Q3 2022 Vertex Energy Inc Earnings Call
Okay.
Good morning, or good afternoon, and welcome to the vertex energy third quarter earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to John that I got Tino. Please go ahead.
Thank you operator, good morning, and welcome to vertex Energy's third quarter 2022 results conference call, leading the call today are chairman and CEO Ben Tower.
<unk> Financial Officer, Chris Carlson, and Chief operating Officer James Ram.
Also attending the call our Chief strategy Officer, Albro, Reis, 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 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 <unk>.
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 Rain and financial review from Chris Carlson.
The conclusion of these prepared remarks, we'll open the line for questions with that I'll turn the call over to Ben.
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 third quarter 2022 simply put we are not pleased with the full results for the quarter largely due to previous hedges that were in place, which did not expire in <unk>.
September 30th.
This was a slight 17% quarter over quarter improvement in hedge impacts along with an additional 22% improvement on the inventory charges related to backwardation. However.
Impact of these items in conjunction with a few non reoccurring items resulted.
And consolidated adjusted EBITDA totaling $1 7 million for the quarter, which is below expectations, Chris Carlson, Our Chief Financial Officer, who will address financial results in greater detail momentarily.
It's considered we're glad to be out of our previous hedge positions and we look forward to showcasing the true value of our mobile asset moving forward as for the remainder of the results. We're very pleased with our operating performance during the quarter. We have continued to transition operations continued steady progress on our R&D.
A J.
And made significant improvements to the assets, while doing so safely and reliably.
<unk> continued to execute safely.
On all fronts, demonstrating operational agility and flexibility and constantly changing market conditions of which I'm incredibly proud of their performance.
We continue to work extremely hard to effectively manage and more importantly, adapt and learn from each of the individual challenges and organizational gaps we encountered along their transformational journey.
Operationally, we reported throughput volumes in line with our prior expectations, achieving better than forecasted operating expense per barrel results.
Our product yield profile and resulting capture rate was also on target generating attractive refining profitability per barrel on unadjusted basis beyond prioritizing safe and reliable operations, we focus on optimizing our refining assets expanding our core capabilities and increasing.
Our knowledge and expertise we did this in three ways first we prioritized the maintenance and optimization of our mobile facility to best position vertex for the fourth quarter ahead of anticipated robust market fundamentals concurrent with the rollout of our previous hedge positions second we grew.
And developed our employee base focused on key areas, such as accounting marketing communications and risk management.
Third we pursued and began engagements with industry, leading consulting groups to help us develop strategic business processes and expand our expertise on an accelerated timeline.
Although we have used this quarter to cover a lot of ground and build momentum each of these initiatives reflect our drive towards continuous improvement serves to help us maintain a clear.
View of the road to a successful future with that I'd like to hand, the call over to Jane drain our Chief operating officer, who will provide a detailed update.
One of our operations during the quarter, including an update on the status of our renewable diesel conversion project at the mobile facility.
Thanks.
Thank you Dan Good morning, I'll begin with a brief report on our health safety and environmental performance during the third quarter, we had zero Osha recordable that the mobile site and for Osha recordable than the legacy business all minor in nature.
Zero environmental record of Oleds across our legacy business and to environmental recordable and one tier one process safety events at our mobile site.
These events had been fully investigated and action has been taken to prevent recurrence.
Moving on to operational performance, beginning with our legacy business, our Columbus refinery saw its largest spread on net backs for our base oil ever during the third quarter of 2022.
<unk> did occur some downtime for equipment replacement and does have a planned turnaround scheduled for the fourth quarter of this year and.
In Louisiana I'm a railroad operations also saw improvement on netback spreads in the third quarter achieving record high run rates at the refinery.
Alero does not have a planned downtime in the fourth quarter.
Turning now to our mobile operations third quarter throughput volumes at mobile refinery averaged approximately 68000 barrels per day or 91% of operating capacity in line with our updated guidance of 68 to 69000 barrels per day we.
We continued processing of crude diet consisting of W. T.
L L S and local sweet crudes total.
Total production of finished high value light products, such as gasoline diesel and jet fuel represented approximately 69% of total production versus 67% in the second quarter of 2022, reflecting the type of improved yield efficiency, which we expect to continue in the fourth.
Quarter following completion of the recent turnaround work.
Our fuel only gross profit per barrel for the quarter was $18.18.
Driving our capture rate of 52% of the benchmark Gulf Coast 211, crack spread which came in at $34.82 in line with our guidance of 50% to 54% capture rate.
On a realized basis, including the impact of hedging and onetime adjustments gross profit was $7 73 per barrel.
During the quarter, we successfully completed a catalyst change on our distillate hydro treater and number one reformer and we're able to clean the number one crude unit.
We are pleased to have completed these operations on time and on budget and have since seen the yield benefits of changing the catalyst on both units.
Total throughput volumes were restored to full operational capacity as of early October and continue to remain at or above these levels currently.
Bond impact are performing the recent maintenance operation that mobile benefited overall facility performance maximizing throughput capacity and enhancing yields ahead of the anticipated historically robust heating oil demand season.
We remain confident in our recent decision to extend the schedule associated with the Rd conversion and address necessary maintenance operations as it positions the company extremely well to enter the fourth quarter.
As expected refining margins quarter to date had been some of the highest in the industry has ever witnessed in with the benchmark <unk> Gulf coast crack spread averaging $43.90 during the month of October .
Now turning to our renewable diesel conversion project as previously disclosed in September we extended our project timeline for the renewable diesel conversion project by approximately three months.
The decision not only reduces the total planned downtime of the unit during the conversion. It also significantly reduce the risk of any further unanticipated operational delays caused by supply chain disruptions.
I am pleased to report that progress on the development and construction activities are advancing as planned with the conversion project tracking on time and on budget for targeted mechanical completion during the first quarter of 2023 and initial production anticipated in the second quarter of 2020.
At our budgeted total capex of 90 million to $100 million.
The majority of the engineering and procurement activities are now complete and significant milestones and the actual construction progress have been achieved to date.
Recent procurement delays on critical bulk items had been resolved with 100% of pipe and valves fittings have recently arrived at the fabrication shop.
<unk> schools have been delivered on site as of the first week of November in line with scheduled delivery with all schools currently projected to be on site prior to the end of the year.
Some of our prior long lead equipment delay concerns have been abated with final delivery of all long lead engineered equipment.
Expected on or around feed out in January .
To date the project has safely completed a combined 55000 work hours, we're extremely proud of the progress made to date by the team who continue to prioritize the safety of side operations.
With that I would now 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 our outlook for the fourth quarter of this year.
Thank you James and welcome to those joining us on the call today for.
For the three months ended September 32022, vertex reported net income attributable to common shareholders of $22 2 million.
Or <unk> 28 per share on a fully diluted basis versus net income attributable to common shareholders of $7 9 million or <unk> 12 per share on a fully diluted basis in the third quarter 2021.
We reported adjusted EBITDA of $1 7 million in the third quarter 2022 versus $1 5 million in the prior year period.
On a standalone basis, the mobile refinery generated a $500000 loss in adjusted EBITDA, while our legacy operations at Heartland and Marrero contributed a combined $2 2 million and adjusted EBITDA.
Third quarter results benefited from a continuation of strong operational reliability elevated refined product margins and robust demand for conventional fuels.
All set by the notable onetime items recorded during the quarter.
The third quarter net income includes a previously noted unrealized commodity derivative gains, which amounted to $47 7 million during the quarter.
And they realized derivative loss of $38 7 million.
Additional factors impacting reported third quarter financial results include a loss on an inventory intermediation agreement related to continued backwardation in the crude and products markets in the amount of $17 9 million.
A gain on the change in derivative liability in the amount of $12 3 million related to the warrants associated with our outstanding convertible bonds.
And $2 9 million of expenses related to the shell acquisition.
Due to the number of significant moving parts embedded in our financial results. This quarter I would like to briefly touch upon each of these items to provide a better understanding of how they arise and what can likely be expected in quarters to come.
First the impact of the Q2, and Q3 commodity derivative hedging activities, while quite significant over the prior two quarters will not impact our results in the fourth quarter or beyond as all contracts have expired as of September 32022.
These hedges were put in place with the best intentions of ensuring our ability to continue to service the significantly increased debt load taken on to fund the mobile acquisition.
And protect the cash set aside for the Rd conversion project. However, an unusually large run in refining margins turned these contracts against us over the past two quarters.
The loss on our inventory intermediation agreement of $17 9 million is related to the continued backwardation in the crude and products market similar to what we experienced in the second quarter 2022, where the impact was $23 1 million.
A 22% reduction quarter over quarter.
We continue to keep a close eye on the shape of the futures curve and are currently evaluating possible risk mitigation strategies to limit our exposure to such losses going forward.
Finally, we recorded a $12 $3 million gain on changes in derivative liability, which is a noncash item.
This benefit relates to the change in recorded value of warrants outstanding which were issued in conjunction with our convertible note offering used to finance the purchase of the mobile facility.
Due to the decline in our stock price following the announcement of second quarter 2022 results a sizable change in the value of these warrants was recorded which is what is reflected by this change in value.
As long as these warrants are outstanding this will impact us quarter to quarter as a noncash item.
As of September 32022, the company had total liquidity, including restricted cash of $122 3 million versus $98 million at the end of the prior quarter.
<unk> had total net debt outstanding of $364 million at the end of the third quarter of 2022, including lease finance obligations of $45 4 million, implying a net debt to trailing 12 month adjusted EBITDA ratio of two five times as of September 32.
'twenty two.
During the fourth quarter, we intend to operate mobile at between 73070 5000 barrels per day.
Positioning us to capitalize on continued strength in the market.
Opex per barrel is expected to be $3 50 to $3 75 per barrel for the quarter and our capture rate on the benchmark Gulf Coast 211, crack spread is forecast to be approximately 50% to 54%.
Total capital expenditures for the fourth quarter are expected to be between 35 million to $40 million.
I'd like to now turn the call back to Ben to provide some final comments before we open it up for Q&A.
Thank you Chris as we look towards the end of the year and into 2023 refining margins are anticipated to remain at elevated levels domestic fuel demand remains strong the global refining complex continues to operate at a reduced capacity and domestic gasoline and distillate inventories remain well below average.
Following the work performed at the site and the progress that the team has made during the third quarter. We're looking forward to showcasing these improved efficiencies and highlighting the performance of the business as we close the fourth quarter out going into 2023 with that we will open the line for questions operator.
Okay.
Okay.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Using a speakerphone please pick up your Hudson it before pressing the keys to withdraw your question. Please press Star then two.
This time, we will pause momentarily to assemble our roster.
The first question comes from Eric Stine from Craig Hallum. Please go ahead.
Good morning, everyone.
Hey, good morning, Eric.
Okay.
Obviously, given the hubs given everything going on a lot of noise in the number for the third quarter before moving on from that.
So just to be clear I mean, all of these adjustments the inventory loss in backwardation that that was adjusted out of EBITDA.
I do want to confirm that because I mean.
At least the looks of it right now that is something backwardation that.
It's going to be the reality here for at least the foreseeable future.
Yes, Sir it is than it was back data backed out of adjusted EBITDA.
Yes.
Okay, Alright, good and then.
So the hedge.
<unk> gone from the fourth quarter I mean, it sounds like from your commentary and trying to get.
A lot of the noise out of the results and although you did it.
Back when you took on mobile with good intentions.
Fair to say that unless things change dramatically in the market you likely will not be putting on our heads.
At least the foreseeable future.
That's correct.
Okay.
<unk>.
Maybe just an update on the U M O process I know that.
That's certainly something that you've been operating it as this.
You are going to.
Colin that going forward, but I also know there's a lot of interest in the market.
It looked like the results were kind of below what the run rate has been over the last couple of quarters.
But maybe just some discussion on that and curious what your thoughts are going forward.
Okay.
Yes, so good morning, Eric.
We still have the work in progress.
Yeah as far as.
Tendering interest and certain assets.
We've made we've made enough headway too.
And you'll see the syndicated to pull out.
The Gulf coast part of that that that work.
And we see the synergies and the integration.
With those assets into what we're doing in mobile so.
I really hope we would have everything.
At a speaking level today.
But I think we're pretty close to resolve and where things stand on the balance of the business.
And that's kind of the state.
That process.
So.
The legacy business is a very small portion of the company today.
And so I know the numbers arent going to.
<unk> come through and in.
In detail like like we presented them in the past, but the legacy business has certainly.
<unk> actually had a really good quarter just.
The detail that we're providing now under the new reporting.
It doesn't provide.
The granular.
View of that because there's so much more to talk about related to mobile and where we're heading with the <unk>.
<unk>.
Yes.
Okay I appreciate it I will take the rest offline.
Thank you.
The next question comes from Amit.
H C. Wainwright. Please go ahead.
Thank you good morning, guys just to begin a Ben could you clarify.
You know what the.
Hedging related number is that would show up in fourth quarter. I know there are some numbers in the paragraph in the press release, but.
If you could just clarify for everyone. You know what that amount is that impacted CQ, but won't show up in <unk>.
The cash yes.
Yes, that's right. So this is Chris so in our deck. There is a schedule that breaks out the adjusted EBITDA and in that is the <unk>.
Adjustments of the hedge that is no longer on it's right at $46 9 million.
That again as of 930.
There is nothing outstanding at this point.
Okay. Thank you for that.
And then you know whats throughput a little lower in the <unk>.
I I I recall, maybe you said it was going to be around 72 to 74000 barrels.
Maybe I got it wrong, but just wanted to clarify that.
Yes, we came out this is James Thank you we came out.
In September and said we were <unk>.
Move to our projection down we had an issue during the quarter with third party docks and our ability to access crude and that affected us about $3 five.
<unk> thousand barrels a day on average across the quarter and that was the majority of the Miss from 60 68 to 72. The rest was us doing some of the work we did and we even though we returned on time, we didnt get crude all the way back up but we reprocessed every bit of that so that's what that difference and we did it.
In September .
Okay. Okay I got it thank you.
Are those issues resolved for I mean, do you expect any of those issues just resurface in the fourth quarter.
No. What we did was we have contracted another.
Vessel that allow us the ability to move crude in by water without delays that's not to say there is not risk, but we continue to knock those risk down and work with our crude suppliers to make sure we have enough crude to run.
Thank you just one last one from me with respect to the Rd ramp.
How are you seeing already that being in 'twenty two 'twenty three I know youre starting initial production in Q2.
From there you know from a modeling perspective, you know how should we be thinking about you know setting our projections in terms of the ramp.
Yes. So our plan is we'll go through commissioning.
At the end of the first quarter into the second quarter.
We will ramp up to approximately 8000 barrels a day of renewable diesel we will in turn into the first quarter of 2024 finished the phase III enough to ramp to the next level, which is projected to be 14000 barrels a day.
Okay. Thank you. Thank you that's all I really appreciate it.
Very good thank you.
Okay.
Okay.
Okay.
Your next question comes from Noah Kaye from Oppenheimer. Please go ahead.
Thanks, so much so just to reflect what I've heard so far it sounds like hedging rolls off and we're going to have a pretty clean <unk> normalized production rates.
No impact from hedging.
Where at this point in terms of 15 to $20 per barrel.
If you're doing 50% to 54% capture of what's a very elevated refining margins. It seems like a very healthy set up so far.
If we kind of.
Look our Pasha generation off of that I think that's really where I wanted to take the questions. Because you generated an awful lot of cash this quarter.
Next quarter as you ramp up how do we think about puts and takes in terms of cash generation any build in working capital needs.
Impacts of continued backwardation.
Should we be thinking about in terms of cash generation.
Yes, I mean, it's a good point, we definitely anticipate a significant generation of cash.
From a backwardation perspective.
We're still seeing backwardation in the futures market.
So I don't expect much change from what we reported.
As far as uses of cash looking forward, we're going to continue to focus on self funding the R&D project.
On focusing improving the balance sheet.
And then looking at mobile refinery projects that will produce higher return long term.
Yes.
And then I guess third pay down debt.
Well, we're going to see some of that debt pay down in the fourth quarter.
I don't know if it will be Q4, but we'll definitely be looking at Q4 Q1.
Okay.
Great.
And then just in terms of the product slate, Yeah I think.
We're going into.
Pretty unprecedented time in terms of.
Heating oil and diesel demand.
It seems like a good setup.
Are you thinking about in terms of.
The skew of the mix of the product slate.
The refinery is built to produce.
More more just thoughts on balance right.
Yeah No. This is Ben.
Youre correct and <unk>.
Really a lot of work has been put into the yields and adjusting the refinery to maximize our margins.
Our distillate yields which includes jet fuel is almost half of our output today, which is pushing.
Where the refineries men in the past so they've done an excellent job to position us well related to those yields are our products in general including gasoline.
<unk>.
Yes, three fourths of our of our production so.
Yield wise as you've seen we had a 2% improvement quarter over quarter and as James indicated coming out of the.
Turn around and doing the.
The work around the catalysts in our reformers and our diesel hydro treater, yes, we're seeing.
Yes, more improvements and so we're we're pretty set we're in a good position.
Great maybe just a last one if I may on the renewable diesel side can you talk about the status of feedstock contracting.
How much supply do you have line of sight too.
Can you comment on sort of the diversity of your supplier base.
And basically any considerations, we should be thinking about as you look to start ramping up the facility.
Thank you.
Yes. Thank you. This is James I'll answer that Bart Rice is one leading our acquisition of feedstocks. What we do see is we're initially going to start up on <unk>, where we're looking at alternatives to that shortly after startup.
We're working with a tremendous number of suppliers as you can see.
None of them can supply all of our needs, but we're working with those not just from a different supply point, but a different mode to bring in to make sure that we're maximizing the feed in front of the plant and how do we get it in the plant is where we've been working also so that's we're close to finalizing those and hope to finalize that of course in the fourth quarter.
And get everything lined up so we are prepared for startup.
All right looking forward to it thanks for taking the questions.
Thank you.
The next question comes from Brian Butler from Stifel. Please go ahead.
Thank you guys for taking my question can you hear me.
Yes, yes, yes.
Great.
So I guess.
You talked about the crack spread I think in October somewhere around $44.
Does that is that where we're at in early November here and how should we think about that for the rest I mean, not that you can forecast the crack spread but is there anything major that suggest that that's going to be going up or down.
Oh, yes, we're projecting October at $43 90, we're continuing to see strong distillate margins and that's what's driving that a good bit and we do not see much impact in the quarter.
But again to me looking in the future I'm always wrong, but as you can see from the industry inventories are extremely low going in the heating oil season and.
That's really what's the basis risk and we got our projections of course from IHS and other professionals that are out there.
Okay. That's helpful.
On the supply chain and kind of.
Building out the.
Hydro cracker.
Is there any more risk of disruption at mobile for the upgrade or at this point is everything in place and supply supply chain issues or something of the past.
Yes.
We believe theres something of the past we're doing every two twice a week, we have a swat team watching parks coming in we have three items that are long lead items that will.
Show up right about feed out time or pretty close to that everything else will be on site prior to us taking fleet out of the unit, which is how I want it to be done and what the industry expects to be done. So we feel very confident where we are.
Okay, and then on the on the feedstocks. The prior question how does this compare to your original expectations on where you thought feedstock would be for the R&D part of it right and you give some color on that.
We're finding more people available to us for feedstocks than we originally projected the volumes arent perfect all the way through but it looks like that's a problem is solvable and we do have many people wanting to work with us and as I stated before Bart Rice has done an excellent job, reaching out and developing that.
Yes.
Okay, and then maybe last one just on some of the accounting on the backwardation, so that sounds like thats going to be again in the fourth quarter.
Directionally is that continuing to go down and that is the cash that is a cash item right.
Yes, do you see the intermediation agreement structure.
It is a cash item that runs through our P&L.
And yes to your point.
Being in backwardation as we look forward.
At the same level as kind of a third <unk> is that the right way to think about it or is that gradually improving and it's going to be something less than that $18 million.
As of right now the values are right in line with <unk>.
Okay, great. Thank you very much for taking my questions.
Thank you Brian .
Okay.
This concludes our question and answer session I would like to turn the conference back over to Ben Cohen for any closing remarks. Please go ahead.
Thank you operator, thank you everybody for joining the call. Thank you for the.
Interest and vertex we are.
Working hard on this and to really showcase the V.
Value from our new acquisition in mobile as we come through the fourth quarter and on into the first quarter things are moving well our teams are coming together. So we're very pleased.
With the progress we've made and we look forward to communicating between now and the close just as to some.
Some detail on that progress as we go forward. Thank.
Thanks for dialing in.
Yeah.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines Goodbye.
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