CYPRESS ENERGY PARTNERS. Investor Presentation June 2015 NYSE: CELP

Transcription

1 CYPRESS ENERGY PARTNERS NYSE: CELP Investor Presentation June 2015

2 Forward Looking Statements Some of the statements in this presentation concerning future performance are forward-looking within the meaning of U.S. securities laws. Forward-looking statements discuss the Company s future expectations, contain projections of results of operations or of financial condition, forecasts of future events or state of other forward-looking information. Words such as may,, assume, forecast, position, forecast, position, strategy, except, intend, plan, estimate, anticipate, believe, project, budget, potential, or continue, and similar expressions are used to identify forward-looking statements. Forward-looking statements may include statements that relate to, among other things, availability of cash flow to pay minimum quarterly distributions on the Company s common units; the consummation of financing, acquisition or disposition transactions and the effect thereof on the Company s business; the Company s existing or future indebtedness and credit facilities; the Company s liquidity, results of operations and financial condition, future legislation and changes in regulations or governmental policies or changes in enforcement or interpretations thereof; changes in energy policy; increases in energy conservation efforts; technological advances; volatility in the capital and credit markets; the impact of worldwide economic and political conditions; the impact of wars and acts of terrorism; weather conditions or catastrophic weather-related damage; earthquakes and other natural disasters; unexpected environmental liabilities; the outcome of pending or future litigation; and other factors, including those discussed in Risk Factors section of our annual report on Form 10-K. Except for historical information contained in this presentation, the matters discussed in this presentation include forward-looking statements that involve risks and uncertainties. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated and unanticipated events. Forward-looing statements are not guarantees of future performance or an assurance that the Company s current assumptions or projects are valid. Actual results may differ materially from those projected. You are strongly encouraged to closely consider the additional disclosures and risk factors contained in the prospects. 2

3 Cypress Energy Partners, L.P. (CELP) Overview We strive to be the premier midstream energy services company in markets we service by building strong relationships with our stakeholders including customers, partners, employees, regulators, and suppliers Pipeline Inspection & Integrity Services (PI&IS) Water & Environmental Services (W&ES) Pipelines are essential to transport hydrocarbons from the wellhead to various users Pipelines are regulated and require inspection and integrity services Operated under Two companies Tulsa Inspection Resources, LLC (TIR) Brown Integrity: Integrity assessment hydro testing Services cover oil, gas, NGLs, refined products, CO2, LDC/PUC s, storage, gas plants, compressor stations, etc. Proprietary database of 15,000+ inspectors Attractive recurring revenue associated with maintenance, repair & operations (MRO) activities Saltwater is a naturally occurring byproduct of the oil and gas production process Saltwater disposal is regulated and required CELP has 11 owned saltwater disposal (SWD) facilities High quality new construction & well bores Avg. disposal volume of ~51k 1 barrels/day and annual injection capacity of ~53 million barrels 82% of our volumes are produced and piped water (not flowback, which is tied to new drilling) 2 We receive piped water directly from oil & gas wells owned by E&P companies via 9 pipelines into 5 facilities We have contracts to manage facilities in the Bakken 1 Three months ended March 31, Twelve months ended December 31,

4 Investment Highlights Building a Track Record Our company was started in 2012 to provide a variety of midstream services to energy companies in North America. We completed our IPO in January 2014 and exceeded our distribution per unit estimate in our first year Attractive IRS PLR Highly Experienced Management We have an IRS private letter ruling (PLR) that covers additional diversified opportunities and expansion potential into areas that have not previously been MLP-eligible We have assembled a talented, experienced management team and Board of Directors with 200+ years of energy experience and substantial success building value for investors Aligned Interests CELP insiders retain approximately 65% of the limited partner (LP) and 100% of the general partner (GP), aligning the interests of our executive team and Board of Directors with unitholders Distribution Growth We plan to grow our distribution per unit by 10% annually over the long term through a combination of organic growth and disciplined acquisitions. We have completed three acquisitions since our IPO Strong Liquidity We have an attractive credit facility with over $180 million in availability (inclusive of the accordion) 4

5 Timeline of Achievements Initial Cypress Acquisitions of SWD s December 2012 Cypress IPO January 2014 Acquired Remaining 49.9% of TIR February Cypress Energy Partners founded March 2012 Acquired Control of TIR June 2013 Acquired SWD Bakken December 2014 Acquired 51% of Brown Integrity May 2015 CELP Quarterly Distribution History Q1 Q2 Q3 Q4 Q1 June 15 Distribution $ $ $ $ $ Average Price $23.20 $23.23 $23.97 $19.04 $15.98 $17.33 Average Yield 6.7% 6.8% 6.8% 8.5% 10.2% 9.4% 5

6 Significant Growth Opportunities Acquisitions Diversify Our Business Offering Our broad PLR allows us to diversify into other businesses: Additional midstream, pipeline & inspection activities Traditional MLP activities (storage, rail, trans-loading) Solids, recycling, oil reclamation, expanded geography Brown Integrity Drop Down Potential drop down of remaining 49% Brown interest 1 Sell Unused Capacity (W&ES) Facilities are currently only ~ 40% utilized Requires no additional capital spend Infill drilling will increase volumes Focus on piped water (Represents ~25% of volumes) Organic Expand Inspection Customer Base (PI&IS) Expand TIR inspection customer base of 70+ clients Growing federal and state regulations Currently serve small subset of available market including E&P, midstream, and LDC/PUC Leverage Hydrotesting Acquisition (PI&IS) Expand Brown Integrity to more states Brown operates in six states (vs. TIR of 47 states) Opportunity to expand breadth of services to include chemicals and nitrogen services 1 Right to acquire in

7 Broad PLR Enhances Our Growth Opportunities Qualifying income under our existing private letter ruling (PLR) Removal, treatment, recycling & disposal of flowback & produced water (SWD s, transportation, pipelines, etc.) Removal, treatment, recycling & disposal of completion fluids, drilling mud, drill cuttings, contaminated soil, tank bottoms, pit water & fracturing fluids Removal, treatment, recycling & disposal of fluids from cleaning storage tanks, trucks and equipment Marketing and distribution of chemicals and salvaged hydrocarbons Infrastructure inspection required by law including oil and gas pipelines and gathering systems, drilling, E&P, mineral and natural resources mining Transportation and heating of frac water Design, own, manage & operate oil and rail transportation assets Remote monitoring and sensoring of E&P assets Recently issued IRS guidance on qualifying income should not have any adverse impact to our existing business. Potential growth opportunities exist associated with our intrinsic activities essential to the energy industry. 7

8 PI&IS Our Pipeline Inspection & Integrity Offering Pipeline Inspection Pipeline Services We Offer We offer professionals for all types of infrastructure: Oil, refined fuels, NGL pipeline systems Gas gathering and related systems Storage facilities Compression stations Public utility distribution systems Transfer stations Water gathering facilities Pipeline Integrity Pipeline Services We Offer TIR: Full service integrity department, project management, in-line inspection support, CIS, DOC, GPS combo surveys, maintenance inspection and make-ready NDE Technologies: FAST, QUEST, Phased Array, OD Anomaly Assessment Brown Integrity: Onshore and offshore hydrostatic and related services 8

9 PI&IS Our Midstream Pipeline Services Inspection Service PI&IS Federal and some state regulations require pipeline operators to develop integrity management programs and conduct inspections, with operators outsourcing elements In-line Inspection Smart pigs Pigs tracking Integrity Assessment Hydrostatic testing Pneumatic pressure testing Other Non-destructive Examination (NDE) Inspection Visual / aerial Wellhead End Users Gathering Systems Pipelines / Transportation Lines / Storage Facilities Processing / Treating Facilities X-ray Ultrasonic Data & Integrity Program Management Services Smart pig and other NDE inspection data Anomaly & above ground marker (AGM) reports Automated dig sheet generation Chemicals Staking Services AGM placement Dig site staking Construction & Repair Management Project supervision & coordination of field activities Dig site excavation oversight Defect assessments & mapping / surveying Documentation Nitrogen Services Indicates business activity performed by our PI&IS business Indicates potential expansion opportunity 9

10 PI&IS The Life Cycle of a Pipeline Record Retention / Documentation Remediation New Construction year expected life Require inspection and integrity services for the entire life cycle PHSMA Required Testing: Liquids Pipelines: 5 years Gas Pipelines: 7 years Prudent Operator State requirements continue to vary and evolve Data Review Initial Assessment (baseline) Risk Assessment New Construction Services Current Services Right-of-way acquisitions (limited) Potential Services Engineering / design Right-of-way (ROW) Survey / drafting Pipeline supply Barcode scanning Nitrogen services Integrity Management Program Current Services Hydrostatic testing External corrosion direct assessment Pig tracking Dig staking Inspection NDE Potential Services In-line inspection (ILI) pig Close internal surveys (CIS) Maintenance pigging supplyhouse Leak detection surveys Aerial patrol right-of-way Chemicals and nitrogen services 10

11 PI&IS Growing Market Dynamics Market Dynamics Substantial existing infrastructure is aging 2.3+ million miles of transmission and distribution pipelines plus millions of miles of gathering systems 1 ~60% of U.S. pipelines are over 40 years old. Aging pipeline infrastructure will drive demand for pipeline services Pipelines require substantial recurring maintenance during their lifetime Expanding infrastructure with shifts in energy production and consumption $640+ billion will need to be invested in North American energy infrastructure over the next 20+ years, or an average of ~$30 billion per year 2 ~12% pipeline growth projected in 2015 Increased regulation benefits outsourced services Recent regulations and accidents have increased oversight Pipeline inspection and integrity services (i.e. pig tracking, mobile x-ray, ultrasonic testing, etc.) can identify anomalies before they lead to bigger problems 60% 50% 40% 30% 20% 10% Pipelines U.S. Pipeline Age Distribution by Installation Date 0% 12% Pre-1950 (65+ yrs) 48% (46-65 yrs) 30% (16-45 yrs) 10% (6-15 yrs) 1 Source: Pipeline and Hazardous Materials Safety Administration (PHMSA), U.S. Department of Transportation. 2 Source: INGAA North American Midstream Infrastructure Through 2035, March

12 PI&IS A Large and Growing Service Industry > $2.1 billion > 47,000 miles > 12,000 digs > 1,450 runs Over $2.1 Bn spent on integrity management by operators of liquids pipelines in Over 47,000-miles of liquids pipeline inspected with in-line smart-pigs in Over 1,450 in-line inspection smart pig tool runs on liquid pipelines in Over 12,000 digs for further inspection or liquid pipeline maintenance in % vs. prior year % vs. prior year % vs. prior year % vs. prior year Customer Forecasted Capital Spending 2 $2B in capital projects $1.2B current expansion spending $ MM 2015 capital $2.15B organic capex $7.4B under construction through 2017 $1.18B 2015 expansion capital $ MM 2015 capex $4.9B growth capital, $1.7B sustaining capital $1.1B 2015 capital $ B capex through 1H 19 $12B in capital projects $160MM 2015 capital $1-1.4B 2015 Capex $140MM 2015 Capex 1 Source: 2015 AOPL Annual Liquids Pipeline Safety Performance Report & Strategic Plan. Note: 2013 is the most recent year for which data is available 2 Source: Capital spend information acquired from most recent investor presentations for each company listed 12

13 PI&IS An Overview of Our Midstream Services How We Generate Revenue Customers typically pay a daily or weekly rate per inspector and per diem expenses Results driven by the number and type of inspectors performing services and the fees charged Inspection services gross margins ~9% Non-Destructive Examinations (NDE) and hydrostatic testing generates higher gross margins of ~25% Recurring revenue opportunities with maintenance, repair and operations (MRO) activities 46% CAGR in TIR Revenue 1 Average TIR Inspector Headcount Revenue ($mm) $400 $300 $ # inspectors 1,700 1, ,153 1,745 1,470 $ $ Q1 '15 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 1 CAGR for period from

14 W&ES Strategic Footprint Enhances our Position We own 11 SWD facilities 9 in the Bakken 2 in the Permian The Bakken and Permian are strategic basins that benefit from high volumes of produced water and flowback and long-life production Total wastewater solids (TDS) are a measure of dissolved matter found in water (salts, minerals, sodium calcium, etc.) Bakken Basin 1 Produced Water Volumes Frac Fluid Flowback (%) 2 Wastewater Solids (mg/l) Bakken High 15-40% 150, ,000 Denver-Julesburg Low 15-30% 20,000-65,000 Eagle Ford Low < 15% 15,000-55,000 Marcellus Moderate 10-40% 20, ,000 Permian High 20-40% 20, ,000 Permian SWD facility SWD facility with piped water 1 Source: Oil and Gas Facilities, Halliburton Percentage of hydraulic frac fluid that returns as flowback. 14

15 W&ES Essential Midstream Services Oil & gas production produces water & solids that require proper disposal Water acquisition Fracturing fluid mixing Fracturing fluid injection Well completion Production of oil/gas and saltwater Water Handling And Disposal Is A Growing, Multi-Billion Dollar Annual Market * E&P companies prefer to pipe water to SWD s instead of trucking water whenever possible Flowback water transportation Produced water transportation and/ or * Saltwater disposal (SWD) Current CELP activity Saltwater injection Residual oil sales Recycling 15

16 W&ES CELP Facilities Salt Water Disposal Facility Chemical Process 1804 Ross Mountrail County, ND Injection pump house Saltwater tank Gun barrel tank Unload facility Saltwater transportation truck Injection Well Skim oil tanks Office & lounge Containment Crew quarters Basics of a SWD Facility Regulations require subsurface injection of wastewater deep into the earth. EPA Class II injection wells have multiple layers of protection in design to safeguard the environment A typical facility includes infrastructure for unload, filtration, treatment, storage (water, oil), oil recovery, pumps, disposal wells & associated equipment Process Overview Wastewater arrives to SWD facilities by: Trucking historical approach 1 Pipeline E&P preferred approach 2 Residual (skim) oil may remain in saltwater upon delivery. We remove residual oil through a recovery process and sell the oil Saltwater is eventually injected back into the earth at depths of at least 4,000 Note: SWD wells regulated by U.S. EPA as Class II Injection wells. 1 CELP does not own trucks but serves trucking companies. 2 CELP has 5 facilities that currently receive piped water via 9 pipelines 16

17 W&ES Business Overview & Opportunity How We Generate Revenue We charge a fee per barrel Management fees for third party SWD s Transportation fees for pipelines (future) Selling residual/skim oil recovered 15-30% of an oil and gas wells operating cost is associated with water handling 1 mm barrels 8 $1.31 $1.27 $1.17 $ $1.13 $1.06 $1.09 $ $ Decline in $/bbl 2 primarily oil related 1 0 1Q13 2Q13 3Q13 4Q13 1Q14 Revenue per Barrel (right axis) 2Q14 3Q14 4Q14 1Q15 Disposal Volumes (left axis) $/bbl $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Significant Unused Capacity Annual injection capacity of ~53 million barrels Our facilities have more than 60% of available capacity today Represents substantial capacity to generate more revenue and cash flow Utilization of existing capacity does not require any incremental capital needs CELP SWD Facility Utilization Utilized capacity, <40% Unused capacity, >60% 1 Source: Steven Mueller, Southwestern Energy CEO, Houston Strategy Forum 17

18 Our Customers W&ES 125+ customers in the U.S. E&P companies Trucking companies that serve oil & gas producers Crude oil purchasers PI&IS 70+ customers in North America a majority are investment grade publicly-traded companies Midstream companies Oil & gas producers with gathering systems LDC/PUCs Significant opportunity to leverage recent Brown Integrity acquisition through expansion of service offering to existing and new customers W&ES Pipeline Inspection Pipeline Integrity 18

19 Energy Macroeconomics Quarterly U.S. Rig Count Quarterly Oil Prices Quarterly Gas Prices # rigs 2,000 1,800 1,600 1,400 1,200 1, $/bbl $ 120 $ 100 $ 80 $ 60 $ 40 $ 20 $ 0 $/mmbtu $ 5.00 $ 4.50 $ 4.00 $ 3.50 $ 3.00 $ 2.50 $ 2.00 $ 1.50 $ 1.00 $ 0.50 $ Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 Pipeline Inspection & Integrity Services (PI&IS) Regulations require inspection services Growing federal and state regulation High profile incidents drive demand Water & Environmental Services (W&ES) Water disposal occurs for the life of a well Flowback only occurs for a short period after well completion Declining drilling reduces flowback Reduced flowback results in less oil Source: Bloomberg, Baker Hughes. Note. Oil prices represent WTI crude, gas prices represent Henry Hub. Rig count represents U.S. oil and gas rigs 19

20 Factors Enhancing our Stability Stable Product Focus W&ES Required Services PI&IS Stability, Diversity, Growth CELP Produced water focus: Occurs for the life of a well Piped water growth: Pad drilling, down spacing Required services: Natural gas, crude and liquid pipelines must be regularly inspected pursuant to various state and federal laws Increased oversight: Drives demand Fixed-fee model: We charge a fixed-fee or daily rate for most services Location & product diversity: Our strategy is to enter all key basins and be diversified across oil and natural gas sources Majority of volumes: Produced and piped water accounted for 82% of our 2014 disposal barrels, and continues to grow Resilient business: Low correlation to commodity prices Brown acquisition: We now own 51% of a hydrotesting company with a right to acquire the remaining 49% 1 1 Right to acquire in

21 Conservative & Flexible Balance Sheet CELP runs a conservative balance sheet profile, offering financial flexibility $mm Debt balance Debt Capacity Capacity with Accordion (2) Debt summary Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Pro Forma Interest coverage 4.88x 5.20x 5.78x 6.32x 9.14x 8.21x 8.93x Leverage ratio x 0.80x 0.79x 0.82x 0.94x 2.85x 2.90x Available capacity $45.0 $50.0 $50.0 $45.0 $122.4 $69.8 $59.1 Total Credit facility capacity of $200 million (amended 10/21/14) $75 million borrowing base facility & $125 million acquisition facility Provides for $125 million accordion 1 Total availability after TIR drop and Brown Integrity acquisition of ~$59mm All covenants based on 100% adj. EBITDA 2 1 Accordion subject to additional commitments from lenders and satisfaction of certain other conditions 2 Does not include an additional $11 million borrowed on May 2015 to fund the Brown Integrity acquisition (see Pro Forma information) 3 Leverage covenant excludes certain borrowings per credit agreement 21

22 CELP An Attractive Investment Opportunity Geographic diversity Independent inspection U.S. energy independence CYPRESS ENERGY PARTNERS Significant industry experience Growing regulatory focus Water & Environmental Services Pipeline Inspection & Integrity Services Fragmented markets Long life assets 22

23 Appendix

24 Consolidated Financial Performance (1Q15) First Quarter 2015 Highlights W&ES Summary Distribution: Q1 distribution of $ ($1.63 annualized), total distribution of $4.8 million Increase of +4.9% vs. MQD of $ EBITDA: Adjusted EBITDA of $5.6 million Attributable to CELP: $5.0 million Coverage: ~0.9x based on DCF of $4.4 million Leverage: Conservative leverage of 2.85x MM Bbls Disposal volumes (Ieft axis) Revenue (right axis) Q1 '14 Q1 '15 $mm $7 $6 $5 $4 $3 $2 $1 $0 Revenue & Adjusted EBITDA PI&IS Summary $mm $120 $90 $60 $ Revenue (left axis) Adj. EBITDA (right axis) $mm $10 $8 $6 $4 $2 # inspectors Avg. # of inspectors (left axis) 2, Revenue (right axis) ,500 1,000 1,506 1, $mm $95 $90 $85 $80 $75 $0 Q1 '14 Q1 '15 $0 0 Q1 '14 Q1 '15 $70 24

25 Consolidated Financial Performance (FY14) Full Year 2014 Highlights Distributions: Completed two distribution increases since our Jan 2014 IPO (+4.9% above our MQD) EBITDA: Achieved +23% growth in adj. EBITDA, to $28.5mm Balance sheet: Increased borrowing capacity by 65% to $200 million, extended maturity to Dec 2018 Operational: Averaged 1,535 inspectors. Increased average revenue per barrel of disposal volumes to $1.18/bbl (+3.5% YoY) for W&ES MM Bbls W&ES Summary FY13 Disposal volumes (Ieft axis) Revenue (right axis) FY14 $mm $30 $25 $20 $15 $10 $5 $0 Revenue & Adjusted EBITDA 1 PI&IS Summary 1 $mm $500 $400 $300 $200 $100 Revenue (left axis) Adj. EBITDA (right axis) $mm $30 $25 $20 $15 # inspectors Avg. # of inspectors (left axis) $mm 2,000 Revenue (right axis) $450 $375 1,500 $ ,000 $225 1,706 1,535 $ $75 $0 FY13 FY14 $10 0 FY13 FY14 $0 1 Includes 100% of PI&IS (since 6/26/13 for 12/31/13) 25

26 2014 CELP EBITDA to DCF Reconciliation Per our Omnibus Agreement, the 49.9% owners previously absorbed additional costs ( subsidies ) benefiting CELP, including: 1) Incremental interest expense for credit facility use 2) 100% of the non-cash amortization fees associated with the CELP credit facility that supports TIR 3) 100% of the cash non-use fees on the credit facility The net impact is that CELP through it s 50.1% interest enjoyed ~ 58% of TIR s distributable cash flow ( DCF ) prior to the acquisition of the remaining 49.9% interest (and ~ 40% DCF) in February U.S. Dollars in Thousands YE 12/31/14 Less: Attributable to 49.9% TIR Interest (Period from IPO to 12/31/14) Less: Attributable to GP & Other Non- Controlling (YE 12/31/14) Attributable to Partners (YE 12/31/14) Net Income $ (15,179) $ 4,682 $ 440 $ (20,301) Plus: D&A expense 6,513 1, ,849 Impairments 32, ,546 Income Tax Expense Interest Expense 3,208 2, Offering Costs / GP Costs Adjusted EBITDA 28,499 8,328 1,981 18,190 Less: Cash Interest, Taxes & Maint. Capex 3,833 3, Distributable Cash Flow $ 24,666 $ 5,322 $ 1,535 $ 17,809 ~40% 26