Ecoslops delivers strong cash flow generation from its first slops refining plant. It envisages an even brighter future made of similarly planned units in Marseilles and Antwerp as well as tiny ones (“refineries in a box”) adapted to a wider market. Slops (i.e. waste oil products) processing appears to be a bigger market than anticipated.

Doubters of two years ago when Ecoslops went live on the stock market will have to capitulate in the face of Ecoslops 2017 earnings which show a strong FCF generation from its current unique plant. This performance is hidden in bottom-line terms (€-1.4m loss when we contemplated €-0.9m) by substantial development-type opex as the tiny group invests in more capacity in at least two new ports (Marseilles and Antwerp) and in technology to address smaller unitary markets.

The balance sheet has been made even stronger as convertibles have been converted and a 2017 €5m rights issue have injected in all a total €10.5m in fresh resources. The net cash position at c.6.5m is enough to fund Ecoslops’ share of new projects.

As a reminder, Ecoslops turns slops collected from ships into useful refined products instead of burning them. Its stock in trade is to have designed and deployed what amounts to a micro refinery geared to the poor quality of inputs (slops). The first such capacity in Sines (Portugal) has performed beautifully in 2017 with a 22,000 tons run vs a nominal capacity of 30,000 tons. This is in itself quite a feat with a FCF generation at €0.5m from that unit.

Whereas the initial business model was dependent on finding enough slops to process without pushing their price up (they can have a negative price depending on local market conditions), the issue of realisation prices has never been a real one. It is even less so now that crude prices are firming up. The 2017 twist in the business has been the recognition that onshore slops are actually abundant and of better quality (i.e. lighter) than shipping ones.

This leaves an opportunity to go for more of the light-refined products which are easier to sell and improve the mix per ton of output. A first substantial step in the marketability of such light-refined products has been achieved with a 2017 agreement with Galp that mixes its own diesel fuel with that from the Ecoslops unit in Sines.

Ecoslops ongoing strategy is to tweak its new capacity (Marseilles by 2019, then Antwerp by 2020) so that it can process such lighter slops (which are more inflammable). It also took the risk of adjusting the Sines capacity so that it can accept lighter feedstocks. The cost is not small as it involves a three-month stoppage of production over Q1. Management still sees a case to deliver 25,000t in 2018, presumably with higher netbacks following the upgrade to lighter, more expensive products.

Near-term acceleration

One of the good points of the latest communiqué is that plant number 2 in Marseilles seems on track. Of course the experience curve is partly there but it is in a JV with Total (25% stake) which could have been a calendar curse on quality /safety issues. So far so good with financing about completed (€7m of fresh debt found out of the €9m needed). The next big step 12 months later is to deploy a twice as big unit in Antwerp with essentially the same design and the same project team. By contrast with the Sines prototype pains, the Belgian unit looks like a walk in the park.

Pico refineries the next big thing

Ecoslops is making a convincing case of the fact that it has a working design of a tiny refinery in a container (or two for that matter) which could be fully transportable and automated. This fits with ports/locations where the slops to be processed account for less than 4,000t/year.

The attraction is that the market is about 10 times larger and the business model could shift from build, own and operate to build and rent with a service contract attached or build and sell, etc. It is just then a question of arbitrage between financial terms and servicing.

Clearly the maintenance side may be attractive in profitability terms. And there is no reason to think that the service dimension could not be extended to sticking a power generation unit next to the pico refinery (dubbed “Mini-P2R”).
The business model would thus move from a refinery owner and operator to that of a capital goods supplier with all sorts of servicing and maintenance contracts attached à la Wärtsilä, not to mention lift manufacturers.

Green clothes

As the name implies, Ecoslops turns waste into a useful product. Its green credentials as a cleantech have yet to be fully assessed as there are no proper metrics to value its environmental benefits. Whereas most of the slops are no longer dumped at sea, their use as low energy, dirty, heavy burning fuels typically in cement production is environmentally less attractive than as refined quality products.

How to value that avoided pollution is an open question as the carbon content itself is not that different.
This obvious point may be complemented by the deployment of the refineries-in-a-box as such refineries will help recover oil-related waste in otherwise uneconomical circumstances with a net gain for the environment.

Allowing for the 2017 release will bring down the earnings for that year as we were a bit too optimistic, while the fast forward deployment of new sites and possibly of tiny units is likely to keep opex costs at a high level. The near-term earnings outlook shall be trimmed a bit but the valuation is likely to remain attractive.

Fundamental analysis is available here