Cypress Energy Partners, L.P. Announces First Quarter 2018 Results

Cypress Energy Partners, L.P. (“CELP”) (NYSE:CELP)
today reported:

• 6 new pipeline inspection and integrity customers added in Q1 2018;
• 28.4% increase in gross margin vs. Q1 2017;
• $26.1 million of cash at March 31, 2018;
• Cash distribution of $0.21 per unit, consistent with the last four
  quarters; and
• Completion of the first phase of our strategic alternatives review
  process.

Peter C. Boylan III, CELP’s Chairman and Chief Executive Officer stated,
“During the first quarter of 2018, we made solid progress on our stated
goals of improving our gross margins and more efficiently managing our
working capital requirements. Customer spending continues to improve,
and numerous new projects have been announced by several clients that
should benefit us later this year. Demand remains strong for inspection
and integrity services. Pipeline Inspection and Integrity Services
represented approximately 96% of our revenues and approximately 82% of
our gross margin.”

Mr. Boylan continued, “Revenues from our 51%-owned Integrity Services
segment were much greater than the first quarter of 2017. Revenues from
our Water Services segment were approximately 34% greater than in the
first quarter of 2017, despite the sale of our Pecos saltwater disposal
(“SWD”) facility. Additionally, this week we completed a sale of our
Orla, Texas facility on attractive terms, thereby reducing the amount of
equity funding that will be required to deleverage the partnership. The
Orla facility was struck by lightning in early 2017 and contributed very
minimally to our EBITDA or distributable cash flow over the last fifteen
months. After the sale of both our Pecos and Orla SWD facilities in the
Permian Basin, we are now solely operating our Water Services segment in
the Bakken region of North Dakota. We currently operate nine facilities
and approximately 49% of our saltwater disposal volumes for the first
quarter were received via seven different pipelines, with two other
pipelines currently under development. About 95% of our saltwater is
produced water from completed oil wells. We simply have better economies
of scale to operate efficiently in North Dakota and we continue to
benefit from higher rig counts, well counts, well completions, and
higher oil prices.”

“In April 2018, we obtained $10 million more in commitments to our
proposed new credit facility. Last quarter, we announced that CELP had
retained a financial advisor to shop the market to determine if more
favorable private investment in public equity (“PIPE”) terms could be
obtained from an independent third party, and to explore strategic
alternatives to determine if any more attractive transformational
opportunities exist. We have completed the first phase of this process
and the process is advancing toward the next round of discussions. We
hope to complete this process during the second quarter of 2018.
Regardless of the outcome of these discussions, after our refinancing,
CELP would have substantially lower leverage which would, in turn,
significantly reduce interest expense, improve distributable cash flow,
and position CELP to increase the size of our credit facility when we
find a suitable acquisition opportunity.”

Mr. Boylan further stated, “Our ownership interests remain fully aligned
with our unitholders because the general partner and insiders own
approximately 64% of CELP. We continue to believe that a pro forma
stronger balance sheet with less debt, as the result of the contemplated
PIPE transaction or other strategic transaction, will allow us to both
support the current distribution and ultimately position us to begin
growing the distribution again.”

First Quarter:

• Revenue of $64.8 million for the three months ended March 31, 2018,
  compared with $64.7 million for the three months ended March 31, 2017
  in our seasonally low first quarter. The three months ended March 31,
  2017 included revenue from a low margin Canadian customer that we
  elected to cease serving. Revenue from U.S. operations was $64.1
  million for the three months ended March 31, 2018, compared with $50.4
  million for the three months ended March 31, 2017, an increase of
  27.4%.
• Gross margin of $8.1 million or 12.5% for the three months ended March
  31, 2018, compared to $6.3 million or 9.8% for the three months ended
  March 31, 2017, representing a 28.4% increase in our seasonally low
  first quarter.
• Net income of $1.0 million for the three months ended March 31, 2018,
  compared to a net loss of $4.9 million for the three months ended
  March 31, 2017 (which included impairment charges of $3.6 million).
• Net income attributable to CELP limited partners of $0.7 million for
  the three months ended March 31, 2018, compared to a net loss of $2.8
  million for the three months ended March 31, 2017 (which included
  impairment charges of $2.8 million and excluded $0.9 million of loss
  allocated to the general partner).
• Adjusted EBITDA of $3.3 million for the three months ended March 31,
  2018 (including noncontrolling interests), compared to $2.8 million
  for the three months ended March 31, 2017 (including noncontrolling
  interests and amounts attributable to our general partner),
  representing an increase of 16.0% in our seasonally low first quarter.
  Adjusted EBITDA for the three months ended March 31, 2017 included
  $0.9 million of sponsor support. Exclusive of sponsor support in the
  first quarter of 2017, Adjusted EBITDA increased by 73% from the first
  quarter of 2017 to the first quarter of 2018.
• Adjusted EBITDA attributable to limited partners of $2.9 million for
  the three months ended March 31, 2018, compared to $3.1 million for
  the three months ended March 31, 2017, representing a decrease of
  6.1%. Adjusted EBITDA for the three months ended March 31, 2017
  included $0.9 million of sponsor support. Exclusive of sponsor support
  in the first quarter of 2017, Adjusted EBITDA attributable to limited
  partners increased by 35% from the first quarter of 2017 to the first
  quarter of 2018.
• Distributable Cash Flow available to limited partners of $0.9 million
  for the three months ended March 31, 2018, compared to $1.3 million
  for the three months ended March 31, 2017 (which included $0.9 million
  of sponsor support), representing a decrease of 28.7%. Exclusive of
  sponsor support in the first quarter of 2017, Distributable Cash Flow
  increased by 143% from the first quarter of 2017 to the first quarter
  of 2018.
• A coverage ratio of 0.37x for the three months ended March 31, 2018
  compared to the March 31, 2017 coverage ratio of 0.52x (including
  sponsor support in 2017). Historically, our Distributable Cash Flow
  has been lowest during the first quarter of the year, due to the
  seasonal nature of our business, and our coverage ratio has improved
  later in the year.
• An adjusted leverage ratio of 3.53x compared to a 4.0x covenant
  maximum and an interest coverage ratio of 3.01x compared to a 3.00x
  covenant minimum on March 31, 2018, pursuant to the terms of our
  credit facilities.

Highlights include:

• We sent an average of 1,030 inspectors per week to our customers for
  the first quarter of 2018, compared to 1,083 in the first quarter of
  2017, a decrease of 4.9%. The headcount of our U.S. operations was 19%
  higher in the first quarter of 2018 than in the first quarter of 2017;
  however, we elected not to lower pricing with a significant customer
  in Canada in the second half of 2017, which led to a decrease in our
  active inspector workforce in Canada of over 200 inspectors per week.
• We continue our focus on maintenance, integrity, and non-destructive
  examination services. These business lines yield higher gross margins
  than our standard inspection work.
• We disposed of 3.1 million barrels of saltwater during the first
  quarter of 2018 at an average revenue per barrel of $0.82, compared to
  disposal of 2.8 million barrels at an average revenue per barrel of
  $0.68 in the first quarter of 2017, an increase in volume of 10.9%. We
  experienced this increase despite the January 2018 sale of our Pecos,
  Texas SWD facility. We disposed of 3.0 million barrels of saltwater at
  our North Dakota SWD facilities during the first quarter of 2018,
  despite the impact of adverse weather conditions in North Dakota
  during the first quarter of 2018.
• Maintenance capital expenditures for the first quarter of 2018 and
  2017 were $0.1 million, reflecting the minimal maintenance capital
  expenditures necessary for the day-to-day operations of our businesses.
• Our expansion capital expenditures during the three months ended March
  31, 2018 were $1.9 million. The expansion capital expenditures were
  primarily related to the construction of a gathering system at one of
  our saltwater disposal facilities in North Dakota, the rebuilding of
  our saltwater disposal facility in Orla, Texas, and 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
  new customers we added during 2017 and the first quarter of 2018 that
  should continue to benefit us throughout the remainder of 2018 and
  subsequent years. Our two new inspection service lines should also
  benefit us as we look forward into 2018 and beyond.
• Our Integrity Services business’ (hydrostatic testing) first quarter
  2018 and fourth quarter 2017 results improved dramatically over prior
  quarters with a significant increase in revenues, gross margins and
  field personnel utilization, reflecting recent business development
  efforts.
• During the first quarter, approximately 95% of total saltwater
  disposal volumes came from produced water, and piped water represented
  approximately 49% 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. As prices continue to improve, we expect to benefit from the
  completion of drilled and uncompleted wells 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 approximating 25%.
  During the second quarter of 2018, we plan to reopen a facility we own
  in the Bakken that was struck by lightning in July 2017.
• We continue to evaluate acquisition opportunities as they present
  themselves that our parent, CEH, may pursue, with the expectation that
  these acquisitions would be offered to CELP in the future as drop-down
  opportunities.
• LIBOR interest rates have risen over the last quarter by almost 31
  basis points, approximately 89 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 significantly
  lower level of debt, once refinanced, would reduce our interest
  expense in 2018.
• Our distributable cash flow should benefit from significantly lower
  outstanding debt as a result of the new credit facility that should
  result in significantly lower overall interest costs.

CELP will file its quarterly report on Form 10-Q for the three months
ended March 31, 2018 with the Securities and Exchange Commission
tomorrow. CELP will also post a copy of the Form 10-Q on its website at www.cypressenergy.com.
Unitholders may receive a printed copy of the Quarterly Report on Form
10-Q free of charge by contacting Investor Relations at Cypress Energy
Partners, L.P., 5727 South Lewis Avenue, Suite 300, Tulsa, Oklahoma,
74105 or emailing ir@cypressenergy.com.

CELP will host an Earnings Release Conference Call on Friday, May 11,
2018 at 10:00 am EDT (9:00 am CDT), to discuss its first quarter 2018
financial results. Analysts, investors, and other interested parties may
access the Earnings Release Conference Call by dialing toll-free (US &
Canada): (888) 419-5570 Passcode 22980541, or International Direct: +1
(617) 896-9871.

An archived audio replay of the call will be available in the Investor
section of our website at www.cypressenergy.com
on Tuesday, May 15, 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, 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, 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 less cash interest paid, cash
income taxes paid, and maintenance capital expenditures. 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 midstream 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, of the 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 alternatives 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 supplemental financial measures 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. Actual
results could vary significantly from those expressed or implied in such
statements, and are subject to a number of risks and uncertainties.
While CELP believes its expectations, as reflected in the
forward-looking statements, are reasonable, CELP can give no assurance
that such expectations will prove to be correct. The forward-looking
statements involve risks and uncertainties that affect operations,
financial performance, and other factors as discussed in filings with
the Securities and Exchange Commission. Other factors that could impact
any forward-looking statements are those risks described in CELP’s
Annual Report filed on Form 10-K and other public filings. You are urged
to carefully review and consider the cautionary statements and other
disclosures made in those filings, specifically those under the heading
“Risk Factors.” CELP undertakes no obligation to publicly update or
revise any forward-looking statements except as required by law.

About Cypress Energy Partners, L.P.

Cypress Energy Partners, L.P. is a master limited partnership that
provides essential midstream services, including pipeline inspection,
integrity, and hydrostatic testing services to various energy companies
and their vendors throughout the U.S. and Canada. Cypress also provides
saltwater disposal environmental services to upstream energy companies
and their vendors in North Dakota in the Bakken region of the Williston
Basin. In all of these business segments, Cypress works closely with its
customers to help them comply with increasingly complex and strict
environmental and safety rules and regulations, and reduce their
operating costs. Cypress is headquartered in Tulsa, Oklahoma.

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