The US’s largest wood pellet producer, Enviva, is facing significant challenges due to a wrong bet on the price of wood pellets. Despite high demand from European and Asian power plants that are switching from coal to wood, Enviva’s attempt to buy pellets from a customer and resell them at a higher price backfired when prices fell. This has resulted in nine-figure losses and the potential for a default with its lenders by the end of the year. Enviva’s shares have plummeted by 60% and its financier, Riverstone Holdings, has seen its stake decrease in value from $2.5 billion to less than $50 million. The company is now seeking negotiations with lenders and exploring alternative options.
Enviva’s troubles began with a single bad trade made during the fourth quarter of last year. The company is now on the hook to pay $296.3 million this year for 800,000 metric tons of wood pellets that will only fetch $156.9 million on the open market. Additionally, the company anticipates another $140 million loss over the next two years based on current prices for future pellet deliveries. The trade has had a significant negative impact on Enviva’s profitability, cash flows, and liquidity, with the company expecting this to continue through 2025. Enviva has enlisted the help of investment bankers, lawyers, and restructuring advisers to navigate the situation.
Wood pellets, which are cylinders of compressed wood, have gained popularity as an alternative to fossil fuels, particularly in Europe. Enviva started its pellet manufacturing and export network in 2010, with financing from Riverstone, and has since become the largest exporter of wood pellets in the US. Despite its market dominance, the company has faced operational challenges that have affected its profits. Enviva’s plants have experienced setbacks, leading to a reduction in dividends and a decline in investor confidence. The company had hoped to expand with the construction of new plants in Bond, Mississippi, and Epes, Alabama, but these plans have been impacted by its current financial situation.
Enviva’s troubles come at a time when interest rates have impacted alternative energy stocks and reduced funding opportunities for companies in the sector. Additionally, there is a shrinking pool of money available for companies claiming to benefit the environment, further complicating Enviva’s financial situation. The company’s immediate focus is on resolving the consequences of its bad trade and negotiating with lenders and counterparties.
In other news, the European Commission has proposed a new regulation for collecting forest data in the EU. The regulation aims to set rules for data collection and encourage sustainable forest management. However, Nordic countries have expressed concerns about the proposal, fearing that it may infringe on their national sovereignty and existing forest governance systems. The proposal will now undergo further discussions and negotiations before any final decisions are made.
Overall, Enviva’s financial troubles highlight the risks associated with commodity trading and the challenges faced by companies in the alternative energy sector. The company’s situation serves as a reminder of the importance of careful risk management and the need for sustainable business practices in the industry.