, these inspectors make an enormous amount of money. And the inspector who most of the time never went to college, grew up out on the pipeline right away as a welder, they can make well over $200,000 a year. Remarkably most of them go work 6, 7, 8 months away from their family, at wherever the work is, then they go return to see their family. And many of them despite having made a couple of hundred grant will file for unemployment and reconnect with their family. So their cash flow and their economics for that 12 month cycle remain very strong and much better. So very few people ever left the industry to go to some other industry because the economics are so attractive. And frequently about half of their pay can be nontaxable pay, which is attractive to them, because they’re getting a per diem, they’re getting a mileage reimbursement, they may be getting equipment and some other things and most of that is nontaxable and frequently they got their fifth wheeler behind their truck. They’re living in it, but they’re getting compensated by that particular client based on the high, low or the government rate for a hotel or a meals or whatnot. So there's a nice free cash flow pay element there that you don't get in other businesses. So we really haven't seen a shortage except as I mentioned earlier in a few key markets where clients have said we want the very best people and they're willing to pay more for those best people.

[Ethan Bellamy:]

Well, I know, my plan B is going forward. That’s nice. So on that business if you look at what’s slated announced projects and sort of regularly [ph] maintenance work, what do you expect the breakout between maintenance and new build work to be, say, on average over the next 3 to 5 years?

[Pete Boylan:]

For us or for the market as a whole?

[Ethan Bellamy:]

For you.

[Pete Boylan:]

Yes, for us, as I mentioned in my prepared remarks, I'm really trying to shift the company away from basic inspection services unless it's for a good client that we are doing their integrity work, their NDE work, their mechanical integrity, the stickier recurring higher margin work. Where in the past, we would chase any project that there was an opportunity for revenue and headcount, despite what the margin profile, the working capital requirements might be in a [indiscernible] where there was very little cost to interest, you didn't pay as much attention to the true net free cash flow economics of it. So our hope would be to get our company over the next 3 to 5 years to 70% or 80% of our business coming out of higher margin maintenance and integrity, more complicated work that is 20% to 35% type of gross margin work as opposed to where we’ve been in the past, where the majority of the work was basic inspection which tends to be 10%, sometimes even sub 10% depending upon who it is and we have as you would imagine a range of types of clients. Some where it's all about price and they'll have five inspection companies working for them and whoever bids at the lowest is going to get the work. And we have other clients who say this is peanuts relative to my investment in these assets, maintenance and integrity, and the problem that occurs if I have an issue with regulators, investors and I want the best people and I don't care if I have to pay more to get them.

[Ethan Bellamy:]

That’s helpful. Last question and this is sort of a sensitive one. One of the places where -- we're not sure about the right amount of spending is maintenance CapEx on pipelines. And to varying degrees maintenance CapEx may have declined during the downturn when cash flow was tight. Are there any, let's say, deferred maintenance backlogs that may accelerate now that cash has become less constricted for some of the customers out there?

[Pete Boylan:]

I think that's a very rational and reasonable assumption to make. I obviously can't comment because we have confidentiality agreements and we respect our clients expectations on that. But it is all over the map and some clients that had stronger balance sheets, didn't have to tighten [indiscernible] this much and others chose to defer for everything that could be deferred reasonably and that’s kind of everything in between. But we feel like there's a nice big amount of work that's -- needs to be done that you just can't defer indefinitely.

[Ethan Bellamy:]

Got it. Thank you very much, Pete, for your time.

[Pete Boylan:]

Thanks.

[Operator:]

Thank you. We have no further question at this moment. And I would like to turn it back to Mr. Boylan.

[Pete Boylan:]

Okay. Well, thank you everybody again for your valuable time and support. Have a great weekend and we look forward to updating you next quarter and what the outcome is on our strategic alternatives process.

[Operator:]

Thank you. Ladies and gentlemen, you may now disconnect.