Stockwatch: Quadrise Fuels - risk lovers only need apply

Is it worth buying the drop in AIM-listed shares of specialist fuels group Quadrise Fuels International? Quadrise is an alluring growth story: applied chemistry transforming "heavy oil" into a superior fuel, with enormous scope globally for shipping and refining.

This explains why the five-year chart soared from 12p near 50p in 2013 for a capitalisation near £400 million. That's quite some hope value considering no real financial record and net assets around the £10 million mark.

As I have suggested in various Stockwatch pieces, such exuberance resulted from bullish sentiment when the $85 billion a month, "QE3" at its peak, with a cumulative effect from early 2012. Many cyclical and high-expectations stocks have fallen in 2014, a context that hasn’t helped when it's hard to assert what Quadrise could be worth.

Despite markets recovering in late October, the share price edged lower from about 30p near 26p (circa £215 million mkt cap) implying nerves relative to the time horizons for progress management has set. A presentation at the November 2013 AGM implied early commercialisation in 2014 and "once this has been accomplished...the pace of growth thereafter in both existing and new programmes could be very rapid."

A £10.7 million placing last March at 32p a share meant the company had £11.1 million cash at end-June and no debt. The indication was, this would "securely bridge the gap to sustainable revenues, now expected in 2015." In the latest 20 October prelim statement (financial year to end-June) the chairman continued to entertain 2015 as a "watershed" year for the company: "our secured points of entry now afford Quadrise access to very large markets on well-defined pathways."

Recent newsflow has been characterised by testing, while evidence of commerciality is awaited - a familiar story to AIM investors. Not to draw a direct parallel, but Corac has for years presented an appealing story based on a downhole gas compressor able to enhance recovery from mature gas fields; but the company has had to keep raising capital and diversify to establish revenues while losses have continued; hence the speculative bubble has deflated to near 4p a share

. Quadrise is becoming more interesting to follow, though, as the drift in its chart approaches something of an inflection point for sentiment. Indeed, at the time of writing the stock has dropped 2.5p to about 26p.

You can learn more via the company's website and doubtless a new presentation will be downloadable after the 28 November AGM. However, the two main areas of interest relate to recent ship trials with the aim of "concluding contracts for manufacturing and supply by end-2014...for commercial roll-out through 2015" and a trial at a thermal power station in Saudi Arabia aiming to complete by end-June 2015 - with potential for large-scale fuel conversion projects in Saudi Arabia. Confirmation of these elements proceeding to plan is likely to help sentiment; or delays undermine it.

While a decision was taken in 2013 to broaden activities e.g. in Columbia, Mexico and Singapore, progress has been slow. It’s a moot point whether a small technology company is managing risk effectively this way. At least cash burn of £5-6 million a year has not been substantial and the £11 million end-June cash position is good for the foreseeable future.

Typically just 50% of processed crude oil is sold as premium-value transportation fuels, but this could rise to 70% via Quadrise's Multiphase Superfine Atomised Residue (MSAR) technology.

The concept has existed for 20 years and some of the developers of a bitumastic emulsion fuel - Orimulsion - now work for Quadrise. Over 60 million tonnes of this fuel were used globally until 2006, since then Quadrise and AkzoNobel have enhanced the concept by developing the MSAR fuel system. The company's business model is therefore licensing and services, which is indeed long-term attractive - the basis for example on which ARM Holdings (ARM) has become Britain's pre-eminent technology firm, in microprocessors.

The recent drop in oil prices - potentially signalling weaker energy demand amid a slowing global economy - should not be a worry as the MSAR technology has scope to revolutionise the industry irrespective of cycles. Experienced investors are aware, however, financial history includes regular examples of new technologies making total sense and offering a substantial market, yet commercial adoption still involves challenges. Extending time horizons are quite the norm, i.e. stock trading opportunities according to sentiment change.

There is no independent analyst coverage cited by Company REFS, beyond Peel Hunt - Quadrise's broker - which published a "buy" note on 13 October projecting a £2.4 million pre-tax loss for the year to end-June 2015. This is insignificant anyway in long-term context.

The lack of coverage is not a negative, it reflects little business independent brokers can generate at this stage. After ARM Holdings de-merged from Acorn plc in the late 1990's there was scant coverage yet the stock traded on very high price/earnings multiples. This company had an established earnings record however, growing strongly.

Comparisons with ARM and Corac are crude albeit scenarios for how Quadrise could evolve in the medium term; they are examples how stockmarket sentiment has applied, bullish and bearish. In the words of Jesse Livermore, the famous early 20th century trader: "All through time, people have basically acted and reacted the same way in the market as a result of greed, fear, ignorance and hope. That is why the numerical formations and patterns recur on a constant basis."

So buy if you are a risk lover, or see what news evolves.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.