Stock in Focus: Drax Group

Monday, Jun 15 2015 by
13
Stock in Focus Drax Group

Electricity generator Drax’s decision to convert half of its generators from coal to biomass appears to have been well timed.

The pressure on coal-fired generators to reduce emissions through costly modernisation or emission capture schemes is rising.

DraxUtility peer SSE recently decided to close Ferrybridge, one of its two remaining coal-fired stations, for these reasons. So Drax’s move to biomass, at a cost to shareholders of some £700m in capital expenditure, appears to make sense. The firm has some big institutional backers, too. Amongst them are Schroders, which recently doubled its stake from 5% to 10%, and noted fund manager Neil Woodford.

It hasn’t been a trouble-free process, though, partly thanks to the government’s apparently confused and short-term thinking on energy.

Drax shares have fallen by 50% since March 2014, and lost 10% in one day in December last year, when the government hinted that subsidies available for biomass conversions might be changed.

Drax shares are now trading close to their all-time lows.

557ea3aa8802cDrax_2.png


Is now a good time for contrarian value investors to buy, or is this a business in decline?

The story so far

Drax generates about 8% of the UK’s electricity. In 2014, the firm reported revenue of £2.8bn and gross profit of £450m. With a market capitalisation of £1.5bn, it’s a pretty substantial business.

The company has changed in recent years. Originally owned by the Central Electricity Generating Board, it was the last coal-fired power station to be built in the UK when its final units were completed in 1986. Although privatised in 1990, Drax has only been listed on the London Stock Exchange since 2005.

In 2012, Drax announced plans to convert three of its six generating units from coal to biomass. Two of the three have now been completed, while the third is now underway and expected to begin producing electricity later this year.

Is Drax good value?

Drax’s relatively modest StockRank of 63 belies a ValueRank of 91 and a QV Rank of 88, the highest in the utility sector.

Drax has been on my radar as a potential investment for some time, but I’ve remained undecided.

However, the shares have fallen by another 10% over the last month and the firm qualified for the

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Drax Group Plc is engaged in the electricity generation; electricity supply to business customers, and manufacturing of sustainable compressed wood pellets for use in electricity production. The Company's segments include Generation, which is engaged in the generation of electricity at Drax Power Station; Biomass Supply, which is engaged in the production of sustainable compressed wood pellets at its processing facilities in the United States, and Retail, which is engaged in the supply of power to business customers and wood pellets to the domestic heat market. Its business units include Drax Power, Haven Power, Drax Biomass and Billington Bioenergy. Drax Biomass provides compressed wood pellets. Haven Power supplies electricity to businesses. Billington Bioenergy supplies sustainable compressed wood pellets to provide businesses and households with renewable heat. Drax Power Station is located near Selby, North Yorkshire, connecting into the national electricity distribution grid. more »

LSE Price
313.8p
Change
 
Mkt Cap (£m)
1,285
P/E (fwd)
10.2
Yield (fwd)
5.5



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25 Comments on this Article show/hide all

herbie47 16th Jun '15 6 of 25

The problem with Drax is it relies on Govt. subsidies, are these sustainable? The other problem seems to be Drax is importing pellets from the USA so its maybe not that green and future costs? Also I have read it emits more CO2 than coal, which is very cheap at the moment. Thinking about it I'm not sure about this at all, cutting down millions of trees to burn does not make that much sense to me.

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Roland Head 16th Jun '15 7 of 25

In reply to post #101157

Herbie47,

I certainly agree that importing biomass fuel from the US is not intuitively eco-friendly. Haven't read about the relative CO2 emissions but I can imagine the transport adds a nasty hit -- albeit not in the UK. This might be relevent from Drax's perspective.

The risk of subsidy dependence is definitely a risk, as we saw in December last year -- https://woodfordfunds.com/hitting-decc/

It all highlights the UK's need for a committed, coherent long-term energy policy...

Cheers, Roland

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herbie47 16th Jun '15 8 of 25
1

In reply to post #101160

I have read Drax will need vast amounts of wood more than all the trees in the UK. Many trees that are cut down will take many years to be replaced upto 100 years, some of these are not just pine trees grown for that purpose but ancient woodlands in the USA. I will attach a link about it: http://www.theguardian.com/sustainable-business/blog/campaign-drax-biofuels-effects-replacing-fossil-fuels

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pka 16th Jun '15 9 of 25

Here's another article discussing the environmental issues of burning biomass:

http://www.carbonbrief.org/blog/2014/10/is-burning-wood-for-energy-worse-for-the-climate-than-coal/

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Fangorn 16th Jun '15 10 of 25
1

herbie,


"I have read Drax will need vast amounts of wood more than all the trees in the UK. Many trees that are cut down will take many years to be replaced upto 100 years, some of these are not just pine trees grown for that purpose but ancient woodlands in the USA"

Arent they using the sawdust from woods that were going to be cut down anyway?So its hardly a case of THEM, Drax, cutting down many trees. Better surely if they're using the byproducts(eg sawdust) of felling that was going to occur anyway???

" but Pauline insists forests are not being felled to burn at Drax. Instead the station uses by-products of the construction and paper industry. "

http://www.yorkpress.co.uk/features/features/12976602.Behind_the_scenes_at_Drax/

And there's also this advantage as well apparently - "Biomass allows the power station to increase or reduce output in an instant. Something wind, gas and nuclear plants can’t do."

Great article - thanks for the thought and time put into it Roland.

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herbie47 16th Jun '15 11 of 25

In reply to post #101170

If you read the 2 links about this above you will see this does not seem to be the case. One area in the USA seems to use 60% of the trees in pellets, hardly just sawdust. Also there is the energy and pollution in producing the pellets, then transporting them them to the coast and then shipping them to the UK. Drax may use some by-products but it is certainly importing a lot from USA. Can you not turn down the gas in a gas powered station?

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Fangorn 16th Jun '15 12 of 25
1

Herbie,

I read the Guardian article - Any veracity to their claim?

"Huge logging operations are devastating the Carolina swamp forests, which are among the world's most biodiverse temperate forests and home to the only wild population of Venus fly traps and other carnivorous plants. The forests are being cut down to make wood pellets, some of which are shipped to the UK to feed the Drax electrical generation facility......Even when they make statements to the effect that "we only burn forest wastes and residues", which critics allege is not the case,"

As in, any substance to the claim the trees are specifically being cut down to turn into pellets?

Why would Pauline therefore lie when she claims if the Guardian link comments truthfully.
" but Pauline insists forests are not being felled to burn at Drax. Instead the station uses by-products of the construction and paper industry."

Such a lie can be easily substantiated surely?

Have to say I'm sceptical when reading anything environmentally focused especially, in the BBC or Guardian, given their erroneous reporting of the Virunga Nature reserve Oil drilling by Soco.All utter tosh.

So I did a search on the author

Charles Eisenstein
Author
Charles Eisenstein is a progressive author and public speaker, and self-described "degrowth activist". He is the author of several books including The Ascent of Humanity, Sacred Economics, and The More Beautiful World Our Hearts Know Is Possible

So an out an out Eco warrior clearly. Hardly likely to be the bastion of truth frankly.

"Also there is the energy and pollution in producing the pellets, then transporting them them to the coast and then shipping them to the UK. Drax may use some by-products but it is certainly importing a lot from USA

Don't dispute most of that...the big question is taking these pellets, shipping them from US to UK, then using them in the Biomass plant cheaper and less pollutive than Coal.

"Drax says it uses wood from thinnings and off-cuts, and that this reduces emissions by 80 per cent compared to burning coal."

http://www.carbonbrief.org/blog/2014/10/is-burning-wood-for-energy-worse-for-the-climate-than-coal/


Ultimately all this green taxation is an utter farce. It wont solv the Eco issue(assuming the global warming, erm climate change is man made)

A far simpler solution exists - one that revolves around the population of the earth.

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herbie47 16th Jun '15 14 of 25
1

The problem is worldwide trees are being cut down, look at the Amazon and Borneo. Is it cheaper than coal? Where does coal come from? Trees? So if you burn coal and don't cut down trees for biomass what is the saving on co2? Lets say if China converts all its coal to biomass where will all the trees come from? Drax is just one small power plant yet it needs something like the area the size of Lincolnshire each year in forest. Not sure about the pollution figures, most of that is based on the trees absorbing the co2 but they will for coal? One answer is to stop cutting down all the trees in the Amazon and Borneo.

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Fangorn 16th Jun '15 15 of 25

Ok, so in addition to sawdust, and other offcucts being used for pellets, it seems,from your linked article

" While many of the trunks went for lumber, the limbs and the smaller trees were loaded on trucks headed to a mill 30 miles away, to be ground up, compressed into pellets and put on ships to Europe. "

Limbs and smaller trees are included. So not the trunks of main trees going elsewhere....ie not for pellets, not for Drax, forests arent being cut down for DRAX - they are using the offcuts and whatever would have been left over anywhere!

""Now that Europe is using all these pellets, we can barely keep up.""

However this would seem to indicate to the contrary as the US logging firms are experiencing bumper business where before they apparently were not..

""We only take the low-value material from the forest," said Nigel Burdett, the environment chief for Drax PLC, a U.K" Many of the pellet-making plants springing up in the U.S.—which include plants planned by Drax and other European power companies—are near pine plantations established long ago partly to serve the now-slumping wood-pulp market

So that's another company person claiming they use the low grade stuff that would be available regardless due to commercial logging activities.

""Young trees absorb more carbon than older trees," said John Keppler, chief executive of the U.S.'s biggest wood-pellet exporter, "

Is this claim true?

Who to believe.

The solution though is clear - less people on the planet. For that to occur some hard realities need to be faced.That , or a good long war.

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Fangorn 16th Jun '15 16 of 25

In reply to post #101176

"One answer is to stop cutting down all the trees in the Amazon and Borneo."

I didn't realise the trees in Amazon and Borneo were being felled to supply Drax's Biomass units? Wasn't the wood coming from US?

Amazon & Borneo surely another issue entirely - namely one of "People!" Too many people requiring food, water,housing, cars, a job, power for their computers,gas for the oven etc etc.

If we take Drax's contribution out of the equation what are you going to substitute it with?
natural gas? Nuclear? Wind/Solar?

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herbie47 16th Jun '15 17 of 25
1

In reply to post #101180

No I did not mean that trees from Amazon were supplying Drax, this is a worldwide problem, this is what it is about not just Drax, UK, Europe its the whole world and that is the problem. Yes you are right about population growth but its not just that its the change in diet and lifestyle in countries like China and India.

Some argue that Drax should have been replaced with gas. I think we should have more waste incinerators. No more landfill, very little emissions and power. One council even sends its waste to Sweden I believe at some cost. to be incinerated. Problem with solar is its mostly around midday, I have heard the national grid can't cope in some parts of the country. We need more storage as well, I know there are new batteries coming out. There is too much waste in the west. Look at food about 1/3 of it is thrown away.

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Roland Head 17th Jun '15 18 of 25

Fangorn, herbie47,

Great debate, thanks for expanding on the uncertainty about the sustainability and impact of biomass, this wasn't material I could fit in the article!

What seems fairly likely to me is that biomass usage can only expand up to a certain point, beyond which it will have such undesirable side effects in terms of environmental damage or rising supply costs that it becomes self-defeating.

I've no idea where this will end, but I am reminded of this Bill Gates quote:

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don't let yourself be lulled into inaction."

Drax was right to do something to move away from coal, and given the nature of its assets and the commercial framework in which it operates, biomass did make sense and was arguably quite bold. I'm less sure about how it will seem in 10 years' time, though.

Cheers, Roland

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Fangorn 17th Jun '15 19 of 25

@Herbie,
"Yes you are right about population growth but its not just that its the change in diet and lifestyle in countries like China and India"

Agreed - change in diet /lifestyle amongst the upcoming/newly arrived nations is indeed causing significant impact.But what to do? It doesnt help that such countries also happen to be the most populous

"We need more storage as well, I know there are new batteries coming out. There is too much waste in the west. Look at food about 1/3 of it is thrown away."

Absolutely - we also need Desalination plants - there is no way and Island surrounded by water should ever have droughts/water shortages and hose pipe bans. Think of the investment, the jobs created, and being water security assured.Costly - but then if we slashed the foreign aid and spent it on British taxpayers we could have both desalination and improve those storage facilities you mention prior. Far too sensible though - lets just keep subsidising the Ferraris, Rolexes and private jets of all those tinpot African dictators.

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kenobi 17th Jun '15 20 of 25

In reply to post #101176

So if you burn coal and don't cut down trees for biomass what is the saving on co2? -

surely if you cut down trees use the bulk of the tree as wood, and burn the offcuts and waste, this returns a proportion of the carbon to the atmosphere, say 50% as long as the trees are farmed and replaced each time only half the carbon is released into the atmosphere, effectively reducing co2 in the atmosphere. Trees consume more co2 while growing faster, so as long as the logging is sustainable then surely it makes sense ?

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herbie47 17th Jun '15 21 of 25
1

In reply to post #101203

In theory yes but according to some reports biomass produes 2x the CO2 that coal does, that is not including the conversion into pellets. Also much of this wood would have been used in making products such as chipboard, plywood and mdf, apparently prices of these are increasing. Here is a report: https://notalotofpeopleknowthat.wordpress.com/2015/02/26/biomass-emits-double-the-co2-of-gas/

Quite a few other reports say biomass is more polluting than coal: http://www.pfpi.net/trees-trash-and-toxics-how-bio...



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pka 17th Jun '15 22 of 25

In reply to post #101221

"In theory yes but according to some reports biomass produces 2x the CO2 that coal does, that is not including the conversion into pellets. Also much of this wood would have been used in making products such as chipboard, plywood and mdf, apparently prices of these are increasing. Here is a report: https://notalotofpeopleknowthat.wordpress.com/2015/02/26/biomass-emits-double-the-co2-of-gas/"

Actually, that report said "So, on a straight comparison, we get:

CO2 kg/MWh
Coal 1018
Gas 437
Bio 920

While bio is slightly better than coal, it is emitting more than double the CO2 of gas. None of these figures account for the emissions involved in processing or transporting wood pellets. Equally of course, they don’t include these for fossil fuels, although it seems reasonable that the add on emissions for gas would not be as great."

The main reason why the CO2 emissions from gas are about half those from biomass and coal is because Combined Cycle Gas Turbine power stations (which burn gas) are about twice as efficient as conventional power stations (which burn coal, oil or biomass) in converting the thermal energy in their fuel into electricity.

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herbie47 17th Jun '15 23 of 25

In reply to post #101240

Yes sorry I misread that.

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herbie47 8th Jul '15 24 of 25

I take it some bad news in the budget today?

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Irishmanabroad 4th Apr '17 25 of 25

Hello,
DRAX has fallen in the stock ranks, is this a sign to cut losses and invest some place else?

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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have an interest in commodity stocks.  I hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  more »

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