Enviva Partners: Powering The Green Future

Summary

• Enviva Partners is the global leader in a niche market.
• 8.7% yield from a green machine with 1.6x coverage.
• 18th consecutive quarter of increased distributions; K-1 issued during tax time.
• Strong long-term contracts with a sales backlog of ~$10.6 billion and avg. duration of 11.4 years.
• Opportunities in the pipeline with potential to double the product sales backlog.

The Opportunity

A sharp drop in Enviva Partners' (NYSE:EVA) stock price following the market-wide panic due to coronavirus and the oil price slump presents a great buying opportunity for long-term investors.

In my opinion, the spread of coronavirus has little to do to impact operations of the partnership. Further, the driving force behind Japan, Denmark, the UK and South Korea (EVA’s customers) increased demand for wood pellets is to tackle climate change by reducing dependency on fossil fuels. With strong long-term contracts underway and increased push to reduce greenhouse gas emissions, I believe the short-term drop in oil prices would not cause detraction from the greater cause.

Source: Investor Presentation

The Business

Wood pellets are sustainably produced at Enviva’s plants, stored and shipped to customers, majority of whom are in the UK, Europe and Japan.

Source: Enviva Partners website

The wood fiber used for wood pellet production predominantly is comprised of:

1. Low-grade wood fiber: Trees or wood that are unsuitable for or rejected by the saw-milling and lumber industries because of small size, defects (e.g. crooked or knotty), disease, or pest infestation.

2. Tops and limbs: The parts of trees that cannot be processed into lumber.

3. Commercial thinnings: Harvests that promote the growth of higher value timber by removing weaker or deformed trees to reduce competition for water, nutrients, and sunlight.

4. Mill residues: Chips, sawdust and other wood industry byproducts.

The company explains in its 10-K the lack of other competing usage for its wood source:

"Demand for the non-merchantable fiber, waste products or byproducts that we use is generally low because they have few competing uses, in part because they cannot be transported cost-effectively. The tops, limbs and other low-grade wood fiber we purchase would otherwise generally be left on the forest floor, impeding reforestation, or burned. Wood pellet production provides a profitable use for the residues from sawmill and furniture industries and also for the trees that are thinned to support the growth of higher-value lumber-grade trees. U.S. demand for such low-grade wood fiber historically emerged from the pulp and paper industry. However, due to the decline in demand from paper and pulp, many landowners lack commercial markets for this wood fiber. Wood pellet producers help fill the gap."

During 2019, the partnership sourced wood fiber from approximately 310 suppliers, indicating strong diversity in its source of raw material.

Image Source: Company Presentation

Growing Distribution (with more coming in 2020)

Enviva Partners has increased the quarterly distribution for the 18th consecutive quarter to $0.675 per unit with a coverage ratio of 1.59x (Source: Company conference call). This represents an 8.7% yield at current prices.

Source: Seeking Alpha

Based on company’s projections for 2020, Enviva Partners expects to distribute between $2.87 and $2.97 per common unit for full-year 2020.

Enviva has strong long-term contracts

Enviva Partners is engaged in long-term, take-or-pay off-take contracts constituting a product sales backlog of $10.6 billion and having a total weighted-average remaining term of 11.4 years from February 2020.

The partnership has seen 19% YoY growth in revenues and is on a strong growth trajectory. Looking into the opportunities in the pipeline, there is potential for the product sales backlog to increase to $19.6 billion and the remaining term to rise to 13.8 years (source: Company Form 10-K).

Source: Author's calculations

Though the contract terms are long, it is worth noting that Enviva’s four largest customers accounted for 94% of product sales in 2019.

With new Japanese contracts underway, the contract book is expected to grow to close to 7 million metric tons per year in 2025 and this will provide the much needed diversification in the revenue mix.

Source: Enviva Partners Presentation

Cons

Incentive Distribution Rights

The general partner incentive distribution rights (“IDRs”) represent the right to receive increasing percentages (from 15.0% to 50.0%) of quarterly distributions from operating surplus after distributions in amounts exceeding specified target distribution levels have been achieved by the partnership.

IDRs result in diversion of a large percentage of future profits to the general partner. With a strong growth potential ahead, we cannot estimate how much of it will be directed to the general partner.

Schedule K-1

Enviva Partners issues a schedule K-1 for tax filing purposes. While this adds inconvenience to investors during the tax filing time, its tax deferred nature offers advantages.

Also, there can be issues associated with holding it in an IRA and may require consultation with a tax advisor prior to proceeding.

Conclusion

With limited competition in the wood pellet supplier space, consecutive increases in distributions and a strong growth pipeline, I believe the market panic has created a great buying opportunity in Enviva Partners. I recommend EVA to long-term investors.

Analyst’s 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.