Texas-based Vertex Energy (NASDAQ: VTNR) has witnessed an incredible surge in its share price over the past seven days. The Vertex share price has risen over 382%, in the past week alone, netting big gains for loyal shareholders. But it was up almost 500% at the height of investor speculation.
Shell’s loss is Vertex’s gain
The news that sparked this major price jump is that Royal Dutch Shell (NYSE: RDSA, NYSE: RDSB) is selling its Mobile Chemical LP Refinery in Alabama to Vertex for $75 million. Vertex has committed to spending a further $85 million on developing it for renewable purposes.
This Mobile refinery facility was first purchased by Shell in 1996. Since then it’s been used to process foreign and domestic crude oils for the production of Heavy Olefin Feed, which is subsequently shipped to and converted at other Shell sites to ethylene, propylene, butadiene, etc. A range of other fuel products such as liquid petroleum gases, gasoline and kerosene have also been made here.
Photographer: Krists Luhaers | Source: Unsplash
Shell is being forced to divest some of its fossil fuel assets in order to meet its climate change objectives by reducing its carbon footprint. So, speculative investors see this as a major triumph for Vertex.
Vertex Energy is a specialist refined goods producer and marketer of high-quality alternative food stocks and petroleum products.
Vertex plans on turning the refinery’s hydrocracking unit into a renewable diesel production plant.
Renewable diesel, also known as Hydrotreated Vegetable Oil, is made from food waste. The company projects it could earn as much as $3 billion in revenue and $400 million in gross profit in 2023 if all goes to plan.
Environmental concerns with traditional diesel are severe. In 2006, the US Environmental Protection Agency (EPA) instructed diesel fuel refiners to reduce the sulphur content of their fuel by 97% because sulphur gas compounds are a major source of air pollution. That’s why renewable diesel is preferable.
This refinery deal is expected to complete by Q4 of this year.
Vertex Energy financials
With this recent share price surge, Vertex Energy now has a $444 million market cap (nearly half a billion dollars!). Its share price is down 21% from its 52-week high and up 2,047% from its 52-week low. Hence, it’s been subject to extreme volatility in the past few days.
Currently, Vertex Energy’s forward price-to-earnings ratio is 103, earnings per share are negative and it doesn’t offer a dividend. Therefore, it’s a highly speculative investment.
Nevertheless, renowned Wall Street analyst Amit Dayal of H.C. Wainwright thinks there’s blue sky ahead. He commented:
“We believe this transaction positions Vertex as a unique energy transition play where investors could reap the benefits of favorable regulatory drivers supporting the growth in demand for renewable diesel, while also benefiting from price stability (and potential improvements), in our opinion, from artificial supply constraints being imposed by the same regulations on conventional energy products”.
This is an exciting acquisition for Vertex but not its first.
In a joint venture with Tensile, the company operates its Heartland base oil refinery. Here it converts used motor oil into high purity base oil.
The company currently has nationwide processing capacity of around 115 million gallons annually. The Shell acquisition should significantly increase this capacity.
EPS growth
Vertex Energy’s earnings per share growth was already improving throughout 2020, prior to this Shell deal being announced.
Vertex’ EPS growth went from around 21% in March 2020 to 67% in June, 80% in September and 142% in December. This year it fell back to 28% in March.
If the Vertex Energy share price reaches $13 that’s a 50% gain to be had from here. And if it achieves Dayal’s most optimistic target of $25, that’s a 190% upside. For it to achieve this level of confidence from shareholders it’s going to have to prove its ability to generate considerable income from the Alabama refinery. With a $3 billion revenue target, that may not be as easy as it sounds.
If it does achieve its targets, then it should be at a strong competitive advantage to peers.
The energy sector is hot right now, but things can change in the blink of an eye.