Cypress Energy Partners: IPO Could Flow Nicely Uphill

Jan.14.14 | About: Cypress Energy (CELP)

Trading Opportunity

Cypress Energy Partners LP (NYSE:CELP), a master limited partnership that provides saltwater disposal, along with other water and environmental services, plans to raise $75 million in its upcoming IPO on Wednesday, January 15th. The deal was moved up from Thursday and we are hearing it is oversubscribed. When a deal gets moved up, it usually is a great sign.

The Tulsa, Oklahoma-based firm will offer 3.8 million shares at an expected price range of $19-$21 per share. If the IPO can find the midpoint of that range at $20 per share, CELP will command a market value of $237 million. See S-1 here.

CELP filed on November 14, 2013.
Lead Underwriters: BMO Capital Markets, Raymond James and Associates, Robert W. Baird, Stifel Nicolaus & Company Inc.
Underwriters: Janney Montgomery Scott, Wunderlich Securities

Summary

CELP provides saltwater disposal and other water and environmental services to American oil and natural gas firms and trucking companies. The firm also offers pipeline inspection and integrity services. CELP owns and operates a total of nine saltwater disposal facilities (SWD)-seven in the Bakken Shale region of the Williston Basin in North Dakota and two in the Permian Basin in Texas. CELP also manages additional facilities in the Bakken Shale region.

The water and environmental services segment treats flowback water (the fluid used to fracture shale) and "produced water" (which occurs naturally in shale formations and flows to the surface in gas wells). Both contain chemicals or other toxins that represent ecological threats. The segment generates revenue by charging a per-barrel fee to dispose of the water through its SWD facilities. The pipeline inspection segment generates revenues through fees charged for a variety of inspection and integrity services performed on midstream pipelines, gathering systems, and distribution systems.

The firm's inspection and integrity customers include some of the larger American pipeline companies, such as DCP Midstream (NYSE:DPM), Enbridge Energy Partners (NYSE:EEP) and Enterprise Products Partners (NYSE:EPD).

Valuation

CELP offers the following figures in its S-1 balance sheet for the nine months ending September 30, 2013:

Revenue: $16,665,000
Net Income: $12,581,000
Total Assets: $85,452,000
Total Liabilities: $1,542,000
Stockholders' Equity: $83,910,000

CELP's S-1 filing states that the firm will make quarterly distributions of all available cash to unitholders. Although the firm has no legal obligation to make distributions in specific quantities-its general partner has "considerable discretion" to determine the amount of available cash each quarter.

CELP plans to make quarterly payments of $0.3875 per unit, which annualizes to $1.55 per unit. If CELP IPO's at the midpoint of its expected price range at $20 per unit, this would represent a strong 7.75% annual yield.

Business

CELP has made significant efforts to expand and improve its facilities to maintain its business. The firm has acquired or constructed SWD facilities near existing wells and expected future producing sites in order to entice current and future customers.

CELP must compete with similar third-party disposal and inspection firms in its target markets.

Management

Peter C. Boylan III is co-founder, President and CEO of Cypress Holdings and Chairman, President and CEO of Cypress Energy Partners GP. Mr. Boylan previously served in various senior executive management positions with public and private companies controlled by Liberty Media Corporation. He currently serves on the board of directors of publicly traded BOK Financial Corporation (NASDAQ:BOKF) and MRC Global Inc (NYSE:MRC).

What Should Income IPO Buyers Do

We are rating CELP a Buy in the proposed range of $19 to $21. We would expect those fortunate enough to get a good allocation to see the stock price initially flow up.

The firm is profitable and should see a steady supply of business as long as gas and oil production continue in its regions of operation. Both segments of CELP's business will benefit from the increasingly strict regulatory policies to which fossil fuels industries have been (and likely will continue to be) subject. More environmental regulation means more inspections and tighter control of water disposal. The firm's efforts to expand its presence near active sites is also encouraging.

CELP should turn out to be a strong income generator for investors, given the high yields that its filings discuss.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CELP, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.