2023-12-27 18:03:25 ET
Summary
- Vertex Energy, Inc. reported solid Q3 results, as its conventional refining business performed well, running above nameplate capacity.
- Its Renewables business showed improvement in Q3, with increased capacity utilization and higher gross margin per barrel.
- Questions still remain, however, about the path to profitability for Vertex Energy's Renewables business, as well as how crack spreads will impact its traditional refinery business.
Back in October, I wrote that the transition to a traditional refiner for Vertex Energy, Inc. (VTNR) has not been smooth, and that investors should stay on the sidelines. With the company reporting Q3 results last month , let’s catch up on the name.
Company Profile
As a reminder, VTNR is a refiner. The company was previously known for its re-refining business, where it would recycle and re-refine used motor oil and other petroleum by-products into vacuum gas oil ("VGO"). It previously tried to sell this business, although the FTC rejected a deal for its two facilities. It later turned around and sold its smaller facility, but it continues to own the used oil refining Marrero facility in Louisiana.
It also owns a traditional refinery in Alabama, which it acquired in April of 2022 for $75 million from Royal Dutch Shell (RDS.A). The refinery processes crude oil and turns it into refined products such as gasoline, jet fuel, and diesel.
Upon the acquisition of the Mobile Refinery, VTNR set out to convert the refinery's hydrocracking unit to produce renewable diesel. The project cost around $110 million and the refinery began producing renewable diesel in Q2 of 2023.
Q3 Results
For its most recent quarter reported last month, VTNR saw its revenue rise 26% to $1.02 billion. That topped the analyst consensus of $900 million.
Revenue in its Refining & Marketing segment rose 28% to $978.7 million. Gross margins were 8.0% for the segment, with a gross profit of $78.6 million. That was up from 6.4% gross margins a year ago and $48.7 million in gross profit.
The company’s conventional fuels refinery had throughput of 80,171 barrels per day. The refinery operated at a whopping 106.9% of nameplate capacity. That compare to year-ago throughput of 67,954 barrels a day and 90.6% capacity utilization.
Fuel gross margins per barrel came in at $17.56 a barrel versus $7.73 a year ago. About 67% of its production was finished products, with gasoline 23.2%, ULSD 20.3%, and jet fuel 17.7%.
On the renewable refinery side, the company had throughput of 5,397 barrel a day. That was up from 2,490 barrels a day in Q2. Capacity utilization was 67.5%, up from 31.1% in Q2. Its gross margin per barrel was $4.78 versus -$13.66 in Q2.
For its Black Oil & Recovery segment, revenue rose nearly 4% to $44.3 million. Gross margins were 14.4% for the segment, with a gross profit of $6.4 million. That was down from 16.7% gross margins a year ago and $7.1 million in gross profit.
Overall, the company recorded $51.5 million in adjusted EBITDA compared to only $1.7 million a year ago. Adjusted EBITDA for conventional refining was $80.1 million, -$24.1 million for its renewable refining, and $2.5 million for its Black Oil & Recovery segment.
EPS from continuing operations was 17 cents, up from 15 cents a year ago.
Turning to its balance sheet , VTNR ended the quarter with cash & equivalents of $75.5 million and $143.3 million in debt, as well as $182.5 million in inventory financing. It ended the quarter with net leverage of 1.3x, which takes into account lease liabilities but not its inventory financing.
The company has generated -$71.7 million in operating cash through the first nine months of the year and -$200.3 million in free cash flow.
Looking ahead, the company projected Q4 conventional throughput volumes of between 68,000-71,000 barrels per day, representing 91-95% capacity utilization. Between 64-68% is projected to be finished products. On the renewable side, it is looking for throughput volumes of between 4,000-6,000 barrels per day, representing 50-75% capacity utilization. Combined, it expects direct operating costs of between $3.95-4.20 a barrel.
The reduced capacity utilization in Q4 will be due to two maintenance issues. At the start of the quarter, the company had a total plant outage to let the local power provider proactively replace the plant’s main electrical transformer. Later in the quarter, it will have decoking maintenance on its crude unit furnace.
Ask on its Q3 call about the path to profitability for its renewable business, CCO Douglas Haugh said:
“We're in no way concerned about the start-up costs and the additional expenses to get the unit up and running. What we're pleased with is the reliability of the unit, the yields are fantastic. And our ability to flex our supply chain has been much greater than we anticipated. So one of the problems with the run rate losses coming into the start-up period was, we had built up almost 500,000 barrels of inventory because we weren't experienced in the supply chains, we didn't know how reliable they would be. The last thing we wanted to do is build a big brand new unit and not have the feeds to run it. So we kind of over inventoried the business, if you would, but we felt that was prudent coming in. We've had to run off those high-cost feedstocks to get back to normalized inventory levels, which we're at now. And we've been able to really gain an appreciation for the reliability of our supply base in that sector. We've continued to expand the number of suppliers and continued to qualify new feeds. We found that feedstocks have been plentiful and available, which we weren't certain of when we started up because we weren't out in the market buying every day. So we're quite pleased with where we're at. And yes, you're right. I mean the path to profitability from here is to continue to drive down carbon intensity, continue to maximize the LCFS contribution now that we're in the system to continue to optimize our logistics that were brand-new assets for us there in the second quarter, third quarter. So, there is a lot of opportunity ahead, but we're very confident in the business, very pleased with how it's run.”
VTNR turned in a solid quarter that saw its conventional refining business run well above nameplate capacity. The company also did a nice job shifting production to gasoline to also take advantage of a strong refining market for the end product.
The Renewables business remains a work in progress, but the company did see a big improvement over Q3. This came both from a capacity utilization level and on a gross margin per barrel level.
While the company will see some lower volumes in Q4 due to maintenance, this is something that should be expected time from time from a company that only has one refinery. For its traditional refining business, crack spreads will continue to play a big role in VTNR results. Crack spreads have been volatile this year, but remain above historical averages of about $10.50 . Note that due to having a bit more middle distillate mix (jet fuel and diesel), crack spreads aren’t a perfect gauge, but still a good one for VTNR.
For its renewables business, meanwhile, the company needs to run off high-cost feedstocks that is stockpiled. At the same time, RIN credits for renewable diesel (D4) collapsed in 2023, making production less profitable.
Valuation
VTNR trades at a 10.3x EV/EBITDA multiple based on the 2023 EBITDA consensus of $74.8 million. Based off of the 2024 EBITDA consensus of $116.7 million, it trades at around 6.6x.
The company is projected to post three cents in EPS in 2024.
It's projected to see revenue grow 17% in 2023 and 5.2% in 2024.
VTNR's stock generally trades at a large premium to other refiners. Much of this is due to an expected large contribution from its renewable diesel operations down the road.
VTNR Valuation Vs Peers (FinBox)
Placing between a 5-8x multiple on 2024 EBITDA give the stock a fair value range of between $1.75-$5.50.
Conclusion
With nearly a quarter of its float sold short, VTNR is one of the most heavily shorted energy stocks out there. This can be likely contributed to doubt surrounding a path to profitability around its renewable business, the problems that can occur operating only one traditional refinery, and crack spreads coming down from earlier historic highs.
It’s also worth noting that the company recently paid $75 million for its one refinery and put in just over $100 million into upgrading it. It also still owns the Marrero used oil facility and some other legacy assets that may be worth around $100 million, and there is about a $40 million difference between its inventory and inventory financing. Thus, its EV of $750 million is well above the value of its physical assets, and the company is burning through cash.
Now a stock being heavily shorted isn’t necessarily a bad thing for longs, as if the company outperforms, it can lead to short covering and an outsized rally. A rally in crack spreads for its traditional business and/or RIN and LCFS (low carbon fuel standard) prices for its renewable business could push the stock higher. Meanwhile, if the company can show it is able to use lower-cost feedstocks to run its renewable business profitably, it could go a long way to helping the stock.
All in all, I’m neutral on Vertex Energy, Inc., as I continue to think there are a lot of question marks surrounding the name and its current valuation.
For further details see:
Vertex Energy: The Most Shorted Energy Stock