Rentech Nitrogen Partners (NYSE:RNF) is a newly spun-out nitrogen fertilizer business that recently announced its first quarterly earnings as a standalone business. For the three months ended Dec. 31, 2011, Rentech Nitrogen reported net income of $10.5 million compared with $4.3 million in the year ago comparable period. The 2011 income figure included a $10.3 million loss on extinguishment of debt. Excluding this loss, net income was 56 cents a share. Revenues for the 2011 quarter were $63 million.

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Looking Past the Numbers
Rentech Nitrogen's numbers don't seem exciting until you look past the numbers and learn more of the story. Rentech Nitrogen was spun out from Rentech, Inc. (NYSE:RTK). Post-spin-off, RTK held on to about 60% of Rentech Nitrogen. RNF was spun out as a nitrogen partnership meaning that intends to pay out its profits to shareholders. According to the company's forecast for the 12 months ending Sept. 30, 2012, Rentech intends to distribute $2.34 a share. As of writing, shares trade for about $26, implying a yield of 9%. While changes in the company's operating environment could ultimately effect the actual distribution, the yield will nonetheless remain attractive. Nitrogen prices continue to hold up, but more importantly, Rentech Nitrogen has locked in or delivered nearly 70% of its ammonia production and 50% of its UAN production in 2012 at prices above what is needed to make the payout. (For related reading, see Profit From Agriculture.)

Income and Growth Play
In recent weeks, shares of RNF have quickly surged from $16 to $26, as investors realized that the quality yield and growth potential were here to stay for Rentech. RNF's current market cap of $990 million gives the company and EV/EBITDA ratio of about 10, based on the company's projections of $96 million in EBITDA in fiscal 2012. That compares with a EV/EBITDA ratio of eight for Terra Nitrogen Company (NYSE:TNH), another pure play nitrogen partnership. But Rentech is also in the middle of a significant expansion project that should significantly boost EBITDA over the next several years. And that growth will likely increase the annual distribution which as it now stands is higher than the 8% paid out by TNH. Terra, it should be noted, is majority owned by CF Industries (NYSE:CF), one of the largest nitrogen fertilizer companies in the world. Looking ahead, another major fertilizer company or even CF could be interested in Rentech and the excellent proximity that its nitrogen plant has to corn-producing regions.

The Bottom Line
Rentech Nitrogen appears to be an excellent income-producing investment in a very sound industry. The company is on track to pay out an attractive distribution, which will likely be very appealing to many investors. With a significant expansion plan well underway, investors stand to benefit from increased distributions as the businesses grow.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.



Tickers in this Article: CF, RTK, RNF, TNH

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