Update on Canadian Investments

RNS Number : 9188F

Quadrise Fuels International PLC

22 June 2012

 



22 June 2012

Quadrise Fuels International PLC ("QFI" or "the Company")

Update on Canadian Investments

Quadrise Fuels International PLC is the emerging manufacturer and supplier of MSAR^® emulsion fuels, a low cost alternative to heavy fuel oil in the global shipping, refining, steam and power generation markets.

QFI has equity investments in independently managed unlisted Canadian associate companies.

Quadrise Canada Corporation ("QCC")(20.4 % shareholding)

QCC was formed to develop MSAR^® emulsion fuels as a replacement for higher cost gas in steam and power generation associated with oil production in Alberta.  In developing and adapting the MSAR^® technology for this purpose, QCC undertook extensive 'in house' research and development, filed a range of patents, and accumulated unique know how.

MSAR^® Fuels

Despite best efforts, including a successful field trial, continuing uncertainty regarding future gas prices prevented Albertan oil producers from committing to the MSAR^® fuel alternative. The recent rapid growth in North American shale gas supplies has compounded this issue, eliminating this target market for all practical purposes.

QCC responded to these developments in 2010 by refocusing on opportunities in which its proprietary technologies could offer unique competitive advantage. The model features the formation of independent venture companies in which QCC shareholders have a pro-rata shareholding at no direct initial cost, and new investors are then invited to fund development. The first identified was Enhanced Oil Recovery ("EOR") which led in 2010/11 to the creation of Optimal Resources Inc. (refer to the Operational Update below). Other ventures are planned to follow.

In addition, QCC identified certain MSAR^® fuel business prospects, not related to oil field steam and power, in Central America and South America. Following a recent joint review, it has now been agreed that QFI will take control of all MSAR^® fuel business developments in Central and South America. QFI therefore assumes full responsibility for certain key relationships and contractual terms with the parties concerned are close to finalisation. QCC retains certain rights to participate in associated projects on commercial terms should it decide to re-enter the MSAR^® fuels business in the future.

Other QCC Proprietary Technologies 

Preliminary work has been completed on at least three other opportunities where QCC technology could replace existing products in energy related service applications, either reducing costs, improving efficiency or both. The focus is generally on oil exploration and production activities and service requirements.

Two programmes are relatively advanced:

1. Proprietary "drilling mud" additive formulations offering cost effective solutions to long standing fluid loss problems which affect a large number of oil field operations in Canada. The technology has been reviewed with a major oil company and discussions are progressing on a field application programme.  

2. Proprietary formulations to mitigate lost circulation in oilfield drilling programmes. An oil production client has agreed terms for completion of a simulation programme which will progress, on success, to application in an operating oil field.

Future opportunities for QCC technology application may also include novel 'fracking fluid' formulations which could potentially mitigate cost escalation currently affecting the fast growing North American shale gas industry.

Valuation

These developments have affected the valuation of QCC and, by extension, the value of QFI's investment. It is too early to assess the extent to which new business ventures will mitigate the elimination of the original target market for QCC's MSAR^® fuels activity. For the forthcoming 2012 annual accounts, QFI has elected to take a conservative 'zero base' valuation approach. Subject to near term developments, the current £2.825 million carry value of the investment in QCC may be reduced to £1.25 million or lower at year end 2012.

Optimal Resources Inc. ("Optimal") (6.9% direct holding)

Optimal applies EOR technology developed by QCC in Optimal's own, partner and client oil fields to increase the recovery of 'oil in place' from qualifying "depleted" oil fields and those with declining production.

As conventional techniques seldom recover more than 15% of discovered and measured 'oil in place' in heavier oil reservoirs, the potential to add value from successful application is considerable, as are the remaining volumes of discovered 'recoverable' oil.

As previously reported, the pilot programme in the Optimal owned Lloydminster oilfield experienced setbacks and operational difficulties leading to earlier than planned termination of the EOR programme in this field. This affected the intended independent assessment of the EOR technology which, in turn, affected the implementation of the overall Optimal business strategy.

Developments since last reporting include:

·        The 100% acquisition by Optimal of EOR patents from QCC (formerly shared), paid for with new issue shares in Optimal. This was progressed on professional advice to make Optimal more attractive to new investors. As a result, QCC now owns 17% of Optimal. QCC retains royalty rights to be paid by Optimal on incremented 'enhanced' oil production. QFI therefore now has an effective 2.8% additional interest in Optimal through its 20% interest in QCC.

·        The officially reported successful incremental oil production from the 'depleted' Lloydminster wells has led to several owners of declining and depleted fields approaching Optimal for EOR services. A number of the oilfield licenses had previously been identified by Optimal as candidates for the technology application.

·        A revised Optimal development model featuring an initial 'service business' phase has been adopted. This will reduce equity funding requirements and dilution, while building a field application record and working capital reserves to add value to the company. Phase two should see a return in future to the joint venture and field acquisition model to secure equity participation in incremental oil production.

·        Consideration of an application by Optimal and adjacent license holders for approval of an extended EOR programme in Lloydminster across several sections. This is expected to be a financially attractive programme and an early positive response is anticipated from the authorities.

A number of EOR 'service agreements' are in negotiation and related activity is expected to start during Q3 2012.       

Valuation

The QFI shareholding in Optimal was last valued on a fully risked 'equity oil ownership' model basis which featured additional funding and shareholder dilution.

The revised 'service' model is more conservative and essentially builds value ahead of new funding requirements for the deferred 'equity oil' phase.

Pending near term events and revised assessment, a conservative approach is advisable. The value of the Optimal interest was set at £4.578 million in the 2011 accounts. Applying a new 'zero based' approach to recognise the revised model could reduce the value for 2012 accounts to approximately £ 3.0 million.  

Paxton Corporation (3.8% shareholding)

No information has been received on Paxton developments beyond that reported to shareholders in the QFI Interim Report on 23 March 2012.  The holding and its value is not considered to be material for the Company.

Commenting on these developments, Ian Williams, Chairman of QFI said;

"The revised strategies and business models should serve to stabilise both QCC and Optimal. Viable programmes with quality clients and partners who recognise the potential of these proprietary technologies could add significant value. I am especially pleased that we have been able to agree a way forward for Central and South America which could offer significant near term project opportunities for QFI companies."

For further information, please contact:

Ian Williams, Executive Chairman Hemant Thanawala, Finance Director Quadrise Fuels International Plc	[phone]
Dr Azhic Basirov / Siobhan Sergeant Nominated Adviser Smith & Williamson Corporate Finance Limited	[phone]
Dermot McKechnie / Petre Norton Broker Westhouse Securities Limited	+ 44 (0)20 7601 6100
Philip Dennis / Nick Lambert / Rollo Crichton-Stuart Public & Investor Relations Pelham Bell Pottinger	[phone]

 

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