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August 14, 2019

Volume 2 Issue 33

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Vertex-Tensile JV Boosts Rerefining Plans

Tensile Capital Management LLC formed a joint venture with Vertex Energy Inc., agreeing to inject capital that will accelerate development of Vertex’s Columbus, Ohio, rerefinery and help fund a pilot program at an idled site in Belle Chase, Louisiana.

The Columbus rerefinery, known as Heartland, and the Belle Chase site, known as Myrtle Grove, will be owned jointly by Vertex and a fund managed by investment firm Tensile through two newly created special purpose vehicles. A special purpose vehicle is a company subsidiary protected from the parent company’s financial risk, and it is often created for a limited business acquisition or transaction.

The company said Myrtle Grove is located on a 41-acre industrial complex along the Gulf Coast in Belle Chasse, with existing hydro-processing and plant infrastructure assets, which include 9 million gallons of storage.

The Tensile deal is structured into two distinct phases. Phase one, which closed July 26, places Vertex’s Myrtle Grove assets in Belle Chasse, Louisiana into a standalone special purpose vehicle. Tensile acquired a 15.6 percent acquisition in the special purpose vehicle for $4 million – paying $1 million to Vertex – purchased 1.5 million newly issued shares of Vertex common stock and was granted warrants to purchase 1.5 million shares of common stock for cash. This phase includes commencement of the pilot program. Upon its successful completion – expected during 2019’s fourth quarter and subject to Tensile’s option to move forward – phase two of the transaction would close.

Phase two would include creation of the Heartland special purpose vehicle, of which Tensile would acquire a 65 percent interest. Also included would be Tensile’s purchase of $13.5 million of interests from Vertex, which is expected to result in a $13.5 million cash infusion to Vertex’s balance sheet; and Tensile’s investment of $7.5 million in the Heartland special purpose vehicle – with the option to invest an additional $7 million.

Assuming the closing of Phase Two on or before Dec. 31 this year, Vertex plans to commence investment activities to expand the Heartland special purpose vehicle, which is expected to include new capital improvements in the rerefinery and expansion by the end of 2021 of the regional used motor oil collections operations that serve the Heartland rerefinery. According to the company’s quarterly earnings presentation, $22 million of cash from the JV would be available to fund development projects.

Erica Snedegar, manager of base oils and intermediate products for Vertex, said in a phone interview with Lube Report that the improvements at the rerefinery would focus on five aspects.

One is improved self-collection of used motor oil. “As opposed to buying from a third party, we’re going to improve our collection of used motor oil,” she said. “So we’re going to grow that portion of the business.”

Next is decoupling of the Heartland plant’s front end to increase the volume of used motor oil supplies it can take in. “If we do that, we also need to increase the back end, or the hydrotreating capacity,” she added.

Another is about efforts to improve continued ratability. She explained this means a continued focus on uptime and quality customers can continue to depend upon as a valued supplier.

Lastly, the company is working on developing niche markets for the Heartland rerefinery’s base oil in the lubricant business.

Vertex Chairman and CEO Ben Cowart spoke about the transaction during its second quarter results conference call on Aug. 7. Cowart said the company will continue to grow its used motor oil collection business while becoming a selective acquirer of other collection operations as well.

“The development of the collection business in the Heartland region will fall under the new joint venture with Tensile,” Cowart said during a conference call with analysts. “So we will have the capital, and that’s a big part of what our goals are for the Heartland growth over the next three years.”

Cowart described the Myrtle Grove site as “a long-term development opportunity for the company and our shareholders.” He noted that while Vertex will use some of the Myrtle Grove site’s pilot plant data at its Heartland facility, the biggest impact will be in terms of development at the Myrtle Grove site.

“We see a significant opportunity for Vertex to leverage their specialized expertise in their core markets and believe our financial support will help them to create meaningful value for all their shareholders,” Doug Dossey, managing partner of San Diego, California-based Tensile Capital Management, said in a July 31 news release. “We look forward to supporting the Vertex team as they transition into their next phase of growth.”

In August 2018, Vertex announced it would serve as marketer in the United States of API Group III base oils from Abu Dhabi National Oil Co.’s plant in the United Arab Emirates. Vertex is agent for Netherlands-based Penthol C.V., which is Adnoc’s distributor, and exports the base oils to the U.S.

In 2014, Houston-based Vertex acquired Heartland Group Holdings – owner of a used oil collection network and a 1,500 barrels per day API Group II rerefinery in Columbus, Ohio.

Heartland rerefinery

Photo courtesy of Vertex

Vertex Energy's Heartland rerefinery in Columbus, Ohio, has 1,500 barrels per day of API Group II base oil production capacity. A joint venture partnership with investment firm Tensile Capital Management is expected to help accelerate development of key improvements at the rerefinery.