Based in Los Angeles, California, Rentech Nitrogen Partners, L.P. (RNF) scheduled a $300 million IPO with a market capitalization of $765 million at a price range mid-point of $20 for Friday, November 4, 2011. The full IPO calendar for the week of October 31 includes four scheduled IPOs.
Summary
RNF was formed in July 2011 by Rentech (RTK), a publicly traded provider of clean energy solutions and nitrogen fertilizer, to own, operate and grow a nitrogen fertilizer business, which was established in 1965.
RNF is a spin-off of Rentech, which had a market capitalization of $330 on October 27, 2011, and a book value of $41 million. The RNF spin-off is expected to have a market cap of $765 million, over twice that of the parent (see below).
Two other publicly held companies also in the nitrogen fertilizer business are CVR Partners (UAN) and Terra Nitrogen (TNH).
Valuation
Limited partnerships are mostly valued based on current and expected payouts, or yields. RNF’s proforma yield of 11.7% for the year ending September 2012 yield looks enticing, if the assumptions can be believed (see below). Both TNH and UAN currently yield in the 9% range.
Another IPO scheduled for this week is Enduro Royalty Trust (NDRO), whose current assets are depleting, with a current projected payout of 6.75%. (See the NDRO pre-IPO report here.)
Limited partnerships with strong general partners often perform better than limited partnerships with weak general partners. Oiltanking Partners (OILT) is an example with a stong general partner. Rentech Nitrogen Partners, L.P, on the other hand, is an example with a much weaker general partner.
Notice below that RNF’s pro-forma payout for the June quarter of 7.7% is less than either UAN’s 8.9% or TNH’s 9.2%.
Our current nitrogen fertilizer preference is CVR Parnters, based on its yield and lower price to book value. (See our pre-IPO analysis of CVR Partners.)
PRO-FORMA DISTRIBUTION PROJECTIONS | 12 months ending | ||||
Sept '10 | June 2011 | Sept 2012 | |||
Adjusted EBITDA ($mm) | $30.5 | $75.8 | $100.6 | ||
Cash for distribution | $0.44 | $1.54 | $2.34 | ||
Yield at $20 | 2.2% | 7.7% | 11.7% | ||
Price / | Post IPO | Post IPO | ||||
Valuation Ratios | IPO Mrkt | Price / | Pretax | Price / | Price / | % offered |
Sept qtr estimate for RNF | Cap (mm) | Sales | Earnings* | BookValue | TangibleBV | in IPO |
Rentech Nitrgn LP (RNF) | $765 | 5.0 | 19 | 6.9 | 6.9 | 39% |
for the L.P.s below | ||||||
Payout | ||||||
Rentech Nitrgn LP (RNF) | $765 | 5.0 | 19 | 6.9 | 6.9 | 11.7% proj |
Rentech (RTK- parent) June qtr | $330 | 1.1 | 10 | 8.0 | 10.1 | none |
RTK note: prior four quarters losses totaled $29mm, versus June qtr's $7.9mm profit | ||||||
CVR Partners (UAN) June qtr | $1,870 | 5.8 | 12 | 3.9 | 4.2 | 8.9% |
Terra Nitrogen (TNH) June qtr | $3,210 | 4.1 | 11 | 12.2 | 12.2 | 9.2% |
See more RNF metrics here.
Imaginitive Investment Bankers
Perhaps the RNF IPO can be attributed to imaginative investment bankers, who discovered an undervalued parent company, Rentek, and are using the RNF IPO to revalue Rentek’s assets.
The investment bankers are creating $775 million in new market value for parent RTK, whose pre-IPO net worth is $41 million. Also, there’s not much left at the table for RNF after the parent RTK rakes in the cash.
The IPO is expected to net RNF $275 million:
- $151 is allocated to be repaid to the parent RTK to pay down a loan,
- $40 million is to be repaid to the parent RTK for expenses,
- $35 million is to be paid to the RNHI, which is essentially the parent of RTK.
- $8.1 is to be used for plant expansion,
- $40 is to be used for working capital.
$48 million in proceeds will go to RNF:
- $40.0 million for general working capital purposes,
- $1.8 million for the payment of expenditures related to the replacement of RNF’s steam methane reformer tubes,
- $5.7 million for the payment of expenditures related to urea expansion and the DEF build-out project,
- $0.6 million for the payment of expenditures related to the ammonia capacity expansion project.
So the newly public operating partnership gets only $48 million from the IPO, the parent gets $226 million in cash and also gets $460 million in newly created limited partnership interests, at the price range mid-point of $20.
Business
RNF was formed in July 2011 by Rentech to own, operate and grow RTK’s nitrogen fertilizer business. The nitrogen fertilizer facility, located in East Dubuque, Illinois, has been in operation since 1965 and has a long track record of operating at high capacity utilization, with infrequent unplanned shutdowns. The plant produces primarily ammonia and UAN at facility, using natural gas as primary feedstock. Natural gas costs are usually a little over 50% plus of the cost of goods sold.
Taxes
A unit-holder will be allocated an amount of U.S. federal taxable income due of approximately 40% of the cash distributed. For example, “if you receive an annual distribution of $2.34 per common unit, we estimate that your average allocable U.S. federal taxable income per year will be no more than $0.94 per common unit.” (Source: S-1 page 19.)
Key Operating Data and Assumptions
Key Operating Data | Sept fiscal year | Sept 2102 year | ||||
and Assumptions | 2008 | 2009 | 2010 | June9mos'10 | June9mos'11 | projections |
Amonia - products sold, tons | 173 | 126 | 153 | 118 | 106 | 140 |
UAN | 313 | 267 | 294 | 195 | 238 | 274 |
Product pricing - amonia | $539 | $726 | $377 | $371 | $580 | $663 |
UAN ($ per ton) | $308 | $267 | $180 | $185 | $259 | $328 |
Production - amonia, tons | $299 | $267 | $267 | $194 | $218 | |
UAN ($ per ton) | $311 | $274 | $287 | $207 | $245 | |
On stream factors - amonia % | 99.5 | 98.10 | 91.8 | 89 | 100 | 94 |
UAN % | 98.4 | 96.70 | 92.9 | 91 | 100 | 94 |
Source: S-1 page 22 | ||||||
Natural gas prices per MMBtu* | $9.34 | $5.67 | $4.69 | $4.73 | $4.95 | |
*natural gas is an important feedstock, 50% + of the cost of goods | ||||||
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
