Since our last outlook note, Quadrise has begun to supply MSAR for extended LONO sea trials, paving the way for commercial adoption from calendar H217 onwards. In August it signed a memorandum of understanding with clients in the Kingdom of Saudi Arabia (KSA), which is a key enabler for progressing the production-to-combustion pilot there. In October it completed a placing and open offer raising a total of £5.25m (gross). This should enable it to transition comfortably to the commercial phase on successful completion of the LONO and KSA trials.
The extremely positive newsflow regarding the Maersk marine programme indicates that the timetable for commercialisation of a substitute bunker fuel in 2017 is achievable. However, while the news of the MoU in KSA clearly demonstrates that the clients in Saudi are committed to a thorough evaluation of the technology, the commercial scale demonstration has been pushed back by around a year compared with our November 2015 note. We have revised our estimates and valuation to reflect this delay and introduce estimates for FY19.
The Quadrise process mixes heavy oil residues with water and specialty chemicals from AkzoNobel to produce MSAR, which is a cost-effective, environmentally cleaner substitute for HFO. Refineries produce HFO by mixing residues with valuable middle distillates. More than 450Mt of HFO is consumed globally each year. About 40% is consumed by marine fleet operators, for which fuel is the largest 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. By substituting MSAR for power generation, oil-based economies can reduce the volume of middle distillate consumed in HFO production and crude oil used in power generation. Refineries can divert middle distillates to more profitable applications and generate revenues from MSAR sales.
Our valuation is based on potential cash flows from projects in different markets, applying a blended discount factor to reflect specific country and execution risk. We revise our indicative value from £431m to £325m (38p/share) to reflect more conservative estimates of the volumes of MSAR produced longer term for both the marine and KSA programmes as well as the delay to the Saudi programme.