Cypress Environmental Partners, L.P.
Q3 2017 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cypress Energy Partners Third Quarter Earnings Conference Call. [Operator Instructions] I would like to now to turn the call over to Richard Carson. Sir, the floor is yours.

[Richard Carson:]

Thank you. Hello and welcome to the Cypress Energy Partners' third quarter 2017 investor conference call. I am Richard Carson, the General Counsel. With us today are Pete Boylan, our Chairman and CEO and Les Austin, our CFO and Jeff Herbers, our Chief Accounting Officer. We released our third quarter 2017 financial results and posted the associated press release on our website, 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 is important that you review it. Also included in the press release are various non-GAAP measures that we have reconciled to Generally Accepted Accounting Principles. Those reconciliations appear towards the end of the press release. So with that, I will turn the call over to Pete.

[Pete Boylan:]

Thanks Richard. Good morning everybody. Thank you for joining us today and thank you for your interest in our company. We are pleased with our sequential continued progress during the third quarter finishing the quarter with approximately $19.2 million of cash and current working capital of approximately $52 million. We continue to focus on growing and diversifying our customer base and continue to add new customers across all three business segments adding a total of 18 new customers in the last quarter. For our PIS and IS business segments, revenues, margins and margin percentages were higher in the third quarter of 2017 than they were in the second quarter of 2017, even though some projects were delayed due to the hurricane Harvey disrupt the Gulf Coast in August. This is generally consistent with the seasonality inherent in our business and with the third quarter of each year it’s generally the strongest quarter of the annual business cycle. We believe that our PIS and IS segments will have many opportunities over the next several years as many projects previously delayed have recently been approved with the new [Indiscernible]. We have continued to invest in organic growth and have started two new business units this year, with the latest business unit offering mechanical integrity services, a new line of inspection and integrity support that every energy customer we have requires. This new line of business has already been awarded several nice new projects from investment-grade companies. For our pipeline inspection services segment, headcount was higher in the third quarter of 2017 than it was in the second quarter of 2017, despite the loss of over 200 lower margin inspectors in Canada in our basic services offering that we discussed previously this year. We have continued to focus on our non-destructive examination, staking and mechanical integrity businesses as the revenues of these business lines were higher in the third quarter of 2017 than in any previous quarter. These businesses typically generate higher margins that our base inspection services. We remain focused on margin improvement, working capital efficiency and distributable cash flow. As a result, our Canadian revenues will be much lower in the future than they have been in the past, due to the loss of this lower margin basic service work from a significant Canadian customer at the end of the second quarter. However, importantly we continue to work for this customer providing higher-margin integrity services. Revenue of our 51% owned integrity services segment, Brown hydro testing were also higher in the third quarter of 2017 than they were in the second quarter. As our utilization rate has materially improved and our backlog has remained stable. Earlier in 2017, we hired a new business development leader to assist in these efforts and we have reaped some success via increases in backlog for the fourth quarter of this year, as well as the first two quarters of 2018, and we have recently added one more business development professional. 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 especially when we have excess capacity in the schedule. Revenue of our Water & Environmental Services segment was 5% higher in the third quarter versus the second quarter. Two of our facilities are located in the Permian basin, which has experienced dramatic increase in production activity. The remainder of our facilities are located in the Bakken region where the recovery of production activity has been a little slower than the Permian. However, through the nine months ended September 30, a substantial amount of M&A activity has occurred with private equity backed energy companies acquiring both production and acreage in the Bakken with plans to increase drilling which in turn will create substantial amounts of new water for disposal. Additionally, in both regions a significant number of wells have been drilled and not yet completed as docs inventory grows. Year-to-date the permitting activity has been very robust, the countries up 61% versus 2016 taxes is up 56% year-to-date over last year with more than 11,000 new permits and importantly, North Dakota is up 39% with over 1000 new permits issued for new well activity. And that coupled with the private equity investment up in North Dakota should benefit us in quarters to come. Once producers complete these docs, we expect to have the opportunity to generate additional volumes and revenues, as well as the new permitting activity. As previously disclosed, two of our facilities were struck by lightning and one remains out of service. Our Orla Texas facility should be fully rebuilt and open for regular business in December, and we have recently reached an agreement with our insurance company on the covered loss at our Grassy Butte North Dakota facility. We also continue to work on the growth capital expenditure development opportunity with three new pipelines that will connect three large five well pass for a total of 15 new wells into one of our existing facilities in the Bakken for a large public energy company. Despite a low commodity price environment of the recent few years, we maintain positive operating cash flows during the year ended 12 31 16 and expect the same this year. Our sponsor, Cypress Energy Holdings and its affiliates who control our general partner remain fully aligned with our common unit holders with an approximate 64% ownership interest in CELP. As a result of this alignment, CEH has again provided financial support to CELP by contributing $1 million and expense reimbursement during the quarter. CEH did not require any consideration from CELP for this additional support. We continue to evaluate several interesting acquisition opportunities, including, continued due diligence on one sizable exclusive opportunity currently under letter of intent. Areas of focus for us continue to be traditional midstream opportunities and opportunities in our existing lines of business we are also considering the possibility of changing the composition of our portfolio of assets in light of these potential acquisitions we are currently pursuing. Holdings remain willing to deploy capital to assist us in acquiring attractive assets that may be larger than what we currently can acquire independently with plans to offer those assets to us as drop-down opportunities. As we announced in October, this quarter’s cash distribution will be $0.21 per limited partner unit. At this level, distributions will total approximately 9.9 million for the year. We continue to see encouraging signs including adding new customers across all three of our business segments, new drilling and permit activity and the price of oil currently exceeding $56 per barrel up over 30% just from the beginning of the third quarter. We continue to focus on organic growth and margins to improve our working capital and cash flow that will in turn contribute to improvement of all of our financial ratios. We continue to believe the fundamental increased demand for inspection and water disposal remains strong over the long-term. I would now like to introduce Jeff Herbers, our Chief Accounting Officer. Jeff has been named our principal accounting officer in addition to serving as our CAO. Jeff has significant public company experience having worked for two much larger public entities prior to joining Cypress in 2016. We have a strong team that Jeff will lead while we conduct a new search for a CFO. So with that Jeff can we walk you through some of the financial highlights?

[Jeff Herbers:]

Thank you, Pete. I would like to take a moment to highlight some of our financial information. Adjusted EBITDA for the third quarter was 4.5 million, 5.3 million of which is attributable to our common unit holders, 0.2 million of which is attributable to the non-controlling interest holders that owned 49% of our hydrostatic testing subsidiary and one point million dollars EBITDA loss attributable to our general partner. Distributable cash flow for the third quarter was $3.4 million, which is up from $2.1 million in the second quarter. Today we will pay a quarterly distribution of approximately $2.5 million or $0.21 per unit. Our coverage ratio was 1.37 times, up from 0.84 times in the second quarter, and 0.52 times in the first quarter. I’m providing this additional information to further up our investors understand our performance. Our net income in the third quarter was 0.6 million, the net income was comprised of $1.6 million attributable to our common unit holders in a net loss of $1 million attributable to our general partner. In addition to these financial highlights, I would also note that we continue to have over 85% of our revenue generated from investment-grade customers and we have continued to win new business with additional investment-grade customers that should be reflected in future periods. We are currently bidding on some new major contracts and we have picked up some new work. More than 90% of our inspection clients continue to be investment-grade. Our leverage ratio as calculated under our credit facility was 3.77 times versus our covenant of four times. And our interest coverage ratio was 3.08 times versus our covenant of three times. Our cash position stands at $19.2 million at the end of the quarter, in part as a result of the financial support from our sponsor. Our average domestic inspector headcount increased approximately 2.1% from the second quarter of 2017, despite the fact that hurricane Harvey delayed some projects in both our inspection and integrity segments during the quarter, and despite the fact that we lost some lower margin basic service work in Canada earlier this year. We averaged 1,211 inspectors and 21 field service personnel per week for the third quarter of 2017. As we head into a seasonally slower fourth-quarter, we still have over 1100 inspectors currently working. During the third quarter, approximately 90% of our total water volume came from produced water, and piped water represented approximately 45% of our total water volume. As commodity prices continue to improve, and drilling and completion activities increase, we expect to have significant operating leverage with our current cost structure and we anticipate minimal maintenance capital expenditures as volumes increase. Our latest research shows an estimated 500 drilled and uncompleted wells within a 15 mile radius of our facilities, 300 of which are in the Bakken North Dakota region and 200 of which are in the Permian Texas basin. As prices improve, we expect to benefit from the completion of these docs and other newly completed oil wells. Our saltwater disposal facilities are currently utilized at less than 25% of their capacity. As activity has picked up in the Bakken, we should see some meaningful benefits, considering that 80% of our saltwater disposal facilities are located in this region. We continue to move forward with a new water gathering system connecting three significant well pads with a total of 15 oil wells in North Dakota to one of our existing saltwater disposal facilities. After the new water gathering system is completed, the expansion capital expenditures related to this agreement should yield higher water volumes, revenues, EBITDA and DCF. We dispose of approximately 3.1 million barrels of saltwater during the third quarter of 2017 and the average revenue per barrel was $0.68 for the third quarter. Despite the impact of lower drilling activity, oil prices and disposal rates for water and environmental business generated a third quarter gross margin of over 60% and strong adjusted EBITDA with nominal maintenance capital expenditures, which is attractive relative to many service businesses serving the energy industry. Our integrity service businesses third quarter operating results continue to improve in 2017 because of increased backlog and increased field personnel utilization rates. Backlog continues to be strong and our higher utilization has yielded better operating results and should allow us to operate this segment more profitably. We continue to see the benefit of our significant investment in business development talent in the segment, resulting in higher sustained backlogs. Maintenance capital expenditures for the three months ended September 30, 2017 were 224,000 reflecting the attractive business model of limited maintenance capital expenditures required to operate a business. This remains a key differentiator for us versus virtually all other MLPs. And with that, I will turn the call back over to Pete. Pete Boylan Thanks, Jeff. The rising activity levels as a result of the increase in rig count, increase in permits and higher commodity prices have clearly benefited virtually all of our customers and in turn us, despite a generally negative macro investor sentiment for energy over the last year. The hedging activity that’s been reported in the current quarter and what we expect in the fourth quarter with E&P companies taking advantage of the higher prices should further benefit our customers. I was pleased that we were able to add 18 new customers across our three business segments, as we continue to focus on a tremendous opportunity to address the thousand plus customers that need our services that we do not currently serve. We continue to aggressively look for acquisition opportunities that will allow us to supplement our organic growth, and are currently conducting due diligence on several promising potential targets and as mentioned earlier have ongoing diligence on one LOI with exclusivity that we are excited about. We have a strong sponsor that has a material economic interest. Our sponsor is truly interested in growing our value and assisting in financing acquisition opportunities that are larger than what we can handle independently. We truly appreciate your valuable time, your continued support and your interest in Cyprus. Please note, that we remain focused on execution, organic growth and sequential improvement in our current operations, while continuing our pursuit of attractive acquisition opportunities with a suitable risk profile. Our board, management team and employees also remain committed to building the best company we can with a focus on long-term unit holder value through a disciplined approach to growth. Finally, at this time, I would like to thank Les Austin, our CFO for his valuable contributions over the last five years. Les has made significant contributions to us and we wish him great success in his new endeavour. CELP has a talented management team, and as I mentioned a strong board and sponsor. Our attractive businesses can grow organically pursuing new customers with the benefit of requiring minimal Capital expenditures. Both segments we currently operate and have strong long-term fundamentals and they are essential services required by law to support our energy customers core business. We are planning to build upon these lines of business by adding traditional midstream services to our portfolio though acquisition to further strengthen and diversify our business. Operator, we may now begin taking some questions.

[Operator:]

[Operator Instructions] And our first question comes from Marshall Adkins from Raymond James. Go ahead, Marshall.

[Marshall Adkins:]

Good morning guys, looks like you had ex the Canadian stuff, a pretty nice pop in the pipeline inspection side in U.S. and the integrity business also had a nice bump. I’m curious, how much of that do you consider seasonal in nature, because we normally bounce up that time of the year, versus a structural improvement in the business that is sustainable going forward.

[Pete Boylan:]

Good morning, Marshall, how are you doing?

[Marshall Adkins:]

Good.

[Pete Boylan:]

I think that we are really continuing to make progress in this pursuit of a change in the mix of our business and the pursuit of higher-margin integrity opportunities that come out of a different you know pocket of money, typically operating expenses with our customers as opposed to the older days where we had a lot of gearing toward basic, much lower margin, new construction inspection services. So we are kind of re-thinking and have been the focus of our business development efforts to really find opportunities that will be there year after year as we get to know our clients existing infrastructure become a bigger part hopefully of their ongoing operating expense maintenance budget that in turn requires fewer inspectors and each of those inspectors generate a substantially better margin for us, which has the effect obviously of reducing our working capital improvement things. You know clearly we are going to see some pop in new construction activity, with the first quorum getting placed in so forth. But we hit new records and our non-destructive examination and some of our other higher-margin integrity activities during the quarter, and we expect that to grow when and then this new initiative I mentioned, you know basically what I call in the fence we’re calling at the mechanical integrity group it’s yet another layer of regulation where OSHA is involved on top of the state and federal regulators. And in the fence, we defined to be things like, could be a refinery, it could be a gas plant, could be an oil storage facility, could be a refined fuels, storage facility, could be a compression station etcetera. TIR had never served that market, and we had an opportunity to pick up some talent from a competitor in that space and have hit the ground running with some mom really nice new work with some new customers, and we think that’s a tremendous untapped opportunity that TIR never pursued in the past.

[Marshall Adkins:]

Though it sounds like there is a lot of it is structural bulges from the industry getting better and your change of direction, is that of sufficient summary?

[Pete Boylan:]

Yeah, I think that’s fair and as you know, you can defer some maintenance and integrity cost, for a finite period of time, which is indeed what happens you know during the downturn, but you can’t defer that work indefinitely because the consequences are so draconian, and we’ve seen people spend more money on maintenance and integrity work, that you know they have tightened their belt like everybody had to do in the last couple of years.

[Marshall Adkins:]

Okay, switching gears the Orla facility, Delaware basins, one of the hottest basins in the United States and it does tend to produce a lot of water. I think you mentioned, you expect to have that back up and running December, how long will it take you to ramp up on that reconnect pipelines or whatever you need to do to take to get that facility go on again.

[Pete Boylan:]

Yeah, so that facility is still operating on temporary frac tanks and then gun barrel, basically supporting the three pipelines that we have into it from three different investment-grade producers, but without the rebuilt storage battery we’ve got a great wellbore there and we’ve got close to 30 acres, so we’ve got the ability to put in another wellbore and as you pointed out, it’s probably Ground Zero in the United States for activity levels. We have kind of some back and forth on the type of facility we were going to build. There was somebody looking at some nearby acreage that was competing for it and have they won, they wanted to secure the substantial amount of our capacity for new pipelines. It turned out they didn’t win that auction and somebody else did has their own water infrastructure capabilities. So that caused us some delay in terms of deciding what type of facilities we were going to build, and whether we were going to dedicated all the pipeline or continue to be able to support truck water and as it turns out, we’ll continue to have a hybrid facility. But I would imagine that you know we’ll begin to see the pick up and activity in Q1 and sequentially you know grow from there.

[Marshall Adkins:]

All right, last one from me. You mentioned acquisitions or heating up, you got one in the hopper here, and I think your close traditional midstream opportunities, does that mean it’s on the water side or the inspection site?

[Pete Boylan:]

So one of them is in water, another one that’s too early to tell, we don’t have exclusivity at, would be traditional midstream and an attractive basin they would get us into the gas processing business. And then there is another one we are pursuing that would fit into the inspection and integrity [Indiscernible] of the company.

[Marshall Adkins:]

So across the board. Okay, guys thank you.

[Pete Boylan:]

Thank you.

[Operator:]

And our next question comes from Ethan Bellamy from Barke. Go ahead, Ethan.

[Ethan Bellamy:]

Hey guys, good morning and before I dive in the question, just want to say thanks to Les for all his hard work in the past year, he’s been super helpful and wish him the best.

[Les Austin:]

Thank you.

[Ethan Bellamy:]

With respect to the metric on inspection services, average revenue per field personnel, looks like that’s come down sharply year-over-year, is there a change in mix that’s driving that or have rates come down in that business?

[Pete Boylan:]

All of the above, and if you would imagine every job has got kind of a different model, some pay per VM seven days a week, some pay probably in six days a week, some pay at five days per week, as you recall Ethan, generally speaking we get no margin on per diem [ph] but it drives our working capital, because we pay our inspectors weekly, and then we invoice a client, and it may take some 40 plus days to pay us, so that can create a lot of noise and the average revenue per inspector, because that requires us to get reported at the top line. Mileage policies and equipment policies, you can also influence that. Yeah sometimes, you know ATVs are involved, sometimes specialized other equipment involved, some clients pay a guaranteed mileage fee per day regardless of miles driven, other clients pay only based on miles driven and then of course you have the specific inspection skill being applied to the opportunity and the rates can range from maybe a low of 400 bucks a day for steel XYZ to a high of probably $1300 a day for a different level of skill, see that all of that stuff going on. Les of Jeff, would you guys anything else to that.

[Les Austin:]

Just to Pete’s point, seven days of per diem versus no per diem in the $1200 per week number, that can change that rate.

[Ethan Bellamy:]

Okay. I mean it sounds like there are a lot of elements that go into that, that it would be impossible for us to forecast. More broadly speaking would you anticipate that that metric will increase as the capacity tightens with new projects coming online.

[Pete Boylan:]

I think that because we obviously don’t disclose the specifics for competitive reasons, I think the way I would think about Ethan is that the -- our goal is to grow our gross margin percentage, and we are less focused on headcount and more focused on the type of work and projects we are pursuing, because of the significant difference in margins with a different type of services we offer, where in the past we took on a lot of new construction at market rate basic service margins which were quite a bit lower, so I don’t know lest Jeff, do you guys have any other color you would give to Ethan on that question

[Jeff Herbers:]

No, I think that there is mixed, but backed by per diem issue, the construction projects are typically out where we are paying per diem for most of the inspectors on those projects.

[Ethan Bellamy:]

Okay, switching to disposable, how are the rates trending by basin?

[Pete Boylan:]

Rates bottomed out in my view Ethan probably six months ago, and now there are some places especially in the Permian where there is a shortage of disposal capacity and people are willing to pay a higher rate to guarantee disposal capacity for their plans. And, a couple of big things are going on better than I do, but when we first started this business, a completion in the Permian a big one would be 200,000 barrels of freshwater and a frac job and now we are seeing 700,000 barrels and some frac jobs and it used to be all single well pads and we’re seeing some six and seven well pads, so the logistics same amount of water and that of course drives flow back and then these longer laterals continue to get drilled with these enhanced completions are stimulating not only more hydrocarbons, but more water and you’re getting that water quicker in the cycle, yet was a whole bell curse slides closer to time zero, so there is a lot of positive dynamics from the water business going on.

[Ethan Bellamy:]

Okay. Any specific about per barrel numbers that we can cite, like range wise maybe?

[Pete Boylan:]

Yes. Every neighborhood is different so please understand these are just macro comments, and we’re not in the Eagle Ford. We’re not in the stack. We’re in the Marcellus, although we look at acquisition opportunities all the time is those basins. So the only one that I can really speak to authoritatively would be the Bakken and the Permian, and in the Bakken you might see some low disposal rates at $0.40, but those that are becoming few and far between and I think it would be closer to 45 to 50 with no differential pricing. In the Bakken where you got differential pricing between flow back and produced water and you've got different operating cost structure up there. The taxes are higher. The electricity costs are higher. The labors higher et cetera. They would be -- maybe $0.45 on the low to $0.70 on the high and probably closer to 50 or something for produced and flow back to you now can be north of $1, but it just depends on the neighborhood and we have a broad footprint there as you know is scattered with 700 plus miles of windshield time to see them all and each of those neighbourhoods command a little different pricing depending upon what competitors might be doing.

[Ethan Bellamy:]

Got it. And one last question. With respect to pipeline connections that you have coming on, what the pro forma mix of the trucked versus piped water look like?

[Pete Boylan:]

Going forward obviously the percentage of pipe growth when that pipeline comes online, but a lot just depends on where we end up with Orla in the rebuild. We’re talking with some producers who have a lot of water they need to get rid of and if we were able to secure some new pipeline deals that could really change that question and suck up a lot of that capacity.

[Ethan Bellamy:]

Okay. Assuming you don’t get those deals where would you land with what you have right now?

[Pete Boylan:]

What would you say, Les or Jeff?

[Les Austin:]

We were 45% piped volumes in the third quarter, but it would be higher than that. We would be north of 50%.

[Ethan Bellamy:]

Okay. More than 50. Okay. That’s helpful. Thanks guys. Appreciate it. Thanks again, Les.

[Les Austin:]

Thank you.

[Operator:]

Our next question comes from Brian Butler from Stifel. Go ahead, Brian.

[Brian Butler:]

Good morning. Thank you for taking my questions.

[Pete Boylan:]

Good morning.

[Brian Butler:]

Just on the first one, when you think kind of the positive trend you saw sequentially into the third quarter from the second quarter, how should we be thinking about the fourth quarter on a segment basis considering seasonality, but then also kind of some of the project work that may have been pushed due to the hurricane. So if we could just kind of go through the core -- just on the fourth quarter kind of trends, can we just talk about that, but what we should thinking about?

[Pete Boylan:]

Yes. So, one of the wildcard that always the impacts the fourth quarter is you got the Christmas holiday, you got Thanksgiving holiday and an energy industry that generally a lot of people take time off in those holidays. The second dynamic is a lot of people have a CapEx budget and the industry have generally been geared toward exhausting that by Thanksgiving and once they’ve spent CapEx budget they really don't get reengaged on new CapEx until the new fiscal year and the new budget authorizations have been spent or made available to be spent. Offsetting those typical seasonal issues you've got obviously Hurricane Harvey which has delayed some things. You've got a growing number of docs. You got a backlog growing a shortage of completion crews to complete, and so that drilling can then generally in front of the completions and obviously we don’t benefit until there's completion. And then the other anomaly we've got going on right now is a whole bunch of projects that have been hung up in the administration and FERC have now been green lighted and those people are moving forward with them and were actively engaged with a number of people that are planning new pipelines, and they want get them in the ground this quickly as possible and they will really be gated by weather more than anything else because they want to proceed. So long-winded answer to a simple question, but those are all the variables that drive what may or may not be possible. So I would hope that we can do higher water volumes. I believe we will do more work and the integrity, Brown Hydro testing division and the inspection business a lot depends on whether and whether they have to stop work and some of these projects because of weather. Les, would you have anything else to add or Jeff.

[Les Austin:]

I think that’s pretty accurate.

[Brian Butler:]

Okay. Again, it sounds like seasonality is still going to be there and you’re going to be down sequentially from third quarter, but probably based on the strength of the -- what we saw in the quarter is up year-over-year. Is that a fair directional call?

[Pete Boylan:]

I think it’s hard to predict there is some projects out there that I don't know which way they're going to go and so I'm hesitant to speculate on that.

[Brian Butler:]

Okay. And then with the Orla facility coming back online or expected back on line in December. How should we think about revenues – or volumes, I'm sorry, how should we think about volumes heading into 2018, kind of on a run rate basis or on a quarterly basis once that facility is up?

[Pete Boylan:]

Well, I think we should be able to grow the volumes sequentially on a quarterly basis from where they are today. What date we will have the facility able to be fully utilized remains a moving target. As you would imagine labors become super tight every sub is very busy and getting electricians and concrete people and roustabouts to do show up when they're supposed to do and are not always easily predictable frustratingly so.

[Brian Butler:]

Okay. And if you think I can spend just kind of with the positive trend we’ve talked about just thinking of 2018 overall, you know, if you’re in that kind of quarterly revenues kind of call it 75 to 80 if that's the sustainable. How should we think about profitability, I mean, third quarter was at 12.5% or 12.1% gross margins? How does that go incrementally forward if we see some incremental growth? I guess what’s the operating leverage is what I’m kind of trying to think about?

[Pete Boylan:]

Yes. It depends on whether any of these acquisitions that will remain optimistic about happening on. So let assume the status call. The water business has substantial operating leverage. And so obviously we’ll have this growth CapEx with the pipeline project, but there the facilities not highly utilize. They’ve got tremendous capacity with no incremental material maintenance CapEx. So literally $0.90 of a dollar of revenue can drop straight to the bottom-line, because your incremental costs are electric city and chemicals generally speaking. Sometimes you may have a royalty surface on them. The Brown Hydro testing business has a totally different cost model, and as long as we continue to run acceptable utilization rates which is about managing the schedule, that business has significant operating leverage. If we can again make sure we keep our fixed costs covered in the right periods of time and we don't get lumpiness in our work and one of our challenges has been sometimes we’re the tail-end of the project you know it’s getting done and it's time to go put that line in service and a hydro test occurs, and all things have to happen before the test occurs and then you add to that weather. And so, we can have a client say, we want you to be and the Permian basin in the third week of October and we got this hydro testing job, so we block it out on the schedule and we’re committed to be there and then a week before we get a call that this problem or that problem happened with construction and its been delayed a bit rain for four, five days and hey loss five days. And all of a sudden what look like a fully utilized, when to uptime you get double book on top of each other. By having said that, we’re getting better about managing that and how we’re navigating that. And we think we’ve got a path to wining more of the bids. The high class problem we have is we’re bidding on a tremendous number of war. We to hydro testing demand continuing to grow. We just need to when more of it at the right to stay hardly utilized. And then on the inspection and integrity front, we kind of already talked about that, but again we want to continue to pick up work and win those of time there are otherwise swap. So for example, our less course PUC work in Northern California is a nice counterbalance to traditional mid stream work that starts to slow down because of weather or because of the holidays. They tend to work more and better climates, and we have been expanding into the Southeast with some PUCs that again have the benefit of better weather and working. And then last but not least you’ve got this mix of business that I already discussed that we’re focused on.

[Brian Butler:]

Okay. And then, maybe one last one, on the SG&A line how should we think about the fee release that you continue to receive from the sponsor and kind of what is right level of that into fourth quarter and thinking about 2018 should we assume that just runs at – call it, 20 to 25 million SG&A. And then they’re not going to get the temporary release going forward or where does that switch off. It seems like you’d have to get net income somewhat closer to 6 million before that fee relief would be dial back?

[Pete Boylan:]

Well, we obviously have said, now as I repeat several times is the sponsors align them. Will continue to be supportive, obviously I’d like to in a position where we didn’t need this support, which is just a function of the continued sequential improvement. So we’ll continue to look at that on a quarter-by-quarter basis and do what we believe is prudent with regard to that.

[Brian Butler:]

Okay. Great. Thank you for taking my questions.

[Pete Boylan:]

Thanks Brian.

[Operator:]

And that appears to be the last question. At this time, I would now like to turn the floor back to Pete Boylan. Sir, the floor is yours.

[Pete Boylan:]

Well, once again thank you everybody for joining us this morning. We appreciate your time and support. And we’ll talk to you next time. Thanks.

[Operator:]

Thank you. This does conclude today conference. We thank you for your participation you may disconnect your lines at this and have a wonderful day