RTK - Rentech Inc

[Guest roark33]

https://www.sec.gov/Archives/edgar/data/868725/000092189517000633/xslF345X03/form407738031_03082017.xml

 

Looks like raging capital is still buying, not sure if this is throwing good money after bad or....

[heth247]

I did some research on Viridis, it seems that its Scotia Atlantic sub cannot find a buyer because of difficulty to secure long term contract:

http://thechronicleherald.ca/business/1393180-no-buyer-for-idle-pellet-plant-in-middle-musquodoboit

 

Its Okanagan sub is already sold to American Biomass last Oct. in 2016.

 

Thanks for taking a look. There are no official filings about this, but it didn't sound like the plant was among the acquired assets:

"American Biomass announced Tuesday it was acquiring the brand name, trademarks and customer lists of Okanagan Wood Pellets from Viridis Energy Inc. of Vancouver, Canada, according to CEO David Nydam." http://www.unionleader.com/apps/pbcs.dll/article?AID=/20161019/NEWS02/161019168&template=printart

 

You are right, the Okanagan assets are already under the creditor's control in May 2016:

http://www.viridisenergy.ca/_resources/Viridis_Energy_Update_Press_Release.pdf

 

It is located in the west coast, EU companies probably would not be interested in it anyway.

[KJP]

Keith Forman, Rentech's CEO, has just resigned from the board of UAN's GP.  [uAN filed an 8-K today.] 

[awindenberger]

Keith Forman, Rentech's CEO, has just resigned from the board of UAN's GP.  [uAN filed an 8-K today.]

 

What should we read into that?

[KJP]

Keith Forman, Rentech's CEO, has just resigned from the board of UAN's GP.  [uAN filed an 8-K today.]

 

What should we read into that?

 

To me, it implies an actual or planned sale of the UAN shares.  Why would RTK give up its board seat unless it's selling the shares? 

 

The shares were collateral for the GSO debt, so RTK would either have to pay off the debt or get a waiver.  if RTK got a waiver from GSO by paying a fee and offering substitute collateral, RTK would have a big cash pile and there would no longer be any real risk of them lacking enough liquidity to run a proper sales process.

 

If my speculation is correct, we're going to hear about a sales process on the 3/16 call.

 

On the other hand, I don't know if all of that could be done without RTK issuing its own 8-Ks prior to the call.  So, I may be totally wrong.   

[heth247]

Keith Forman, Rentech's CEO, has just resigned from the board of UAN's GP.  [uAN filed an 8-K today.]

 

What should we read into that?

 

To me, it implies an actual or planned sale of the UAN shares.  Why would RTK give up its board seat unless it's selling the shares? 

 

The shares were collateral for the GSO debt, so RTK would either have to pay off the debt or get a waiver.  if RTK got a waiver from GSO by paying a fee and offering substitute collateral, RTK would have a big cash pile and there would no longer be any real risk of them lacking enough liquidity to run a proper sales process.

 

If my speculation is correct, we're going to hear about a sales process on the 3/16 call.

 

On the other hand, I don't know if all of that could be done without RTK issuing its own 8-Ks prior to the call.  So, I may be totally wrong. 

 

So Keith thought  UAN would be worth $10~$15 next year, and now they are going to sell at $4.70? That really seems to imply that RTK is distressed with liquidity.

 

[igor]

I think the following less exciting theory is also possible:

 

According to "Section 3.02 Director Designation Rights" of the CVR transaction agreement:

- RTK has two board seats if their share ownership is >= 15% of UAN units

- RTK has one board seat if their share ownership is >= 7.5% and < 15% of UAN units

- RTK loses the right to appoint any directors if their share ownership is < 7.5%

 

RTK reported ~6% as of September 30, 2016 and June 30, 2016.

So then, how has K. Forman managed to keep the board seat until now?

 

The language in the section 3.02 is in terms of "Partnership Unitholders and their Included Assignees". The latter is defined as follows:

“Included Assignees” means any Permitted Assignee that is (a) a wholly owned direct or indirect Subsidiary of Target Parent (provided that such subsidiary remains a wholly owned direct or indirect Subsidiary of Target Parent) or (b) for only the first year after Closing, any fund managed by or affiliated with GSO Capital Partners LP.

 

"Closing" is the date of the closing of the East Dubuque Facility acquisition - April 1, 2016.

 

UAN 10-K:

"affiliates of Rentech, Inc. ("Rentech") and GSO Capital Partners LP ("GSO") own approximately 6% and 9% of the common units, respectively, which units were acquired in connection with the East Dubuque Merger, "

 

So, it could be that K. Forman left UAN board because in a couple of weeks he is going to loose the seat anyway, since GSO's 9% are not going to be counted anymore.

[awindenberger]

Thanks for that detail Igor.

[nafregnum]

https://www.glassdoor.com/Reviews/Employee-Review-Rentech-RVW7433153.htm

 

At least they moved out of the expensive Hollywood offices. 

 

I read the thread from the beginning.  I broke rule #1 and lost money on WRES (Warren Resources, an oil & nat gas company) in 2015 -- the things this former employee says about RTK management are similar to WRES, especially how they were into different businesses and all spread out with headquarters in an irrelevant location (WRES was an oil company but HQ'd in NYC) ... here's what the glassdoor reviewer had to say:

 

Pros

If you are career focused, goal oriented and success driven then Rentech is probably not the place for you. But if you like to fake the funk then this place has your name all over it. They do have Oracle and one of its higher end Business Intelligence tools but aside from that don't waste your time here.

 

Cons

Rentech's first business model was to convert coal to liquids (CTL) diesel, gasoline, jet fuel and other petro chemical products. They would do this by building a 53MM process demonstration unit (PDU). Their PDU ended costing more than 150MM and it never worked. Besides, their "new technology" was nothing more than 70 year technology invented by Germany during WWII to fund their war machine, converting coal to fuel. After 8 years all the original executives are gone, the PDU was sold for about 10MM and their true business model was revealed: 1.) Come up with a sexy story. 2.) Spin it to win it. 3.) Give yourself a lot of stock options each year. 4.) Issue smoke and mirror press releases. 5.) Cash in said options. 6.) Wash, rinse, repeat. Research the lawsuits and note the number of outstanding shares each year. And their current executives aren't any better.

 

Now Rentech's business model is selling wood chips at Home Depot. Like you need a NEW publicly traded company headquartered next to Beverly Hills California in one of the most expensive building in Los Angeles to do that. And they have the entire floor. It doesn't take millions of dollars each month in SG&A coming from Los Angeles to figure out that China can sell wood chips cheaper than you, unless you're Rentech.

 

It feels a little like ZINC: a crappy plant that can't get on track, a burning fuse attached to a stick of debtomyte, and some overpaid underperforming execs who probably aren't aligned with shareholder interests. 

 

But it's at around $0.73 right now.  I held my nose and bought a few shares today, just to be a contrarian against my  own judgement.

[evg98]

Here is another assessment of RTK that I ran across today. 

 

http://www.altenergystocks.com/archives/2017/03/rentechs_wood_saw_hits_a_knot.html

 

[alwaysdrawing]

I'm not sure that article provides much color on whether RTK equity is worth anything.

 

Based on my present understanding, this should be something close to an adjusted balance sheet (which looks similar to KJPs post a couple weeks ago):

 

Assets:

Cash:  $20 million

Fulghum Fibers mill sale contract:  $5 million

Fulghum Fibers: Est value of $90-120 million (10x FCF of $12 million is $120MM, purchased in 2013 for $112 million)

UAN shares (7.179 million shares): $31 million as of today

NEWP:  $30-40 million (10x FCF of $4 million, purchased in 2014 for $45 million)

Wawa:  Unknown, but possibly 0 or less, and possibly significant.  $40 million in legal claims against contractor and engineers who designed it (vs. $3 million in counterclaims for unpaid progress payments)

Atikokan: Unknown, possibly 0, possibly significant if someone thinks they could make the facility work.

Industrial Pellet producers have over $100MM in Capex invested, and it’s very difficult to know what residual value that has (if any)

Total:  $176-250 million

 

Liabilities:

Balance Sheet Debt:

Fulghum Fibers:  $37 million

NEWP:  $16.25 million

GSO Due April 2019: $52.25 million

QSL: $14 million

Total BS: $119.5 million

 

Contingent/Off-BS:

Drax Take or Pay: up to $20 million

Canadian National Rail Take or Pay penalties:  up to $3.6 million/year, ~$25 million over 7 years

Cash Burn (Wawa shutdown, Atikokan, NEWP, re-structuring, etc): Unknown

Total non BS: $45-55 million (although could be more or less)

 

Total: Approx $170 MM

 

I would be interested in thoughts on what you think the likely next steps are. 

 

Raging Capital owns over 20% of the equity and may be able to push back on management, who likely will want to dilute shareholders and keep managing the businesses and cashing paychecks (and maybe get some new options that are closer to the money).

 

I do not believe short term liquidity should be a big issue--there should be some time to unwind assets, but what is likely? 

 

Fulghum Fibers is the major asset, however that's the only part of the business that is performing. 

 

The industrial pellet plants may be a tough sell, and yet that's the best case scenario if they can get something for them, as having those plants running helps them with their contingent liabilities.

 

UAN shares are depressed, but they should be reasonably easy to convert to cash.

[KJP]

http://phx.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle_print&ID=2254346

 

So far, I've only glanced at the Fulghum discussion, and it looks grim.

[alwaysdrawing]

Some good and some bad:

 

The good:

--"We did not incur penalties in 2016 for the shortfall in delivered pellets because the spot market prices for wood pellets were less than the contracted price with Drax."

--"We now expect to achieve total consolidated annual SG&A expense savings of approximately $20 million, up from our prior guidance of $12 to $15 million of savings"

 

 

The bad:

--"Management expects to report in the Form 10-K substantial doubt about our ability to continue as a going concern over the next twelve months through March 2018"

--"We announced in February 2017 that a customer of Fulghum has indicated its intent to exercise its option to purchase two wood chipping mills that Fulghum operates for the customer under a processing agreement. If the purchase option is indeed exercised, Rentech expects to receive a one-time cash payment of approximately $5.5 million. Fulghum expects the loss of these mills to negatively impact operating income and cash flow in the second half of 2017 and going forward. In 2016, these mills contributed approximately $3 million and $4 million of operating income and Adjusted EBITDA, respectively."

 

 

Overall, I think it remains to be seen what types of strategic alternatives they can come up with.  There are a lot of moving parts here, and it will be interesting to see how the situation develops.

[KJP]

Following up on my prior post, something is really off at Fulghum.  The U.S. operations processed 2.8 million GMT in Q4.  Based on historical margins, this should have produced something like $13.2 million in revenue and ~$3.1 million in gross profit.  (You can check this against the Q3 figures to confirm.)  Based on the limited disclosure about South America, I would expect something like $600,000 in gross margin from processing revenue in South America and about $500,000 in gross margin on South American chip sales, for total segment gross margin of ~$4.2 million.  Subtract about $1.25 million in quarterly segment-level SG&A would produce segment-level operating income of ~$3 million. 

 

Instead, in Q4, Fulghum's US ops produced only $11.8 million in revenue, and the entire segment produced only $2.7 million in gross profit and $1.3 million in EBIT.  So, it looks like the revenue shortfall in the US dropped down entirely to gross profit and on down to operating income.

 

The explanation offered for the decline -- the sale of one mill in April 2016 -- doesn't explain the numbers above, because that mill was already gone in Q3, as evidenced by the fact that U.S. GMT processed was 2.8 million in both quarters.

 

So, if Q4 reflects what the economics of Fulghum's U.S. operations are going to be before the loss of the two additional mills, the valuations of Fulghum posted on this thread (mine included) are too high.

 

To pile on, the details about the profitability of the two mills customers are potentially taking back in 2017 are striking.  These are either very large mills or mills that generate very high profits per ton processed.  That is the only possible explanation for two mills accounting for $3 million EBIT/$4 million EBITDA/$$3.5 million pre-tax FCF.  And Fulghum is only receiving $5.5 million for those two mills! 

 

In short, on first read through, the Fulghum results and mill losses appear to be a catastrophe.  And it needs to be said that Fulghum appeared to be this company's most valuable asset. 

 

I hope I've missed something important and gotten this all wrong, but as the person who posted the first thread on this company, I feel some obligation to post my thoughts on the results, even when they're all bad.

 

EDIT:  I should have added that there's always some variance in quarterly numbers, and there have been quarters in the past where U.S. rev/ton was about as low as this quarter.  So, there could be a good explanation for U.S. quarterly revenue, and perhaps it's just some unfortunately timed variance.  But the numbers on the two mills that are likely to be lost in 2017 are unambiguously bad and require a reassessment of this segment's value in a sale, not only because two very profitable mills have been lost, but also because this segment has now had customers take back (or advise that they plan to take back) 3 mills in the last year.  That had happened only once in the prior 20 years (4 total lost mills, but three were due to paper mill closures).  The recent mill losses are either a very unpleasant coincidence or something is happening in the underlying business that is not apparent from the outside.  Either way, it seems to me that the fact of the mill losses would lower (perhaps substantially) the multiple that a buyer would be willing to pay for the remaining mills. 

[Guest roark33]

None of you guys got on the call to ask a question:(

[alwaysdrawing]

Some concerning comments from management on the call (I'm paraphrasing):

 

"If we published our Fulghum Fibers contracts, we would be out of business within a few weeks because our competitors are private companies"

 

Keeping your contracts secret is the only reason you're in business?

 

"Our relations with GSO remain on solid footing, but nothing is forever"

 

Yikes.

[KJP]

None of you guys got on the call to ask a question:(

 

Unfortunately life intervened, so I couldn't even listen to the call.  I look forward to reading the transcript.  It doesn't sound like there was any reason to be optimistic.

[heth247]

What is your estimation of their corporate SGA going forward?

 

In today's report, they have total SG&A for 2016 of $32.5MM, with segment SG&A of  Fulghum + NEWP $7MM, and Industrial of $8MM. Even assume they cut Industrial SGA to 0, they will still end up with $32.5-7-8=17.5M at corporate.

[alwaysdrawing]

On the call they estimated SG&A at $20 million going forward.

[Guest roark33]

I am not really following this closely, but if they keep getting plants "taken back" for meaningless payments, the SGA cost will not matter. 

[heth247]

On the call they estimated SG&A at $20 million going forward.

 

For the total? So it means that, excluding Fulghum+NEWP,  at the corporate level it will be $20-7=14MM?

[KJP]

I am not really following this closely, but if they keep getting plants "taken back" for meaningless payments, the SGA cost will not matter.

 

I agree.  In my view, the details about the mills being taken back were by far the most important information disclosed in the release.  If the loss of two mills can have such a large effect on cash flow and profitability, what kind of multiple would you put on the remaining business, which has not been growing?  Would you pay 10x cash flow for an at best stagnant and apparently fragile business?  And what kind of discount would you seek to extract from a forced seller?

 

Once you estimate the cash flow from the remaining mills and put a lower multiple on it, what is a reasonable estimate of the equity value in Fulghum?  Does that equity value, and whatever equity value you think NEWP has, leave anything for common shareholders after paying off likely Industrial liabilities and making up the difference between the GSO debt and the value of Rentech's UAN shares?

 

These are painful questions for me to write, but unless the strategy is prayer, I think they have to be answered by anyone holding (or actually considering buying) the common shares. 

[alwaysdrawing]

On the call they estimated SG&A at $20 million going forward.

 

For the total? So it means that, excluding Fulghum+NEWP,  at the corporate level it will be $20-7=14MM?

 

I can't speak to that, my impression was total SGA was estimated to be $20 million going forward.  I haven't seen the call transcript, but there was a question specifically about SG&A runrate going forward.

 

I am not really following this closely, but if they keep getting plants "taken back" for meaningless payments, the SGA cost will not matter.

 

I agree.  In my view, the details about the mills being taken back were by far the most important information disclosed in the release.  If the loss of two mills can have such a large effect on cash flow and profitability, what kind of multiple would you put on the remaining business, which has not been growing?  Would you pay 10x cash flow for an at best stagnant and apparently fragile business?  And what kind of discount would you seek to extract from a forced seller?

 

Once you estimate the cash flow from the remaining mills and put a lower multiple on it, what is a reasonable estimate of the equity value in Fulghum?  Does that equity value, and whatever equity value you think NEWP has, leave anything for common shareholders after paying off likely Industrial liabilities and making up the difference between the GSO debt and the value of Rentech's UAN shares?

 

These are painful questions for me to write, but unless the strategy is prayer, I think they have to be answered by anyone holding (or actually considering buying) the common shares. 

 

I agree with this 100%.  How is it that the two mills being sold represented such a large amount of EBITDA?  Is it possible that all of their quality mills will be subject to these repurchases and they will have to keep the ones that are under-performers?  That could be a cause of the mill sale in 2016 resulting in such a drag on EBITDA.

 

It doesn't seem likely that there will be any ready buyers for the Wawa plant, and any asset sales would likely be at distressed prices based on the deteriorating results in 2016, and RTK's urgent need to come up with cash.

 

The "doubt about our ability to continue as a going concern" seems well founded.  The tone of the call seemed like management was extremely anxious (as might be expected considering the results).  It seems unlikely after those results that any of the assets besides the shares in UAN are worth close to what was expected.  I can't imagine anyone paying a full price on Fulghum, NEWP, or the industrials right now.

[heth247]

I am not really following this closely, but if they keep getting plants "taken back" for meaningless payments, the SGA cost will not matter.

 

I agree.  In my view, the details about the mills being taken back were by far the most important information disclosed in the release.  If the loss of two mills can have such a large effect on cash flow and profitability, what kind of multiple would you put on the remaining business, which has not been growing?  Would you pay 10x cash flow for an at best stagnant and apparently fragile business?  And what kind of discount would you seek to extract from a forced seller?

 

Once you estimate the cash flow from the remaining mills and put a lower multiple on it, what is a reasonable estimate of the equity value in Fulghum?  Does that equity value, and whatever equity value you think NEWP has, leave anything for common shareholders after paying off likely Industrial liabilities and making up the difference between the GSO debt and the value of Rentech's UAN shares?

 

These are painful questions for me to write, but unless the strategy is prayer, I think they have to be answered by anyone holding (or actually considering buying) the common shares.

 

Yeah, I am surprised that for the two mills that producing $4MM EBITDA, they only received $5.5MM. Have they disclosed that if there are any more of such "customer options" that can be exercised?  Did anybody ask such question on the call?  I think that kind of "exercieble option" will definitely impact buyer decision. They indicated that there are $30MM of goodwill on Fulghum that might be written off.

 

[alwaysdrawing]

 

Yeah, I am surprised that for the two mills that producing $4MM EBITDA, they only received $5.5MM. Have they disclosed that if there are any more of such "customer options" that can be exercised?  Did anybody ask such question on the call?  I think that kind of "exercieble option" will definitely impact buyer decision. They indicated that there are $30MM of goodwill on Fulghum that might be written off.

 

 

That question was asked and it was deflected--they did say that there are many agreements in place with the various mills and it was not 100% clear what the terms of those agreements are.  Management said they could not release the contract details as that would be a competitive advantage for their private competitors.

 

There are certainly a great deal of impaired assets, as we have been discussing for a few weeks.  The 10K is unlikely to provide as much clarity as a future sale would--Fulghum's mill sales may result in a significant impairment if they really did produce that much EBITDA.