Looking at the statistics there would appear to be a clear arbitrage opportunity. A boom in North American shale gas exploration has caused US gas prices to plummet, while oil trades at over $100 a barrel. Turn the cheap one into the expensive one and you’re quids in.
All Oxford has to do is convince owners of small and medium sized gas fields to adopt its technology. It will make money from the reactor, and receive catalyst revenue and licence fees. As much as 25 million barrels per day could be produced this way, which means Oxford's share could be substantial.
Oxford Catalysts' alchemist in chief, Roy Lipski
The idea isn’t new, of course. So-called Fischer-Tropsch synthesis was perfected nearly 100 years ago and made it possible to convert fossil fuels like natural gas and coal into liquid synthetic fuels. Coincidentally, both the Nazi’s in coal-rich but oil-poor Germany and the sanction-hit apartheid regime in South Africa in the 1970s were big fans.
Over the last 15 years, Oxford has developed highly active catalysts which, when placed in more efficient compact microchannel reactors made by its Velocys subsidiary, make the whole process up to 1,000 times faster than conventional reactors.
It’s cost over $300m (£188m), largely funded by commercial backers, to get through the pilot stage and most of the demonstration phase. Now, management says it’s on the cusp of commercialisation. The first inflection point – a first commercial plant – is “in line of sight”. Get there and other early adopters will follow. After that, the larger commercial firms will get involved and the big bucks won’t be far behind.
Latest financial results are largely irrelevant. For the record, revenue fell £3m to £4.7m and there was an operating loss of £10.8m. What’s crucial now is the pace at which Oxford can commercialise its technology. And there seems no shortage of backers. “Several millions” of additional funds have just been made available on top of the £17m in cash Oxford held at year-end. More than a dozen major oil companies are said to be holding talks with the company too.
However, as with any new technology, the story might seem compelling, but progress is inevitably slow and prone to setbacks. To date, five reactors have been sold. One bought by an unnamed “diversified energy company” won’t start up until “around mid-year” and SGC Energia’s large commercial plant still hasn’t materialised. Broker Peel Hunt also points out that rival CompactGTL’s Petrobras plant successfully completed its qualification test back in February. What’s more, there are no guarantees that gas will be this cheap forever, or, indeed, that oil will always cost $100. Any change would dilute that arbitrage opportunity.
Yes, Oxford’s technology is impressive enough to have grabbed the attention of oil company executives. Still, parting an oil man and his money is another thing entirely, and shareholders run the risk of a further cash call between now and then. Clearly, these shares are for brave investors only, willing to take a gamble on this being one of these very rare examples of a company with great technology living up to its commercial promise. Widows and orphans steer clear.
