August 29, 2019 - 11:36am EST by
2019 2020
Price: 9.00 EPS 0 0
Shares Out. (in M): 25 P/E 0 0
Market Cap (in $M): 222 P/FCF 0 0
Net Debt (in $M): 94 EBIT 0 0
TEV ($): 128 TEV/EBIT 0 0

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  • Specialty Chemicals
  • Non-Core Asset Monetisation
  • Management Change
  • Deleveraging
  • Duopoly


Trecora Resources has been written up on VIC twice before, by Saltaire in May 2015 and by Mitc567 in
Sept 2016. In the three years since Trecora was last written up, we believe the company has materially
increased its intrinsic value while the company’s EV is lower. We believe the business presents a
compelling entry point today because Trecora has finally completed a multi-year capex investment
phase and it has just begun to reap the benefits of those investments. Moreover, the new phase will be
led by Pat Quarles, a new CEO who was appointed last November, and we are optimistic about his
potential to strengthen the businesses and rebuild Trecora’s credibility. We currently value Trecora
Resources over 50% higher than its current valuation and we see multiple potential catalysts which may
unlock shareholder value over the next year.
The prior write-ups did a good job explaining Trecora’s business model and its competitive advantages
so we won’t go into as much detail on that front. We will be focusing on Trecora’s more recent
developments and the catalysts that we expect will unlock value.
Business Overview
Trecora operates two main business segments in addition to owning a 33% stake in a Saudi Arabian
mine. Trecora’s Specialty Petrochemical segment accounted for 87% of total sales in 2018 from their
South Hampton Resources facility and Specialty Wax accounted for the remaining 13% out of their
Trecora Chemical facility.
The Specialty Petrochemical division is located at the South Hampton Resources (SHR) facility in Silsbee,
Texas. SHR is one of the largest producers of high purity hydrocarbons which include pentane,
isopentane, hexane, and isohexane. SHR’s customers are large multi-national chemical companies who
use SHR’s products in the production process of polyethylene, polyurethane foam, polystyrene, and in
the Canadian oil sands. The Specialty Petrochemical division uses natural gasoline (distinct from natural
gas) as its feedstock which is sourced through a dedicated pipeline from Beaumont, Texas. About 2/3rds
of SHR’s sales are formula based which include a component based on the average cost of feedstock
over the prior month and the remaining 1/3 of sales are based on spot pricing. The company uses FIFO
to account for the cost of natural gasoline and the formula lags can cause profitability to bounce around
from quarter to quarter, but earnings usually normalize within a quarter. The Canadian oil sands
business is the largest end market by volume but it is much smaller by profit contribution. Our research
suggests that the polyethylene end market contributes the most profits, about as much as the
polyurethane and polystyrene end markets combined, and the Canadian Oil Sands business is smaller.
As highlighted in the prior write-ups, SHR’s products provide significant value for its customers. SHR’s
specialty solvents are mission critical in customer production processes and they account for a very low
amount of the cost of materials (less than 2% for production in polyethylene for example). It is
technically difficult or risky to try and substitute in other molecules. Additionally, many North American
polyethylene plants use Univation technology in their production and we’ve been told manufacturers
would lose their license to operate Univation if they used anything other than isopentane as a
condensation agent. One notable difference with SHR’s business today compared to SHR several years
ago is the current sales mix has a much larger exposure to stable end markets. Canadian Oil Sands is
Trecora’s most volatile end market but its exposure has declined as the price of oil has fallen since 2015.
The industry structure for SHR’s specialty petrochemicals is a duopoly and P66 is the only other company that
makes high purity pentane in North America. They compete largely on reliability since the solvents are
mission critical and the costs are relatively insignificant compared to the value they add. We’ve heard
that SHR has a reputation for being a reliable supplier despite the operational difficulties they faced in
2018. Market share has been stable and we don’t expect that SHR will take or lose a lot of share with
P66. We’ve been told it isn’t in either Trecora or P66’s interest to compete for share by driving
utilization higher because it would simply drive down prices which would hurt both. Additionally, the
market share is stable because it requires a technological change to switch from the pentane of one
producer to another. An opportunity for share shifts occur if either SHR or P66 struggles to provide
reliable service in which case the competitor may make a play for the other’s business. We’ve been told
that SHR has strong customer service, typically responding to customer requests within 24 hours
compared to weeks for P66.
Trecora’s Specialty Wax segment is located at the Trecora Chemical Inc (TC) facility in Pasadena, Texas.
TC produces specialty waxes that are used in coatings, inks, and adhesives. Historically, TC secured its
raw wax input from two companies that produced it as a waste product. With a limited amount of raw
material in North America, this business does not have a lot of competitors. Trecora even has an
exclusive relationship with one of its two suppliers. However, in 2018 they hit a bottle neck with their
feedstock supply which required them to develop the ability to make “on purpose wax”. In recent
months, Trecora has been qualifying these new on purpose streams which will allow for volume growth
in coming quarters and are expected to add mid-single-digit millions of EBITDA over time. In this same
segment, TC also provides custom processing services which is a smaller separate business located on
the same site. Custom processing provides customers with a range of offerings including the synthesis,
hydrogenation, and distillation of custom products for chemical and industrial customers. The custom
processing segment was unprofitable in 2018 because it was hindered by operating and reliability issues
related to its hydrogenation/distillation unit which came online in 2017.
Trecora owns 33% of the Al Masane Al Kobra mine (AMAK) in Saudi Arabia. The mine was shut down
several years ago but was recommissioned in 4Q17 and has since been successfully extracting cooper,
zinc and silver in addition to smaller amounts of gold and silver. For years, investors were waiting for
AMAK to IPO in Saudi Arabia but this never materialized which contributed to investor fatigue. Trecora
finally decided to pursue a sale of its stake in AMAK and has hired an investment bank. We’ve been told
the bank has relevant expertise in both mining assets and the Middle East. The most likely buyer may be
a new Saudi investor or an existing shareholder and the company may break up its stake and sell it to
multiple parties. In 2016, AMAK issued equity to one of its current shareholders, ARMICO, at a price
that would value Trecora’s stake at $130m. Since that 2016 reference price, the market value of the
mines copper, zinc, and gold reserves have all appreciated except for silver. But the book value of
Trecora’s stake is around $45m dollars which is where we feel comfortable valuing it. We believe that
Trecora’s ownership of AMAK has been a frustration for existing shareholders and a deterrent for
potential new investors. Divesting the AMAK stake will allow Trecora to delever their balance sheet and
we believe it will make the company more attractive to new investors.
Why Now?
Trecora’s shares have underperformed in recent years while undertaking its $100m multi-year growth
capex cycle which faced significant delays, cost overruns, and operating issues. The capex projects are
now up and running and we believe Trecora has finally reached an inflection point where it is beginning
to see returns on its investments. Trecora’s enterprise value is lower today compared to where it was in
2016 but we think Trecora’s intrinsic value is even higher now with $100m of new equipment. We
believe that the appointment of Pat Quarles is positive and we are optimistic about the ongoing process
to sell Trecora’s stake in AMAK.
We believe most of Trecora’s struggles are now behind them. Trecora built out a new D-Train in
anticipation that $100 oil would lead to increased demand from Canadian Oil Sands. That proved to be
a mistake as much of the Oil Sands business has gone away, but now expectations have been reset.
Trecora’s prior CEO initially sold investors on big growth to come from new capex projects but investors
lost confidence due to delays, cost overruns, and operational problems. The advanced reformer was the
biggest capex investment which was expected to come online mid-2017, it was delayed till the end of
the year, and then faced several reliability problems through 2018 which cost Trecora time and money.
As of January 2019, the advanced reformer has been reliably processing the byproduct stream which has
been making a noticeable impact on earnings. Several years ago, the investment story was largely a bet
on Trecora’s ability to build out these growth capex projects which involved a sequence of stumbles.
Today, the heavy lifting has been completed and these projects are finally beginning to generate
earnings, but the market still gives no more credit to Trecora’s valuation than it did three years ago.
Pent up investor frustration led the board to appoint Pat Quarles as the new CEO. He shortly purchased
$1m worth of shares on the open market which is important to us as we like to invest with CEOs who
have skin in the game. Pat came to Trecora from division leading roles at Celanese and LyondellBasell
where, based on our research, he developed a reputation for being a strong performer and for being
credible, which is important for Trecora. Based on Pat’s early traction, we believe Trecora’s main
specialty petrochemicals division is on track for substantial EBITDA and FCF growth. The segment
earned $37m of EBITDA in 2017 which fell to $23m in 2018. Pat quickly got to work in 1Q and 2Q19 and
the company showed material growth versus the prior year and outpaced the targets it set to
accomplish by the end of the year. In 2Q, the company reported EBITDA of $9.2m which beat consensus
by 50% showing how low expectations are for this company and that Pat is building credibility.
Compared to the prior CEO, it seems that Pat has been careful with setting expectations to make sure he
can achieve the targets he sets.
Pat has discussed further growing profitability by improving reliability of the new equipment and
through cost reductions at SHR. The advanced reformer operated smoothly in Q1 and Q2. While we
believe Trecora’s current profit goals for the company are modest, we expect Pat will soon set larger
goals, possibility at an Investor Day during the first half of 2020. With potential for improvement at SHR
and more focus on commercial excellence which will help volumes and price. Since the advance
reformer began operating in January, TREC has produced $42m of run-rate EBITDA out of SHR and we
believe Pat’s two initiatives can generate at least $3m EBITDA each which gets us to $48m in SHR. With
a strong position in a duopoly and a diverse mix of end markets, we believe Trecora could trade at a
premium multiple. But until they show consistent execution, we are applying a discounted multiple to
our comp set of 10x EBITDA-capex. Our comp set trades at a median of 12.5x and includes Canadian and
American specialty chemicals companies with an EV between $100m and $2b.
In contrast to SHR which has been profitable, Trecora Chemical has been struggling. However, the TC
includes both the stronger specialty wax business and an unprofitable custom processing unit which is
really a separate business despite being located at the same plant. We estimate the wax subsegment
generated $5m in EBITDA in 2018 and we are underwriting an incremental $3m in EBITDA once the new
on purpose wax streams are qualified. The custom processing business has been struggling and is
lumped into the same division which masks the strength of the wax business. The whole unit is
currently unprofitable providing about a $5m EBITDA drag. Turning this business around will be difficult
but at the very least, management should be able to curb much of its operating expenses if they don’t
see a path to profitability. The wax division is more challenging so we expect Pat Quarles will begin
speaking to discuss a turnaround strategy within the next 6 months.
Lastly, Trecora shares are also face an overhang from its largest 11% shareholder slowly selling shares. Al
Athel Fahad Mohammed Saleh still owns 2.6m shares and sold over 350K shares in Q2, accounting for
more than 10% of the total trading volume. Our understanding is that he is not in touch with company
management and that he is selling to free up liquidity rather than for fundamental reasons. We’ve
heard that he is potentially interested in selling through block trades. We are optimistic that if he can
reduce his stake another significant overhang will be lifted off Trecora.
Trecora Sum of the Parts 2020 EBITDA Mutiple Value
Specialty Petrochemicals 48 10x 480
Specialty Wax 8 10x 80
Custom Processing     25
AMAK Mine     45
Corporate (9) 10x (90)
Capex (10) 10x (100)
Total 42   440


Enterprise Value 440
Net Debt 94
Equity Value 346
Diluted Shares 24.7
Price Target $14.00
Trecora Price $9.00
Upside 56%


Trecora’s Specialty Petrochemical division generated $21m EBITDA in the first 6-months of 2019, a $42m run-rate. With additional cost cuts and improved reliability, we think Trecora could get the segment to $48m. We’re giving SHR credit for further operational improvements and some pricing but not a material increase in volume even though there will be some polyethylene plant starts in the US in 2019/2020. Specialty wax (excluding custom processing) is generating about $5m today but once the new wax streams are qualified, they will be at $8m in 2020. Custom processing is currently unprofitable so we use a $25m value which is the cost of hydrogenation distillation unit recently installed at TC. AMAK of course is valued at book value but has room to positively surprise.

If we add the parts together, we estimate the business is worth about $14 per share, representing over
50% upside, and we believe it will continue to grow in value. With numerous catalysts within the next
12 months, we believe Trecora presents a timely and attractive investment opportunity.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Monetization of Trecora's stake in AMAK Mine

Sheikh Fahad Mohammed Saleh Al-Athel (11% owner of Trecora) executes a large block trade or reduces his selling pressure

Continued execution of reliability and cost cutting plan

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