Rentech Inc.’s stock has been as hot as the fuel the company produces.
Since the beginning of August, Rentech shares more than quintupled to $2.60 on Aug. 19. However, the next day it gave back one-third of its gains to close at $1.85. That’s still an increase of 277 percent.
However, analysts are cool on the company because profits are far away and it faces technical hurdles in building a production facility.
For Rentech, a Westwood-based company that produces synthetic fuels and fertilizers, the excitement began Aug. 5 with the announcement that its jet fuel made from green waste had won regulatory certification for use by commercial airlines. That news more than doubled the stock’s price in the following days.
On Aug. 10, the company announced a multiyear agreement to supply synthetic diesel fuel to eight airlines at Los Angeles International Airport. The fuel will not be used by aircraft but to power ground vehicles and equipment. The contract could involve as much as 1.5 million gallons per year. The clean fuel will supply equipment for such major carriers as American Airlines, Delta Air Lines, Southwest Airlines and United Airlines.
On Aug. 19, analyst Pavel Molchanov at St. Petersburg, Fla.-based Raymond James & Associates upgraded the stock to “market perform” from “underperform.” In a note to clients, Molchanov wrote that the LAX deal “represents arguably the most tangible validation of the company’s synfuels strategy to date.”
On Aug. 20, Rentech said it had agreed to sell an institutional investor 8.6 million new shares at $1.75 each. The proceeds of $15 million will fund development costs for the company’s proposed synthetic fuel facility in Rialto. Because the deal was dilutive, 20 percent fell off the share value.
Analysts remain cautious toward Rentech. Of the seven analysts who cover the company, five rate it “neutral” and two advise clients to sell it.
That’s because all the recent good news won’t reach the bottom line for years, if ever.
“While Rentech continues to make progress on its growth business of conversion of carbon feedstock to liquids, the company’s current earnings and cash flows come solely from its nitrogen fertilizer business,” wrote John Bridges, an analyst at J.P. Morgan, in a report Aug. 10.
The LAX diesel fuel agreement won’t begin until late 2012, when the Rialto facility is scheduled to come on line and produce the fuel. Even as he upgraded the stock, Molchanov warned that Rentech still faces financial and technical challenges in getting the facility built.
Julie Dawoodjee, vice president of investor relations at Rentech, said the company expects to finish a feasibility study this fall and file for building permits by the end of the year.
Those developments could inspire another updraft in Rentech’s stock price, said Bridges at J.P. Morgan.
“We like the long-term prospects for Rentech,” he wrote to investors. “A feasibility study and air permits for (the Rialto plant) should be the next catalyst for this stock.”
