Sunday, February 14, 2016

Rentech Nitrogen Partners LP - Fertilizers

There is a wealth of information in the  Rentech Nitrogen Partners' and CVR Partners' investor presentations and Form S-4 filings that I won't reproduce here. The basic outline of the investment case, however, is as follows:

  • UAN plans to merge with (i.e. acquire) RNF;
  • RNF's unitholders would receive $2.57 per unit in cash consideration, retain 100% of the value of the Pasadena facility,  and would have a 35.6% interest in the post-merger entity;
  • the merged entity should be able to deliver average annual distributions of ~$248 million representing $2.18 per pre-merger RNF unit, for a yield of >60%.  
  • A 12% yield is more apropriate, valuing the new, post-merger CVR Partners at the marginal cost of supply of new fertilizer capacity in the United States;
  • Sum of the parts -- cash consideration, value of the Pasadena facility, and share of the MergerCo's dividends at 12% yield values RNF's units at ~$22;
  • UAN is similarly undervalued in case the merger succeeds (the merger proposal has the votes, only regulator intervention could prevent it) but less so if the merger doesn't succeed.
  • Price action: some part of it is attributable to UAN's dividend suspension, some part to the sell off of MLPs and yield vehicles generally, and some part is attributable to RTK's distress. 

The partnerships' own estimates of future numbers can be found here and here. I have assumed that RNF's debt is refinanced at 3.5% in line with UAN's debt.


The shale revolution has spurred new investments in North American fertilizer capacity. I have chosen two of these investments as representative of the marginal cost of supply: the Dynatec facility on the Gulf Coast, and the facility at Wever, IA that is now owned by CF Industries. The latter is a close comparable to RNF's East Dubuque facility. The economics of the Incitec Pivot facility are, because of transportation cost differentials, ~25% inferior to UAN's fertilizer plant in the Southern Plains. 

Other projects with economics similar to Dynatec facility have been delayed because EPC costs have gone up by 20%, suggesting that an IRR of 12% at 8% cost of capital does, in fact, represent the marginal cost of supply.



So we might say that the reproduction value of the East Dubuque and Coffeyville plants = 1283 + 1055 = 2,388 million. Plus the MLP tax advantage of, say, 30% = 3,039. This implies an equity value of $2,580, or ~$23 per RNF unit.   Plus or minus, give or take. The scale is more relevant more than exact amount.

Disclosure: I own some RNF units

141 comments:

  1. Thanks for writing this up, I have a few questions.

    You say that the combined entity will have 114m$ in distributions, isn't that about 1$ per unit, since there will be 113m units outstanding? referencing to page 134 and 135 of the S4. Why are you adding Rentech's numbers to that? Aren't you adding Rentech's numbers twice in that case?

    Why does UAN have an advantage if they use petcoke instead of cheap NA natural gas?

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    1. Combined entity should be able to pay out an average annual distribution of ~238M as indicated in the fist graphic above. RNF's share will be 35.6% and each unit of RNF will recieve its pro rate share of that distribution. That gets me to $2.18/unit, give or take.

      70% of UAN's pet coke requirement is purchased at below market prices from its sponsor and is, in any case, indexed to the price at which CVRP is able to sell its ammonia products. 30% is purchsed on the sport market. At 100% market prices for pet coke the over/under in terms of competitive advantage is $4/MBtu Henry Hub.

      Thanks for the questions

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    2. Alright thanks, Im seeing my mistake now. Im confused I guess by your 2014 numbers. You show 179m for 2014, and the s4 statement shows only 102m$ for the combined entity. How do you get double the income in 2014 for RNF?

      Especially struggling with the 124m$ from RNF going forward. Since last 9 months it shows in the S-4, excluding pasadena, 50m$. Is that an assumption that Nat gas stays at 2$ (which seems v unsustainable, with large drops in production already) and the price of fertilizer recovers? in the 8k, the range is 50-90m$. it seems 1-2$ lower nat gas prices mean about 10-20m$ lower costs? I dont have very accurate info on UAN and ammonia pricing, but it seems prices currently are roughly at estimates in 8k?

      thanks

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    3. I have taken out one-time costs and share-based compensation (Uncle Carlwon't tolerate the latter). I have used actual maintenance capex instead of D&A (again, please see the first graphic above). I have not included synergies. I have assumed $3.85 nat gas for convenience but whether nat gas is priced at $3, $4 or $5 is not important to the thesis. For example, higher gas means fewer newbuilds and reduced compettion. This is consistent with the PF here:
      http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTkyMTg1fENoaWxkSUQ9MzAwMTY2fFR5cGU9MQ==&t=1 and here: http://www.sec.gov/Archives/edgar/data/1425292/000119312516447702/d45504d8k.htm and here http://www.sec.gov/Archives/edgar/data/1425292/000119312516447702/d45504d8k.htm


      Please TAKE YOUR TIME, read all the materials, and build your own model so that you can understand for yourself the sensitivities at different combinations of product prices and feedstock costs.

      Delete
  2. This is not really a question related to this stock, but have you looked at Fordoo holdings? They sell suits and casual wear. It trades at 2.6x ev/ebit, 12.5% divvy yield and seems to be growing. Im struggling to see why it is so cheap. Maybe you know more about it?

    thx.

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    1. http://www.financeasia.com/News/388295,menswear-firm-china-fordoo-targets-hk-listing.aspx

      Delete
    2. Seems to be that the market thinks this company is likely to be crowded out by competitors and get its earnings compressed by competition? Yet their casual section grew by 100% YoY. You have a rough estimate of fair value?

      Happen to have a view on Soundwill holdings as well? Or why a lot of HK real estate companies trade at such large discounts to NAV for that matter? They seem one of the higher quality HK real estate companies, yet trade at a 80% discount to NAV. The market thinks that because of large insider ownership, minority shareholders are going to get trampled on?

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  3. Looks like $2.18 might be a fairly bullish estimate?

    Couple of things - in the 2/2/16 8-k, Morgan Stanley estimated CVR would be able to issue debt at 6%, not 3.5%, so i think that should be your refinancing rate...probably not worth it if the Rentech rate is currently 7.5%.

    Second, in that same 8-k, they lay out their valuations for each company, and put Rentech in the $12.50-$14.50 range, I believe. So it's difficult for me to get from there to $26+, no matter how you play with the numbers.

    Secondly, in that same 8-k, they show that Rentech's DPU will be diluted by ~20%...this makes sense, since we're receiving cash upfront. But then, how do we get from $1.70/yr in distributions to $2.18 in distributions if Rentech is supposed to be diluted? Thoughts?

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  4. On that same 8-k, they do show that Rentech's CAFD would equal $80 million in 2017. But, we know that DPU for Rentech is diluted by 20%, right? So, maybe 64 million CAFD to Rentech?

    This doesn't account for synergies, but synergies are going to add maybe $12 million? So $4 of that goes to Rentech...so that brings us up to $68 CAFD..

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  5. Man i wish i could edit my comments

    first, keep in mind the distribution will come in 2016 due to planned outages at Rentech..

    Second, yeah...we had 123-124 combined pf distributions in 2014, maybe 150 in 2015? 2016 is going to be lower because of Rentech's maintenance. But, in Rentech's Def 14a from January 14, 2016, CVR indicated that they expect their earnings to modestly decline through 2019. And the Def 14A also indicated that there was addiitonal fertilizer capacity coming online in Rentech's markets (one of the reasons for the combination was to give it scale to better compete). To get from 150 to 225 is a pretty big jump, especially considering the headwinds both are facing. At 150 of DCF, Rentech unit holders get ~$50 million, which puts us at a 22% yield (curr market cap is 325, ex cash is 225 -> assign no value to Pasadena to be conservative). 22% yield is still good, but it's not 60% :p

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    1. yeah check out the Def 14A - showing combined pf 180 in distributable cash flow, in 2019 (based on mgmts estimates)

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  6. Have you looked at Nexstar Broadcasting? FCF yield pro forma for the Media General merger is about 25%.

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  7. Red,

    About Rentech Inc.

    Net debt in 2015 is 136 millions, for 2016 your estimation is 71 millions, but they said they´re going to amortize just 18.3. How do yo arrive to 71 millions?

    Thanks.

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  8. Last one,

    Also for 2016 they said the capex will be 26, you take just 10. The difference is due to maintence capex vs invest?

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    1. David,

      On net debt: http://phx.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle&ID=2152471
      on CapEx; yes, I am modeling maintenance capex for valuation purposes; actual capex in 2016 will be higher

      Delete
  9. Have you looked at Taiga (TBL.TO)? Sort of rhymes with BXC--deleveraging, expensive (14%) 2020 notes, negative common equity inching towards positive, with decent underlying business and reasonably shareholder-friendly management looking basically to manage the balance sheet until they can return cash to shareholders, just based on body language and their aspirational dividend policy. Canada risks, size risks...

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    1. I looked at it briefly) when doing DD on BXC. It seemed to me that the interest on the notes and WC movements to accomodate a potential housing recovery would take up much of their cash flow so that perhaps the only way that things get better is that the notes get refi'd at a better rate when they mature. So there looked to be only only one way to win and that seemed to be four years away. BXC appeals to me because there seem to be multiple ways to win.

      Delete
    2. Thx for mentioning it to me, btw.

      Delete
    3. You're very welcome, and thanks for your insight--those were pretty much my thoughts, but clearer!

      Delete
  10. And just to jump back in, have you looked at CPLP? It's reasonably well known, and I suspect you have; beg pardon if you've already mentioned it. Capsule: distribution cut to pay off facilities/debt through 2018; current yield ~11% with coverage well above 1x; potential catalysts apart from general shipping recovery include further dropdowns, successful refi/extension, and payoff of debt as per plan. Counterparty risk is the well-known bugaboo; their current stance is prepping for a Hyundai Maritime (one of their larger lessees) default, which multiple parties are working against. Seems like the child of GSL and CEQP. Backlog covers debt with current charters and at a ~25% haircut from Hyundai too.

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    1. I haven't mentioned it but I have looked at it. In addition to the cover there's also some precedent for lessors to extract an equity stake in the lessee as compensation for contract breakage/weakening and I was hoping to follow CPLP and see if I could see a glimpse of that possibility in its future. So I have an rss feed on HMM, and CPLP's sitting on my watchlist. I'm trying mightily but unsuccessfully to reduce my gross exposure to the market, though, so I'm having to let a few opportunities pass me by until at least one or two of my highest conviction positions work themselves out.

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  11. Hey Red,

    Curious regarding your short term trade in BCOR- been looking this one over and it seems fairly compelling here, other than some uneasiness with the advisory business after my experience in RCAP. Did something change your view or are you just allocating to better opportunities? Sure are a lot of interesting cigar butt type opportunities in the NA markets recently :)

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    1. Worth maybe $13? Something like that?

      I'd thought that results showing lack of TaxAct weakness --> analyst ratings revisions --> re-rating of the stock to about $9 or $9.50, all before Olin, BXC, and especially LXU show their hands this week. Just a trade that didn't work.

      I like TaxAct. I think HD Vest is ultimately worth 0.5x revenues which is what these things seemingly change hands at when purchased whole. Less a little something for the DOL reg change, so maybe 0.4x sales.

      Maybe 100 to 200 for the disposals. Debt paydown. FCF. One can imagine the kinds of institutions/constituencies that would like it after that.

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  12. thoughts on LSB industries?

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    1. Share prices of $5, $15 and now $8 on the same information set. CEO was irritable on the call. If anything has actually changed for the worse, though, I'm unable to determine what it is. Obviously, if the ammonia plant blows up when they run it in a fortnight then there's a problem.

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  13. Mind sharing your thoughts about Rentech? To simplify things, I've been assuming that the UAN stake cancels out the $53 million in GSO debt and trying to value the rest of the business. I recognize that this assumption may not be right, but I wanted to focus on the non-UAN parts of the business to start. Here's what I've come up with so far:

    Fulghum Fibers: Management seems to have fixed the cost issues that cropped up around Q1 2015, and the business now looks like its about what was expected when it was bought in 2013 -- roughly $10 million EBIT/$20 million EBITDA per year. At 5x EBITDA/10x EBIT, the business would be worth $100 million, which isn't far off from the $112 million that RTK paid for it in 2013, when the plan was to make additional acquisitions and then drop the business into an MLP.

    New England Wood Pellets: Looked like a great purchase until the disaster this quarter, but El Nino's don't last forever. So, this business looks like around a $10 million EBITDA/$7 million EBIT business that might be worth a bit more than the $50 million (plus the Allegheny acquisition) that RTK paid for it. Let's say it's worth around $60 million.

    Industrial Wood Pellets: This is obviously the big question. Atikokan looks like it's finally producing near nameplate capacity, but Wawa is still a mess. It appears that, at best, Wawa won't be running at full capacity until some time in 2017, if it ever is. The recent management commentary about potentially needing to revise the potential capacity of the plant is particularly troubling. But if we assume that management can finally work out the kinks at Wawa, they now estimate stablized EBITDA for the combined Wawa and Atikokan to be $CAD 13 - 16 million, or around US$10-13 million. But RTK needs to spend at least another $20 million in CapEx to get there, and fund the operating losses that will occur in the meantime. All in all, it's hard to see how this business is worth more than $50 million today, and might be worth less.

    Unallocated corporate: This appears to be the major sinkhole. As far as I can tell, there's about $5 million per quarter of expense here. I'm not sure how much, if any, would ultimately be allocated to Wawa/Atikokan once (if?) they ever stabilize. If you capitalize the full $5 million per quarter at 10 times, you get a negative $200 million, which would about equal the sum of the parts segment value I got to above.

    Do you have a different view about the value of the non-UAN parts of RTK?

    As far as the balance sheet, you have pro forma cash as of 3/31/16 of $86 million. If you subtract $10 million for tax payments on the prior transactions (midpoint of guidance) and $20 million of Wawa/Atikokan CapEx this year, you're at $56 million. Against that you have about $80 million in Fulghum, NEWP and QSL debt. So, by year end it looks like a net debt position of around $20 - 25 million. With the market cap at around $50 million, I get a simplified enterprise value of around $75 million. (Again, this is based on the simplifying assumption that the UAN stake is worth the same as the GSO debt.) But I'm not sure what, at the end of the day, you get for the $75 million. On the one hand, I can see how Fulghum and NEWP, standing alone, could be worth twice that. On the other hand, I can see how there's nothing left at all after the unallocated corporate expenses are taken into account.

    So, I'm back where I started: Would you mind sharing how you think about the business?


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    1. Thanks for the detailed questions.

      Fulghum: I think we differ on maintenance capex
      NEWP: I think tihis is a minimum 11M/year EBIT business with room to grow. 10x = 110M. I think that's low for a noncyclical,recurring purchase business.

      Industrial pellets:
      I think cash breakeven across the 2 facilities is achieved at a combined 100KT per year. Atikokan is currently at 80% of 110KT. Marginal ton contributes ~$49 to cash flow.
      Getting to 450K production/sales seems to me a question of when (measured in quarters rather than years) rather than if.

      Listening to the last call it seemed to me that there was a skills/experience deficit rather than a fundamental design flaw that requires capital expenditures. Wawa is larger but not all that different from Atikokan. I note also that Enviva Partners seems to have its act together. So, given these two reference points, I would be more than surprised if Wawa did not meet its contracted production target run rate by, at the latest, mid-2017. That's 50% of actual capacity, of coure, and each incremental 100KT in sales would add US$4M in EBITDA. Let's leave that there for a sec.

      Unallocated overhead. They've cut corporate staff and they're moving. Current run rate is ~19M/year. There's no reason why eventual corporate expense should exceed $15M

      So:
      UAN less GSO debt = 0
      Cash = 56
      QSL debt = -21
      Net = 35

      Fulghum: value of enterprise 150 less 48 debt = 102
      NEWP: value of enterprise less debt 130 less 15 in debt = 115

      Unallocated: 8x -15 = -120
      Dividends from UAN: = 7.18M x $1.50 (minimum) = 9 x 12 = 108 (I don't think this is double counting)
      Subtotal: 35+102+115-120+108 = 240

      Industrial = 0

      Total 240 = ~$11/share

      Plus:
      UAN is worth a great deal more than its market price


      Or, starting with your estimate of 75M in year-end EV subtract $9M in UAN dividends to get to 65M.

      For that 65M you have a business that should generate $24M unlevered FCF without a contribution from industrial pellets and $35M with it when it eventually comes together.


      It's about management in the end and I have confidence that the new fellow means to do his best to have the financials reflect the value of the assets.

      Delete
    2. Thanks for your response. I will look further into the underlying FCF at Fulghum and earnings power of NEWP. I agree that, on the last call, management was quite candid about the issues with Wawa likely stemming from their own lack of experience with these types of assets.

      Why aren't you double counting somewhat on UAN? I can see why it wouldn't be double-counting if you subtracted interest on the GSO debt ($53 million at L + 700, so about ~4.25 million per year) from your expected UAN dividends, but I don't think you've done that. Also, I'm not following your UAN calculation. I assume you're saying it's 9 million in distributions per year capitalized at 12x. But doesn't 7.18 x 1.5 equal 10.77, rather than 9? Or am I misinterpreting what you're doing?

      Thanks again for sharing your thoughts.

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    3. No no, you're quite right. UAN dividends = $10.77 less interest on GSO debt ==> ~6.5M excess cash flow rather than my clumsy and rushed 9M figure.

      thanks for reading. Obvs we have a confluence of factors that have come together in Q1 and have exacerbated the stigma attached to this name. So there's not telling where the share price goes in the immediate period. But the CEO is an MLP guy and the pellets business was on track to be MLP'd so, in the end, the market's view of the company need not matter. I think there's enough upside and enough resilience in the performing segments to allow one to see an attractive IRR.

      Delete
  14. On Fulghum, I had not realized that there is about $4-5 million a year in non-economic amortization related to the wood chipping agreements in place on the date of purchase. So if you ignore that, then Fulghum's EBIT before tax is closer to $14-15 million. At ten times, that's $150 million. Is that roughly how you got to your $150 million EV for Fulghum?

    Regarding NEWP, I tried to back into the assumptions that gave you $11 million in EBIT. NEWP's gross profit margin in 2015 was 22%, and SG&A + D&A was about $4.1 million, that includes about $550k of non-economic amortization, but also leaves out three weeks of Allegheny, so estimate that annual SG&A + D for NEWP is about $3.6 million. To get to $11 million EBIT, you need $14.6 million in gross profit. At 22% gross profit margins, that's $66 million in sales. (NEWP only did $54.3 million last year, though November and December were hit by warm weather and that's missing three important weeks in January from Allegheny.) Is $66 million revenue/22% gross profit/$3.6 million in SG&A + D/$11 million EBIT roughly what you're seeing? I'm pushing particularly hard on NEWP because, if you're valuation is right, the NEWP and Allegheny sellers really didn't know what they had.

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  15. re: Fulghum Right,that's how I get there. A multiple anywhere between 8x and 11x that 15M EBIT number is reasonable, I think.

    re:NEWP That's right. A typical year (weatherwise) ought to see legacy NEWP selling 295KT of pellets at an ASP of $200. Plus ($1.5M/22% = $6.8M) revenue contribution from Allegheny gets me to the $65M revenue range

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  16. I think your estimates about UAN distributions are high

    They issued in June 645m of debt at 9%, that's is 60m interest expense... Assuming 200m EBITDA at current prices or maybe 215-220m with synergies, that means 125m-135m, wich is equeal to 1,10$-1,15$ FCF/share.

    Maybe they can refinance their debt at lower rates in the future. It seems odd to me, they bought back second lien notes due in 2021 at 6,5% , using SENIOR notes due on 2023 at 9,2%...

    http://www.cvrpartners.com/News/PDF/2016-06-03%20CVR%20Partners%20Pricing%20Press%20Release--FINAL.pdf

    Thank you for your posts

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    1. yes, thanks for the comment. A B1 rating from Moody's didn't help but nevertheless and an odd/surprising refi exercise.

      The story over the last few months has been that we are (or have recently been) at multiyear lows for each of the exogenous variables that matter to UAN: corn, gas, gas differentials, anthracite, and shipping. There is no good argument to suggest that these will not substantially reverse in due course. When they do -- individually or, more likely, together -- I expect corn belt pricing of N fertilizers to revert back to close to historical prices despite the additional North American capacity due to come on stream over the next two to three years.

      So my thinking is (1) to not use spot N prices as a realistic indication of average future prices; and (2) to come at UAN obliquely. The first attempt to do so was via the RNP merger arb and, now that that idea has expired, to now come at it via RTK.

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    2. Hi Red,
      Thanks a lot for your blog. Why do you decide to get at UAN indirectly and not just buy it outright?

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    3. Hi, sorry for the delay.

      RTK has three pots of value of which one is its stake in UAN. If the other two pots have value (and I think they do) then the UAN stake is free. That'sone way of putting it. Or, there are three probable ways to make money via RTK: (1) recovery in nitrogen prices; (2) normal winter temperatures; and (3) normal production levels at its industrial pellet plants. There is only really one way to make mone on UAN directly: recovery in nitrogen prices.

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    4. Far as I can see, LXU and RTK progressing more or less according to plan--aye? GSL likewise: same risks and opportunities, perhaps with a bit more confidence after latest extension in an implicit mild CMA-CGM put (for what that's worth).

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    5. Indeed. I am happy with LXU and RTK's progress. GSL is something I may come back to when one or two of my current positions pay off and if Singapore Shipping Corp is not by then still slumming it in the mid $0.20s.

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  17. At what price, if ever, would you sell RTK and just go long [a perhaps smaller position in] UAN? If I take the values you listed above in your May 18, 2016 at 11:22 AM post and net the current market value of RTK's UAN stake against the face value GSO debt, I get something like:

    Cash: 35
    Fulghum EV: 102
    NEWP EV: 115
    Industrial: 0
    Corporate: (120)
    GSO Debt less UAN: (10)
    Total: ~$120 million

    Current market cap is $90 million, so there's still a discount to your estimate of NEWP & Fulghum. But what if the shares move up to around $5 and UAN stays where it is? At that point, it seems like you'd be counting on the Canadian plants and UAN for further upside. In that scenario, would you rather just go with UAN directly?

    Also, do you still estimate that the cash flow breakeven point for the Canadian plants is 100kt? I believe at the end of the last call management said the EBITDA breakeven point for Wawa was "north of 70%" of capacity, though Atikokan may already be cash flow positive given that it's running at around 90%.

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  18. I'd start thinking about it $6ish if UAN stays here.

    Clearly, though, I am less inclined to view Wawa as a risk to Rentech than the market is. I see: Drax building its own pellet capacity in North America; that its future needs are much greater than its consumption today; and, given the forestry + rail + port infrastructure necessary to deliver those pellets to the UK I wonder "What would Drax Biomass pay for Wawa?".
    e.g. http://biomassmagazine.com/articles/10423/drax-plans-another-mississippi-pellet-plant

    So I won't feel the need to get out of it as quickly as I might otherwise when it hits $6

    --

    re: breakeven volume

    $230/MT ASP less $105/MT cash variable costs = $125/MT gross profit x 445K MT minimum contracted volume = $56 million

    $56 million less $20 million in fixed cash costs and less also $15 million in SG&A burden ==> $11 million in EBITDA, i.e. the low end of their guidance.

    So, breakeven -- when burdened by the items that will move over from SG&A -- looks like 445,000 MT which is consistent with what management said in the last call and also consistent with the kinds of unit numbers that Enviva reports. In any case I think it a much better estimate to use than the 100k number that I used earlier which,I think, was unburdened by SG&A and was in any case wrong.

    --

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    1. http://seekingalpha.com/article/4015267-cvr-partners-structural-mispricing

      Just because I saw you mention $4.5 as an opportunity to buy. Haven't even read through this yet, but wanted to share!

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    2. That's kind of you, thanks.

      I would approach it this way:

      1) Does the marginal cash cost of supply in practice establish a floor on selling prices?
      2) Do imports set the marginal cost of supply? For ammonia? For Urea" For UAN? For AN?
      3) what are the drivers of the marginal cost of supply?
      4) What are the marginal cash costs of supply today?
      5) What are they likely to be one year from now? two years? five years?

      6) what is normal SG&A per gross ton of ammonia?
      7) what is historical maintenance expenditure per gross ammonia ton?

      8) Is there an inexpensive natural hedge against a decline in North American nitrogen prices? Does the hedge cost exceed the yield on UAN units?

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    3. Btw, if you want to go further, the most efficient Chinese coal-based producer of urea (China XLX) and the most efficient Chinese producer period (China Bluechemical, nat gas - based) are listed in HK and you can see in their filings what their production costs are, what drives them and how, what domestic selling prices are, etc.

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    4. Do you think the big price jump of coal in China provide sustainable floor for global market? From the price action, it doesn't seem so.

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  19. RTK's commentary on Wawa was discouraging. It may not be possible to run that plant profitably under the Drax contract.

    For standalone FCF for Fulghum I get about $11-$12 million, after accounting for interest on Fulghum's debt. For NEWP, using your $65 million revenue assumption, I get about $10 million. Assuming $15 million in run-rate corporate SG&A (I think it may be lower than this on a run-rate basis already, once the write-off for former office space is omitted), you have $5-$6 million in normalized pre-tax FCF, before accounting for UAN dividends or any contribution from Industrial wood pellets.

    After today's decline, the current market cap isn't too far off 10x that pre-tax FCF number, which seems like a fair valuation to me, given the volatility of NEWP's weather-driven profitability. So, do you view upside from here being driven by UAN and the Industrial plants? Put another way, would you be a buyer here if you thought the Canadian plants had a PV of close to zero (further Capex and near-term cash operating losses against potential cash flow down the line) and could just invest in UAN directly? (I recognize there's also about $40 million of cash on the balance sheet, but ~$7.5 million of that goes to taxes, you'll have to fund additional Wawa Capex and operating losses, and current GSO debt exceeds UAN stake by about $20 million.)

    I agree that UAN is undervalued. I think the fact that LXU is up 60% just by putting out a press release shows that current market values of nitrogen plants doesn't correspond to private market value. I'm just trying to think through what the case is for investing in RTK, as opposed to UAN directly.

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    1. ps. I think 15m corporate costs would be too high for a business that does 22 in segment EBIT and 140M in sales. In that eventuality either corporate costs would be drastically reduced or the business would be sold off. The brouhaha 2 years ago or so was all about that if I remember.

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  20. I can see the good sense in someone choosing UAN over RTK just as I can see the sense in someone else preferring RTK over UAN.

    I think it comes down to this: will Wawa manage to fulfil its volume obligations to Drax? If so, then RTK is a much better bargain than UAN.

    There's really no definitive way for an outsider to know whether it will but I don't see large capital expenditues being mooted and it therefore seems to me that it really is a matter operating inexperience wrt to he chemistry of the plant. I'm not an engineer, obviously, but the story nevertheless seems to me to hang together well, to have a narrative truth.

    As long as the entity as a whole is FCF positive over the next few quarters I am inclined to wait for them to figure it out. (Bottom line: If I saw RTK today for the first time, I'd buy it in size).

    The argument for UAN is that it will maybe re-rate before RTK does and that after UAN has re-rate one would have a better sense of what was happening at Wawa and whether there was still a spread worth investing in.

    ReplyDelete
    Replies
    1. Thanks for the thoughts. I agree corporate should not stay at $15 million if the business ends up with underlying segment EBIT of $22 million.

      Do you know if Rentech, Inc. is ultimately liable for (i) penalties to Drax, (ii) penalties to the railroad, and (iii) the QSL debt, or whether those are debts of a subsidiary that could be bankrupted without affecting the rest of the company? I'm trying to understand whether a real disaster at Wawa -- e.g., ultimate production capacity is far below the amount necessary to fulfill the Drax contract and take or pay obligations to the railroad -- could bring down the company, or whether they can wash their hands of it without too much spillover to the rest of the business.

      Delete
    2. "On May 1, 2013, Rentech’s subsidiary that owns the Wawa Facility entered into a ten-year take-or-pay contract (the “Drax Contract”) with Drax Power Limited (“Drax”). Under the Drax Contract, such subsidiary is required to sell to Drax the first 400,000 metric tons of wood pellets per year produced from the Wawa Facility. In the event that it does not deliver wood pellets as required under the Drax Contract, the Rentech subsidiary that owns the Wawa Facility is required to pay Drax an amount equal to the positive difference, if any, between the contract price for the wood pellets and the price of any wood pellets Drax purchases in replacement. Rentech has guaranteed this obligation in an amount not to exceed $20.0 million."

      On page 136 of the 10-k

      Delete
    3. It was lazy of me not to look this up myself. Thank you for posting it.

      Delete
  21. Seems like the market is way overreacting here? What am I missing. Or is it just tax loss selling? The CEO said that costs could be somewhat higher, and now the market is starting to fully discount this thing will just blow a hole in their balance sheet?

    I suppose if you don't think UAN will recover to 10-15$ at least, and they cannot get their industrial wood pellet plant profitable + warm winters = bad earnings for NEWP, then the balance sheet looks kinda ugly.

    But I would say that is just one of the possible outcomes here.

    If UAN does not get above 8$ anytime soon, and they are forced to take further 20-40m losses on industrial and NEWP FCF stays <5m (due to warm winters), then this thing will not generate more than 3-4m of FCF, unless they sell the company?

    Just thinking out loud here before adding some more :) .

    ReplyDelete
  22. If you assume good faith behavior by management then this price is unambiguously incorrect.

    ReplyDelete
  23. Nothing to say about current management but difficult to assume good faith with a board that has kept previous management for so long.
    Invest-fiction: this company will be bought cash plus CVC units, industrial sold and non allocated expenses minimized.

    ReplyDelete
  24. An activist on board?
    https://www.sec.gov/Archives/edgar/data/1205885/000092189517000280/0000921895-17-000280-index.htm
    He's on the board of several companies that Raging capital is invested in.

    ReplyDelete
  25. Ah Raging Capital again. Well, I suppose that means that the lower bound SOTP value is firmed up.

    ReplyDelete
  26. Sounds like you ran into that guy before. I looked at some of his previous deals, and he's done ok.

    ReplyDelete
    Replies
    1. We were both involved in Crestwood Equity Partners last year

      Delete
    2. why can't they be more boring...
      http://phoenix.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle&ID=2247552

      Delete
    3. It'll be interesting to see which way the share price goes today

      Delete
    4. agreed.
      pre market is -42%, although LXU started similarly after announcing "the exploration of strategic alternative", but ended up +20%.

      Delete
    5. seems like each and every part of the business has underperformed our expectations. NEWP at 4m, Wawa a total cash drain, Atikokan breaking even, and CVR's cash distribution eliminated.
      What's your take on it?

      Delete
    6. Well, two things matter:
      Liquidity for a few months; and
      Disposals

      I don't doubt that the resale value of the individual businesses exceeds the Rentech's enterprise value. The receipts from the sales of the two Fulghum plants and from the distributions from UAN should, I think, see them through for a little while. But they must sell one or all of their businesses before the Drax penalties start to pile up.

      Delete
  27. What is the maximum exposure of Rentech corporate to Wawa? Earlier in the thread there is language from the 10-K stating that the maximum recourse exposure on the Drax contract is $20 million. What is the maximum recourse to Rentech corporate from the CN Rail take-or-pay and the QSL debt? In other words, if Rentech simply bankrupts the Wawa subsidiary and walks away, what is the maximum exposure of the holding company?

    ReplyDelete
  28. CNR liability:
    "3,600 rail carloads annually for the duration of the long-term contract. Delivery shortfalls would result in a penalty of $1,000 Canadian dollars per rail car" p23 of latest 10-Q

    The QS debt is, I think, what is says on the tin: $12MM in cash

    Offsetting that is the resale value of the equipment at Wawa. The capex for the industrial business was $140M, if I remember correctly,so haircut that at will and that may cover the liabilities

    ReplyDelete
  29. Yes, the CN Rail take-or-pay penalty is $3.6 million per year for the life of the contract. I couldn't find the contract on EDGAR to see if it's recourse or how long it it lasts. The 2013 presentation related to the wood pellet business also doesn't say how long the CN Rail contract is; it only describes the contract as "long-term".

    QSL debt is recourse to Rentech.

    So, worst case appears to be $20 million to Drax, $14 million to QSL, and $3.6 million for an unknown period of time. Against that you have an apparently functioning Atikokan facility (though it's not making any money) and Wawa.

    ReplyDelete
    Replies
    1. Well I assume that the term length of the rail contract matches the term of the Drax contract so they should be able to settle that liability for $22M or less. I think it's safer to assume that it is recourse to Rentech.

      Delete
  30. Is this back-of-the-envelope liquidation scenario just pie-in-the-sky thinking:

    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]
    Remaining Fulghum -- equity value after segment debt = ~$75 - $90 million [Roughly what they paid for it in 2013]
    NEWP -- equity value after segment debt = ~$50 - $75 million [a bit more than they paid for NEWP + Allegheny]
    Corporate -- All eliminated (implicitly assumes none of it is needed by buyers)

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

    ReplyDelete
    Replies
    1. That looks about right. You may want to bring the lower bound down to $100 million in order accomodate fire sale pricing, bankers' fees, etc

      The key here, though, is that they properly manage their liquidity and sell things as and when they can rather than being greedy and holding out for better prices.

      Delete
    2. SOTP according to acquisition prices paid by rentech:

      . Fulghum May 2013 : EV:~ 113m (equity + credit facilities - cash) PP&E: 94m
      . NEWP May 2014: EV:~ 47m (""") PP&E: 30m; Allegheny Jan 2015 EV:~7.2m PP&E: 3.9m
      . Capex Industrial: ~ 145m Assuming needed additional investment and price for similar plants (Enviva southampton):131m* 60% = 80
      . Net debt: 100m

      Equity per EV: ~140m and per PP&E equity: ~100m.

      With this approximate valuation that is obvious for everyone, it is difficult to understand the gap between market cap and valuation, being activist investors involved in the company since 2014. What can be the cause?
      1. Grossly overpaid for acquisition by previous management with a great track record of shareholder destruction, price paid does not represent the real value of these investments.
      2. Investment in industrial wasted.
      2. Entrenched board, bad corporate governance, no credibility.
      3. GSO debt?
      4. Possibility of fraud?

      As another anonymous mentioned the timing of bad news release after activist position disclosure is really strange.



      Delete
    3. There are significant off-balance-sheet contingent liabilities that now have to be considered (Drax, CN Rail) and there likely will be some cash burn to get from here to there. What if that's $40 million? Industrial is a great unknown -- what can those two plants actually be sold/scrapped for? If the number is actually only $40 million? That's additional $80 million off of your numbers.

      Delete
  31. Thanks for the feedback. I wonder what Raging Capital and Ariel Investments are thinking right now.

    ReplyDelete
  32. Oh I'm sure they're thinking what anyone else would be thinking -- one disposal would turn this into a highly profitable investment but unnecessary dithering would sink it without a trace.

    ReplyDelete
    Replies
    1. If I were management and I were greedy I'd be considering a bankruptcy. Not that it'd be so easy to sell to court or control, but dithering could help--burn some cash considering alternatives, declare, use protected restructuring to do the harder work (w/implicit or explicit support of some current stakeholders) and emerge with a slug of incentive equity for management. High-risk/reward for management, but they have certainly shown more financial than operational finesse.

      Delete
    2. You are right. I fear Rentech ends as Horsehead.
      https://aqfd.docsend.com/view/dva4b9g

      Delete
    3. Well that's certainly possible. I think, though, that that end would have been easier to achieve that by just letting Wawa continue to burn cash so that they appear to be blameless and clearly out of options. GSO also had a nice opportunity to swallow the company whole back in last quarter of 2015. We'll see how it plays out soon enough. Still, anything is possible in the public markets and I don't count that scenario out.

      Delete
  33. There is no way they can take this to restructuring. GSO debt is collateralized and QSL ,CN and Drax liabilities are negotiable. The problem with Horsehead was the forced note default and them running out of cash. If Horsehead had done what these guys did i.e. throw up the towel a year before ,the CEO would still be sitting at Pabrai's meeting begging for money.

    It is interesting that they declared all the negative news right when these hedge funds starts hovering.Most likely Raging capital will be placing couple members to sit on the board.

    ReplyDelete
  34. fun fun...
    http://www.businesswire.com/news/home/20170221006770/en/SHAREHOLDER-ALERT-Levi-Korsinsky-LLP-Announces-Investigation

    ReplyDelete
  35. and another one.
    http://finance.yahoo.com/news/shareholder-alert-bronstein-gewirtz-grossman-213300972.html

    ReplyDelete
  36. A market cap of 25m assumes a fire sale.
    Do you consider further purchases?
    It will be intriguing to see if management can for once do the right thing and do it well.

    ReplyDelete
  37. Well I think I'd like to wait for more information before considering buying more shares.

    My understanding of a liquidation scenario has been this:

    Assumption:9 month shopping period

    Starting cash: 20

    Interim cash flows Q1 to Q3
    Fulghum: 13
    NEWP: 1.5
    UAN: 3.5
    Atikokan: 0
    Wawa*: -9
    Interest on GSO debt: -3.2
    SG&A: -10
    Net interim cash flows = -6.1

    Sale of Fulghum: 90
    Repayment of GSO debt: -54 principal & -3 penalty

    Ending cash 3Q 2017: 47
    Value of UAN $6/unit: 48
    Value of NEWP: 65
    GROSS VALUE = 160

    Drax liabilities recourse to RTK: -20
    CNR liabilities recourse to RTK: -20
    Miscellanoeuos other charges, fees, expenses: -30
    NET ASSET VALUE = 90 million

    If that's realistic then I think my cost basis is good enough. If I'm wrong then I may be off by a lot and committing more money to this idea may not be worth reduced reward. So I'd need more information -- about GSO's forbearance for example, or for any indications of purchaser interest in the Wawa assets,



    * for Wawa I have used p.57 of the RTK 10-K for guidance on penalties and assumed 500K in idling expenses per quarter

    ReplyDelete
    Replies
    1. Thanks for walking through your thinking. A few questions:

      1. Your $13 million interim cash flow from Fulghum includes the $5.5 million payment for the two mills being bought by a customer, correct?
      2. Your segment level interim cash flows from Fulghum and NEWP are after interest on segment-level debt, correct?
      3. Your $90 million proceeds for Fulghum are net proceeds after paying off its segment-level debt, correct?
      4. Are you accounting for repayment of the QSL debt under the $30 million miscellaneous number?
      5. Your assigning no value (not even any salvage value) to Atikokan and Wawa in the $90 million NAV, correct?

      Delete
    2. Yes to #1,#2,#3

      For the Canadian operations, I am assuming that minimum salvage value of Wawa's PP&E and working capital simply cancel out the QSL debt. I am assigning no value to Atikokan.

      If I were running things at Rentech I'd satify the GSO debt, then place the Candian subsidiary in reorg proceedings so that, if the salvage value of the equipment, working capital etc were to exceed the liabilities, as I think would be possible, another 40 million would accrue to Rentech's equity by virtue of reducing the recourse liabilities to zero. Distribute the residual cash and essentially leave the RTK ticker as a tracker for UAN.

      But that may be too much to ask of management (though maybe not of Raging Capital).

      In any case, my prior comment was my disaster scenario updated for the most recent information.

      Does it make sense to you?

      Delete
    3. A supplement to #3, I assume some cash is burned on legal & financial costs, any remediation costs at Wawa, and anything that I may not have thought. $30 million is likely too much but I thought it a good enough number.

      Delete
    4. If you place RTK WP CANADA into bankruptcy, aren't you get off the hook for the QSL liability? Even though it's a ULC and not LLC.
      According to the EX-10.4 (2013-08-08 10Q), paragraph 5.4 (via 5.3).

      Delete
    5. Sorry, no you are not off the hook. If RTK WP CANADA is in the bankruptcy, then it's QSL that terminates the agreement, not RTK. Then 5.4 doesn't trigger.

      Delete
    6. That's right. I appreciate the comment, Igor

      Delete
  38. Thanks for the quick sketch.
    Looks like everything depends on the first pitch.

    ReplyDelete
  39. Yes, your numbers make sense to me.

    As your analysis shows, there really shouldn't be a huge cash burn through the rest of this year, so there is time to get this done. But it's unfortunate that it's been another warm winter in New England. LTM valuations for NEWP are not going to look good. So, it seems like Fulghum should be the first to go.

    ReplyDelete
  40. Also, in case not everyone follows Enviva as a matter of course, they talked about the industrial pellet landscape on their earnings call today (replay available at their website).

    ReplyDelete
  41. I went back and took another look at all of the Fulghum financials. I estimate $1.12 gross profit/ton for both US and South American processing, and about $1.6 million/year in normalized gross profit from South American biomass sales (this year's sales appear higher than normal). In 2015, US GMT processed was 12.5 million tons. Following the loss of the three mills relative to 2015, the go-forward U.S. GMT is likely to be 11 to 11.5 million GMT. I estimate South American processing GMT at about 1.85 million tons/year. Adding it all up, I get a new-rate annual gross profit of $16 - 16.5 million. Subtracting $5 million in annual SG&A, I get EBITA (my estimate of pre-tax, pre-interest cash flow) of $11 - $11.5 million.

    Do any of those numbers sound off to you? I'm struggling with the right multiple for that cash flow stream.

    ReplyDelete
  42. I've approached it via cash gross profit less cash SG&A less actual maintenance capex


    US processing: 11 million GMT x $4.75 = 52 million sales
    South America processing: 3 million GMT x $3 = 9 million sales
    South America product sales = 35
    SALES = 96
    Cash gross margin = 24% = 23
    Cash SG&A = -5
    Actual MCX = -6
    Unlevered cash flow = 12

    re: multiples

    MLP-eligible cash flows outght to be able to support 3x EBITDA in debt, expecially if it is mortgage debt

    Cash purchase at 10x = 120
    Debt 18x3 = -51
    Equity component = 69

    uFCF = 12
    Interest at 5% = -2.6
    FCFE = 9.4 = 13.5% yield on equity

    That ought to be a good enough yield for a purchaser, imo

    ReplyDelete
  43. Also I had double counted the recourse liability for the Drax contract in the liquidation sketch above

    "Rentech has guaranteed the Wawa Company’s obligation in an amount not to exceed $20.0 million until May 1, 2018, and thereafter through the term of the Drax Contract for an amount not to exceed $11.0 million."

    ReplyDelete
    Replies
    1. Sorry, I don't see double counting. I'm curious whether I'm wrong.

      You said
      Drax liabilities recourse to RTK: -20
      CNR liabilities recourse to RTK: -20
      Miscellaneous other charges, fees, expenses: -30

      I have
      RNP tax liability   $  (15.0)
      Pending industrial capex  $      0   
      Quebec Stevedoring facility  $  (14.0)
      Drax penalties   $  (20.0)
      7 years of rail-road penalties  $  (25.2)

      I interpreted your 'Miscellaneous other charges, fees, expenses' as 'RNP tax liability' + 'Quebec Stevedoring facility'.

      Delete
    2. Some of the Drax liabilty is included in the interim burn. Answered via email and I make note it here also.

      Delete
  44. Why does Fulghum Fibers' business exist? The paper companies do the vast majority of their chipping in-house. Why do they outsource a sliver of it to Fulghum? Is it just to use Fulghum's balance sheet to avoid CapEx? Based on Fulghum Fibers' lack of growth and recent mill losses, it doesn't appear that outsourcing is increasing. Why not? Did the MLP scare interrupt what was originally intended to be a cost of capital play? [This doesn't seem likely because Fulghum was never an MLP.]

    I understand that the business was originally affiliated with an equipment manufacturer (Fulghum Industries), so perhaps there was originally some incentive to create the business as a value-add and incentive to buy Fulghum machines. But that rationale (if it ever existed) seems to have passed.

    ReplyDelete
    Replies
    1. I think the rationale for contracting out that function may depend on the size of the cutomer's operations. A large operator may value non-union employees and the operating experience/reliability of the contractor. A small operator may prefer to lease the equipment vs buying it as well as reliability. There's no dount some risk-shifting/risk-spreading as well: the lessor is in theory better able to find alternative uses/clients for the capital equipment than is the lessee.

      Delete
  45. Hi Red, if your negative scenario is a NAV of USD 90mio (i.e. USD 3.9/share), isn't the current price of 0.85 a screeming buy? Or do you fear an even worse scenario of a massive-dillution-capital-raise?

    ReplyDelete
    Replies
    1. Asset value + reasonable behavior/performance by management suggests a higher share price than this. But I think it's better to wait for mid-March when management will lay out their next steps and reassess the situation then.

      Delete
    2. Okay, thanks for the reply :-)

      Delete
    3. Red, how do you assess the impact that UAN will not pay dividend in 9 month? Is market predicting this case thus dilution in some way?
      How do you feel about UAN 10k?
      Gross margins narrowed from 39.36% to 9.78% compared to the same period last year, operating (EBITDA) margins now 21.44% from 42.99%.

      Delete
    4. You said management could have chosen to burn out cash in wawa if they had cooperated with major stakeholders. Under what scenario can you totally rule out likelihood of fraud? Any other blackswan events not baked in RTK's financials? Thanks a lot for your blog.

      Delete
    5. It looks to me that UAN should be in a position to pay at least 50c per share in dividends this fiscal year and twice that next fiscal year. So the options are:
      a) sell UAN stake at market price now
      b) sell UAN stake to CVR Energy at a small premium to market price after collecting the Q1 2017 dividend
      c) sell some other asset and keep UAN stake until the price recovers

      Delete
    6. Well if there was outright fraud they would have had to also fool GSO, their lender. I think it reasonable to assume that that would have been quite hard to do.

      Delete
  46. Regarding your three-pathway UAN scenario, that's really one where good or bad management comes into play. I'm sure that Forman realizes that nobody is going to pay him $1 million a year to babysit UAN shares. Let's hope the Board understands that when it's evaluating the advice it gets about "strategic alternatives."

    Regarding "fraud," what's the fraud that you'd be concerned about here? The reported financials are terrible, and cash in a US or Canada bank is easy to audit. So, what is it that they might be hiding?

    ReplyDelete
    Replies
    1. Is the question about fraud addressed to me or to the fellow who asked the original question? If to me, I see no reason to suspect fraud.

      Delete
    2. Sorry for the lack of clarity. It was to the person who asked the original question.

      From the post any Anon at 11:49, I take it the reference to "fraud" may have been a reference to management filing early to squeeze out equity holders and then get themselves cut in on the pie post-reorg. My understanding of that scenario is that it's much more likely where there are debtholders who want to play that game get the equity for themselves. The Fulghum/NEWP debt likely won't be in default, and I don't think those are the type of debtholders you need to worry about. The contingent liability claimants on Industrial also don't want to be equityholders. So that leaves GSO, and they've already shown their hand somewhat. So, I never say never when it comes to stuff like that, but I don't see the debtholders eager to push this company into bankruptcy.

      Delete
    3. Red, Unknown, appreciated.

      Delete
  47. somebody mentioned horsehead story earlier in the comment section. The price action looks like BK scenario, which should not be.

    ReplyDelete
  48. two side notes:
    Raging now owns 25% of the company.
    And Rentec was registered in SEC as one of the institutional holder in Rentech, which might explain some of the volatility in the stock.

    ReplyDelete
  49. Keith has resigned from UAN's Board

    ReplyDelete
    Replies
    1. Any inference to draw here? I'm inferring that RTK is more likely to be planning a sale of its UAN units.

      Delete
    2. He is supposed to have left the board by April 1st anyhow (1 year from closing the deal), and considering that fact, it's wiser of him to invest his time in finding buyers. so we might be reading too much into it.

      Delete
    3. Two more points, not sure if either would be interesting to you:
      1. Raging Capital, the good - years of experience in the energy/industrial space, and valuable connections that might assist in finding a buyer. the bad - with AUM of over a billion, RTK does not move their needle. So they will give it a go, but if it gets messy and time consuming, they'll probably budge.
      2. Distressed company costs - in finance literature, research estimates it between 15-20% of market value (Altman is one, Andrade & Kaplan another)

      Delete
  50. May have been already sold. If so the plan must, I suppose, be to show up at the earnings call with 50M in cash and an "orderly liquidation" narrative. Ad if that is so then I suppose thet are signalling their preference is to sell the company whole rather than in pieces

    ReplyDelete
    Replies
    1. The shares were security for the GSO debt. So, you're also envisioning a waiver by GSO plus the grant of additional security, right?

      Delete
    2. We'll find out soon enough how they plan to proceed.

      Delete
  51. Rentech 2016 results: http://phx.corporate-ir.net/phoenix.zhtml?c=66629&p=irol-newsArticle_print&ID=2254346

    I had to take a break from reading this after getting through the Fulghum discussion. Unless my math is all wrong, it looks like the most profitable US mills are the ones being taken back by customers. I did not anticipate that Rentech would only get $5.5 million for two mills that account for $3 million EBIT/$4 million EBITDA/$3.5 million pre-tax cash flow.

    ReplyDelete
  52. Following up on my prior comment about Fulghum, do you understand what happened to Fulghum's US operations in Q4? In both Q3 and Q4, the US ops processed 2.8 million GMT of logs. But in Q3 Fulghum's US ops generated $13.2 million in revenue, versus only $11.8 million in Q4. That revenue shortfall appears to have fallen directly to the gross profit line and on down to operating income, producing an gross profit number that is about $1.5 million less than I would have expected. (Based on the disclosed SA numbers, my model predicted $4.2 million in gross profit.) That gross profit shortfall, in turn, left an EBIT shortfall of ~$1.5 million.

    If Q4 represents the economics of Fulghum's US operations before the loss of two additional mills, I think there's a serious problem here.

    ReplyDelete
    Replies
    1. Revenue per processed GMT at US mills appears to have been $4.21 similar to Q1 2015. Average over last 8 quarters = $4.60, median = $4.75

      Delete
    2. Yes, I found some quarters where US rev/ton was as low as this quarter. In addition to Q1 2015, I think Q1 2016 was only $4.28/ton. So it just be quarterly variance, but's it's unfortunately timed.

      The economics of the lost mills, on the other hand, is a real issue.

      Delete
  53. The business is in a state where there won't be a buyer.

    ReplyDelete
    Replies
    1. What do you mean by the "business"? RTK consists of four pieces that aren't really related to each other and probably should be broken up (UAN units, Industrial pellets, contract wood-chipping (Fulghum), and consumer pellets (NEWP)). I've always thought the best approach is to sell Fulghum and NEWP separately, rather than trying to find one buyer that wanted both and would take on all the other liabilities.

      So, are you suggesting that RTK can't find a buyer for the whole company? Or that RTK can't find a buyer for Fulghum and/or NEWP? Or that buyers will wait for a bankruptcy to buy the piece or pieces they want? To my knowledge, there are no corporate-level debt covenants that would prevent the sale of one of the pieces.

      Delete
    2. KJP, your statement is true. "buyer" means who can pay decent money for the underlying business of Fulghum or NEWP. UAN is liquid.

      Delete
  54. Red, based on the release and call, I tried to take another look at likely interim cash flows through the end of Q4. I estimate that Fulghum's current run-rate FCF is ~$11 million and will decline to and ~$8 million run-rate in Q3. Here's what I came up with:

    Starting cash: $20

    CASH FLOWS
    Fulghum Q1 - Q2: $5.5
    Sale of Mills: $5.5
    Fulghum Q3 - Q4: $4
    NEWP: 1
    UAN: 0
    Atikokan: 0
    Drax: 0 [Assumes continued low spot market prices]
    Wawa idling: (2)
    CN Rail: (3.6)
    GSO Interest: (4)
    QSL/Fulghum/NEWP debt amortization: (9) [From debt schedule in 2015 10-K; assumes none of this already paid as of Feb 22, 2017]
    Corporate: (14) [Includes some one-time expenses to get down to the final run-rate number]
    Interim cash flow: (16.6)

    UAN could produce some cash, while the Drax liability could increase.

    Do you have similar numbers?


    ReplyDelete
  55. Fulghum operating 12.0
    Sale of mills 5.5
    NEWP 5.2
    UAN 4.2
    Atikokan 0
    Drax 0
    Wawa idling (2.0)
    CN Rail (3.6)
    Corporate (14.0)
    Interest on GSO debt (4.0)
    Interest on Fulghum debt (2.3)
    Interest on NEWP debt (0.8)
    Amortization of QSL debt (1.4)
    Net cash burn -1.3
    Ending cash = 18.7

    Consensus view is that UAN will pay $0.58/unit in dividends & that should be heavily weighted to the first half.
    If 2017 Drax liability is non-zero one might expect that NEWP's cash flow is also higher
    Also, note that there's 7 million in cash at Fulghum South America

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    1. My understanding is that there is mandatory amortization on the Fulghum and NEWP debt. Some of the Fulghum portion should be covered by the S.A. cash, and I suppose they could repatriate additional cash from S.A. and pay the penalty if they need to. But even accounting for that, have you captured all of the mandatory debt amortization?

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    2. The last 10-k indicates 9 million in maturities and the latest 8-K indicates that 6 of that is the NEWP working capital facility.

      In addition, 8 million of NEWP's debt amortizes at 1.1m/year. So assuming that the schedule in the 10-K still holds -- i.e. that that debt hasn't been retired in the interim -- there's 1.9m or so that's other than the 2 items (NEWP revolver & NEWP term loan) listed above.

      I haven't been able to find that other item. (If you've found it in the discussion of Fulghum do point me in the right direction).

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    3. Red, in light of conf call and sale price at Fulghum, how would you reassess the worst scenario valuation? Do you need to put bigger discount on management's ability to execute the sale plan? It seems to me market projects a harder sele, seems FCF analysis is useless when management hides behind min disclosure docs. Appreciate your analysis.

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    4. ps. I don't see anything irregular or inappropriate about management's reticence to disclose the microeconomics of each of Fulghum's 24 processing contracts

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    5. Fulghum ==> roughly 9 million in FCF plus 12.5 million in cash: A not unreasonable equity value may be 75 million
      NEWP ==> roughly 7 million in FCF in average FCF per year: Maybe 60 million in equity value
      Corporate costs ==> 7 million in cash costs per year of which about 4 are public company costs = maybe (-30) million to a private buyer
      Maybe 10 million in corporate cash
      7.18 million UAN units that pay out $0.58 each at what is widely perceived to be the bottom of the cycle ==> maybe 52 million
      Corporate (i.e. GSO) debt = (-52)
      => 110 million in value before the Canadian operations and liabilities

      Canadian liabilities that are recourse to RTK seem to be capped as follows:
      Drax contract: (15) million
      QSL debt: (13) million
      CNR rail liability (may not be recourse to RTK): (18) million
      = (46) million total

      Assuming no value for Atikokan or for the scrap value of Wawa's equipment, a low estimate of NAV = 110 minus 46 = 64 million

      The important thing, as I've previously indicated, is that management manage dispose of assets in the correct order and in a timely way.

      If UAN hasn't recovered by January + if crude oil goes to the $60s + if there's warm weather in 2017/8 + if Fulghum loses any more customers in the interim, the company will have run out of options and the current share price will be justified.

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    6. Thanks for the recap.
      As you said before, buyer of UAN won't pay too much premium over current market price ($4.5) so I think MTM value of 23mm is more appropriate. That brings RTK NAV =44mm, subject to further multiple contraction.
      Regarding 4 risk factors you listed, IMO, UAN recovery seems a bit speculation and warm weather is high probability event given past history. Oil may bounce between $40- $55 due to shale production and storage capacity. For the buyers, if he wants UAN, he can buy from open market. For the rest, why not collect pieces after bankrupt? Thanks for your time to write the blog & comments.

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    7. Red, pardon for my lack of knowledge. Could you explain a bit more about
      1. management said in the call the corp expense is 15mm/yr. You says 7mm cash cost.
      2. how you reached -30m for private buyer?
      Greatly appreciated.

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  56. How do you know that $6 million of the $9 million maturities in the 10-K refer to the NEWP credit line? My understanding is that the NEWP line is a $6 million maximum revolver, but that doesn't mean $6 million was drawn as of 12/31/15, which I think would have to be the case if $6 million of the $9 million in maturities was attributable to the credit line. In addition, if the credit line is used to cover the seasonality of working capital, one wouldn't expect it to be maxed out in December. Also, unless I'm misunderstanding it, the 3/16 release only refers to it as a $6 million credit line; it doesn't say that the $6 million is currently drawn.

    In addition, Fulghum debt has been amortizing much faster than would be implied if $7.1 million of the $9 million was attributable to NEWP. Specifically, here's the Fulghum debt as of 12/31:
    2014: 53
    2015: 47
    2016: 36.7 [some of the acceleration here likely due to the April 2016 mill sale]
    None of this has been described as voluntary paydowns in any disclosures that I recall.

    I cannot point you to specific disclosures that define the amortization schedule of the Fulghum debt, but I believe management has described it as amortizing, including during yesterday's call.

    Based on the above, I think the bulk of the $9 million referred to in the 12/31/15 10K is NEWP/Fulghum/QSL term loan amortization, rather than the NEWP credit line.

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    1. In your shoes I'd trust your instincts. The debt amortization schedule is not and has not been a high priority issue for me.

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  57. One possibility I haven't seen discussed is a local management buyout of Fulghum's South American operations. Those operations seems to be doing well, and I believe local management already owns a piece of that business. In addition, if they're interested, local management wouldn't need due diligence -- they know the business better than anyone. The big question, of course, is whether they're interested and can find a financial backer. A sale of the S.A. operations may also have significant repatriation tax issues for RTK.

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  58. maybe should include legal cost or discount by all the litigation?

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    1. From seasonality perspective, it seems UAN will continue to go down. Schwartzman dumped 1/3 UAN before earning. Value Line had their 3-5 year price projections at 14-20 in the October report and in the January report it is only 9-13. A fairly significant cut.
      The prior fourth qrt. UAN paid approx. 2 mill in interest. This qrt almost 16 mill. that was basically the difference of posting a small profit and now posting a loss. The interest they are paying is coming out of the unit holders pockets in the form of no distribution. Meanwhile more supply is coming online in the market. Not too confident in the forecasted dist. Refinancing seems the only catalyst to boost UAN value.

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