If CVR Partners (NYSE:UAN) delivered an outstanding fourth quarter and rewarded its shareholders with record dividends in 2013, Rentech Nitrogen (UNKNOWN:RNF.DL) sent shockwaves among investors with horrendous numbers and a massive cut in dividends.
What went so drastically wrong at Rentech, when even a company like PotashCorp (NYSE:POT) didn't suffer as big a drop in sales or profits and even maintained its dividends, despite facing severe headwinds from unprecedented industry developments in recent months? It's time investors pause and dig deeper.
The big drop no one expected
Rentech swung to losses worth $17.4 million in Q4 versus a profit of $17.6 million in the comparable period last year. Its top line shed a massive 41% year over year. Management blamed softer nutrient prices and lower production because of plant outages for the revenue drop.
Nutrient prices are largely uncontrollable, and affected nearly every player in the industry. But Rentech took the hardest hit of all. If last-quarter sales from PotashCorp's nitrogen division slipped 10% year over year, CF Industries reported a small 4% drop in its nitrogen sales during the fourth quarter. Interestingly, CVR Partners, which is very similarly structured to Rentech, saw its last-quarter revenue surge 25% year over year.
So how do you explain this huge variance?
Rentech's primary nitrogen-producing facility at East Dubuque, Ill., was down for nearly two months during the fourth quarter. Yes, you read that right. Aside from 31 days of planned downtime for maintenance, a fire forced the plant to shut down for another 29 days. Since the company operates out of one plant only, it paid a heavy price for the loss in production.
But a bigger concern was the lower production at Rentech's Pasadena facility, which produces ammonium sulfate, or AS fertilizer. After acquiring Agrifos in late 2012, Rentech edged out Agrium (NYSE:AGU) to become the largest AS producer in North America. Naturally, Rentech was betting big on the acquisition to fuel future growth, but the results have been disastrous so far.
A deal gone wrong?
During its third quarter, Rentech took a charge of $30 million as impairment after it lowered its profitability outlook from the Pasadena facility. In other words, the acquisition hasn't proved as fruitful yet as the company expected. What's alarming is that the problems continued into the fourth quarter, with the facility facing several "unplanned disruptions" that hurt production.
Worse yet, Rentech is still selling AS at lower prices as compared with Agrium. So while Agrium realized $303 per tonne of AS in its last quarter, Rentech sold AS for only $190 per tonne in Q4. Meanwhile, Rentech's input costs continue to be high. As a result, it ended Q4 with gross loss margin of 32% at the Pasadena Facility, compared with gross loss margin of 5% in Q4 last year.
With additional capacity going online at its Pasadena facility, Rentech projects positive earnings before interest, taxes, depreciation, and amortization for the facility this year. Sounds good, but how Rentech plans to achieve it remains to be seen.
How does all this affect you?
Most investors who own Rentech shares in their portfolio have high dividends in mind since the master limited partnership can pass on its income to its shareholders instead of paying tax. Unfortunately, Rentech's dividends are losing appeal.
Rentech distributed only $1.67 a share in financial year 2013, compared with $3.30 per share in 2012. Rentech's dividends could slide further if its profits don't pick up soon. But there's a bigger problem.
Can you rely on such management?
It looks like Rentech's management has started taking the business lightly in its bid to impress shareholders. For example, the $0.05 dividend per share that the company paid during the fourth quarter came from the insurance proceeds that it had claimed against the fire at the East Dubuque facility. I simply don't understand the move, and I'd call it bad business sense.
Worse yet, Rentech may not be keeping enough cash aside even to run its day-to-day business in its bid to pay dividends. What else do you understand when the company says that it may be unable to distribute all the cash available in 2014 if management has to use some of it to "replenish working capital reserves" that depleted last quarter? If that was the case, why did Rentech pay dividend out of the insurance proceeds? It all looks very dicey to me.
The Foolish bottom line
Rentech has too many problems to deal with, and the fertilizer market isn't particularly strong right now. And the company's dividend distribution strategies raise serious questions. I'd steer clear of Rentech and instead look at other MLPs that are consistently growing their top and bottom lines and doling out greater dividends.