Vertex Energy (VTNR) operates in a unique niche within the recycled used oil market and has two divisions: Black Oil and Re-refining & Marketing. Vertex is more than a simple collector and aggregator of used oil, as it has some re-refining capabilities. Its primary focus is recycling used motor oil and other petroleum by-product streams. Vertex purchases these streams from an established network of local and regional collectors and generators. The company also manages the transport, storage and delivery of the aggregated feedstock and product streams to end users, and manages the re-refining of a portion of its aggregated petroleum streams in order to sell them as higher-value end products.
Moreover, the company sells its aggregated petroleum streams as feedstock to other re-refineries and fuel blenders or as replacement fuel for use in industrial burners. The re-refining of used motor oil that Vertex manages takes place at a facility operated by a related party that uses a proprietary Thermal Chemical Extraction Process ("TCEP") technology.
In 2012, Vertex captured 60 million gallons of used oil directly and through independent aggregators, which it has proceed for resale as recycled fuel oil (RFO) and/or runs through its proprietary TCEP process. Vertex maintains the flexibility to do so in order to respond to price and supply fluctuations across the collection/resale markets. As such, its margins, while low, are very stable. Over the next three years, Vertex should be able to expand its collection organically to nearly 80 million gallons. The bulk of that growth should come from its own collection and the rest from aggregators.
The TCEP expansion is moving along according to plan. The new expansion is in start-up and test phase and expected to be functioning fully by mid-June. The TCEP segment reported 17.8% gross margins in Q1:13 from 9.4% last year and reported an 80% improvement in gross profit dollars Y/Y, from $1.5M to $2.7M. The benefits from the TCEP expansion is expected to become more noticeable in Q3.
Elevated crude prices ($80-$100/barrel) coupled with a growing effort to reduce the negative environmental impact from the improper disposal of used motor oil has created an attractive market for used oil collectors, recyclers, and re-refiners. Used motor oil, industrial lubricants, or process oil, can be successfully recycled to a quality that is on par with virgin-produced base oils.
Used oil volumes of 1.4B gallons are available for recovery with only 1.0B gallons actually collected and recovered. Once the used oil is recovered, the bulk is used as a fuel in industrial boilers and asphalt plants (RFO); the remainder is re-refined. Roughly 70% of the used oil collected is sold as recycled fuel oil (RFO) and burned as an industrial fuel. The remaining 30% is beneficially re-refined into base lube, fuel oil cutter stock, or transportation fuels. This translates into a $2.3 billion market opportunity.
On May 17, Wunderlich's analysts initiated coverage on Vertex with a Buy and a $4.00 price target, representing a premium of 34% to VNTR stock closing price of $2.99. The analysts estimate that the upside potential from a second TCEP facility could be $0.75 to $1.00 per share. In addition, they are forecasting FY13 free cash flow of $5.1 million, as the company works to increase throughput at the TCEP facility and maintain TCEP gross margins around 1Q13 levels.
- Vertex competes against firms with greater financial resources and larger footprints than it has, such as Safety-Kleen (SFYK.PK) [acquired by Clean Harbors (CLH)] and FCC Environmental and sizable regional players like Heritage-Crystal Clean and Heckmann as well as small niche providers of services in a fragmented market.
- Vertex depends on consistent availability of feedstock to maintain operations. A disruption in supply or sharp increase in the cost of supply could adversely affect the company's financial results. The company also transports re-refined oil by truck and rail. As a result, increases in shipping and transportation costs could have significant impact on operating expenses. Additionally, the price at which VTNR collects and sells its products is affected by changes in certain commodity indexes. Significant or sudden changes in these commodity prices could adversely affect financial results.
Vertex seems to be moving along nicely with continued sequential improvement in gross margins and growing overall volumes even in a tough environment.
Looking forward, TCEP is expected to be a growth driver for the company over the foreseeable future, and management claimed to be aggressively pursuing plans to construct additional TCEP facilities around the U.S. as well as improvements to the current facility. Overall, a healthy growth in company-wide volumes with potential for additional capacity announcements in the next few quarters is expected.