Cypress Environmental Partners, L.P.
Q2 2015 Earnings Call Transcript

Published: 13 Aug 2015

[Operator:]

Welcome to the Cypress Energy Partners Second 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. Hello, and welcome to the Cypress Energy Partners second quarter investor conference call. I’m 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 morning. Thank you for your interest and investment in our company. We had a solid second quarter despite very difficult conditions compared with one year ago when oil was over $100 per barrel during the second quarter. We were pleased to announce that we maintain our distribution rate at a $40.6413 per unit consistent with our first quarter distribution unit, despite the continued downturn and commodity prices impacting virtually everyone in the energy industry. We expect our coverage ratio to build the balance of the year and plan for a fact the distribution asset in a unprecedented developments. Considering that our insiders on approximately 65% of the LP units, we have a full and complete alignment with our minority unit holders to protect the LP. Investors should also remember that half of our units remain in a subordination, and therefore the common unit coverage is quite strong at approximately 1.5 times and 1.89 times on a pro forma basis for a transaction closed July 1. We continue to focus on organic growth opportunities in each of our segments. We have also begun cross selling our new hydro testing services to our existing inspection clients. EMP producers are focused on reducing cost and dealing with lower commodities that are impacting their borrowing basis, capital budgets and free cash flow. As a result, we continue to evaluate interesting opportunities with EMP producers that may lead to accretive acquisition and growth opportunities, as these producers focus on their core business of finding and producing hydro carbons. It’s important to note we currently don’t operate any facilities and areas with seismic activity and plan to order the same. We continue to operate with the strong balance sheet and credit facility that allows us to pursue new opportunities. We have approximately $59 million of available and an additional $125 million in the current accordion feature under such facilities. I would like to introduce Les, our CFO so that he can walk you through the highlights on 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 second quarter was $1.9 million, comprised of $2.1 million attributable to our common and subordinated unit holders and a loss of 260,000 attributable to our non-controlling interest holders and general partner. Adjusted EBITDA which we define as net income plus interest expense depreciation and amortization expense, income tax expenses, offering costs, noncash allocated expenses and equity based compensation was $5.4 million, $5.3 million of which is attributable to our common and subordinated unit holders and 56,000 of which is attributable to our non-controlling interest holders. Distributable cash flow for the second quarter was $3.5 million and we will pay a quarterly distribution of $4.8 million or $40.6413 per unit which represents a 4.88% increase over our minimum quarterly distribution and is consistent with the 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 1367 inspectors and 36 field personnel per week for the second quarter of 2015. We disposed a 5.2 million barrels of saltwater during the second quarter of 2015 compared to disposing 4 million barrels of saltwater during the second quarter of 2014, representing an increase of 10.6%. Average revenue per barrel declined from $1.27 for the second quarter of 2014 to $0.77 for the second quarter of 2015 primarily due to the decline in volumes of residual oil sales and the average price we received for these sales which was approximately 47% lower between the quarters. During the quarter, more than 90% of our volume was produced water and more than 25% was piped, as we completed another connection to an investment grade EMP company. The percent of pipe water continues to grow. Our leverage ratio as calculated under our credit facility was 2.51 times and our interest coverage ratio was 6.79 times reflecting a strong balance sheet with $28.6 million in cash and substantial availability. Maintenance capital expenditures for the three months ended June 30, 2015 were $215,000 reflecting the limited maintenance capital expenditures required to operate our businesses. 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. Directionally we believe the total barrels disposed in the next two quarters will be consistent with the average barrel disposed in the second quarter and we do not anticipate any further decline in price per barrel disposed should commodity prices stabilize at current levels. We have worked with our customers collaboratively to address the downturn and commodity prices and the needs to reduce their expenses. Currently we expect inspector headcounts to increase 5% and 10% in the third and fourth quarters as delayed projects commence work. And with that I will turn the call back over to Pete.

[Pete Boylan:]

Thanks Les. Starting early June we began to see a material increase in acquisition opportunities as the market has begun to accept new commodity price environment in the lack of a V shape recovering. We believe that we will continue to see additional new opportunities in the second half of the year. We also have a very strong general partner as material economic interest in the LP and that is interested in willing to help commit any acquisition opportunities that are larger than what the LP could handle through independently. We eternally appreciate your valuable time investment and continued support. The beating our units and taking is quite frustrating for everyone on our team, and as the largest owner of LP units we remained focused on execution that will lead to a recovery in the unit price. Unfortunately, we can’t control commodity prices or macro investor sentiment that has lost some confidence in the MLP sector as a whole. Our board and our management team remain committed to building a great company and a long-term unit holder value through the disciplined approach to growth. We look forward to reporting our Q3 results in November and we remained focused on our stated goal of growing distributable cash flow over the long-term at a 10% annual rate, despite the industry challenges that we currently face at this point in time. Again, as insiders we own over 65% of the LP units and we are fully aligned with our other unit holders with regard to growing our company, unit value and distributions. Operator, we may begin taking some questions.

[Operator:]

Ladies and gentlemen, at this time we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Praveen Narra from Raymond James. Please state your question.

[Praveen Narra:]

Hey good morning, guys.

[Pete Boylan:]

Good morning.

[Praveen Narra:]

Could you help us understand the deal with SPG on the acquisition on minority interest, just a little bit more color on that?

[Pete Boylan:]

Are you speaking about the management company, are you speaking about the acquisition [indiscernible] facility or which particular?

[Praveen Narra:]

I guess the color on that’s in the 10-Q I guess but [indiscernible] the SPG already deserves as to get the 49% of CES?

[Pete Boylan:]

So when we originally structured our transaction with them, we had an normal out piece which they did not end up making. We also have 51% interest in the management company that managed the facilities up there with some third-party facilities, and we had negotiated the right to acquire the remaining 49% interest in that management company which also happened to own our 25% interest in one of our facilities up there with piped water. So, we exercised our right to acquire the remaining 49% which increased our ownership at [indiscernible] facility from 12.5% to 25%. So, I think that maybe what you’re asking about.

[Praveen Narra:]

Right, so you guys actually decided the color option that you guys had as part of the agreement?

[Pete Boylan:]

That’s correct. We still continue to have a number of other rights of first to refusal to acquire other businesses, still our partner has up there including his trucking company, rail facility and diesel business and some other things that were outlined in our original information.

[Praveen Narra:]

Okay, perfect. And then on the inspection side, you mentioned differed projects, the projects being delayed on the pipeline inspection portion. Could you give us a sense of what kind of magnitude of impact that’s had so far? And do you spent of which they’re going to be able to delay these projects?

[Pete Boylan:]

Yeah, I’ll provide some macro color in the last feel free [indiscernible]. Several of these projects are absolutely proceeding, unfortunately the spout page just slipped for a variety of reasons and typically the reasons to update slip as that the owner of the pipeline has gone back to the construction companies building them, and rebid the work in light of the downturn. And that has delayed the kick off and so there were several jobs that we had originally budgeted to occur earlier in the year based upon what the client was telling us and when they wanted to have the inspectors on the ground in the particular geography, and those projects are proceeding now and will in the third and fourth quarter and we’re staffing up on them but needless to say it impacted our headcount at that time. So there is a number of those situations. There was only one large situation and have the name of the client I won’t share, but it was going to be over a 150 inspectors, we have been awarded to work and they went into some right away rerouting problems and then the actions of opec and what led them to the price declines were seeing ironically led to their decision to cancel the project for the foreseeable future, notwithstanding they had secured and acquired lot of the right away and a lot of the pipe and had aborted contracts to many by these. So, most of the time it’s just slippage as to when the projects actually start but in one case there was a material project that would have had 150 plus inspectors for us and actually got cancelled. Les, would you add anything that?

[Les Austin:]

Yeah Praveen, I would say that when we provided a little bit of guidance at the end of our first quarter conference call we said that the second quarter headcount should be flat to the first quarter, and they were down about 7% of the first quarter so that’s the difference in the slippage from the headcounts perspective.

[Praveen Narra:]

Okay, that’s very helpful. And if I can squeeze one more, you guys mentioned M&A targets increasing. Can you give us a sense of that’s coming from, you partially mentioned but can you give us a sense where that’s coming from the EMP use saltwater from or is that third-party that you’re seeing?

[Pete Boylan:]

It is both, and we remain obviously most interested in those opportunities directly with the producer where we can secure a long-term relationship and partnership acquire administering SWBs and produced water pipeline gathering systems. And then B, they’re trusted partner to build out and expand that network including additional pipelines and additional disposals to support their drilling plan for their acreage overtime. But we have also seen a number of competitors and third-party SWB owners that have had a dramatic term of events with its downturn and especially that what I call skim oil junkies that worth casing flow back and skim oil and many of those minority investors that were involved in those things are dissolution and looking to exit. And many of them missed a bubble and as you know, we tried to be extremely disciplined in 2013 and 2014 and we believe that that was the light decision in light of what these assets were trading for, in some cases what people were trying. And so we’re excited about the chance to really acquire some good opportunities and we focus on those that, A, are dominated flat produced water, and B, have either existing pipeline connections or the opportunity to tie pipelines into it.

[Praveen Narra:]

Perfect. Thank you very much for the color.

[Operator:]

Your next question is from Brian Butler from Stifel. Please state your question.

[Brian Butler:]

Hi, good morning, thanks for taking my questions.

[Pete Boylan:]

Thanks, Brian.

[Brian Butler:]

First just one back on the acquisition, can you give a little bit more color just kind of on the magnitude of that increase you’ve seen since June and maybe different color about has valuation expectations come down and are they getting to a reasonable level or are we approaching kind of a fire sales scenario?

[Pete Boylan:]

I wouldn’t say we’re at fire sale scenario, there is always some exceptions where somebody had buy a bunch of money and they’re upside down, they can’t make their debt payments and banks want them to liquidate the asset. We see some of those from time-to-time. But I think for the most part that’s just a sobering realization that where the drilling activity down and naturally the client occurs on all of these [indiscernible] that they’re not going to generate the cash flow they were once generating. And especially those folks have changed the flow back in the skim oil, they’ve seem the most profound impact and the downturn in their cash flow. And obviously the MLP sector, yields have all moved up here of late and so folks like us and others are not valued the same where we were a year ago. And so generally speaking, I don’t think anybody is privately buying SWBs at multiples that they were paying in 2014 and we’re certainly very disciplined. And I think you saw what we did last December where some folks are paying very large prices where we’re buying stock a lot closer to cost that’s got good solid cash flow in piped water.

[Brian Butler:]

Okay, great. And then on the produced water side, when you looked at the lower growth expectations for the final opportunities, I’m sorry, the inspection side, when you look at the number of inspectors coming down to that 5% to 10% growth rate versus the 15% to 20%, how much of that is projects being canceled versus projects being pushed into 2016?

[Pete Boylan:]

Very, very small amount of cancelations, mostly it’s just pushing. And these projects are going to go and they have commitments from end users, they’ve got right away, they have the balance sheet. The substantial majority of our clients as you know are investment grade parties and so generally speaking, I’d say it’s just a push out. And another important thing to note is we look at our available market of clients to serve as 100 plus MLPs out there, you then add to that the 65 or 70 PUCs, Public Utility Companies that are moving natural gas to homes businesses, industrial plants etc. And then the 1,000 plus EMP companies out there that had gathering systems, storage tanks, gas plants, processing facilities, compression stations, etc. So, we have only cautioned the surface, today in the United States and Canada we serve about 85 clients. So our focus is really growing organically into that 1,000 plus available addressable market, but our terms are quite high doing that. Having said that, there are some acquisition opportunities out there that we think are interesting and we continued to look at those on our parallel path with just expanding our audience and customers.

[Brian Butler:]

And then, the current specter rates, how should we think about those in the second half in the current environment? Are those going to be under pressure or what kind of [indiscernible] on the second quarter?

[Pete Boylan:]

I think there’ll be less [indiscernible]. I think they’ll similar, having said that I think there isn’t Energy Company out there that doesn’t want any vendor to shop in that council and what with them as it relates to dealing with the slower commodity price environment but Les have you had anything?

[Les Austin:]

No, we’re forecasting as we said in the prepared remarks 5% to 10% on the headcount and the revenue per inspector metrics we think will be very similar to what we’ve experienced in the first half of the year.

[Pete Boylan:]

Yeah, we’ve been on some really big projects and made the short list with some major clients that – it’s too early to tell but if we were able to secure that client in one case it could be hundreds and hundreds and hundreds of inspectors. We just don’t know and therefore it doesn’t make sense for us to forecast a win there but we’re certainly working hard on penetrating some major new clients.

[Brian Butler:]

Okay, and one last one. On your growth, your distribution growth target of 10%, if the current environment kind of stabilizes where we are, I mean is that an achievable target in 2016 or do we really need to see a recovery in the industry in order to get to that 10%?

[Pete Boylan:]

Well, I think for us to achieve the 10% absent of recovery and commodity prices, we’ve got to find some good acquisitions. And we have a couple that were in serious discussions on that would materially improve our EBITDA and distributable cash flow. It’s just – and the deal business as you guys know, it’s not done till it’s done and the doubles of the detail are working through with the other party and making sure there are opportunities that we truly believe we’re in the long-term growth prospects.

[Brian Butler:]

And I could squeeze one last one, and do you have a leverage kind of cap that you don’t want to go above when you consider the amount of acquisition you’re willing to do?

[Pete Boylan:]

Yeah, we told everybody in the road show a year and half ago that we always want to be thoughtful about leverage and protect the LP, but we’re also going to be opportunistic. And so it really depends on the risk profile of the target and the stability of the cash flow and what we think about it that will dictate whether we bump up a little bit and would come back down where we end up, but I don’t think any of us are interested in running an over leverage company.

[Brian Butler:]

Great. Thank you very much for taking my questions.

[Les Austin:]

Thanks.

[Operator:]

Back to you Richard, for concluding remarks.

[Richard Carson:]

Well, thanks everyone for joining us. We appreciate your interest, we appreciate your questions. And we look forward talking to you next quarter.

[Operator:]

This concludes today’s conference call. Thank you for attending.