Quadrise ripe for re-rating

Admittedly, the road towards commercialisation of Quadrise's technology - aimed at vastly improving the efficiency with which low-grade oil is utilised - has been far from smooth. It has been a long, drawn-out process, punctuated by intermittent delays as well as positive updates. But as Quadrise edges towards the initial rollout of MSAR, we think the investment case will start to crystallise.

The MSAR fuel technology is employed during the refining process to render heavy, low-grade crude more commercially viable by suspending it within a low viscosity fuel oil that uses water, rather than relying on expensive oil-based diluents. It effectively allows refiners to free up high-value distillates, traditionally mixed with heavy fuel oil, thereby providing a low-cost alternative process for exploiting the dregs of a barrel of crude oil.

Bolt-on MSAR units can be installed at a refinery for a relatively modest outlay - around $10m (£6.6m), but the resultant improvement in refining margins - through the preservation of high-value distillates - would outstrip the initial capital commitment in fairly short order. The end product also delivers improved combustibility and environmental benefits. The latter point is particularly significant given a recent tightening in European maritime emissions legislation.

Initial commercial application of MSAR will probably centre on the maritime version of the fuel. That's because Quadrise has reached agreement with Danish shipping giant AP Møller-Maersk and Spanish refining group CEPSA to install and commission a manufacturing unit to produce MSAR emulsion fuel at the CEPSA San Roque refinery near Gibraltar. The resultant Marine MSAR will be used in a trial (nine to 11 months) on board participating Maersk Line vessels. If successful, a Letter of No Objection (LONO) will be produced by the main engine manufacturers (Wärtsilä and MAN) that will mark the adoption of MSAR as a new approved marine fuel - hopefully, this will come midway through 2017.

Away from the high seas, it has also been announced that one of Saudi Arabia's largest refineries has been designated as another MSAR production site. The resultant Power MSAR fuel will then be utilised at a large-scale thermal power station for an extended production-to-combustion demonstration during the second quarter of next year.

Analysts at Peel Hunt have pointed out that Saudi Arabia uses around 30m tonnes of crude oil, fuel oil and diesel to meet its annual power requirements. As a consequence, the "scale of the potential displaceable market in Saudi alone is therefore very significant". If the MSAR trial proves successful, it should also be easier for Quadrise to push the cost benefits of Power MSAR in other countries that produce electricity through the burning of hydrocarbons, most notably Mexico.

With Quadrise's market value down 57 per cent over the past 12 months, despite a recent 30 per cent share price rally, it seems the collapse of crude oil prices has taken its toll. But the markdown seems curious when you realise that the value proposition of MSAR isn't actually tied to crude's trajectory. Rather, it depends upon the spread between the price of heavy fuel oil and distillates in the refining process - and that remains sufficiently wide to generate a major price incentive.