Top Picks 2020: Enviva Partners, LP (EVA)

01/15/2020 5:00 am EST

Focus: COMMODITIES

Robert Rapier

Editor, Investing Daily

A global renewable energy revolution is underway. The key driver has been the steady rise of carbon dioxide concentrations in the atmosphere. The culprit is global consumption of fossil fuels, notes Robert Rapier, editor of Investing Daily's Utility Forecaster.

Coal is most carbon-intensive of the fossil fuels, so many countries have put a high priority on phasing out coal consumption. That’s where Enviva Partners, LP (EVA) comes in.

Enviva Partners is an unconventional master limited partnership (MLP), as well as the world's largest manufacturer of wood pellets. Although conventional midstream oil and gas MLPs have struggled in recent years, Enviva has been outstanding. 

Today, Enviva operates seven wood pellet plants in the southeastern United States. It conducted an initial public offering in 2015. Burning wood pellets from managed forests is different from burning coal.

These trees were planted to be harvested. The pellets that are burned are releasing carbon dioxide that was sequestered when the trees grew.

Then new trees will be replanted. Because there is some slash added to the soil, and the tree roots can remain in the soil for decades, there can be a net sequestration of carbon dioxide from managed forests.

That’s different from coal, which is simply adding ancient, sequestered carbon into the atmosphere

The wood pellet export trade from the U.S. to Europe is booming. The main demand driver in Europe is the European Commission's 2020 climate and energy plan.

Member states have national renewable energy targets, which some countries are meeting by using wood pellets to produce electricity. This can either be done by burning the wood pellets alongside coal, or with a dedicated wood pellet power plant.

The U.S. is the world’s largest producer of wood pellets. The sourcing of U.S. wood pellet exports has been concentrated in southeastern states because of 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 excellent transportation infrastructure for exporting pellets, with a deep-water marine terminal at the Port of Chesapeake, Virginia and long-term leases with the ports of Mobile, Alabama and Panama City, Florida.

Transportation costs can account for a quarter of the total cost of wood pellets, so companies with strategically located transportation infrastructure will have an advantage over competing pellet manufacturers in Brazil and western Canada.

Enviva is fully contracted through 2025, with a backlog of $9.5 billion. The weighted average on the company’s current contracts is 10.4 years. Industrial wood pellet demand in Europe has doubled since 2012 and is forecast to grow at a compound annual growth rate (CAGR) of 13% through 2023.

Since its IPO, Enviva’s distribution has grown at a CAGR of 12.1%, and has a 22.8% annualized total return. Over the past three years, EVA’s total return has been more than triple that of the S&P 500. The company has guided toward a distribution between $2.87 and $2.97 for 2020, the midpoint of which would represent an annualized yield of 8.6%.

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