Sasol and the Liquid Coal Revolution

A lump of coal should be on everyone’s Christmas list this year. Whether you subscribe to the theory that we have reached “Peak Oil” or not, one thing should be clear: demand for oil is increasing rapidly, while supplies are stagnant to declining.

Turning Away from Oil
The price for a barrel of oil has more than doubled over the past two years and has since been stubbornly holding around the $60 mark. We will surely see the price of oil drop into the $50’s and quick dips into the $40’s aren’t unfathomable. However, the days of oil at $30 are well behind us.

Politicians are feeling the heat amidst calls for windfall profit taxes on the oil giants that have been posting the largest quarterly profits of any company, anywhere, at any time in history. And if you think gas prices are outrageous now, consider that many experts have predicted oil prices over $100 per barrel and gas prices over $5 per gallon within the next 5 years.

The silver lining in the gloomy picture painted by skyrocketing oil prices is the massive shot of adrenaline given to the alternative energy sector. With oil prices at these levels and increased tensions in the Middle East, both public and private enterprise are turning their focus and their budgets towards power sources such as wind, solar, hydrogen, ethanol, biodiesel and nuclear.

But while these technologies are moving us in the right direction, they each carry significant setbacks that leave many to conclude that no substitute for petroleum can fill enough of the demand, at an acceptable price and within a reasonable time-frame, to make much of a difference.

Liquid Coal: Then and Now
Enter an old technology that has been gaining plenty of new steam lately: Coal Liquefaction. The technology of producing a liquid fuel from coal or natural gas is hardly new. The Fischer-Tropsch process was developed by German researchers Franz Fischer and Hans Tropsch in 1923 and used by Germany and Japan during World War II to produce alternative fuels and overcome their limited access to oil. Germany utilized the technology to produce 6.5 million tons, or 124,000 barrels a day.

South Africa has also been producing liquid coal for a number of years, developing the technology to tap its large coal reserves and seeking ways around apartheid sanctions. In fact, liquid coal meets 30 percent of the transportation fuel needs in South Africa.

Not to be confused with coal-to-liquid [CTL], a similar technology called gas-to-liquid [GTL] converts natural gas into liquid fuel form. Most of the companies involved with CTL are also exploring GTL technology. In addition to being cheaper than oil, advocates point out that CTL/GTL fuel is better for the environment than its oil counterpart.

Burning raw coal is highly polluting, but with the liquefaction technology sulphur, ash, mercury and other pollutants are removed. The sulphur can be sold as a byproduct and CO2 is segregated and can be injected underground. If hydrogen is needed for fuel cells, these plants can also provide it. The gasoline and diesel produced are high grade and clean, meeting even future 'clean diesel' requirements of the US.

Coal liquefaction would also help America wean itself from foreign oil imports. The United States has the world's largest coal reserves with an estimated 268 billion recoverable tons. Converting just 5 percent of the U.S. coal reserves to Fisher-Tropsch fuels would equate to the existing U.S. crude reserves of 29 billion barrels. America could virtually double its domestic motor fuel supply without drilling a single well or building a new refinery.

In October of 2006, Montana Gov. Brian Schweitzer announced an agreement with a team of companies to build one of the nation’s first coal-to-liquid fuel facilities. The Montana plant would use what is called integrated gas combined cycle technology to gasify, rather than ignite, the coal. The project calls for converting a portion of the synthetic gas into 22,000 barrels per day of diesel fuel, using the rest of the gas to generate about 300 megawatts of electricity.

China, which is the world's second biggest consumer and importer of oil after the U.S., is planning a $6 billion investment in new liquefaction plants that would have a total annual production capacity of 440 million barrels of liquid fuel annually. This capacity would dwarf that of the world’s largest plant, located in South Africa. A facility planned for Mongolia is slated to come online in the next few years and to eventually produce 50,000 barrels daily of clean-burning gasoline and diesel fuel.

Sounds good so far, right? Here is some icing for the cake. The production costs are reported to be as low as $15 per barrel. More conservative estimates come in around $30 per barrel, but that is still half the cost of a barrel of oil today! Which brings us to the investment portion of this article.

Investing in Coal Liquefaction
There are a number of ways to invest in coal-to-liquid technology, but our choice is the industry leader Sasol (SSL). With 30,000 employees and a market cap of $22 billion, Sasol is much larger than most of the companies we track.

Syntroleum (SYNM) and Rentech (RTK) are two smaller companies playing in the coal-to-liquid sector, but we don’t believe their management teams stack up to the quality and depth of experience found at Sasol. Their stock prices have taken a beating in the past year, but either company’s stock could explode upwards on any significant news, technological advancements or new contracts.

Syntroleum recently had their fuel successfully tested in B-52s by the US Air Force. If they manage to ink a long-term agreement, the price could easily double from current levels. But let’s take a deeper look at Sasol and explain why we think the company offers the best investment platform in the coal-to-liquid sector.

Sasol was founded in 1950 with the original Fischer-Tropsch [FT] technologies for synthesizing fuel, and enhanced it from there. Sasol was established to provide petroleum products in coal-rich but oil-poor South Africa. The firm has built a series of Fischer-Tropsch coal-to-oil plants, and is one of the world’s most experienced synthetic fuels organizations.

In addition, Sasol also markets a natural gas-to-oil technology and is working in Qatar on this process which skips the coal gasification process, and takes natural gas to syngas and then to fuels. These resulting fuels are very clean — much lower in emissions such as Volatile Organic Compounds, CO and Particulate Matter than standard petroleum fuels.

As recently as December 11, 2006, Sasol announced that it may invest up to 6 billion U.S. dollars over five years to build a second coal-to-liquid [CTL] plant in South Africa with a capacity of 80,000 barrels of fuel per day. A new Sasol-led CTL plant could be the country’s best option in terms of security of energy supply, using South African resources. For perspective, a CTL plant producing 80,000 barrels of liquid fuel a day would consume between 9 million and 15 million tons of coal per year.

Sasol is not a pure play on CTL technology, as they also explore for, produce and refine crude oil and a wide range of chemicals and oxygenated solvents. Still, the percentage of their business that comes from Synfuels is significant, at over 50% of earnings and in expected future growth. Speaking of earnings, Sasol generated an annual net income of $1.45 billion on revenues of nearly $8 billion. Income was down slightly (-0.9%) for the period ending June 30, 2006, after an impressive 71% growth between 2004 and 2005.

In addition, Sasol has increased their gross profit margin by 12 points, from 40% to 52%. While these are impressive statistics, we do have some concern over the 22% decline in revenues versus a year ago. And while their P/E ratio of 15 is strong by most standards, it is a bit high in comparison to the oil giants.

Management has a wealth of experience and is rock solid in both executive and non-executive capacity. Pat Davies, the CEO with full responsibility for Sasol Synfuels, joined Sasol in 1975 and has experience across engineering design, project management, operations management and corporate affairs for the company. He has a degree in mechanical engineering and a Masters from Harvard Business School.

After falling from its May high of $46 to just under $30, Sasol’s share price consolidated and has since been trending upwards towards it current level at around $35. We expect a breakout from these levels that will push the share price above $40 in the first quarter of 2007 and test the May peak of $46 during the 2nd quarter. Technical indicators have turned bullish, with the RSI breaking above the neutral 50 mark for the first time since shares traded at their May highs.

Higher Share Price for Sasol on the Horizon
Sasol stands to benefit from any increase in the price of crude oil and while oil prices have remained at $60 longer than we anticipated, we expect a steady increase in the price in the coming months. And that is assuming relative calm in the Middle East. Any increased tension, particularly between the U.S. and Iran, will quickly push oil back above $70 per barrel, with $100 oil a distinct possibility.

Factoring in the increasing demand from China, OPEC’s announced desire to keep oil above $60, threatened supply cuts from Venezuela (4th largest oil producing nation), and the fact that oil is becoming increasingly costly and difficult to extract, we can only see higher prices for crude on the horizon and thus, a much higher share price for Sasol.

But even if oil prices remain flat or decline slightly, the production cost of CTL or GTL fuel will remain significantly lower than oil. And with countries such as China and the U.S. sitting on massive coal reserves and looking for domestic solutions to their energy needs, CTL technology is the future. Sasol is well-positioned to profit from the increased interest in CTL and we believe their technology and experience is well ahead of anyone else playing in this arena. The liquid coal revolution is just around the corner. Are you ready?

We do not currently have a position in Sasol, but are looking to purchase shares on dips below $33. We view this as a mid to long-term investment, although we may also pick up $40 March call options, anticipating higher oil prices and increased media coverage of CTL technology over the next 6 months.

SSL vs. SYNM vs. RTK 1-yr chart:

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[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 02:24 AM