If 2021 was the year you decided to start investing in energy, congratulations! After years of underperformance, the energy sector was the top performing sector in 2021 with the S&P GSCI Energy Index generating a total yield of 60.72%, compared to the S&P 500 total yield of 28.7%.
Biomass as an energy source is nothing new (it is the oldest, in fact), but for many years it took precedence over other fuels for a multitude of reasons. Enviva is looking to change that, however, and some recent changes make it a much better investment now than in previous years.
Enviva is a wood pellet processing and sales company. At first glance, it looks like a pretty boring business, but wood pellets and biomass have become a much more attractive energy option in recent years. On the one hand, it’s a fuel alternative for coal-fired power plants and industrial furnaces (think cement and steel) that can dramatically reduce full-cycle carbon emissions. Enviva believes that the combination of wood pellets and carbon capture at the emission sources is a negative emission option for many industries.
It’s an attractive option, and it has attracted a lot of clients in recent years. The company has a fully contracted order book of $ 21 billion in revenue over the next 14.4 years, and management is developing new processing plants and export terminals to increase production by 40% over the years. next three years.
One thing that has been a hit against Enviva before was its corporate structure. It was a master limited partnership that paid a one-time distribution to a managing partner, known as incentive distribution rights, and the limited partners had no say in corporate governance. Earlier this month, however, the company eliminated its managing partner and converted to a traditional C corporation, eliminating those incentive distribution rights and giving all shareholders an equal voice in corporate governance. Removing the incentive distribution rights will eliminate significant cash expenses and allow him to spend more on growing the business.
With a strong order book, a compelling ecological and value proposition for various industries, a clear line of sight for significant growth and a more user-friendly business structure, Enviva currently looks like an attractive energy value.
Utility-type dividends with a growth mindset
Investing in utilities is normally a big compromise for investors. On the one hand, you get a decent yielding dividend stock that will reliably throw money away for decades. The downside is that utilities tend to grow at a torturous pace and have underperformed the broader market for over a decade. One utility that does not fall into this category is Sempra Energy. Indeed, even though it is still largely a regulated utility, it is strategically located in high growth markets and offers additional growth opportunities outside the conventional utility sector.
Sempra’s activity is divided into three components: Sempra California, Sempra Texas and Sempra Infrastructure. Sempra California has electricity and natural gas distribution services in the southern part of the state. Sempra Texas is a public electricity transmission and distribution utility. And Sempra Infrastructure owns a host of energy assets, including two LNG export facilities, natural gas export pipelines to Mexico, and Mexican energy developer Ienova, to name a few.
The high rate of return from its California operations, above-average growth in the Texas market, and investment opportunities outside of its regulated utilities resulted in annualized earnings per share growth of 13% over the years. past three years, and management is targeting double-digit annual returns over the next five years.
These numbers may not sound breathtaking, but over the past 20 years these decent and steady growth numbers have translated into a total return of 990%, compared to a total return of 499% of the S&P 500 over the same period.
Even though Sempra has grown much faster than most players in the utilities industry, it still has one of the highest dividend yields in the industry, at 3.3%. High yield today with a history of compound wealth is a tough offer to pass up.
A cash cow cleans her act
Cheniere Energy has always been a polarizing business. On the one hand, it has relatively predictable revenues thanks to an order book spanning several decades to supply its customers with LNG, which represents almost all of its production capacity. On the other hand, it’s a company that took on a mountain of debt to put its facilities up and running and racked up billions in losses along the way.
Fortunately for investors, the company is maturing, it has major growth plans about to begin operations, its finances are improving, and management is now rewarding shareholders with a dividend. These things are helping to make Cheniere an attractive stock right now.
Since its last update, Cheniere plans to commission its most recent expansion project, Liquefaction Train 6 at its Louisiana plant, in the first quarter of 2022. This, combined with some optimization strategies that have increased output from existing liquefaction trains by 12%, should give Cheniere a decent growth track for the next year or so. Beyond that, it plans to commission another expansion of its Texas plant, which would increase overall production by an additional 22 percent. This is all in addition to its existing operations which have contracts in place to generate approximately $ 6 billion in revenue per year over the next 17 years.
The stability of its existing operations and these options for future growth have given management the confidence to launch an ambitious strategy to reduce debt and return capital to shareholders. Management is targeting $ 1 billion in debt reduction per year until it achieves an investment grade credit rating, an annual dividend of $ 1.33 per share, and share buybacks totaling $ 1 billion. dollars over the next three years.
All of these efforts combined should constitute a convincing investment over the next few years, especially with the demand for LNG expected to increase significantly over the next 20 years. Cheniere’s track record for long-term returns is a bit patchy, but he’s already cleared some of his toughest hurdles and is positioned well from here.
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* Returns of the portfolio advisor as of December 16, 2021
Tyler Crowe has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.