RTK - Rentech Inc

[heth247]

 

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.

 

Thanks for the infor. I am still waiting to read the CC transcripts.  I think $20MM SG&A is still too high. The value and margin of safety will be eroded away by the SG&A if they cannot do a quick sale. However, given the current status of Fulghum, NEWP, and UAN, any quick sale would likely be deeply discounted.

[KJP]

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.

 

A few points on this:

 

1) The mills have a wide range of different capacities.  Some are 250k tons per year, while others are well over a 1 million tons per year.

2) Fulghum has some contracts that are more profitable than others.  If you go back to the financials shortly after the acquisition, you'll see that they assigned a positive value to some of the existing contracts and a negative value to others, thus the negative amortization they recorded in 2013.

3) Going from memory, I believe the purchase prices for the contractual purchase options decrease over time.  Presumably the declining purchase prices were structured to match actual depreciation of the equipment.  But if that's not the case, there would be clear incentives for the customers to exercise their purchase options in certain circumstances.  That appears to be what happened with respect to the 2017 repurchased mills.

 

In light of the issues noted above, any mills lost were always likely to be the most profitable ones. 

 

When Rentech bought Fulghum, they said that only 1 mill had been purchased by a customer in the prior 20 years.  I thought that was a good track record to rely on when assessing the actual risks posed by the points above.  I was wrong and did not understand the actual fragility of the business. 

 

That fragility has a cascading effect on Fulghum's valuation because the natural buyer for Rentech's assets appeared to be a REIT that could lever the assets and then pay a decent yield to retail investors for several years.  But how much leverage can you really put on these assets?  And given the purchase options, just how steady are the processing fees?  And if the mills are not actually great REIT assets, who is the natural buyer of them? 

[KJP]

 

The value and margin of safety will be eroded away by the SG&A if they cannot do a quick sale.

 

What "margin of safety" do you think currently exists based on what we know?  I've written alot this morning about how the new (to me at least) information about Fulghum significantly lowers my estimate of its value.  What is the reasonably conservative valuation for the assets relative to the known and estimated liabilities that creates any "margin of safety," or, for that matter, any significant value at all for the common shares?

 

There are still scenarios in which the common shares could recover, but they are becoming a smaller and smaller part of the probability curve everyday.  And you can get the benefit of one of those positive scenarios -- a massive spike in nitrogen fertilizer prices -- by investing directly in one of the pure-play nitrogen fertilizer companies, rather than RTK and all of its other baggage. 

 

 

[Paarslaars]

Yeah I wanted to double down at .7 but dicked around... Dang! Could go down sharply again for no reason though

 

Guess you were right.

 

I am really surprised how two mills can cost us such a big part of EBITDA... painful to lose them for a measly 5.5mil.

[Patmo]

Yeah I wanted to double down at .7 but dicked around... Dang! Could go down sharply again for no reason though

 

Guess you were right.

 

I am really surprised how two mills can cost us such a big part of EBITDA... painful to lose them for a measly 5.5mil.

 

Share price went down but for a pretty valid reason. My idea for the endgame was that a Chinese buyer would come in and scoop up the business for a small premium over market value, but even that doesn't look likely anymore. Which is sad, even LeapFrog found a buyer after the annihilation that its latest management team had brought upon it. And even if that played out, $1 shares are now dead money. Sad face...

[alwaysdrawing]

http://seekingalpha.com/article/4055999-rentechs-rtk-ceo-keith-forman-q4-2016-results-earnings-call-transcript?part=single

 

Here is the call transcript.

 

These were the areas I paraphrased earlier that I found quite concerning while listening:

 

So we don't get into that level of detail in every one of our contracts you could imagine with 30 plus plants counting South America that would be a heck of an exercise to disclose all of those, and by the way would probably put us out of business in three or four weeks because our competitors all of them are private would know something that we don't know about them.

 

Joseph Pratt

 

Okay. And then number three, do you have any - you've put a fairly strong sense in there, saying that you believe you can - starting with liquidity for a sense at this time, we have sufficient liquidity et cetera, you know the rest of the sentence or do you have any near-term obligations that can be talked about or the shareholder should know about?

 

Keith Forman

 

No I think but if you - there would be in Canada for instance one party that we haven't paid is pursuing begin - begun the pursuit of legal recourse to be paid and that takes time and effort and stuff like that. But no we don't have - as you know that our GSO obligations, which have provisions that could accelerate that debt are in a position right now, where they're not accelerated, but that could change as well. I mean so our relations there remain on solid footing, but nothing's forever.

[KJP]

Two other important parts of the call:

 

1) The discussion of how and when they learned that the customer planned to buy back the two mills in 2017. It apparently came out of the blue -- completely unanticipated by management.  As a result, they had to admit that they can't really predict whether other customers will do the same thing.

 

2) The discussion of the problems at Wawa.  It's clear that it isn't just about CapEx -- the plant has operating cost problems in almost every area, along with a burdensome contract.  It appears to be exactly the type of fundamentally unsound asset that Enviva management talked about on their Q4 call.  It has only salvage value, and I believe even that's encumbered by an unpaid contractor's lien. 

 

I also find it odd that they discuss the Drax and QSL debt on both the call and the release, but no mention of the CN Rail take-or-pay obligation, unless I just missed it.

[sabeverly]

Any thoughts on where RTK is heading? Agrium just increased fertilizer production with a new plant in Texas so it looks like UAN shares held won't get above $4-5/share for awhile.

[KJP]

UAN announces Q1 earnings before the open tomorrow.  I believe the expectation is for them to start up the dividend again.  RTK could certainly use the cash.  I'm not aware of any other reason someone would be eager to send this up 30% today.   

[sabeverly]

So is Wells Fargo going to be able to pull RTK's butt out of the fire ? Two cents per share UAN dividend wont help much. Maybe its time to bite the bullet and set a stop loss trade for 30 cents before May 11th CC in case price tanks to a dime or less on more bad news?

[heth247]

10Q is out, no news on the sale of any of their assets. But according to the following, does it mean that the CN Rail liability is limited to $1.3M?

 

In November 2013, the Wawa Company entered into a lease agreement through April 30, 2024 (the “TrinityRail Lease”) with TrinityRail Canada, Inc. (“Trinity”) under which it committed to lease the required rail cars (258 rail cars per full calendar year) needed to satisfy its delivery requirements under the Drax Contract. The TrinityRail Lease was terminated on March 31, 2017. Due to the lease termination, the Company recorded an estimated remaining liability of $1.3 million that represents the Company’s liability for the remainder of the term of the TrinityRail Lease reduced by an estimate for sublease rental of the rail cars. As facts and circumstances change, the Company will review its estimated liability and adjust the liability, if needed.

[KJP]

10Q is out, no news on the sale of any of their assets. But according to the following, does it mean that the CN Rail liability is limited to $1.3M?

 

In November 2013, the Wawa Company entered into a lease agreement through April 30, 2024 (the “TrinityRail Lease”) with TrinityRail Canada, Inc. (“Trinity”) under which it committed to lease the required rail cars (258 rail cars per full calendar year) needed to satisfy its delivery requirements under the Drax Contract. The TrinityRail Lease was terminated on March 31, 2017. Due to the lease termination, the Company recorded an estimated remaining liability of $1.3 million that represents the Company’s liability for the remainder of the term of the TrinityRail Lease reduced by an estimate for sublease rental of the rail cars. As facts and circumstances change, the Company will review its estimated liability and adjust the liability, if needed.

 

No, the TrinityRail liability is for the railcars themselves.  The CN Rail take-or-pay is different.  They are discussed separately in the press release. 

[sabeverly]

So Trinityrail Canada sues RTK in Texas and price goes up 10% ??? What am I missing ?

[investor-man]

I don't see any news for today's jump either. Maybe someone knows something we don't?

[sabeverly]

I'm guessing we wont see any sustained change in stock value until news of a full or partial sale of assets comes out. Come on Wells Fargo....earn your fee !

[KJP]

From the quarterly report filed last night:

 

"In August 2017, Fulghum was notified by a customer of the exercise of its purchase option for six of Fulghum’s chip mills. The parties are in discussions to enter into new operating agreements for Fulghum to continue to operate the mills on terms similar to operating agreements at other Fulghum mills when Fulghum transfers the asset ownership to the customer. When the sale of the mills is consummated, the Company expects to receive a one-time cash payment of approximately $5.0 million.

 

In addition, the purchase option price of the six mills is below their carrying value, which would result in a potential write-down of fixed assets that the Company would expect to record during the three months ended September 31, 2017. The Company will also assess the impact on other long-lived assets related to changes to the operating agreements."

 

So, Fulghum is continuing to unravel, NEWP is getting killed by warmer weather and low NGL/fuel oil prices, and UAN is at all-time lows.  The chances of selling any of these assets in the near future for a decent price look very grim.  And they're tripping covenants . . . .

[sabeverly]

So is Rentech going to zero ????

[Patmo]

You bet

[KJP]

You didn't have to wait long for an answer.  Rentech has filed.

[writser]

Delisted yesterday. No payout for equity holders expected.

[netnet]

I have not followed this, but the thread is only 14 months old. There were glowing reports to start, so from solidly undervalued, with (allegedly) good asset coverage to 0.

 

So:

• What were the company factors in this debacle?
  
• What was missed in the analysis?--this may or may not be the  same question as the above.
  

[KJP]

I have not followed this, but the thread is only 14 months old. There were glowing reports to start, so from solidly undervalued, with (allegedly) good asset coverage to 0.

 

So:

• What were the company factors in this debacle?
  
• What was missed in the analysis?--this may or may not be the  same question as the above.
  

 

There is another Rentech thread that has a post-mortem. 

[netnet]

I have not followed this, but the thread is only 14 months old. There were glowing reports to start, so from solidly undervalued, with (allegedly) good asset coverage to 0.

 

So:

• What were the company factors in this debacle?
  
• What was missed in the analysis?--this may or may not be the  same question as the above.
  

 

There is another Rentech thread that has a post-mortem.

 

Thank you well done post mortem on the other thread.  Circle of competence, turnaround, leverage and commodity business: potent combination for the downside. To give a hand waving argument about the original thesis, it is entirely possible that well versed analyst might have missed the take or pay.