How Putin’s Invasion Of Ukraine Produced A Windfall For Enviva’s Wood Pellets Business

Environmentalists have doubts, but John Keppler’s faith in the energy source is rewarded by European customers willing to pay top dollar.

On a crisp North Carolina morning, an eastern pine forest is being clear cut in a precisely choreographed hydraulic ballet. Pincers grab 500-pound, 30-foot tree trunks, run them through trimmers and auto-cutters and then stack the nearly uniform logs onto flatbed trucks which take them to mills to be cut into construction boards. Grappling claws scoop up the remains of the harvest—branches, limbs and scraps—and drop them into open-topped dump trucks headed for one of 10 plants run by Enviva, to be chopped, dried, pulverized and pressed into two-inch wood pellets.

You could burn those pellets in your backyard grill—if you could buy them, which you can’t. “We’re already sold out,” boasts John Keppler, Enviva’s cofounder and CEO. Earlier this year, the Bethesda, Maryland-based company locked in take-or-pay contracts to sell German and other European customers millions of tons of pellets over the next 15 years at upwards of $250 a ton, a record price that now yields gross margins of $43 a ton, up 14% over last year. The pellets fuel plants that might have previously relied on Russian coal or natural gas. In Europe, natural gas prices have jumped ten-fold in two years to the equivalent of $60 per thousand cubic feet (versus $8.25/mcf in America). “There’s never been a better time to be in the pellet business,” Keppler says.

While Vladimir Putin’s invasion of Ukraine has produced a windfall for Enviva, it’s no overnight success. Keppler, 50, has spent 15 years building it into the world’s largest producer of industrial grade pellets, with $1 billion in annual sales and a current stock market cap of $4.65 billion. The company still runs a net loss after depreciation and interest but expects EBITDA to more than double this year to $250 million. Keppler is aiming to build ten more plants over the next five years, doubling current annual output of 6.2 million tons of pellets. “Every ton we produce is a ton of coal that stays in the ground,’’ he says.

Many environmentalists doubt that’s a good tradeoff. In fact, burning wood pellets emits more carbon dioxide for the same amount of energy than does coal. The pellets are considered green only because biomass is renewable. The catch? It takes decades for newly planted trees to sequester the carbon dioxide released by burning their predecessors. “The best strategy to lower atmospheric CO2 levels is to preserve and expand forests, rather than destroy them and use trees as fuel,’’ says climate change expert Robert Musil, CEO of the Rachel Carson Council.

“There’s never been a better time to be in the pellet business.” – John Keppler

The European Union Parliament, concerned by the loss of old growth forests amid rampant growth in pellet combustion, voted in September to reduce pellet subsidies and “phase down” the portion of wood-based fuel counted as renewable. While competing for a bigger piece of a potentially smaller pie in Europe, in America, Enviva is enthused by the new Inflation Reduction Act, which includes tax credits for burning pellets for electricity.

Keppler insists that Enviva never turns whole trees into pellets—except those knocked down by hurricanes. Instead, it buys scraps that used to get pulped into newsprint for now dead or shrunken newspapers. Enviva says it only works with landowners who replant trees—not those clearing land for development. “If it doesn’t go back to forest, we won’t buy it,’’ declares Lauren Killian, a 32-year-old sustainability forester at Enviva.

Keppler first became fascinated by renewable resources at 30. His career had been largely on hold for six years as he beat stage 4 Hodgkin’s lymphoma and he was recharging with an MBA at the University of Virginia. As a class project, he and a couple of B-school pals worked up a business plan for a rice milling plant that wanted to power its operations by burning high-silica husks of rice kernels in a specialized gasifier. After working a few years at other jobs (Keppler at AOL), they decided to give gasifier plants a go. After building plants in the Dominican Republic and Alabama, Keppler and Enviva President Thomas Meth branched into another variety of biomass—a project to enable a Belgian lumber mill to power its main operations by pressing sawdust into pellets.

Then came their Eureka moment: instead of doing one-off projects, they could build a whole pellet business based around more than 50 million acres of pine forests stretching from Virginia through the Carolinas, Georgia, Alabama and Mississippi.

But they needed more capital. In 2010, Keppler and Meth turned to private equity shop Riverstone Holdings, which specializes in energy. With the new money, they bought a small pellet-making plant in Amory, Mississippi, which was already selling its output to Europe. They got it running 24/7, and tripled production. They sold and spun off those early gasification plant assets to focus on pellets. They tapped higher-risk capital (from investors like Jeffrey Ubben of Inclusive Capital) to finance new pellet plants and launched a master limited partnership to buy the plants once they were built.

Enviva became a publicly traded MLP in 2015 and this year converted to a traditional corporation in a bid to market itself as a pure environmental play for ESG investors. Riverstone and its investment funds still own 42% of the stock, which now trades at just under $70 and pays a generous dividend of $3.62 a share.

One lesson Keppler says he learned from Riverstone: don’t turn a spade of dirt for a new plant until its output is fully contracted. He sees no problem inking enough orders to sell the output of the ten more mills he wants to build or finding a spot for each plant where there’s already enough tree harvesting going on within 75 miles to keep it in wood scraps. “We’re symbiotic to that (harvesting) activity, we’re not driving any of it,” he says.

Competitors are catching on. Last year, private equity giant Apollo Global invested in Estonian pellet maker Granuul (Europe’s biggest), which has acquired a handful of plants in the east Texas pine forests. Keppler says that with “zero excess liquidity” in world pellet supply, he welcomes new competition as affirmation that the business has a future. “This is a monopsony,” he says. There’s thousands of sellers (of wood scrap), very few buyers.” For now.