• Energy and Income Advisor
  • Conrads Utility Investor
  • Capitalist Times
  • Twitter
  • Seeking Alpha
  • Roger S. Conrad

Cypress Energy Partners LP: A Marriage of Nontraditional Business Lines

By Peter Staas on Jul. 18, 2014

Despite these challenges, a number of MLPs have entered the water-management space over the past few years, with NGL Energy Partners LP (NYSE: NGL) establishing a foothold in 2012 with its $693 million acquisition of High Sierra Energy Partners LP.

This business, which includes disposal and recycling operations in the Permian Basin, Eagle Ford Shale and the Marcellus Shale, now accounts for 23 percent of the diversified MLP’s operating cash flow.

Earlier this year, Ferrellgas Partners LP (NYSE: FGP) completed the $124.7 million purchase of Sable Environmental Services, a company that handles fluids for operators in the Eagle Ford Shale. This deal marked the publicly traded partnership’s first effort to diversify beyond its legacy propane distribution business.

It’s no accident that NGL Energy Partners and Ferrellgas Partners gravitated to water solutions; the business features similar characteristics to the MLPs’ legacy propane distribution operations and leverages their existing expertise in trucking logistics.

And despite the highly competitive nature of oil-field water management, this business appeals to scrappier publicly traded partnerships for a number of reasons:

  • Inexpensive Valuations: Traditional midstream assets (pipelines and processing) fetch elevated valuations in this red-hot market, creating high barriers of entry to smaller operators and making it difficult for them to build scale. At the National Association of Publicly Traded Partnerships’ annual MLP investor conference, Ferrellgas Partners’ management team emphasized the reasonable multiples in the water logistics space as one of the primary reasons that the firm acquired Sable Environmental.
  • Opportunity for Consolidation: A profusion of local operators makes the water services industry ripe for consolidation. Moreover, players that build a footprint in multiple shale oil and gas basins could leverage this scale to win business from larger exploration and production companies.
  • Upstream Focus on Core Operations: With exploration and production companies seeking to lower costs and maximize their capital expenditures on drilling and development, these operators may be incentivized to divest their internal water-handling capabilities. SandRidge Energy’s (NYSE: SD) management team, for example, has suggested that the company might spin off its water-handling assets as a MLP or pursue other strategic alternatives for this business. At the same time, upstream operators’ focus on the drill-bit expands opportunities for third-party operators, especially those that can lower the transportation costs associated with water disposal.
  • The Push for Pipelines: Given the oil and gas industry’s focus on increasing hydrocarbon production and maximizing price realizations, efficiently managing wastewater has been somewhat of an afterthought. In many basins, the industry relies primarily on trucking to transport wastewater from the drilling site to disposal wells. This major cost center and inefficiency eats into exploration and production companies’ returns, while municipalities also face the expensive headache of maintaining the roads used by trucks carrying freshwater to drilling sites and wastewater to saltwater disposal units. Note that water-related transportation expenses can vary widely, depending on local labor costs and an operation’s proximity to disposal wells. With their relatively low costs of capital, MLPs are well-positioned to work with producers to reduce water-transportation costs in the most challenged basins by constructing collection pipelines that connect to disposal sites.
  • Steady Cash Flow from Produced Water: The inventory of producing shale oil and gas wells grows with each year, increasing the stream of produced water that saltwater disposal wells must accommodate. Consistently growing volumes and fee-based agreements with customers make wastewater management a good fit for the MLP structure.
  • Long-Term Potential of Flowback Recycling: Although the logistics challenges and higher costs associated with flowback recycling have weighed on adoption of this technology, tight water resources in some areas and potential regulation could breathe life into this industry. And in areas with elevated transportation costs, on-site (or nearby) recycling of flowback water can improve wellhead economics. The outlook for this service line could improve over the long term. 

Energy & Income Advisor

Your complete guide to energy investing, from growth stocks to high-yielders.

In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.

Subscribe today to receive a sample issue of EIA
  • Live Chat with

    Elliott and Roger on Aug. 29, 2017

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Coverage Universe

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLP Ratings

      Our assessment of every energy-related master limited partnership.

    • International Coverage Universe

      Roger Conrad’s coverage of more than 70 dividend-paying energy names.

    Experts

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Peter Staas

      Managing Editor: Capitalist Times and Energy & Income Advisor