Quadrise Fuels International: A Year Of Progress

A year of progress
Quadrise Fuels International, (QFI) is the supplier of MSAR, an emerging low-cost alternative to heavy fuel oil for the shipping, refining and power generation industries. It continues to make progress in key projects with major shipping line Maersk and in Saudi Arabia and Asia. It has broadened its project portfolio to include programmes with Ecopetrol in Colombia and a global oil major. Commercialisation of any one of these projects would result in substantial profits for Quadrise. Further progress regarding any of these key projects has the potential to drive upwards movement in the share price beyond our indicative value of 28.8p/share towards 39.1p.

MSAR, a cost-effective alternative to heavy fuel oil
Over 600Mt of heavy fuel oil (HFO) are consumed globally each year. Typically, refineries mix heavy oil residues with valuable middle distillates to produce HFO. Quadrise’s process uses water and specialist chemicals from AkzoNobel to produce MSAR, an HFO substitute. Refineries and oil-based economies can thus derive much higher value from the middle distillates, potentially enabling oil-producing economies to reduce distillate imports and their refineries to offer MSAR at a discount to HFO. MSAR is also attractive to marine fleet operators, for which fuel is up to 75% of operating costs. In addition, MSAR produces significantly lower NOx emissions and negligible black soot on combustion.

Progress de-risks investment proposition
Over the last 12 months, Quadrise has passed major milestones in the development of a marine fuel, so that management is looking to commence commercial roll-out in calendar 2014. Confirmation that MSAR is now approved for application in Saudi Aramco refineries has given added impetus to activities in Saudi Arabia. The selective addition to the portfolio of projects with Ecopetrol in Colombia and a global oil major de-risks the cumulative opportunity.

Valuation: Increase in value with commercialisation
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 reduce this blended discount rate to 13.8%, reflecting progress made in the marine, Saudi and Asia programmes, revising our indicative value from £150m (19.4p/share) to £223m (28.8p/share). Further progress could reduce it further, implying up to 39.1p/share. Management has noted that it may seek additional funding, depending on the timing of first commercial revenues. A placing similar in magnitude to October 2012 (£3.5m gross) would not be materially dilutive to our indicative value.

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