Ecoslops’ H1 18 release highlights a strong performance of its existing refining unit after upgrading, an inevitable rise in opex and c. 6 months push-back on the opening of the second unit in Marseille. We have trimmed down our earlier unrealistic 2018 expectations. This has a limited impact on our valuation.

Ecoslops’ H1 earnings allow for the Q1 closure to upgrade its only current production site. The group posts a net loss of €-1.4m vs. €-0.6m. Its gross cash position is €7m with net cash at c.€4m.

Ecoslops had made it clear that tweaking its Sines refinery so that it can process slops with lower flashpoints would mean losing a full quarter of 2018 operations. The benefit is that the processing unit can access a much wider range of slops including from land-based origins which are cheaper feedstock (more available supply) and thus magnify processing margins.

As a reminder, Ecoslops has set up a form of profit sharing of good times with slops providers so that EBITDA margins may not go much above 50% against improved visibility from suppliers.

The positive news behind this investment (more an opportunity cost than a heavy capital spending) is that the Q2 operating performance has been very strong. Revenues (ex no margin utility-type revenues) reached €1.4m vs. €1.8m the year before.

This remarkable performance is owed to strong pricing, up 64%, of which 24% is due to the mix and 32% due to the rise in the € price of Brent.

With an H1 18 EBITDA at €0.2m, the Sines plant even manages to more than breakeven as the above-quoted pricing conditions have been so favourable.

The opportunity cost of updating the unit when demand was so strong may seem steep but this is obviously secondary with a view to the long-term benefits of being able to digest all sorts of slops and thereby changing the economics of the feedstocks by widening sources meaningfully.

The H1 EBITDA of the small group is a €-0.7m loss, however, as Ecoslops keeps flooring its opex/capex gas pedal. These include:
– the La Mède (near Marseilles) processing unit whose launch timetable has slipped to late H2 19 as the various building authorisations have been awarded quite late. This c. €15m capex should open with a 30,000t annual capacity;
– the Antwerp one is about twice the size at 60,000t/y and is still at the study phase;
– the development of the so-called mini-P2R. The mini-P2R can be summarised as a refinery in a box (a container in effect). A small unit at an estimated price of €3.5m would permit economically processing slops in smaller ports where a normal unit would not breakeven. The prototype is expected to be up and running by October this year (please see full report on Ecoslops for more on the mini-P2R).

Green credentials

Ecoslops’ process helps decarbonise by recycling otherwise lost fossil fuels. The firm has found it difficult though to explain that one can deal with oil products and be green nevertheless. By calling itself “the cleantech that allows oil to enter the circular economy”, Ecoslops is making a statement that happens to be factually correct.

This should put it on the horizon of investors who are now more aware that assessing carbon externalities is not a black and white exercise.

In early October 2018, Ecoslops received a technology award for the design of its mini-P2R. This is based on a project but nevertheless confirms that the French ministry for environment is ready to back innovative projects even when they relate to fossil energies. In this respect, this is a major win for Ecoslops.

Ecoslops sees itself as churning c.19,000t of finished products in 2018 (vs. 22kt in 2017) with revenues up nevertheless on the previous year, courtesy of higher selling prices. In spite of this positive outcome, 2018 sales look set to land somewhat below our earlier (and admittedly too rosy) expectations.

We have trimmed, accordingly, our top-line figure for 2018 with a less than proportional impact on the EBITDA of Sines as we were too pessimistic on margins.

From 2019, higher crude prices would combine positively with access to cheaper slops per unit of refined product sold. Our net earnings are also trimmed down to allow for the headquarters’ higher costs than we initially thought.

All in all instead of a marginal profit, we see a c.€1.8m loss in 2018. The next two years are also impacted negatively by c. €1m each compared to earlier expectations. This is partly owed to the push back of investments in La Mède and Antwerp by six months.

It is worth stressing that these earnings adjustments are marginal compared to the overall solid deployment of Ecoslops from a prototype to deal with intriguing idea (refine slops) to a working network of unique and sought-after waste processing capabilities.