Friday, April 04, 2008

Picked Too Green?

Last week the Wall Street Analyst Forum staged an investor conference in New York City. Most of an entire day was devoted to the “green” stocks of alternative energy or energy efficiency companies. Listening to the presentations, it became clear that it sometimes can be too early to pick some “green” stocks.

Among the five presentations, Rentech, Inc. (RTK: AMEX), appeared to be the most developed. With $144 million in trailing revenue, at first glance looks like Rentech has proven both the feasibility and marketability of its version of the Fischer-Tropsch process for producing fuel products. Unfortunately, the revenue is from the production and sales of nitrogen products at a fertilizer plant acquired by Rentech in 2006. Rentech only pulled in $504,000 from the sale of alternative fuels in fiscal year 2007 (September 2007).

The Rentech process converts synthesis gas to diesel or jet fuel, naphtha and other specialty chemicals. Rentech touts the flexibility of the process to work with gases derived from coal, biomas or municipal waste. As sexy as this might sound, we note that the company only claims a 20% reduction in the carbon footprint well-to-wheel. Nonetheless, the process is conducive to CO2 capture and storage.

Also at issue is cost of production. Without government subsidies, crude oil as a diesel source still has Rentech beat. However, as crude has remained above $100 for some weeks now, this dynamic could change.

Rentech management has guided for positive cash flow in fiscal year 2008 (ending September 2008) of $40.0 million. If achieved, this would represent a near-miraculous turn-around in Rentech fortunes. Rentech operations used $23.6 million in cash in the twelve months ending September 2007.

The company expects first production in its Sand Creek, Colorado demonstration unit in early 2008. This is also a training center for operators. A training center is optimistic thinking since Rentech has several production facilities on the drawing board but remains several months if not years away from production.

The first commercial scale synthetic fuels plant is planned near Natchez, Mississippi. The company expects to produce 1,500 barrels per day by 2011, with another 28,000 barrels coming online in the second phase of the Natchez project. Rentech also has joint development projects on the drawing table for coal and biomass to liquids projects.

In the meantime, Rentech has its fertilizer plant to bring in some cash. In FY07 the fertilizer operation in Illinois brought in $131 million in sales and earned a 12% operating margin. After investing in the alternative fuels side of the business, the trailing net loss in FY07 was $106.7 million.

Rentech plans to convert the Illinois fertilizer plant to a coal fed facility (from the current natural gas feed stock) and gasify the coal to produce both fertilizer and synthetic fuels. This plant was originally supposed to be the company’s first commercial operation, but we note that the Natchez Project has taken the lead.

As a consequence of this decision, Rentech had to take a $38 million charge in FY07. While that helps assuage the shock of the net loss in FY07 - the net loss would have been $68.5 million without the charge - it still should give investors pause in considering the risk of poor execution at Rentech. After all, at this stage in Rentech’s development, management’s ability to successfully block and tackle their way down the field is perhaps the most important factor impacting success. With only $33.7 million in cash on the balance sheet, there is little room for error - at least errors that have “cash” price tags.

Watch for reviews of the other four “green” stocks in the next four Small Cap Copy posts.

Neither the author of the
Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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