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Cypress Energy Partners, L.p.  (CELP)
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Cypress Energy Partners, L.p.

Business Description


The Partnership is a Delaware limited partnership formed on September 19, 2013 to become a diversified Partnership serving energy companies throughout North America. We currently provide essential midstream services that include independent pipeline inspection and integrity services to producers and pipeline companies and water and environmental services with salt water disposal facilities to U.S. onshore oil and natural gas producers and trucking companies.

Our business is currently organized into three reportable segments: (1) Pipeline Inspection Services (“Pipeline Inspection”), comprising the TIR Entities’ operations, (2) Integrity Services (“Integrity Services”), made up of Brown’s operations and (3) Water and Environmental Services (“Water Services”), constituting salt water disposal activities in the CEP LLC and CES LLC entities. We also have a number of other potential lines of business outlined in our IRS private letter ruling (“PLR”) that would allow us to further diversify our business activities and lines of business serving the energy industry.

Through the Pipeline Inspection segment, we provide independent inspection services to various energy, public utility and pipeline companies in both the United States and Canada. Inspectors in this segment perform a variety of inspection services on both new and existing midstream pipelines, midstream assets and infrastructure, gathering systems, and distribution systems, including data gathering and supervision of third-party construction, inspection, and maintenance and repair projects. Results in this segment are driven primarily by the number and type of inspectors performing services for our customers and the fees they charge for those services, which depend on the nature and duration of the projects. Pipeline Inspection is entirely comprised of the operations of the TIR Entities.

The Integrity Services segment primarily provides hydrostatic testing services to major natural gas and petroleum companies and pipeline construction companies for both newly-constructed and existing natural gas and petroleum pipelines. Field personnel in this segment perform various integrity services on newly-constructed and existing oil and natural gas pipelines. Results in this segment are driven primarily by the number and skill level of our field personnel performing the integrity services, size and length of the pipelines tested, the complexity of services provided, the degree to which customers use our equipment, and the nature and duration of the projects. These projects are typically based on fixed-bid agreements with customers. The Integrity Services segment is mainly comprised of the operations of Brown.

Our Water Services segment provides salt water disposal services to oil and natural gas producers and trucking companies and consists of the operations of CEP LLC, which, as of the end of the year, owned and operated eight commercial salt water disposal facilities in the Bakken Shale region of the Williston Basin in North Dakota and two in the Permian Basin in Texas and CES LLC, which provides management and staffing services for an additional salt water disposal facility (one salt water disposal facility in the Permian Basin was sold in January 2018). We generate revenue by treating produced water and flowback water and injecting the water into our salt water disposal facilities. Results are driven primarily by the volume of water injected into our salt water disposal facilities and the fees we charge for these services. These fees are charged on a per-barrel basis and vary based on the quantity and type of salt water disposed, competitive dynamics, and operating costs. Our salt water disposal facilities currently utilize specialized equipment and remote monitoring to minimize downtime and increase efficiency for peak utilization and are located in close proximity to existing producing wells and expected future drilling sites, making our salt water disposal facilities attractive to our current and future customers. These facilities also contain oil skimming processes that remove oil from flowback and produced water that has been delivered to our sites. We then generate revenue by selling the residual oil recovered from the water treatment process. In addition to the nine salt water disposal facilities owned by CEP LLC (post the sale of the one salt water facility in January 2018), our consolidated subsidiary, CES LLC, provides management and staffing services for an additional salt water disposal facility in the Bakken Shale region, pursuant to a management agreement. CES LLC also owns a 25% interest in this facility. The Water Services segment is directly tied to oil and gas activity and is impacted by changes in commodity prices, competition, and newly completed oil and gas wells.

Pipeline Inspection. We believe the pipeline inspection services market offers attractive long-term growth fundamentals; as such, we intend to continue to position ourselves as a trusted provider of high quality essential inspection services. Over the last few years, new laws have been enacted in the U.S. that, in the future, will require operators to undertake more frequent and more extensive inspections of their pipeline assets. These requirements are not tied to the current state of the oil and gas industry as a whole. Additionally, a significant portion of the pipeline infrastructure in North America was installed decades ago and is therefore more susceptible to material degradation requiring more frequent inspections. We believe that increasingly stringent U.S. federal and state laws and regulations and aging pipeline infrastructures will result in increased need for inspection and integrity services and higher demand for independent, third-party inspectors capable of navigating these complicated requirements. Although the recent energy downturn has impacted our customers, most of our clients are investment–grade, well-capitalized companies that have long lead time projects that require our services regardless of the state of the current economy. Our clients also require ongoing maintenance and integrity work on their aging pipelines. That being said, our business is not immune to changes in the energy economy. However, we believe that we can continue to grow organically by acquiring new customers and additional work from existing customers. For example, in 2017 despite lower revenues due to the loss of one large customer in Canada, we added 30 new customers in this segment. We also continue to grow our business development team to pursue these and other opportunities.

Integrity Services. Effective May 1, 2015, we acquired Brown, which operates our Integrity Services business segment. The industry downturn significantly impacted Brown and the Integrity Services segment. We took a variety of actions in the second half of 2016 to reduce the cost structure of Brown. We continue to remain cautiously optimistic that Brown is well positioned to resume growth as customers become more active following the most recent industry downturn. It is our intent to capitalize on Brown’s strong reputation and expand our Integrity Services business.

Water Services. We believe that the water and environmental services market will continue to offer long-term growth fundamentals and we intend to maintain our position as a high quality operator of salt water disposal facilities, despite the recent sluggish energy economy that has adversely impacted our Water Services segment. We took aggressive actions in the second quarter of 2016 to adjust our cost structure to compensate for the lower volumes associated with the industry downturn. We continue to look for pipeline opportunities with exploration and production (“E&P”) companies that will secure water for our salt water disposal facilities. Regulations continue to increase and we have proven to our customers that we are a trusted and dependable service provider. Increasingly, E&P companies are having their central procurement and Environment, Health and Safety (“EHS”) personnel conduct inspections of our salt water disposal facilities. This trend should benefit our Partnership. We remain an approved vendor for many prestigious investment grade E&P companies that demand very high standards from their vendors. Although the oil and gas industry can be cyclical in nature (as is evidenced by the recent three year downturn), our current business strategy is to derive a significant portion of our volume and revenue from existing wells. Although new drilling activity declined significantly over the last three years, the recent rebound in commodity prices have led to an increase in drilling activity in both basins in which we operate. Currently, activity in the Permian is much stronger than activity in the Bakken. A portion of Water Services salt water disposal facilities will continue to suffer declines in volumes and pricing until the market continues to rebound leading to additional drilling and completions that, in turn, generate additional produced water for the life of those newly-completed oil and gas wells. We intend to capitalize on the continued demand for removal, treatment, storage and disposal of flowback and produced water by positioning ourselves as a trusted, dependable provider of safe, high-quality water and environmental services to our energy customers.

Optimize existing salt water disposal assets. The average age of our salt water disposal facilities was 5.3 years at the end of 2017. We estimate that we utilized approximately 24% of the aggregate annual capacity (53 million barrels per year) of these facilities for the year ended December 31, 2017, evidencing capacity for growth without additional capital expenditures. We are seeking to increase the utilization of our existing salt water disposal facilities by attracting new volumes from existing customers and by developing new customer relationships, including pipelines. In 2012, only one pipeline was directly connected to our salt water disposal facilities. We currently have ten pipelines connected to four of our salt water disposal facilities. Because many of the costs of constructing and operating a salt water disposal facility are either upfront capital costs or fixed costs, we expect that increased utilization of our existing salt water disposal facilities will lead to increased gross margin percentage and operating cash flow in the Water Services segment. The three-year industry downturn placed significant pressure on both the volumes we processed and the prices we were able to charge for our services, however, the industry began a recovery following OPEC’s decision to reduce production in November 2016.

Increase the number of pipelines connected to our salt water disposal facilities. As more oil and natural gas producers focus on improving operational safety and reducing liability, carbon footprint, road damage, and the total transportation cost associated with the trucking of saltwater, we anticipate that the natural gas producers will increasingly prefer to utilize pipeline systems to transport their saltwater directly to salt water disposal facilities. We intend to purchase or construct, whether alone or in joint ventures, saltwater pipeline systems that connect producers to our salt water disposal facilities or newly developed salt water disposal facilities. We continue to focus on increasing pipeline water delivered to our facilities. Our 2017 pipeline water volumes (excluding two salt water disposal facilities which were inoperable a significant portion of 2017 due to being struck by lightning) increased approximately 249,000 barrels from piped water volumes in 2016. As a percentage of total water volume, pipeline water was 46%, 45% and 31% in 2017, 2016 and 2015, respectively. We will continue to focus on potential pipeline opportunities. For example, in January 2018, we completed the construction of a gathering system that transports water from a customer’s producing fields to one of our disposal facilities in North Dakota.

Leverage customer relationships in our business segments. We intend to pursue new strategic development opportunities with oil and natural gas producing customers that increase the utilization of our assets and lead to cross-selling opportunities between our business segments. Many customers of Water Services also own gathering systems, storage facilities, gas plants, compression stations, and other pipeline assets to which we can offer pipeline inspection and integrity services. In addition, we intend to enhance our relationships with our customers in the Pipeline Inspection segment by broadening the services we provide to our customers, including expanding our ultrasonic nondestructive examination services. By cross-selling our service offerings and adding complementary service offerings, we believe that we can further integrate into our customers’ operations and increase our profitability and distributable cash flow.

Pursue strategic, accretive acquisitions. We intend to pursue accretive acquisitions that will complement the Partnership. Our business segments operate in industries that are fragmented, giving us the opportunity to make strategic and accretive acquisitions. We remain optimistic that attractive acquisition opportunities are currently present or will present themselves in the near future. We plan to expand Water Services by seeking water and solid acquisition opportunities that will diversify our customer base in existing and additional high-growth resource plays throughout the U.S. We are particularly focused on pursuing on pipeline opportunities directly with E&P customers. In addition, provided certain opportunities fit with our strategic plan of expanding our businesses (such as the addition of our Integrity Services segment), we intend to grow Pipeline Inspection and Integrity Services by acquiring other strategic pipeline service companies that will allow us to broaden the suite of services we offer our existing customer base.

Our business currently operates in three reportable segments: (1) Pipeline Inspection Services (“Pipeline Inspection”), comprising the TIR Entities’ operations, (2) Integrity Services, made up of Brown’s operations and (3) Water and Environmental Services (“Water Services”), constituting salt water disposal activities. Our IRS private letter ruling (“PLR”) allows for expansion into other lines of business. Our long-term goal continues to be to diversifying the Partnership into other attractive lines of business including, but not limited to, traditional midstream activities, production chemicals and remote monitoring of energy infrastructure, in addition to the continued expansion of our current segments.




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