Member Q&A: Rentech

Q) What is your opinion of Rentech (RTK)?

A) Rentech is a small-cap company that operates in two segments: fertilizer and alternative energy. The company produces nitrogen-based fertilizer made from natural gas, which it sells across the Midwest. It generally funnels the cash flow from this business into its alternative energy business where it is developing a plasma based gasification system to convert fossil, biomass, and waste materials into synthesis gas, which in a second step are then refined into clean burning fuels, including military and commercial jet fuels and ultra low sulfur diesel.

The company has two development projects: one in Rialto, California and one in Natchez, Mississippi. The Rialto Project when finished is expected to convert biomass and fossil fuels into 600 barrel/day of liquid synthetic fuels and 35 megawatts of electric power. The Natchez Project, meanwhile, is anticipated to produce 30,000 barrels per day of synthetic fuels and 120 megawatts of power. Neither project has secured construction financing.

Some analysts have questioned the Rialto Project, believing it has marginal economic returns unless gasoline prices are very high. They also feel the process is unproven, and relatively risky. In December, the company projected a 30-year unlevered after-tax internal rate of return of 11-15% on the project.

The Natchez project, meanwhile, has signed a memorandum of understanding with 13 domestic & international carriers for the project’s entire jet fuel production of 250 million gallons/year. Rentech has also signed long-term contracts to sell captured C02 from the project for use in enhanced oil recovery in the Gulf. The project is projected to come online in 2014. In a December interview on CNBC Rentech CEO D. Hunt Ramsbottom said that the price of the fuel from the project would be “competitive” with jet fuel prices.

For its fiscal Q2 ended March 31st, the company saw its revenue rise 14% to $19.2 million, helped by increased ammonia volume in its fertilizer segment. Its net loss was -$16 million, or -7 cents per share, versus -$25 million, or -15 cents per share, a year ago. Adjusted EPS was a loss of -6 cents.

The company ended the quarter with $70.4 million in cash and $100.3 million in debt.

“The synthetic fuels produced using the Rentech process are ready for commercialization; they are drop-in high-value jet and diesel fuels that can be produced economically and at large scale, the only alternative fuel type certified for commercial aviation and also the United States military,” Ramsbottom said on the conference call. “These low cost feedstocks that do not compete with food and have a lower carbon — have a lower regulated emissions and carbon footprints than petroleum based fuels.”

“Since the acquisition of SilvaGas, we’ve developed four distinct product offerings for project development in North America and licensing worldwide. Product number one, what we call repowering boilers. Our Rentech-SilvaGas gasifier can replace the coal input at existing coal-fired boilers to produce renewable power, helping producers meet their renewable mandates and reduce emissions. Product number two, standalone biomass-to-power. Our Rentech-SilvaGas gasifier combined with a gas turbine can produce renewable power at brownfield and greenfield sites, this technology offering efficiently uses biomass and reduces emissions. Product number three, biomass-to-fuels and power. Our Rentech-SilvaGas gasifier and the Rentech Fischer-Tropsch process integrated with our Proprietary Gas Cleanup Technology can produce low-carbon, synthetic jet or diesel fuel and base load renewable power. Our Rialto project in California is a great example of product number three.”

“Product number four: fossil and biomass-to-fuels and power. Using commercially available coal or petrol gasification with our Rentech’s SilvaGas and Fischer-Tropsch technologies, we can produce ultra-clean jet or diesel fuels on a large-scale from combination of fossil and biomass resources. With carbon capture and sequestration, our fuels have a carbon footprint significantly better than petroleum. Our Natchez project is an example of product number four.”

BMR Take: At this point, Rentech is a highly speculative stock that is a bet its alternative fuel technology will eventually take off. The prospects for its Natchez Project look decent, but with the fuel not projected being cheaper than jet fuel, it certainly isn’t a slam-dunk; after all, while the airlines may want to be environmentally friendly, it’s a difficult industry that struggles turning a profit. Meanwhile, we’ve never found the nitrogen-based fertilizer business particularly attractive, and Rentech has the disadvantage of being a smaller player who sells its production to a competitor to distribute.

In addition, Rentech is facing a class action lawsuit after it had to restate its earnings for 2008 and 2009, and is facing a large amount of potential share dilution with recent actions such as issuing convertible notes and warrants, restricted stock awards as part of the SilvaGas acquisition, and an equity distribution agreement with Knight Capital.

The stock is best suited for only the most aggressive investors.

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