Synthetic Fuel to Power Rentech's Profitability

• The Company: Rentech, a provider of clean synthetic fuel solutions.
• The Filing: Form 10-Q filed with the SEC on August 11, 2008.
• The Finding: Rentech said it lost $54 million in the nine-month period ended June 30, much of it due to R&D expenses, However, the coal-to-liquid fuel company is finally producing liquid synthetic fuel at its $45 million Product Demonstration Unit (PDU) in Commerce City, Colorado, using natural gas as the feedstock. The pilot facility will play a critical role in strengthening commercialization efforts by exhibiting Rentech’s fully integrated Fischer-Tropsch (Rentech) process to prospective customers, licensees and partners.

The Upshot: Although the company is currently using natural gas and a steam methane reformer as the source of synthetic gas, management believes the Rentech process can convert synthetic gas from practically any carbon-bearing resource, including municipal solid waste, petroleum coke, and coal, into hydrocarbons that can be processed and upgraded into ultra-clean synthetic jet and diesel fuel, specialty waxes and chemicals.

Management told analysts on its third-quarter earnings call that they believe having the only operating synthetic transportation fuel facility in the country provides Rentech with a competitive advantage. The pilot plant is capable of delivering up to 420 gallons (10 barrels) per day of synthetic fuels for testing.

The development of Fischer-Tropsch technology for the production of liquid fuels is not new, and is based on processes that have been in use for decades. For example, Sasol has been producing synthetic fuels in South Africa from coal and natural gas for over 50 years, and several integrated oil companies, such as Exxon-Mobil and Conoco-Phillips, hold important patents in the process space, too.

Rentech has historically funded its synthetic fuel research from equity offerings, debt issuances, and cash flow generated from product sales of nitrogen fertilizer. Construction of its first commercial coal-to-liquids plant near Natchez, Miss., will cost about $450 million, which will require Rentech to tap the credit markets. The Company is targeting to complete Phase 1, the production of 1,600 barrels per day, in 2011.

Rentech is targeting to produce an additional 28,000 barrels per day during Phase 2 of the project. I am not as confident on the commencement date of this stage, for it could require more than $1.0 billion in additional financing.

The Question: Can Rentech win over environmentalists in its efforts to transform the U.S. synthetic fuels market?