I think we're gonna start now. My name is Brian Butler. I am the environmental services analyst at Stifel, and today I have the pleasure of having Vertex Energy and the CEO, Ben Cowart, and talk about kind of what's going on at Vertex. Obviously, some big changes over the last couple of years, but maybe we'll back up a little bit. We'll talk about maybe how we got here from-- I mean, we've had a long history from the oil re-refining days-
That's right.
to now, now just a straight refiner, I guess. But let's walk back to that, maybe just give everybody a quick, you know, one- or two-minute kind of history lesson, and then we can talk about what's happening now.
Yep. So, thank you for having me here and the company again, and the relationship with Stifel goes way back, as you said. And, you know, my background gets back to a 16-year-old truck driver collecting used motor oil from shops and garages and then building out 4 re-refineries. In 2015, that was the U.S. largest refining capacity for used motor oil, over, you know, a long career, 38 years. I started Vertex 2001. So 2015, you know, we really hit the high point of re-refining and processing used motor oil. So that was, you know, just following everything I've done career-wise down that path.
Used motor oil has been an alternative feedstock that has had a lot of opportunity to expand and develop. And so we've really spent a lot of time around technology and collections and controlling that feedstock and also making a market for a lot of companies that go out and collect that material. So it's really been a great career from that standpoint. And in the used motor oil business and the refining of that material, we focus on two markets. We focus in the Gulf on a fuel market that would supply low sulfur fuel to ships, primarily to meet the low sulfur requirements for
IMO 2020.
IMO 2020. That's right. So that was focused in the Gulf, and then we had two base oil refineries, one in Nevada and one in Columbus, Ohio, where, you know, we really worked on technology, hydrotreating and producing very high purity, re-refined base stocks. And so that was the next key focus. So fast-forward, probably 2018, you know, we had grown our business in the Gulf five times larger than our refinery in the Gulf that was producing the low sulfur fuel from used motor oil. So we were buying from all the major oil companies just to supply the fuel to the ships.
And then if you took the base oil business from re-refining used motor oil, we imported 76 million gallons of Group III high purity base oil from ADNOC refinery in the Middle East and brought it to the US and made a huge market for base oil. So it was two big markets that used motor oil could not supply for us. So we started looking at low sulfur crude to expand our refining capacity to really fill backfill those markets that we had already built.
Right.
And that begins the journey.
Right. I was gonna say, and then you kind of got out of that business, and you bought the Mobile business, although you still have, you know, some parts of that still exist. But then, you know, the big, I guess, strategic step was when you bought Mobile from Shell.
That's right.
You were gonna go down the path of being a conventional refiner and the renewable diesel, and then the most recent shift has been you're putting the renewable diesel on pause.
That's right.
I think let's talk about that and maybe unpack one what led you to decide that you're gonna get out of the Renewable diesel? Because that was a huge, you know, focus over the last 2.5 years.
Yeah.
Why you think now, the conventional piece, you know, what makes that super attractive?
So to fast-forward now on making a decision to step into crude refining, right? Used oil just was not big enough as a feedstock to meet these markets. We identified Mobile refinery long before it was for sale, as the most strategic asset we could acquire that would touch both of those markets. And I'll come back to that in just a minute. But when the refinery was put on for sale by Shell, we knew that this was something we needed to put full focus on, and it would be a monumental challenge to acquire that asset. And it was. So we started in 2020 to acquire the facility. We closed April 1st, 2022, so it was a two-year all-in process.
We had to build a $500 million capital structure and take the asset down. What was interesting is, we really weren't able to use the asset like we wanted to because COVID had killed the conventional refining business, and we were right in the middle of COVID when we were negotiating to purchase the asset. So when you look at the purchase price, we bought the refinery at $75 million. Today, we have it insured for $1.4 billion. It is a world-class crude refining asset. And the hydrocracker is the money maker. This is a very expensive asset that today has a $600 million replacement value.
When we looked at the hydrocracker, we knew that we could make Group III base oil from with that hydrocracker, based on the VGO that was coming out of the crude in that local area. I'm originally from Mobile, so that's my home turf, and I knew that asset really well. So I knew I could get to the marine market for bunker fuels from that location 'cause it's in the port, and I knew we could make high-purity base oil from the VGO that was coming out of the ground and in the crude stream, right? That would complement our markets that I was trying to get to. So if you look at what happened, the COVID killed the refining business.
There was no capital for a $40 million market cap used oil refining business to go buy a Shell 75,000 barrel a day crude refinery. It just—you couldn't get there. So I had acquired a fueling business in Birmingham, Alabama, during COVID and the longtime friend and guy who owned the business said, "Ben, we need to convert the hydrocracker to renewable diesel." That was the recommendation. He and I both built biodiesel plants in 2005. He built one in Alabama; I built one in Houston. And so we went down that renewable path, you know, early. I guess, you know, being a developer in the refining space, I've always, you know, besides used motor oil, I've been—I've always looked at alternative feedstocks. But what else could we do?
So in that we decided that was the vehicle to go acquire the refinery, and we put renewables as a new focus, along with the other things that we've done across our career. And we sold our used oil refinery in Ohio for $90 million. That kind of paid for the purchase of this Shell asset that we acquired. So if you think about it that way. So then it refined our focus in the Gulf Coast. So we still run a very good used oil refining business. We have the largest in the Gulf at the Marrero, Louisiana location.
How big?
Our collection businesses continue to grow exponentially across the Gulf Coast.
Right. And how big is that business now? I mean, 'cause that gets kind of overshadowed by the-
That's right.
-Mobile asset, but, I mean, that is worthwhile. So maybe just a quick-
Yeah.
How big is that? How profitable is that?
5,000 barrels a day, as far as what we process. We collect in our footprint close to 4,000 of that with our own trucks now, which is-
Okay.
It's a lot of trucks on the road. We should be the largest in that Gulf Coast footprint as far as collections go.
What does that do revenue-wise? Is that... I mean, obviously, still de minimis to the Shell.
Yeah, it's, it's pretty small, but it's still very important. Now, you know, I'll come back to that-
Okay
... in a minute. So, you know, we kept that business because it was strategic to the Mobile asset and to the footprint. So it allows us to leverage logistics and efficiencies across, you know, a much bigger platform, you know, with the Mobile Refinery, which makes us very competitive in the used oil business. So when I'm moving oil from Houston back to the refinery in New Orleans, I've got barges that we control that, you know, are Vertex assets. Now they're going to Houston. I can load the UMO and bring it back on the back haul, and there's just a lot of things that have worked out really well for the used oil part of the business. So let's get to renewables. This, you know, obviously is an alternative feedstock.
It's right in our wheelhouse of how we think about, you know, our, our expertise. The technology to convert the hydrocracker there was very much in line with our re-refining, hydrotreating technology, and engineering and mindset. So when we, we decided, "Let's figure this out," our engineering team was able to drop right in on renewables and, and lay out a technical plan to convert hydrocracker, and do it, unbelievably well. So we, we developed that strategy, while we were, going through the purchase process. It's embarrassing to say, but you, you, you're still talking to a used oil guy. So when we closed, we already had $22 million of equipment purchased that we had already bought.
We were convinced we were gonna close and get this done, and that allowed us to accelerate our construction work, which, you know, we built the plant. We spent $125 million in 12 months. We had 724 people on site, for-
I mean, you were successful. You successfully implemented it and built it out, upgraded the hydrocracker.
We, we-
We're producing renewable diesel, but-
We-
The market was less-
We built it-
-receptive
... on time, on budget, 12 months. Everybody took 2 years and took twice as much capital. So executed well, and we went into the market, started the plant. Plant's actually still running today. We're winding our renewable production down, but we, the market collapsed on us. So-
That's primarily the credits, really.
The-
The D4 RINs and the LCFS credits.
That's right.
Um-
RINs credit is what we get as far as revenue to support the business, and that is set, you know, the demand for RINs is set by the renewable volume obligations that EPA sets for the carbon refiners, right? So we're a carbon refiner in one sense, and we're a renewable producer in the other. Not to confuse the two, but we need a high RINs price to, you know, supplement the cost of feedstock, like soybean oil, canola oil, or used cooking oil, or poultry fats. All of those things are very expensive in comparison to, you know, crude. So what happened was, this past summer, EPA established a ceiling for renewable volumes.
They just basically said, "For the next three years, we're not gonna raise the demand for renewables to be blended with crude," which in turn, there was a lot of new production, ours being one that was coming online. And the market's oversupplied grossly in the interim based on the threshold volume that the EPA set. In October, we seen that. We started saying: "Hey, we gotta start thinking about a pivot." We had already started an alternative process with Bank of America to sell half of that renewable business and pay our construction debt off, which is kind of the only thing that we got sitting on the balance sheet now.
And the process was very fluid, with a lot of very big companies coming in to size up, you know, being a partner with us, like other companies had done. So we were hoping to get a $500 million check, go right, you know, pay our debt off of $200 million in construction and then, you know, really move the business forward. The market collapsed.
You're out of renewable diesel now, right? Or it's on pause.
Yeah.
I mean, I'm guessing at some point, renewable diesel can come back, and you, you can restart it.
For sure.
How much would it cost to restart this?
It's a catalyst change to restart it.
Okay.
Everything's kind of set. Even now, we're changing at the catalyst change for the renewable is about every 12 months, and we're gonna switch to fuel catalyst for now, put the renewable business on pause. We can come back to it. If the markets they are great, not a real issue. So we're gonna pivot, which we announced. We're in the process of doing that. We'll have the plant turned back on to conventional in the fourth quarter.
In the fourth quarter. So let's talk about that market-
Yeah
... and kinda where that fits in the opportunity that you have, you know, not only to service that market, but from a growth perspective. I mean, obviously you have other stuff in between. You know, the balance sheet has to be talked about, and maybe we can get to that.
Yeah.
But what's the opportunity in that market, and what's that facility gonna look like?
Yeah
... post the conversion?
So there's some key points I wanna make here that haven't been made yet about the pivot. One, the asset itself is very robust. It serves a niche market. There's no pipeline of gasoline diesel that comes down to that region. We're the furthest refinery east in the Gulf. So the whole market, every brand of fuel east of Mobile, Alabama, is loaded at our truck rack. We load 175 transports a day off the rack to supply the local market with fuel. So that's a business in and of itself. Part of this is that when we bought the refinery for $75 million, we let Shell continue to run that truck rack and make the margin on the truck rack.
The majority of that will expire in 10 months now. That was a 3-year contract.
Right. These are the offtake agreements-
That's right
...you had with Shell. You talked about this a little bit on the call, that one had already rolled off, and there was a handful.
That's right.
Maybe provide some-
Yeah
... detailed color around that.
So, so the truck rack, the unbranded fuels, which is probably 80% roughly of what goes across the truck rack, it was on a 3-year term. We gave them a 1-year notice in April. We take the truck rack back for all the unbranded in 10 months. The jet contract was on a 2-year term. We took it back April the first of this year, in this quarter now. So that's about $35 million of new capital, new cash flow. Just so-
You'll be making the margin now on that business.
That's correct. And so there's still another $15 million that we'll capture in the next 2 years or, you know, at the end of a 5-year term. But that's mainly their branded Shell stations only. So we've really. Think of that as acquisition costs or financing costs. We're gonna have the refinery truly paid for in 10 months, once we take the truck rack and get the rest of our margin on that business. So we picked up 10. We got 25 still sitting out there in 10 months at awaiting. So that's. I'm glad you brought that up 'cause that's important. The other thing is that we invested in this hydrocracker. It's a 30,000-barrel-a-day asset. Like I said, it's $600 million replacement cost. Hydrocrackers are used for full conversion of fuel, and they're used for making high-purity base oil.
That's the highest and best use for a hydrocracker. The refinery only produced 20,000 barrels a day of crude VGO, so the asset has never operated at full capacity because it didn't have all the bells and whistles around the asset, like heat removal and hydrogen, and all the other things that we had to invest in order to get full capacity for renewable diesel. So the investment that we've made in renewable diesel now gives us another third throughput capacity... that wasn't there before.
So when you think of the facility, is what, 75,000 barrels a day?
Yeah.
That increases to?
Not the 75. We take 20,000 barrels of the 75 and run through the hydrocracker.
Right.
Right.
So instead of producing the 25 of VGO, that's now gonna be a higher-- You're gonna produce a higher value product?
Well, we're gonna, if nothing else, we can increase our VGO throughput now through the asset and pick up a third more margin. All right? Just-
So higher quality, higher quality VGO, is that, is that—
Just same VGO. If you took the same VGO that we got from the refinery today, it's 20,000 barrels. If I put another 10 right behind it-
Okay. So the VGO production is gonna go up?
That's right.
All right.
So let's talk real quick about the economics. If you back cast the EBITDA, like I discussed on my call, for just the 20 years of operating history, the two-thirds capacity of the hydrocracker, then in 2023, it would have been a—we would have had $161 million of EBITDA compared to $17 million that we did, because of the losses on renewable.
Right, 'cause renewable-
Right
was a headwind, and
That's right
... the conventional.
And you, and you lost your opportunity to make the margin on the VGO, too. So it's not just the losses. If you look at the first quarter that we just announced, we left $40 million on the table. Should have been 58 instead of 18. All right? So that's two-thirds capacity of the hydrocracker, and that has none of the rack, the $35 million, margin that, that we're gonna get from the truck rack once the 10 months expires.
Right. So you're gonna benefit from the contracts renewals or the outsourcing piece of that?
That's right.
You're also gonna have more volume in the VGO.
That's correct.
So when you think about that, you know, once you've completed that, so getting into 2025, how do we think about the EBITDA on that piece of the business or just the conventional piece of business, and how sensitive is that to the spreads? Because, I mean, clearly, you've seen the spreads move around a lot.
Yes.
What are you doing, I guess, you know, is there steps you can take to reduce that sensitivity on the, on the spread piece?
Yeah. So, conversion, like, the rack margins, is in addition to, like, a 2:1:1 crack . Conversion down the hydrocracker, that's additional improved margin compared to the 2:1:1 crack . You're just getting more product, same cost to feed, et cetera. So I think that, our EBITDA inflection is much higher on a per barrel basis as we go forward than what it's been, with the renewable taking up the hydrocracker. So when you put the conventional feed back through the hydrocracker, then that's... Just think of the hydrocracker giving you another $100 million of cash flow.
So even in a real tight spread environment, should this facility, now just running conventional, run EBITDA positive?
Yeah.
I mean, is that the right way to think about it?
Yes. As soon as the hydrocracker comes online, you think of EBITDA around $150 million-$160 million a year, just running the two-thirds capacity of the VGO that you have from the crude. So if you supplement that, and you put, you know, more feed through the hydrocracker, which we will be able to do, there's another $100 million of EBITDA on that, that-
And-
and additional capacity.
What spread? Is that at the current spread, right? I mean-
Yeah.
Assuming-
So, 150 at $15 or 2:1:1 crack.
Yeah. So if you go to $7 on a 2:1:1 , I mean, that, that's not unreasonable-
That's right
... right? You've seen a lot of volatility.
From time to time.
Does that go to 75 or does that go to zero? Where, where's the break even, I guess, maybe on the-
Yeah-
The 2:1:1
... I would say it's gonna be south of $10 a barrel.
Okay.
Right? Maybe down in the nine-something range once we're using the capacity of the hydrocracker. So there's always gonna be dips in the even in the last year, 2023, we had two great quarters, two bad quarters. So that business kinda goes with driving season, heating oil season, and you got to have the liquidity. So, you know, a lot of volume, a lot of working capital that goes up and down in the business. So to address that, you know, the Bank of America process didn't go, so we've-
Is that wrapped up, the Bank of America process?
No.
Or it's still-
I mean, it's, it's going. Yeah-
It's going. It's just-
We-
has not produced the results you need.
We don't wanna make a deal around the business in a vacuum under the cloud of renewable diesel market conditions, right? So we had to pivot the asset out and then separate and apart, we're running a refinance now. Instead of just paying the debt off through a B of A process, we're just gonna get a mortgage now to pay the construction loan off. So there's $200 million. We're looking for, you know, $300 million dollar piece of paper over a 5-year term, you know, hopefully low teens. And then that puts, you know, another $100 million of working capital back in the business.
We've got plenty of historical cash flow, and we have plenty of forward cash flow in utilizing the asset and the cash that's gonna come through on the site that lenders are very interested in, and that's an early process. We're about 3 weeks into that, and so we need to deliver on a re-refinance. At the same time, we've got options sitting over here that could be ready to go if we choose to with the B of A process. So-
Since this, you're kind of in this transition, how noisy is the second quarter and third quarter going to be, you know, from a perspective of EBITDA volatility?
Yeah
... and what the market expectations should be? Because, you know, you're not gonna be at 150-- You're not gonna be running at-
That's right
... $150 million on an annualized basis.
It's gonna. We gotta watch and see. That's my message to investors and everyone is, even we as a company are watching a lot of things kind of shake out. So we're heading towards a tight, you know, entry into a tunnel that is gonna go to the other side, and we're going from eight lanes of traffic down to two or three, and we've got to pick our, you know, our lane, and who's with us as we what I call thread the needle. We gotta go right through and get to the other side of this. So that's, you know, just being fully transparent. You know, we've been here multiple times.
We've been on this journey, so, I would never count our team out in any way as far as being able to execute and deliver real value to our shareholders. It's an interesting place. I think the whole renewable business, the fact that our construction debt is current, you know, it sets the challenge up for us. You know, we can look at some alternatives that aren't so interesting, and we can look at a business and a world-class asset that we own and control and has the cash flow there. We've got to deliver a, you know, a refinancing foundation, and we've got a lot of other bells and whistles that can go with that to get us to some serious upside long term.
Let me come back. The last thing I'll say about used motor oil and what I really like about this Mobile asset, you take that VGO that we produce in Mobile, and you put it through that extra one-third capacity of that hydrocracker. It gets real interesting.
So you'd be producing then-
Base oil.
High quality this Group III base oil?
Could.
What does the economics on that look like versus, you know, if you were the trade-off? You know, if you're gonna do $150 maybe as a conventional, and now you put in an incremental, you know, you're gonna do the VGO and produce base oil.
Yeah. It's a little bit early to quote the numbers, but I would say that it's pretty interesting.
Do you have, I mean, do you know buyers for the Group III? How does that market, I guess, look? Because Group II, you know, is pretty liquid, but Group III, you know, there's still demand.
Just remember, we built the largest import Group III business in North America with the oil we brought in from the Middle East, so we covered all of Mexico and the States.
So you have a list of customers that would be willing to-
Absolutely
... to buy it.
That's right.
And does anything else have to happen to the hydrocracker there? I know you have more hydrogen kind of coming online.
More hydrogen.
Does that have to happen in order for this to all work out?
There's a little bit of fuel stripping capacity at the refinery we got to improve on because you can't have any fuel in the base oil. And so we've got a project there to take one of our fractionators and do some improvement.
Does that require capital?
Little bit. Little bit.
Like $10 million or $100 million?
No. Like, we'll say, you know, little more than 10.
Okay.
With a very quick payout, you know, like, you know, several 2 or 3 months type of payout.
Right. And that's really fourth quarter, though, right? Because-
No, no. That, that's gonna take a little bit more time.
Okay.
So that, you know, that's-
The Hydrocracker is gonna get converted-
The hydrocracker is going in the fuels.
... converted to conventional in the fourth quarter.
Going in the fuels, and then-
But then you would-
Yeah, we have multiple base oil opportunities. We've got the VGO that-
Right
... that we can use and for feed to make base oil, and we also have our UMO VGO. So there's very good upside for this site and for the business.
Right. Well, the conventional, the conventional facility, I've been out there, it's, it's impressive.
Yeah.
It's just a lot of moving pieces.
Part of base oil in general is you need good rail infrastructure. So Norfolk Southern has just bought 45 acres of our property, and they're doing a $100 million rail expansion on the site to bring rail, you know, into the port of Mobile and also put a spur right into our facility.
That just helps you from an efficiency perspective and being able to move stuff?
Yeah, logistics for moving products out by rail. So we'll have water. You know, we got the ability to load ships. We have a deep water dock. So if you look at just the asset value, like I said, we're insured for $1.4 billion. So any part of the assets, you know, is just from a midstream standpoint, we got 3.8 million barrels of tanks there at that site.
Got it
... the business, so.
We've run out our time.
Yeah.
This has been super interesting. Thank you very much for participating.
Really appreciate-
Enjoyed it
... the invitation and, look forward to catching up-
Yeah
... if you got any questions, and thank you all, everybody, for coming.