Is Rentech the Answer to U.S. Energy Problems?

Ok, maybe Rentech (RTK) is not THE answer. However, they do offer a valid, intermediate solution to our foreign dependence on oil through their coal-to-liquids [CTL] and gas-to-liquids [GTL] technologies. I’ve been following this company closely for 7 years – I first learned of them when I was an engineering intern at their pilot plant in Denver during college. I’ve seen compelling change in the company and in the industry over the last 3 years that has prompted me to start buying the stock.

The key realization here is that the U.S. is sitting on the largest coal reserves in the world and that there is a CLEAN way to turn this coal into CLEAN burning fuel. Copied below (in quotes) are some facts about CTL provided by the Coal-To-Liquids Coalition (see here (.pdf) for appropriate references):

"Facts About CTL

1. CTL technologies are ready for deployment now and have been in use outside the U.S. for decades.
2. CTL fuels will work in existing engines and distribution systems without modifications.
3. America will need high-quality diesel transportation and jet fuels for the foreseeable future. There are no practical applications for hybrid airplanes, locomotives, ships, construction equipment and long-haul trucks.
4. CTL fuels are much cleaner than petroleum-derived fuels for pollutants such as sulfur dioxide, nitrogen oxide and particulates, helping to reduce smog, acid rain and associated health effects such as lung cancer and emphysema.⁽¹⁾
5. Using carbon capture and storage technologies, the production and use of CTL fuels can emit less carbon dioxide than the foreign fuels they will replace.⁽²⁾
6. America has ample coal supplies to meet the needs of both electricity generation and production of liquid fuels, at affordable prices.⁽³⁾
7. Water usage for CTL fuels production is in line with that of other fuels, including petroleum and other alternative fuels."⁽⁴⁾

Here is a graphic pulled from Sasol Chevron's website that sums it up:

Fuels produced with this technology can provide better air quality and be more fuel-efficient. So, you’re probably asking yourself why we haven’t been doing it this way all along --- especially considering the technology was developed almost a hundred years ago (1920’s) in Germany. Here are a few potential reasons, and what is changing that is making this technology look more feasible in the U.S.:

1. Oil as a feedstock was way more profitable. As the oil supply continues to dry up, this will cease to be the case.
2. Lack of government support. This is getting more and more attention (though nothing compared to ethanol) in both the media and through industry lobbyists.
3. Existing infrastructure would have to be modified (we haven’t built a new refinery for decades). The ROI for these projects is looking better.
4. “Going green” has only recently become cool.

RTK Is Gaining Momentum

How does Rentech play into all this? Rentech, Inc. (RTK) has evolved since their inception in the early 1980’s from a company with a strict R&D focus on their patented catalysts and Fischer-Tropsch technology, to a company that seems determined to lead the way in commercializing the CTL process (and GTL) in the United States. The company’s founders realized long ago that this old technology still had a lot to offer in the U.S., especially considering it is estimated we sit on the largest coal reserves in the world. After 25 years of fine-tuning, developing, and patenting their technology, they appear motivated and ready to scale-up and start turning a profit just in time for the world to start its push towards “going green” and further away from foreign oil as a primary energy source. Ethanol, Biodiesel, Solar, Wind --- yeah, those are other valid alternatives that will no doubt contribute to our success as well, but what are we going to do with all this coal!

Here are the highlights of their project pipeline. The first project that will come to fruition is their conversion of the old Royster-Clark nitrogen fertilizer plant in Illinois to a coal feedstock. The front-end engineering is complete and the next milestone is securing an EPC contract. This will be a huge catalyst if this project is ultimately successful…this is the first poly-gen project of this nature in the U.S. (in addition to making fertilizer, it makes more energy with less energy, and the process is cleaner) and it will open up many doors and increase demand for their technology in other similar applications (this is still years out however). Next, they have entered into a joint venture with Peabody Energy (BTU), a major coal company with a ton of reserves, to develop their technology at the mouth of their coal mines. Hmmm…that seems logical. Why hasn’t this been done yet? Then, just weeks ago, they announced that they received approval to proceed with the purchase of land for a future clean fuels/chemical facility in Natchez, MI. Another project that makes total geographic sense. I hear their PDU (small scale product development unit) is still on schedule for mechanical completion by year-end --- something a Goldman Sachs analyst noted as a key milestone. I don’t personally think that it is that major of a milestone with respect to their overall business plan, but it is good news nevertheless.

As you can see, they are positioning themselves to be the premiere U.S. company to commercialize this technology. The only other significant player in the U.S. that I am aware of is Syntroleum (SYNM). I’m staying away because of the beating their stock has taken over the last few years and because of their weaker financial picture. Their project pipeline seems to be improving, but they seem to be shifting away from the niche where Rentech is focused. Sasol (SSL) has been producing fuels this way in South Africa for years as the country was forced to solve their own energy problems during apartheid. They are a solid company and would be much less speculative than RTK, but their current global expansion plans do not appear to be focused on the U.S. at all – they are building/planning plants in Qatar and China – albeit great markets for their own growth. I’m sure if/when our government starts supporting this industry, they would likely move into this market and challenge RTK and SYNM for market share. If you are looking for exposure (though not a pure-play) to the industry with less risk, I’d go with Sasol over Rentech. However, if you are looking for a U.S. company or just a little riskier investment, Rentech would be the way to go as they stand to benefit the most in the U.S. over the next few years.

Other Highlights

There has been some re-shuffling going on and the new management team (new CEO September 2005 / CFO May 2006) appears competent and focused on executing successful projects.

Three large institutions have major stakes in the company comprising ~25% ownership (Blackrock, Wellington, and Barclay’s). They seem to be adding to their positions.

Technical Note

As I write the stock is trading at $2.07. Look at a long-term chart and you will see the pull-back this stock has had. There seems to be support at the $2.00 level and the stock seems to be consolidating nicely after a major pullback over the last few years.

Buyer Beware

I own RTK for the long-term story here and plan to add to my position on any dips around the $2.00 level or below. This is a risky and speculative investment in a small company that has yet to turn a profit, has quite a bit of debt, and still needs to secure financing for their projects. Don’t chase this one…it bounces around quite a bit, so take your time. I’d recommend dollar cost averaging in case of further declines, or use tight stops around the $1.90 - 2.00 level.

Disclosure: Author has a long position in RTK

Footnotes:

1. California Energy Commission, Publication No. CEC-600-2005-029-FS, June 2006.

2. National Energy Technology Laboratory, “Increasing Security and Reducing Carbon Emissions of the U.S. Transportation Sector: A Transformational Rolefor Coal with Biomass.” DoE/NETL-2007/1298, August 2007.

3. National Coal Council, “Coal: America’s Energy Future.” March 2006.

4. Dr. Richard Boardman, Idaho National Laboratory, testimony before the U.S. House of Representatives’ Subcommittee on Energy and Environment. Sept. 2007. National Energy Technology Laboratory, “Emerging Issues for Fossil Energy and Water: Investigation of Water Issues Related to Coal Mining, Coal to Liquids, Oil Shale, and Carbon Capture and Sequestration.” DoE/NETL-2006/1233, June 2006.

Comments

[User 116101:]

great write up on Rentech Inc

2007 Oct 23 04:06 PM

[Believer:]

I agree with your comments about Rentech (RTK) This one is about to explode...No pun intended. It is a perfect fit for the coal reserves in the USA and the DOD contracts.
Buy+++

2007 Oct 23 11:12 PM

[Believer:]

I agree with your comments about Rentech (RTK) This one is about to explode...No pun intended. It is a perfect fit for the coal reserves in the USA and the DOD contracts.
Buy+++

2007 Oct 23 11:13 PM

[helplessobs...:]

Right after WWII the government poured a lot of money into coal to liquid conversion via the Bureau of Mines. Several small plants were built and operated. A commercial plant was built by Union Carbide in West Virginia sponsored by Sen. Byrd. The effort collapsed with Eisenhour when big oil said the new fields in the mid-east provided oil for $2 and Byrd's projects were a waste of government money. A big problem then was corosion of metal parts exposed to the high heat and gasses used in the process. The Rentech plant at East Dubuque, Ill will be the first and only coal to liquid plant operating in the US.

2008 Jan 12 11:38 PM

[john s. gordon:]

FT is a superior method of producing wax, diesel, jet-A and other aliphatics. to produce high-octane gasoline there is another superior method - illinois/kentucky coal to aromatic syncrude at high yield using two-stage direct liquefaction; this was practiced at wilsonville, alabama during 1982-1985, but the plant operation was terminated on orders from the ronald reagan white house.

2008 May 22 08:08 PM

[Ferdel:]

Someone with influence (so it's not going to be me) needs to convince our out of ideas, unimaginative, outroght imbecile congress that GTL/CTL is worth pursuing and that the FT technology is superior to off-shore drilling.
If congress were to guarantee a minimum price for imported foreign oil, so that the oil producers could not undermine the GTL/CTL technology again, like they have in the past by reducing prices to a point that made GTL/CTL no longer economically viable, investors would be there on the ready to go full scale.
But . . . with our no good for nothing congress that is not likely to happen because self interest is much stronger than the mandate they (the congress) have to act in the interest of the people.
So, we continue on the path to being the underdog, eventually.

2008 Aug 25 01:14 PM

[Ferdel:]

For years it has been clear to intelligent people that sending truck loads full of money to countries who would rather slit our throats, is ludicrous.
As the writer says . . . is anything of intelligence and forsight going to come from the congress? Absolutely not! Or perhaps from the president? His handlers wouldn't have it!
Wherever the initiative toward achievable oil independence might come from, here's my take: In order to entice investors to put money into projects like FT (CTL/GTL) there has to be some assurance that long term investments will pan out. This would require, among other assurances, that the oil price will not fall below a certain price, let's say $ 60.00 for arguments sake, at which price FT technology would be feasible and profitable.
If the price were artificially lowered by the oil producers to destroy any efforts of synthetic fuels energy, as they have done several times in the past, a special tax would kick in to keep the price of crude at the above minimum level. The windfall tax could and should be used to accelerate alternative energy sources. No tax payer money would be wasted to further efforts like the Pickens plan, which, again, I suspect is lop sided and helps Pickens and friends to sell their NG at taxpayers' expense, or GE's caper to monopolize the wind energy front.
We must stop hoping that congress will do the right things, and DEMAND that the right course be taken, free from partisanship and personal interest void of all concern for the future of this great nation.
Is congress getting the message? Absolutely not. With people like Pelosi and Reid throwing around their weight, there's no hope. Replacing them with the other buffoons? No hope either.
Something radically new has to come along. How? If congress does not want to listen and act their mandate to work for the people, we will orchestrate a "General Strike" and then see what will emerge that is palatable and acceptable to the majority of the people.
Right now would be the time to make radical changes in our nation, because we are already in the midst of unprecedented upheaval. Solutions are NOT going to come from our bought and paid for "leaders", but must come from the people.

Apr 27 04:41 PM