Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2022 Earnings Call Transcript

Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day and welcome to the Vertex Energy Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. I would now like to turn the conference over to John Ragozzino, Head of Investor Relations. Please, go ahead.

John Ragozzino: Thank you. Good morning and welcome to Vertex Energy’s fourth quarter and full year 2022 results conference call. Leading the call today are Chairman and CEO, Ben Cowart; Chief Financial Officer, Chris Carlson; and Chief Operating Officer, James Rhame. Also attending the call are Chief Strategy Officer, Alvaro Ruiz; Vice President, Bart Rice; and Vice President of Black Oil Operations, John Strickland. I want to remind you that management’s commentary and responses to questions on today’s conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company’s control. Although, these forward-looking statements are based on management’s current expectations and beliefs, actual results may differ materially.

For a discussion of some of the risk factors that could cause actual results to differ, please refer to the Risk Factors section of Vertex Energy’s latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued today. Today’s call will begin with remarks from Ben Cowart, followed by an operational review from James Rhame and financial review from Chris Carlson. At the conclusion of the prepared remarks, we’ll open the line for questions. With that, I’ll turn the call over to Ben.

Ben Cowart: Thank you, John, and good morning to those joining us on the call today. This morning we issued a press release detailing our financial and operating results for the fourth quarter of 2022. We are pleased to report the continued safe and reliable operations with the improved financial and operating results which exceeded our prior expectations. We feel these results reflect the true earnings potential of our conventional fuels business at the Mobile refinery facility, which contributed the majority of our fourth quarter adjusted EBITDA of $75.2 million. Reported results benefited significantly for continued strength in conventional fuels refining margins, increased market exposure following the expiration of our prior hedge positions beginning on September 30.

Attractive refining deals of high-margin distillate products following the turnaround work performed in the third quarter. Operationally, we reported strong throughput volumes of approximately 78,000 barrels per day for the quarter, 5.4% ahead of our midpoint of our prior guidance issued in November. Our product yield profile and premium pricing for diesel and jet fuels drove a strong capture rate of 61%, which exceeded our prior outlook of 52% and generated very attractive refining profitability on a per barrel basis. In addition, we made notable progress on several strategic initiatives aimed at streamlining our business. First, we continue to expand our team by adding experienced talent throughout our key areas of the business. Secondly, we recently completed the sale of our Heartland UMO business, enhancing our ability further to prioritize the optimization of our current refining business.

And third, we have continued advancements of our construction of our RD conversion project for on scheduled mechanical completion by end of March, with carefully planned start-up early second quarter of this year. I’m proud of our employees and contractors who work together for the results achieved for 2022. The transition from our legacy operations, to the advantaged position we find ourselves in today, would not be possible without the team’s relentless pursuit of our goals, while keeping safe and reliable operations as our highest priority. With that, I’d like to hand the call over to James Rhame, our Chief Operating Officer, who will provide a detailed update on our operations during the quarter, including a more detailed update on the status of our renewable diesel conversion project in Mobile.

James?

James Rhame: Thank you, Ben, and good morning everyone. I will begin with a brief report on our health, safety and environmental performance. During the fourth quarter of 2022, our mobile operations had zero OSHA reportables, zero environmental reportable and zero process safety events. Our legacy operations saw two OSHA reportables, both moderate in nature with zero environmental reportable. Moving on to operational performance, beginning with our legacy business. Our Columbus refinery maintained safe and reliable operations during the fourth quarter and through the close of the recently announced divestiture. This is to the credit of our former Heartland employees and clearly demonstrates the quality of the team running those operations.

We are proud of their contribution and grateful for the opportunity to have worked with them over the last eight years. In Louisiana, our Marrero operations also saw continued progress in improving plant reliability and performance in the fourth quarter, achieving strong run rates and 106% capacity utilization at the refinery. Mobile performed well despite challenging weather conditions and increased site activity around the RD conversion. Fourth quarter throughput volumes at the Mobile refinery averaged 77,964 barrels per day or 104% of stated operating capacity, exceeding our initial guidance of 74,000 barrels per day and slightly ahead of our updated guidance of 77,000 barrels per day, issued in January. We continue to process — our crude diet consisting of WTI, LLS and local light sweet crudes.

Total production of finished high-value like products, such as gasoline, diesel and jet fuel represented approximately 74% of total fourth quarter production versus 69% in the third quarter of 2022, reflecting improved performance following the previously disclosed catalyst change in our distillate and reforming units. Our fuels-only gross profit per barrel during the quarter was $20.5, driving a capture rate of 60.6% of the benchmark Gulf Coast 2-1-1 crack spread, slightly ahead of our guidance of 50% to 54%. The strength in our reported fuels-only gross profit per barrel and resulting capture rate versus the benchmark is a direct function of the strength we continue to see in refining margins for diesel and jet fuel, which contributed to the strong per barrel profitability reported.

On a rent-adjusted basis, which we believe provides an additional layer of clarity around the per barrel refining economics for our conventional fuels business, gross profit per barrel was $16.54. Now turning to our renewable diesel conversion projects. I’m pleased to report that the development and construction activities are advancing as planned, keeping the project on schedule for targeted mechanical completion by the end of the first quarter with anticipated initial production to follow early in the second quarter of this year. Our budgeted total project CapEx has been adjusted slightly from the $90 million to $100 million range that was reported to $110 million to $115 million. The upward cost revision reflects three primary drivers: extremely tight local labor markets, incremental rental equipment gaping costs necessary to ensure adherence to all site safety protocols along with some additional supply chain-related costs, which we chose to pay in order to keep the project on schedule.

Despite inflationary pressures and supply chain complexity, we remain laser-focused on a safe, reliable and timely execution of the project. Progress towards these goals, we are prouder for continues without compromise due to the cohesive efforts of all employees and contractors involved in the project. Notable milestones include the safe shutdown of the hydrocracker unit completed as planned on January 6. With over 55% of the outage-related work completed, our crews have logged in excess of 290,000 work hours thus far with zero reportable incidents to date, the performance of which I’m very pleased to share. While we have an understandable bias and our pride over our team’s performance, the significance of what our Legacy and Mobile teams have accomplished throughout 2022 cannot be overstated.

Continued prioritization of our strict safety standards and relentless focus on achieving our goals by each individual team member is something I’d like to take time to perfectly acknowledge and commend. With that I’d like to hand the call over to Chris Carlson, Chief Financial Officer, who will review our financial results for the quarter as well as provide an outlook for the first quarter of this year.

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Chris Carlson: Thank you, James and welcome to those joining us on the call today. For the three months ended December 31, 2022, Vertex reported net income of $44.4 million or $0.56 per share on a fully diluted basis versus a net loss of $5.3 million or $0.09 per share on a fully diluted basis in the fourth quarter 2021. We reported adjusted EBITDA of $75.2 million in the fourth quarter of 2022 versus $9.5 million in the prior year period. On a standalone basis, the Mobile refinery generated $78.6 million of adjusted EBITDA during the quarter versus a $500,000 loss in adjusted EBITDA during the third quarter of 2022. Our legacy operations in the Black Oil and Recovery segment contributed $3.9 million adjusted EBITDA. Overall, fourth quarter results benefited from a continuation of consistent operational reliability and resulting throughput volumes.

Continued strength in refined product margins reflecting the robust conventional fuels market fundamentals, we continue to see. The fourth quarter financial results include a loss related to continued backwardation in the crude and product markets in the amount of $9.6 million. A return to Contango, during the quarter, helped offset a substantial portion of this charge relative to what we have seen in the prior two quarters, where backwardation charges came in at $17.9 million and $23.2 million respectively. As of December 31, 2022, the company had total liquidity, including restricted cash of $146.2 million versus $122.4 million at the end of the prior quarter. Vertex had total net debt outstanding of $214.1 million at the end of the fourth quarter of 2022, including lease obligations of $100.1 million, implying a net debt to trailing 12-month adjusted EBITDA ratio of 1.3 times as of December 31, 2022.

We continue to remain fully exposed to current robust refining margins with no fixed price hedge contracts currently in place. Subsequent to quarter end, we successfully closed on the planned divestiture of our Heartland UMO facility for total gross proceeds of $90 million. We are extremely pleased with the results of this sale, as we originally purchased this asset for $8.3 million in stock back in 2014. The net proceeds of $85 million are largely being used to finance the significant working capital required associated with our planned RD production with volumes of soybean oil feedstock currently being purchased in preparation of our April production start-up. The portion of the proceeds, are also being directed towards the repayment of our $165 million term loan, which carries a 15.25% interest rate.

We were able to make a prepayment of $11 million of the term loan saving over $1.5 million in future interest expense on the loans through year-end 2023. Looking to the first quarter of 2023, we anticipate total throughput volumes at Mobile to be between 69,000 and 72,000 barrels per day, reflective of the shutdown in the hydrocracker to accommodate completion of the RD conversion project by the end of the quarter. OpEx per barrel is expected to be $3.85 to $4 per barrel for the quarter. And our capture rate on the benchmark Gulf Coast 2-1-1 crack spread is forecasted to be approximately 50% to 54%. We anticipate total capital expenditures for the first quarter to be between $30 million to $35 million. I’d now like to turn the call back to Ben Cowart, to provide some final comments before we open it up for Q&A.

Ben Cowart: Thank you, Chris. The fourth quarter of 2022 sets a bar for financial and operating performance, which I’m extremely proud of. We continue to be encouraged by the fundamental outlook for refining margins on both the conventional and the renewable fuel side of the business. As we approach the start-up of our renewable fuels production in April, we look forward to establishing Vertex as an important player in the rapidly developing renewable fuels market. We remain extremely enthusiastic about the outlook for potential profitability in this business, knowing each player in this market faces widely different circumstances that ultimately determines their individual performance. Therefore, we anticipate updating the market with a detailed look at our expectations for the business as we build confidence in our ability to accurately forecast and deliver on these expectations.

Until then, we will continue to take a very measured, thoughtful and prudent approach to each decision we face as the RD business ramps. On the conventional side of our business, the macro environment continues to be extremely robust. Product margins for lighter distillate products, including diesel and jet fuel continue to maintain historically elevated less, fueled by the tight refining capacity and domestic inventory levels well below historic averages. As a result, we expect to continue to see strong financial performance on that side of the business. I’d like to thank all of you for joining us on this call this morning, and I look forward to being able to deliver another positive update on our next quarter performance. With that, we will open the line for questions.

Operator?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Today’s first question comes from Manav Gupta with UBS. Please go ahead.

Manav Gupta: Guys, congrats on a great quarter. My first question is you acquired the asset on April 1. You are showing a material improvement in capture in the last couple of quarters. Throughput has gone up. Help us understand some of the changes you have brought about, which are allowing you to learn from this experience and improve the performance of this asset. And a follow-up on this one is, help us also understand once the R&D project actually goes into the picture, does it change the throughput or does it change the screen product yields? If you could walk us through some of those parameters?

James Rhame : Good morning, Manav. This is James. I’ll answer that. So, what occurred and allowed us to increase the capture rate in the fourth quarter were really three things. During the third quarter, as you remember, we changed our reformer catalyst, which was at end of life and was affecting yields. And while we did change both the reformer and the distillate hydrotreater, we increased the capacity of catalysts that we were able to put in there, which we were able to capture that improvement in yields between the age catalyst and the improvements we made inside the reactor space. Those are the two main things. The other one that I would also say is we bought the site and this site was one that had many very good projects that we could go execute that were relatively simple that focused on distillate — maximum distillate strategy and that’s what we’ve been doing.

Everywhere from crude selection to how we’re running the unit, and making sure that yields or matter we’re paying attention to those. And so that answers that question. And in the end, you also saw the amount of crude throughput that we had and we were able to make sure that we didn’t lose yields during the crude throughput also. Did that answer the first question? Then I’ll go to the next one.

Manav Gupta: That did answer the first question.

James Rhame : All right. So what’s going to change? Number one in the first quarter, so you’ll see slightly down on crude performance and that’s primarily, because I don’t have a hydrocracker up to absorb hydrogen. So therefore, I’ve got to limit my fuel system that’s there, but once the hydrocracker comes up, so capture rate will change. And actually what you do see is, we’re back to what the capture rate was from our initial purchase, because of the benefits we saw in the fourth quarter. But what will occur is now I no longer have VGO going to a hydrocracker making roughly 8,000 barrels a day — 8,000 to 9,000 barrels of diesel, I’ll be selling VGO out on the open market as a result. All of that affects capture rate. But I will run the same amount of crude once I get the RD unit up. I’m sorry, I should have added that in too, Manav. Our crude rate will be consistent with what it was prior to, taking the OFAs down for the conversion.

Manav Gupta: So perfect. So the VGO, which is selling at a massive premium, the yield of VGO goes up is that right?

James Rhame: That’s, correct. It goes from — let me give you some rough numbers 10,000 barrels a day, to about 20,000 barrels a day.

Manav Gupta: Perfect. And my very quick follow-up here is, we recently saw another Louisiana project. We had an excellent valuation from a European major, almost $6, a gallon. Is this something you could be open to if a European or US major approaches you, for that kind of valuation would you be open to that kind of a deal, or do you want to do this on your own? And I’ll turn it over, after that.

Ben Cowart : Manav, good morning, and thanks for being on the call. This is Ben. We’ve taken no — there’s two projects now, that have set a value on RD production. And for us, we have planned to go down this path on our own, if necessary, but we’ve also legally bifurcated our renewable business on site, in the event that our whole value has exceeded, by somewhat of interest at least for a portion of that business. So we will be prepared to look at those opportunities, but we are very excited to own 100% of this business today, based on the performance of the rest of the company and our ability to continue down this path.

Manav Gupta: Perfect. Congrats, on great quarter guys.

Ben Cowart : Thank you.

James Rhame: Thank you.

Operator: Thank you. The next question today comes from Donovan Schafer with Northland Capital Markets. Please go ahead.