Bagholding $VTNR: crouching uncertainty, hidden asset.

Dumpster diving the dumpster divers.

In 2021, coincidentally near the Covid lows in oil, Royal Dutch Shell had finally had enough of the Western governments’ suicide cult treating them like villains and trying to regulate energy production to death.  They decided to move their headquarters to London, eschewed Royal Dutch from their name, and strategically liquidated most of their North American assets.  Good for them.

Black Stone Minerals, BSM, was a major beneficiary as they acquired an enormous tract of mineral rights in Texas for a very attractive price.  But what caught my degenerate value junkie attention was Vertex Energy’s VTNR acquisition of an oil refinery in Mobile Alabama for $75 million.

This oil refinery cost Shell $1 billion to build.  If it were rebuilt today, good luck doing it for $2 billion.  It is currently insured for $1 billion, and meteorologists are predicting a very above average hurricane season.  Of course I am not hoping for destruction, but it is very interesting that destruction would probably generate a minimum of a 5x return.  

When I was a teenager and Ebay was new, I went to garage sales and sold what I found online.  It was a sellers market in the early days, I bought a box of 8-track tapes for $5, and sold them for $150.  I kept the original movie soundtrack to Saturday Night Fever, I am the genie of funk, everybody get down.  At some level, when I see the purchase of the Mobile refinery for $75 million, I just have to respect it.  

Vertex Energy is a scrappy, founder led, renewable energy business.  It was originally and still maintains a legacy business of collecting used motor oil and recycling it into renewable diesel.  In 2023 VTNR sold their Ohio used motor oil business segment for $90 million.  They had bought it for $8 million and had invested $20 million into the business.  This is the sort of accretive behavior that gives me some optimism that founder and CEO Benjamin Cowart can bootstrap himself with grit and determination onward and upward out of his current troubles.

The idea behind acquiring the Mobile refinery was to operate the traditional refinery in order to generate cashflow to fund the expansion of more renewable energy projects, starting with renewable diesel using southern sunbelt crop access and Mobile’s deepwater port to be a lowish cost producer for California and Canada’s renewable diesel government mandates.  Now I didn’t become a capitalist just so I could suckle at government teat.  I don’t particularly like businesses that live and die by regulatory Rube Goldberg machines.  I am not interested in being a long term investor in a process that probably uses more than a gallon of diesel in agriculture and transport to create a gallon of biodiesel just so some smug Californians can pretend they are holier than me.  I intended to exit this position once it reached something like half of replacement cost.

Shortly after the acquisition, interest rates spiked, and renewable diesel credits tanked.  This did not bode well for VTNR which is currently in the middle of one of the biggest pig-in-the-python situations trying to digest an acquisition far larger than itself.  The Mobile refinery was acquired for $75 million, but just the inventory of crude oil to run the thing was $100 million.  Prior to the acquisition, VTNR was doing $200 million in revenue in a good year.  The acquisition was financed with floating rate debt, which with rising interest rates stands at about 16%.  Yikes.  And it is due in April 2025.  Double yikes. 

To make matters worse, management zigged when they should have zagged.  The traditional refinery needed work and optimization as Shell was using it for intermediate products for their network, but VTNR needs to make finished products.  Instead of prioritizing traditional refining, they spent a large amount of capex to build out the renewable diesel capability at the Mobile refinery.  They have since announced that they are mothballing the renewable diesel business until further notice once their feedstock has been worked through.  Whoops.  

VTNR has four assets, one of them hidden.  The legacy used motor oil business could probably sell for something like $200 million, not right now of course, green stocks are in the toilet cyclically.  The renewable diesel business at the Mobile refinery, currently mothballed, but at the top of the next cycle, some analysts believe it will be more valuable than the traditional refinery business. The traditional refining business, which is in the process of being optimized. The scrappy management team has already built out a new vertical of supplying bunker fuel to ships at nearby ports rather than selling it to wholesalers.  

But now for the hidden asset, VTNR wasn’t the highest bid at the auction, but they were the winning bid.  As a part of their $75 million bid for the refinery, they allowed Shell to keep the cherry on the sunday for three years, the profits from the truck ramp business.  If the refinery is the manufacturer and the gas station is the retailer, then the truck ramp is the wholesaler.  Even if there were no refinery, the deepwater port and storage tanks would be the place where approximately 10,000 customers come to fill up their trucks to refill their gas stations.  Profits from this business is estimated to be somewhere around $25 million to $35 million annually, and VTNR is about to inherit this hidden asset in mid 2025.  So this $98 million market cap company is about to inherit a whole new business line which would alone result in a Price to Earnings ratio of 3.

Vertex Energy’s balance sheet is upside down, interest expense is killing them.  There are three ways out of this problem.  About five months ago they initiated the process through Bank of America to find a joint venture partner.  We should hear potentially any day now the results of that process.  VTNR wants to sell a stake in their refinery the same way Calumet CLMT did in Montana.  The difference is that Calumet completed their deal before the renewable diesel market cyclically went to drek.  Still, the capital markets are open, private equity has $2 trillion of dry powder to deploy, and the whole oil and gas industry is in a massive merger & acquisition wave.  I would put the odds of VTNR successfully selling between 1/4th to 1/3rd of the refinery for $200 million at pretty darn good.  

Second, they could sell their legacy used motor oil business for $200 million to pay down debt.  One good thing about management is that they aren’t overcome with nostalgia, they would sell for the right price.  One bad thing is that the right price might not be forthcoming at this point in the renewable diesel cycle.

Third, they could refinance and try to bootstrap their way out of this mess.  Their lenders would refinance between 10% and 12% now that the execution risk of converting the refinery is behind them, so the 16% interest rate could be reduced somewhat.  The traditional refining business, with the startup of their Texas Tower this fall, the new bunker fuel vertical, the repurposing of the expanded hydrocracker from the renewable segment, it could just pull them out of this mess.  That is unless crack spreads collapsed for whatever reason.  Crack spreads are called the widowmaker for a reason.

I like what Benjamin Cowart has done so far, he has grit, and he finds a way.  But there is uncertainty in his chance of success.  I would put this at a 20% chance of going to zero, and an 80% chance of at least a 10x return.  If I could find a large number of bets like this, textbooks say to take their probability weighted average.  The real world doesn’t work that way, and this is not my preferred style of investing, but I am fond of these guys for trying.