Forget Oil And Gas
Enviva Partners (NYSE:EVA) is a midstream energy MLP. But it's not your typical energy MLP, not at all. For one thing it's up 25% over the last three months, a period when energy MLPs [represented by the Alerian MLP Index (^AMZ)] lost 26%.
Following its May 2015 IPO, EVA's share price dropped along with the MLP market and remains down -7.8%. But at today's mid-day price it is beating the Alerian MLP Index by over 37 percentage points from its IPO.
From its mid-October low, EVA is up 41.2%. For the same period ^AMZ has lost 27.4%.
Biomass Fuel: Generating Electricity from Trees
Of course EVA is not a fossil fuel MLP so these comparisons may not be strictly fair but they do serve to illustrate how different EVA is from the typical midstream MLP. EVA deals in biomass-based energy. As they describe it, the partnership "aggregates a natural resource, wood fiber, and processes it into a transportable form, wood pellets."1 Pelletized wood is a biomass fuel product as opposed to fossil fuels. Biomass fuels are derived from living organisms that store energy from the sun, in this case the energy is stored as wood.
Biomass fuels are renewable, consequently more nearly carbon-neutral than fossil fuels. Utilizing the biomass for energy generation does, of course, release carbon dioxide, but the source forests are replanted after harvest, so new tree growth consumes atmospheric carbon dioxide reconverting it back into consumable biomass. At that level the generation of the energy resource is carbon neutral. There are, of course, subsequent carbon costs associated with processing and transport, but overall wood as an energy source generates about 80% less net carbon than oil, gas or coal.
Why wood pellets?
When many of us think of wood pellets we're likely to consider it in terms of retail consumer uses we may be familiar with: things like home heating in pellet stoves, or pellet-fueled BBQ grills or smokers. Enviva operates at an entirely different scale. Their customers use wood pellets as a replacement fuel for coal in power generation. A significant majority of their sales comes from long-term, take-or-pay agreements with creditworthy electricity-generating utilities in the United Kingdom and Europe.
"European nations have adopted aggressive, mandatory renewable energy targets for 2020. Several countries... have put additional regulations in place that are designed to phase out many coal plants altogether."2 The UK has announced plans to shut all of their coal-fired plants by 2025. Because the existing coal-fired infrastructure can be converted to use wood biomass Enviva offers a reliable, cost-effective means of meeting these regulations.
Switching from coal to biomass reduces emissions of carbon dioxide by between 74 and 90% on a lifecycle basis.3
Biomass is one of the most cost-effective renewable energy resources. The cost of biomass power generation in Europe is less than the cost of offshore wind, solar thermal, and solar PV. In addition to the low generation costs, biomass also has low grid-level costs. These are the costs incurred by energy transmission companies to deal with the intermittent nature of other renewable resources.
Resources and Facilities
Enviva sources its materials from forests in the South and Southeast. They work with suppliers who deliver fiber from privately owned forests and directly from sawmills and other wood industry manufacturers. They procure low-grade wood fiber that would otherwise be rejected from lumber mills, tops and limbs that cannot be refined into lumber, commercial thinnings, and mill waste and residues.
Enviva Partners owns and operates six plants in Northampton County and Ahoskie, North Carolina; Southampton County, Virginia; Amory and Wiggins, Mississippi; and Cottondale, Florida. These have a combined production capacity of approximately 2.2 million metric tons of wood pellets per year.
In addition, the partnership owns a deep-water marine terminal at the Port of Chesapeake, Virginia, which is used to export wood pellets. Enviva Partners also exports pellets through the ports of Mobile, Alabama and Panama City, Florida.
The industry offers little competition. A fragmented supply base of suppliers with small plants historically has characterized the wood pellet industry. By contrast, Enviva has taken an industrial, enterprise-scale approach. It performs the full range of activities comparable to other midstream MLPs: Gathering, processing, transport and storage. Income is generated by aggregating the resource, processing it into fuel pellets, delivering the pellets to deep water marine storage terminals and delivering them to utility customers.
This chart shows worldwide production (millions of tons of pellets per year) with current capacity represented by the filled bars and capacity with projects scheduled for completion by 2017 shown as the open bars.
As shown, Enviva is the world's largest producer.
Earnings and Distributions
Enviva has had two quarterly earnings reports since its May 2014 IPO. Each beat expectations. Fourth quarter earnings are scheduled for 18 February with a consensus estimate of $0.26/share. Earnings are expected to increase to $0.41/share for 2016's first quarter.
EVA has paid two quarterly distributions. Its initial $0.263/share distribution increased to $0.44 for the third quarter of 2015. Yesterday the partnership announced a 4.5% increase to $0.46/share for the fourth quarter of 2015 with an ex-date of 12 February. Forward yield is 10.12%.
S&P Capital IQ lists four analysts currently covering Enviva. They give it a combined strong buy rating, with a consensus price target of $22.
Key Metrics vs. Industry
The table below lists some key metrics for Enviva vs. the Oil, Gas and Consumable Fuels industry group.4
Enviva offers a high-yielding investment opportunity in an alternative fuel, midstream MLP. An investor can earn a 10% distribution with reasonable prospects for share price appreciation going forward. The MLP provides either an alternative or a supplement to a portfolio of traditional MLPs.
4S&P Capital IQ Company Report (3 Feb 2016)
Disclosure: I am/we are long EVA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article does not constitute investment advice. I am passing along the results of my research on the subject. Any investor who finds these results intriguing will certainly want to do all due diligence to determine if any security mentioned here is suitable for his or her portfolio.