In my last article on Rentech (RTK), the stock was trading at a price of $1.18 and is now approximately 25% higher at the $1.50 level. In this article, I will provide some key reasons why our fund has recently started an aggressive long position in RTK and why we expect the stock to double in 2012.
RTK is a provider of clean energy solutions. The company is 61% owner of Rentech Nitrogen (RNF), a publicly traded fertilizer company. RNF operates a nitrogen fertilizer plant in East Dubuque, Illinois that manufactures and sells natural gas-based nitrogen fertilizer products within the corn-belt region in the United States. Additionally, RTK is developing energy projects to produce certified synthetic fuels and electric power from carbon-containing materials, such as biomass, waste and fossil resources. Its technologies can produce synthesis gas (syngas) from biomass and waste materials, and convert syngas from its own or other gasification technologies into complex hydrocarbons (the Rentech Process) that are then upgraded into fuels using refining technology that it licenses.
In addition to developing projects using these technologies, it is pursuing the licensing of its technologies to developers of projects that are expected to produce fuels and/or power. As I will discuss later, both lines of business are expected to provide substantial returns for stockholders.
RNF (Fertilizer Business)
RNF is well-positioned for growth and should be a cash cow for RTK. RNF recently announced an expansion project of it’s current facility. The project is expected to increase ammonia production capacity by approximately 23% or 70,000 tons annually, and includes an additional 20,000 ton ammonia storage tank at the facility in East Dubuque, IL.
The key factors that make this a sustainable and expandable source of earnings are as follows:
- Mid corn belt location: The facility sells to the mid-corn belt area where there are higher Net Sales Prices for Ammonia. Over 90% of sales are in Illinois, Iowa, and Wisconsin ( Illinois and Iowa are the top 2 corn-growing states)
- Significant transportation cost advantage: RNF serves it’s core market (200-mile radius of plant) and is therefore has a cost advantage over its competitors who mostly ship from the gulf area.
- Strong industry fundamentals: Increased grain demand has driven higher fertilizer prices (As stated in the public filings here, Illinois and Iowa are the two largest corn producing and nitrogen fertilizer consuming states with 33% of U.S. corn production in 2010 and 18% of U.S. nitrogen fertilizer consumption in 2010. Consumption exceeds production. Furthermore, Ammonia and UAN consumption in Illinois, Iowa and Wisconsin have increased by 20% and 14%, respectively, since 2000.
- Reduced dependence on natural gas: As Don Hofstrand, agriculture expert states here, “the cost of natural gas is the major factor in determining the price of ammonia and the cost of ammonia is a major factor in determining the price of nitrogen fertilizer.” The expansion project by RNF will reduce its dependence on natural gas by approximately 6% thereby lowering per unit production costs in significant way.
Clean Energy Business
RTK’s clean energy with biomass gasification and fuel conversion technologies are commercially proven and viable. United Airlines conducted a validation flight that tested RTK’s Synthetic Jet Fuel and the fuel is certified by the FAA. Additionally, RTK’s RenDiesel fuel was tested for 1,000 miles on two Audis and achieved “flawless” performance. RenDiesel is anticipated to be twice as fuel efficient as ethanol and contains around 60 per cent more energy per gallon than ethanol.
Hunt Ramsbottom, President and CEO of RTK, recently stated in the Pritchard Capital Energize Conference that the company is looking only at high-return investments that do not require significant spend before all financing and/or partners are in place. Furthermore, RTK does not intend to fund expensive development activities such as front-end engineering and design for development projects without partners and spending should be less than $2 million per year before financing is in place.
As such, we are expecting that RTK will soon announce project partner announcements on the following projects which could provide substantial short-term lift to the stock:
- Olympiad Project: This will produce 36M gallons/year of low carbon jet fuel and naphtha. It was selected by the Province of Ontario for proposed supply of 1.3 million tons per year of mostly forest waste and unmarketable crown timber.
- BTL Project at HC&S Sugar Plantation: This will produce 18M gallons/year of renewable diesel (or jet) and naphtha. It will provide power and steam delivery to HC&S for sugar mill operations
- Natchez Project Site: This is a 450 acre site adjacent to Mississippi River with access to biomass supply, barge, pipeline and rail.
RTK has a strong balance sheet with approximately $200 million cash or $0.88 per share which is more than half the stock price. There is only $57 million in debt financed at a rate of 4%. And the RNF expansion project is underway with returns currently projected above 20%.
RTK's current quarter consensus estimate has increased notably over the past 90 days from -0.02 to 0.03, a gain of 235.0%. This improvement is significantly greater than the Agricultural Chemicals Industry average of -6.0% during the same time period. Based on analyst estimates, RTK trades at a forward P/E of 10, which is a 10% discount to the Agricultural Chemicals Industry and a much greater discount to clean energy companies.
Despite the recently increased estimates, we believe the analysts are underestimating the earnings for FY2012 and will further revise estimates upward. According to the company’s recent presentation, they expect to receive $54 million cash distribution from RNF and they expect to reduce cash spending approximately 40% this year (see link). We estimate the reduction in spending to be $109 million. Even if revenue stays flat which we don’t think it will, projected 2012 net income is greater than $44 million or approximately $0.20 per share.
Thus, according to our estimates, RTK is trading at a forward P/E of only 7.5. Given the revenue growth rate, we believe RTK should trade at a minimum of 15 times its forward P/E and would therefore be fairly valued at $3 per share.