Rentech is located in Illinois, right in the heart of the farm belt. I wrote a previous article about a similar fertilizer producer in the farm belt, CVR Partners LP (UAN). I thought it was a strong buy then at $27 a share, and now some people may not be too happy with my thoughts, as it has fallen below $25 a share. Most of this downward price pressure is due to Carl Icahn's takeover bid on parent company CVR Energy (CVI). This is forcing CVR Energy to sell part of its CVR Partners business to raise a special dividend for CVI.
Rentech has fallen from a high of just over $26 a share into the $23 range. I believe this is due to some fallout from CVR's issues. A month ago, there were also issues with the falling prices of fertilizer. Here in early March, these trends have turned around.
Reviewing this report from early December showed ammonia prices from the Gulf at just over $500, with estimated farmgate prices of $720-$743. It was thought that prices would adjust downward for buyers in the Midwest. Reviewing the newest report, prices at the Gulf were about $400, with an estimated farmgate price of $570 a ton. However, retail prices have not shown this decrease, and prices are still over $800 a ton in the Central Midwest. Prices for UAN bottomed out, and are coming back up in price, now at $255 a ton for 32% at the Gulf, and $430 a ton in Iowa. In December, 30% farmgate prices were estimated to be $364 a ton, and today fair value suggests $335.
Rentech uses natural gas to produce its fertilizer, which currently gives them a cost advantage, even over CVR Partners, which uses coke as its fuel. Natural gas is at a 10-year low, around $2.40 per thousand cubic feet.
The demand for fertilizer is there, as corn production is predicted to be at an all time high for 2012, at 94.2 million acres. Farmers were holding out from buying fertilizer due to the high prices, but I think we are seeing farmers that finally have to cave in to get ready for the 2012 growing season.
Rentech is looking to pay its first distribution in May in two quarters, which is estimated to be close to 90 cents to $1. Before releasing the IPO, RNF was predicting a full year distribution of $2.34 a share, which would be around a 10% yield on today's price. Rentech needs to achieve $605 a ton for ammonia, and $315 a ton on UAN, to make this distribution. Prices in the Midwest have held above these levels.
RNF also has the same cost advantages as UAN in shipping costs over U.S. Gulf Coast ammonia and UAN producers and importers, due to its location in the farmbelt, and the majority of sales are in the farmbelt area.
There are also expansion plans for RNF in 2012. The latest facility can produce up to 830 tons of ammonia per day and Rentech has an expansion project underway to increase ammonia capacity to approximately 1,022 tons per day.
Final summary: With continued low prices for natural gas, fertilizer prices back on the upswing, and "bad" news in fertilizer stocks currently (CVR's possible takeover bid attempt), there is significant upside for RNF, without the drama that is currently going on with UAN and CVI. RNF will pay at least a $2 distribution for 2012, and more likely, closer to the $2.30 range. These numbers will stay solid with continued high demand for fertilizer in the corn belt.
Additional disclosure: I have added to my RNF position as I wrote this article.