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Edited Transcript of CELP earnings conference call or presentation 18-Mar-19 2:00pm GMT

Q4 2018 Cypress Energy Partners LP Earnings Call

Tulsa Apr 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Cypress Energy Partners LP earnings conference call or presentation Monday, March 18, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey A. Herbers

Cypress Energy Partners, L.P. - CFO & VP of of Cypress Energy Partners GP LLC

* Peter C. Boylan

Cypress Energy Partners, L.P. - Chairman, CEO & President of Cypress Energy Partners GP LLC

* Richard M. Carson

Cypress Energy Partners, L.P. - Senior VP & General Counsel of Cypress Energy Partners GP LLC

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Cypress Energy Partners Fourth Quarter Earnings Release Conference Call. As a reminder, today's meeting is being recorded. (Operator Instructions)

And now to get us started with opening remarks and introductions, I'm pleased to turn the floor to Mr. Richard Carson.

Mr. Carson, the floor is yours, sir.

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Richard M. Carson, Cypress Energy Partners, L.P. - Senior VP & General Counsel of Cypress Energy Partners GP LLC [2]

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Thank you. Hello, and welcome to the Cypress Energy Partners Fourth Quarter 2018 Investor Conference Call. I'm Richard Carson, the Senior Vice President and General Counsel. With us today are Pete Boylan, our Chairman and CEO; and Jeff Herbers, our Vice President and Chief Financial Officer.

We released our fourth quarter 2018 financial results and posted the press release on our website cypressenergy.com, earlier today.

In the press release, you will find an important disclaimer regarding forward-looking statements. This disclaimer is an essential component of our remarks, and it is important that you review it.

Also included in the press release are various non-GAAP measures that we have reconciled to financial measures under generally accepted accounting principles. Those reconciliations appear toward the end of the press release.

With that, I will turn the call over to Pete.

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Peter C. Boylan, Cypress Energy Partners, L.P. - Chairman, CEO & President of Cypress Energy Partners GP LLC [3]

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Thank you, Richard, and good morning. I appreciate you joining us today, and thank you for your continued interest in our company.

I am proud of our team and very pleased with our operating results during the fourth quarter, which historically, is seasonally lower as a result of the holidays and weather conditions.

All 3 of our segments generated increased revenues in the fourth quarter of 2018 relative to the fourth quarter of 2017 with strong gross margins, which reflect not only the diversity and strength of our customers, but the need for the services we offer.

Our 2018 performance was very strong across the board, and we successfully deleveraged the company, reducing our net debt by 46% with additional equity that materially strengthened our balance sheet.

Revenues of our Pipeline Inspection segment increased from $63.6 million in the fourth quarter of '17 to $82.2 million in the fourth quarter of '18, an increase of 29%. Gross margins in this segment increased from $7 million in '17, to $9 million in '18, an increase of 28%.

We continue to make progress on our goal of diversifying our revenues into higher-margin inspection and integrity services. We finished '18 with strong head count. Our weekly head count averaged 1,375 inspectors in the fourth quarter of '18 compared to 1,101 in the fourth quarter of '17 or a 25% increase.

During the fourth quarter of '18, we began work on the largest contract award in our history, a pipeline project that we announced last quarter that is expected to continue throughout this year.

Revenues of our Pipeline and Process Services, otherwise referred to as PPS segment, increased 11%. The increase was due in part to increasing demand and in part to improved business development efforts.

Gross margins increased 25%. We began 2019 with a solid project backlog and have recently experienced robust bidding activity on new projects.

The extensive rain in the first quarter of 2019 has led to delays in the start dates of several of these projects we've been awarded. Revenues in our Water Services segment during the quarter increased 24%, partially driven by the completion of some new pipelines attached to our facilities earlier in the year. Demand for this segment increased in 2018 as customer activity increased in the Bakken share region with the higher commodity prices.

Gross margins in this segment increased 77%. These increases occurred despite the fact that we sold our 2 saltwater disposal facilities in Texas in the Permian Basin during January of '18 and May of '18, respectively, on attractive terms effectively exiting our saltwater disposal presence in the Permian Basin.

Our sponsor, Cypress Energy Holdings, completed 2 acquisitions in the third quarter of 2018, with the intention of offering these businesses to the partnership when appropriate. These are the first acquisitions we've made since the second quarter of 2015. We believe this will allow us to expand the breadth and depth of our pipeline Integrity Services we offer our clients.

Both transactions were asset purchases that require some repositioning before bringing them into the partnership. Our sponsor, has made solid progress on both acquisitions related to this goal and intends to offer them to the partnership once it is accomplished, certain developmental goals, most likely in early 2020, if not sooner.

These acquisitions would move us into several new lines of work, including various Pipeline and Process or PPS services, including chemical cleaning, pumping, flushing, water treatment, in-line inspection, otherwise known as ILI, with next-generation high-resolution technology for energy companies, equipment rental, which can be converted into a service business before offering this line of business to the partnership and other PPS services, including nitrogen and dehydration.

Our new Lafayette regional facility also allows us to expand into the offshore market, which we've never served before and positions us to better serve the Southeastern part of the country with all of our inspection and integrity services.

Our new MFL, ILI technology, magnetic flux leakage detection, and ILI again stands for in-line inspection, otherwise known as smart pigging, is also the first high-definition tool capable of serving the municipal water industry's aging mortar-lined steel pipelines that are used to transport our drinking water throughout this country and most of the world.

Most of the waterlines in this country are very old and need a substantial maintenance repair and replacement. The acquisition of these businesses by the partnership also position us to eventually resume increasing our distributions. I

n all of our business segments, we continue to invest in talent, technology and capabilities that we believe will drive organic growth; expand the number of customers we serve; increase margins; and most importantly, deliver attractive returns on capital invested.

Despite a decline in crude oil prices in the fourth quarter of '18, the outlook for global supply and demand dynamics remains solid. We also remain confident that Cypress has a winning strategy and provides essential services required by our customers to deliver attractive long-term growth.

We now have a very solid balance sheet with modest leverage of 2.6x adjusted EBITDA net debt. And with these 2 potential strategic drop-down opportunities, we have additional opportunities to enhance our organic growth. We remain a leader in North America in the inspection and integrity industry and we continue to grow the breadth and depth of our service offerings.

We believe this industry is poised for attractive long-term growth, given the aging energy infrastructure in North America as well as new construction that requires our essential midstream services.

I'm also excited to have the opportunity to serve the large municipal water industry with our inspection services. The ILI services for the municipal water industry are not MLP eligible qualifying income, and we will be required to pay taxes on these activities.

(technical difficulty)

We apologize, we're not sure what happened, but I'll go ahead and repeat a few comments not knowing exactly where we dropped off. Our sponsor, Cypress Energy Holdings, completed 2 acquisitions in the third quarter of '18 with the intention of offering these businesses to the partnership when appropriate.

We believe this will allow us to expand the breadth and depth of the pipeline Integrity Services we offer our clients. Both transactions were asset purchases that require some repositioning before bringing them into the partnership. Our sponsor has made solid progress on both acquisitions related to this goal and intends to offer them to the partnership once it has accomplished certain development of goals most likely in early 2020, if not sooner.

These acquisitions would move us into several new lines of work, including the various PPS services of chemical cleaning, pumping, flushing, water treatment, in-line inspection with next-generation high-resolution technology, equipment rental, which can be converted into a service business and other Pipeline and Process Services, including nitrogen and dehydration.

Our new regional facility in Lafayette will allow us to expand into the offshore market and position us to better serve the southeastern part of the country with all of our inspection and integrity services. Our new MFL, ILI technology, MFL stands for magnetic flux leakage detection, ILI is in-line inspection, some people refer to this as smart pigging, is also the first high-definition tool capable of serving the municipal water industry's aging mortar-lined steel pipelines, used to transport our drinking water. Most of the waterlines in this country and the world are very old and in need of substantial maintenance repair and replacement. The acquisition of these businesses by the partnership should also position us to eventually resume increasing our distribution.

In all of our business segments, we continue to invest in talent, technologies and capabilities that we believe will drive organic growth, expand the number of customers we serve, increase margins, and most importantly, deliver attractive returns on capital invested. Despite a decline in crude oil prices in the fourth quarter of '18, the outlook for global supply and demand dynamics remains solid. We also remain confident that Cypress has a winning strategy and provides essential services required by our customers to deliver attractive long-term growth.

With our deleveraging, we now have a very solid balance sheet with modest leverage of approximately 2.6x net debt and with these 2 potential strategic drop-down opportunities, we have additional opportunities to enhance our organic growth.

We remain a leader in North America in the inspection and integrity industry and continue to grow the breadth and depth of our service offerings. We believe this industry is poised for attractive long-term growth, given the aging energy infrastructure in North America as well as the new construction that also requires our essential midstream services.

I'm excited to have the opportunity to serve the large municipal water industry with our MFL tool. Although, this is not qualifying income and we are required to pay tax on these activities, the margins are still very attractive and there is less competition in this market. It's also not correlated to commodity prices.

The future of our partnership will continue to be focused on pipeline, inspection and integrity services that are mandated by various federal and state laws. Today, these services already represent over 95% of our revenue. Management and insiders continue to be fully aligned with the minority unitholders, given our 64% common ownership of the partnership and approximately 76% common ownership upon conversion of the preferred units, which is where in our industry.

At this time, I would like to turn the call over to our CFO, Jeff Herbers, so that he can share some additional financial highlights.

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Jeffrey A. Herbers, Cypress Energy Partners, L.P. - CFO & VP of of Cypress Energy Partners GP LLC [4]

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Thank you, Pete. As Richard mentioned, in addition to the GAAP financial metrics that we will talk about this morning, our remarks will also include non-GAAP financial information that we believe enhances our investors understanding of our performance. These non-GAAP financial metrics are reconciled to GAAP financial information in our press release.

Revenues in the fourth quarter were $88.9 million, an increase of $19.5 million or 28% over the same period last year. Revenues for the year were $315 million, an increase of $28.6 million or 10% over the prior year. Our net income in the fourth quarter of 2018 was $2.6 million compared to net income of $1.9 million in the fourth quarter of 2017, an increase of nearly 36%. Of this net income, $1.6 million was attributable to our common unitholders and $1 million was attributable to our preferred unitholder.

Net income for the year was $12.1 million, an increase of $14 million over the prior year. Net income attributable to our common unitholders for the year totaled $9 million compared to $3.2 million in the prior year, an increase of 177%. In 2017, net income attributable to our common unitholders included $4.1 million of sponsor support provided to us for no additional consideration.

Adjusted EBITDA for the fourth quarter of 2018 was $6.3 million compared to $4.5 million in the same period of 2017, an increase of $1.8 million or 40%. Adjusted EBITDA for the year was $23.1 million compared to $16.6 million in the same period of 2017, an increase of $6.5 million or 39%.

Adjusted EBITDA for the 2017 year, included $1.8 million of sponsor support. Exclusive of sponsor support in 2017, our EBITDA in 2018 increased 55% over 2017.

Adjusted EBITDA attributable to our limited partners for the fourth quarter of 2018 was $6.2 million compared to $5.5 million in the same period of 2017, an increase of 13%. Although, the 2017 amount included $1.3 million of sponsor support.

Exclusive of this sponsor support, adjusted EBITDA attributable to our limited partners, increased by 48% in the fourth quarter of 2018 compared to the fourth quarter of 2017. Adjusted EBITDA attributable to the noncontrolling interest owners, that owned 49% of our hydrostatic testing subsidiary, was $0.1 million for the fourth quarter of 2018.

Adjusted EBITDA attributable to our limited partners for the 2018 year was $21.9 million compared to $18.7 million in the prior year, an increase of $3.2 million or 17%. The 2017 adjusted EBITDA attributable to our limited partners

(technical difficulty)

Great. Thank you very much. We are back on the line. Distributable cash flow for the fourth quarter of 2018 was $3.1 million compared to $3.2 million for the same period in 2017.

Distributable cash flow in the fourth quarter of 2017 benefited from $1.3 million of sponsor support. Exclusive of this support, distributable cash flow increased by 61% in the fourth quarter of 2018 compared to the fourth quarter of 2017. Distributable cash flow for the full year of 2018 was $12.9 million compared to distributable cash flow of $10 million, an increase of $2.8 million or 28%.

The 2017 distributable cash flow included $4.1 million of sponsor support. Exclusive of this sponsor support in 2017, distributable cash flow increased $6.9 million or 115%.

In addition to these financial highlights, I would also note that net debt calculated as long-term debt less cash and cash equivalents was $60.2 million at December 31, 2018 or 2.6x trailing 12-month adjusted EBITDA.

The net debt of $60.2 million at December 31, 2018, decreased 46% from net debt of $111.9 million at December 31, 2017. The leverage ratio, as calculated under our credit facility was 3.3x compared to a maximum ratio of 4x.

Our interest coverage ratio was 5.1x compared to a minimum ratio of 3x. We had $15.4 million of cash on our balance sheet at December 31, 2018. We had $76.1 million of borrowings outstanding on our credit facility at December 31, 2018, which is the same amount that was initially outstanding when we refinanced our credit facility in May.

In our Pipeline Inspection segment, the head count of our U.S. operations was 25% higher in the fourth quarter of 2018 than in the fourth quarter of 2017. Overall, we sent an average of 1,375 inspectors per week to the field for the fourth quarter of 2018 compared to 1,101 in the fourth quarter of 2017, which yielded revenues of $82.2 million in the fourth quarter of 2018, an increase of $18.6 million or 29% over the prior year.

Our Pipeline and Process Services segment generated revenues of $3.7 million during the fourth quarter of 2018 compared to $3.3 million during the fourth quarter of 2017, an increase of 11%. Gross margin was $0.8 million during the fourth quarter of 2018 compared to $1 million during the fourth quarter of 2017, a decrease of 17%.

Revenues for the full year of 2018 were $15 million compared to $9.3 million in 2017, an increase of $5.7 million or 62%. And gross margins increased by $2.4 million from $1.9 million in 2017 to $4.3 million in 2018.

In our Water Services segment, we disposed of 3.9 million barrels of saltwater during the fourth quarter of 2018 at an average revenue of $0.78 per barrel compared to 3.7 million barrels during the fourth quarter of 2017 at an average revenue of $0.65 per barrel. The increase in volume is partially attributable to the 2 new pipelines that we constructed and connected to one of our saltwater facilities in January of 2018. The increase in volumes occurred despite the sales in 2018 of our 2 Texas saltwater disposal facilities.

Our North Dakota revenues increased 72% from the previous year. The increase in revenue per barrel is primarily due to the new pipelines, price increases and higher oil prices.

The Water Services segment generated a gross margin percentage of 74% and an EBITDA margin of 47% in the fourth quarter of 2018 with nominal maintenance capital expenditures.

We had 10 pipelines leading into our facilities and others potentially under development. During the fourth quarter, 94% of our total water volume came from produced water; and pipeline water represented 47% of our total water volume. Should commodity prices improve and stabilize 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. We estimate that each incremental barrel of water we dispose has an average incremental contribution margin in excess of 80%. Our saltwater disposal facilities were utilized at approximately 42% of their capacities in the fourth quarter of 2018.

On a consolidated basis, maintenance capital expenditures for the fourth quarter were $0.1 million, reflecting the attractive business model we have in our portfolio of businesses that have limited maintenance capital expenditure requirements. This remains a key differentiator for us versus virtually all other MLPs.

Our growth -- our cash growth capital expenditures for the 2018 year were primarily related [to] the rebuilding of the surface equipment at 2 of our water facilities, one of which we subsequently sold, and equipment purchases to support our growing nondestructive examination business.

And with that, I will turn the call back over to Pete.

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Peter C. Boylan, Cypress Energy Partners, L.P. - Chairman, CEO & President of Cypress Energy Partners GP LLC [5]

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Thanks, Jeff. We apologize again for the technical difficulties. Not sure what occurred. You'd like to think something like that happens with bad news not good news. But after several difficult years during the industry downturn, as I said earlier, I'm very proud of our team for their dedication, hard work and perseverance.

We are pleased to report this improved operating set of results for both the fourth quarter and the full year of 2018. We remain optimistic as we look to the future and the substantial organic growth opportunities we have to expand our customer base, along with the potential drop downs of our 2 acquisitions that will add offshore nitrogen, rentals, ILI services to our growing portfolio of services.

I've recently hired a new Houston-based VP of Business Development that will report directly to me.

Our organic growth opportunities are significant and continue to be our biggest opportunity and that we only serve less than 10% of the potential available customers that can utilize one or more of our services.

Our 2018 results were excellent with revenue growth of 10%; operational adjusted EBITDA growth, excluding sponsor support of greater than 55%; And DCF growth, excluding sponsor support, of over 115%. Those are the measures I really pay attention to and we're proud of the results.

PG&E remains an important customer and we continue to work with them through their unfortunate bankruptcy filing as a result of the wildfires in Northern California associated with their electrical system.

We appreciate the investment of your valuable time in joining this call and your continued interest in our partnership.

Although, I'm pleased with our fourth quarter results and the trends in our business, we will continue to strive for profitable growth, safety and operational excellence that should enable us to effectively and efficiently grow the partnership, while maintaining a disciplined focus on long-term unitholder value and ensuring that we have attractive returns on our capital invested.

Operator, we may now begin to take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Peter C. Boylan, Cypress Energy Partners, L.P. - Chairman, CEO & President of Cypress Energy Partners GP LLC [2]

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Okay, operator. Well, thank you. It doesn't appear that we've got any questions this morning. Thanks again for your time, everybody. So long.

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Operator [3]

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Ladies and gentlemen, this does conclude today's conference and we do thank you all for your participation. You may now disconnect, and we hope that you enjoy the rest of your day.