Vertex Energy Announces Fourth Quarter and Full Year 2022 Results

Vertex Energy, Inc. (NASDAQ:VTNR) (“Vertex” or the “Company”), a leading specialty refiner and marketer of high-quality refined products, today announced its financial results for the fourth quarter and full-year ended December 31, 2022.

The company will host a conference call to discuss 4Q22 results today at 8:00 A.M. Eastern Time, details are included at the end of this release.

FOURTH QUARTER 2022 HIGHLIGHTS

• Reported net income of $44.4 million, or $0.56 per basic share
• Reported Adjusted EBITDA of $75.2 million
• Continued safe operation of Mobile refinery with fourth quarter 2022 operational results exceeding with prior guidance for throughput, and capture rate at 77,964 bpd and 61%, respectively
• Renewable diesel conversion project continues to track on schedule for mechanical completion in late March 2023 and start-up in April 2023
• Total liquidity including restricted cash of $146.2 million as of December 31, 2022

FULL YEAR 2022 HIGHLIGHTS

• Reported net income of $1.9 million (which includes a $2.5 million tax benefit) or $0.03 per basic share
• Reported Adjusted EBITDA of $161 million
• Successfully closed on strategic acquisition and associated financing of Mobile, AL refining facility for $75 million
• Exhibited significant operational reliability at Mobile facility with 9-month throughput volumes of 72,555 bpd (97% capacity utilization)
• Initiated construction of renewable diesel conversion project at Mobile refining facility
  • Tracking on schedule for mechanical completion in March 2023 and initial production of 8,000 bpd in April 2023
  • Installation of additional hydrogen supply to drive production ramp to 14,000 bpd by early 2024

Vertex reported fourth quarter 2022 net income of $44.4 million, or $0.56 per fully diluted share, versus a net loss of $8.3 million, or $0.15 per fully diluted share for the fourth quarter 2021. Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) was $75.2 million for the fourth quarter 2022 compared to Adjusted EBITDA of $9.5 million in the prior-year period and $1.6 million in the prior quarter. Financial results for the fourth quarter 2022 include a $9.6 million financing charge related to inventory backwardation and a $2.5 million released valuation allowance which is reflected as an income tax benefit as a result of the taxable gain generated by the Heartland divestiture subsequent to the quarter end. Schedules reconciling the Company’s GAAP and non-GAAP financial results, including Adjusted Net Income and Adjusted EBITDA are included later in this release (see also “Non-GAAP Financial Measures”, below).

Management Commentary

“During the fourth quarter, we delivered as promised on our goals of truly demonstrating the significant earnings potential of our Mobile facility.” stated Benjamin P. Cowart, President and CEO of Vertex, who continued, “Our fourth quarter financial results reflect the continued safe, smooth operations at the facility, attractive product yields following the maintenance operations completed in the prior period and the continuation of near record refining margins during the quarter. We remain on track to begin the production of renewable diesel in the second quarter of this year while continuing to benefit from an extremely attractive macro environment facing the conventional fuels business for the foreseeable future. We believe the Company is well positioned to execute on both our strategic goals in the renewable fuels business, as well as our financial goals of streamlining our balance sheet and capital structure in 2023.”

Operating Details and Discussion

Mobile Refinery Operations

The Mobile refinery operations generated $147.1 million of fuels gross margin or $20.50 per barrel during the fourth quarter 2022, its third quarter of operations since being acquired by Vertex. The Mobile refinery financial results include the impact of an inventory backwardation charge in the amount of $9.6 million. Adjusting for the impact of $3.96 of RIN obligations per barrel, refining gross margin at Mobile was $118.7 million, or $16.54 per barrel.

Total throughput at the Mobile refinery was 77,964 barrels per day in the fourth quarter, resulting in 104% utilization for the stated operable capacity of approximately 75,000 barrels per day. Total production of finished high-value light products, such as gasoline, diesel and jet fuel, represented approximately 74% of the total production in the fourth quarter, vs 69% in 3Q22.

The benchmark 2-1-1 Gulf Coast crack spread was $33.84 in the fourth quarter 2022, an increase of 134% versus the fourth quarter 2021, supported by reduced inventories for refined fuels, a constrained global refining complex and continued strength in demand for conventional refined products. On a gross margin per barrel basis, excluding non-fuel costs, the Mobile refinery captured $20.50 per barrel or 61% of the Gulf Coast 2-1-1 crack spread, exceeding prior expectations on higher than expected diesel and jet fuel margins. Adjusting for the per barrel RIN obligation, RIN-adjusted gross profit per barrel was $16.54 or 49% of the Gulf Coast 2-1-1 crack spread.

The following table presents the summary financial and operating results from the Mobile Refinery:

Black Oil & Recovery Segment

The legacy Black Oil and Recovery segment generated gross profit of $9.6 million for the fourth quarter 2022. Operating income was $3.4 million in quarter. The prior year period is not comparable due to the reclassification of our segment operating and financial data, which has been consolidated into two primary reportable segments, Black Oil and Recovery and Refining and Marketing, for financial reporting purposes.

During the 2022 fourth quarter, the Company’s legacy Marrero (Louisiana) and Columbus (Ohio) refineries operated at 106% and 89% of total utilization, respectively.

Renewable Diesel Conversion Project Timeline & Construction Update

Renewable diesel conversion project continues on estimated timeline and budget. Vertex’s previously disclosed capital project designed to modify the Mobile, Alabama refinery’s hydrocracking unit to produce renewable diesel fuel on a standalone basis continues to progress along the Company’s planned construction timeline towards mechanical completion in late March 2023, with initial renewable diesel production volumes expected in April 2023. The company took down the hydrocracking unit as planned on January 6^th 2023, with approximately 55% of shut-down related work now completed. The company continues to expect the project to reach mechanical completion in late 1Q23. Expected total capital costs for the project are estimated to be approximately $110-$115 million, with approximately $33.2 million or 75% of the company’s total $42.2 million capital expenditure budget for the fourth quarter spent on the project. Recent construction progress milestones as of February 28, 2023 include:

• Over 290,000 work hours completed without reportable safety incident
• Hydrocracker outage related work execution is >55% complete
• ISBL equipment nearing completion – catalyst loading to begin in the next week
• Mechanical completion remains on track for late March 2023
• Detailed system handover and commissioning plan in place

Balance Sheet and Liquidity Update

As of December 31, 2022, Vertex had total long-term debt outstanding of $360.3 million, including long term debt $260.2 million and lease obligations of $100.1 million. The Company had total cash and equivalents of $146.2 million including $4.9 million of restricted cash on the balance sheet as of December 31, 2022, for a net debt position of $214.1 million. The ratio of net debt to trailing twelve month Adjusted EBITDA was 1.3x as of December 31, 2022.

Management Outlook

Based on current data and projected trends, Company management believes that several ongoing factors will continue to support a robust refined product margin environment for the US refining complex in the near to medium term. Primary market drivers include continued strength in global refined product demand, reduced capacity in global refining throughput and below average levels of domestic inventories of refined products including gasoline, and distillate. As a result, management’s expectations for a historically elevated margin environment continue through the first quarter of 2023 and into the second quarter of 2023.

All guidance presented below is current as of the time of this release and is subject to change. All prior financial guidance should no longer be relied upon.

First Quarter 2023 Financial and Operating Outlook:

Commodity Derivative Position and Price Risk Management Strategy

Vertex may, at times, utilize derivative instruments to manage exposure to fluctuations in various commodity prices, including refined fuel products sold, natural gas used in the refining process, as well as feedstocks and refined products held in inventory. Management sets and implements hedging policies in order to improve visibility on cost inputs, sales prices, and resulting cash flow generation for the purpose of planning and budgeting of the business.

The company currently has no substantial outstanding commodity derivative hedge positions as of February 28, 2022, and as such, continues to remain exposed to prevailing market prices and conditions for the purchase and sale of all feedstocks and refined products.

Conference Call and Webcast Details

A conference call will be held today at 8:00 A.M. Eastern Time to review the Company’s financial results, discuss recent events and conduct a question-and-answer session. An audio webcast of the conference call and accompanying presentation materials will also be available in the “Events and Presentation” section of Vertex’s website at www.vertexenergy.com. To listen to a live broadcast, visit the site at least 15 minutes prior to the scheduled start time in order to register, download, and install any necessary audio software.

To participate in the live teleconference:

Domestic: 1-877-300-8521

International: 1-412-317-6026

Conference ID: 10174530

To listen to a replay of the teleconference, which will be available through Tuesday, March 14, 2023 at 11:59 PM ET, either go to the Events and Presentation section of Vertex’s website at www.vertexenergy.com or call the number below:

Domestic Replay: 1-844-512-2921

Access Code: 10174530

ABOUT VERTEX ENERGY

Houston-based Vertex Energy, Inc. (NASDAQ: VTNR), is an energy transition company focused on the production and distribution of conventional and alternative fuels. Vertex owns a refinery in Mobile (AL) with an operable refining capacity of 75,000 barrels per day and more than 3.2 million barrels of product storage, positioning it as a leading supplier of fuels in the region. Vertex is also one of the largest processors of used motor oil and co-products in the U.S. Gulf Coast. Vertex also owns a facility, Myrtle Grove, located on a 41-acre industrial complex, with hydroprocessing and plant infrastructure along the Gulf Coast in Belle Chasse, LA, that presents high yield, low CAPEX opportunity for future Energy Transition projects.

FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this communication which are not statements of historical fact constitute forward-looking statements within the meaning of the securities laws, including the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “would,” “will,” “estimates,” “intends,” “projects,” “goals,” “targets” and other words of similar meaning are intended to identify forward-looking statements but are not the exclusive means of identifying these statements. Any statements made in this news release other than those of historical fact, about an action, event or development, are forward-looking statements. The important factors that may cause actual results and outcomes to differ materially from those contained in such forward-looking statements include, without limitation, the Company’s projected Outlook for the first quarter of 2023, as discussed above; the Company’s ability to raise sufficient capital to complete future capital projects and the terms of such funding, to the extent necessary; the timing of planned capital projects at the Mobile Refinery and the outcome thereof; the future production of the Mobile Refinery; the estimated timeline of the renewable diesel capital project, estimated and actual production associated therewith, estimated revenues over the course of the agreement with Idemitsu, anticipated and unforeseen events which could reduce future production at the refinery or delay planned capital projects, changes in commodity and credits values, and certain early termination rights associated with the Idemitsu agreement and conditions precedent to such agreement; certain mandatory redemption provisions of the outstanding senior convertible notes, the conversion rights associated therewith, and dilution caused by such conversions; the Company’s ability to comply with required covenants under outstanding senior notes and a term loan and pay amounts due under such senior notes and term loan, including interest and other amounts due thereunder; the ability of the Company to retain and hire key personnel; risks associated with the ability of Vertex to complete current plans for expansion and growth, and planned capital projects; the level of competition in our industry and our ability to compete; our ability to respond to changes in our industry; the loss of key personnel or failure to attract, integrate and retain additional personnel; our ability to protect our intellectual property and not infringe on others’ intellectual property; our ability to scale our business; our ability to maintain supplier relationships and obtain adequate supplies of feedstocks; our ability to obtain and retain customers; our ability to produce our products at competitive rates; our ability to execute our business strategy in a very competitive environment; trends in, and the market for, the price of oil and gas and alternative energy sources; the impact of inflation on margins and costs; the volatile nature of the prices for oil and gas caused by supply and demand, including volatility caused by the ongoing Ukraine/Russia conflict; our ability to maintain our relationships with our partners; the impact of competitive services and products; the outcome of pending and potential future litigation, judgments and settlements; rules and regulations making our operations more costly or restrictive; changes in environmental and other laws and regulations and risks associated with such laws and regulations; economic downturns both in the United States and globally, increases in inflation and interest rates, increased costs of borrowing associated therewith and potential declines in the availability of such funding; risk of increased regulation of our operations and products; disruptions in the infrastructure that we and our partners rely on; interruptions at our facilities; unexpected and expected changes in our anticipated capital expenditures resulting from unforeseen or planned required maintenance, repairs, or upgrades; our ability to acquire and construct new facilities; our ability to effectively manage our growth; decreases in global demand for, and the price of, oil, due to COVID-19, state, federal and foreign responses thereto, inflation, recessions or other reasons, including declines in economic activity or global conflicts; our ability to acquire sufficient amounts of used oil feedstock through our collection routes, to produce finished products, and in the absence of such internally collected feedstocks, and our ability to acquire fourth-party feedstocks on commercially reasonable terms; unexpected downtime at our facilities; risks associated with COVID-19, the global efforts to stop the spread of COVID-19, potential downturns in the U.S. and global economies due to COVID-19 and the efforts to stop the spread of the virus, and COVID-19 in general; anti-dilutive rights associated with our outstanding securities; our level of indebtedness, which could affect our ability to fulfill our obligations, impede the implementation of our strategy, and expose us to interest rate risk; dependence on fourth party transportation services and pipelines; risks related to obtaining required crude oil supplies, and the costs of such supplies; counterparty credit and performance risk; unanticipated problems at, or downtime effecting, our facilities and those operated by fourth parties; risks relating to our hedging activities; and risks relating to planned divestitures and acquisitions. Other important factors that may cause actual results and outcomes to differ materially from those contained in the forward-looking statements included in this communication are described in the Company’s publicly filed reports, including, but not limited to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 and future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. These reports are available at www.sec.gov. The Company cautions that the foregoing list of important factors is not complete. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements referenced above. Other unknown or unpredictable factors also could have material adverse effects on Vertex’s future results. The forward-looking statements included in this press release are made only as of the date hereof. Vertex cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, Vertex undertakes no obligation to update these statements after the date of this release, except as required by law, and takes no obligation to update or correct information prepared by fourth parties that are not paid for by Vertex. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

PROJECTIONS

The financial projections (the “Projections”) included herein were prepared by Vertex in good faith using assumptions believed to be reasonable. A significant number of assumptions about the operations of the business of Vertex were based, in part, on economic, competitive, and general business conditions prevailing at the time the Projections were developed. Any future changes in these conditions, may materially impact the ability of Vertex to achieve the financial results set forth in the Projections. The Projections are based on numerous assumptions, including realization of the operating strategy of Vertex; industry performance; no material adverse changes in applicable legislation or regulations, or the administration thereof, or generally accepted accounting principles; general business and economic conditions; competition; retention of key management and other key employees; absence of material contingent or unliquidated litigation, indemnity, or other claims; minimal changes in current pricing; static material and equipment pricing; no significant increases in interest rates or inflation; and other matters, many of which will be beyond the control of Vertex, and some or all of which may not materialize. The Projections also assume the continued uptime of the Company’s facilities at historical levels and the successful funding of, timely completion of, and successful outcome of, planned capital projects. Additionally, to the extent that the assumptions inherent in the Projections are based upon future business decisions and objectives, they are subject to change. Although the Projections are presented with numerical specificity and are based on reasonable expectations developed by Vertex’s management, the assumptions and estimates underlying the Projections are subject to significant business, economic, and competitive uncertainties and contingencies, many of which will be beyond the control of Vertex. Accordingly, the Projections are only estimates and are necessarily speculative in nature. It is expected that some or all of the assumptions in the Projections will not be realized and that actual results will vary from the Projections. Such variations may be material and may increase over time. In light of the foregoing, readers are cautioned not to place undue reliance on the Projections. The projected financial information contained herein should not be regarded as a representation or warranty by Vertex, its management, advisors, or any other person that the Projections can or will be achieved. Vertex cautions that the Projections are speculative in nature and based upon subjective decisions and assumptions. As a result, the Projections should not be relied on as necessarily predictive of actual future events.

NON-GAAP FINANCIAL MEASURES

In addition to our results calculated under generally accepted accounting principles in the United States ("GAAP"), in this earnings release we also present Refining Gross Margin, EBITDA and Adjusted EBITDA. Refining Gross Margin, EBITDA and Adjusted EBITDA are “non-GAAP financial measures” presented as supplemental measures of the Company’s performance. They are not presented in accordance with GAAP. Refining gross margin is defined as revenues less the cost of fuel intakes and other fuel costs. It excludes operating expense and depreciation attributable to cost of revenues and other non-operating items in cost of revenues. EBITDA represents net income before interest, taxes, depreciation and amortization, for continued and discontinued operations. Adjusted EBITDA is defined as EBITDA before other income, impairment loss on assets, unrealized (gain)/loss on hedging activities, (gain)/loss on hedge roll (backwardation), environmental clean-up reserve, loss (gain) on change in value of derivative warrant liability, unrealized (gain) loss on derivative instruments, gain (loss) on intermediation agreement, Shell transaction related and acquisition expenses and stock-based compensation expense (for continued and discontinued operations) and other unusual or non-recurring items. Refining gross margin is defined as gross profit (loss) less the cost of fuel intakes and other fuel costs. Refining Gross Margin, EBITDA and Adjusted EBITDA are presented because we believe they provide additional useful information to investors due to the various noncash items during the period. Refining Gross Margin, EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Refining Gross Margin, EBITDA and Adjusted EBITDA as supplements to GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to allocate resources and to compare our performance relative to our peers. Additionally, these measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that fourth parties have indicated are useful in assessing the Company and its results of operations. Refining Gross Margin, EBITDA and Adjusted EBITDA are unaudited, and have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: Refining Gross Margin, EBITDA and Adjusted EBITDA do not reflect cash expenditures, or future or contractual commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, capital expenditures or working capital needs; EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments; although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. In addition, other companies in this industry may calculate Refining Gross Margin, EBITDA and Adjusted EBITDA differently than Vertex does, limiting its usefulness as a comparative measure. The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measure. For more information on these non-GAAP financial measures, please see the sections titled “Unaudited Reconciliation of Refining Gross Margin and Refining Gross Margin per throughput barrel to Gross Profit”, each included at the end of this release and “Unaudited Consolidated Continued and Discontinued Operations Reconciliations of Net Loss attributable to Vertex Energy, Inc., to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA” each included at the end of this release.

Unaudited segment information for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):