Cypress Energy Partners, L.P. Announces Fourth Quarter 2017 Results

March 22, 2018

TULSA, Okla.–(BUSINESS WIRE)–#CELP–Cypress Energy Partners, L.P. (“CELP”) (NYSE:CELP)
today reported:

Forty new inspection customers added in 2017, seven of which CELP won
in the fourth quarter;
30.2% increase in Net Income Attributable to Limited Partners in the
fourth quarter compared with the corresponding period in 2016;
$24.5 million of cash as of December 31, 2017 (on a consolidated
basis), an increase of 27.4% from the third quarter of 2017;
Coverage ratio of 1.28x, down slightly from the ratio of 1.37x in the
third quarter of 2017;
Cash distribution of $0.21 per unit, consistent with the last three
quarters; and
New three-year credit facility and commitment to invest up to $50.0
million in equity to deleverage balance sheet.

Peter C. Boylan III, CELP’s Chairman and Chief Executive Officer,
stated, “2017 represented a turning point for CELP relative to the
bottom of the downturn experienced in the second quarter of 2016. For
our Pipeline Inspection Services and Integrity Services segments,
revenues, margins, and margin percentages were higher in the second half
of 2017 than they were in the first half of 2017. This is generally
consistent with the seasonality inherent in our business, in which the
third and fourth quarters of each year are generally the strongest
quarters of the annual business cycle due to weather, fourth quarter
holidays, and our clients’ budgeting cycles. During 2017, customer
spending was generally higher than the prior year and many new projects
have been announced by several clients. Demand remains strong for
inspection and integrity services. Pipeline Inspection and Integrity
services represented approximately 97% of our revenues and approximately
85% of our gross margin in 2017.”

Mr. Boylan continued, “Revenues from our 51%-owned Integrity Services
segment were higher in the fourth quarter of 2017 compared with the
third quarter of 2017, as our utilization rate significantly improved,
and our backlog increased. We continue to bid on a substantial amount of
upcoming work and remain focused on winning more of these bids. We ended
2017 with a backlog of over $2.8 million, which was materially higher
than the backlog at December 31, 2016. We are also continuing to evolve
our business strategy to focus more on maintenance and integrity work
directly for the owners of pipelines, as opposed to new construction
work that can frequently get delayed for various reasons.

“Revenues from our Water & Environmental Services segment were 15.3%
higher in the fourth quarter of 2017 than in the third quarter of 2017,
despite two facilities that have not yet reopened following lightning
strikes and fires in 2017. Our Orla facility in Reeves County, Texas in
the Delaware basin will reopen for regular business in the next 30 days.
In January 2018, we completed two pipelines that connect large
multi-well pads into one of our facilities in the Bakken for a large
public energy company who provided us with a long-term contract and
acreage dedications. In 2018, we plan to focus on additional midstream
pipeline water opportunities.

“We continue to search for attractive acquisition opportunities to
supplement our organic growth opportunities. In 2017, our team
considered over twenty-five potential acquisition opportunities in a
very competitive environment. In January 2018, we terminated discussions
on a large opportunity in the Permian. Future areas of focus continue to
be inspection and integrity services, traditional midstream
opportunities, chemicals, and logistics. Our sponsor and its affiliates
remain willing to deploy capital to assist us in acquiring attractive
assets that may be larger than what we can currently acquire
independently, with plans to offer those assets to us as drop-down
opportunities. We remain focused on a disciplined and conservative
approach to evaluating acquisition opportunities and believe that
patience and perseverance will ultimately be rewarded.

“We continue to believe the long-term increasing demand for inspection
and integrity services and water solutions remains solid, despite our
relatively slow pace of recovery from the multi-year downturn. Our
business is less correlated to drilling rig counts than many other
service companies.”

Refinancing

In March 2018, CELP successfully negotiated commitments for a new
three-year credit facility with its existing bank group to replace the
current facility that expires later this year. The new $80.0 million
credit facility also has a $20.0 million accordion feature (for a total
of $100.0 million), exclusive of other banks that may yet join the
credit facility. Under the new credit facility, CELP will borrow at
closing 3.75x its trailing twelve-month adjusted EBITDA as defined in
the new credit agreement. The new facility would have customary
covenants, including but not limited to, a maximum leverage ratio of
4.0x adjusted EBITDA and a minimum interest coverage ratio of 3.0x
adjusted EBITDA. The details will be included in our 10-K filing. The
bank group required a substantial reduction in our outstanding debt to
reduce leverage to 3.75x. As previously disclosed, this can be
accomplished through a combination of improved earnings, divestitures,
use of excess cash, and the issuance of additional equity. The lenders
also required that our sponsor, Cypress Energy Holdings, LLC (“CEH”) or
one of its affiliates, provide this equity commitment as a condition of
the refinancing commitment.

We accomplished this successful refinancing by receiving a commitment
from an affiliate of CEH to invest up to $50.0 million in a preferred
public investment in private equity (“PIPE”) necessary to reduce
indebtedness. We believe the terms are more attractive to CELP than what
it would receive from unaffiliated third parties. Favorable terms
include but are not limited to an attractive payment-in-kind (“PIK”)
option, coupon, conversion premium, and redemption features. The
Conflicts Committee of CELP’s board of directors and its advisors
negotiated the terms of the PIPE to ensure fairness of this
related-party equity investment required by the bank group. The terms of
the new PIPE will also be disclosed in our 10-K filing. Additionally,
CELP has retained a financial advisor to shop the market to determine if
more favorable PIPE terms can be obtained from an independent third
party, and to explore strategic alternatives to determine if any more
attractive transformational opportunities exist. The Conflicts Committee
would likely be involved in the approval of any strategic alternative
that includes a related-party transaction. The substantially lower
leverage should materially reduce interest expense, improve
distributable cash flow, and position CELP to increase the size of the
facility when CELP finds a suitable acquisition opportunity.

We repaid $4.0 million of principal on our revolving credit facility in
January 2018 through the sale of our saltwater disposal facility in
Pecos, Texas. We were able to obtain an attractive price and retain a
perpetual royalty on the facility. CELP also plans to use approximately
$7.0 million of existing cash on hand to further reduce indebtedness at
the closing of the new credit facility. The combination of these events
should allow us to reduce our outstanding debt balance approximately 44%
from $136.9 million to approximately $76.1 million and our net debt by
approximately 48% to approximately 3.0x trailing adjusted EBITDA at
closing.

Mr. Boylan further stated, “We believe this new credit facility and very
favorable PIPE commitment from an affiliate of our sponsor will support
our current business requirements until we find an accretive acquisition
opportunity, at which time we will likely expand or refinance this
facility to accommodate the transaction. We will also fully check the
market to ensure that no better alternative is available. In addition to
the material support provided above, our sponsor provided another $4.1
million of support during 2017 at no charge to our unitholders,
reconfirming the fact that its interests are fully aligned with our
unitholders as a result of their approximate 64.0% ownership in CELP. We
believe that our stronger balance sheet with less debt as the result of
the PIPE will allow us to support the current distribution and
ultimately position us to begin growing the distribution again.”

Fourth Quarter:

Revenue of $69.4 million for the three months ended December 31, 2017,
compared with $77.7 million for the three months ended September 30,
2017, representing a 10.7% decrease as is common with our seasonality.
In the fourth quarter of 2016, revenue was $70.4 million.
Gross margin of $9.3 million or 13.4% for the three months ended
December 31, 2017, compared to $9.4 million or 12.1% for the three
months ended September 30, 2017. Gross margin was $10.4 million or
14.8% in the fourth quarter of 2016 primarily driven by a customer
retroactive payment in 2016 that distorted margins in that quarter.
Net income of $1.9 million for the three months ended December 31,
2017, a 245.0% increase compared to $0.6 million for the three months
ended September 30, 2017. Net income was $1.8 million for the fourth
quarter of 2016.
Net income attributable to CELP limited partners of $3.1 million for
the three months ended December 31, 2017, compared to $1.6 million for
the three months ended September 30, 2017, representing a 96.8%
increase. Net income attributable to CELP limited partners was $2.4
million for the fourth quarter of 2016.
Adjusted EBITDA of $4.5 million for the three months ended December
31, 2017 (including non-controlling interests and amounts attributable
to our general partner), compared to $4.5 million for the three months
ended September 30, 2017 (including non-controlling interests and
amounts attributable to our general partner). Adjusted EBITDA was $6.9
million for the fourth quarter of 2016 (including non-controlling
interests and amounts attributable to our general partner), with the
difference being driven by a combination of sponsor support and a
customer’s retroactive payment for services previously rendered.
Adjusted EBITDA attributable to limited partners of $5.5 million for
the three months ended December 31, 2017, compared to $5.3 million for
the three months ended September 30, 2017, representing an increase of
3.3%. Adjusted EBITDA attributable to limited partners was $6.7
million for the fourth quarter of 2016 driven by the sponsor support
and customer’s retroactive payment referred to above.
Distributable Cash Flow of $3.2 million for the three months ended
December 31, 2017, compared to $3.4 million for the three months ended
September 30, 2017. Distributable Cash Flow was $5.1 million for the
fourth quarter of 2016 driven by the items referred to above and to
the two additional saltwater disposal facilities that were in
operation at that time.
A coverage ratio of 1.28x in the fourth quarter of 2017, compared to a
coverage ratio of 1.37x in the third quarter of 2017, and a coverage
ratio of 1.05x in the fourth quarter of 2016.
A leverage ratio of approximately 3.7x and an interest coverage ratio
of 3.1x at December 31, 2017, pursuant to the terms of our existing
credit facilities.

Calendar Year 2017:

Approximately 97% of our revenue and approximately 85% of our Adjusted
EBITDA came from inspection and integrity services.
Our customer retention rate remains very high at over 98%.
In 2017, we accomplished these results despite having lost two
saltwater disposal facilities to lightning strikes and fires. Both
losses were insured and both facilities will reopen in 2018.
In the second half of 2017, we ceased doing business with a large
Canadian customer who sought lower rates on basic inspection services;
this adversely affected our revenues by approximately $7.8 million.
Revenue of $286.3 million for the year ended December 31, 2017, down
3.9% from revenue of $298.0 million in the prior year.
Gross margin of $33.6 million for the year ended December 31, 2017,
down 5.3% from the gross margin of $35.5 million in the prior year.
Net loss of $1.9 million for the year ended December 31, 2017
(including impairment charges of $3.6 million), compared to a $9.2
million loss for the prior year (including impairment charges of $10.5
million).
Net income attributable to limited partners of $3.2 million for the
year ended December 31, 2017 (including impairment charges of $2.8
million), compared to $1.6 million for the prior year (including
impairment charges of $6.4 million).
Adjusted EBITDA of $16.6 million for the year ended December 31, 2017
(including non-controlling interests and amounts attributable to our
general partner), down 15.9% from the Adjusted EBITDA of $19.8 million
in the prior year. In 2017, the sponsor provided $4.1 million of
support compared to $6.3 million in the prior year. Excluding sponsor
support, Adjusted EBITDA was $14.9 million in 2017 and $16.0 million
in 2016.
Adjusted EBITDA attributable to limited partners of $18.7 million for
the year ended December 31, 2017, down 15.9% from Adjusted EBITDA
attributable to limited partners of $22.2 million for the prior year.
Distributable Cash Flow of $10.0 million for the year ended December
31, 2017, down 35.5% from $15.5 million in the prior year.

Highlights include:

We sent an average of 1,101 inspectors per week to our customers for
the fourth quarter of 2017, a decrease of 9.1% compared to 1,211
inspectors per week in the third quarter of 2017. This decrease is
consistent with the seasonality of our business. The average number of
inspectors we sent per week to customers was consistent
year-over-year, as we sent an average of 1,093 inspectors per week to
our customers in the fourth quarter of 2016, despite the fact we
elected not to lower pricing with a major customer in Canada in the
second half of 2017, leading to a decrease in our active number of
inspectors in Canada of approximately 200 inspectors per week. Our
focus on maintenance and integrity services and non-destructive
examination continues to benefit our gross margins in comparison with
our standard inspection work.
We disposed of 3.7 million barrels of saltwater during the fourth
quarter of 2017 at an average revenue per barrel of $0.65, an increase
of 20.8% compared with the disposal of 3.1 million barrels of
saltwater at an average revenue per barrel of $0.68 for the third
quarter of 2017. This also represented a 10.5% increase over the 3.4
million barrels of saltwater we disposed at an average revenue per
barrel of $0.68 for the fourth quarter of 2016. It is important to
note that this was accomplished with two facilities under
reconstruction due to lightning strikes and fires in 2017.
Maintenance capital expenditures for the fourth quarter of 2017 were
$0.2 million, compared to $0.2 million in the third quarter of 2017
and $0.1 million in the fourth quarter of 2016.
Our expansion capital expenditures during the year ended December 31,
2017 totaled $2.2 million and were primarily related to the
construction of a gathering system at one of our saltwater disposal
facilities in North Dakota, and to the purchase of new equipment to
support our pipeline integrity businesses.

Looking forward:

We continue to pursue new customers, new projects as they are
announced, and renew existing contracts. We are very pleased with the
forty new customers added during 2017 that should benefit us in 2018
as activity ramps up. Our two new service lines should also benefit us
in 2018, as the start-up phase associated with these lines is behind
us.
Our Integrity Services business (hydrostatic testing) fourth quarter
results improved over the prior quarter with a material increase in
field personnel utilization. We have also improved our backlog
approximately 982% from the end of 2016 to the end of 2017.
During the fourth quarter, approximately 91% of total water volumes
came from produced water, and piped water represented approximately
41% of total water volumes. As commodity prices continue to improve
and drilling activity increases, we expect to have operating leverage
with our cost structure and minimal maintenance capital expenditure
requirements as volumes increase. Private equity investors have been
very active, acquiring acreage and production in the Bakken this year
that will likely lead to increased new drilling activity. Recent
research shows there are an estimated 500 drilled and uncompleted
wells (“DUCs”) within a fifteen-mile radius of our facilities, 300 in
North Dakota and 200 in the Permian. As prices continue to improve, we
expect to benefit from the completion of these DUCs and other newly
completed wells from both existing Bakken operators and many new
private equity backed operators.
Our saltwater disposal facilities have substantial unused capacity to
support growth with current utilization rates of approximately 25%. In
the next thirty days, we anticipate completing the rebuild of our
Delaware basin saltwater disposal facility near Orla, Texas, and plan
to reopen a facility we own in the Bakken in the second quarter, both
of which were struck by lightning in 2017.
We continue to evaluate several acquisition opportunities that CEH
intends to pursue, with the expectation that these opportunities would
be offered to CELP in the future as drop-down opportunities.
LIBOR interest rates have risen over the last quarter by approximately
eleven basis points (and by almost seventy-five basis points compared
to this time last year). This has increased our interest expense and
negatively impacted our distributable cash flow and coverage ratios.
Our materially lower level of debt will reduce our interest expense in
2018.
Our distributable cash flow will benefit from materially lower
outstanding debt as a result of the new credit facility and the PIPE
investment that should result in significantly lower overall interest
costs.

CELP will file its annual report on Form 10-K for the year ended
December 31, 2017 with the Securities and Exchange Commission tomorrow,
March 23, 2018. CELP will also post a copy of the Form 10-K on its
website at www.cypressenergy.com.
Unitholders may receive a printed copy of the Annual Report on Form 10-K
free of charge by contacting Investor Relations at Cypress Energy
Partners, L.P., 5727 South Lewis Avenue, Suite 300, Tulsa, Oklahoma
74105, or emailing [email protected].

CELP will host a conference call on Friday, March 23, 2018 at 10:00 am
EDT (9:00 am CDT), to discuss its fourth quarter 2017 financial results.
Analysts, investors, and other interested parties may access the
conference call by dialing Toll-Free (US & Canada): (888) 419-5570 and
using the passcode 354 960 89, or International Dial-In (Toll): +1
617-896-9871. An archived audio replay of the call will be available on
the Investor section of our website at www.cypressenergy.com
on Tuesday, March 27, 2018, beginning at 10:00 am EDT (9:00 am CDT).

Non-GAAP Measures:

CELP defines Adjusted EBITDA as net income (loss), plus interest
expense, depreciation, amortization and accretion expenses, income tax
expenses, impairments, non-cash allocated expenses, offering costs and
equity-based compensation expense, less certain other unusual or
non-recurring items. CELP defines Adjusted EBITDA attributable to
limited partners as net income (loss) attributable to limited partners,
plus interest expense attributable to limited partners, depreciation,
amortization and accretion expenses attributable to limited partners,
impairments attributable to limited partners, income tax expense
attributable to limited partners, offering costs attributable to limited
partners, non-cash allocated expenses attributable to limited partners
and equity-based compensation expense attributable to limited partners,
less certain other unusual or non-recurring items attributable to
limited partners. CELP defines Distributable Cash Flow as Adjusted
EBITDA attributable to limited partners excluding cash interest paid,
cash income taxes paid, maintenance capital expenditures and certain
other unusual or non-recurring items. Adjusted EBITDA and Distributable
Cash Flow are supplemental, non-GAAP financial measures used by
management and by external users of our financial statements, such as
investors and commercial banks, to assess the following: our operating
performance as compared to those of other companies in the mid-stream
sector, without regard to financing methods, historical cost basis or
capital structure; the ability of our assets to generate sufficient cash
flow to make distributions to our unitholders; our ability to incur and
service debt and fund capital expenditures; the viability of
acquisitions and other capital expenditure projects; and the returns on
investment of various investment opportunities. The GAAP measures most
directly comparable to Adjusted EBITDA, Adjusted EBITDA attributable to
limited partners, and Distributable Cash Flow are net income (loss) and
cash flow from operating activities, respectively. These non-GAAP
measures should not be considered as alternatives to the most directly
comparable GAAP financial measure. Each of these non-GAAP financial
measures exclude some, but not all, items that affect the most directly
comparable GAAP financial measure. Adjusted EBITDA, Adjusted EBITDA
attributable to limited partners and Distributable Cash Flow should not
be considered an alternative to net income, income before income taxes,
net income attributable to limited partners, cash flows from operating
activities, or any other measure of financial performance calculated in
accordance with GAAP as those items are used to measure operating
performance, liquidity, or the ability to service debt obligations. CELP
believes that the presentation of Adjusted EBITDA, Adjusted EBITDA
attributable to limited partners and Distributable Cash Flow will
provide useful information to investors in assessing our financial
condition and results of operations. CELP uses Adjusted EBITDA, Adjusted
EBITDA attributable to limited partners and Distributable Cash Flow as a
supplemental financial measure to both manage our business and assess
the cash flows generated by our assets (prior to the establishment of
any retained cash reserves by the general partner), to fund the cash
distributions we expect to pay to unitholders, to evaluate our success
in providing a cash return on investment, and whether or not the
Partnership is generating cash flow at a level that can sustain or
support an increase in its quarterly distribution rates and to determine
the yield of our units, which is a quantitative standard used throughout
the investment community with respect to publicly-traded partnerships,
as the value of a unit is generally determined by a unit’s yield (which
in turn is based on the amount of cash distributions the entity pays to
a unitholder). Because adjusted EBITDA, adjusted EBITDA attributable to
limited partners and Distributable Cash Flow may be defined differently
by other companies in our industry, our definitions of Adjusted EBITDA,
Adjusted EBITDA attributable to limited partners and Distributable Cash
Flow may not be comparable to similarly titled measures of other
companies, thereby diminishing the utility of these measures.
Reconciliations of (i) Adjusted EBITDA to net income, (ii) Adjusted
EBITDA attributable to limited partners and Distributable Cash Flow to
net income attributable to limited partners, and (iii) Adjusted EBITDA
to net cash provided by operating activities are provided below.

This press release includes “forward-looking statements.” All
statements, other than statements of historical facts included or
incorporated herein, may constitute forward-looking statements.

Contacts

Cypress Energy Partners, L.P.
Jeff Herbers, 918-947-5730
Chief
Accounting Officer
[email protected]

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