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Vertex Energy: Mixed Messages

Sep. 05, 2022 7:57 AM ETVertex Energy, Inc. (VTNR)CLH, VLO44 Comments


  • Today, we take our first look at Vertex Energy, Inc., a refiner that has seen explosive sales growth thanks to a major acquisition.
  • However, there have been some significant share dispositions by two insiders at the company recently and net losses in the second quarter were somewhat concerning.
  • An investment analysis follows in the paragraphs below.
  • Looking for more investing ideas like this one? Get them exclusively at The Insiders Forum. Learn More »

Aerial drone view of petrol industrial zone or oil refinery in Yaroslavl, Russia during sunset time


What luck has gave you will probably leave you. - Amit Kalantri

Today, we put Vertex Energy, Inc. (NASDAQ:VTNR) in the spotlight for the first time. Vertex is a specialty refiner and marketer of high-quality refined products based in Houston

Author's note: I present an update my best small and mid-cap stock ideas that insiders are buying only to subscribers of my exclusive marketplace, The Insiders Forum. Our model portfolio has nearly tripled the return of its benchmark, the Russell 2000, since its launch. To join our community and gain access to our market beating returns, just click on our logo below.

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We are a team of analysts led by Bret Jensen, Chief Investment Strategist at Simplified Asset Management.

We run the investing group The Insiders Forum where we specialize in small and mid-cap stocks that insiders are buying. The Insiders Forum portfolio managed by Bret Jensen consists of 12-25 top stocks in different sectors of the market that are attractively valued and have had some significant and recent insider purchases. Our goal is to outperform the Russell 2000 (the benchmark) over time.

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Comments (44)

Darp Research profile picture
#1 short in sector

As of the close of business on Wednesday, 9/21, we captured the Top 10 Highest Short Interest % stocks within the Energy Sector.

The average short interest for stocks within the Energy sector stands at 2.81%. Therefore, the below stocks are showing a more pessimistic outlook than their peers within the respective sector.


Many think short money is smart money, it is not. I have seen many 10+ baggers in heavily short stocks like PTRUF.
So Shell was just stupid to sell the refinery that low? Or is there more to the story?
@qwerty11 not really. Shell is a Deutsch company who is under a mandate by their country to reduce their carbon footprint globally by 25%. For a company that big, the only way to achieve this goal was to sell some of their refineries. Mobile was just one of those that they sold over the last few years. Shell also has agreement with Vertex to buy back some of the refined product. Lastly, Vertex had to purchase $173m of existing feedstock which was never really mentioned in any of the Vertex press releases when the deal was announced.

So Vertex actually paid $248m for the plant with the feedstock, not $75m. Plus $90-100m to covert a portion of the plant to biodiesel. If you throw in the interest on the outstanding loan balance every quarter and the $30m it cost them to structure the loan, it was a very expensive purchase. They also borrowed another $40m in Q2. I assume they will probably borrow more in Q3 too.

From my calculations, they are somewhere in the $300-400m in debt. Their AR and AP nearly balanced out in Q2 and the had $98m in cash. Vertex will need several $100m profitable quarters to become debt free. Some say 2025 but who really knows.

Hope this helps.
@User 1111970 Yes helps greatly, thanks for all this info!
@qwerty11 Debt not nearly what is reported above. Half is inventory financing. There is also no compelling need to be totally debt free any time soon.
I would strongly suggest everyone reading the Risk Analysis found in #VTNR 10q filled with the SEC on 8/9/22. This management team is hiding a lot of information from shareholders. Vertex is closer to $400m in debt and climbing because of their inability to record a profit. The variable interest rate on their loans are also a lot higher at 10.25% as of 6/30/22. Also, the company must enter into a crack spread every quarter as it is part of their loan agreement. Hopefully they get it right in Q4. Lastly, Vertex admits that it will have to raise capital through a share offering resulting in dilution. Between this and the lenders 22m warrants which can be exercised anytime the stock reaches $15/share, this stock will experience dilution of at least 50% in 2023. Investors will not know the chances of Vertex being successful until their investor call in February 2023.
grok42 profile picture
@User 1111970 Thanks for your comment which I thought was really important. Had not read the 10Q yet. I took a look at the 10Q risk factors on debt and have to agree with you that something is not right. Very negative tone on debt risk factors and very straightforward statement about needing to raise more equity. The 10.25% interest rate is way too high given the huge crack spreads. Something does not add up here.

Per the 10Q - "As of June 30, 2022, we owed approximately $81 million in accounts payable and accrued expenses, $173 million in connection with our inventory financing agreements obligations and $260 million, net of original issue discount "OID", under our senior notes payable". The $81m accounts payable should be covered by AR (Q2 was $91m) in the normal course of business unless they are going to lose a lot of money, which seems unlikely given the high crack spreads and ending of the hedges in 3 weeks. The $173m in oil inventory financing should also get paid off as oil inventory is turned into diesel and gasoline etc, assuming they are not somehow losing money despite high crack spreads. So that leaves us with $260m in senior notes, of which only $165m is the term loan. That is not much given they have $98m in cash and should be able to sell their motor oil operation for $90m to $100m (might be wrong on the motor oil amount - just from memory).

The hedging loss for Q2 was $46.9m, plus there was an accrual for the hedging loss for Q3 of $46.1m taken in Q2. Spreads contracted in Q3 so far and they expect to recover $23m of the hedge loss in Q3. They also had a "a $23.2 loss on an intermediation agreement due to backwardation" (think that is the oil inventory financing but am not sure). They also took a $40m hit from convertible bonds being converted to stock and had to recognize OID. If you add all that up, they took a $93m hedging loss + $40m one time OID interest expense which is $132m. They will recover $23m of the hedging loss in Q3 and should have no further hedging losses in Q3 or beyond, although we need to figure out the loan covenants requirements for hedging as you alluded.

Q3 could show a profit. If you add back the $132m one time losses to the Q2 -$63.8m loss they would have had a profit of $68.2m. Assume Q3 has the same profit and add back the $23m recovery on the hedging loss you end up with Q3 on the order of $91.2m. That is just a wild guess on my part and I need to drill down to the hard details and get a real number. But at first blush things don't seem anywhere near as dire as management seems to indicate in the debt risks section of the 10Q.

In looking at other refiners (DK for instance), they are making a huge amount of money. There does not seem to be any reason VTNR would not be in the same position once the hedges are gone in 3 weeks. Not sure what is going on.

Something feels very off on VTNR's communications.
@grok42 a lot of great points you made. Yes, the $23.2m loss was from the sale of the converted Shell feedstock. This was a result of the crack spread they entered into for Q2 and Q3. I will check and see if they can record a net positive in Q3 by recording an unrealized loss in Q2 for Q3.

What most don’t know is Vertex will be forced to enter another crack spread every quarter until their Mobile loan is paid off. It is part of their loan agreement and spoken about in their 10q filing. Hopefully they hired some experts to help with this. If they get it wrong again, I would say the company is in serious trouble and all shareholder confidence will be out the window.

If I was a betting man, I would bet they had to take out any additional $20-40m loan to stay alive in Q3 due to the crack spread revenue loss. We will see if I am correct on the next investor call which should be around Oct 9.

With the 22m warrants outstanding and the fact that a portion of these warrants can be exercised every time the stock hits $14-15, I believe this stock will have significant issues staying above $15 for the foreseeable future. This does not include any dilution by the company in an effort to raise capital without incurring more high interest debt.

A lot of things have to bd done differently for Vertex to be successful but there is definitely an opportunity if management makes better financial decisions in the coming quarters.
@grok42 I read the Q completely before, including the factors. Always recommend folks should. Have written more 10Qs and risk factors in my life than I can count. The factors all read like the end of the world for legal reasons, so they have to be individually considered in context. Otherwise, you would never invest in any company ever again. I saw nothing out of the ordinary for a small cap company on the verge of a complete business model change. No doubt the rate on the term loan is high, but my only concern was that it is floating with some onerous prepay penalties. P&I is easily manageable with cash flow. Net debt position is fine (and one can't include the inventory financing arrangements, but then exclude the actual inventory). Equity issuance language is boilerplate and not really applicable until 2025. They will have long since succeeded or failed by then. Warrant dilution is well disclosed, most are way out of the money and there is a lot of capital gain to get from $8 to $14. Operating cash flow is tough to isolate from just one quarter of operations due to the derivative items and working capital changes. It should be easier to tell in 3Q, but cash looks to be more than adequate. Ultimate disposition of the UMO business is perhaps as important a variable in the short term as the progress in the core refining operations.
User 195396 profile picture
Mgmt incompetence on hedges=Q2 disaster, director insider sales=possible fiduciary violation; mgmt failure to provide forthright guidance=all negatives!

Avoid probably not strong enough, run the heck the other way! This company is fraught with negatives with mgmt incompetence compounding the problem, they are in over their heads!
CincinnatiRick profile picture
@User 195396 The concerns you allude to were already addressed in the previous commentary. Unfortunate that you failed to respond, in detail, to the cogent discussion, particularly that offered by CPA022784 and grok42. Hint: it's never too late.
User 195396 profile picture
@CincinnatiRick I'm inclined to go with grok42 who clearly has misgivings about the mgmt ability to manage and communicate; his other factors are also persuasive, e.g. debt levels and payments. The many other negative comments on the operations of this company contained herein are also of prudent value.

BTW, td ameritrade reports consensus earnings estimate for Q3 is minus $1.72, that is negative $1.72, est report date of 11/07. Not sure if these are the same analysts who had Q2 as plus $1.24 with result of negative $0.98 so take that number FWIW.

As someone else recently commented, maybe a key indicator would be when bod member phillips buys back as an insider trader as he dumped 100% of his shares in early June when it would have been obvious to all that the hedges were blowing up or had already blown up.
MerosTC profile picture
I did work on this company a couple of years ago when they announced the Mobile transaction. For me, you can't own this stock unless you're comfortable (and knowledgeable) with the outlook for renewable diesel (RD) and the associated credits (such as RINs, et al) that make the industry viable. Without the various credits, the product is not viable, and further RD is 80-90% a California product. Other jurisdictions may have joined, I'm not sure. My concern a couple of years ago was that due to the favorable RIN structure, many companies were expanding RD capacity - far too many I thought. Capacity announcements of 3.8B gallons against a total market of 4B gallons ...nearly as much as the entire California market. And VTNRs small (200M gal?) unit was relatively small. The other players involved (P66, Marathon, Holly, CVR, DGD/Darling) have much larger balance sheets than VTNR. The company benefits from the current high refining margins industry wide, but this is not the future for the company. In other words, if you want traditional refining exposure, don't own this one.
@MerosTC Wow, so good to read some real life experience. And makes my (remaining) short position a bit less scary...
PBRM1 profile picture
Thank you for the writeup. I've been waiting for someone's perception of the company going forward after the Q2 results. I bought at just under $7 a share and planned to hold but got spooked after the recent downdraft. It's hard to know the direction going forward after bad Q1 guidance, sales falling through, director's suspicious insider sales. But I think based on the nature of the sector currently they'll have no choice but to make money. I'm getting back in when I can.
@Seeking Mammon I took profits after a double and jumped back in shortly after the fall in price. I think low 60s by the end of 2024. Just ignoring my shares for until then. Kind of like our potato field.
@Seeburto we will never see $60 with current assets. Will never even see $30 with currents assets
Long VTNR - patience is a virtue......
Poor superficial analysis. CEO had almost 7 million shares - selling about 1% each time under 10b5-1 plan. High short interest is mostly due to convertible bonds. Quarter losses were all related to derivatives prudently placed for a brand new operation and would not have caused losses if not for extraordinary spreads, which have since normalized. Limited hedges going forward. Did some nice capital structure cleanup actions in quarter. Possible retention of the previously AFS businesses which are generating nice returns and would only add to EBITDA. Currently inexpensive at EV/EBITDA multiples.
grok42 profile picture
@CPA022784 Useful and accurate comment! While I agree with your views on the mitigating factors, I found management's communications and previous forward guidance pretty bad. Management put out huge forward guidance and then delivered exactly the opposite results with, I think, very little to no interim updates. Management also appeared to have muffed the sale to SafetyClean. Makes me wonder if they are in over their heads at this point. Having said that the refinery performance was solid, which is good and they did hire some new exec talent with refining experience.

The second thing that is not discussed much is the notion that refining is a commodity business and eventually margins will revert to long term low margin levels. It seems to me an analysis of the factors driving the high crack spreads need to be examined and some notion of how long they will last is needed. The refining story in Europe (Russian strangle hold on NG prices) is going to drive high refining margins for awhile. The problem could extend past the end of the Ukraine war as Europe would be really dumb to depend on Russian gas in the future. So we may see higher crack spreads until Europe can establish reliable alternative NG sources. On the other side, the rapid growth of EVs will reduce demand for gasoline and diesel. But I am just guessing here as to how those factors play out as I do not have much background in refining. Would be really useful to see a professional analysis of the supply/demand macro situation for refining.

The biodiesel initiative should be a winner, particularly with the passage of the IRA act with its incentives for green diesel. For the next year or two profits at the refinery should be quite large. I think the stock market underestimates the win for that. VTNR should be able to reduce or eliminate their debt, buy back stock, etc with those outsized profits. It also seems to me the stock market is ignoring the fact that the hedges will be gone in a month and that VTNR already took a reserve for hedging losses for Q3 in Q2. A lot of the Q2 loss is one time and Q3 should see material profits, if I understand the financials correctly.

Anyway, thought you made an insightfull comment!
@CPA022784 lower crack spreads might lower hedging loss but it wouldn’t add to the bottom line any. The loss represents where they sold the inventory at market price minus the hedge price. Market price going down would have resulted in lower top line and same bottom line unless the market price fell below the hedges. Bottom line is this was a rookie mistake and even an amateur sitting in the cheap seats would have known it was a terrible idea.
@Joeyh72 That is one possible perspective with perfect 20-20 hindsight (that could further be applied to almost every energy firm that has hedges). Another alternative view is that they only hedged 50% (or so) of a brand new operation to prudently protect and control the potential cash flow from the new venture as it is needed for further operations and build-out cap-ex. Their hedges did not work out due to extraordinary market conditions that are highly unlikely to be repeated but, in any case, they are letting the hedges roll-off. The CEO then freely admitted their mistake and discussed the issue extensively in the conference call (in contrast to companies such as EOG which had billions in hedging losses in the 2Q and didn't feel it necessary to mention it in their release, presentation or conference call).
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