Rentech Nitrogen IPO Entices Buyers With High Yield

Nov. 3.11 | About: Rentech Nitrogen (RNF)

Rentech Nitrogen Partners LP (NYSE:RNF) priced their 15 million unit IPO at $20.00, the midpoint of the indicated range of $19.00-21.00. All of the units are being offered by the company, however, a majority of the proceeds will flow back to the parent company and it subsidiaries as a capital contribution to repay debt incurred and as a distribution as reimbursement of expenditures. Based on the $20.00 pricing, the company will have a market capitalization of approximately $765 million, and an estimated forward dividend yield of 11.7%. Morgan Stanley and Credit Suisse are leading the offering.

Rentech Nitrogen is a pure play nitrogen fertilizer company. Their plant has been in operation since 1965. The parent company Rentech (NASDAQ:RTK) is a diversified energy company that develops technologies to produce certified synthetic fuels and electric power from carbon containing materials. They acquired the fertilizer plant in 2006 from Royster-Clark with a plan to convert to coal gasification for ammonia and energy production. In 2007 they decided to not pursue the conversion due to excessive costs, a changing regulatory environment, and positive fertilizer outlook.

The company states that the location of their plant in the heart of the Mid Corn Belt is a competitive advantage. The majority of sales within the mid Corn Belt are within 200 miles of their facility (with over 90% of their sales going to the agriculture market). They receive premium pricing due to their location as there customers save on freight and delivery costs associated with other producers. Top competitors include CVR Partners (NYSE:UAN), Terra Nitrogen (NYSE:TNH), Potal Corp. (NYSE:POT), CF Industries (NYSE:CF), and Agrium (NYSE:AGU). UAN and TNH are also pure plays in nitrogen fertilizer with the others all diversified into other segments such as potash. Nitrogen fertilizer represents 98% of Rentech’s revenue, while UAN and TNH have 100% of their sales in nitrogen. The average net ammonia sales price for RNF over the last three years (end 9/30/10) was higher than that of their two pure play peers UAN and TNH, at an average price of $531 per ton (versus $378 for UAN and $444 for TNH).

Global fertilizer consumption has grown at a 3% CAGR from 1972 to 2010, and is driven by population growth, decrease in farmland, income growth in emerging markets, and ethanol production. Nitrogen represents approximately 63% of fertilizer consumption. Nitrogen has the most stable demand because it must be applied annually. There has been an 11% increase in grain demand over the last 5 years, while the USDA projects 2011 US grain stock to be at 15 year lows. Grain production is directly tied to nitrogen fertilizer application. The US is a net importer of nitrogen fertilizer. There has also been a reduction of 34% (between 1999 and 2010) of the US nitrogen fertilizer capacity as producers such down less attractive plants. And the industry has consolidated in the meantime, with the top 5 producers representing 78% of the market share today versus 56% in 2000. The Company has an expansion underway to increase the ammonia capacity by an estimated 23%.

Revenue decreased due to the economic downturn from $217M in 2008 to $131M in 2010. However, sales for the 12 months ended 6/11 were $176M. They predict a net sales of approx $204M for the next twelve months (ntm), ending Sept 2012. EBITDA for the ntm is projected to be $101M, with cash available for distribution of $89.4M. These projections are based on average plant gate prices of $328/ton of UAN and $663/ton of ammonia (both of which are below the mid Corn Belt current prices of approx $400/t for UAN and $750/t for ammonia). The company has pre-sold more than 40% of their gross margin over the next 12 months. Pro forma the company will have approx $48M in cash and no debt, and an anticipated new undrawn $25M revolver.

There has been some criticism in the press that this offering is some sort of ploy by the parent company and the underwriters in that the spinoff is being offered at a market cap much greater than that of the existing company. I beg to differ that this is any sort of ploy but rather is a sound financial decision by the company. They clearly have an asset that is worth more as a separate entity than as part of the whole. Sure, they are taking advantage of the current market environment and the success of their peers. But isn’t that precisely what a management should do? At the IPO price of $20.00 per unit, RNF is coming at an estimated forward dividend yield of 11.7% (based on the estimated next twelve month dividend of $2.34). The two closest peers, UAN and TNH, are currently trading at forward dividend yield of 7.7% (or 9.1% if you annualize third quarter results) and 8.9% respectively. Both stocks have well outperformed the overall market thus far in 2011 (with AUN up 56% from their IPO pricing of $16 in April. Based on the discount to the peers on an estimated forward yield basis RNF looks to likewise reward their investors through this offering.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I may initiate a long position in RNF within the next 72 hours.