RTK - Rentech Inc

[valcont]

I was supposed to post this few days ago and the price has run up a little bit the past few days probably because of the NE storm but it is still a good bet. I came across this security while researching for LSB. Horsehead shareholders beware, this will bring back some painful memories of broken promises, crappy management and an inability to get the plant back up but redux this is not. They got rid of the senior management and the new CEO has so far delivered by reducing debt and selling non core assets. Plus one of the two problematic plants is fully operational so they have some credibility.

 

RTK are a leading provider of wood fibre processing services, pellets and chips with three core subsidiaries:

 

1. Fulghum : Sell wood chips to the paper and packaging industry. Revenue is split evenly between US and South America. Its a stable business with volumes contracted through 2018. Generates about $16-17 million in EBITDA.

 

2. NEWP : This is the wood pellet business that captures about 15% market share. Pellets are used to heat residential/businesses in remote areas and compete with the heating oil. This segment had taken a beating last year due to warm winters and heating oil dropping to $1.5 a gallon from $4/gallon a year before. Both reach parity at about $2/gallon price point. Right now the heating oil is hovering at $2.5/gallon.

 

https://www.eia.gov/petroleum/heatingoilpropane/#itn-tabs-2

 

They'll do $5-6 million EBITDA this year. In a normal winter like this one, I think they can do $10-11 million.

 

3. Industrials: This is the problem child, especially one half of it. This business supplies wood pellets to utility companies in Canada (Atikokan Facility) and the UK (Wawa). Wawa with the production capacity of 450,000 tonnes has run into several operational issues and is running at 40%. Atikokan faced similar issues but they have been resolved and it is running at 90% of 110,000 tonnes capacity. 45,000 tonnes of those are contracted to the OPG and the rest is shipped to UK for the drax(a British utility firm) contract .The problem is that they are under contract to deliver 400,000 tonnes of pellets to drax or face penalties. The penalty is capped at $20million for the difference between contracted price and the spot price.

 

Zero EBITDA for industrials but management had indicated that it'll be $14-15 million if both plants run at 90% capacity.

 

4. UAN Units: This is how I found out about the company. RTK owns 7.2m units of UAN as part of subsidiary sales transaction this March. Partially owned by Icahn, UAN is a variable rate MLP and is in the nitrogen fertilizer business. They manufacture ammonia and urea ammonia nitrate. Their prices are at an all time lows. The stock is selling at $5.65.

 

Valuation:

Assuming you get zero from industrials, this is a business with a market cap of $50m that has trough EBITDA of about $10m.

$16m(fulghum) + $6m(NEWP) - $12m(corporate overhead) .

 

On the balance sheet side they have a net debt of  $40m 

($127m LT debt - $45m from UAN units - $40m in cash)

 

So you can buy the whole business for $90m and get the normalized earnings of $15m at 6x times EBITDA.  Enviva Partners(EVA) , the closest comp is trading at 11x.

 

Another way to value it is to compare the purchase price of these businesses since they were bought recently. RTK paid $112m for Fulghum and $45m for NEWP and another facility in NE. Less $40m debt and you get $120m of business selling for $50m.

 

I see a lot of optionality at these prices,

 

1. Wawa’s issues are fixed and they are able to fulfill drax contract. That is an extra $16m EBITDA and the most bullish scenario. Even if it doesn’t, assuming $20m penalty for drax and another $14.5m of remaining capex, you have $35m of liability. Unless the management is stubborn and keep burning cash, this should not result in a ZINC like scenario. The new CEO Keith Foreman, an MLP specialist, was brought

in to fix up this mess so he shouldn’t have any problems getting rid of these plants. He had indicated that in his conference calls.

 

2. UAN price appreciation: Keith thinks UAN should be worth in mid teens by next year. I am not that bullish but ammonia prices are at an all time lows and the Chinese producers are hurting at these levels. Prices have improved a little bit due to the closure of Chinese anthracite producers.

 

http://marketrealist.com/2016/12/urea-prices-rose-yet-week-ended-december-23/

 

3. NEWP : The earnings were a disaster last year. Should be average or slightly better than average this year because of expected normal winter. I think the 15% appreciation yesterday was due to the coming snowstorm in the NE.

4. Fulghum’s North American market improves: Keith expects an average of $20m EBITDA from Fulghum and was slightly disappointed by its performance this year.

 

 

Notes:

1. GSO debt – 53 million @3.5% due 2019 with collateral of UAN unit.

2. Interest payments are ~$10m, they’ll receive $8m as distribution from UAN

3. Total SG&A is $44m and projected to decrease by $10-15m due to the corporate move to the DC from LA.

 

[KJP]

Good summary.

 

There's another thread on this here:  http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/rtk-rentech/

 

I would add that new management has done a good job cutting corporate SG&A down to size.

 

I believe the GSO debt is L+700 and recourse to RTK.  Also, UAN is a variable rate MLP.  With nitrogen fertilizer prices where they are, near-term distributions by UAN are murky at best.  The bull case for the nitrogen fertilizer producers is that prices can't stay where they are because they are below the cash cost of production of the marginal (Chinese) producers, and their cost structure should increase with rising coal prices.  (U.S. production is largely derived from natural gas, not coal.)  In the near-term, however, significant new supply has come online (or will come online shortly) in North America.  There's a thread on LSB Industries (LXU), another nitrogen fertilizer producer, for those interested. 

 

When RTK ran up to ~3.90 earlier this year while UAN sank to below $5/share, I started to think about whether it made sense to sell RTK and just go long UAN, but I never got around to thinking that all the way through before UAN began its sharp decline to $1.50.  I think this is something worth thinking about now so you're prepared in the event of similar price movements in the future.

 

Any investor in this should be prepared for high volatility.  For example, there has been a 60% decline and a 66% increase in the last few months.   

 

 

[valcont]

Ah I should have searched it before posting. You had done a great job discussing the debt structure. Looks like it'll be another $35-40m on the due date.

 

I found this security while researching for LSB. I could not get comfortable with their leverage and lack of options. RTK is a good option call on ammonia prices.Your downside is protected by Fulghum and NEWP which  are pretty stable EBITDA wise. And their capex is low enough to get good amount of FCF. I usually look for that in a commodity play.

 

I am ok with the volatility as long as my fundamental valuation is correct. Full disclosure: My cost basis is $1.95 and this has run up a little too much too fast. Be careful getting into this.

 

[valcont]

Raging capital acquired a 15% stake in Rentech. They are good activists. We may see some traction now.

 

 

http://www.reuters.com/article/idUSFWN1FV1BM

[KJP]

Bad news all around:  http://phx.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle&ID=2247552

 

No mention of what they're going to do with the Drax obligations.

 

EDIT:  Not bad news all around, actually.  It certainly seems like a sale is going to happen.  But's it's hard to get a handle on what the value (positive or negative) of the industrial wood pellet business is.  Atikokan should be worth something.  The release suggests Wawa would be worth something, but it's hard to say how much given that any buyer is going to have to put in money to get the plant going.  And then you have to assess the fallout from the Drax contract, CN Rail take-or-pay, and the QSL debt.

 

[valcont]

Bad news all around:  http://phx.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle&ID=2247552

 

No mention of what they're going to do with the Drax obligations.

 

EDIT:  Not bad news all around, actually.  It certainly seems like a sale is going to happen.  But's it's hard to get a handle on what the value (positive or negative) of the industrial wood pellet business is.  Atikokan should be worth something.  The release suggests Wawa would be worth something, but it's hard to say how much given that any buyer is going to have to put in money to get the plant going.  And then you have to assess the fallout from the Drax contract, CN Rail take-or-pay, and the QSL debt.

 

Seems like an overreaction. The good news is that they are going to shut down Wawa and not bleed money on capex. The Drax contract states $20m maximum liability between the contracted price and the market price. The GSO debt ($55m) is collateralized with UAN unit that are worth $41m. They are going to get $5.5m for fulghum plants recall. Add it all up and you still get an enterprise value more than the mkt cap of $35m today.

 

They need to move on corporate overhead. There is no point in spending $12m/year now that the industrials are closed.

[KJP]

Bad news all around:  http://phx.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle&ID=2247552

 

No mention of what they're going to do with the Drax obligations.

 

EDIT:  Not bad news all around, actually.  It certainly seems like a sale is going to happen.  But's it's hard to get a handle on what the value (positive or negative) of the industrial wood pellet business is.  Atikokan should be worth something.  The release suggests Wawa would be worth something, but it's hard to say how much given that any buyer is going to have to put in money to get the plant going.  And then you have to assess the fallout from the Drax contract, CN Rail take-or-pay, and the QSL debt.

 

The Wawa shutdown also creates additional liabilities on the CN Rail take-or-pay, and they have the QSL debt.

 

Seems like an overreaction. The good news is that they are going to shut down Wawa and not bleed money on capex. The Drax contract states $20m maximum liability between the contracted price and the market price. The GSO debt ($55m) is collateralized with UAN unit that are worth $41m. They are going to get $5.5m for fulghum plants recall. Add it all up and you still get an enterprise value more than the mkt cap of $35m today.

 

They need to move on corporate overhead. There is no point in spending $12m/year now that the industrials are closed.

[valcont]

Bad news all around:  http://phx.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle&ID=2247552

 

No mention of what they're going to do with the Drax obligations.

 

EDIT:  Not bad news all around, actually.  It certainly seems like a sale is going to happen.  But's it's hard to get a handle on what the value (positive or negative) of the industrial wood pellet business is.  Atikokan should be worth something.  The release suggests Wawa would be worth something, but it's hard to say how much given that any buyer is going to have to put in money to get the plant going.  And then you have to assess the fallout from the Drax contract, CN Rail take-or-pay, and the QSL debt.

 

The Wawa shutdown also creates additional liabilities on the CN Rail take-or-pay, and they have the QSL debt.

 

Seems like an overreaction. The good news is that they are going to shut down Wawa and not bleed money on capex. The Drax contract states $20m maximum liability between the contracted price and the market price. The GSO debt ($55m) is collateralized with UAN unit that are worth $41m. They are going to get $5.5m for fulghum plants recall. Add it all up and you still get an enterprise value more than the mkt cap of $35m today.

 

They need to move on corporate overhead. There is no point in spending $12m/year now that the industrials are closed.

 

QSL is $14.5m, I didn't count it since I'm giving industrials a zero valuation even though one plant is fully operational. I think they can sell it and break even. Take or pay contract breach are negotiable and are rarely settled at the contracted price. Look at all the shippers that breached them 2 years ago during low energy prices.

[KJP]

So how are you thinking about a liquidation? 

 

The rosy version is something like this:

 

Sale of Atikokan and Wawa cancels out $20 million Drax, $14 million QSL and $3.6 million annual CN Rail liability

 

UAN stake + interim distributions cancels out GSO debt

 

Leaving:

$20 million cash + $5 million cash from Fulghum  [likely will be burned to fund various obligations and sales process]

Fulghum -- equity value after segment debt = ~$75 - $90 million

NEWP -- equity value after segment debt = ~$50 - $75 million

 

So equity value of ~$125 million - $165 million vs. $35 million current market cap.

 

 

 

 

[valcont]

So how are you thinking about a liquidation? 

 

The rosy version is something like this:

 

Sale of Atikokan and Wawa cancels out $20 million Drax, $14 million QSL and $3.6 million annual CN Rail liability

 

UAN stake + interim distributions cancels out GSO debt

 

Leaving:

$20 million cash + $5 million cash from Fulghum  [likely will be burned to fund various obligations and sales process]

Fulghum -- equity value after segment debt = ~$75 - $90 million

NEWP -- equity value after segment debt = ~$50 - $75 million

 

So equity value of ~$125 million - $165 million vs. $35 million current market cap.

 

I am more conservative with the numbers. I am capitalizing the corporate overhead to somewhere around $60-80m and I'll get $70-85 million. Still a good deal.

[goblue100]

Thanks for the posts.  Can you guys provide a breakdown of where the debt resides - i.e how much at fulgham and newp?  Thanks.

[KJP]

Thanks for the posts.  Can you guys provide a breakdown of where the debt resides - i.e how much at fulgham and newp?  Thanks.

 

Look at Page 21 of the latest 10-Q for a breakdown of the on-balance-sheet debt:  https://www.sec.gov/Archives/edgar/data/868725/000156459016028610/rtk-10q_20160930.htm

 

You also need to consider the off-balance-sheet contingent liabilities that are significant, including Drax penalties and CN Rail take-or-pay. 

 

According to the 10-K, the Drax liabilities of the Rentech parent are capped at $20 million, but I couldn't find the actual guarantee on EDGAR (the contracts between Drax and the Rentech sub are available, with the latest amendment at Ex. 10.1 of the 8/10/15 10-Q). 

 

The QSL contract (including the Rentech corporate guarantee) is at Ex. 10.4 of of the 8/3/13 10-Q.

 

I'd be interested in another take on Rentech corporate's ultimate liability on the various subsidiary obligations.  The market is pricing the equity for bankruptcy, but I don't see that so long as management is honest and sensible.  If they dither or act with bad intent, then the equity could be a zero.

[Guest roark33]

I see this comment a lot, "pricing in equity for bankruptcy"....what does this mean?  If the market was pricing equity for bankruptcy, wouldn't the equity be trading at zero or as close as possible?  I am just curious....

 

 

[investor-man]

I see this comment a lot, "pricing in equity for bankruptcy"....what does this mean?  If the market was pricing equity for bankruptcy, wouldn't the equity be trading at zero or as close as possible?  I am just curious....

 

as a shareholder you are entitled to the remaining assets once the debt holders are paid off.

[KJP]

I see this comment a lot, "pricing in equity for bankruptcy"....what does this mean?  If the market was pricing equity for bankruptcy, wouldn't the equity be trading at zero or as close as possible?  I am just curious....

 

Assume a business that is balance sheet insolvent, but has enough liquidity to last a year.  Assume there are also scenarios in which, depending on future events, the assets may, within a year, be worth more than the liabilities.  What is the equity worth today?  It's not zero, because there is option value in getting the upside without having to bear the full potential downside (equity loss capped at investment; it doesn't have to make up for any "deepening insolvency" that may occur during the year).  When I say the equity seems priced for bankruptcy, I'm referred to the situation where the equity is approaching just the option value referred to above. 

 

Other people may mean something different, like a liquidity crisis forcing a bankruptcy of a company that is not actually balance sheet insolvent.

 

 

[Patmo]

I like this spot. I get to about $53 million in NAV, much lower than you guys' calculations but still a double. What I really like though is the fact that they are "exploring strategic alternatives", so you essentially get the catalyst right there for free. In this environment, it's good to have an expiration date on the investment.

 

Bought some shares @ 1.15

[KJP]

I like this spot. I get to about $53 million in NAV, much lower than you guys' calculations but still a double. What I really like though is the fact that they are "exploring strategic alternatives", so you essentially get the catalyst right there for free. In this environment, it's good to have an expiration date on the investment.

 

Bought some shares @ 1.15

 

How'd you get to $53 million? 

 

The numbers in post #8 were the "rosy" scenario, so I agree that the conservative view would be significantly lower.

[Patmo]

I like this spot. I get to about $53 million in NAV, much lower than you guys' calculations but still a double. What I really like though is the fact that they are "exploring strategic alternatives", so you essentially get the catalyst right there for free. In this environment, it's good to have an expiration date on the investment.

 

Bought some shares @ 1.15

 

How'd you get to $53 million? 

 

The numbers in post #8 were the "rosy" scenario, so I agree that the conservative view would be significantly lower.

 

Back of envelope calculation:

 

Current assets at 62mil

 

CVR/UAN shares at 0 (washed off against the GSO debt)

 

Fulghum at 2.75*25 mills (valuing the 5 South American mills and proceeds of 2 mills at 0 just because)

 

NEWP at 47mil

 

Wawa at 0

 

Atitokan at 22mil

 

Intangibles at 0

 

 

Total assets: 200

 

Liabs:

Short term 53mil

LT 127mil

Drax 20mil

-GSO debt 52mil

 

Total liabs: 147mil

 

Voila

[heth247]

This is an interesting idea! Anybody still has a copy of the Seekalpha Pro article: Rentech: Heads You Win, Tails You Win A Lot ? It is not free anymore. Thanks.

[heth247]

I haven't gotten a chance to read the 10K, but is the "$20 million Drax, $14 million QSL and $3.6 million annual CN Rail" liability recourse to RTK corporate or just the Industrial subsidiary?

 

Ironically, I see the recent news of idling the Wawa plant as a "catalyst" to speed up the realization of the investment thesis, while the market sees it as a big negative and presents a even better opportunity.

 

What would be the total cost to close Wawa down? It would probably cancel out with the annual SGA reduction eventually, but in short term will they have liquidity issue, since they will also need to pay Wells Fargo for the selling the company?

[goblue100]

what multiples do you think they can get for assets....EVA trades at 7.5x EBITDA.  If RTK sells assets for 7x EBITDA and you capitalize corporate, I am not sure there is much equity value.

[heth247]

what multiples do you think they can get for assets....EVA trades at 7.5x EBITDA.  If RTK sells assets for 7x EBITDA and you capitalize corporate, I am not sure there is much equity value.

 

If that is the case, why sell? I don't think they are desperate to sell, it is not like that they are going bankrupt. Assuming they have enough liquidity to shut down Wawa completely and pay the liability, the longer they wait, the more EBITDA they can generate from the other two business, and the better chance for their UAN stake to appreciate in value, which will provide much larger upside.

[KJP]

what multiples do you think they can get for assets....EVA trades at 7.5x EBITDA.  If RTK sells assets for 7x EBITDA and you capitalize corporate, I am not sure there is much equity value.

 

What is the scenario you're thinking of?  Specifically, what assets are being sold and what level of corporate overhead is going to remain after the sale?  I don't see shareholders letting $12 million in annual corporate overhead continue once Wawa is effectively shut down and either Fulghum or NEWP are sold. 

 

 

[heth247]

KJP,

 

What is their total current NOL?  After the impairment of Wawa plant shutdown, they probably will add another $100M to it. Putting a 35% tax rate, that is like $35MM+ of cash value. I don't know but are such kind of NOLs considered sort of like an "assets" when selling a company?

 

 

[valcont]

what multiples do you think they can get for assets....EVA trades at 7.5x EBITDA.  If RTK sells assets for 7x EBITDA and you capitalize corporate, I am not sure there is much equity value.

 

What is the scenario you're thinking of?  Specifically, what assets are being sold and what level of corporate overhead is going to remain after the sale?  I don't see shareholders letting $12 million in annual corporate overhead continue once Wawa is effectively shut down and either Fulghum or NEWP are sold. 

 

 

 

Corporate overhead although reduced will still remain. Most of the G&A expenses at the sub level are rolled into corporate overhead and reported separately. This is an opaque structure and if you go through the previous CC's you would notice the analysts demanding that overheads be reported at the  sub level. My guess is that the overheads will be in the range of $7-8 minus industrials.

 

Right now there is only one board member from activist investor ,Ariel investments but if the Raging capital can get the board seats, then there is some hope that those overheads will be reduced.