Vertex Energy - Not What I Was Hoping For

Well, this morning I took the loss on my Vertex position.  It was an ~10% loss on my cost basis of around a 12% holding. Why? I was operating under the assumption that the messaging from the past 3-6 months (reducing leverage, lowering interest rates on debt) was the corporate priority for Vertex. I expected an announcement in January on the term loan - my expectation was a refinancing, maturity amendment, or early pay down. Instead, we got this:

The amended term loan provides for an incremental $50.0 million in borrowings to Vertex, the full amount of which was borrowed upon closing, which brings the total outstanding balance on the term loan to $198.0 million. The amended agreement also bears interest at a rate of a base rate calculated as the greater of (i) prime minus 1.5%, and (ii) the federal funds rate (not less than 1%) plus 0.5%, plus 1025 basis points and includes no change to the previous duration of the term loan agreement due April 1, 2025. These amendments were pursued to support current operational and strategic needs as the Company continues to evaluate previously disclosed alternative options aimed at strengthening the Company’s balance sheet. The lenders also have the option in their sole discretion to provide up to an additional $25.0 million of lending availability under the term loan, subject to certain terms and conditions.

My operating assumptions based on company statements and the Q3 conference call were the following:

• The company hit an operating inflection point in Q3, showing profitability from the conventional refining
• The company hedged gasoline downside for Q4
• The company announced they were working with Bank of America (I assumed to refinance the term loan)
• The company would be reducing inventory in Q4, which would improve working capital
• The RD project was nearing completion, and capex demands going forward would be 50-75% lower than in 2022 and 2023

My assumptions may or may not be correct, but the company needing to borrow another $50M (increasing the term loan debt, which is at 16% interest, by another 30%) just doesn’t make sense to me.

I congratulate the shorts on this name and the skeptics. Owning 5% of US renewable diesel capacity and a profitable conventional refinery seemed (and still seems) like a very attractive proposition to me, but the announcement from Vertex today shook my confidence in management’s ability to deliver. Pre Mobile, Ben Cowart had a good track record, and I don’t think the company will go under, but if there is some greater good in adding 30% to a high interest term loan due in 14 months, I just don’t see it. Perhaps there is some hat and some rabbit that demanded $50M, and a miracle is forthcoming, but until I see the rabbit, I’m not going to believe it’s there.

For those who followed me on this one, I’m very sorry it hasn’t worked out. It still could, but I think we need to wait for signs of life first. A quote from Jesse Livermore:

A loss never bothers me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does damage to the pocketbook and to the soul.

This certainly doesn’t mean I think Vertex is a short. The short interest is very high, and that can lead to very volatile trading, as we saw last month with just a small amount of short covering. On the long side, after today’s announcement, I think it’s clear the opportunity may not be as good as I hoped.