RTK - Rentech Inc

[KJP]

I'm not sure Cohrs knew what he was talking about.  Here's the historic annual CapEx:

 

YE 3/2012:  $10.3 million

YE 3/2013:  $3.8 million

8 months 4/2013 - 12/2013:  $2.2 million

2014:  $21.7 million [includes $9 million of expansion CapEx in S.A.; also had fire in Maine]

2015:  $9.1 million

9 mos. 2016:  $5.2 million

 

Depreciation recorded in COGS was $7.4 million for 2014 and $8.7 million for 2015.  For 9 months of 2016, it has been $5.75 million.  So, the deprecation recorded in COGS looks like a pretty good proxy for normalized CapEx. 

 

There is also additional D&A reported in operating expenses, but I think the vast majority of that is amortization of processing agreements, so I've excluded it from the depreciation I used to calculate normalized unlevered FCF. 

 

[heth247]

Keep in mind that based on their original goal, they just need to spend $75MM to generate 15% ROI. So if a buyer can buy the Industrial for $50MM and put in another $25MM to make it work, then it is still a good deal.  But again, I don't know how much more money is needed.

Shouldn't the same logic work for the current owner as well? If the required investment to make it work passes the hurdle rate of the buyer, why wouldn't it pass the hurdle rate of the current owner (assuming similar hurdle rates)?

 

Sunk costs should not affect the rational decision-maker's best choice. It seems safer to conclude that the required investment doesn't pass a typical hurdle rate.

 

Igor, see my last post quote from EVA's CC. I guess it is not just as simple as a hurdle rate....  :-[

[Patmo]

One thing to also consider is whether "exploring strategic alternatives" meant they gave up or whether they actually hope to keep going. There's always a Chinese buyer for a failing business at a small premium to share price. In that event, valuing the business is a futile exercise because the offer will be based on share price, not business value.

 

Actually meeting mgmt to get a pulse for the size of their balls would be a pretty big boon if you think this is worth a multiple of share price, although I wonder why the mgmt team would waste time doing that in this current situation. Get to work ya lazy bums!

 

I disagree. First, the company as a whole is not a failing business. They have valuable (UAN stake) assets and profitable business (Fulghum+NEWP).  Second, valuing the business is still a good exercise since it helps you to know the downside.

 

Of course, but do you not want to know what these guys are thinking? Sure it doesn't look like a lost cause at all, but that doesn't mean they didn't throw in the towel. Just putting the language where they say they are exploring their strategic options is pretty ominous in that regard, any time I've seen this, the company was actually near closing a deal for full sale of the company and announced just a couple weeks later. I am prepared (although certainly not hoping) to not see the ROI be on full value, but some truncated amount that will be excused a million ways and promptly swept under the rug. It's a possibility to remain cognisant of, you know?

[Guest roark33]

Is it pricing in bankruptcy yet after falling another 20%? 

[KJP]

Is it pricing in bankruptcy yet after falling another 20%?

 

You didn't respond to my last post on this issue.  If you think what I said was dumb (which it may be), why don't you just say that and explain why? 

[Guest roark33]

I am sorry, I wasn't trying to be rude.  My gut reaction to that concept is that if a stock were truly pricing in bankruptcy, it would probably be a penny stock, i.e. a few pennies, not 120 pennies.  With a company like RTK, if bankruptcy occurs, the equity is almost certainly a zero. 

[KJP]

 

So in your opinion, what are the options RTK have here and what are the main risks left for RTK?  On last week's press release, they specifically mentioned that they expects NEWP and Fulghum to generate positive cash flow and be self-sufficient from a liquidity perspective in 2017.  Thanks.

 

The main risks are (i) the assets don't cover the liabilities and the equity is a zero; and (ii) management dithers and runs out of liquidity before selling the assets.

 

Liabilities

GSO debt: $54 million

Fulghum segment -level:  $37 million

NEWP segment-level:  $17 milion

QSL debt: $14 million

Drax liability: $20 million

CN Rail liability:  $25 million

Cash burn over next ~9-12 months:  ~$5-10 million

Total:  $177 million [Perhaps the Industrial liabilities ultimately come in lower]

 

The assets to cover those liabilities:

2/17 Cash + Fulghum partial sale:  $25 million

My Fulghum estimate:  $110 million [at one turn less of EBITDA, $91 million]

NEWP: ?

UAN:  Who really knows what these shares ultimately will be sold for?  UAN is a retail-investor-driven yield vehicle that sells a commodity product into a market that's been depressed for awhile, and more capacity is coming online later in the year. 

Atikokan:  A 90k-100k ton per year plant that is supposedly cash-flow breakeven at 45k tons/year.  Can they sell the extra capacity, or is this plant inherently flawed?

Wawa:  Is there any value here at all?  Or is the plant so fouled up that it's worth only salvage value? 

Fees/taxes:  There will be substantial financial and legal advisor fees accompanying any sales of the operating units, potentially change-of-control payments to senior management, and potentially tax liabilities. 

 

You can make your own assessments of UAN, NEWP and the plants and decide if there's enough value there to be long the equity. 

 

As for liquidity, I indicated an estimate of the cash burn over the next year or so.  It's difficult to look further out than that, because you need to determine what distributions UAN will be paying and what the weather and heating oil prices in New England are going to be next winter.  I don't know how to do that, but I do know that the business will be cash flow negative if UAN isn't paying distributions, NEWP has another year like last year, and they're paying Wawa idling costs and penalties. 

 

[KJP]

I am sorry, I wasn't trying to be rude.  My gut reaction to that concept is that if a stock were truly pricing in bankruptcy, it would probably be a penny stock, i.e. a few pennies, not 120 pennies.  With a company like RTK, if bankruptcy occurs, the equity is almost certainly a zero.

 

I'm sure I'm just a bit prickly right now given the freefall in the stock price.  I agree that if bankruptcy occurs the equity is a zero.  "Pricing in bankruptcy" may be self-delusional drivel. 

 

 

[Patmo]

I am sorry, I wasn't trying to be rude.  My gut reaction to that concept is that if a stock were truly pricing in bankruptcy, it would probably be a penny stock, i.e. a few pennies, not 120 pennies.  With a company like RTK, if bankruptcy occurs, the equity is almost certainly a zero.

 

I'm sure I'm just a bit prickly right now given the freefall in the stock price.  I agree that if bankruptcy occurs the equity is a zero.  "Pricing in bankruptcy" may be self-delusional drivel.

 

It could mean that it's too cheap for any scenario besides bankruptcy, or simply a colloquial saying to convey that the stock price went to the loony bin... Not a big whoop, man

[KJP]

I am sorry, I wasn't trying to be rude.  My gut reaction to that concept is that if a stock were truly pricing in bankruptcy, it would probably be a penny stock, i.e. a few pennies, not 120 pennies.  With a company like RTK, if bankruptcy occurs, the equity is almost certainly a zero.

 

I'm sure I'm just a bit prickly right now given the freefall in the stock price.  I agree that if bankruptcy occurs the equity is a zero.  "Pricing in bankruptcy" may be self-delusional drivel.

 

It could mean that it's too cheap for any scenario besides bankruptcy, or simply a colloquial saying to convey that the stock price went to the loony bin... Not a big whoop, man

 

I suspect that's part of Roark's point:  The phrase doesn't really have much meaning so it should probably be discarded in favor of something more concrete.  If you think a stock has declined far more than warranted, I think's always better to show that, rather than just say it.

[valcont]

I am sorry, I wasn't trying to be rude.  My gut reaction to that concept is that if a stock were truly pricing in bankruptcy, it would probably be a penny stock, i.e. a few pennies, not 120 pennies.  With a company like RTK, if bankruptcy occurs, the equity is almost certainly a zero.

 

I'm sure I'm just a bit prickly right now given the freefall in the stock price.  I agree that if bankruptcy occurs the equity is a zero.  "Pricing in bankruptcy" may be self-delusional drivel.

 

Its ok KJP. Part of the game when you go for multibaggers. I have only got ~30% of them right but my returns are much better than if I had just owned stocks like BRK in the last 5 years. And never underestimate the cumulative knowledge and the steely nerves that you are getting analyzing these type of stocks. Majority of your competition freezes with fear like a deer caught in the headlights.

[KJP]

I am sorry, I wasn't trying to be rude.  My gut reaction to that concept is that if a stock were truly pricing in bankruptcy, it would probably be a penny stock, i.e. a few pennies, not 120 pennies.  With a company like RTK, if bankruptcy occurs, the equity is almost certainly a zero.

 

I'm sure I'm just a bit prickly right now given the freefall in the stock price.  I agree that if bankruptcy occurs the equity is a zero.  "Pricing in bankruptcy" may be self-delusional drivel.

 

Its ok KJP. Part of the game when you go for multibaggers. I have only got ~30% of them right but my returns are much better than if I had just owned stocks like BRK in the last 5 years. And never underestimate the cumulative knowledge and the steely nerves that you are getting analyzing these type of stocks. Majority of your competition freezes with fear like a deer caught in the headlights.

 

Yeah, I haven't thrown in the towel yet.  I'm curious to hear in a few weeks what management has to say about the decision idle Wawa, the run-rate costs of an idled Wawa, likely penalties over the next year, run-rate corporate costs, and the effects of losing the two mills.  Unless I've missed a big cash expense, I think we'll come out of that will the view that there is more than enough liquidity to run an orderly sales process, if management is inclined to go that route. 

[Guest roark33]

 

 

I suspect that's part of Roark's point:  The phrase doesn't really have much meaning so it should probably be discarded in favor of something more concrete.  If you think a stock has declined far more than warranted, I think's always better to show that, rather than just say it.

 

Yeah, that's a much better way to say what I was thinking...thanks.

[valcont]

Yeah, I haven't thrown in the towel yet.  I'm curious to hear in a few weeks what management has to say about the decision idle Wawa, the run-rate costs of an idled Wawa, likely penalties over the next year, run-rate corporate costs, and the effects of losing the two mills.  Unless I've missed a big cash expense, I think we'll come out of that will the view that there is more than enough liquidity to run an orderly sales process, if management is inclined to go that route.

 

That's what I am curious about.The market is pricing it as if some secured lender would take hold of this and wipe out the equity here. There is none. The GSO loan is collateralized and as long as they get paid $3.5m they are fine. Liabilities claim can trigger restructuring but none of them are due yet and as I have said they can almost always be negotiated. So you have $37.5m(wawa liabilities) + $3.5m(interest expense) due this year.Add $10m additional to run the remaining business. So $51m total.

 

They have $20m cash. So a shortfall of $31m. The uncertainty here is if they can sell one of the business units in time to resolve this. They can easily net $50m for Fulghum at a firesale price. You still have $19m left which is roughly the market cap here. You still have NEWP + 7m UAN units - $55m GSO + scrap from Enviva & Wawa.

 

 

[valcont]

BTW here are the debt obligations of RTK filed under Note 15. QSL debt is not due until 2020.

 

[Picasso]

Never understood why investors say a stock at $1 isn't pricing in bankruptcy.  First, we're investing on probabilities not certainties.  If a stock is trading at a price where ten similar situations will result in permanent losses, then it's not trading as if it's bankrupt.  But a stock can be trading at a price where the vast majority of the time you'll do well and the only way you'll lose money is if you get wave after wave of bankruptcies.  That's trading like it's bankrupt.  And sometimes there's a lot of option value in bankruptcy for different reasons so you can see various market values far and away from zero and still effectively be pricing in bankruptcy. 

[Guest roark33]

I read beat the dealer, so I only deal in certainties....

[heth247]

BTW here are the debt obligations of RTK filed under Note 15. QSL debt is not due until 2020.

 

But their 2015 10K did list about $9MM mature in 2017, how can they pay for it?

[valcont]

BTW here are the debt obligations of RTK filed under Note 15. QSL debt is not due until 2020.

 

But their 2015 10K did list about $9MM mature in 2017, how can they pay for it?

 

I don't understand what you are referring to here?

[heth247]

BTW here are the debt obligations of RTK filed under Note 15. QSL debt is not due until 2020.

 

But their 2015 10K did list about $9MM mature in 2017, how can they pay for it?

 

I don't understand what you are referring to here?

 

They have a total of $9MM from Fulghum + NEWP due in 2017.  For 2016 it was $18MM due.  I suspect that their cash decrease from $39 to $20 in 4Q was mainly because they paid $14MM current debt due for 2016.

[KJP]

 

They have a total of $9MM from Fulghum + NEWP due in 2017.  For 2016 it was $18MM due.  I suspect that their cash decrease from $39 to $20 in 4Q was mainly because they paid $14MM current debt due for 2016.

 

They have $20 million cash + $5.5 million in Fulghum partial sale.  On an operating basis, Fulghum generates a significant amount of cash.  Based on the historical financials, you can estimate how much cash it will produce on an operating basis over the next 9-12 months after segment-level interest.  You can also estimate what cash flow, if any, NEWP will produce over that period after segment-level interest.  Nitrogen fertilizer prices have come off their bottom, so Rentech might also get a distribution from UAN over the next quarter or two, but that's hard to say.  So, that's your existing cash and cash flow in.

 

Cash flow out is (i) Fulghum/NEWP debt amortization; (ii) GSO interest; (iii) corporate overhead; (iv) Wawa idling costs; and (v) Wawa penalties over that same 9-12 period.  When I look at likely cash in versus cash out based on all of those items, I see adequate liquidity for a year-long sales process. 

[sampr01]

Hi KJP

 

Thanks for your detailed responses. Have you looked at the debt covenant restrictions at segment level as well as GSO debt?. I think that will provide more color. Atikonan and wawa facilities have second liens and litigation by contractors , so, it will hard for them to sell.

 

Thanks

 

They have a total of $9MM from Fulghum + NEWP due in 2017.  For 2016 it was $18MM due.  I suspect that their cash decrease from $39 to $20 in 4Q was mainly because they paid $14MM current debt due for 2016.

 

They have $20 million cash + $5.5 million in Fulghum partial sale.  On an operating basis, Fulghum generates a significant amount of cash.  Based on the historical financials, you can estimate how much cash it will produce on an operating basis over the next 9-12 months after segment-level interest.  You can also estimate what cash flow, if any, NEWP will produce over that period after segment-level interest.  Nitrogen fertilizer prices have come off their bottom, so Rentech might also get a distribution from UAN over the next quarter or two, but that's hard to say.  So, that's your existing cash and cash flow in.

 

Cash flow out is (i) Fulghum/NEWP debt amortization; (ii) GSO interest; (iii) corporate overhead; (iv) Wawa idling costs; and (v) Wawa penalties over that same 9-12 period.  When I look at likely cash in versus cash out based on all of those items, I see adequate liquidity for a year-long sales process.

[awindenberger]

Boy this is really tanking every day. I keep telling myself I'm going to start a position soon, but so far this is the definition of a falling knife. Are any of you guys adding or starting positions yet?

[KJP]

Hi KJP

 

Thanks for your detailed responses. Have you looked at the debt covenant restrictions at segment level as well as GSO debt?. I think that will provide more color. Atikonan and wawa facilities have second liens and litigation by contractors , so, it will hard for them to sell.

 

Thanks

 

I have not looked.  The segment-level debt is at Fulghum and NEWP consists of many small loans and revolvers secured by specific property.  Most of the debt was assumed when the assets were purchased.  The descriptions in note 15 of the 2015 10-K suggests that there may be certain restrictions on dividending cash up to the parent.

[heth247]

Hi KJP

 

Thanks for your detailed responses. Have you looked at the debt covenant restrictions at segment level as well as GSO debt?. I think that will provide more color. Atikonan and wawa facilities have second liens and litigation by contractors , so, it will hard for them to sell.

 

Thanks

 

The part of second liens and litigation claim by the contractors that is attributable to RTK totals only $2.9MM. RTK has a counter litigation and claim against them for $46MM. If RTK can get just half of that amount, then it will be worth of more than market cap today.