Quadrise — Closer to commercial revenues

Quadrise is still pre-revenue. Stripping out share option and exceptional charges, operating losses widened by £0.3m year-on-year during H123 to £1.7m, reflecting a £0.4m increase in production and development costs as test activities on bioMSAR intensified and a £0.1m reduction in administrative costs. Free cash outflow rose by £0.3m to £1.7m through a combination of higher operating losses and a £0.1m increase in inventory linked to the manufacture of MSAR and bioMSAR for the trial at a client site in Morocco. Capex totalled £0.1m (H122: £0.0m) as the group received and commissioned a prototype 5 tonne/hour emulsion system, which will be used to manufacture MSAR and bioMSAR for site trials and potential blend-on-board testing on marine vessels. The group had £2.6m in cash and cash equivalents (£4.4m at end FY22) and no debt or convertible securities at end H123. While management remains confident that the group will generate its first commercial revenues during Q423 (Q2 CY23), and has sufficient cash to reach that point, it notes that additional funding will be required to bridge the gap to sustainable cash generation.

In July 2022, Quadrise signed a framework agreement with MSC covering both POC tests and subsequent LONO trials. These trials are essential preliminaries to Quadrise potentially supplying its proprietary fuels to MSC for use in its fleet, which is the largest container ship fleet in the world, thus helping MSC to reduce its greenhouse gas emissions. The POC tests will take place on the MSC Leandra, which was previously named the Seago Istanbul and was used by Maersk for its successful demonstrations of MSAR during 2016 and 2017. The Leandra is scheduled to be in a dry dock during April and May 2023 for a routine maintenance and regulatory class inspection, during which time equipment intended to reduce carbon dioxide emissions and improve vessel efficiency will be installed. A project team from Quadrise has already inspected the MSAR emulsion fuel and booster unit on board the vessel. This system will be upgraded and commissioned while the vessel would be in dry-dock anyway, so the time taken to prepare the vessel for MSAR and bioMSAR trials should have minimal impact on when the trials can start.

Provided that agreements can be signed with a suitable feedstock provider and the HAZOP study (see below) does not reveal any major issues, the POC tests could commence in H2 CY23 (Q1 CY23 guidance in October 2022). Assuming that the results from the POC tests are positive, MSC would then conduct lengthier trials (4,000 hours of operation) to provide commercial operating experience, potentially culminating in obtaining LONOs from the engine manufacturer, Wärtsilä. Management expects that the POC tests and LONO trial will take nine months to complete. As the trials progress, Quadrise, MSC and other key stakeholders, such as refineries, will commence discussions regarding the supply of bioMSAR and/or MSAR for use by MSC’s global fleet.

bioMSAR was not available when Maersk carried out the original trials, so as well as getting the Leandra ready for the trials, there need to be further tests on bioMSAR. In December 2022, Wärtsilä Services Switzerland carried out optical combustion and engine wear tests of bioMSAR. The optical combustion test demonstrated that bioMSAR combustion was similar to MSAR. The extended fuel injection test evaluated the wear and fatigue of components in contact with bioMSAR over a prolonged period (over 250 hours). Based on the results of these tests, Wärtsilä recommended a further hazard identification and operability (HAZOP) study to assess feasibility and safe operability prior to use on a two-stroke Wärtsilä engine. Management expects that these tests will be completed in Q2 CY23.

The new LONO tests will require 25,000 tonnes each of bioMSAR and MSAR, which will be manufactured by a third-party who will sell the fuel to MSC, with Quadrise supplying the additives and IP required to make the fuel. Management has yet to complete discussions, which are still ongoing, with third-party fuel suppliers for the production of the fuels for the vessel trials.

Quadrise is also working on a ‘Blend-on-Board’ solution for the production of MSAR or bioMSAR emulsions on vessels. This may be tested under the MSC agreement or with new marine clients that the company is approaching. Aquafuel in the UK has been carrying out tests using bioMSAR and other fuel/biofuel formulations for the Blend-on-Board solution. The results from this activity are expected in Q2 CY23.

Quadrise is working with a Moroccan industrial client, which is considering using MSAR and bioMSAR as a substitute for heavy fuel oil (HFO) to generate power at some of its operations. Quadrise successfully completed a pilot trial at one of the partner’s sites (site A) in Morocco in October 2020. A follow-up industrial-scale trial at a different site (site B) owned by the same group is still delayed from Q1 CY21, initially because of a combination of site access restrictions related to COVID-19 and an internal management reorganisation at the client, which held up signature of a new material transfer and cooperation agreement until May 2022. The signing of this agreement cleared the way for the industrial-scale trial to take place. After a couple of months’ delay caused by global electronic component shortages, which meant that a new MSAR manufacturing unit was not able to start producing fuel for the trial when scheduled, both types of fuel were manufactured and sent to Morocco. However, while the bioMSAR arrived at the client’s site in December 2022, the MSAR was held up in Moroccan customs and did not reach the client’s site until the end of February. The trial equipment is now at the site as well, which has allowed Quadrise to complete the site engineering set-up. The company is now finalising the trial schedule, which has to be integrated with the client’s production schedule, and anticipates that fuel trials will commence in April, with the results available shortly thereafter.

Once the trial has completed, Quadrise will provide the client with a written report on the efficacy of using MSAR and bioMSAR. Provided that the client’s stated parameters regarding fuel performance and product quality are met, the parties will enter into discussions regarding a potential commercial supply agreement, which could potentially be signed in H2 CY23 (H1 CY23 guidance in January), ahead of commercial supply later in the calendar year. An industrial demonstration test at site A, which will be covered by a further agreement, is contingent on the results of the tests at site B.

In April 2022, Quadrise signed a phased commercial development agreement with energy services company Valkor Technologies to commercialise MSAR and bioMSAR technology at Valkor’s projects in Utah. Valkor has equity stakes in multiple heavy oil projects in Utah including Greenfield Energy, Petroteq Energy and Heavy Sweet Oil LLC. The agreement provides a framework for the potential delivery of commercial revenues from bioMSAR/MSAR manufactured using oil from one or more of these projects. For several months ending in August 2022, Valkor carried out an extensive core sampling programme to accurately define the recoverable reserves from surface oil sands and sub-surface heavy oil in Utah. It also worked with partners to optimise the solvent extraction process for extracting oil from the sand. Valkor is still waiting for drilling permits for four pilot wells, which it hopes to receive in Q2 CY23 (Q4 CY22 guidance in October), enabling it to extract its first oil as soon after that as the weather permits. Some of this oil will then be used by Quadrise for on-site trials converting oil to bioMSAR and MSAR during H2 CY23. We note that Quadrise has already demonstrated it can convert oil from this area into MSAR and bioMSAR, so this step should involve working out the optimal process for converting the oil rather than the overall viability of conversion.

The two parties are currently finalising commercial terms for an MSAR and/or bioMSAR licence and supply agreement with the aim of concluding discussions in Q2 CY23 (Q1 CY23 guidance in January). Signing this agreement would potentially trigger the receipt of licence revenues and of Quadrise supplying Valkor with equipment for manufacturing emulsion fuel in Utah ahead of potentially receiving royalty revenues later in the calendar year as Valkor starts to extract oil and convert it to low-sulphur variants of bioMSAR and/or MSAR.

At present bioMSAR is made from a mixture of renewable glycerine, oil residues, water and specialist surfactants from Nouryon, so there is a risk that commercial volumes of bioMSAR may be restricted in the longer term by the availability of glycerine. In July 2022, Quadrise announced a joint development agreement with biofuel specialist Vertoro, under which the two companies are investigating the use of Vertoro’s advanced crude sugar oil, which is a by-product of its process for extracting lignin from waste woody biomass, as a cost-effective supplement or alternative to glycerine. The first fuel resulting from this initiative is currently being tested on a diesel engine at Aquafuel, which intends to release the results of the tests early in Q2 CY23. The costs of this initiative are currently being supported by the EU Innovation Fund. In addition, Quadrise is continuing to work on a net zero variant of bioMSAR with a number of renewable fuel counterparties. Management aims to be able to offer a net zero biofuel by 2030.

As Quadrise has yet to generate commercial revenues, its value resides in the potential future cash flows generated from volume production of MSAR and bioMSAR. Since there is substantial uncertainty on when the various projects Quadrise is working on with its partners will progress to commercialisation, precluding the preparation of estimates, we present a high-level scenario analysis based on data from the company, which we understand is derived from the numerous detailed case studies it has carried out for prospective clients. This shows potential revenues, EBITDA and capex requirements attributable to projects for various levels of adoption by global refineries and penetration of MSC’s shipping fleet. We note that minimal capex is required for projects where MSAR technology is installed on a licensing basis, although the potential profit and risk is substantially less than if Quadrise were manufacturing fuel on a toll basis (ie charging a fee per tonne of MSAR and bioMSAR manufactured as it did for the production of fuel for the Maersk trials). We expect that Quadrise will form a separately financed joint venture with a partner for projects involving production on a tolling basis, thus avoiding substantial investment in capex and minimising shareholder dilution.

Exhibit 1 shows that adoption across only 8% of MSC’s global fleet of around 700 vessels including chartered ships could generate around $106m in licence revenues and $15.8m EBITDA and be transformational for Quadrise. The other two projects closest to commercialisation are smaller. Commercial adoption by the Moroccan partner would require the output from one MSAR manufacturing unit (MMU), ie c 2–5kbd. This would be only part of the output from a single refinery such as the Cepsa site, which produced MSAR for the Maersk trial and has an output of 240kbd. The projected output from extraction of oil and oil sands in Utah is 3–10kbd for each site. In our opinion, adoption of MSAR in any one of the projects closest to commercialisation would encourage multiple customers to use the fuel, which could potentially support profits beyond the upper range of our analysis.