Cypress Environmental Partners, L.P.
Q4 2014 Earnings Call Transcript

Published: 30 Mar 2015

[Operator:]

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

[Richard Carson:]

Thank you. Good morning and welcome to the Cypress Energy Partners fourth 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 Web site 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 very much for your interest and investment in our company. We had a respectable performance in the fourth quarter despite the headwinds created by falling commodity prices during the second half of 2014 that impacted our waters segment. With the drop down of the remaining 49% interest in TIR in February we believe our earnings and distributable cash flow potential should be enhanced with our Pipeline Inspection and Integrity Services business segment providing us additional flexibility in 2015 with regard to our coverage ratio and distributions. We continue to focus on both acquisitions and organic growth opportunities, securing several new inspection clients during the quarter that represent promising new prospects for growth in future periods. Our Water & Environmental services divisions focused on produced water that occurs for the life of a completed oil and gas well versus flowback in skim oil will help reduce some of the inevitable pressure from lower drilling activity, water volumes and crude oil prices. This focus on produced water was demonstrated in December of last year with our previously announced new facility located in McKenzie County, North Dakota which includes a new SWD connected to a water pipeline gathering system that connects to oil and gas wells that features minimum volume guarantee, a long-term contract for produced pipe water delivery from a publicly traded major E&P customer. Several other opportunities are also under consideration that includes pipe water and long-term agreements directly with E&P companies. Despite the pressure from lower commodity prices we were pleased to announce that our fourth quarter distribution was 4.88% higher than the minimum quarterly -- that fourth quarter distribution was 4.88% higher than the minimum quarterly distribution, consistent with the third quarter, despite a very challenging environment for E&P companies and their service providers. We continue to operate with a strong balance sheet and capital structure, it allows us to pursue new opportunities and we have an attractive pipeline of opportunities we're currently evaluating. The post TIR drop-down pro forma leverage ratio was 2.7 times pursuant to the terms of our credit facilities. We have approximately $70 million available and an additional 125 million in the current accordion feature under such facilities. Demand of our pipeline inspection and integrity services remains encouraging. As previously mentioned, we've also been presented with some opportunities to grow our Water & Environmental Services Segment. Lastly we took some non-cash goodwill impairment charges during that quarter as a result of the material decline in commodity prices and the corresponding impact on our Water & Environmental Services Segment. Commencing with Q2 of this year our financial presentation will be simple type as a result of the TIR drop-down. I'd like to introduce Les 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 fourth quarter excluding non-cash impairment charges was $3.8 million, $2.9 million of which is attributable to our common and subordinated unit holders and 0.9 million of which is attributable to our non-controlling interest holders as general partners. Adjusted EBITDA which we currently define as net income plus interest expense depreciation and amortization expenses, income tax expenses, offering costs, impairments and non-cash allocated expenses, less gain on reversal of contingent consideration was $6.7 million, 4.4 million of which is attributable to our common and subordinated unit holders and 2.3 million of which is attributable to our non-controlling interest holders. Distributable cash flow for the fourth quarter was $4.3 million and we paid a quarterly distribution of $4.8 million or $.0406413 per unit which represents a 4.88% increase of our minimum quarterly distribution and was consistent with the prior quarter's distribution. The financial statements have been presented as if the contribution of the Water & Environmental Services Business and TIR occurred at the later at the beginning of the period presented or the date Cypress Holdings obtain control. Accordingly the prior income statement and cash flow reflect only the third and fourth quarters of 2013 plus four days of TIR activity because holdings did not obtain control until June 26, 2013. The prior year columns are labeled as recast for this reason. In addition to the financial highlights on net income, adjusted EBITDA and distributable cash flow mentioned previously, I would note the following. We average 1,552 inspectors per week for the fourth quarter of 2014. We disposed 4.9 million barrels of saltwater in the fourth quarter of 2014 compared to the disposing 5.1 million barrels of saltwater in the fourth quarter of 2013 as a result of increased competition. Average revenue per barrel declined from $1.13 for the fourth quarter of 2013 to $1.07 for the fourth quarter of 2014. Primarily due to the decline in average price we received for our residual oil of approximately 29% between in the quarters. Our leverage ratio prior to the TIR drop-down as calculated under our credit facility was 0.94 times and our interest coverage ratio was 9.14 times reflecting a strong balance sheet with $20.8 million of cash and substantial availability under our credit facility. Our pro forma leverage ratio after the drop of TIR was approximately 2.7 times. There were no maintenance capital expenditures for the three months ended December 31, 2014 and for the year maintenance capital expenditures were $157,000 reflecting the limited maintenance capital expenditures required to operate our business. Given the continued uncertainty about 2015 commodity prices and the declining capital expenditure budgets of our customers we are not going to provide 2015 guidance. And with that I will turn the call back over to Pete.

[Pete Boylan:]

Thanks Les. Again we greatly appreciate your valuable time, investment and continued support despite of overall environment for the energy sector over the last several months. 2015 will indeed be a challenging year in our Water and Environmental Services segment as a result of the dramatic decline in oil prices and new drilling activity. We hope that the drop down of the remaining 49% of TIR, our inspection business will help insulate these pressures. Our board and management team remained committed to building a great company and long-term unit holder value through a disciplined approach to both organically growing the company and through acquisitions. As a reminder insiders own approximately 65% of our company. We look forward to reporting our Q1 results in May. We remain focused on our stated goal of growing distributed cash flow over the long-term at a 10% annual rate. Operator we may begin taking some questions, thank you.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from Abhi Sinha from Wunderlich Securities. You may ask your question.

[Abhi Sinha:]

Just two quick ones. One is, I know you guys are not providing any 2015 outlook but I’m just trying to understand if you provide some color if possible on the pipe inspection business going forward here -- I mean the numbers were, number of inspectors were a little bit down. So where do you see going forward has the number taken a hit already or you see more reduction coming in. How should we look at that?

[Les Austin:]

We have said in my comments in the opening that we weren’t going to provide guidance on 2015 and so I don’t want to go down the road of trying to say where headcounts are going specifically, but obviously we felt strongly enough to drop the other 49.5% -- 49.9% of TIR in February, but we think that it’s a good business to continue.

[Pete Boylan:]

And I would add to that, that we’ve started out the year ahead of our own internal plans, as I mentioned we're focusing on growing that business organically but in addition to the organic growth there are a number of acquisition opportunities in the Pipeline Inspection and Integrity Services segment, there are lines business that we are not currently operating in that we hope to be able to bring over the finish line in the not too distant future. As I’ve noted in the past we have a very disciplined approach to acquisitions and due diligence and I think we served our unit holders exceptionally well by exercising that discipline last year because as most folks that were aggressive on the M&A front ended up paying substantially higher prices for assets this past year.

[Abhi Sinha:]

Sure, for the water segment business do you see, I mean in the fourth quarter did you see lower volumes across all regions or is there any other region that you saw was holding volumes better than that, better than the rest?

[Pete Boylan:]

Each and every facility is a different story and competitive landscape and so I would not say that there was an across the board common theme. Some locations have more competition than others, some locations had more drilling rigs than others and some locations have higher water cuts relative to the formation of the hydrocarbon comes from the other locations. So it really does vary facility-by-facility, and we've continued to focus on piped water. And when we started the compared we had one pipeline into one facility, and today I think Les we've what six or seven with another one or two in the works, including the assets that we purchased in December that has piped the asset. So obviously when you can secure piped water, and you work with the producer to connect all of their wells, whether they are doing pad drilling with multiple wells per pad, or whether they are doing single wells, you end up effectively as they go down spacing on their drilling activity, picking up incremental new volumes of water once those wells are completed. None of us have a real crystal ball or certainly I don’t as it relates to when commodity prices are going to return to a level that will see a material pickup in new drilling activity. But I think most of the producers have done a very good job of reducing their cost. And they stand ready, willing and able to put rigs back to work at better cost structures than they had prior to the downturn.

[Operator:]

Our next question comes from Michael Hoffman from Stifel Nicolaus. You may ask your question.

[Brian Butler:]

This is actually Brian Butler in for Michael today. Just on the produced water and the flowback that you were talking about. Do you have some numbers on where 2014 was on that split between produced water and flowback? And where maybe fourth quarter was? And then the trend going into first quarter '15?

[Pete Boylan:]

We don’t specifically provide guidance on that Brian, but I will reconfirm what we told folks when we announced the drop down or I’m sorry the purchase of the facility in North Dakota in December that approximately 80% of our volumes are produced water, and only 20% is flowback. And nothing has changed on that front. In fact I’d expect to see the produced water volumes as a percentage increase during 2015, given some of the things we’re focused on and additional pipeline connections we’re working on. Les would you add anything to that?

[Les Austin:]

No, I would just add that the produced water does include both truck and pipeline activity.

[Brian Butler:]

And when you think about the pricing pressure that you have talked about in the water business. Can you give any color between flowback and produced? Is the flowback water been discounted that much more? Or they are on PAR?

[Pete Boylan:]

Sure, I’ll attempt to address that generically. Again each and every location has its own competitive landscape and dynamic depending upon who the producers are in that area? Do the producers have their own SWDs? Or do they outsource the disposal of their water? And in Texas in the Permian in particular there generally is not a differential between produced water and flowback water it tends to be the same price. And those prices have always been much lower in the Permian than in the Bakken for example or in Utica or Marcellus for example, and in part it’s because the Permian such an old, well established area in the industry. In North Dakota much like any new basin that rapidly develops, you start out with higher prices as that Basin develops. And three years ago that basin may have received as much as 250 a barrel for flowback and as much as $1.25 a barrel of produced water. And is always the case for any services and the oil field as a new basin begins to grow up and develop and new competitors come in to support those E&P clients often trusted vendors from other basins the supply and demand starts to adjust and prices start to come down and that hasn’t been the case in North Dakota as it is in other markets as well. And I think a year ago or so the prevailing market price for flowback might have been $1.75 down from $2.50 and the prevailing price for produced water might have been $0.75 down from a $1 and $1.25 which is still a great deal higher than the Permian Basin as an example and dramatically higher than the Eagle Ford as an example. Having said that, every producer is looking to tighten their belt and reduce their LOE or their operating cost. And we have certainly received requests from virtually everybody to lower our prices for both flowback and produced water. We work with our customers as trusted long-term business partners and certainly understand because that's the DNA of our founder and controlled shareholder, who is a producer, but you got to have a long-term relationship of trust with the E&P Company and you need to work with them through the commodity cycles as they evolve. And so I think that you can see depending again upon the competitive landscape in an area, prices come down 15% and so it's possible that you'll see flowback ranging anywhere from $1.50 to $1.75 depending on volume and other things and produced water ranging anywhere from $0.65 to $0.75 in the Bakken depending upon competition and volumes and other considerations. In the Permian you never had this differential pricing and I think whether it was produced water or flow back water it generally ranged from $0.50 to $0.60. It's clearly no longer $0.60 except and rare exceptions and I think the trend is something closer to the low 50s but again it's back and circumstance specific depending upon the local market conditions doesn’t produce or send this water to third party and what is the competition doing. So Les, would you add anything to that?

[Les Austin:]

No I think that's accurate reflection of pricing.

[Pete Boylan:]

Yes the only other comment I would add is you can all do the math on where commodity prices have moved and a year ago commodity prices were dramatically higher than what a barrel of oil generates today, and as a result of that depending upon the skim oil ratio that ripples through the revenue per barrel calculation.

[Brian Butler:]

When you think then about the cost side of that business, I know that you talked about being able to reduce operating cost and improve some efficiency. Any thoughts without going into guidance on what's the way to think about? How much cost can be really removed out of that business?

[Pete Boylan:]

Well that's a great question needless to say we are doing the same thing -- our clients are doing which is we're reassessing every nickel we spent every penny we spend. So whether it's chemicals which are material or filter sox which are material or labor, and so forth there are some expenses where you don’t have much flexibility, real-estate taxes, insurance, utilities et cetera but there are many expenses that you do have some flexibility labor being the greatest. Six months or nine months ago we had effectively 0% unemployment rate in places like the Bakken and the Permian and there was significant wage pressure. With the thousands and thousands of layoffs that have occurred there is a lot of talent available and that talent is willing to work for substantially less and they were willing to work in the past. So we’re seeing an opportunity at times to high grade our employees and sometimes at lower cost in the field, and I think that trend is going to continue throughout the year. The second thing we’ve looked at is just our schedule and hours of operation and how we’re staffing and we’ve gotten smarter and are doing some things differently there, the tech labor cost out, we are obviously with reduced volume you have a direct correlation on the chemicals which are generally volume driven. And then your repairs and maintenance costs especially with pumps and other equipment declined as a result of lower volumes. The big opportunity that we continue to evaluate is just automation and man versus unmanned facilities and the hybrids that exits in there and many of our competitors operate unmanned facilities that are opened 24/7, 365. There is no employee there during the day generally; however, they have pumpers go by which is often times have E&P companies handled around tank batteries and production they don’t have staffed there 27/7 365 but they have people that come by everyday and check on things and so forth. So that continues to be an additional opportunity as we evaluate technology automation and some of the merits of that. All of our facilities were new build facilities. The substantial majority of our facilities we’ve own without a royalty, which is a real advantage to many competitors that they don’t own the land fee simple and a have royalty obligation per barrel that often times and fluids skim oil, so we do have a lot of different levers and we’re leaving no stones unturned as we look to tighten our belt and hunt down until these commodity prices recover and drilling activity picks up again.

[Brian Butler:]

Just at a high level for fourth quarter, do you have any sense of what the fixed versus variable was on the operating cost?

[Pete Boylan:]

We don’t get into that level of disclosure.

[Brian Butler:]

And on the skim oil sales, do you have a barrel number for fourth quarter in 2014?

[Pete Boylan:]

Hold on one second Les is checking?

[Les Austin:]

I don’t know that we actually disclosed, we did disclose that the revenue was about 22% to the skim oil side.

[Brian Butler:]

22% skim oil. And what’s the best I guess thinking about that for the best commodity that mere's what you’re selling at oil for, is that just crude?

[Pete Boylan:]

Good question, the Permian is generally a discounted WTI and the Bakken tends to be a larger discount given as you know oil producers generally are selling their crude up there off of clear book pricing and so there is a differential between the two basins and there is also significantly different severance tax. I think North Dakota is 11.5% and Texas is what less 4.5, so it’s almost 700 basis points, there is some further complexity and North Dakota has a provision for some assistance with some lower taxation when commodity prices are below $50 which they are now.

[Operator:]

Our next question comes from Victor Kalivas from Raymond James. You may ask your question.

[Victor Kalivas:]

So I wanted to get into fluids wise a little bit, I mean, I know you guys aren't providing exact guidance going forward but do you expect volumes to continue lower or kind of should we get a bounce back going forward? Can you give us some kind of figure on that?

[Pete Boylan:]

Yes. If you can help me figure out where oil prices are going and rig counts, I could give you a better guesstimate on that. But again each producer although many of them have now reported what their CapEx budgets are going to be and what their anticipated rig counts are going to be during the year. Most of them have not specifically disclosed how many rigs they're going to be operating in this particular field or this particular geography? And without that data I'd really be guessing and it be misleading to try to tell you that I can predict what's going to happen within a 30 mile radius of any one of our facilities absent the producer really giving us some more granular clarity on how many rigs will be active that will in turn generate new produced water and one-time flowback. So, we have in our own budget assumed lower volumes but again we don't have perfect vision on this for those reasons.

[Victor Kalivas:]

And looking at SGA this quarter or SG&A this quarter, it kind of jumped up little bit. Is that to do with the SWD facility in the Bakken or is there something else behind that?

[Pete Boylan:]

One of the things driving total SG&A, there was a non-cash charge that GAAP requires us to record it was about $497,000. This is an excess of the $4 million omnibus charge that the MLP bears and it was a charge attributable to the general partner but again it was one that we had to run through SG&A, so that was one of the contributing factors. It relates to the public company cost of the MLP that is in excess of that $4 million cap that the MLP is capped at.

[Victor Kalivas:]

So going forward, this come out or is this spend -- is there something you expect to continue to see?

[Pete Boylan:]

Going forward is the actual cost of operating the MLP from an SG&A standpoint exceeds the omnibus cap, you will continue to see a similar type charge. I would also add that we have been investing in our business development resources in particular in the Pipeline Inspection and Integrity segment. And we have also been investing in our NDE Group our Nondestructive Examination segment. That type of business as an example generates over 6x of return on margin for a dollar of revenue generated. But near-term there is some SG&A implications associated with growing that business. And we as I've mentioned previously are very focused on creating long-term value and making the right investments in our future, not obsessing and worrying about short-term quarter-to-quarter blips in SG&A coverage ratio or other types.

[Operator:]

[Operator Instructions]. It appears that you don't not have any further questions at this time.

[Pete Boylan:]

Thank you everybody. Have a great day.

[Operator:]

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