We need to focus on green jobs: solar, wind, geothermal, biomass. There’re so many opportunities. But other countries like China are getting ahead of the curve. − Alexi Giannoulias
Biomass energy is produced from plant- and animal-origin materials such as wood, garbage, solid waste, crops, animal manure, and human sewage. Biomass converters use a variety of processes to turn the materials into solid, liquid, or gaseous liquid fuel. The U.S. Energy Information Administration (EIA) estimates that though energy consumption will fall by 2.2% in 2020, and remain at 2020 levels in the next year, electricity generation from all renewable energy sources (including hydroelectric) will rise from 20% in 2020 to 22% in 2021.
Image Source: Twitter and my post on renewable power in The Lead-Lag Report
Biomass energy is part of the renewable energy gang and just like the EIA, I am bullish on the entire sector but have some caveats on ethanol and biodiesel. Investors need to be very selective about stocks. Should they buy into companies that produce energy from wood pellets or from waste, or companies that make liquid fuels like biodiesel and ethanol from crops? Here’s my take:
2021 Power Generation Estimates
Image Source: EIA
The EIA estimates that 3,981 billion kilowatt-hours (kWh) of electricity will be generated in 2021. Of the total electricity produced, 599 kWh, or 15%, will be produced from wind, solar, and biomass sources. The use of renewable energy in 2021 is estimated to increase by more than 22% year over year, which includes electricity from conventional hydroelectric and renewable (non-hydroelectric) sources. It is a significant number, so let us investigate which sources will experience higher demand.
2021 Power Consumption Estimates
Image Source: EIA
Though this post is not about wind and solar power, investors should note that wind power consumption is estimated to rise by 17% and solar power consumption is estimated to increase by 25% in 2021 over the 2020 consumption.
On biomass power consumption:
(A) 1.147 quadrillion Btu of ethanol is estimated to be consumed in 2021 as against 1.054 quadrillion Btu in 2020 – a 9% increase.
(B) 0.318 quadrillion Btu of biodiesel is estimated to be consumed in 2021 as against 0.261 quadrillion Btu in 2020 – a 22% increase.
(C) Consumption of energy from waste and wood biomass sources in 2021 is expected to be more or less the same as consumption in 2020.
Based on the year on year growth estimates, the prospects of biodiesel and ethanol stocks look better than waste and wood biomass companies. However, biodiesel and ethanol companies have some inherent disadvantages which you will read about in the following sections.
Investors can also stay up-to-date on technology changes in the biomass energy space. Here are a few recent developments to track:
1. Dendro Liquid Energy (DLE) is a recent technology in the waste-to-energy space. It involves throwing in a reactor all types of mixed waste, including plastics and wood, to produce carbon monoxide and hydrogen, which in turn are used to generate electricity. Any cost or productivity benefits in the future will boost the waste-to-energy space, and therefore this development is worth tracking.
2. The Mid-Atlantic Sustainable Biomass for Value-Added Products Consortium (MASBio) has partnered with governments and industries to study the use of biomass in land reclamation, crop production, and bio-product development.
3. Research and press releases of the National Renewable Energy Laboratory (NREL) can clue investors on new research and applications of biomass.
Biomass Energy Stocks
Here’s my quick take on a few biomass energy stocks:
(1) Enviva Partners (EVA): It is the world’s largest producer of wood pellets – a renewable alternative to coal that can be used in the production of electricity and heat. It sources land from owners who intend to return their land to the forest. It then exploits the low-value wood, and protects and increases forest inventory.
A bullish chart, an attractive 7.23% dividend yield, a 24.2% projected revenue growth rate, consistently positive operating cash flows quarter after quarter, and the recent doubling of stake by ValueAct suggest that EVA has a bullish future (long term).
(2) Green Plains (GPRE): This company makes ethanol using distillers’ grains. It has reported an anorexic gross profit margin of 2% on a TTM basis. Companies with low gross profit ratios need to generate very high volumes to ensure profitability. However, GPRE’s revenues have been declining since 2016. I also am not a fan of companies that generate fuel from food because politicians can go after them if food shortages occur.
(4) REX American Resources Corporation (REX): Makes and markets ethanol. This food-to-fuel company generates very low gross profit margins, and faces the same disadvantages that GPRE does. The EIA reported that ethanol producers reported negative margins in March 2020 and many fuel ethanol facilities had to stop production. EIA believes this is a passing trend and that margins will increase.
I just picked up four companies at random. There are many more and I suggest you make a list and analyze each because the long-term prospects of the biomass industry look good. While analyzing biodiesel and ethanol companies, focus on volume and capacities.
COVID-19 has highlighted the dangers of climate change and renewable energy is likely to become an emerging sector in the post-COVID-19 era. Many renewable energy companies are already popping around these days.
Biomass energy companies are expected to do well going forward.
Based on EIA data, it would be best to focus on waste, wood, biodiesel, and ethanol companies – in that order. After creating a list of companies, read up on the financials, and narrow down to two to four investable stocks. I would suggest investing ETF-style – that is, allocating an equal percentage of your biomass investment capital per stock.
The only issue is that many ethanol and biodiesel companies make fuel from food. Though there is no problem at the moment, any food shortages in the future for whatever reason can invite policy action against ethanol and biodiesel companies. Also, these companies report low margins and, therefore, need very high volumes to sustain and reward shareholders. However, their volumes are expected to rise in 2021, and probably such companies can overcome the volume-based hurdle in 2021.
There’s one more caveat: biomass stocks have run up quite a bit in the recent past and are pricey. Though no one can time the market, the chances of a correction seem high. Other than this, the industry seems like the green, green biomass of home.
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