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November 4, 2011

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Rentech Nitrogen Partners IPO: Feeding Fertilizer to Farmers

The 7,000,000,000 people in the world consume a lot of food, specifically course grains, which the U.S. is the largest exporter of.  According to the Rentech Nitrogen Partners, L.P. ($RNF) IPO prospectus, the U.S. is also the world’s third largest consumer of nitrogen fertilizer and historically has been the world’s largest importer of nitrogen fertilizer. When grain demand and prices are high, like today, nitrogen prices and demand tend to be high.
Aside from Terra Nitrogen Partners ($TNH), which has been public since before electronic filings on (so pre-1996), two new pure play nitrogen producers have gone public this year.  CVR Partners, L.P. ($UAN) in April, and RNF priced last night at $20 per unit, the midpoint of its IPO range.  CVR has done very well, up 56% since pricing above its IPO range at $16.

RNF and its publicly-traded parent company $RTK are hoping for similar results.  There are some differences in the two businesses, but both are single-facility fertilizer producers (RNF in Illinois, CVR Partners in Kansas), producing lots of ammonia and UAN (urea ammonium nitrate).
The main difference that I can see (aside from valuation), is in the feedstock they use. RNF uses natural gas as its feedstock to produce nitrogen.  Given how low natural gas prices have been the past few years, that’s added to RNF’s margins.  CVR Partners, by comparison, uses petroleum coke as its feedstock, which CVR says has a cost advantage over natural gas, and has been more stable an input price.  Natural gas will likely stay cheap given the massive production increases expected, unless there is a step change in demand for natural gas.
RNF expects around $100 million in EBITDA the next 12 months, and expects that growth to come from facility expansions.  The plant runs almost at capacity, so will need to expand to grow (beyond price and margin increases).  Acquisitions don’t seem to be a focus of management.
There are a lot of risks with these assets, and plenty of cash flow volatility.  The assets are very geographically concentrated, almost all of their customers are within a 200 mile radius of the facility.  There is no hedging of fertilizer, all spot prices.   There are some short term purchase contracts, but nothing like we see in the midstream MLP space.  Margins are exposed to volatile price swings in nitrogen, exposed to volatile swings in natural gas prices.  This is a seasonal business, with 73% of sales occurring in second and fourth calendar quarters of the year on average.

As a result of the cash flow volatility, Rentech (like TNH and CVR Partners) will have a variable distribution model, meaning the company will pay out 100% of available cash every quarter.  There are no IDRs, no minimum quarterly distribution, and no subordinated units.  The parent company will retain 60.8% of the outstanding L.P. units.  Tax shield is estimated at 60%, less than midstream MLPs that are typically above 80%.  CVR Partners went public with 50% tax shield.
I won’t be buying RNF units any time soon for clients, based on the risk profile of the assets and the likely extreme unit price volatility compared with traditional midstream MLPs.  But it does carry a hefty yield as a reward for those willing to stomach the volatility and it looks to be a compelling way to bet on rising agriculture demand and cheap natural gas.
RTK Implications
What does the deal mean for parent company RTK?  At $20 a share, the value of Rentech, Inc.’s stake is $465 million.  I’ve put together the following back of the envelope calculations based on the latest 10-Q of RTK and the IPO prospectus for RNF.
$21.4 million in cash is on the RNF balance sheet, leaving the unconsolidated cash on RTK’s books at around $83 million.  All of the debt at RNF and RTK gets wiped away with the IPO proceeds, and RTK is left with a pile of cash and an equity stake in RNF valued at $465 million, which is more than 30% more than the enterprise value of RTK after the IPO.  Looks like a good deal for RTK.

Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.  No positions, all data from public filings at

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