10-K: Vertex Energy Reports Full Year 2023 Results, Navigates Market Volatility and Strategic Growth

Vertex Energy's 2023 annual report details a year of strategic shifts, including the full operation of the Mobile Refinery and the launch of renewable diesel production, amidst fluctuating commodity prices and economic pressures.

Summary

• Vertex Energy's 2023 annual report highlights a year of significant operational changes and financial challenges.
• The company's revenue increased to $3.18 billion, up from $2.79 billion in 2022, primarily due to the full year operation of the Mobile Refinery and the launch of the renewable diesel (RD) unit.
• The RD unit contributed $285.1 million in revenue, while the Mobile Refinery saw a $191.3 million increase in revenue compared to 2022.
• However, these gains were partially offset by a $43.3 million decrease in revenue from black oil operations and a $35.2 million decrease from Crystal Energy due to lower commodity prices.
• The cost of revenues increased to $3.01 billion, up from $2.60 billion in 2022, driven by the RD unit's $324.5 million in costs and the Mobile Refinery's $180.6 million increase.
• The company reported a gross profit of $144.2 million, a decrease from $180.0 million in 2022, with a gross profit margin of 4.5% compared to 6.4% in the prior year.
• Operating expenses increased to $172.8 million, up from $131.5 million in 2022, due to the full year operation of the Mobile Refinery and the RD unit.
• The company reported a loss from operations of $28.6 million, compared to an income of $48.6 million in 2022, primarily due to the RD unit's losses.
• Interest expense increased to $119.6 million, up from $79.9 million in 2022, due to the induced exchange of the Senior Convertible Note and increased Term Loan expenses.
• The company reported a net loss of $72.0 million, compared to a net income of $2.0 million in 2022, and a loss from continuing operations of $126.2 million, compared to a loss of $16.7 million in 2022.
• The company had income from discontinued operations, net of tax, of $54.2 million, which included a $53.8 million gain from the sale of the Heartland Assets and Operations.
• The company aggregated approximately 67.9 million gallons of used motor oil and other petroleum by-product feedstocks and managed the re-refining of approximately 59.7 million gallons of used motor oil.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with strategic progress in renewable diesel production and the full operation of the Mobile Refinery, but significant financial losses and increased debt obligations. The company faces numerous risks and challenges, which temper the overall sentiment.

Positives

• The Mobile Refinery began processing soybean oil into renewable diesel (RD) in May 2023, contributing $285.1 million in revenue.
• The company completed Phase I of the RD project, achieving a production target of 8,000 barrels per day.
• The company sold its Heartland Assets and Operations on February 1, 2023, for $90 million, resulting in a $53.8 million gain, net of tax.

Negatives

• The company's gross profit decreased by $35.8 million year-over-year, with a gross profit margin of 4.5% compared to 6.4% in the prior year.
• The company's operating expenses increased by $41.3 million year-over-year, driven by the full year operation of the Mobile Refinery and the RD unit.
• The company's loss from operations increased by $77.2 million year-over-year, primarily due to the RD unit's losses.
• The company's net loss from continuing operations increased by $109.5 million year-over-year, primarily due to the RD unit's losses.
• The company's interest expense increased by $39.7 million year-over-year, driven by the induced exchange of the Senior Convertible Note and increased Term Loan expenses.

Risks

• The company's need for additional funding and the availability of such funding is uncertain.
• The company's ability to pay amounts due on outstanding indebtedness, including term loans, is a risk.
• The terms of agreements with Macquarie and Idemitsu, including termination rights, pose a risk.
• Unanticipated problems at facilities and unexpected changes in capital expenditures are a risk.
• The company's hedging activities and failure to hedge production pose a risk.
• The company's outstanding Convertible Senior Notes, including amounts owed and conversion rights, pose a risk.
• Ongoing capital projects at the Mobile Refinery, including timing and cost overruns, pose a risk.
• The level of competition in the industry and the company's ability to compete is a risk.
• Decreases in global demand for, and the price of, oil, and the availability of crude oil and used oil feedstocks are risks.
• The loss of key personnel or failure to attract, integrate and retain additional personnel is a risk.
• The company's ability to protect its intellectual property and not infringe on others' intellectual property is a risk.
• The company's ability to maintain supplier relationships and obtain adequate supplies of crude oil and other feedstocks is a risk.
• The company's ability to produce products at competitive rates and the impact of competitive services and products is a risk.
• The company's ability to execute its business strategy in a competitive environment is a risk.
• Trends in, and the market for, the price of oil and gas and alternative energy sources are risks.
• The company's ability to maintain relationships with Shell, Macquarie, and Idemitsu is a risk.
• Potential future litigation, judgments and settlements are risks.
• Increased regulation of operations and products and changes in environmental laws are risks.
• Economic downturns and recessions both in the United States and globally, increased inflation and interest rates are risks.
• Negative publicity and public opposition to operations, and disruptions in infrastructure are risks.
• The inability to identify attractive acquisition opportunities and successfully negotiate acquisition terms is a risk.
• The company's ability to complete acquisitions and effectively integrate acquired assets, companies, employees or businesses is a risk.
• The company's ability to effectively manage growth and scale operations is a risk.
• The company's ability to maintain insurance, the costs of required insurance, lack of insurance, or claims not covered by insurance are risks.
• The company's lack of effective disclosure controls and procedures and internal control over financial reporting is a risk.
• The loss of the company's ability to use net operating loss carry-forwards is a risk.
• Improvements in alternative energy sources and technologies are a risk.
• Accidents, equipment failures or mechanical problems which may occur are risks.
• Operational hazards and unforeseen interruptions for which the company may not be adequately insured are risks.
• The threat and impact of terrorist attacks, cyber-attacks or similar hostilities, on facilities are risks.
• Risks of downturns in the U.S. and global economies, changes in inflation or interest rates, and/or the ongoing conflicts in Ukraine and Israel are risks.
• The company's ability to meet earnings guidance is a risk.
• Anti-take-over rights, limits on liability of officers and directors and indemnification rights and other terms of governing documents are risks.
• The volatile nature of the market for the company's common stock and the ability to maintain the listing of common stock on The Nasdaq Capital Market is a risk.
• Dilution caused by new equity offerings, the exercise of warrants and/or the conversion of outstanding convertible notes is a risk.

Future Outlook

The company anticipates that the market for its common stock will be subject to wide fluctuations in response to several factors moving forward, including, but not limited to: (1) actual or anticipated variations in our results of operations; (2) the market for, and volatility in, the market for oil and gas; (3) our ability or inability to generate new revenues; and (4) the status of planned acquisitions and divestitures and ongoing capital projects at our facilities.

Industry Context

The report reflects the challenges and opportunities within the energy sector, particularly the transition to renewable fuels and the volatility of commodity markets. The company's strategic shift towards renewable diesel production aligns with broader industry trends, but also exposes it to new risks and competitive pressures.

Comparison to Industry Standards

• The company's performance is compared to a custom peer group including Heritage-Crystal Clean, Calumet Specialty Products Partners L.P., Par Pacific Holdings, Inc., Aemetis, Inc., Clean Energy Fuels, Corp. and Clean Harbors, Inc.
• The company's crack spread performance is compared to the USGC 2-1-1 crack spread, a common benchmark in the refining industry.
• The company's fuel gross margin per barrel of throughput is compared to industry standards.
• The company's adjusted gross margin per barrel of throughput is compared to industry standards.

Legal Proceedings

• The company is involved in ongoing lawsuits seeking damages relating to alleged noxious and harmful emissions from its facility located in Marrero, Louisiana.
• The company is involved in ongoing issues in connection with Penthol LLCs termination of a June 2016 Sales and Marketing Agreement.
• The company is defending a class action that was filed against it and certain of its senior executives alleging claims for violations of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act.

Related Party Transactions

• The company consults Ruddy Gregory, PLLC., a related party law firm of which James Gregory, a former member of the Board of Directors and the current General Counsel and Secretary of the Company, serves as a partner.

Stakeholder Impact

• Shareholders face the risk of dilution from new equity offerings, the exercise of warrants and/or the conversion of outstanding convertible notes.
• Shareholders face the risk of a decline in the market price of the company's common stock due to the volatile nature of the market and the company's ability to maintain its listing on The Nasdaq Capital Market.
• Shareholders face the risk of a loss of their investment due to the company's need for additional funding and the availability of such funding is uncertain.
• Employees face the risk of job loss due to the company's financial challenges and potential restructuring.
• Customers face the risk of supply disruptions due to the company's operational challenges and reliance on third-party suppliers.
• Creditors face the risk of default due to the company's substantial indebtedness and potential inability to repay its obligations.

Next Steps

• The company plans to increase renewable diesel production to approximately 14,000 bpd by the end of 2024.
• The company intends to expand its feedstock supply volume by growing its collection and aggregation operations.
• The company plans to broaden existing customer relationships and secure new large accounts.
• The company intends to develop, lease, or acquire technologies to re-refine its feedstock supply into higher-value end products.
• The company plans to pursue selective strategic relationships or acquisitions.

Key Dates

Keywords

Renewable Diesel, Refining, Used Motor Oil, Petroleum, Energy Transition, Feedstock, Mobile Refinery, Commodity Prices, Re-refining, Transportation Fuels