Vertex Energy: Bango Sale Will Spur Buying Spree

| About: Vertex Energy, (VTNR)
This article is now exclusive for PRO subscribers.


Vertex Energy announced it would sell a leased facility in Nevada to Safety-Kleen on February 3rd.

Though the facility was, originally, to be a key factor in Vertex' plans in the western United States, the plan did not take shape as intended.

Proceeds from the sale will be used to pay down debt and for, finally, acquiring more street collection routes.


On February 3, 2016, Vertex Energy (NASDAQ:VTNR), a used motor oil (UMO) re-refiner, sold its Bango, Nevada facility, a base lubricating oil production plant, to Safety-Kleen Systems, a subsidiary of Clean Harbors (NYSE:CLH). The total purchase price was $35 million. Of the total, Vertex Energy is clearing less than $22 million. And, that $22 million is already providing breaths of relief.

In May, 2014, Vertex Energy completed the first of two closings in an acquisition of the assets of Omega Holdings. Three assets were tied to the first closing - the Marrero, Louisiana re-refinery, the Myrtle Grove complex in Belle Chaise, Louisiana and Golden State Lubricants Works in Bakersfield, California. The second closing was tied to the Bango, Nevada plant and was subject to specific closing conditions. The plant was to be fully restored and operational before closing. The purchase price included $30.75 million in cash, approximately $4 million in stock and provision of a loan of $3.1 million.

In Vertex Energy's 2014 second quarter earnings call, the company described its plans.

"We believe we will be well-positioned to leverage both that asset as well as our Bakersfield, California, blending facility to become a major participant in both re-refined base oil and finished product markets in the West."

By the 2014 fourth quarter, the second closing had been renegotiated. Omega Holdings was not able to meet the closing requirements. Vertex and Omega were contracted in a shared-service and tolling agreement. In the earnings call, Vertex described its role and responsibilities.

"Yes, we have a tolling agreement in place today and a kind of a shared service or advisory services where we provide the technical support to the Omega staff that's running the refinery. The tolling agreement allows for us to provide all the feedstock into the refinery and take all of the finished products and co-products on the back side of refinery and sell those into the market and then we provide a tolling feedback to Omega for the operations of the plant."

In the 2015 first quarter, Vertex reported it had entered into a new leasing agreement with the land owner of the Bango facility. Omega's lease had been terminated. Vertex had also secured equipment leases for the equipment used at the plant. Vertex would not owe rent in 2015. Payments in 2016 of $244,000 per month could be paid in cash or stock. The lease agreements included a right to acquire the plant and equipment directly by paying pre-negotiated purchase prices. The $1 million in costs for negotiating and transferring the lease agreement hit the first quarter bottom line at a loss of approximately $0.04 per share.

Because Omega had been unable to fulfill the requirement to fully restore the plant to operational status, Vertex undertook the maintenance. The plant was taken offline in the third quarter. Vertex expected Bango would be back online at some point in the 2015 fourth quarter. Vertex estimated the carrying costs on the inactive facility included $1.2 million of SG&A costs and $500,000 of operating expenses.

In the latest investor presentation, Vertex provided a map describing its footprint - absent the Bango, Nevada facility.

The map indicates Vertex Energy is no longer focused on its 2014 plans to become a major participant in the UMO market in the West.

Lower crude oil prices have pressured Vertex Energy's business of late. The company's ability to address its debt level has been a source of concern with revenue under pressure. By June 30th, 2015, Vertex Energy was required to raise at least $9.1 million to meet its obligations under the second amendment of its Goldman, Sachs & Co. credit and guaranty agreement. The company raised $25 million and paid down $15.1 million (32%) of its debt. At the end of the 2015 third quarter, Vertex owed $27.44 million in long-term debt. Of the $27.44 million, $23.2 million was owed to Goldman.

Vertex Energy will use nearly $14 million of the $35 million to exercise the purchase option of the lease agreement for the equipment and facility. The company then used $16 million to pay down its long-term debt. The obligation to Goldman is now around $7 million.

The remainder of the sales price will be added to Vertex's cash balance. At the end of the 2015 third quarter, the company's cash balance was $4.02 million. After the sale and elimination of associated carrying costs for the inactive facility, the balance is around $10 million.

Some may question why Vertex did not use the entirety of the balance to pay down debt. The simple answer is Vertex Energy needs available cash to acquire street collection routes. Vertex Energy found street collection is a key factor in improving its business model. By collecting UMO rather than paying third parties for it, the company can significantly lower its cost of revenue and increase its gross profit margin. But, without available cash, the company was limited in its ability to acquire collection routes.

Decreasing debt will decrease expenses. Accumulating street collection routes should increase operating income. Both are, without doubt, quality uses of proceeds from the sale. If the company finds it still has available cash, the Vertex Energy board should consider authorizing a share repurchase program.

Vertex Energy has no control over the price of crude oil. But, it can impact the other side of the equation. Volumes processed by the company continue to climb steadily. For the first nine months of 2015, the year-over-year increase was 16%. Improving operating income and decreasing expenses are key steps in returning Vertex Energy to breakeven and, beyond, to profitability.

Disclosure: I am/we are long VTNR.

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.

Additional disclosure: I belong to an investment club that owns shares in VTNR.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.