Q1 2022 Vertex Energy Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the vertex Energy Q1, 2022 earnings conference call. At this time, all participants have been placed on listen only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Noel Ryan with the Investor Relations team knows the floor is yours.
Thank you Paul Good morning, and welcome to vertex Energy's first quarter 2022 results conference call, leading the call today are our chairman and CEO , Ben Cowart, CFO , Chris Carlson and EVP of development Albert Reis will.
We issued a press release before the market opened this morning detailing our recent operational and financial results.
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 could 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 you can find reconciliations of the historical non-GAAP financial measures discussed during our call. The press release issued today.
Today's call will begin with remarks from Ben Cowart.
Followed by financial review from Chris Carlson.
The conclusion of these prepared remarks, we'll open the line for questions and with that I'll turn the call over to Ben.
Thank you know and good morning to everybody joining us today, sorry for my voice.
I had a lot to talk about here lately.
Purpose of today's call I'd like to begin with an update on our recent acquired refinery in mobile Alabama.
Exactly 40 days ago vertex assumed ownership of the mobile refinery signaling and.
An entirely new chapter in the history of the company. This next chapter will be one during which you will see us build a leading platform focused on the development and acquisition of complementary energy transition assets with an emphasis on conventional and alternative fuels.
We view the acquisition of the moment, where foundry as a first pivotal step.
And this multi year transformation.
Since assuming ownership of the mobile refinery April one the transition.
Of the refinery operations from shareholder vertex has been seamless with no impact on production levels are scheduled product deliveries.
As expected, our new teammates and to mobile refinery have performed with exceptional professionalism.
And assuming a successful integration process.
When we first evaluated in mobile refinery as a potential acquisition target our base acquisition case focused mainly on the hydrocracker conversion project.
Once completed would allow us to produce high valued renewable fuels.
Both Dan and now this project remains a key cornerstone of our investment thesis one with the potential to drive significant value creation and future years.
However.
What we didn't fully anticipate at that time was the value creation potential of the conventional fuels business, which today is more profitable than originally expected.
Conventional fuels refining economics have improved materially in the recent months driven by.
A combination of improved post pandemic demand for conventional fuels.
A 5% decline in domestic comparable crude oil refining capacity since 2019.
And lower domestic natural gas prices versus those in Asia, and Europe , which as advantaged domestic refiners.
Yeah.
At present domestic inventories of distillate fuel our protein a multiyear low.
Given our recent geopolitical events.
This inventory situation is only expected to worsen, creating the potential for further widening.
And refined product margins.
Currently the Gulf Coast, three one to crack spread and approximate gross profit per barrel a benchmark for the mobile refinery has more than $48 per barrel versus the five year average of 13 per barrel.
Even more importantly, the Gulf Coast Distillate crack is currently north of $70 per barrel versus a five year average of $15 per barrel.
Given that approximately two thirds of the mobile refineries.
Product slate is digitally.
We are uniquely positioned to capitalize on current refined product economics further with no refined product pipeline.
Feeding the region.
Our fad a refinery remains the primary source.
Two of these local markets.
During the month of April 2022, our first full month of operations. The mobile refinery operated at 90% of utilization given operable capacity of 75000 barrels per day.
During the first 30 days of operations to refinery generated strong EBITDA all of which came from conventional fuel production.
Putting the significance of this performance in perspective, we currently anticipate vertex we have generated enough cash flow to pay for the mobile refinery and related logistic assets and less than one full quarter of operations and an incredible accomplishment that supports further balance sheet.
Optionality as we look over the coming years.
Concurrent.
With our acquisition of the mobile refinery, we entered into a crack spread hedging program, representing approximately 50% of our anticipated production for the period between April one and September 32022.
For the six month period, we've locked in an average crack spread hedge at a level of approximately 25% above the trailing.
Five year average three one to crack spread.
This hedge program, which is intended to secure elevated product margins and a favorable spread environment as expected.
Significantly derisk.
Anticipated margin capture for the full year 2022, while still providing our spot market exposure.
On the other half of our production.
With respect to the Hydrocracker conversion project, we remain on schedule with.
With the previous communicated project timelines to date, we have engaged technology engineering and construction partners to lead the project with approximately 50% of all detailed engineering work now complete.
Long lead equipment has been purchased to ensure a timely completion of the project by year end 2022.
Initial production rates are expected to be approximate 8000 to 10000 barrels per day, beginning in first quarter 2023. The range is being governed by what we know now to be our current hydrogen capacity at the site. We anticipate the completion of a hydrogen expansion project.
During the second half of 2023.
And it will allow maximum production of renewable diesel and anticipated levels of 14000 barrels per day.
Our initial project estimate was 85 million.
And as increase between $90 million to $100 million, given raw materials and labor cost inflation.
These cost increases were well within our expected range of total potential project costs. We currently anticipate.
Let the entirety of this project budget will be funded through cash on hand and available liquidity. We anticipate no further increase to the project budget at this time.
Turning now to review our recent financial results.
We generated record first quarter results driven by a combination of strong operational execution together with elevated refined product margins, which currently set at multiyear highs our legacy business.
We need to perform ahead of plan during the first quarter highlighted by continued growth in Europe about collections together with strong reliability at both our marrero and Heartland refineries.
On a trailing 12 month basis through the end of the first quarter.
Our legacy assets generated more than $31 million of adjusted EBITDA supported by strong spreads on <unk> and group II plus base oil prices.
As the mobile refinery acquisition closes on April one.
This performance.
Lose any contributions from mobile.
Second quarter to date refined product margins have increased above first quarter levels across each of our refining assets positioning our combined business to continue outperformance as we move into the remainder of 2022.
In the press release issued earlier today, we introduced updated financial guidance, including forecasted.
<unk> from the mobile refinery for the full year, 2022, and 2023, which Chris will walk through shortly.
Given current expectations for significant outperformance over the next 24 months.
Together with strong first quarter results reported earlier today, we believe the company is well position to deliver additional shareholder value with that I'll turn the call over to Chris. Thanks.
Thanks, Ben and welcome to those joining us on the call today.
For the three months ended March 31, 2022 vertex reported a net loss of <unk> 8 million versus net income of $3 million in the first quarter of 2021.
The first quarter of 2022 net loss includes $8 1 million of nonrecurring items, including a $3 6 million noncash gain on a change in the value of a derivative liability and a $4 6 million of nonrecurring transaction related expenses.
We reported record adjusted EBITDA of $13 million in the first quarter of 2022 versus $7 million in the prior year period.
First quarter results benefited from elevated utilization rates at both our marrero and heartland refineries together with improved refined product margins.
As of March 31, 2022, the company had a total cash including restricted cash of $124 5 million.
Total liquidity at the end of the first quarter of 2022 included $17 2 million of cash limited to use by the two special purpose vehicles.
<unk> had total term or senior secured debt outstanding of $145 7 million as of March 31 2022.
We have provided a full year financial guidance for the full year 2022, and 2023, including anticipated contributions from the mobile refinery completed on April one 2022.
Together with the implied net cash impact of hedges currently in place on approximately 50% of the mobile refineries production in the second and third quarter of 2022.
All guidance is current as of the time provided and is subject to change.
For the full year 2022, vertex anticipates gross profit and a range of $440 million to $460 million.
Adjusted net income in a range of 235 million to $255 million.
And adjusted EBITDA in a range of 340 million to $360 million.
Free cash flow in a range of $150 million to $175 million.
For the full year 2023, vertex anticipates gross profit and a range of $530 million to $550 million.
Adjusted net income in the range of 250 million to $270 million.
Adjusted EBITDA in a range of $425 million, so $450 million.
And free cash flow in a range of 260 million to $280 million.
This guidance assumes that the mobile refinery will operate between 69 and 70000 barrels per day in 2022.
In 2023, we anticipate the refiner will operate at 80000 barrels per day, including 70000 barrels per day of conventional and 10000 barrels per day of renewable diesel.
As the conversion project is set to be complete in the fourth quarter of 2022.
Our D to come Onstream in the first quarter of 2023.
Importantly in the second quarter of 2022.
We expect to generate total adjusted EBITDA in a range of $110 million to $130 million.
The resulting in free cash flow generation of between $70 million to $90 million.
The strong free cash generation will position us to fully fund the hydro Cracker conversion project together with other internal growth initiatives entirely from cash on hand.
With that we will open the line for questions operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question you. Please pickup your handset of lifting on speaker phone to provide optimum sound quality. Once again. Please press star one if you have a question at this time.
Please hold while we poll for questions.
And the first question today is coming from Manav Gupta from Credit Suisse Manav. Your line is live.
Thanks, guys and congrats on a good quarter and a very positive outlook.
We're looking to the slides here so it looks like mobile refinery on its own is looking at about 220 million EBITDA.
And if you look at the throughput guidance, it's coming down to about like no other.
50 of EBITDA margin, which is extremely get table at this point and similarly for next year, its like $16 less EBITDA margins. So if you could walk through if it does the rightly you are modeling at about 12% to $16 of EBITDA margin, which is very achievable and then for next year. If you could also help us a little bit on terms of <unk>.
But a gallon of renewable diesel project that you are building in to get to the annual guidance. So if you could just walk us through the assumptions. Thank you.
Okay.
Yes, so and Chris you can pick up as well.
We're using forward strip so the market is in backwardation.
We agree with you we think those are conservative on the conventional side of the business.
Yes.
The.
This is something we're going to we're going to be looking at on a quarter by quarter basis. So we can we can.
Kind of break bringing more of these economics forward as they develop so.
As far as the per gallon.
On the renewable.
Chris I don't have that myself, but.
We are using the floodwaters studies.
We signed and are using forward stretch going forward.
And liquidity.
Good day.
<unk> 17 shows the credits that we're utilizing for the Capex drove.
So that gets you to your answer.
I look forward I think.
But point is I think youre defining assumptions.
Are very achievable so that's good.
If you add in a <unk> environment right now, but what you are assuming now that is a reasonable. So I think that's a positive I just have a quick follow up here, sorry yesterday, a competitor's Dino who is also looking to do something indicated that one of the <unk> units, which they were planning to do they're not going to move ahead with it. They don't think its the right use of capital.
At this point of time and I'm wondering if you had similar to what you were thinking of building a pretreatment unit.
As you said in the earlier in the call the existing conventional food margins.
Very good and I'm just wondering I mean are you definitely will have the cash but do you still want to go ahead and build a pretreatment unit at this point of time.
Well our teams been us.
Very successful in partnering with several pre treatment.
Facilities.
And so we have the property at our Myrtle Grove site.
We believe the intermediary.
Truly is going to be in our favor to where we can build a pretreatment plant at Myrtle Grove.
<unk>.
We are still evaluating.
The investment we do have engineering done in technology. So you did for the site.
But we do know that's a finite supply of material and it could very easily get commoditized, if there's already an overbuild around pre treatment assets.
No.
We have a view on this to continue cautiously down that path.
And they make that decision in the next quarter or two.
Oh, perfect I'll turn it over and congrats on a good quarter and a very positive outlook. Thank you. Thank you.
I appreciate it.
Thank you. The next question is coming from Eric Stine from Craig Hallum Eric.
Eric Your line is live.
Good morning, Thanks for all the details and thanks for taking the questions.
Thank you good morning.
Hey, so just.
Following up on what you talked about with pretreatment and Myrtle Grove, maybe just.
Stepping back to feedstock.
Would love to get your current thoughts on that I know, that's an area, where you've been pretty positive given your location.
There.
And all of the potential sources in the netback and all of that but would just love your current thoughts on feedstock.
Yes, nothing nothing has changed as far as our view.
We're excited to be in the market now we've got <unk>.
Storage.
The carrier product feedstock product for the refinery.
<unk>.
We've made some recent hires.
That are going to be moving.
Our supply and trading forward.
Around the renewable and the conventional business so.
We just don't see a change.
Our view on feet, we're very optimistic about our position and our ability to buy feed and our logistic system to optimize transportation cost of feedstock into our refinery.
As well as deliver finished product.
By cargo vessel.
Two key markets so.
Got it and I guess that that would then plan to you certainly don't have as much urgency youre looking at the looking at the upgrade.
Myrtle Grove, but I guess, we'll have to see how that plays out.
Maybe just given the guidance and your Capex needs if I do if I do the math I mean, it looks like if.
Debt repayment is your is a priority that you could be in a cash neutral potentially cash positive position by the end of the year.
So maybe how you think about.
That but then also.
Weigh that against at the start of the call you talked about that mobile is just the start and youre looking at some other areas. So maybe maybe how you view all of that together and timing of when potentially you do look at some other asset.
Well, obviously, we got a lot to get.
Put to bed the team's done a great job as far as integration and settling the refinery into our platform.
So all of that's gone extremely well.
We do see the mobile.
Site.
And the vertex platform collectively.
In a position to expand and grow over time.
We do see the use of capital.
To vertically integrate and build off this platform as far as.
What our next steps are I think there's still a lot of work before we can really open up and convey where we want to go.
As far as.
Future investments in the business.
For us just the journey over the last five years with Berry.
Tight means and the team's work to.
Build the business out and grow under those conditions were actually enjoy them.
The cash generation.
The business is today.
Today so.
I think we're going to.
We don't let that kind of get ahead of us a little bit before we start making plans on how we grow and expand the business.
Absolutely I can.
Can appreciate that I mean, I guess, you have options, which is great. So.
Maybe last thing just on the hedging strategy is this.
I mean I would assume this will be pretty dynamic just based on the market you are locking in and 50% for the next six months.
Just curious is that is that the kind of level. You think is the right place to be in terms of what you lock in.
Or is that something that really is going to just depend on where spreads are at any given moment.
Yeah, I mean, it's a rule of thumb for.
Refining at least.
Mike.
We entered the business.
Make sure that.
We have exposure.
I think people appreciate the exposure, especially now but at the same time.
We have the fiduciary of removing the volatility of our earnings to ensure a safe journey.
This space and so I think we've done both very pleased with our what we accomplished for.
For the first six months.
And again that speaks to our relationship on our working capital.
Side of the business and our partner our banking partners that have <unk>.
Provided a hedging vehicle this credit back.
In order to be able to.
To take those kind of.
Positions without draining cash and liquidity at the company.
Got it okay. Thanks, everyone.
Thank you. Thank you.
Thank you and the next question is coming from Amit <unk> from H C. Wainwright.
Amit Your line is live.
Thank you and good morning, everyone, sorry, I joined a bit who needs.
Just one question from me for now Ben.
What are the plans for the U M business I know you are looking to sort of carve it out previously that didn't go through are.
Are you potentially looking for options.
Going forward, maybe to deleverage a little bit et cetera.
Maybe just sticking with the business any comment on that would be.
Helpful. Thank you.
Yes.
Thank you for the question.
It was tough going through that process.
Sure.
We're running the business like we're going to keep the business.
We.
Our goal.
<unk>.
Through the process of evaluating.
Certain interest in some or all of those assets.
As a fiduciary to make sure that we understand.
We are.
Where the market is and where their interest is in and those assets I think we have to do that we're in that process and so it's too early to say if there's a change to our plan that we currently have in place right now.
Okay. Thank you that's all I have been I appreciate it thank you.
Thank you and the next question is coming from.
Yeah.
It looks like we just lost Michael He had Michael from Stifel. He had a question.
Okay.
In the meantime, I'll hand, it back to <unk>.
Ben <unk> for some closing remarks.
Okay well.
This is.
The close.
The closing quarter of what I call vertex one point.
We're very excited about.
The call coming up that will represent the first.
New quarter or the second quarter of the year of vertex to point out.
And.
I couldnt be more pleased with.
The way all of this has come together to support the company's got.
Investors and banks.
And in the market in general.
To the work that we're doing.
<unk>.
No it was really.
A new date for the company.
And where we're moving the business forward, we got tremendous opportunities as we as we look ahead. So.
Thank you everybody for joining the call and if you have any further questions feel free to reach out to.
At vertex energy Dot com and.
And that we will reach.
Our Investor Relations representative Noel Ryan.
And we'd be glad to answer any other questions that may come up thank you for joining the call.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.