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Vertex Energy: Shell deal maps out new landscape for diesel recycling

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Last week Vertex Energy (NASDAQ:VTNR) was trading along quietly at a pedestrian 1.78 but since then stock in this energy refining business has gone berserk. At time of writing it had broached the 10.10 mark with every expectation from many traders that it will go higher.

Vertex has carved a niche for itself as a specialist refiner of alternative feedstocks. It is also a marketer of high purity petroleum products. Based in Texas, it is recognised as one of the largest processors of used motor oil in the USA.

Shell refinery acquisition will see new renewables capacity

Vertex has just announced that it is going to acquire Shell’s refinery in Mobile, Alabama for $75m, with the deal expected to close by Q4 of this year. The company is going to invest a further $85m in the refinery, turning its hydrocracking unit into renewable diesel. By the end of 2023, Vertex said it would expect to see revenues of $3bn and gross profit of $400m.

Amit Dayal, an analyst with HC Wainwright, raised his price target on VNTR from $4 to $25. That’s still a lot of upside from $10. “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,” he said.

Dayal reckons the deal could bring competitive benefits as it gives the company a head start in this market against the competition, and do it with less capex.

Going into the announcement, Vertex had a used motor oil processing capacity of 115m gallons annually. This deal should considerably inflate that. Let’s not forget it also have distribution capacity and the ability to sell base oils and lubricant back into the market. This is where much of the anticipated post 2022 revenue is likely to come from.

Speculative – and expensive looking – energy market play

This is a speculative energy stock with some characteristics of a momentum trap, but institutional buying activity is certainly behind the share. Revenues had been trending up at Vertex since 2015, but the last couple of years look less impressive. The company was only able to turn an operating profit in 2018, and has then followed up with two loss making years, although 2020 was a particularly special year for US oil refiners. Sales growth is looking solid at the moment when compared with its peers.

Overall you need to look at Vertex stock with more of a grand strategic view – the Shell deal is a big one, but a lot of the price activity is currently being driven by one analyst’s enthusiasm for the company. Relative strength is currently good, but many other metrics are against it. Investors seem to be buying in because of the large potential revenues from diesel recycling and this could indeed yield some very impressive revenue streams, as HC Wainwright indicates.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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