The international trade in wood pellets are the fastest growing alternative energy export from the USA to the European Union.
According to the US International Trade Commission, “the growth in wood pellet consumption has been heavily influenced by the EU’s Renewable Energy Directive (RED) requirements1 and the EU’s decision to designate biomass as a low-carbon renewable energy.”
The immediate question is — how can investors make money from wood pellets, this little understood alternative energy source?
Thomas Meth, the President, Chief Executive Officer, and a co-founder of Enviva Inc. (NYSE:EVA) has the answer to this provocative question. He is the wood pellet CEO.
“Enviva is the largest wood pellet manufacturer in the world.
We have a capacity of 6.2 million tons.
We take a very heterogeneous, fragmented, renewable natural resource in the form of woody biomass and turn it into a commodity, a biomass fuel that can replace fossil fuels, such as gas, coal and oil across the world.”
In his recent 2,409 word interview, exclusively with the Wall Street Transcript, wood pellet maestro Meth pulls no punches.
“We make this product transportable and cost effective.
For example, currently, it is competitive, or even at a lower cost, than any fossil fuel alternative taking carbon pricing into account.
We started this business in 2004 and have been a pure play as a wood pellet company since 2010.
We also consider ourselves an infrastructure business, meaning we sign long-term off-take agreements with credit worthy counterparties across the world.
We have a contracted revenue backlog of over $20 billion, and with that backlog, we are building infrastructure to take that fragmented resource — wood fiber — and turn it into the product that replaces fossil fuels — wood pellets.
In addition to manufacturing facilities, we are also building the logistical infrastructure — port terminals — needed to create storage that will eventually load, transport, and deliver our product in a reliable and timely fashion to our customers.”
A $20 billion backlog represents alot of wood pellets. This order cushion provides investors with some upside from the current $3 billion market cap, especially considering a current dividend yield of over 8%.
The CEO of Enviva (NYSE:EVA) explains further:
“We have an incredibly supportive market dynamic for our business.
At the beginning of the pandemic, Europe decided to really lean in on green energy and announced the Green Deal, which fundamentally changed the value of carbon in Europe, and has led to more long-term certainty.
From historically EUR20 per ton, to now EUR75, EUR80, going onto EUR100 a ton. That was a massive change in step and a tailwind for our business.
There is a large subset of our business that is the power industry.
The power industry pipeline was developed on the basis of different policy instruments in Europe, such as the coal tax or various incentives for biomass to compete against coal, for example, particularly when carbon pricing was that low.
Fast forward, it’s an incredible vote of confidence from our existing customers that they’re actually willing to lock in incremental contracts, believing that these tailwinds will run for the foreseeable future.
Not to mention, there is a structural biomass shortage and a structural renewable power shortage.
Both of those together allow that particular customer to say, “You know what, we want to make sure we have the biomass available as part of our strategy and we don’t want this to be sold somewhere else.”
So our customer is taking a very long-term strategic view for delivery starting in 2027.”
The wood pellet company is a new opportunity for investors.
“It’s important to note that 2022 was our first year as a publicly traded corporation.
And now we have 10 plants operating, and we’re constructing and delivering a plan to continue to maximize uptime of those facilities, drive down costs, hire the right people, and to retain those people in a job market that has been difficult.
I think we’ve done a lot of good work in 2022 and we’ll continue that way in 2023.
Last thing I will say is, in addition to growing and developing our infrastructure, we’re paying a healthy dividend.
We can do both and we’ll certainly continue to do that.”
Enviva gets support from top tier Wall Street analysts as well as its CEO.
In his recent, and exclusive, 2,300 word interview with the Wall Street Transcript, Pavel Molchanov, the long term award winning alternative energy expert analyst of Raymond James, touts the wood pellet future and the attraction of it’s investment thesis.
“While the Inflation Reduction Act has gotten a lot of headlines, I think the European energy crisis is even more of a big deal as a catalyst for energy transition.
There are some companies that have a very direct footprint in the European market for supporting energy diversification and security.
First one that I will mention is Enviva (NYSE:EVA).
Enviva is the world’s largest provider of utility-grade wood pellets.
One of the things we’ve seen in Europe, because Russia has basically cut off natural gas supply, is some utilities are needing to burn more coal.
This is not only a big problem environmentally, but it’s also quite expensive.
The price of coal has doubled since the start of the year.
Wood pellets of the kind that Enviva makes are substitutes for coal.
They are renewable because they’re made from wood, and they are also cleaner burning, without the various toxins that coal contains.
Because coal is so expensive, wood pellets for the first time ever are actually cheaper than coal.
It is absolutely a no-brainer for power plants in Europe that are burning coal.
Switching to wood pellets makes perfect sense.
Enviva is a U.S. company and it produces the wood pellets along the eastern seaboard, where there has always been a lot of forestry.
But they are all shipped abroad: 80% to Europe, 20% to Japan.
That makes Enviva a one-of-a-kind story on improving Europe’s energy security as well as promoting greater sustainability by displacing coal.”
The 2022 development of the wood pellet investment opportunity of Enviva is just one unexpected consequence of government focus on the de-carbonization of our energy supply coupled with the Russian invasion of Ukraine.
The CEO of Enviva insists his wood pellet company will be around for the long term.
“One of the most important things in our business is sustainability, and it is at the core and at the heart of what we do.
Let me explain how we ensure that we’re taking the right kind of wood.
For starters, it’s a commercial reality that, one, the straight stem of a tree that can go to a sawmill is five to 10 times more expensive than the type of wood we buy.
So, purely from a commercial perspective, there is no incentive for someone to sell wood to us that should, and would otherwise, go to a sawmill.
It is really important to understand that our industry is symbiotic to the sawmill industry.
Approximately 50% of trees that are harvested typically go to a sawmill and will be turned into long-term carbon storage in the form of furniture or building materials for housing.
The other 50% historically have gone to the paper industry.
As the paper industry has quite substantially declined over the last 20 years in the United States, we are filling that gap in areas where there is no, or very little, demand from the paper industry.
The bioenergy industry can fill that void in concert with the sawmills.
On top of that, we have an industry leading, proprietary Track & Trace system that requires GPS coordinates of where the wood is being harvested so that we can check that the wood does not come from High Conservation Value — HCV — areas. If HCV areas are identified, we will not accept wood from those tracts/areas.
In our processes, it is also really important to know the landowner’s intention to keep the land as forests — this is crucial, and is part of our wood procurement contractual obligations.
Then, we make sure that we understand the quality of the stands coming to us to verify we’re paying the lowest amount of money per ton, which we verify.
We also take the time to better understand where other products from a particular tract are going to further verify we’re taking the right kind of wood out of a traditional timber harvest.
In addition to traditional harvests, we also take sawmill residues from the local processing facilities.
The current yield and the current growth for the wood pellet company Enviva creates an upside to the current stock market doldrums.
Get both the detailed equity analyst interview and the CEO interview, exclusively in the Wall Street Transcript.
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