Newer MLP Enviva Partners L.P.

July 3, 2015

Enviva Partners L.P. (ticker:EVA) IPO’ed in May of this year. Since we are simple people we are drawn to companies like Enviva as their product is a simple one—wood pellets.  It is pretty easy to visualize scrap wood being processed into a uniform pellet which can be readily transported to end users all throughout the world. 

Enviva is a company whose sole business is creating wood pellets (biomass) that are burned for fuel. The company has 5 production facilities, all located in the southeastern part of the U.S.  This area of the U.S. has an abundance of wood product factories from which Enviva can source their raw materials–waste wood chips, sawdust and other wood unsuitable to be used at a sawmill.  These materials are pressed into pellets which are used in many different processes, but primarily are used as a fuel for power and heat generation. The companies slant on their product is that it is low carbon, energy dense, easy to transport and always available—certainly in their minds much preferrable to coal.

So let’s take a quick peek at their financials.  For the quarter ended 3/31/2015 the company had pro forma revenue of $114 million, which is 10% greater than the year ago quarter.  From this revenue EVA was able to generate net income of $5.6 million and distributable cash flow of $12.5 million–70% above the same quarter a year ago.  The cynic in us says to use caution when comparisons on a pro-forma basis look this good just prior to a IPO–and we wouldn’t make a purchase based upon a initial pro-forma income statement.

Looking ahead the company is forecasting net income of $17 to $21 million and EBITDA for the year ending 12/31/2015.  These would seem to solidly support the minimum quarterly distribution of 41.25 cents/quarter.  Shares are currently trading at $18.52 which would give them a current yield of 8.91%.  The high current yield would reinforce our view that investors need to wait a while before committing capital to a investment in EVA—coming public and having a current yield of 8.91% seems a bit too good to be true–a potential ‘sucker yield’.

Digging further into the customers that EVA is currently selling to we were somewhat startled to find that the company is selling close to 60% of their production to just 2 customers–1 in the United Kingdom and 1 in Belgium. The entire production for 2015 and 2016 is contracted with take-or-pay customer contracts and for years 2017-2021 about half of their production is contracted.  In general these seem like pretty positive attributes to have–excepting for the fact that there is such a limited customer base.

Now further into our research we did some checking into the environmental aspect of burning wood pellets.  Interestingly in Europe, where Enviva is selling virtually all of their product, wood pellets are classified as renewable energy.  There is a continuing debate as to whether wood pellets are any better than coal for burning in power plants.  This is a concern (or should be) for potential investors.  You can find a story on these potential issues here.

In summary, while we are always interested in companies that are easy to understand and are straightforward they don’t always make good investments.  While the 8.9% current yield of EVA is enticing it comes loaded with plenty of future risk. We have watched newer MLP issues for a number of years now and generally they perform up to standard the first year or two and EVA will likely do OK–for now, but with the number of MLP’s available with long track records we see no reason to get involved with EVA. For those with a higher risk tolerance than us it may be of interest.

The companies website is here and their initial registation statement (SEC for S-1) is here.