Thursday, March 26, 2015

Rentech: New Management, Strategic Alternatives, and Potential MLP IPO

For years Rentech has wasted shareholder capital by chasing the alternative energy dream, the company has never turned a profit in 30+ years of existence.  In 2014, Rentech's board finally threw in the towel, fired the CEO, hired an MLP veteran, sold the last of the alternative energy business, and shifted focus to their agricultural commodity/fertilizer business Rentech Nitrogen Partners (RNF) which they own 60% of the MLP's units, and their wood fibre business which produces wood chips and pellets for both industrial and energy market use.

I'll be the first to admit that I know little about the nitrogen fertilizer or wood fibre businesses, but the sentiment is severely depressed around Rentech, despite most of the capital spend being completed in the wood fibre business and a new CEO with a wide range of experiences centered around the MLP space in Keith Forman.  Using current market prices for RNF, the market is assigning very little value to the wood fibre businesses which have been marred by delays and cost overruns, but are still on target to produce significant cash flow by year end with the ultimate goal to float the business as it's own MLP.  Additionally on 2/17/15, Rentech announced they were pursuing strategic alternatives of their primary asset RNF, all options are on the table, either in whole or one of the two fertilizer facilities in East Dubuque, IL and Pasadena, TX, both of which struggled in 2014 with site specific issues and industry headwinds.

Wood Fibre Business
In 2013, following the decision to exit the alternative energy space, Rentech started converting and acquiring wood chipping and pellets plants to sell into the packaging/paper industry and power/heating markets.  They divide their business into three segments based on products and historical acquisitions:
  • Fulghum Fibres: Rentech entered the wood fibre market in 2013 with the purchase of Fulghum Fibres which produces wood chips for the pulp, paper, and packaging industry.  Fulghum operates 31 mills each typically under long term contracts with a major market participant, with the customer being responsible for supplying the wood product and Fulghum is paid a processing fee for running the mill.  Fulghum has a strong 70% market position in the United States (also has operations in South America) but struggled in 2014 due to a fire at one of their mills and some resulting costs.  It's projected to do $17MM in EBITDA in 2015, down from the originally guided $20MM annually at the time of the acquisition.
  • New England Wood Pellet (NEWP):  Rentech acquired NEWP on 5/1/14, NEWP operates four wood pellet processing facilities in the northeast for commercial and residential heating applications (so it's a pretty seasonal business).  They primarily sell through big box retailers like Home Depot and Lowe's but also will sell directly to entities like governments, schools, etc.  NEWP has been performing above expectations (perhaps the only RTK unit that can say that) and is expected to earn $9MM in EBITDA in 2015.
  • Wood Pellets - Industrial: Rentech's expensive boondoggle has been the repurposing of two plants in Ontario, Canada that when operational will produce and sell wood pellets for use by two large Canadian power utilities (Drax and OPG).  The Wawa plant (the larger of the two) was a former strand board mill and the Atikokan plant a former partical board processing mill, both are significantly behind schedule and over budget (although Atikokan is essentially completed and in the commissioning phase).  These two projects are where much of the negative investor sentiment lies, as incremental progress is made and revised timelines are met, Rentech has the opportunity to regain the market's trust.  The segment isn't expected to be cash flow or EBITDA positive in 2015, but in 2016 new management is sticking to the $15MM EBITDA estimate.
All of these business segments are qualified assets for an MLP which remains the primary goal of management and would force the market to revalue the stub via the MLP tax arbitrage game.  There doesn't appear to be a good comparable in the MLP market (please alert me if you know of one), so below I just took a swag at determining a multiple for each piece of the stub that's hopefully reasonable and conservative.
Assuming the market is valuing RNF correctly (although you can play with various upside scenarios a strategic buyer would pay for those assets, plus there appears to be some traction in their turnaround plan for the Pasadena plant), I come up with the below valuation for the Rentech stub:
Given Rentech's failure in the past several decades to generate taxable income, they also have $177MM in NOLs to help shield any windfall in selling RNF, but expect some tax leakage.  The real key is new management, Keith Forman is a relative outsider to Rentech (he was previously a board member), he brings a fresh perspective without emotional attachment to any legacy business or asset.  Plus he has wide ranging experience throughout the MLP value chain; as a lender to many early MLPs, senior management roles, and leading a trade association group.  With him leading Rentech it's more likely than not the wood fibre businesses gets IPO'd within the next 12-18 months and the market will start to recognize that event sometime sooner.  Risks include continued poor execution in the wood fibre businesses, RNF not being sold (although it's trading below where it was when strategic alternatives were announced, and well below 2012-2013 levels), and GSO/Blackstone (debt, convertible preferred holder) taking a bigger bite out of the upside.  I started a small position this week.

Disclosure: I own shares of RTK


  1. What's your assumption on their cost basis in RNF? I believe it's actually negative. There's definitely going to be tax leakage.

    1. I don't know what the cost basis is for RNF, any information here would be helpful. One thought process I've heard recently is RTK may only sell a piece of RNF to purchase another bolt on acquisition to make the wood fibre/pellet business more scalable for an MLP. If they sell the entire thing, you're right, likely to be tax leakage, but I'm sure that's a consideration for how any transaction will be structured. Thanks for the comment.

  2. Exited my small position today at loss. There might be another, although smaller, opportunity once the transformation has more legs. The MLP market has gotten slammed, likely pushing back the sale of RNF, and the conversion of the wood pellet/chip business.

  3. Any updated thoughts with the sale announcement and further RTK weakness?

    1. Sorry for the delay, I haven't had the chance to revisit my thesis since I sold. I did read the below write-up on Seeking Alpha and found the comment section especially helpful, there could still be an opportunity here, but MLPs and anything commodity is so out of a favor its hard to have any confidence.