EUR 238.00 For Business Accounts Only

Avoided carbon gains speed

Avoided carbon gains speed

FINANCING ISSUE

Ecoslops’ success in processing oil wastes for a profit is gaining momentum with a full financing of its second unit due in early 2020.

FACT

Ecoslops posted a raft of positive communiqués somewhat ahead of its FY 2018 release. These include:
- Solid trading in 2018 with sales of the Portuguese unit up 30% (excluding sales at no profit as part of a utility contract)
- Ample financing (up to €18m) from EIB to build the second refining unit in Marseilles
- Essentially no net debt at the close of 2018
- The final go from regulatory authorities to launch the Marseilles site
- Not to have to repay cheap financing provided by European development funds (€3m in all) beefing up Ecoslops’ balance sheet
- Delivery of a “mini” prototype unit, dubbed Mini P2R, currently tested as a refinery-in-a-box product


ANALYSIS

The indicated 2018 turnover (from the first and unique plant so far in Sines, Portugal) is an ounce lower than our modelling at €7.3m, where we were guessing €7.8m. As a reminder, this is less a measure of a volume weakness (at 19,000t it was in line with company forecasts) than a reflection of realisation prices, themselves as volatile as crude oil prices. As input prices (slops) are also substantially geared to crude prices, the lower turnover does not mechanically mean lower profits. Prior to the company’s FY earnings release, we chose to leave the Sines contribution unchanged at c. €1.3m. The unknown is really how much central costs will allow for the development costs of the small “mini” refining unit.
2019 will see no contribution from the Marseille new plant as its construction, now fully financed, will be completed by late 2019. So that the ramping up/de-bottlenecking of the Marseille unit will happen over H1 and, hopefully, a near capacity production by H2.
Financed!
Although management was confident of getting a funding in place for Marseilles, it is an impressive feat to collect €18m from the EIB (with funds aimed at specific capex), €6.5m from banks and a massive discount on earlier financing for the Portuguese unit thereby saving €3m to the benefit of shareholders. Such a robust financing is due to the operational success of the first unit which must have convinced lenders that they will see their money back thanks to plain cash flows.
Assuming Marseille does not have teething problems, it looks as if Ecoslops may avoid passing the hat to its shareholders. We had allowed for a near €10m capital increase this year. Cancelling it would increase EPS by c. 17%. We keep the cash injection in our model for the time being and wait for full-year figures to rehearse the new funding scenario. We would also have to reconcile the fact that FY2018 closes with no net debt when we had computed €10m.
Avoided carbon
Ecoslops is a great practical idea, reprocessing slops by means of an ad hoc, company-designed refining unit, which has “green” implications that are becoming increasingly evident to investors.
The default posture of surface observers is that Ecoslops deals in oil products and thus cannot be touched with a barge pole. This is silly. Such simplistic views now make place for a more positive and practical conclusion that Ecoslops is about avoided carbon thanks to its efficient reprocessing. Its business amounts to drawing less on natural resources and cutting on externalities costs.
Ecoslops has “greentech” credentials that come with a profitable model and significant growth potential. This is rather infrequent for recently-created companies. As a reminder, there is no shortage of slops hiding in every corner of the industry. Even better, Ecoslops operates at a profit in a competitive world so that it is unlikely to fall prey to changing subsidies and regulations. Obviously, it does go by the regulations of the oil industry without which it could not sell some of its output to industry leaders (Galp and Total).
The next twist to the “green” story is the ongoing tests for the Mini P2R, i.e. the refinery-in-a-box that can be delivered in a 20-foot container to any location where there are slops in quantities too small to justify a full unit. This means addressing the markets in smaller harbours or islands where the Mini P2R will be in a position to churn low quality diesel fuel so it is good enough to generate local power at a tiny capital cost and zero input prices, or next to so. All business models are envisaged from outright selling of the units to operating them for power provision.


IMPACT

We understand and can compute that a best case scenario has emerged whereby EIB financing and FCF from the first production unit would be enough to pursue the planned capex programme, i.e. Marseille and Antwerp, without asking shareholders to stump up. That is obviously dependent on the proper execution of the Marseille construction but is effectively good news. On top, one may not exclude the green credentials to justify a degree of P/E expansion.