Quadrise is the supplier of MSAR, a technically proven alternative to heavy fuel oil (HFO) for marine, power generation and industrial applications. Since our last outlook note it has executed contracts governing production of MSAR for extended LONO sea trials, preparing the way for commercial adoption from calendar H117 onwards. Our indicative value is £431m (53.2p/share) at current levels of perceived risk.
The next 18 months will be an exciting time for Quadrise. Management expects extended LONO sea trials lasting nine to 11 months to commence in calendar H116, once sufficient MSAR is available for fuelling. These trials are the final precursor to commercial roll-out across the Maersk fleet and beyond. Preparations are underway for a semi-commercial scale ‘production-to-combustion’ demonstration in Saudi during CY16 and a refinery refuelling project, also during CY16. Activities in Latin America have been temporarily shelved because low crude oil prices have restricted funding available for development projects. The programme with a global oil major is ongoing. The economic attractiveness of MSAR is linked to the spread between diesel and heavy fuel oil residues, which is fairly stable, rather than to absolute crude oil prices.
More than 450Mt of HFO worth $100bn is consumed globally each year. About 40% is consumed by marine fleet operators, for which fuel is a significant proportion of operating costs, making a potentially lower-cost, more environmentally friendly substitute such as MSAR an attractive proposition. Around 30% of HFO is used in power generation. Typically, refineries mix heavy oil residues with valuable middle distillates to produce HFO. Quadrise’s process uses water and specialty chemicals from AkzoNobel to produce its substitute fuel, MSAR. By substituting MSAR for power generation, oil-based economies can reduce middle distillate consumption, enabling them to cut distillate imports, while refineries can divert middle distillates to more profitable applications and generate revenues from MSAR sales.
Our valuation is based on potential cash flows from the key projects, applying a blended discount factor to reflect specific country and execution risk. We revise our indicative value from £450m (55.6p/share) to £431m (53.2p/share) to reflect a slower ramp-up of commercial volumes than previously.