Transformative acquisition
Vertex Energy Inc (VTNR.O) has successfully transformed itself from a value-added logistics provider to a hydrocarbon re-refiner. This shift was accelerated through the acquisition of Omega Holdings’ oil re-refining assets earlier this month. It should enable the group to convert over 110m gallons of used motor oil annually, making it the second largest re-refiner in the US.
Strategic shift drives trebling in FY13 PBT
Revenues and volumes both grew by 20% year-on-year. The per-barrel margin for the core TCEP product rose by 32%. This was the result of incurring lower feedstock costs by collecting more oil in house following the expansion of the collection area, achieving greater throughput at the TCEP re-refinery following the capacity enhancement there and bringing the re-refinery and used oil collection in house through the acquisition of Vertex Holdings in September 2012.
Acquisition strengthens re-refining capability
The Omega acquisition adds another 80m gallons of re-refining capacity and extends the group’s footprint to include Louisiana and Nevada, as well as Texas. These assets enable the group to convert used motor oil (UMO) into “good-as-new” base oil, blended oils created from this base oil and the vacuum gas oil used by refineries in the Gulf of Mexico to produce gasoline and jet oil. This complements the group’s existing UMO activities: using the proprietary TCEP process to convert UMO to a lower-grade “cleaned-up” oil, which is sold to blenders; aggregating unprocessed UMO for sale to blenders in the Gulf of Mexico; and selling small volumes of unprocessed UMO for use by local asphalt plants or energy intensive activities such as paper mills. The group now has a complete portfolio of options for dealing with the UMO it sources. Management intends to grow volumes and improve margins across the enlarged portfolio by extending the group’s direct collection facilities, both organically and by acquisition, increasing the volume aggregated from third-party collectors and selling product output by the former Omega Holdings’ re-refineries through its established sales channels.
Valuation: Trading at a significant discount to peers
Consensus estimates have been updated to reflect the recent acquisition. On these forecasts, the shares trade on a prospective P/E multiple of 12.8x, at a discount to both Clean Harbors (30.3x) and Heritage Crystal-Clean (25.2x). We suggest this discount is greater than that which could be applied solely for the smaller market capitalisation, suggesting potential for further price improvement.
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