Avyuk's Website

APRN, DO, VTNR

6 min read

Summary

APRN, DO, VTNR are all interesting ideas. Looking to buy APRN if it falls to 5-10 range (unlikely tbh). Pretty much a special sit with super lucky Mobile acquisition. Not asymmetric at $15-20 imo.

APRN - Blue Apron Holdings

Thesis

Blue Apron is a POS company. To borrow from the KEDM discord, APRN nukes capital. They are a capital destruction machine. That said, any asset is a buy if the price is compelling enough.

APRN’s Linden, NJ 500,000 sqft fulfillment facility is probably worth around 100 million (remember, this is depreciated…). Side note: Linden facility was featured on History Channel’s Modern Marvels…

APRN also has 100m, but APRN’s market cap is closer to $90m.

Right Tail

Downside protection established, let’s talk about upside potential. I am highly skeptical the following scenarios play out, but if you can get them for free, why not take a position?

  1. Joe Sanberg pulls off a miracle. Blue Apron is Joe Sanberg’s personal passion project. He has injected tons of capital into the company and believes Blue Apron is a 12/share (Blue Apron shares were trading at $3-4 at the time). Note Sanberg backstopping APRN is another form of downside protection. If Sanberg can shift sentiment on APRN and clear a path forward, it could catalyze a multiple re-rate (APRN is heavily discounted vs peers like Hello Fresh).
  2. Food inflation. Interesting thesis point borrowed from Citron research - grocery stores are 3-4 steps separated from producers where as APRN sources direct - means their prices are cheaper. If food prices start getting crazy (which I believe they likely could), could it lead to a resurgence in meal kits? Why buy expensive groceries when you can get legit meals for cheaper delivered to your door?

Risks

Take a peek at APRN’s investor presentation - it will make you audibly groan. Consistent talk of increasing metrics on a per customer basis but no discussion of how they’re planning on improving customer retention or acquiring new customers. Misleading metrics all over the place, like lifetime customers out of context (5.3 million customers since inception… but only 350k stuck around?).

You cannot trust this company on fundamentals. You cannot trust them to allocate capital properly. This is a company you buy only if you are very confident there is a lot of downside protection, and even if there is, keep it a small position.

Useful Sources

DO - Diamond Offshore

Thesis

DO should benefit from rising floater day rates and inflection in offshore. They own 4 drillships, 9 semisubs (3 are cold-stacked) and have about ~200m in net debt.

Their contract backlog mostly rolls off towards end of 2023, but after that they could generate $500m-800m+ in mid/peak-cycle EBITDA. They are currently FCF negative but that will change soon.

They are trading well below fleet replacement value of ~$2B (conservative estimate).

I think it’s likely they get bought — expect a wave of consolidation across the offshore sector.

Risks

  1. Balance sheet is not 100% clean, still have decent amt of debt.
  2. Just coming out of bankrupcty — may be a few more waves of forced selling from creditors, though I feel this is unlikely.
  3. Uncertain about how DO will allocate capital. Last cycle, offshore drillers blew capital on new ships at the top — though I think they will have a tougher time building rigs (again, ESG), I don’t trust their capital allocation especially since they are just coming out of bankruptcy…

Other Thoughts

  • Solid exposure to a quality deepwater fleet here - can it effectively hedge jackup exposure when buying VAL?
  • The warrants are expensive - is that a leading indicator of price action?

Useful Resources

  1. Substack Writeup
  2. Seeking Alpha Writeup
  3. Fleet Report

VTNR - Vertex Energy

Thesis

VTNR purchased the Mobile refinery from Shell in a forced sale for 20,000-25,000/barrel price, the refinery is worth somewhere between 1B and it is net cash. Mobile + clean B/S provides decent downside protection.

  1. Refineries are scarce assets. Refineries are already running at ATH utilization rates. Nobody wants to build them because of ESG and reopening refineries is a complex process — supply constraints will likely continue while demand stays steady absent a recession. ESG induced supply deficits: this is the 2020’s playbook.
  2. VTNR trades at a cheap multiple relative to other refiners - 3-4x earnings vs 8-10x for most competitors. Multiple re-rate implies an immediate 2-3x bagger.
  3. With crack spreads at ATHs, VTNR is printing cash. FCF yield of 25-30+%. Valuation model assumes crack spreads stay high but start dropping through end of 2023, then revert immediately to 5-yr trailing average. This isn’t a directional bet on crack spreads

Risks

Crack spreads could (and likely will) fall through. Biden administration is focused on refineries issue (see here), though it’s not clear how much the White House can really do. As mentioned above, Mobile refinery should still print decent FCF at lower crack spreads.

There’s always a risk of a natural disaster, especially hurricanes in the GOM — if that decimates refinery capacity that means crack spreads and utilization stay high, but if it takes out Mobile refinery that’s a left-tail risk.

Technically VTNR share price is overstretched and the stock has high SI. Some have written SI is primarily bondholders hedging. These could cause short-term pain but don’t impact core thesis.

Vertex was a highly asymmetric play at 15-20. Proceed with caution.

  1. Sankey research on refiners
  2. VTNR Valuation
  3. Twitter dude with great VTNR DD
  4. VTNR Q122 Release + Guidance

Other

Note the high volume of ITM/ATM calls being bought on a daily basis. Many suspect this is large instutions building positions on the DL as they start to initiate coverage of VTNR… it’s bullish.

Major insider cut stake from 40m recently. I don’t read this as bearish - just taking profits on a solid gain.

Graph View