The yr 2023 has seen Vertex Power (NASDAQ:VTNR), producer and marketer of refined gasoline merchandise make noteworthy progress with regard to its renewable diesel mission because the starting of 2023. Its Q2 2023 revenues of $734.89 million beat estimates by $21.18 million representing a rise of 6.34% (QoQ). Efficiency administration can be a key focus for the corporate heading into H2 2023.
Thesis
Vertex Power has reworked from an area oil refinery firm to a major renewable gasoline producer within the US. It accomplished its renewable diesel conversion mission in H1 2023 and is anticipated to extend its yield profile into 2024. The just lately erected Texas Tower cellular refinery deliberate for start-up in 2024 can be anticipated to decrease carbon dioxide emissions and lift hydrogen manufacturing.
Difficult quarter
Regardless of rising its income by 6.34% (QoQ) to $734.9 million in Q2 2023, Vertex Power has seen the identical metrics drop 28.61% (YoY) from $1.03 billion in Q2 2022. The corporate incurred a web lack of $81.4 million dropping greater than 250% (QoQ) after hitting a report web revenue of $53.9 million in Q2 2022.
Among the many area of interest, high-value gasoline merchandise produced by Vertex are gasoline, renewable diesel, and jet gasoline, which in accordance with the corporate represented about 61% of its complete manufacturing in Q2 2023.
I consider that the present economics of manufacturing renewable diesel from soybean oil (feedstock) aren’t as engaging because of the difficult market situations. The value of Soybeans has been marked by nice volatility with the commodity buying and selling at $12.73 per bushel from underneath $9 in 2020.
In its Q2 2023 earnings name, Vertex Power defined that it was diversifying its feedstock provide to a minimum of 8 totally different blends together with distillers corn oil, canola, and crude degummed soy. The rise in demand for renewable diesel has additionally necessitated this diversification with the rising dialog round sustainability. As we all know, after processing from fat and oils, the chemical composition of renewable diesel is much like petroleum diesel as “it meets the ASTM specification for petroleum within the US and N590 in Europe.” In contrast to biodiesel which is produced by transesterification and is mixed with petroleum diesel for utilization, renewable diesel offers a near-perfect various.
Demand for Renewable diesel
Consumption of renewable diesel in California (the most important client of renewable diesel within the US) from 2011 to 2021 has elevated from 1 million barrels a yr to twenty-eight million barrels per yr.
The enactment of the Low Carbon Gasoline Normal (LCFS) on this State in 2011 has been a major driver in direction of the adoption of biofuels. Gasoline producers underneath this regulation in California are required to decrease the carbon depth of fuels whereas encouraging the manufacturing of renewable power sources. In essence, producers of high-carbon gasoline (above the mandated targets) are required to buy credit from firms promoting cleaner fuels. The state is shortly shifting in direction of its zero emissions goal and has inspired different states akin to Kansas, Washington, Wyoming, and North Dakota that additionally promote renewable diesel to California.
Estimates present that the manufacturing of renewable diesel is prone to hit 216 million barrels per yr in 2024. On the identical time, consumption is anticipated to achieve 239 million, indicating a deficit of a minimum of 23 million barrels per yr. The manufacturing quantity of renewable diesel and different biofuels (in 2023), in accordance with the Power Data Administration stood at 3 billion gallons per yr. It has elevated by 1.25 billion, a 71% (YoY) improve from 2022. Within the US alone, the variety of states now producing renewable diesel and different biofuels has elevated from 6 to 11.
Manufacturing Milestones
In Q2 2023, Vertex Power’s “standard throughput quantity” on the cellular refinery stood at 76,330 barrels/ day which was equal to 102% of its working capability. In Q3 2023, VTNR’s cellular refinery is anticipated to vary at 74,000 b/d to 77,000 b/d. Moreover, the corporate attained a full manufacturing capability of 8,000 barrels/ day of renewable diesel which it had deliberate in Q1 2023.
I consider this manufacturing is spectacular contemplating VTNR bought the 90,000 barrel/ day Cellular Alabama refining facility in 2021. It had then deliberate to renovate the standalone refinery property to assist sooner or later manufacturing of renewable fuels, a plan that appears to now be working.
Into Q3 2023, Vertex indicated that it had already commenced business gross sales of renewable diesel from its Cellular Alabama refining facility. In June 2023, the corporate offered its first 110,000 barrels of renewable diesel to Idemitsu Apollo Renewable Corp. This buy adopted an settlement by the 2 firms made in February 2022, the place Idemitsu agreed to purchase a most quantity of 14,000 b/d from Vertex.
The Alabama facility whose first part value about $115 million has a deliberate manufacturing capability within the vary of 8,000 to 10,000 b/d (of renewable diesel). The standalone hydrocracking unit is the principle course of concerned on this part, and it was accomplished by the tip of Q1 2023. It’s noteworthy that domestically sourced soybean oil was the one feedstock that was used within the manufacturing of renewable diesel.
By inference, the rise within the vary of pretreated feedstock (akin to meat tallow, corn oil, vegetable oil, along with soybean oil) for use within the manufacturing of renewable diesel will allow the power to function at full capability. One other vital facet to contemplate is that the feedstock for use can be sourced domestically, thereby creating native employment alternatives. Such a corporation wants neighborhood assist particularly because the Cellular Alabama facility continues to be in its infancy. Nevertheless, Vertex has been growing and sourcing various feedstock for a minimum of 2 a long time. It now has greater than 500,000 tankers and stronger logistical capability to enhance its gasoline manufacturing line in the long term.
Dangers and Valuation
VTNR’s money steadiness as of Q2 2023 stood at $48.5 million, a lower of 44% (QoQ). The corporate’s complete debt and lease obligations additionally stand at $466.1 million with accrued losses (unfavorable retained earnings) at $143.4 million within the quarter. Nevertheless, with the web change in money (within the 12 months to June 2023) at $45.9 million, it reveals the corporate has sufficient cash to final till June 2024.
Vertex Power’s gross revenue declined 92.8% (QoQ) to $5.2 million from $71.8 million in Q1 2023. The corporate additionally registered a web lack of $81.4 million for the primary time because the quarter ending September 30, 2022. I consider that this decline was attributed to the lower in VTNR’s refining margins when thought of at market costs. Value of revenues rose 17.79% (QoQ) whilst the corporate defined that it incurred a $1/ barrel impression on its yields.
On this case, we may additionally contemplate the impression of hedging because the firm defined that it encountered the $1 devaluation of its crude merchandise. The value of jet gasoline within the quarter additionally dropped by about $30 relative to that of crude oil. Total, crude oil costs have been lowered by $8 per barrel indicating a seize fee of 34%. On an analogous entrance, power firm Blue Dolphin (OTCQX:BDCO) additionally introduced a “considerably weaker refining margin” in Q2 2023 that lowered throughput quantity, manufacturing, and gross sales. The refining margin (gross) dropped by nearly 100% to lower than $1 from a excessive of $15 at the start of 2023. The corporate’s gross revenue within the 6 months ending on June 30, 2023, stood at $22.4 million in opposition to $23.4 million recorded a yr earlier. Like VTNR, Blue Dolphin additionally claimed {that a} excessive jet gasoline yield led to a drag on its seize fee in Q2 2023. Nevertheless, I consider that the value of jet gasoline is rising post-Covid whereas gasoline costs will quickly transfer previous their seasonal adjustment part.
With regard to valuation, VTNR’s price-to-book (‘TTM’) ratio stands at 1.77 in opposition to the business common of 1.67 (a distinction of 6.33%). The ahead price-to-cash circulation ratio is 8.09 in opposition to the business common of 5.11 (a distinction of 58.40%). These metrics, for my part, present that the inventory is barely overvalued. Nonetheless, the corporate is varied tailwinds akin to the expansion within the renewable diesel output in H2 2023 and managed hedging that ought to increase the shareholder worth into 2024.
Backside line
The rising uptake of renewable biofuels throughout the US is a major driver in direction of the expansion of Vertex Power. The corporate had a difficult Q2 2023 denoted by lowered gross revenue and excessive web losses attributed to weaker refining margins. Nonetheless, I count on the corporate to beat the hedging points in 2024 on account of favorable power costs. For these causes, I like to recommend a maintain ranking for the inventory.