Cypress Environmental Partners, L.P.
Q1 2015 Earnings Call Transcript

Published: 14 May 2015

[Operator:]

Welcome to the Cypress Energy Partners First Quarter Earnings Release Conference Call. At this time all participants are in a listen-only mode, I would like to now turn the call over to Richard Carson. You may begin.

[Richard Carson:]

Thank you. Good afternoon and welcome to the Cypress Energy Partners first quarter investor conference call. I am Richard Carson, the General Counsel. With me today is Pete Boylan, our Chairman and CEO; and Les Austin, our CFO. We released our 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 integral to our remarks and you should 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 at the back of the press release. So with that, I will turn the call over to Pete.

[Pete Boylan:]

Good afternoon. Thanks Richard. Thank you for your interest and investment in our company. We had a solid first quarter despite very difficult comps compared with one year ago when oil was over $100 per barrel during the first quarter. Last week we announced the acquisition of the controlling interest in Brown Integrity. Brown has an excellent reputation in the pipeline industry for hydro-testing. We have some crossover in clients however TIR has dozens of other clients that regularly spend money on hydro-testing the pipelines. We look forward to offering this additional service to our great customers. The Brown acquisition coupled with the dropdown of the remaining 49% interest in TIR February 01, will enhance our earnings in distributable cash flow potential. The first quarter only reflected two months of the TIR dropdown in [non-Brown]. These two acquisitions provide us with additional financial flexibility in 2015 and beyond with regard to our coverage ratio and distributions. Last week as many of you know the IRS announced the long-awaited proposed rules regarding qualifying income. We continue to analyze the qualifying income regulations that were proposed but we do not believe that the regulations when finalized will have any adverse impact on our business. In fact we see a number of potentially promising new opportunities as we evaluate the guidance on intrinsic activities supporting the energy industry. We continue to focus both on acquisitions and organic growth. Last week we secured two new contracts with investment [Indiscernible] pipeline operators that should lead to material new business with our clients. Our Water & Environmental services divisions continues to focus on produced water that occurs for the life of completed oil and gas wells and we average close to 85% produced water during the quarter. The majority of our customers have materially reduced new drilling activity until oil prices recover and cost continue to decline. Producers are very focused on cost reduction and virtually all have an interest in piping water to SWDs reduced trucking cost and liability exposure. We continue to look at a number of pipeline opportunities. Despite these challenges we hopefully are narrowing the bottom and oil prices have indeed been improving. The SWD business is still a great business despite the downturn with very attractive EBITDA and free cash flow margins that will materially improve when commodity prices recover and new drilling activity commences again. We also achieved a new milestone with over 25% of our water coming from pipelines directly connected to customer oil and gas wells. We also have ongoing discussions with another half dozen potential pipeline opportunities. The big three producers in the Bakken Continental, Hess and Whiting remain our top three EMP customers sending water to our facilities. In the Permian our top customers include BHP, Shell, Anadarko and Cimarex. A substantial number of wells have been drilled but not yet completed including over 900 alone in the Bakken. When prices stabilized and recover we should see a nice rebound in activity. We continued operate with a strong balance sheet and capital structure that allows us to pursue new opportunities. We have approximate $59 million available and another $125 million in the current accordion feature under our facilities. We are now S-3 eligible and planned to file a shelf registration statement as this is customary. With that I would like to introduce Les Austin our CFO so that he can walk you through the highlights of the financials.

[Les Austin:]

Thanks, Pete. I'd like to take a movement to highlight some of our financial information released today. Net income for the first quarter was $2.8 million, $2.7 million of which is attributable to our common and subordinated unit holders and 0.1 million of which is attributable to our non-controlling interest holders. Adjusted EBITDA which we currently define as net income plus interest expense depreciation and amortization expense, income tax expenses, offering costs, and equity based compensation was $5.6 million, $5.0 million of which is attributable to our common and subordinated unit holders and $0.6 million of which is attributable to our non-controlling interest holders. Distributable cash flow for the first quarter was $4.4 million and we will pay a distribution of $4.8 million or $40.6413 per unit which represents a 4.88% increase over our minimum quarterly distribution which was consistent with our prior quarter distribution. In addition to the financial highlights on net income adjusted EBITDA and distributable cash flow mentioned previously I would note the following. We average 1470 inspectors per week for the first quarter of 2015. We disposed a $4.6 million barrels of saltwater for the first quarter of 2015 compared to disposing 4 million barrels of saltwater in the first quarter of 2014. Average revenue per barrel declined from $1.31 per barrel for the first quarter of 2014 to $0.92 for the first quarter of 2015 primarily due to the decline in volumes of residual oil sales and the average price we received for these sales of approximately 58% between the quarters. Our leverage ratio prior to the acquisition of Brown Integrity as calculated under our credit facility was 2.85 times and our interest coverage ratio was 8.21 times reflecting a strong balance sheet with $26.5 million in cash and substantial availability. Our pro forma leverage ratio after the drop of Brown was approximately 2.9 times. Maintenance capital expenditures for the three months ended March 31, 2015 were $147,000 reflecting the limited maintenance capital expenditures required to operate our businesses. Expansion capital expenditures for the quarter at $0.7 million represented capital completion obligations related to the mock SWD facility acquired in December 2014. In May 2015 the partnership was notified by the principle owner of two of our management service customers that they were terminating our management contracts. While we believe that the customers do not have a right to terminate the agreements we expect a loss of management fee revenue and a corresponding reduction in labor cost associated with the staffing of these facilities. Revenue per barrel matrix are comprised of five factors, disposal price per barrel, volume of barrels disposed, volume of skim oil, net realized price per barrel of skim oil, and the third-party management fees including reimbursements of labor expenses associated with the same. Rationally we believe the total barrels disposed in the next three quarters will be 10% to 15% higher on average than the first quarter. However we do anticipate a decline in price per barrel disposed due to continued market pricing pressures, oil prices and a decline in our management facility fees which represented approximately 11% of first quarter revenues in our Water & Environmental Services Segment. Currently we expect inspector headcount to be flat in the second quarter and to increase 15% to 20% in the third and fourth quarters as delayed projects commence work. We have also been awarded two new major contracts at this time and are not certain about the timing associated with the ramp up in number of inspectors required. Consequently we do not include these additional inspectors associated with these contracts in this estimated headcount increase. And with that I will turn the call back over to Pete.

[Pete Boylan:]

Thanks Les. We are finally starting to see some additional acquisition opportunities as market has begun to digest new commodity price environment. Our team believes that we will see more good opportunities in the second half of this year. We genuinely appreciate your valuable time, investment and continued support. Our team remains committed to building a great company in long term unit holder value through a disciplined approach to growth. We look forward to reporting our Q2 results later this summer, we hope to see some of you next week in Orlando at the MLP Annual Conference where we will be presenting. We remain focused on our stated goal of growing distributable cash flow over the long term at 10% annual rate. Insiders own 65% of our LP units and we are fully aligned with our unit holders with regard to growing our company and our distribution thoughtfully. Operator may we begin taking some questions.

[Operator:]

Absolutely. [Operator Instructions] We have a question from Ethan Bellamy, Ethan please state your question.

[Ethan Bellamy:]

Hey guys good afternoon, congrats on the good results. Question about some of the negative crests we have seen on size mix and disposal could you talk about how you are positioned there please?

[Pete Boylan:]

Sure. Hi Ethan, how are you? The seismic headlines have been getting a lot of attention especially here in Oklahoma and as most of you know we are – our facilities are located in North Dakota and then West Texas in the Permian. We study this issue very carefully when we started the company over three years ago and we spent some time with some experts in the industry and as you know my partners of petroleum engineers by background, we do believe that when you place a saltwater disposal well near no fault lines you may induce seismic activity as a result of the reduced friction associated with high volumes of water being re-injected back into the earth where it came from all be in a different zone. So we have by design intentionally not made investments in areas that have no seismic activity fault lines and we believe that the areas we operate do not pose that risk. Having said that the sciences clearly not agreed upon. It remains a healthy debate in the industry about it but I do believe that various state and federal regulators will continue to watch this issue very closely and but it’s been something we were focused on from day one and have been very careful about our approach to where these things make sense.

[Ethan Bellamy:]

That's helpful. One more question. With respect to the deterioration in oil prices, is that freed up additional assets and are you anticipating enhanced M&A opportunities?

[Pete Boylan:]

We are, yes you always have this capitulation that sometimes takes time to occur where sellers have to come to grip sort of their assets not worth what they were worth in Q3 of 2014 prior to the OPEC announcements. Where we are particularly pleased that we exercised the discipline we did. We looked at a lot of deals in late ‘13 and all through 14 and fortunately did not make any acquisitions that we now have to live with and regret and so we are excited about some of the things we are looking at.

[Ethan Bellamy:]

Thank you very much.

[Operator:]

Thank you for your question Ethan. Our next question comes from Abhi Sinha. Please state your question.

[Abhi Sinha:]

Yes, good afternoon everyone. I just wanted to get some color on revenue for inspector, I mean if you have some idea what’s going to be in second quarter or second half?

[Les Austin:]

We haven't put out any comments on revenue for inspectors because as we stated in our prepared comments based on the contracts that are taking off in the third and fourth quarter and the uptake in headcount we don't know the mix of work specifically that will be associated with that initially and so we are not putting out any numbers in that range.

[Pete Boylan:]

And I would add to that that the mix of business we have can vary significantly and as Les noted some projects may require very specialized skills that commands substantially higher rates non-destructive examination work, commands very lucrative rates and then sometimes clients a lot of ministerial administrative work that needs to be done as it relates to compliance with integrity work that commands a lower rate. So until you really understand some of those specifics is the actual work orders come in for those reasons we don't provide specific guidance on that.

[Abhi Sinha:]

Sure. But just coming to that point like as to what level of conference you have other than inspector headcount will increase like 15% to 20% in third quarter and fourth quarter and is that like each in third quarter and fourth quarter or the total 15%-20% in second half.

[Les Austin:]

I think what we are guiding is that the headcounts in the third and fourth quarter should both be somewhere in that range 10% to 15% higher than what we were experiencing in the first and second quarters that we said were second quarter was flat to the first. And basically there are several things that we look to gain confidence in those numbers, number one the typical seasonal activity that we see in our Pipeline Inspection and Integrity business occurs in those quarters. There is an uptake in those quarters and then based on what our customers are telling us about the projects gives us the additional confidence in those – in that guidance.

[Abhi Sinha:]

Sure and the one last thing sort of curiosity like so when you say the IRS willing on the qualifying income, that might open more opportunity what do mean and what are you thinking on those lines?

[Les Austin:]

Sure. So I am sure you have read the 39 pages of published materials but we read it multiple times and then have consulted with a variety of tax professionals that do this for a living and in the past some things that were deemed [essential] were often debated but there appears to be some specific proposed regulations that say if something is required by either federal mandate or state mandate and is essential they can be included very much, still more complicated I am not going to get involved in language but we think that state regulatory requirement potentially opens up a lot of new business activities that we had looked at in the past and we came to the conclusion that they weren't required federally like pipeline inspection is as part of DLT and [FINSA] by the Texas railroad commission or Oklahoma Corporation Commission or the NDIC in North Dakota mandate that a producer or a pipeline owner do certain things that were not federally mandated it would appear that as an example of potentially broader sense of essential opportunities.

[Abhi Sinha:]

All right. That's all I have. Thank you very much.

[Operator:]

Thank you Abhi for your questions. It seems there are no further questions in the queue so I will pass the floor back to you.

[Pete Boylan:]

Great. Well we thank everybody again. Have a great evening and we hope to see some of you next week.

[Operator:]

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines this time and have a great day.