Summary
- Vertex Energy sold its UMO collection and re-refining business at Heartland for net cash proceeds of $85M.
- However, the Heartland re-refinery has a capacity of 20m gallons/year, while the remaining one at Marerro is more than three times bigger.
- Previously, both assets were to be sold for $140M, which indicates that the current transaction is a significant improvement.
- Based on this transaction alone, I’m raising my target price for Vertex by $1.25/share to $15.77/share.
Recently, I wrote an article about Vertex Energy ( VTNR ), highlighting the stock as a short-squeeze candidate. There I underlined the sale of the used motor oil and re-refining business (legacy business) of the company as a potential catalyst. Now that Vertex sold part of it, it’s worth taking a closer look at the transaction and the potential implications on the company. Overall, I find the deal to be very good for VTNR and a significant improvement on the previous sale agreement, which was then terminated. However, the way management communicated the sale might have confused some investors into thinking otherwise. Based on the current sale’s terms alone, I raise my target price for Vertex by $1.25/share to $15.77/share.
The new deal – a significant improvement
The backstory
After entering into an agreement for the acquisition of then Shell’s ( SHEL ) Mobile refinery in Alabama in 2021, Vertex began to look for ways to sell its existing used motor oil and re-refining business in order to improve its financial position and focus on the new venture. As a result, a deal was agreed upon with Clean Harbors ( CLH ) for a price of $140M on the whole legacy business. The press release by CLH reveals specifics about the assets which were included in the deal:
The Vertex assets being acquired include a 20-million-gallon re-refinery in Columbus, Ohio and a 69-million-gallon re-refinery in Marrero, Louisiana . The deal involves 17 service branches strategically located throughout the Midwest and Gulf Coast, supported by approximately 200 employees and a fleet of collection vehicles.
However, in the beginning of 2022, Vertex Energy terminated the deal and paid a $3M breakup fee to Clean Harbors. The CEO of Vertex justified the termination by saying that it was at the best interest of shareholders. However, this has led to Vertex taking on a lot more debt than if the deal had went through and raised questions whether management did the right thing.
The new deal
On February 1, Vertex announced the sale of its re-refining and UMO business at Heartland, Ohio to GFL Environmental ( GFL ) for a total of $90M or net cash proceeds of $85M. The market reaction to the announcement was not positive. Despite opening with a gap up, the stock closed down for the day.
A possible explanation of this could be that some market participants thought that what was to be sold for $140M was now sold for much less – $90M. Had this been the case, the news would have been negative indeed and another serious blunder by management, following the hedging fiasco in Q2 and Q3 of 2022.
In reality, Vertex sold only its smaller re-refining asset (20m gallons/year) for $90M, implying that the remaining Marerro 69m gallons/year re-refinery should be worth north of $290M. This is a significant improvement on the $140M that was agreed upon with CLH previously.
Implications on valuation
In my previous article on Vertex, I valued the company using a sum-of-the-parts approach. There the valuation that I assigned to the legacy business was the $140M, which was agreed upon with CLH. However, the sale of the Heartland re-refinery indicates that the value of this part of the business should be higher. While in terms of capacity, the Marerro is 3.45 times larger than Heartland, assigning the exact same multiple for valuation purposes may be a bit optimistic. After all, the Marrero refinery has been historically operational at lower utilization rates than its smaller counterpart.
For this reason, instead of 3.45x multiple, I’ll apply only a 2x multiple to Marerro, which puts its estimated value at $180M or $170M in terms of net cash proceeds (using the same proportion as in the Heartland deal). The valuation of the other two parts of Vertex – the Mobile refinery and the renewable diesel project remain unchanged.
unit | ||
Legacy business (Marerro) | US | 170 |
Mobile refinery | US | 970 |
Renewable diesel | US | 392.5 |
Implied EV | US | 1532.5 |
Net debt, assuming conversion and the cash from Heartland | US | 83.5 |
Equity value | US | 1449 |
Share count | M | 91.9 |
FV/share | US$ | 15.77 |
The resulting fair value estimate is $1.25 higher than my previous estimate and implies more than 115% upside to the current share price.
Conclusion
The sale of the used motor oil and re-refining business at Heartland (20m gallons/year capacity) for $85M in net cash proceeds implies significant value for the remaining re-refinery at Marerro (69m gallons/year capacity). Furthermore, the cash flow from the sale will strengthen the balance sheet of the company. Adjusting my SOTP valuation model for the new information, I estimate the fair value of Vertex Energy’s stock at $15.77.
For further details see:
Vertex Energy: The Heartland Business Sale Unlocks Value