Heritage-Crystal Clean obtained a required air permit this month to allow it to expand feedstock input capacity at its Indianapolis rerefinery by about 50 percent to improve profitability of its oil business segment.
The rerefinery now has capacity to recycle up to 50 million gallons of used oil and produce up to 30 million gallons of API Group II base oil, or about 2,000 barrels per day.
If and when we expand the input capacity to 75 million gallons per year, we would have production capacity of 45 million gallons of base oil, Heritage-Crystal Clean Chief Operating Officer Greg Ray explained to Lube Report.
Joe Chalhoub, Heritage-Crystal Cleans founder, president and CEO, said during a fourth quarter conference call Feb. 20 that the expansion would allow the company to improve the profitability of its oil business. The resulting increased profit would help us offset the reduced profitability caused by the compression of the lube-to-crude spread, he said.
The company announced the air permit in its Feb. 20 quarterly earnings release. Heritage-Crystal Cleans oil business, including oil collection and rerefining, posted sales of $33.2 million for the quarter ending Dec. 29, up 97.6 percent from $16.8 million in 2011s fourth quarter – at that time, the rerefinery was only producing intermediate products and byproducts.
For the full fiscal year 2012, oil business revenues reached $80 million, up 240 percent from 2011. The company doesnt break out net income for its oil business segment.
As a whole, Heritage-Crystal Clean of Elgin, Ill., reported a $268,000 loss for the fourth quarter, and $2.3 million net income for the full year.
Unfortunately, the downward trend in lube oil prices continued in the fourth quarter, and this led to our achieving lower revenue and profit than we had anticipated, Chalhoub said during the conference call. When we entered the oil business, we recognized we would be exposed to commodity price swings, and have ups and downs through the cycle. However, we believe the current base oil pricing and the resulting spread between crude oil and lube oil prices reflect conditions that are not sustainable in the long run for the virgin production of lube oil from crude. We remain confident that this is a good business that will provide attractive returns over the long run.
In Heritages fourth quarter earnings release, Chief Finanical Officer Mark DeVita noted the impacts of Group II pricing. In our oil business, the fourth quarter average spot price for Group II base oil declined by approximately 5 percent compared to the third quarter, DeVita stated. This deterioration follows a decline of approximately 10 percent from the second quarter to the third quarter. This trend negatively impacted our segment revenue and margin. The average spot price for Group II base oil declined further at the beginning of 2013.