Shares of Vertex Energy (VTNR -0.62%) shot through the roof on Wednesday morning, trading 18.5% higher as of 12:15 ET, after popping 26.4% earlier in the day. Thanks to a massive analyst upgrade, today's surge pushed the micro-cap energy stock into small-cap territory yet again.
Vertex Energy is a specialty refiner and marketer of petroleum products, as well as one of the largest processors of used motor oil in the U.S. Shares have struggled ever since the company announced plans to raise debt worth $155 million in October. It later reported strong growth in net income for the third quarter, but the market couldn't see beyond the massive debt offering that was equivalent to nearly half of what was then the stock's market capitalization.
Not surprisingly, the market is reacting strongly to an analyst seeing more than 160% upside in Vertex shares. Yes, you read that right.
This morning, analyst Manav Gupta at Credit Suisse initiated coverage on the stock with an outperform rating and a price target of $13 a share, representing nearly 164% upside from Tuesday's closing price. As of this writing, Vertex is trading at around $5.80 a share.
Gupta is excited about Vertex's upcoming transformation. The company is trying to sell its core used motor-oil and recycling assets to Safety-Kleen and become a renewable diesel producer by acquiring Royal Dutch Shell's refinery in Mobile, Alabama, for $75 million by early 2022. Gupta believes Vertex's plan to move into renewable energy offers "significant earnings growth potential" as well as opportunities to expand further.
Gupta further estimates the company's renewable diesel business could generate earnings before interest, tax, depreciation, and amortization (EBITDA) of $195 million once the Mobile refinery reaches its target production capacity of 14,000 barrels per day by mid-2023.
I second Gupta's views that a move into renewable energy is a smart strategy that could change Vertex's fortunes. The company already raised $133.9 million ($155 million minus offering and agent fees) in November.
I still would not get too excited yet about the stock for a couple of reasons. First, the amount Vertex has raised is still not enough to fund its Mobile refinery acquisition, and it intends to raise another $250 million in secured and working loans to fully fund the acquisition and consequential capital expenditures on the refinery. Meanwhile, its plan to sell existing assets to Safety-Kleen is yet to clear major regulatory hurdles.
So even if Vertex Energy can acquire the Mobile refinery as planned, it could still be a debt-heavy company, and that's something investors should bear in mind.