November 25, 2009 - 10:15am EST by
2009 2010
Price: 1.78 EPS nmf nmf
Shares Out. (in M): 241 P/E nmf nmf
Market Cap (in $M): 429 P/FCF nmf nmf
Net Debt (in $M): 50 EBIT 0 0
TEV ($): 479 TEV/EBIT nmf nmf
Borrow Cost: NA

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As far as I can tell, Rentech's main business is issuing stock, releasing press releases full of hype, and - on the side - they have a small fertilizer business as well as a questionable alternative energy technology. The stock is up 53% today on an announcement from a microcap Australian company (Syngas - SYS AU) that they will engage Rentech to provide them with some engineering services and that this "could" lead to Syngas entering into a licensing agreement with Rentech. Frankly, I can't see where Syngas is going to get the money for this paper project nor how it is going to translate into earnings for Rentech. Here is the basic short thesis:

  • Since Q2, stock up 4x on a good quarter in the fertilizer business, which led to increased guidance as well as the recent Syngsa announcement
  • The good Q2 was a 1x event because they sold volumes forward at the end of last fiscal year (fiscal year ended 9/30/2008) when fertilizer prices were very high due to high natural gas prices
  • They only hedged a portion of their natural gas out at the time the forward sales were entered into and then only through 3/31/2009. This meant that they were short natural gas after 3/31/2009
  • Their deferred revenue line stayed at a relatively high level through 3/31/09, meaning that they did not recognize most of the presales in their sales through this period
  • Deferred revenue dropped from approx $100mm to $18mm in the quarter from 4/1/09 to 6/30/09 meaning that the vast majority of revenue that was booked (roughly 90%) related to fertilizer that had been presold at much higher prices
  • This fertilizer was produced using natural gas that was purchased at spot rates in the period from 4/1/2009 to 6/30/2009, which was well below natural gas prices at the time the deferred revenue was booked
  • As a result, the company sold a commodity at a very high point in the cycle but produced it using another commodity purchased at a low point in the cycle 6-9 months later
  • Effectively, the company gambled short on natural gas and this paid off
  • This gamble is unlikely to be repeated in such a dramatic fashion because the deferred revenue account has shrunk to $18mm on the balance sheet and current market fertilizer prices are way down (i.e. Yara - same fertilizer manufactured - realized Urea prices that were -58% YOY in Q2 2009 and Ammonia prices that were -52% YOY)
  • The company looks like it will be dropped by their fertilizer marketing partner (Agrium) - see recent 8-K from 10/19 - in which case the prepayments for fertilizer (the ones that are booked as deferred revenue) will cease and the company could face a liquidity crunch
  • Aside from the fertilizer business, the company also has a development stage alterative energy business focused on making a specialized catalyst for gas to liquids bioenergy plants
  • As far as I can tell, this technology is not superior to the other catalysts available in the market and consultants have told us that the technology is not differentiated from that of Headwaters or Syntroleum
  • Sasol is the major user of this technology in the world and they have commented that they don't see the business as being viable in the US
  • The alternative energy business has never produced any real revenue
  • The reported revenue this year is from subleasing some of their office space and not from selling product. Prior year revenue was largely related to contract research
  • The company has never been profitable
  • The company has never been FCF positive
  • The company's secured term loan has an effective interest rate of roughly 15% when the warrants, upfront fees, interest rate, and prepayment fees are considered
  • The company has historically financed itself by issuing shares. The share count has risen from 6 million in December 1991 to about 213 million now (estimated 241 million fully diluted for warrants, options, restricted stock, etc)
  • The CEO has run 2 companies previously - M2 Automotive and Thompson PBE. M2 liquidated and Thompson PBE went from $12 to $8 while it was public and was ultimately sold at $8 including a big premium over the roughly $6/share that it traded for prior to being sold. During the period it was public, it went down roughly -33%, appeared to have paid no divis, and the market was +123% including dividends.
  • The CEO said in the a recent interview that they have a very strong balance sheet yet they did an equity offer the next day. Likewise, he stated that they were going to convert their fertilizer plant to an alternative energy plant but ended up leaving it as a fertilizer plant because the business was so strong. The reality is that they spent nearly $40mm on capex trying to convert the plant, the money was wasted, and they were forced to repurpose the plant back to its original use.
  • I generously value the stock at $0.79 per share. This breaks down as follows: $0.79 * 241mm shares + $50mm est net debt at end Q3 (post burn & share issue) = $241mm EV = $100mm for $0 revenue catalyst business + 2x purchase price of fertilizer plant in 2006 ($70mm purch price)
  • This is 55% downside from the current price. Frankly, it is probably too generous. Why should the catalyst business be worth $100 million? What assets today are really worth 2x their value from 2006?


Return to sanity by the markets as yet another piece of hype turns to nothing.

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