Rentech ( RTK), a research firm that develops advanced technologies to convert coal, natural gas and biomass into liquid fuels, might be about to take it to the next level. While Rentech's future has occasionally appeared questionable during its nearly three decades of existence, the company now looks poised to reap rewards in an energy market desperate for alternative energy solutions. Based in Los Angeles, Rentech has invented a proprietary method for making high-value fuels from coal, natural gas and organic matter. The technology mostly relies on the Fischer-Tropsch process, a chemical reaction that creates various forms of liquid hydrocarbons. Coal-to-liquid, or CTL, technology is not new. It was used by Germany in World War II and by South Africa during its apartheid era, when both were essentially cut off from international crude oil supplies. However, both CTL and gas-to-liquid technologies are now winning support from a broad swath of the political spectrum. Many environmentalists say that the Fischer-Tropsch process converts coal into usable energy in a much cleaner fashion than does the refining of crude oil into petroleum products like motor fuel. Political supporters point out the fact that the U.S. is "the Saudi Arabia of coal," and that using coal in an intelligent fashion could significantly reduce America's dependence on shady, unfriendly exporters of traditional fossil fuels.
"There is a common misconception that all coal is dirty," says Rentech CFO Merrick Kerr. "We want to show people that coal can be used in a clean and efficient way." All of Rentech's operations are intended to reduce greenhouse gas emissions. "Rentech would not take part in a program unless there is a carbon-reduction program in place," says Julie Dawoodjee, director of investor relations at Rentech. Rentech has patented an iron-based catalyst that is three times less expensive than the traditional cobalt catalyst used by other CTL players, according to Michael Tian, an analyst at Morningstar. While the company's strategy once relied on the licensing of its technology for profitability, it now wants to take the next step. Its first move is to convert a fertilizer plant in East Dubuque, Ill., into the nation's first operational CTL plant. That will be a $900 million investment for Rentech, Kerr says. The company next plans to build a larger facility near Natchez, Miss., that would cost between $3 billion and $4 billion. Rentech is also stepping out of the shadows by entering into savvy strategic partnerships. The first is with Denbury Resources ( DNR), a domestic mid-cap oil and gas exploration and production company that's on the forefront of carbon-sequestration technology. Denbury has agreed to purchase and transport all captured carbon dioxide from the Natchez facility and reinject it into completed oil fields. The procedure pushes deep oil closer to the surface, allowing drillers to capture crude that has long been considered unrecoverable.
Rentech has also partnered with Peabody Energy ( BTU), a major domestic producer of coal. The two companies are running feasibility studies on Rentech's technology and hope to build two CTL plants close to Peabody coal reserves. Peabody will likely co-own some facilities with Rentech and will also provide the coal feedstock for Rentech's CTL operations. Longer term, Rentech's strategy is to use various forms of biomass along with coal and natural gas as feedstock for liquid fuel production. It already has a small biomass-testing facility in place in Colorado. Liquid fuels made from coal and organic blends can have emissions footprints that are 20% below that of traditional petroleum diesel, says Dawoodjee. The company's ultimate goal is to construct small fuel-producing plants wherever viable sources of feedstock can be found. While Rentech plans to own some of the plants that use its technology, it would also like to license the technology out on a selected basis. So far, Rentech has relied on equity markets to raise capital. It hopes that it can soon access debt markets as it proves its technology to a wider audience. According to Dawoodjee, the company has already been offered sweetened government offers to back large construction loans for new facilities. After operating for more than 25 years as an R&D firm, its latest scramble for market-scale projects has some watchdogs concerned that Rentech may be biting off more than it can chew. However, Dawoodjee says that unlike many other companies that have chased CTL technology, Rentech has survived wild market gyrations and knows how to endure through hard times. "With oil prices where they are today, the market is ready for our technology, and we are ready to give our technology to the market," she says.
Rentech's history indicates that it is in the CTL business for the long haul, rather than seeking to exploit anomalies in the energy marketplace or geopolitical sphere. It may be small now -- its market cap is around $340 million and fiscal 2006 revenue was $44.5 million -- but that could change one day if its processes ultimately become more widely accepted. And for Rentech to succeed, that will have to happen, because the company has never operated at a profit. Rentech's last 10-K says that from its inception in December 1981 through September 2006, it has accumulated losses of $100.7 million. Zachs Investment Research recently gave Rentech a stock target price of $2.70 a share and a buy rating. Morningstar assigned the firm a fair value estimate of $2.50 a share. The company was recently trading at $2.02.