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Enviva Looking Chipper

By Robert Rapier on June 23, 2016

Enviva Partners (NYSE: EVA) went public in April 2015 as the first publicly traded MLP based on the production and sale of wood pellets. I have closely followed the wood pellet business for a number of years, and I was very intrigued by an MLP in this space. I have written a number of articles on Enviva, both pre– and post-IPO.

Most recently, in February, I wrote A Burning Appetite for Wood Chips, and then not long after we added Enviva to portfolios in both The Energy Strategist and MLP Profits. (Subscribers can also refer to Igor Greenwald’s March article The Little MLP That Could). I mentioned Enviva as one of my favorites at the InvestFest Conference in San Antonio in March and at the Investing Daily Wealth Summit in May (between mentions that $2/MMBtu natural gas couldn’t possibly last).

In short, I really like the business, I like the company, and I like the outlook for this space.

At the time of my February article, Enviva’s total return of -9.2% over the trailing 12 months (TTM) placed it in the top 10 of the best-performing MLPs, and its 2.9% year-to-date (YTD) gain was at that time one of only a handful of positive returns within the MLP sector.

This week, as I was researching topics for this column, I looked at the top MLPs year-to-date and over the past year. While most of the top MLPs YTD are oil producers or fracking sand suppliers, only one of the top 10 YTD performers — gas MLP general partner ONEOK (NYSE: OKE) — has a positive TTM return. In fact, 7 of the top 10 YTD performers are still down at least 30% over the past year, an indicator of just how far they fell.

But when I looked at the top 10 TTM performers, I saw that a familiar name has risen to the top of the MLP heap:

160623TELtop10mlpsttm

Source: MLP Data

For those not familiar with Enviva, let’s review. The wood pellet industry has been rapidly growing for years. In particular U.S. exports to Europe are being driven by the European Commission’s 2020 climate and energy plan, which seeks to reduce greenhouse gas emissions. Member states have national renewable energy targets, which some countries are meeting by using wood pellets to produce electricity. Wood pellets can be co-fired with coal, or they can be consumed in a dedicated wood pellet power plant.

Coal has the highest carbon footprint among the fossil fuels (i.e., it releases the most carbon dioxide per unit of power produced). So phasing out coal consumption has been a priority for many countries. Displacing coal with wood pellets can be a powerful tool for meeting various renewable energy targets.

The U.S. is the world’s largest producer of wood pellets. Between 2012 and 2013 pellet exports from the U.S. doubled, with 98% of the trade destined for European markets, according to the U.S. Energy Information Administration (EIA).

160623TELwoodchipseia

Source: EIA’s Today In Energy

U.S. wood pellet exports further increased by nearly 40% between 2013 and 2014, rising to 4.4 million short tons. The U.K. receives more than half of U.S. pellet exports (73% in 2014), but demand is growing across Europe.

U.S. wood pellet exports come predominantly from southeastern states, which offer abundant commercial forests and relatively low shipping costs to Europe. Rising demand and ample supplies have spurred a flurry of new projects in the region.

Enviva Partners owns and operates six pellet plants; in Northampton County and Ahoskie, North Carolina; Southampton County, Virginia; Amory and Wiggins, Mississippi; and Cottondale, Florida. These plants have a combined production capacity of approximately 2.2 million metric tons (2.4 million short tons) of wood pellets per year, making Enviva the world’s largest supplier of utility-grade wood pellets.

160623TELeva

Source: Enviva Partners investor presentation

Industrial pellet demand is forecast to grow at a compound annual growth rate (CAGR) of 20% through 2019, driven primarily by Europe. Demand for pellets for heating is forecast to grow at a CAGR of 9% through 2019. Further, the EPA’s Clean Power Plan (should it survive court challenges) could create substantial demand in the U.S. similar to what is currently being experienced in Europe as utilities seek to reduce carbon dioxide emissions.

For Q1 2016 Enviva generated net income of $7.5 million and adjusted EBITDA of $18.5 million, up from $2.5 million and $16.9 million, respectively, for the first quarter in 2015. Enviva has raised its distribution each quarter since going public, adding another 10% in the first quarter to reach $0.51 per unit. Coverage ratio for Q1 was 1.18x. The company also reaffirmed 2016 guidance including annual distributions of at least $2.10 per unit.

A potential negative to consider is that cash distributions beyond $0.4744 per common unit trigger incentive distribution rights (“IDRs”) to be paid to the general partner. The Q1 distribution did pass this mark, so future distribution growth will be constrained by the rising profit participation of the general partner.

Nevertheless, Enviva currently yields 8.8% and operates a profitable renewable energy business. If it delivers on management’s 2016 guidance its annual distribution will provide a 9.1% yield at the current price. But is it still a buy after the year it has had? Before taking the plunge be sure to check out our current Buy target for Enviva Partners in the portfolios at The Energy Strategist and MLP Profits.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 

 


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