Rentech: Picked Green

Last month the Wall Street Analyst Forum staged an investor conference in New York City. Most of the first day was devoted to the "green" stocks of alternative energy or energy efficiency companies. Listening to the presentations, it became clear that some "green" stocks may just be too green to pick.

Among the five presentations, Rentech, Inc. (Amex: RTK), was probably the most developed. With $144 million in trailing revenue, it looks like Rentech has proven both the feasibility and marketability of its version of the Fischer-Tropsch process for producing fuel products. Unfortunately, the revenue is from the production and sales of nitrogen products at a fertilizer plant acquired by Rentech in 2006. Rentech only pulled in $504,000 from the sale of alternative fuels in fiscal year 2007 (September 2007).

The Rentech process converts synthesis gas to diesel or jet fuel, naphtha and other specialty chemicals. Rentech touts the flexibility of the process to work with gases derived from coal, biomas or municipal waste. As sexy as this might sound, we note that the company only claims a 20% reduction in the carbon footprint well-to-wheel. Nonetheless, the process is conducive to CO2 capture and storage.

Also at issue is cost of production. Without government subsidies, crude oil as a diesel source still has Rentech beat. However, as crude has remained above $100 for some weeks now, this dynamic could change.

Rentech management has guided for positive cash flow in fiscal year 2008 (ending September 2008) of $40.0 million. If achieved, this would represent a near-miraculous turn-around in Rentech fortunes. Rentech operations used $23.6 million in cash in the twelve months ending September 2007. The company expects first production in its Sand Creek, Colorado demonstration unit in early 2008. This is also a training center for operators. A training center is optimistic thinking since Rentech has several production facilities on the drawing board but remains several months if not years away from production. The first commercial scale synthetic fuels plant is planned near Natchez, Mississippi.

The company expects to produce 1,500 barrels per day by 2011, with another 28,000 barrels coming online in the second phase of the Natchez project. Rentech also has joint development projects on the drawing table for coal and biomass to liquids projects. In the meantime, Rentech has its fertilizer plant to bring in some cash. In FY07 the fertilizer operation in Illinois brought in $131 million in sales and earned a 12% operating margin. After investing in the alternative fuels side of the business, the trailing net loss in FY07 was $106.7 million.

Rentech plans to convert the Illinois fertilizer plant to a coal fed facility (from the current natural gas feed stock) and gasify the coal to produce both fertilizer and synthetic fuels. This plant was originally supposed to be the company's first commercial operation, but we note that the Natchez Project has taken the lead. As a consequence of this decision, Rentech had to take a $38 million charge in FY07. While that helps assuage the shock of the net loss in FY07 - the net loss would have been $68.5 million without the charge - it still should give investors pause in considering the risk of poor execution at Rentech. After all, at this stage in Rentech's development, management's ability to successfully block and tackle their way down the field is perhaps the most important factor impacting success.

With only $33.7 million in cash on the balance sheet, there is little room for error - at least errors that have "cash" price tags.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Comments

[Tim Lloyd W...:]

Gasifying coal for liquid fuel should not be considered green. Remember, the synthetic crude so inefficiently obtained then has to be refined. I've seen the CO2 emissions estimated at seven times those of conventional diesel manufacture. When I last looked China was building its first such plants. If they catch on, it would be disastrous. But they won't.

2008 Apr 22 08:09 AM

[Nightmoves:]

Hey RTK Is the wave of the future they are doing something about the rise in fuel cost. Ill put my money on them it can only go up!

2008 May 06 12:35 AM

[Mr. AC:]

Hey Tim, you are right about the CO2 emissions being high, but I don't think you took into consideration the CO2 recapture process which is what makes them "green". This is not a cure-all to our energy problems, BUT it does allow us to keep some of our own money in our backyard rather than in the middle-easterners pockets. I for one, am all about slight environmental improvements for significant longer term independence from foriegn oil.

2008 Jun 13 02:44 PM

[Doctor Alpha:]

Alternative Green Energy is the Future. Rentech (RTK) Significant Announcement on the Horizon

Company: Rentech

Ticker: RTK

Company Snapshot: Rentech is composed of two business segments each focusing on a major global issue, alternative green energy and fertilizer production. Rentech’s alternative energy segment is one of the world's leading synthetic fuels technology and development companies. Over the last twenty-five years, Rentech has developed and patented the Rentech Process, an advanced version of the well-established Fischer-Tropsch process. The Rentech Process can convert a wide array of carbon-bearing materials, including green resources such as biomass and municipal solid waste, into ultra clean fuels and chemicals ranging from jet fuel to diesel gasoline. Rentech’s objective is to help the world reduce its dependency on oil and lower emissions, including greenhouse gases. Rentech’s second business segment is their fertilizer plant Rentech Energy Midwest Corp. -REMC-, located in East Dubuque, IL. REMC is one of the country’s largest nitrogen manufacturers producing nitrogen-based fertilizer products and industrial nitrogen products.

Recommendation: Buy

Recommendation Date: Friday, November 21, 2008 at .50 cents per share

Recommendation Results:
** 11/21/2008: UP 8.00%
** 11/24/2008: UP 12.96%
** 11/25/2008: DOWN -1.72%
** 11/26/2008: UP 3.42%
*** Since Date of Recommendation: UP 24.00%

______________________...
On Friday, November 21, 2008 we recommended Rentech (Ticker: RTK) with a buy rating at .50 cents a shares. Since then a few positive and significant developments have taken place.

* November 22, 2008 Indiana and Illinois announce they are pursuing major clean coal power projects. Illinois Attorney General Lisa Madigan has announced a measure that will create 2 clean coal projects including a $2.5-billion plant near Taylorville, Illinois. That plant comes in the wake of another $2 billion coal gasification project in southern Indiana.
www.wthitv.com/dpp/new...

* November 22, 2008 Baard Energy has received its final air permits from the Ohio EPA which in turn allows them to build a coal to liquid plant in Wellsville along the Ohio River. One of the first of its kind. The permit is the third and final state environmental permit necessary for Baard Energy to proceed into final design and construction of the 53,000 barrel-per-day coal/biomass to liquids plant at the Columbiana County Port Authority site in Wellsville. Baard has yet to release who will supply their Fischer-Tropsch technology.
www.reviewonline.com/p...

* November 22, 2008 President-elect Barack Obama reaffirmed his support for alternative energy. This includes Rentech’s Fischer-Tropsch technology that converts biomass, natural gas, and coal into liquid fuels ranging from jet fuel to diesel gasoline.
news.yahoo.com/s/ap/20...;_ylt=Anucx2RdHWzyzTRu...

* November 24, 2008 The US Air Force concluded analysis of the effects of using a natural gas-based synthetic fuel with its Lockheed Martin F-22, as work to trial the technology accelerates through its trainer, transport and fighter fleets. The office of the assistant secretary of the air force for installations, environment and logistics is expected to select a private partner during December to develop a Fischer-Tropsch production facility at Malmstrom AFB, Montana.
www.flightglobal.com/a...

______________________...
As of Friday, November 21, 2008 for an Aggressive short-term trade we like Rentech at these current levels. Rentech will release fiscal year 2008 financial statements December 16, 2008. Rumor has it these numbers will be very positive.

Rentech’s stock price has been down significantly along with everyone else:
15 days down –43%
45 days down –62%
65 days down –79%

The last time Rentech hit .46 cents a share was October 27, 2008 and the stock proceeded to rally .43 cents to .87 cents a share. An 89 percent increase in 7 days. Since March of this year a 40 to 80 percent fluctuation in price has been common and we look for this level of volatility to continue. Rentech could easily exceed a $1.20 per share before year-end based on a number of reasons.

Rentech’s management is currently in a pickle. The stock has dropped significantly and the officers of the company need results ASAP if they want to be able to justify their year-end bonuses. In addition, all stock options are underwater including those belonging to the board of directors. As we have seen in the past, Rentech actively manages their stock price by issuing press reports before releasing their latest financial numbers. Only to be followed with additional press releases over the coming weeks in an attempt to influence the stock price. One news release could easily move Rentech’s stock price .50 to .60 cents like it has done so many times in the past. Two or more press releases could be very significant.

Press releases for Rentech's alternative energy segment could focus on:
* Technology licensing partnerships = Revenue increase
* Revenue and cost sharing relationships = Revenue increase and cost decrease
* New business strategies and directions = Shareholder assurance
* New product sales revenue generated by their Product Demonstration Unit -PDU- leading the way to future business opportunities as companies discover value in Rentech’s numerous gas to liquid products = Revenue increase and shareholder assurance
* Continued process improvements at their Product Demonstration Unit -PDU- facility in Commerce City, CO = Shareholder assurance

Rentech’s fertilizer plant, Rentech Energy Midwest Corporation -REMC- located in Dubuque IL, is an extremely valuable asset that generates a tremendous amount of cash. The value of this plant alone creates a support at current levels helping to reduce downside risk. Rentech currently has 166 million shares outstanding and their fertilizer plant alone is valued between 120-210 million. A quick back of the envelope calculation, 122/166 and 210/166, suggests a stock price between .73 to $1.27.

Rentech recently reaffirmed EBITDA guidance for their fertilizer plant and there’s a good chance Rentech will post a net income, something they haven’t done in years. Moving from a net loss to a net income would be a significant event and I think the street HAS NOT priced this into the stock. Last quarter Rentech successfully completed their Product Demonstration Unit -PDU- that converts natural gas into various petroleum based products like jet fuel and diesel gasoline. The completion of the PDU means a reduction in expenses. Combine reduced expenses with record fertilizer sales revenue, coming from greater demand for corn that is used in the production of ethanol based fuels, could translate to a positive earnings per share. Management needs a homerun if they want to justify year-end bonuses; there’s an incentive for them to be aggressive. Shareholders are less likely to be pissed off when they hear about seven figure total compensation packages when the stock is trading at $3.15 versus .50 cents a share. Again, management has a strong incentive to move this stock and all stock options are currently underwater.

Press releases for Rentech's fertilizer segment could focus on:
* Record fertilizer sales revenue growth for fiscal year 2008
* Very favorable EBITDA guidance for 2009
* Favorable asset valuation discussion of their fertilizer plant

As reported at Mutual Fund Facts About Individual Stocks -MFFAIS- the overall number of institutional owners has recently increased 20 percent from 81 to its current level of 97. This is very positive.
Institutions adding to an already existing position include:
Goldman Sachs added 825,221 shares
Vanguard Group added 5,662,885 shares
Barclays Global Investors added 1,918,971 shares
Credit Suisse added shares
Putnam added shares
Oppenheimer added shares
Northern Trust added shares
Bank of New York Mellon added shares
Bank of America added shares
Wells Fargo added shares

There’s a large short position, I believe 8-9 million shares and it’s probably a safe assumption that these sellers are in the money since Rentech is currently near 52-week lows. If Rentech’s stock price does move quickly, press releases and an overall market rally, we could see short sellers add to the buying as they lock in profits. This 1-2 combo could move Rentech’s stock price in excess of .40 cents a share.

Because of a crisis in confidence the major indices, DJIA and S&P 500, have seen a record setting retreat in the last 30 days, especially in the last 7, and the market is due for a 1,200-point rally. This alone could move Rentech’s stock price .30 cents a share.

2008 Nov 28 02:21 AM