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

Oct.24.07 | About: Rentech, Inc (RTK)

Ok, maybe Rentech (NYSEMKT: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 (NASDAQ: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 (NYSE: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


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.