Quadrise Fuels International — Doubling down on delivery

Quadrise is still pre-revenue. Stripping out share option and exceptional charges, operating losses reduced by £0.1m year-on-year during FY22 to £2.8m, reflecting reduced professional advisor fees and lower office costs following the move from the company’s previous head office in February 2021. Free cash outflow increased by £0.2m to £2.6m as the prior year number was flattered by positive working capital movements. The group had £4.4m in cash and no debt or convertible securities at end FY22.

bioMSAR – highly encouraging results from test programme

MSAR is already more environmentally friendly than heavy fuel oil (HFO), but Quadrise went a step further with the launch of bioMSAR in December 2020. Initial results announced in August 2021 from independent tests carried out by VTT in Finland gave average CO2 savings of 26% on a well-to-wake basis compared with conventional diesel. Part of the CO2 reduction was attributable to an increase in engine efficiency of up to 7%. This result is better than the CO2 savings achieved with existing biofuel blends, which are typically in the region of 10–15%. NOx emissions were lower than for HFO and comparable to diesel. Smoke and particulate levels were very low, as were unburned hydrocarbons emissions, due to efficient fuel combustion. Further tests carried out by Aquafuel Research, the results of which were announced in January 2022, showed that engine efficiency could be increased by more than 13% by advancing injection timing, further reducing fuel consumption and CO2 emissions. Typically, higher engine efficiencies result in increased combustion temperatures and NOx emissions. However, it was possible to reduce the inlet air temperature with bioMSAR to the same level as with diesel, resulting in NOx levels around 45% lower than diesel fuel.

bioMSAR is currently made from a mixture of renewable glycerine, oil residues, water and specialist surfactants from Nouryon, so there is a risk that commercial volumes may be restricted longer term by glycerine availability. Quadrise is investigating several options to address this potential issue. Post period-end it announced a joint development agreement with biofuel specialists Vertoro under which the two companies will seek to progress 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.

Marine programme with MSC Shipmanagement

In January 2021 Quadrise announced a joint development agreement with MSC Shipmanagement under which MSC was to carry out a letter of no objection (LONO) trial of MSAR and potentially bioMSAR, which had only recently been launched, on representative commercial vessels in its global fleet. 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. In July 2022, Quadrise signed a framework agreement with MSC covering both POC tests and subsequent LONO trials. 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. A project team from Quadrise has already checked that the MSAR systems installed on the vessel for the Maersk tests are ready for fuel testing and commissioning tests are scheduled for completion in early Q4 CY22. The new LONO tests will require 25,000 tonnes each of bioMSAR and MSAR, which will be produced by Quadrise and sold to MSC. Management intends to complete making arrangements to secure fuel for the trials this quarter.

The POC tests will commence in Q1 CY23 after the Leandra returns from its scheduled maintenance and regulatory class inspection in a dry dock. This is slightly later than the Q4 CY22 start shown in our March note because of the time taken to purchase the Leandra. Assuming that the results from the POC tests are positive, MSC will 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 LONO trial will take around six to eight 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.

Quadrise is also launching 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.

Industrial applications with partner in Morocco

Quadrise continues to work with an international chemicals and mining group headquartered in Morocco, which is considering using MSAR and bioMSAR as a substitute for 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 was delayed from Q1 CY21 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. Signature has cleared the way for the industrial-scale trial to take place in Q4 CY22, following 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. The fuel has now been manufactured.

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 MSAR performance and product quality are met, by the end of CY22 the parties will enter into discussions regarding potential commercial supply, which could potentially commence in H1 CY23. 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.

Converting oil from oil sands in Utah

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 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 now waiting for drilling permits for four pilot wells which it hopes will enable it to extract its first oil later in Q4 CY22. Some of this oil will then be used by Quadrise for on-site trials converting oil to bioMSAR and MSAR. 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. As a result of delays in securing drilling permits, this is later than the timescale outlined in our March note, when production drilling was expected to commence at a Utah site in the summer, resulting in oil being available for on-site trials converting oil to bioMSAR and MSAR during H2 CY22. In that note, we stated that Quadrise and Valkor would agree full commercial terms for an MSAR and/or bioMSAR licence and supply agreement by October 2022, potentially resulting in commercial sales by the end of CY22. The two parties are currently finalising the commercial terms with the aim of concluding an agreement later this quarter.

Since Quadrise has yet to generate commercial revenues, its value resides in the potential future cash flows generated from volume production of MSAR and bioMSAR. As 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 presented a high-level scenario analysis in our November 2021 note based on data from the company, which we understand is derived from the numerous detailed case studies it has carried out for prospective clients. The analysis concluded that adoption across only 9% of MSC’s global fleet could generate around $84m in licence revenues and $13.8m in EBITDA and be transformational for Quadrise. The projects in Morocco and Utah are smaller.