Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2022 Earnings Call Transcript

Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day and welcome to the Vertex Energy Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. I would now like to turn the conference over to John Ragozzino, Head of Investor Relations. Please, go ahead.

John Ragozzino: Thank you. Good morning and welcome to Vertex Energy’s fourth quarter and full year 2022 results conference call. Leading the call today are Chairman and CEO, Ben Cowart; Chief Financial Officer, Chris Carlson; and Chief Operating Officer, James Rhame. Also attending the call are Chief Strategy Officer, Alvaro Ruiz; Vice President, Bart Rice; and Vice President of Black Oil Operations, John Strickland. I want to remind you that management’s commentary and responses to questions on today’s conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company’s control. Although, these forward-looking statements are based on management’s current expectations and beliefs, actual results may differ materially.

For a discussion of some of the risk factors that could cause actual results to differ, please refer to the Risk Factors section of Vertex Energy’s latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued today. Today’s call will begin with remarks from Ben Cowart, followed by an operational review from James Rhame and financial review from Chris Carlson. At the conclusion of the prepared remarks, we’ll open the line for questions. With that, I’ll turn the call over to Ben.

Ben Cowart: Thank you, John, and good morning to those joining us on the call today. This morning we issued a press release detailing our financial and operating results for the fourth quarter of 2022. We are pleased to report the continued safe and reliable operations with the improved financial and operating results which exceeded our prior expectations. We feel these results reflect the true earnings potential of our conventional fuels business at the Mobile refinery facility, which contributed the majority of our fourth quarter adjusted EBITDA of $75.2 million. Reported results benefited significantly for continued strength in conventional fuels refining margins, increased market exposure following the expiration of our prior hedge positions beginning on September 30.

Attractive refining deals of high-margin distillate products following the turnaround work performed in the third quarter. Operationally, we reported strong throughput volumes of approximately 78,000 barrels per day for the quarter, 5.4% ahead of our midpoint of our prior guidance issued in November. Our product yield profile and premium pricing for diesel and jet fuels drove a strong capture rate of 61%, which exceeded our prior outlook of 52% and generated very attractive refining profitability on a per barrel basis. In addition, we made notable progress on several strategic initiatives aimed at streamlining our business. First, we continue to expand our team by adding experienced talent throughout our key areas of the business. Secondly, we recently completed the sale of our Heartland UMO business, enhancing our ability further to prioritize the optimization of our current refining business.

And third, we have continued advancements of our construction of our RD conversion project for on scheduled mechanical completion by end of March, with carefully planned start-up early second quarter of this year. I’m proud of our employees and contractors who work together for the results achieved for 2022. The transition from our legacy operations, to the advantaged position we find ourselves in today, would not be possible without the team’s relentless pursuit of our goals, while keeping safe and reliable operations as our highest priority. With that, I’d like to hand the call over to James Rhame, our Chief Operating Officer, who will provide a detailed update on our operations during the quarter, including a more detailed update on the status of our renewable diesel conversion project in Mobile.

James?

James Rhame: Thank you, Ben, and good morning everyone. I will begin with a brief report on our health, safety and environmental performance. During the fourth quarter of 2022, our mobile operations had zero OSHA reportables, zero environmental reportable and zero process safety events. Our legacy operations saw two OSHA reportables, both moderate in nature with zero environmental reportable. Moving on to operational performance, beginning with our legacy business. Our Columbus refinery maintained safe and reliable operations during the fourth quarter and through the close of the recently announced divestiture. This is to the credit of our former Heartland employees and clearly demonstrates the quality of the team running those operations.

We are proud of their contribution and grateful for the opportunity to have worked with them over the last eight years. In Louisiana, our Marrero operations also saw continued progress in improving plant reliability and performance in the fourth quarter, achieving strong run rates and 106% capacity utilization at the refinery. Mobile performed well despite challenging weather conditions and increased site activity around the RD conversion. Fourth quarter throughput volumes at the Mobile refinery averaged 77,964 barrels per day or 104% of stated operating capacity, exceeding our initial guidance of 74,000 barrels per day and slightly ahead of our updated guidance of 77,000 barrels per day, issued in January. We continue to process — our crude diet consisting of WTI, LLS and local light sweet crudes.

Total production of finished high-value like products, such as gasoline, diesel and jet fuel represented approximately 74% of total fourth quarter production versus 69% in the third quarter of 2022, reflecting improved performance following the previously disclosed catalyst change in our distillate and reforming units. Our fuels-only gross profit per barrel during the quarter was $20.5, driving a capture rate of 60.6% of the benchmark Gulf Coast 2-1-1 crack spread, slightly ahead of our guidance of 50% to 54%. The strength in our reported fuels-only gross profit per barrel and resulting capture rate versus the benchmark is a direct function of the strength we continue to see in refining margins for diesel and jet fuel, which contributed to the strong per barrel profitability reported.

On a rent-adjusted basis, which we believe provides an additional layer of clarity around the per barrel refining economics for our conventional fuels business, gross profit per barrel was $16.54. Now turning to our renewable diesel conversion projects. I’m pleased to report that the development and construction activities are advancing as planned, keeping the project on schedule for targeted mechanical completion by the end of the first quarter with anticipated initial production to follow early in the second quarter of this year. Our budgeted total project CapEx has been adjusted slightly from the $90 million to $100 million range that was reported to $110 million to $115 million. The upward cost revision reflects three primary drivers: extremely tight local labor markets, incremental rental equipment gaping costs necessary to ensure adherence to all site safety protocols along with some additional supply chain-related costs, which we chose to pay in order to keep the project on schedule.

Despite inflationary pressures and supply chain complexity, we remain laser-focused on a safe, reliable and timely execution of the project. Progress towards these goals, we are prouder for continues without compromise due to the cohesive efforts of all employees and contractors involved in the project. Notable milestones include the safe shutdown of the hydrocracker unit completed as planned on January 6. With over 55% of the outage-related work completed, our crews have logged in excess of 290,000 work hours thus far with zero reportable incidents to date, the performance of which I’m very pleased to share. While we have an understandable bias and our pride over our team’s performance, the significance of what our Legacy and Mobile teams have accomplished throughout 2022 cannot be overstated.

Continued prioritization of our strict safety standards and relentless focus on achieving our goals by each individual team member is something I’d like to take time to perfectly acknowledge and commend. With that I’d like to hand the call over to Chris Carlson, Chief Financial Officer, who will review our financial results for the quarter as well as provide an outlook for the first quarter of this year.

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Chris Carlson: Thank you, James and welcome to those joining us on the call today. For the three months ended December 31, 2022, Vertex reported net income of $44.4 million or $0.56 per share on a fully diluted basis versus a net loss of $5.3 million or $0.09 per share on a fully diluted basis in the fourth quarter 2021. We reported adjusted EBITDA of $75.2 million in the fourth quarter of 2022 versus $9.5 million in the prior year period. On a standalone basis, the Mobile refinery generated $78.6 million of adjusted EBITDA during the quarter versus a $500,000 loss in adjusted EBITDA during the third quarter of 2022. Our legacy operations in the Black Oil and Recovery segment contributed $3.9 million adjusted EBITDA. Overall, fourth quarter results benefited from a continuation of consistent operational reliability and resulting throughput volumes.

Continued strength in refined product margins reflecting the robust conventional fuels market fundamentals, we continue to see. The fourth quarter financial results include a loss related to continued backwardation in the crude and product markets in the amount of $9.6 million. A return to Contango, during the quarter, helped offset a substantial portion of this charge relative to what we have seen in the prior two quarters, where backwardation charges came in at $17.9 million and $23.2 million respectively. As of December 31, 2022, the company had total liquidity, including restricted cash of $146.2 million versus $122.4 million at the end of the prior quarter. Vertex had total net debt outstanding of $214.1 million at the end of the fourth quarter of 2022, including lease obligations of $100.1 million, implying a net debt to trailing 12-month adjusted EBITDA ratio of 1.3 times as of December 31, 2022.

We continue to remain fully exposed to current robust refining margins with no fixed price hedge contracts currently in place. Subsequent to quarter end, we successfully closed on the planned divestiture of our Heartland UMO facility for total gross proceeds of $90 million. We are extremely pleased with the results of this sale, as we originally purchased this asset for $8.3 million in stock back in 2014. The net proceeds of $85 million are largely being used to finance the significant working capital required associated with our planned RD production with volumes of soybean oil feedstock currently being purchased in preparation of our April production start-up. The portion of the proceeds, are also being directed towards the repayment of our $165 million term loan, which carries a 15.25% interest rate.

We were able to make a prepayment of $11 million of the term loan saving over $1.5 million in future interest expense on the loans through year-end 2023. Looking to the first quarter of 2023, we anticipate total throughput volumes at Mobile to be between 69,000 and 72,000 barrels per day, reflective of the shutdown in the hydrocracker to accommodate completion of the RD conversion project by the end of the quarter. OpEx per barrel is expected to be $3.85 to $4 per barrel for the quarter. And our capture rate on the benchmark Gulf Coast 2-1-1 crack spread is forecasted to be approximately 50% to 54%. We anticipate total capital expenditures for the first quarter to be between $30 million to $35 million. I’d now like to turn the call back to Ben Cowart, to provide some final comments before we open it up for Q&A.

Ben Cowart: Thank you, Chris. The fourth quarter of 2022 sets a bar for financial and operating performance, which I’m extremely proud of. We continue to be encouraged by the fundamental outlook for refining margins on both the conventional and the renewable fuel side of the business. As we approach the start-up of our renewable fuels production in April, we look forward to establishing Vertex as an important player in the rapidly developing renewable fuels market. We remain extremely enthusiastic about the outlook for potential profitability in this business, knowing each player in this market faces widely different circumstances that ultimately determines their individual performance. Therefore, we anticipate updating the market with a detailed look at our expectations for the business as we build confidence in our ability to accurately forecast and deliver on these expectations.

Until then, we will continue to take a very measured, thoughtful and prudent approach to each decision we face as the RD business ramps. On the conventional side of our business, the macro environment continues to be extremely robust. Product margins for lighter distillate products, including diesel and jet fuel continue to maintain historically elevated less, fueled by the tight refining capacity and domestic inventory levels well below historic averages. As a result, we expect to continue to see strong financial performance on that side of the business. I’d like to thank all of you for joining us on this call this morning, and I look forward to being able to deliver another positive update on our next quarter performance. With that, we will open the line for questions.

Operator?

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Q&A Session

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Operator: Thank you. We will now begin the question-and-answer session. Today’s first question comes from Manav Gupta with UBS. Please go ahead.

Manav Gupta: Guys, congrats on a great quarter. My first question is you acquired the asset on April 1. You are showing a material improvement in capture in the last couple of quarters. Throughput has gone up. Help us understand some of the changes you have brought about, which are allowing you to learn from this experience and improve the performance of this asset. And a follow-up on this one is, help us also understand once the R&D project actually goes into the picture, does it change the throughput or does it change the screen product yields? If you could walk us through some of those parameters?

James Rhame : Good morning, Manav. This is James. I’ll answer that. So, what occurred and allowed us to increase the capture rate in the fourth quarter were really three things. During the third quarter, as you remember, we changed our reformer catalyst, which was at end of life and was affecting yields. And while we did change both the reformer and the distillate hydrotreater, we increased the capacity of catalysts that we were able to put in there, which we were able to capture that improvement in yields between the age catalyst and the improvements we made inside the reactor space. Those are the two main things. The other one that I would also say is we bought the site and this site was one that had many very good projects that we could go execute that were relatively simple that focused on distillate — maximum distillate strategy and that’s what we’ve been doing.

Everywhere from crude selection to how we’re running the unit, and making sure that yields or matter we’re paying attention to those. And so that answers that question. And in the end, you also saw the amount of crude throughput that we had and we were able to make sure that we didn’t lose yields during the crude throughput also. Did that answer the first question? Then I’ll go to the next one.

Manav Gupta: That did answer the first question.

James Rhame : All right. So what’s going to change? Number one in the first quarter, so you’ll see slightly down on crude performance and that’s primarily, because I don’t have a hydrocracker up to absorb hydrogen. So therefore, I’ve got to limit my fuel system that’s there, but once the hydrocracker comes up, so capture rate will change. And actually what you do see is, we’re back to what the capture rate was from our initial purchase, because of the benefits we saw in the fourth quarter. But what will occur is now I no longer have VGO going to a hydrocracker making roughly 8,000 barrels a day — 8,000 to 9,000 barrels of diesel, I’ll be selling VGO out on the open market as a result. All of that affects capture rate. But I will run the same amount of crude once I get the RD unit up. I’m sorry, I should have added that in too, Manav. Our crude rate will be consistent with what it was prior to, taking the OFAs down for the conversion.

Manav Gupta: So perfect. So the VGO, which is selling at a massive premium, the yield of VGO goes up is that right?

James Rhame: That’s, correct. It goes from — let me give you some rough numbers 10,000 barrels a day, to about 20,000 barrels a day.

Manav Gupta: Perfect. And my very quick follow-up here is, we recently saw another Louisiana project. We had an excellent valuation from a European major, almost $6, a gallon. Is this something you could be open to if a European or US major approaches you, for that kind of valuation would you be open to that kind of a deal, or do you want to do this on your own? And I’ll turn it over, after that.

Ben Cowart : Manav, good morning, and thanks for being on the call. This is Ben. We’ve taken no — there’s two projects now, that have set a value on RD production. And for us, we have planned to go down this path on our own, if necessary, but we’ve also legally bifurcated our renewable business on site, in the event that our whole value has exceeded, by somewhat of interest at least for a portion of that business. So we will be prepared to look at those opportunities, but we are very excited to own 100% of this business today, based on the performance of the rest of the company and our ability to continue down this path.

Manav Gupta: Perfect. Congrats, on great quarter guys.

Ben Cowart : Thank you.

James Rhame: Thank you.

Operator: Thank you. The next question today comes from Donovan Schafer with Northland Capital Markets. Please go ahead.

Donovan Schafer: Hi, guys. Thanks for taking the questions. I will second the first analyst’s comment just that, as results broadly seem quite positive. I think the only — I mean, the only thing, is there is this sort of incremental negative thing if you could call it that, is the higher CapEx, but you provided some explanation the coverage — what we’re seeing really tight labor market. Of course it makes sense that, making — staying — you’re making it a priority to stay on schedule. So, of course, supply chain stuff that could mean, a higher sort of expediting costs. But my question is, like if we can dig down just a tiny bit more on that. Sometimes, you — as you say, for instance, tight labor market, you can pay out more and that means you get your hands on people, but you are in a very kind of rural area.

You’ve talked about employees, at the cost of your refinery being third-generation folks. And so sometimes, there’s a difference between having to pay out for something versus just not even being able to get it period, or say with expediting or something. So I’m trying to really hone in on kind of, is there anything in the nature of those — what’s behind the cost of runs, that can give you any — that would incrementally cause some potential of a further delay? I know you’re still on track like, as of now, like as of today of course we’re on track. But say you’re waiting on, 10 large components and you’ve had to expedite three of them because you found there’s a delay is the type of thing, where well, therefore, you could potentially learn about delays in the other seven, and then you might have to expedite those, but sometimes maybe you can’t.

So is there anything in the attributes of the aspects of what’s underneath that €“ that would give a basis for a little bit of caution or a little bit of reservation around there, just really digging into that?

Ben Cowart: Yes, yeah. No. Thank you for the question. We have every single piece of hardware on-site today to finish the project. If I was in the €“ so that’s first on hardware. So the supply chain, even though we did pay to maintain schedule every one of those components we were €“ our team on site, we’re really focused on making sure every little valve €“ say a little, these aren’t little. These are big high-pressure valves were ground as we took feed out as I had previously told you. By the time feed out, we’d have most of it on the ground. I think we had a handful of components and every one of those have arrived. So that’s on the supply chain. And on the people side, I think we’ve seen what the market has performed and what everyone else is seeing in the market.

We could have made some different choices there, and not got the quality of people we had and not paid, but we have had very, very good quality work and performance by our contractors on site. And that hats off to them. They’ve brought the A team for us, and they’ve done very well. And with that we are now in the process of de-staffing the project as we’re coming down from our peak. So if I was ramping up, I would be worried but that’s not where we are on the project at this stage. We are ramping down from peak manpower requirements. Okay?

Donovan Schafer: Okay. That’s great. Okay. So that’s very helpful. And then as a follow-up question just for the $9.6 million loss on the hedge roll or backwardization, I want to make sure, I’m understanding that clearly. So my impression is that, this is a bit different from the initial hedges, you guys had in place sort of in prior quarters, where this is really more about the implicit commodity price exposure that it’s almost sort of a working capital exposure you’re buying the crude one day but those exact barrels of crude that you’re buying you want to kind of lock in that margin when they go in the feeder and they go into the process. And then there’s some amount of lag or delay or they come out of the other side. And so is the $9.6 million is that an explicit hedging that’s tied to that specific exposure and/or alternatively, is it even hedging, or is it more sort of an implied hedge just that, if you’re not hedging you just have that exposure.

And so you’re highlighting the impact of that exposure as commodity prices move in the interim between ones you get crude in and refine product out?

Chris Carlson: Yeah. Hey, this is Chris. I mean, you kind of laid it out well in your explanation. But yes, it’s a combination of the impact of the inventory that we have on hand and the changing in the commodity markets, which are in a backwardation position today. We’re seeing it go back and forth a little bit, but it’s still backward dated at the moment.

Donovan Schafer: Okay. And so in the release in the adjusted EBITDA reconciliation, they caused a gain loss on hedge roll print issues backwardation. So you say hedge roll you use that just more broadly kind of €“ there’s not actually like hedge contracts in place. It’s more of the impact of that exposure. Is that right?

Chris Carlson: No. To clarify that there are hedge contracts in place

Donovan Schafer:

Chris Carlson: in remediation agreement on our inventory. So there are…

Donovan Schafer: So it’s kind of it’s kind of effectively a mix of both in a way, or there’s a sign amount of netting and figuring it out?

Chris Carlson: It’s a combination of both.

Donovan Schafer: I see. I see. Okay. Great. Thank you. I’ll take the rest offline. Congratulations guys.

Ben Cowart: Thank you, Donovan.

Operator: Thank you. Our next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal: Thank you. Good morning, guys. Great results. I appreciate you taking my questions. operating expenses of $3.85 to $4, is this sort of the range for the near term? And how does this change with RD coming online soon?

James Rhame: Yeah. So this is James. Thanks. I’ll answer that question. Our costs are competitive. If we go in comparison on a per barrel basis, we’re continuing to look at that and we’ll always look at what our costs are, as a one refiner site and without some of the conversions, we have we believe this cost us competitive, if we go back to the history of the site. With RD what will occur on that per barrel basis, we may split the pie up as the RD once it’s up it takes its share of the cost of the site. But the size of the pie will not change. It will be the same amount with both the RD operating now as a separate business and we will bifurcate it in that manner. Does that answer your question?

Ben Cowart: So I’ll add just to make sure it’s clear. We already carry the burden of running the hydro cracker in those costs. As we bring RD on, we don’t anticipate our operating cost to change very much. It will be kind of bifurcated as we discussed earlier.

Amit Dayal: Yes. Thank you. It’s clear now. Thank you. Appreciate that Ben and James. Just with respect to the RD another question I have is, are we deploying the pretreatment unit in this initial ramp, or is that coming later? And if it’s coming later, what’s the time line for that and CapEx et cetera that you expect to incur related to that?

James Rhame: Yeah. Thank you. This is James again. I’ll answer that. We’ve been looking real hard at pretreatment and how does it fit and what is the best path forward for that. However, in this process of our investigation, we have found a commercial arrangement with pretreatment facility this at a cost below our capital hurdle rate. And even though it’s not settled yet, we believe it’s a path towards settling that commercial arrangement that would tell us we would not have to be economically best for us not to invest in a pretreatment facility as of today.

Amit Dayal: Okay. Is this local to you guys, or are you getting it from another state or something?

James Rhame: Yeah. And there’s actually two of these facilities. They’re relatively local to our mobile refinery.

Amit Dayal: Okay. Understood. Just one last one for me. Congrats on the sale on the UMO business. Just wondering what is remaining of that business. And what do you expect to do with anything that is remaining for the UMO side of things?

Ben Cowart: Yeah. So thank you Amit for coming into the call and just the coverage work and what you guys are doing over the years. So we’re very pleased with the sale of Heartland. We’re very excited about our legacy business that remains, its 3x bigger. It may be a little more than that than what we were doing at Heartland and various dating to what we are focused on in the Gulf region. So we will continue to combine our Mobile operations with all the work that we’re doing on our UMO collections in refining. And so we see some real synergies and upside as we move that business forward. So it’s just refining that’s our focus to the Gulf. And really focused — continue focus on low carbon products and the molecules that come from our legacy business are becoming more and more valuable. So we’re going to really dial that business in.

Amit Dayal: Understood Ben. Thank you so much. That’s all I have.

Ben Cowart: Thank you.

Chris Carlson: Thank you.

Operator: And our next question comes from Michael Hoffman with Stifel. Please go ahead.

Michael Hoffman: Hey team Vertex. Thanks for taking the call. And I echo everybody’s comments. It’s nice to see this plant at its strides for you given some of the pumps initially. You have a working capital arrangement — sorry Ben go ahead.

Ben Cowart: I just want to thank you. You’ve been here a long time in fight with us. So I was looking forward to sharing this moment with you and appreciate all the work you’ve done.

Michael Hoffman: Yeah. It’s been 15 years, Ben.

Ben Cowart: Yeah, I was — so go ahead with your question. I apologize to interrupt.

Michael Hoffman: Okay. No, not at all. You have a working capital arrangement with Macquarie that hasn’t kicked in yet. What needs to happen next for that to kick-in? And then when it does some of that 75 — of the $85 million net proceeds, you’ve got $74 million you’re using for working capital. Can I peel that back and that goes to paying down more debt and get some more of that 15% money off your balance sheet?

Chris Carlson: Yeah. Hey Michael, it’s Chris. So yeah, we’re — I mean we’re in probably the 50-yard line of working through the next agreement with our lenders for the soybean oil products. It should be a lot simpler than the first one. As far as cash, once we get into that deal, yes, we will have a little bit more cash that will come back to us. And the use of that are going to be to continue to finish out the RD project, which is almost done. And then as noted, we’ll focus on a healthier balance sheet and we will look at opportunities where we can to reduce debt.

Michael Hoffman: Okay. I mean at 15%, you’re really in the cost of equity territory. So it would be nice to see that come down. Q-on-Q sequentially from 3Q to 4Q, there’s a $34 million reduction in inventory. Can you talk us through what was going on there? And what should we see as the trend for 1Q versus 4Q?

Chris Carlson: Yeah. The real story there in the inventory is the value. The cost of the commodities, Brent, diesel, et cetera came down what $10, $15 a barrel. So that, obviously, reduced the financing requirements quarter-over-quarter?

Michael Hoffman: Okay. So it wasn’t a drawdown on it as well physically, so actual volume drawdown. So total volume is consistent just the underlying mark-to-market has changed.

Chris Carlson: Yeah, it’s just the dollars involved. That’s right.

Michael Hoffman: Okay.

Chris Carlson: You’ll see that laid out commodities go up and down.

Michael Hoffman: Okay. And then you alluded to the press release, you put boiler point in about hedging not currently hedging today, but future could. But I presume you would approach hedging differently than you did last year for the second and the third quarter. Could you talk a little bit about if you did it, how you would think about it? And what sort of the approach you would take if you chose to hedge?

Ben Cowart: Yes. I’ll take that question Michael. Keep in mind, there are certain things like Chris mentioned on intermediation that is just normal housekeeping with inventory that’s really not what was reflected in our second and third quarter hedge decision. We were hedging the crack spread. So when you look at that 211 crack spread we were locking that in for the purpose of protecting the limited cash we had and making a safe passage to our RD project and delivering long-term on what our goals and objectives were. Obviously hindsight is always 2020 and we clearly see that for what it is. As we look forward, we have the capacity in the company and the credit capacity to hedge as necessary and we have a team and a deep bench today that looks at the market and looks at what our exposures are and we’ll make those decisions as we go.

We believe as we indicated that the market is very strong for our business in the foreseeable future, and we’re going to maintain the exposure to the market. I think, our shareholders have kind of expressed where they’re head on that. So we hear them loud and clear, but we will also be diligent to be looking at things that other people may not see and protect our margin as we go.

Michael Hoffman: Okay. Fair enough. And then where do you stand on feedstock arrangements? April literally is around the corner. You stat your fingers it’s going to be here. So what’s the status of feedstock to support production through the facility?

Ben Cowart: Yes. And so Bart Rice is here we’ll have him, but I’ll talk about operation and let me talk more about who the suppliers not the supplier, but where we are. But we are already acquiring feedstock and getting them the third-party terminals in front of us. And Bart and his team has done a fantastic job securing those and I’ll let him speak to that.

Michael Hoffman: Thanks.

Bart Rice: Thanks. Hi, Michael. This is Bart Rice. The feedstock piece of the puzzle is the most important for our success. And we look at it as one of our most confidential important avenues as well. We have already lined up logistics with all the big ag companies and each of those ag companies have already shipped product to us. And we haven’t entained in storage in Mobile. We’ll be taking this feedstock by boards, by rail and some by truck. We’re going to focus a lot on some of the fats oils and greases that need to be preprocessed. They have the better CI score and when they extend more value to the company. But our logistics is the key to our success of the feedstock where east of the Mississippi River where we’ve got all the people that have historically been taking their feedstocks right past us to our competitors and they’re happy to find the home with Vertex now.

Michael Hoffman: Perfect. Very helpful.

Ben Cowart: Michael let me make a point here just for future reference as we move this business forward. And again, you’ve been involved with the company for a long time. So, feed origination is a strong point for Vertex. And it’s how we founded the company 22 years ago. So, we’re very excited about ability to move materials as Mark said ability to capture the right feed opportunities, negotiate that at ground level and then the geographic location advantage we have for a lot of feedstock will weigh in heavy. So, we’re very positive and bullish on the feed side of the business.

Michael Hoffman: Okay. And what I heard Bart say is there’s a focus on getting my words, dirty oils, preprocessed, that’s why you’re arranging these third-party preprocessing, but you will balance that with the cleaner soybean types as needed.

Ben Cowart: That is correct. We’re going to start up clean just for smooth operations and then we’ll start integrating.

Michael Hoffman: Okay. And then what did base oil selling prices do in the fourth quarter?

Ben Cowart: Yes, I don’t have that information. I’ve got–

Chris Carlson: It went down some, not base, but it did go down.

Michael Hoffman: Yes. Okay. Okay. And then just to be clear the question was asked earlier Vertex will seek to maximize and maintain an open profile of maximizing shareholder value. So, whatever the best way is to maximize shareholder value, you’ll do that; whether it’s sell it, keep it, and run it.

Ben Cowart: We have a whole value no difference than our renewable capacity we’re bringing online. We’re going to look at the best value we add to our shareholders as you said.

Michael Hoffman: And then lastly on the legacy — sorry go ahead No, no go ahead.

Ben Cowart: And the legacy business is no different than that. And we believe we got a line on how that will play out. But we — as we’ve handled inquires and things we continue to look at what’s in our best interest and that’s leading the decisions that we’ve made so far.

Michael Hoffman: Okay. Well, you anticipated my last question which is I would suspect given — you’ve got a great VGO business in Marrero, but there are other pieces of legacy that maybe aren’t all that relevant going forward that we could continue to see cleaning up of that portfolio and we may end up with just the Marrero processing that 60 million gallons of used oil in the VGO and tying that into the 20,000 barrels a day that you’re going to sell out of Mobile?

Ben Cowart: We will continue to look at each piece of the business with hold values that we’ve already started to assign to each one of them and the answer is yes. That’s going to be our approach.

Michael Hoffman: Okay, cool. Thanks for making the time for me.

Ben Cowart: Thank you, Michael.

Operator: And our next question today comes from Eric Stine of Craig-Hallum.

Eric Stine: Good morning. I’ll just sneak with you here at the end.

Ben Cowart: Good morning Eric.

Eric Stine: Hey good morning. I’m hoping we can go back to capture rate. And I can appreciate first quarter obviously, with the hydro treater offline or is part of the RD expansion. But I know you don’t guide but any thoughts on what we should think about for the capture rate in 2Q and beyond?

Chris Carlson: I think the best way to think of it is we’re not going to be €“ even though our crude rate may be slightly higher, it will not be that much different than it is today in the first quarter that we provided guidance on. We will continue to try to creep the capture rate. However, that €“ if you had asked me, I would tell you would be in that the range of where we are for the first quarter for the rest of the year.

Eric Stine: Okay. And then maybe just longer-term I mean, where can that go obviously, we saw it in this quarter and the capture rate is a huge driver not necessarily by the end of 2023. But as you look longer-term for this business, where do you think that can go? And what are some of the steps that you might take to get there?

Chris Carlson: Yes, that’s a great question because one of the things that we’ve really unlocked at Mobile is the ideas that our people have had there to improve the profitability of the site. And so far every single time that we’re there, they’re looking at what the next opportunity is and where can we do that cost competitively. I would tell you that we are right now I can’t even predict it because I see some projects in front of us that may take us several years to go execute. But they will continue to creep that. My goal is to recover back to where we were in the fourth quarter and beyond and I see that coming from the people. They have been sitting there in a site that was not strategic to now being in a strategic site with a lot of focus in an extremely strong market. And they’re coming forward with ideas daily.

Eric Stine: Got you. Very helpful. I guess I’ll take the rest offline. No need to ask five, six questions. Thank you.

Chris Carlson: Thank you, Eric.

Eric Stine: Appreciate all your work Bart.

Operator: Thank you. And our next question comes from Noah Kaye with Oppenheimer. Please go ahead.

Noah Kaye: Hey, good morning. Thanks for taking the question. Echo that the comment from other really nice quarter, great to see the execution here. With the R&D conversion time table on track, I know we got to walk before we run in terms of standing that up. But have seen a number of other projects in the industry doing a sustainable aviation fuel conversions. And so maybe can you just talk a little bit about the technical feasibility of doing a SAF project at this refinery? How much you’ve looked into that? And when you might think about actually doing a project of that nature.

Ben Cowart: Yes. We’re €“ let’s just put it straight. We’re very interested in the SAF. We’re really trying to see what’s the best path forward for us, understanding the economics, what is the impact associated with the RA? And as we analyze, what’s the best path forward for us, what has the lowest capital with the highest return. What can we use that we can either bolt-on to the RD project or the standalone project. And we’re not prepared for that conversation yet, we are very early in it. But you can €“ as you can guess from the conversation, this is something that’s on my agenda and the team’s agenda to help determine the best path forward for us.

Noah Kaye: Very good. We’ll, stay tuned for more details on that. I want to go back to Michael’s question earlier about hedging. I thought it was a thoughtful response around, how you’re approaching hedging. But what do you anticipate maybe articulating kind of a standing profile or cost share for the company on a go-forward basis? Is that something you might actually be able to communicate to investors, either we will hedge or we will hedge x-percent of our exposure? When do you think you might be able to kind of communicate that clearly to folks?

Ben Cowart: Yeah. I can give you a base for today, as we move forward. And it’s pretty straightforward. We’re going to do right by protecting our inventory for market exposure. So there’s always going to be paper around that. That’s just standard operating procedures. And then, we have a team in place with the ability to hedge, with a much deeper view of markets and cracks and a lot of outside consulting that we’d look to. So we are going to work hard to protect our margins and provide the upside exposure to the market for our shareholders. So if we see that turning, then we have the tools to make decisions at that point in time. But as of today, as long as our team has the view that we have we’re going to keep our exposure on the crack spreads and make sure that we can deliver that back to the shareholders. But we are in a position, if things turn, to protect that margin.

Noah Kaye: Okay. Great. Thanks, Ben. I’ll take the rest offline.

Ben Cowart: Thank you, Noah.

Noah Kaye: Thank you.

Ben Cowart: Appreciate it.

Operator: Thank you. And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back over to management, for the closing remarks.

Ben Cowart: Thank you, Rago and thank you everybody for the time joining the call today. We’re very proud of what our team has accomplished. We look forward to our next call. It shouldn’t be too long. And we will be available if anyone has any questions. You can reach out through our vertexenergy.com so that we can provide more comments and answers if there’s anything else that we had covered today. Appreciate you joining in.

Operator: Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines. And have a wonderful day.

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