Cypress Environmental Partners, L.P.
New York Stock ExchangeEarnings Call Transcripts
Operator
Welcome to the Cypress Energy Partners Third 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 third 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 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 for your interest and investment in our company.
We were pleased to announce our third quarter '15 operating performance, and we maintained our distribution rate of $0.4064 per unit despite the challenging environment impacting virtually everyone in the energy industry. Our team continues to focus on acquisitions and organic growth opportunities with our customer relationships in the inspection industry to cross-sell our new hydrostatic testing services from our recent acquisition.
We also continue to see an increase in Water and Environmental Services opportunities, including strategic opportunities to partner with E&P producers that has led to new piped water opportunity and may also lead to accretive acquisition and growth opportunities as producers focus on their core business of finding and producing hydrocarbons. Our strong balance sheet and credit facility allow us to pursue opportunities, and during the quarter we have seen a material increase in acquisition opportunities in both existing segments and some new areas covered under our private letter ruling from the IRS.
Fortunately, our business requires very nominal capital expenditures, leading to attractive free cash flow generation unlike many other MLPs that have more maintenance capital expenditure requirements. I would like to introduce Les Austin, our CFO so that he can walk you through the highlights of the quarter.
Les Austin Thanks, Pete. I'd like to take a moment to highlight some of our financial information released today.
Adjusted EBITDA, which we define as net income plus interest expense, depreciation and amortization expense, income tax expenses, impairments, offering costs, non-cash allocated expenses and equity based compensation was $7.6 million, $7.2 million of which is attributable to our common and subordinated unitholders and $0.4 million of which is attributable to our non-controlling interest holders. Distributable cash flow for the third quarter was $5.6 million, and today we paid a quarterly distribution of $4.8 million, or $0.406413 per unit, which represents a 4.8% increase over our minimum quarterly distribution, and is consistent with the prior quarter distribution.
We experienced a net loss in the third quarter of $1.6 million, which included an impairment charge of $5.6 million on some of our saltwater disposal facilities as a result of the downturn. This net loss was comprised of $1.8 million attributable to our common and subordinated unitholders and a net income of $0.2 million attributable to our non-controlling interest holders.
In addition to the financial highlights on net loss adjusted EBITDA and distributable cash flow, we mentioned previously, I'd note the following: We averaged 1,406 inspectors and 35 field personnel per week for the third quarter of 2015. We disposed of 4.7 million barrels of saltwater during the third quarter of 2015.
Average revenue per barrel declined from a $1.09 in the third quarter of 2014 to $0.73 for the third 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 53% lower between the quarters. Despite the impact of lower drilling activity, oil prices and disposal rates, the Water and Environmental business generated third quarter gross margins of 58%, and strong adjusted EBITDA with nominal maintenance capital expenditures, which is attractive relative to many service businesses serving the energy industry.
During the quarter, we had a new record with approximately 96% of our volume being produced water, and approximately 37% of that water being piped. The percent of pipe water continues to grow.
Our leverage ratio as calculated under our credit facility was 2.55 times, and our interest coverage ratio was 6.05 times, reflecting a strong balance sheet with 25.7 million in cash and substantial availability. Maintenance capital expenditures for the three months ended September 30, 2015 were $87,000, reflecting the limited maintenance capital expenditures required to operate our business.
Revenue per barrel metrics are comprised of five factors: Disposal price per barrel, flowback and produced water are different in the Bakken region; volume of barrels disposed; volume of skim oil; net realized price per barrel of that skim oil; and third-party management fees, including reimbursement of labor expense associated with the same. We continue our investment in our new enterprise resource planning system that we expect to achieve significant operational and financial efficiencies that should materially benefit the partnership.
We're scheduled to go live with the system, January 1 of 16. Our general partner has made this investment on behalf of the partnership.
And with that, I will turn the call back over to Pete. Pete Boylan Thanks, Les.
Starting in early June, we began to see a material increase in acquisition opportunities as the market has begun to accept the new commodity price environment and the lack of a V-shape recovering. Initially a disconnect existed between seller and buyer valuations.
We believe that we will continue to see additional new opportunities in the second half and balance of this year as sellers appear to have become more realistic. Generally speaking, trailing 12-month results are not a suitable way to evaluate these opportunities.
We have a strong general partner that has a material economic interest in the LP owning approximately 64% of the units that is interested and willing to help finance any acquisition opportunities that are larger than what the LP could handle independently today. We truly appreciate your valuable time, investment, and continued support over this last year, as we have adapted to the impact of lower commodity prices.
The material decline in our units is quite frustrating for everybody on our team, and as the largest owner of the LP units we remain 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 impacted the MLP sector as a whole.
Our Board and management team remain committed to building a great company with the focus on long-term unitholder value through a disciplined approach to growth. We look forward to reporting our Q4 results next spring.
We also remain focused on our stated goal of growing our distributable cash flow over the long-term at a 10% annual rate, despite the challenges the industry currently faces at this point in time. We're fully aligned with our unitholders with regard to growing our company, unit value, and distributions.
Operator, we may begin taking some questions.
Operator
[Operator Instructions] We are now ready to begin. Okay.
And our first question comes from Mike Gyure. Please state your question.
Mike Gyure
Hey, good morning guys. Can you talk a little bit about your growth plans for the integrity services business, and maybe specifically kind of what you're thinking for growing the field personnel from the Brown acquisition?
Pete Boylan
Sure. Good morning, Mike.
The Brown PSI acquisition, which we completed in May is a business that is really interesting. There are a lot of things today that we don't do that all of our clients spend a substantial amount of money on a regular recurring basis doing as it relates to the maintenance and integrity work, and so, the Brown acquisition gets us into two of those segments, the hydro testing side of it as well as some chemical cleaning.
There are a number of other elements that are involved in the maintenance and integrity process in addition to the inspection that we do and the non-destructive examination that we do. And ultimately, when a client takes a line out of service, meaning may stop the flow of product to ultimately do maintenance and integrity work on that line, you start with a dumb pig that moves liquids and solids out of the line, those are things we could do that we're not doing today.
You then frequently move to a chemical flush, and we just started offering that services and are building some talents surrounding that. Once you do the chemical flush, you then introduce a smart pig into the pipeline that runs through it.
Today, we do tracking of that smart pig for the client, who hire the third-party to do the smart pigging and Inline Inspection, IOI, they call that evaluates the anomaly. So that's another natural area we'd like to go in.
Then depending upon the type of anomaly that's identified, sometimes non-destructive examination work is required, and they dig up the pipe, bring it up out of the ground, and we have a group that is growing, that's got a very attractive margin model, a much higher margin model than the base inspection business that does non-destructive examination. Once those issues are identified, the owner of the pipeline then determines what remediation if any is needed, and before the line goes back into service, the hydro testing occurs, and PSI, Brown handle those services.
Today, we are actually generally not involved in the sourcing of the water used to do the hydro testing, nor are we involved in the disposal of the water, which is contaminated and hazardous waste afterward, so those are additional things that we're interested and pursuing. And then last, but not least before the lines are ready to go back and service there, typically is nitrogen services to dry out the line before product is placed back into it, and that scenario that we're interesting in pursuing.
And ultimately, we think we could offer our clients, say, turnkey full suite of those services that would simplify the multiple vendors that they need to coordinate with, the multiple contracts that they need to have, and most importantly, their schedule from when they need a decommission a line to when they can put it back in service and flow product. So, we're looking at growing both organically through hiring people and building those capabilities, but we're also looking at acquisitions and at joint ventures to do that.
So I just wanted to give you a big picture overview of how we're looking at and thinking about growing those elements.
Les Austin
In addition, we have said previously that Brown PSI only operated in six states. We are currently seeking to be able to operate in several other states with that business.
Pete Boylan
And in fact we had very small crossover of customers. We have begun that cross-sale process, and I'm pleased to report Brown has now signed MSAs with some very large prestigious investment grade pipeline owners, and in fact we just received our certifications to be able to offer those services in California, which has a very onerous approval requirement process that requires specialized emissions equipment and as most of you know we have a nice business out there with PG&E and some others.
So we look to be able to expand in the West Coast market and offer some of these services.
Mike Gyure
Okay, that's helpful, and maybe a follow-up on that as to I guess what you're thinking as far as capital requirements maybe outside of acquisitions just related to what you own today for the next, I would say, years of relatively minimal, like the rest of the business?
Pete Boylan
Yes. Generally speaking, although we do have some rolling stock, we do have some compressors and pumps and other things, and the hydro testing business that we don't have and the other businesses, and the non-destructive examination, there have been some major technology advances in these ultrasonic scanners and we have been investing in some of that equipment that has a very, very attractive payback on that.
And we're always going to continue to be opportunistic about acquiring equipment that distressed situations or auctions, and with this energy meltdown there is a lot of pumps and compressors, and nice equipment that is being moved at auctions, and so we're always looking at opportunities where we can buy something at a substantial discount to normal procurement costs.
Les Austin
And we said in our press release that through the nine months we’ve spent $449,000 in maintenance CapEx that does include five months of Brown's maintenance CapEx for those nine months.
Mike Gyure
Great. Thanks for the description, I appreciate that.
Operator
Thank you. [Operator Instructions] Okay, there appears to be no further questions at the moment.
Pete Boylan
Okay. Why don't we wait one more minute and just make sure everybody has had a chance and…
Operator
Yes, of course. [Operator Instructions]
Pete Boylan
Well, great, operator, if there is no further questions, again, thank everybody for your valuable time and participation and joining the call, and hope you have a great weekend. Bye.
Operator
Thank you. This does conclude today's conference call.
Thank you for attending.