Best stock to invest in – Rentech’s Wood Saw Hits a Knot

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by Debra Fiakas CFA

Last week Rentech, Inc. (RTK: 
NYSE) revealed plans to idle its wood pellet production facility in
Wawa, Ontario Canada.  To operate efficiently the plant
requires additional repairs and upgrades beyond the replacement of
conveyors that was completed in Fall 2016.  Beside the fact
that the additional repairs were not included in the regular capital
budget, Rentech management has apparently determined the expenditure
is not economic given profits from Wawa.  When Rentech reports
financial results for the fourth quarter ending December 2016,
shareholders will be treated to an asset impairment charge for the
Wawa facility.

Doors Close, Windows Open (then shut again)

The demise of Wawa is symptomatic of broader issues at Rentech,
which has had to reinvent itself several times as the renewable
energy industry has evolved.  Rentech got its start well over a
decade ago pursuing synthetic gas technologies.  The company’s
Rentech Process for producing synthetic fuel was thought capable of
producing synthetic fuel by gasifying coal.  In 2004, Rentech
bought a natural-gas fed nitrogen fertilizer plant in East Dubuque,
Illinois and laid out plans to convert it for coal feedstock. 
However, by October 2011, fuel projects in Rialto, California and
Natchez had to be scrapped.  The company had planned to produce
drop-in synthetic fuel from landfill waste at Rialto using Rentech’s
proprietary application of Fischer-Tropsch technology.  Just a
few months later in March 2012, Rentech abandoned its coal-to-liquid
plant and later sold its land holdings in Natchez, Mississippi.

In March 2013, Rentech shuttered its product demonstration unit
located in Commerce City, Colorado and terminated research and
development on advanced biofuels.  With the syngas effort
behind it, Rentech quickly moved on other opportunities.  In
May 2013, the company acquired Fulghum Fibres, a processor wood
fiber with 32 wood chipping mills strung out across the U.S. and
South America.  Rentech had its eye on the market for wood
pellets to be used as a low-carbon alternative to coal feedstock in
power generation plants.  Unfortunately by 2015, the company
was forced to begin writing down the value of its wood pellet
inventory as the realizable fell under question under evolving
demand and pricing conditions.  Now those economic conditions
have forced the shutdown of the Wawa wood pellet operation.


Some of Rentech’s early strategic moves have eventually proved
fortuitous.  By 2011, all the company’s revenue was from sales
of fertilizer products made from natural gas at the East Dubuque,
Illinois facility.   In November 2011, 39% of the
fertilizer operation, the Rentech Nitrogen Partners, was sold
through a public offering of its common units.  The company
received $276 million net of costs that was promptly used to retire
term loan.  Then in early April 2016, another fertilizer
producer, CVR Partners
acquired all the common units for $2.67 per
share, retiring the units Rentech Nitrogen Partners from public
trading.  Rentech received $59.8 million in cash and 24.2
million CVR common units valued at approximately $142 million in the
bargain.  Again Rentech promptly distributed cash and some of
the securities to repurchase $100 million in preferred stock and
retire $41.7 million in debt obligations.  Altogether Rentech
received $477 million for its interests in Rentech Nitrogen
Partners.  Considering that the company paid $63 million for
the business in 2004, the returns have been impressive.

After all the deal making, acquisitions and divestitures, at the end
of September 2016, the last balance sheet disclosed by the company,
Rentech had total equity of $278.1 million.  The company has
taken in $533.2 million in equity altogether, but losses over the
years have accumulated to $255.1 million.  The company has used
leverage over the years, but long-term debt has been reduced to
$125.9 million.  The debt-to-equity ratio is now a relatively
placid 0.45.

While Rentech has improved its balance sheet, its assets appear to
go underutilized.  Return on assets and return on equity are
both negative based on recent financial performance.  The net
loss was $127.7 million or $10.42 per share on $287 million in total
wood pellet sales in the twelve months ending September 2016. 
Even excluding discontinued operations, net results were
negative.  Indeed, positive returns from its renewable fuel
operations have eluded Rentech. Only when the company was producing
fertilizer did Rentech generate profits.

Disappointing operating performance appears registered in the RTK
price.  Rentech equity is valued at just $20 million and its
enterprise value is near $106.2 million.  Some investors might
argue that at a stock price less than $1.00 per share, RKT is a
bargain against its total assets of $470.1 million.  Then there
is that looming Wawa asset write-down and the possibility of
additional charges to reflect the demise of yet another misstep in
Rentech’s travels through the renewable energy market.

Debra Fiakas is the Managing Director of
Crystal Equity
, an alternative
research resource on small capitalization companies in selected

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

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