Liquid Coal: Four Stocks To Watch

You are at a cocktail party somewhere, and, after joining a random group of revelers, you utter the following words: “If I say alternative fuel, what’s the very first thing that comes to mind…don’t even think about it, just answer!” If this fiesta was taking place last night, 9 folks out of 10 would have answered “ethanol”. The remaining 10% would have probably made-up a mix-bag of “biodiesel”, “hydrogen”, and, in extremely rare cases, “synthetic fuels”, also known as synfuels. Ten years from now, I bet you anything that far more than 10% of the general public will be thinking synfuel when they hear the words "alternative fuel".

Synfuels are liquid fuels made from coal, natural gas or biomass. They can be used to power the same kind of applications that currently utilize gasoline or diesel, most notably cars. Today I want to focus on one particular sub-type of synfuel - namely coal-based synfuel or coal-to-liquids [CTL]. A Reuters article on CTL hit the mainstream newswire on Monday, casting some light on this little-known-yet-promising fuel source.

Investing in CTL: 4 Things You Should Know

The aim of this post is not to go over the whole process behind making CTL, thus me providing some links above for those who are curious about the science behind CTL. What I want to do here is to give you nuggets of useful information that will provide a good starting point should you decide to look at this seriously as an investment option. Here are 4 main things you should know:

1) There’s lots of coal around. The Energy Information Agency [EIA] estimates that, at the 2002 production rate, there’s about 200 years worth of coal left in the global ground; 26% is in the US, 23% in the Former Soviet Union and 12% in China. Like oil, recoverable reserves will likely increase as new extraction processes are brought on stream. However, like oil, production rates are going to increase massively as demand from booming economies like China and India picks up.

2) Estimates of crude oil price floors required to make CTL operations in the US profitable differ. Estimates typically range from $40/barrel to $45/barrel. You thus have to be an energy bull to want to invest in CTL in the US. Apparently, the Chinese are running operations that are economical at $25/barrel.

On a related note, I recently came across an interesting article in the September 2006 edition of Chadbourne & Parke’s Project Finance Newswire (PDF, see article on p. 24) discussing, among other things, the energy price risk associated with investing in CTL from a project finance standpoint.

3) CTL fuel burns much cleaner than conventional fuels, as a lot of the dirty stuff is removed during the production process. This means that, under certain favorable regulatory scenarios, CTL could hold some form of a ‘clean’ premium over gasoline at the pump (e.g. lower taxes). However, producing synfuel from coal generates large amounts of carbon dioxide, and carbon dioxide could become regulated at the federal level before most proposed US CTL operations are fully up-and-running. This could add certain costs at the front end of the production process that would nullify back end benefits.

4) Politicians and the military like CTL. I won’t discuss the military as I don' know too much about it, other than the fact they have been running some tests and seem to like the idea of not having to rely on hostile countries to power their fighter jets.

Politicians like CTL for the same reasons they like ethanol: (a) there’s a rural job-creation angle in an industry otherwise seen as on the wane, (b) it’s an easy sell to voters concerned about the security implications of sourcing a large part of America’s energy from unfriendly nations, and (c) soft environmentalists, under the right conditions (e.g. carbon capture at CTL plants), will embrace CTL because of its overall cleaner profile. If you want specifics on the existing and proposed government incentives for CTL, go to the EIA’s most recent Coal News and Markets page and scroll down to the section called “Coal Technology” towards the end. Under the sub-heading “Coal-to-Liquids Project Financing”, there is a short discussion on this topic (sorry for not being able to provide a direct link to the section, the page doesn’t allow for it).

Four CTL Stocks

The article on CTL discussed initially lists 3 companies who are banking on a bright future for coal-based synfuel: Headwaters (NYSE: HW), Syntroleum Corp (NASDAQ: SYNM), and Rentech (AMEX: RTK).

Of the 3 companies, Headwaters is the only one with positive earnings, although I suspect it’s not from its CTL operations. The stock has had a terrible year, and it is currently trading down about 40% from its 52-week high of $40.19. Earnings year-on-year are down nearly 38%. Nevertheless, analysts covering the stock seem confident that 2007 EPS will be markedly higher than 2006 EPS.

Syntroleum Corp hasn’t exactly had a great year either, and analysts don’t expect the firm to become profitable for a few more years. Syntroleum is the company with the most important exposure to the military.

Rentech is the company I am most familiar with, as I seriously investigated it as a potential investment last summer. In the end, I decided not to buy at and I’m happy I made that choice. Rentech has a very interesting project pipeline, and is probably the closest thing to a CTL pureplay there is. I might look it again in the near future.

After deciding not to purchase Rentech, synfuels fell off my radar screen, and with good reason. There hasn't been an exciting synfuel story yet, and investor attention (but not mine!) has been squarely on ethanol. I must say that reading that article has rekindled my interest, and CTL is definitely something that I'm going to start paying more attention to.

To conclude, if you want a good, safe way to get some exposure to CTL, have a quick look at the South African company Sasol (NYSE: SSL). When South Africa was under a trade embargo because of its apartheid regime, Sasol perfected CTL technology to keep South African cars running, and the company is now busy developing that side of their business in places like China.

Comments

[Jason Hamlin:]

More details on Sasol (SSL) as an investment option...
www.goldstockbull.com/.../

2007 Oct 03 09:38 PM

[Jason Hamlin:]

More details on Sasol (SSL) as an investment option...
www.goldstockbull.com/.../

2007 Oct 03 09:38 PM

[User 175700:]

I have read that the production of liquid coal produces twice as much CO2 as oil refining, and the same amount as gasoline when burned as a fuel. Considering that we will have CO2 caps in the next 10 years, wouldn't this be a very bad investment ? Read my blog on this topic: Liquid Coal Concerns

2008 Apr 09 01:42 PM

[Doctor Alpha:]

Alternative Green Energy is the Future. Rentech (RTK) Significant Announcement on the Horizon

Company: Rentech

Ticker: RTK

Company Snapshot: Rentech is composed of two business segments each focusing on a major global issue, alternative green energy and fertilizer production. Rentech’s alternative energy segment is one of the world's leading synthetic fuels technology and development companies. Over the last twenty-five years, Rentech has developed and patented the Rentech Process, an advanced version of the well-established Fischer-Tropsch process. The Rentech Process can convert a wide array of carbon-bearing materials, including green resources such as biomass and municipal solid waste, into ultra clean fuels and chemicals ranging from jet fuel to diesel gasoline. Rentech’s objective is to help the world reduce its dependency on oil and lower emissions, including greenhouse gases. Rentech’s second business segment is their fertilizer plant Rentech Energy Midwest Corp. -REMC-, located in East Dubuque, IL. REMC is one of the country’s largest nitrogen manufacturers producing nitrogen-based fertilizer products and industrial nitrogen products.

Recommendation: Buy

Recommendation Date: Friday, November 21, 2008 at .50 cents per share

Recommendation Results:
** 11/21/2008: UP 8.00%
** 11/24/2008: UP 12.96%
** 11/25/2008: DOWN -1.72%
** 11/26/2008: UP 3.42%
*** Since Date of Recommendation: UP 24.00%

______________________...
On Friday, November 21, 2008 we recommended Rentech (Ticker: RTK) with a buy rating at .50 cents a shares. Since then a few positive and significant developments have taken place.

* November 22, 2008 Indiana and Illinois announce they are pursuing major clean coal power projects. Illinois Attorney General Lisa Madigan has announced a measure that will create 2 clean coal projects including a $2.5-billion plant near Taylorville, Illinois. That plant comes in the wake of another $2 billion coal gasification project in southern Indiana.
www.wthitv.com/dpp/new...

* November 22, 2008 Baard Energy has received its final air permits from the Ohio EPA which in turn allows them to build a coal to liquid plant in Wellsville along the Ohio River. One of the first of its kind. The permit is the third and final state environmental permit necessary for Baard Energy to proceed into final design and construction of the 53,000 barrel-per-day coal/biomass to liquids plant at the Columbiana County Port Authority site in Wellsville. Baard has yet to release who will supply their Fischer-Tropsch technology.
www.reviewonline.com/p...

* November 22, 2008 President-elect Barack Obama reaffirmed his support for alternative energy. This includes Rentech’s Fischer-Tropsch technology that converts biomass, natural gas, and coal into liquid fuels ranging from jet fuel to diesel gasoline.
news.yahoo.com/s/ap/20...;_ylt=Anucx2RdHWzyzTRu...

* November 24, 2008 The US Air Force concluded analysis of the effects of using a natural gas-based synthetic fuel with its Lockheed Martin F-22, as work to trial the technology accelerates through its trainer, transport and fighter fleets. The office of the assistant secretary of the air force for installations, environment and logistics is expected to select a private partner during December to develop a Fischer-Tropsch production facility at Malmstrom AFB, Montana.
www.flightglobal.com/a...

______________________...
As of Friday, November 21, 2008 for an Aggressive short-term trade we like Rentech at these current levels. Rentech will release fiscal year 2008 financial statements December 16, 2008. Rumor has it these numbers will be very positive.

Rentech’s stock price has been down significantly along with everyone else:
15 days down –43%
45 days down –62%
65 days down –79%

The last time Rentech hit .46 cents a share was October 27, 2008 and the stock proceeded to rally .43 cents to .87 cents a share. An 89 percent increase in 7 days. Since March of this year a 40 to 80 percent fluctuation in price has been common and we look for this level of volatility to continue. Rentech could easily exceed a $1.20 per share before year-end based on a number of reasons.

Rentech’s management is currently in a pickle. The stock has dropped significantly and the officers of the company need results ASAP if they want to be able to justify their year-end bonuses. In addition, all stock options are underwater including those belonging to the board of directors. As we have seen in the past, Rentech actively manages their stock price by issuing press reports before releasing their latest financial numbers. Only to be followed with additional press releases over the coming weeks in an attempt to influence the stock price. One news release could easily move Rentech’s stock price .50 to .60 cents like it has done so many times in the past. Two or more press releases could be very significant.

Press releases for Rentech's alternative energy segment could focus on:
* Technology licensing partnerships = Revenue increase
* Revenue and cost sharing relationships = Revenue increase and cost decrease
* New business strategies and directions = Shareholder assurance
* New product sales revenue generated by their Product Demonstration Unit -PDU- leading the way to future business opportunities as companies discover value in Rentech’s numerous gas to liquid products = Revenue increase and shareholder assurance
* Continued process improvements at their Product Demonstration Unit -PDU- facility in Commerce City, CO = Shareholder assurance

Rentech’s fertilizer plant, Rentech Energy Midwest Corporation -REMC- located in Dubuque IL, is an extremely valuable asset that generates a tremendous amount of cash. The value of this plant alone creates a support at current levels helping to reduce downside risk. Rentech currently has 166 million shares outstanding and their fertilizer plant alone is valued between 120-210 million. A quick back of the envelope calculation, 122/166 and 210/166, suggests a stock price between .73 to $1.27.

Rentech recently reaffirmed EBITDA guidance for their fertilizer plant and there’s a good chance Rentech will post a net income, something they haven’t done in years. Moving from a net loss to a net income would be a significant event and I think the street HAS NOT priced this into the stock. Last quarter Rentech successfully completed their Product Demonstration Unit -PDU- that converts natural gas into various petroleum based products like jet fuel and diesel gasoline. The completion of the PDU means a reduction in expenses. Combine reduced expenses with record fertilizer sales revenue, coming from greater demand for corn that is used in the production of ethanol based fuels, could translate to a positive earnings per share. Management needs a homerun if they want to justify year-end bonuses; there’s an incentive for them to be aggressive. Shareholders are less likely to be pissed off when they hear about seven figure total compensation packages when the stock is trading at $3.15 versus .50 cents a share. Again, management has a strong incentive to move this stock and all stock options are currently underwater.

Press releases for Rentech's fertilizer segment could focus on:
* Record fertilizer sales revenue growth for fiscal year 2008
* Very favorable EBITDA guidance for 2009
* Favorable asset valuation discussion of their fertilizer plant

As reported at Mutual Fund Facts About Individual Stocks -MFFAIS- the overall number of institutional owners has recently increased 20 percent from 81 to its current level of 97. This is very positive.
Institutions adding to an already existing position include:
Goldman Sachs added 825,221 shares
Vanguard Group added 5,662,885 shares
Barclays Global Investors added 1,918,971 shares
Credit Suisse added shares
Putnam added shares
Oppenheimer added shares
Northern Trust added shares
Bank of New York Mellon added shares
Bank of America added shares
Wells Fargo added shares

There’s a large short position, I believe 8-9 million shares and it’s probably a safe assumption that these sellers are in the money since Rentech is currently near 52-week lows. If Rentech’s stock price does move quickly, press releases and an overall market rally, we could see short sellers add to the buying as they lock in profits. This 1-2 combo could move Rentech’s stock price in excess of .40 cents a share.

Because of a crisis in confidence the major indices, DJIA and S&P 500, have seen a record setting retreat in the last 30 days, especially in the last 7, and the market is due for a 1,200-point rally. This alone could move Rentech’s stock price .30 cents a share.

2008 Nov 28 02:25 AM