Biofuels Firm Pulls the Plug

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Hit by cheap natural gas, moderate oil prices and diminished funding from Washington, Rentech Inc., a Westwood alternative fuel company, is slashing its research and changing its formula for the future.

Rentech last week said that it was closing a biofuels research and development facility in Commerce City, Colo., and laying off 65 workers there.

Rentech also plans to enter the more traditional energy business with an announcement in the next few months.

Chief Executive Hunt Ramsbottom said that the current cost of natural gas – $3.25 per million BTUs compared with a high of $13 five years ago – makes it tough for his fuels to compete. Also, crude oil prices are in the low $90-a-barrel range, and his products aren’t commercially viable unless crude goes well above $100. Plus government enthusiasm for alternative energy has cooled.

“It doesn’t make sense to pursue alternative fuel technologies here in the U.S.,” Ramsbottom told the Business Journal last week.

Instead, Rentech will focus its alternative fuel technologies on overseas markets, particularly Asia and Latin America. In the United States, it will continue to rely on a growing revenue stream from its share of a fertilizer production unit and a soon-to-be announced venture in the traditional fuels sector.

Investors welcomed the news, sending Rentech shares up 3 percent Feb. 28 to close at $2.73.

“The decision to close the (R&D) facility is a positive development for shareholders,” said Matthew Farwell, analyst with Imperial Capital LLC in New York. “They’ve proven that their technology can work. But they haven’t been able to arrange the financing for a larger demonstration project that could lead to commercialization.”

Rentech, which moved its headquarters to Westwood from Colorado seven years ago, has spent the last several years developing technologies to convert various alternative energy sources into diesel and jet fuel.

“We can make the fuel from nearly any source material, from biomass to natural gas,” Ramsbottom said.

The company also has developed two technologies to convert biomass into synthetic natural gas and petroleum products.

Back in 2009, things looked bright for Rentech. Soon after the Obama administration began, the government pledged billions of dollars to alternative energy sources, from solar to biomass. The Energy Department awarded a $23 million, three-year grant to Rentech and partner ClearFuels Technology Inc. to construct a biomass-to-gas conversion facility in the Denver area.

The company also spent $225 million on a plan to develop a biomass-fueled power plant in Port St. Joe, Fla.

Bad environment

But in the last two years, the market and public funding environment for biomass and other alternative energy products has flipped. Hydraulic fracturing opened up vast new supplies of natural gas and domestic crude oil, sending prices plummeting and making alternative fuel sources such as biomass much less competitive.

As a result, Rentech could not find financing for the Port St. Joe biomass plant; the company pulled the plug on the project in January 2012.

Meanwhile, in late 2011, Fremont photovoltaic solar panel maker Solyndra filed for bankruptcy, leaving taxpayers holding the bag on a $535 million DOE loan. The ensuing scandal effectively shut down DOE financing of alternative energy projects, meaning there would be no follow-on money for Rentech’s biomass project in Denver, even though it was operating.

“The climate in Washington had completely changed,” Ramsbottom said.

Late last year, as the DOE grant money was winding down, the company began to re-evaluate its research and development program in Colorado. Rentech decided to shut it down, along with all the other R&D efforts at the facility.

To cover shutdown costs, the company will take a $16 million charge against its fourth quarter 2012 earnings, due out this month.

The change in direction had been long awaited by Wall Street.

“Shareholders have inquired about the status and the ultimate fate of Rentech’s alternative energy business for many quarters now,” Farwell said. “This really begins to answer shareholder concerns.”

Other business lines

Ramsbottom said Rentech’s money and effort would be better spent on finding new markets for its existing technologies. He said the company is in the process of lining up partners to bid on alternative fuel projects abroad, especially in Europe, Asia and Latin America.

“In Europe, natural gas is $8 or $8.50 (per million BTUs), which makes a big difference in how competitive our projects can be,” he said.

Meanwhile, another Rentech venture, a nitrogen fertilizer business, has fared quite well, thanks in large part to those tumbling U.S. natural gas prices. Natural gas is used in the production of nitrogen fertilizer, which has seen major jumps in demand as it’s used more frequently now for corn and other crops. The combination of lower gas prices and higher demand resulted in significant gains in margins for the unit. That prompted the company in late 2011 to spin off the unit as Rentech Nitrogen Partners LP and take 40 percent of that unit public. Rentech still retains control of 60 percent of the nitrogen fertilizer unit and reaps significant quarterly cash flow from it.

Looking ahead, Ramsbottom said Rentech will soon announce that it’s entering a new business line in the domestic traditional fuels sector, one with little leverage, long-term contracts and with after-tax returns “in the midteens or higher.”

Rentech had earlier signaled its intention to find several such business opportunities, a move welcomed by analysts.

“We believe this to be a positive step for the company and anticipate this announcement to prove a meaningful near-term catalyst for the stock,” said Lucas Pipes, analyst with Brean Murray Carret & Co. in New York.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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