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In late 2022, Sky Quarry also acquired Foreland Refining Corporation based in Eastern Nevada which is referred to as the Eagle Springs Refinery for approximately $10.4 million. Foreland refines heavy crude oil into diesel fuel and other petroleum products (including paving asphalt liquids). It is management’s belief that owning an oil sands remediation facility (PR Spring) that can be retrofitted for shingle processing and a heavy crude refinery (Eagle Springs) will enable the company to produce refined oil products from the processed waste asphalt shingles and other by-products on a profitable basis. The company’s management team indicated that while the production capacity of the Eagle Springs facility is 4,500 barrels per day, over the past 3 years, it has averaged just about 1,500 barrels per day, thus there is room for improved output at this refinery. The company anticipates that heavy oil produced at PR Spring will be refined at Eagle Springs which will boost the daily output from this facility despite the significant distance between the two facilities.

The retrofitting of the PR Spring facility, according to the company, will enable it to process both waste asphalt shingles (WAS) and to remediate oil sands. This will be the first commercial application of the company’s proprietary solvent, ECOSolv. The solvent process has been effective in bench tests, according to management, at separating waste asphalt shingles into its base components of oil, sand, fiberglass, and other materials.

To date, Sky Quarry has invested $5.5 million in the retrofit of PR Spring and the company has indicated that it expects to spend at least another $4 million to complete the project.

As noted above, the company also holds asphalt bitumen leases covering almost 6,000 acres in the PR Spring region of Southeastern Utah. Management indicated that it has permits in place to process the bitumen located within this leased land and because the processed Waste Asphalt Shingles would arrive as pelletized liquid asphalt it falls under the company’s current permit.

Asphalt shingles: The 15 million ton problem

If a roofing contractor were to ask a homeowner: “Would you like us to recycle these shingles we are removing or take them to a landfill where they may sit for 300 plus years decomposing?” It’s not hard to imagine most homeowners would say that they would prefer that their shingles be recycled.

However, the reality is that the homeowner is rarely involved in the decision-making process regarding whether shingles are recycled or sent to a landfill. In the majority of cases, it is the roofing contractor who has to make that decision based on:

• The cost of recycling versus sending the shingles to a landfill

• The availability and access of recycling facilities

• The amount of material sorting that is required.

All things being equal when a roofing contractor is being paid by the project, they want to minimize their costs and improve the efficiency of each job to boost their margins. Taking the time to pre-sort materials or drive the materials to a distant recycling center (costly both in terms of fuel and time) is not a reasonable alternative for most roofing contractors.

There have been several local ordinances recently enacted that have attempted to slow the flow of construction and demolition waste (including shingles) to local landfills but they have had limited success given the lack of disposal alternatives.

While it is hard to get a sense of the total number of shingle recycling centers in the US, we believe that relative to the number of landfills and construction waste facilities it is an incredibly small number.

Barring state or federal legislative actions that will force all shingles to be recycled, it seems that the only way to significantly increase the rate of recycling in the US will be to make the drop-off points plentiful and easy to access. We could envision a large waste company or shingle manufacturer placing collection dumpsters in centralized landfill areas that could then be shipped to a single, centralized recycling facility but today no such infrastructure exists.

The Shingle Recycling Process

There are two sources of shingles that can be recycled – manufacturers scrap material which is a by-product of production and materials removed from existing structures. Manufacturer scrap is the easiest to work with because it only contains the shingle itself and no other contaminants like underlayment paper, wood, or roofing nails.

When handling shingles from a roofing contractor (used shingles) it is important for recycling operations to separate the shingles from the other materials before beginning the recycling of the shingles. Ideally, this process is done away from the facility at a pre-sorting facility so the recycling center can focus on just processing the shingles. In most facilities, the waste shingles are ground to a universal size of ¼ inch to ½ inch before being mixed with hot asphalt for the most common application as a component of road asphalt.

Early shingle recycling efforts were hampered by the poor long-term performance of some roads that had a higher percentage of asphalt shingle aggregate in the final mix. The fiberglass in the ground aggregate contributed to the early failure of many roads that were using a higher percentage of recycled shingles in the asphalt mix (potholes emerged). The current best practice seems to recommend that no more than 3-5% of the total final road product consist of recycled asphalt shingles.

The Sky Quarry ECOSolv Process

The company has indicated that its recycling process will be a significantly different approach from current models as it seeks to break down the shingle components into individual materials to be reused as opposed to merely grinding the shingles into pellets to be added to hot asphalt mix.

The company’s ECOSolv process is protected as a trade secret but it is believed that pelleted waste asphalt shingles would be mixed with its proprietary waterless solvent. The company has indicated that the solvent separates the sand from the pre-oil liquid asphalt. We believe this system was originally developed to separate sand from oil in the oil sands leased in southern Utah, so it seems plausible. However, we still believe that the company will likely have to demonstrate that this technology is at least as effective at recycling asphalt shingles as existing alternatives before the market will embrace it.

One of the key issues shingle manufacturers and roofing contractors have highlighted is the need to have processing centers and recycling operations near the source of the used shingles. One of the issues that Sky Quarry’s PR Spring facility will face is that despite the significant growth in Utah’s population in recent years, the state’s population remains fairly small (just over 3 million residents) and the population is concentrated around the Greater Salt Lake City area which is three to four hours away from the PR Spring facility. With one of the lowest population densities in the US, Utah will present a challenge to Sky Quarry to source waste asphalt shingles near its facility. Sky Quarry’s facility is near a major rail line in Utah which could provide a lower-cost method for transporting waste asphalt shingles to the company’s facility.

Additionally, the company intends to build individual collection and front-end processing plants that can be placed around the country and we will discuss this further below.

As noted in the company’s investor presentation the Sky Quarry extraction process is similar to existing recycling processes in the beginning as asphalt shingles are ground into small chunks. However, then these small granules are mixed with the company’s proprietary ECOSolv solvent which dissolves the bitumen. The bitumen and solvent rise to the top of the holding tank while the solids (sand, limestone powder, granules, and fiberglass) are collected at the bottom of the tank. Finally, heat is applied to the bitumen/solvent combination to separate the bitumen while the solvent is recaptured for further use.

The company indicated in a filing with the SEC that in bench testing for oil recovery from waste asphalt shingles with samples containing 22% to 25% asphalt bitumen content, its ECOSolv solution yielded on average 20.8% bitumen which means that the hydrocarbon recovery rate was an impressive 80-95%. Demonstrating this recovery rate at a commercial-scale facility will be a key milestone for Sky Quarry investors to look for.

The Foreland Refinery

In September 2022, Sky Quarry acquired Foreland Refining for $10.4 million. Foreland refines heavy crude oil into diesel and other petroleum-related products at the Eagle Springs Refinery in Ely, Nevada. The company has indicated that it believes this facility could produce 4,500-5,000 barrels per day when at full production but production has averaged about 1,500 barrels per day due to supply constraints. The company’s management team has indicated that they will seek additional crude oil from local producers and by shipping heavy oil produced at the PR Spring facility they will be able to increase production at Eagle Springs and improve the profitability of the operations.

It is worth noting that according to the US Energy Information Administration, this facility is one of just 10 new refineries built in the United States since 1990, and while it is a small facility its location makes it an important refinery for the western half of the US.

In a related development, Phillips Petroleum recently announced plans to close its Los Angeles refinery by the end of 2025. This facility currently provides 8% of California’s diesel supply so an operating refinery in Nevada with excess capacity could be poised to benefit from the need to replace this refining capacity.

Revenue Model

Today, the Eagle Springs facility is refining oil to produce diesel, vacuum gas oil, naphtha, and asphalt paving liquid which generated just over $50 million of revenue for the company in 2023 though gross margins are historically very low in the refining business (17.1% gross margin in 2023).

The company anticipates that once the retrofit is complete at the PR Spring Facility and it receives commissioning in 2025 it could produce asphalt paving aggregate, a low-sulfur heavy oil product from mined bitumen sands and from remediated asphalt shingles, which would then be sent to the Eagle Springs Refinery.

Finally, the company believes that the recycling of waste asphalt shingles will produce liquid asphalt cement, shingle granules, sand aggregate, limestone, and fiberglass, which can be sold back to asphalt paving companies or shingle manufacturers.

Outlook and Expansion:

As we’ve discussed processing shingles for recycling is most effective when the shingles can be collected near the point where they are removed. Since the “recycling vs. landfill” decision is typically made by the roofing contractor it is important for companies seeking to increase shingle recycling participation rates to make the process as simple as possible for roofing contractors.

In order to address the fact that the company’s processing facility is far removed from most population centers the company hopes to place what it calls ASR Modular Facilities in certain regions of the country that are relatively close to the PR Spring facility and in areas with relatively high “tipping fees” for landfill disposal. Tipping fees refer to the cost (usually quoted in $/ton) to dispose of solid waste at a landfill. While the national average tipping fee is around $57/ton⁴ there is a good deal of variability with the Northeast typically having the highest average cost but there are several locations in the southwestern portion of the US that also have high tipping fees.

Since, the shingles are necessary raw material for the company’s recycling plans, tipping fees present a unique opportunity for the company to be paid to collect its raw material. The company has indicated that it intends to build its first ASR facility in 2025 and place it in a waste management facility.

The ASR Facility front end, according to company filings, will grind the shingles, “extract and separate the granules and sand and press the remaining bitumen and solids into pellets for ease of transportation”. The processed pellets from these modules will then be shipped to the PR Spring Facility for further processing which will allow it to separate the bitumen from the pellet. Eventually, the company envisions being able to turn these standalone locations into complete processing plants but that will be part of a long-range plan.

The company hopes to have at least five ASR Facilities built and operating over the next five years.

Crowdfunding and IPO:

The company completed a large crowdfunding offering in 2022 which raised over $18 million where units were sold at $1.25 per unit which included 1 common share and one warrant that could be exercised at $2.50. In preparation for its NASDAQ listing, the company completed a 1-for-3 reverse split so the cost basis for original crowdfunding investors is $3.75/share and the warrant exercise price is now $7.50.

In 2024, the company filed to complete an IPO and list its stock on the NASDAQ market seeking to sell up to 3.33 million shares at $6.00 per share which would potentially raise up to $20 million before fees. The company ultimately completed its IPO by selling 1.2 million shares at $6.00/share raising $6.7 million before fees.

Recent Financial Results:

As a reminder, the company is currently not operating the PR Spring facility to process oil sands or to process shingles, so the sole source of revenues today are the oil refining operations of the Foreland refinery (Eagle Springs). In the first nine months of 2024, revenues fell 51% or $19.9 million to $19.2 million as a result of downtime at the refinery due to planned maintenance and lower crude oil prices.

The lower average price of crude oil in the first nine months of 2024, combined with the greater downtime at the facility for maintenance severely impacted margins. The company’s gross margin in the first half of 2024 was just 4.0% down from 14.6% in the same period a year ago. Management indicated that it believes the scheduled maintenance was a “once-a-decade event” so refining margins may have hit their low watermark in the first half of 2024.

Recent News

The company recently announced a relationship with Atlas Roofing to “assess and develop mutually beneficial processes for asphalt shingle recycling”. The companies will work together to assess the viability of Sky Quarry’s recycling process to recover material and oil from waste shingles produced at an Atlas manufacturing plant. This is an encouraging step forward for Sky Quarry because recycling waste shingles at a manufacturing facility will be the simplest way to test the efficacy of its closed-loop recycling system. Atlas is one of the five largest shingle manufacturers in the US with over 30 plants nationwide.

Potential Risks

We think investors will need to be aware that, unlike most IPOs that have large holders of stock who may be prevented from selling during a lock-up period after the company’s shares start trading publicly, Sky Quarry has over 10,000 individual shareholders who can liquidate their holdings at any time. Since the majority of these holders have a cost basis of $6.00 per share (IPO investors) or $3.75/share (Crowdfunding investors) which is above the current trading price investors need to be aware that this overhang could exist in the stock for some time.

The company’s registration statement detailed financing plans based on raising close to $20 million via its IPO. In the company’s detailed “use of proceeds,” it noted that $4 million would be used to fund the retrofit at PR Spring and another $1.8 million to build its first ASR front-end unit. However, since the company’s IPO raised a little over $6 million after fees most of that money will likely be used to retire debt and fund working capital. In order for the company to successfully launch its plans to recycle waste asphalt shingles at the PR Spring facility and bring ASR units to multiple locations, the company will need to secure a significant amount of additional financing, which could dilute existing holders.

Also, the remote location of the PR Spring facility will present several challenges in dealing with a heavy raw material that is generated in residential communities. Most asphalt shingle recycling companies place their collection and processing facilities near or at landfills in large population centers. In Utah, over 80% of the population lives in the greater Salt Lake City area which is more than 3 hours away from the PR Spring facility. Assuming the company can raise the money to retrofit PR Spring and that the company’s recycling process works as tested, it will still face challenges trying to secure raw materials and transport them to PR Spring while generating a profit. The company intends to process oil sands as well at the facility which could face local opposition but the incoming administration in Washington has viewed the development of Utah oil sands more favorably.

Conclusion

Sky Quarry (NASDAQ:SKYQ) operates an existing oil refinery operation that has been underutilized in the past and owns an oil sands facility in Utah which is currently not operating. However, the company has a vision of one-day converting asphalt shingles back into their original components (fiberglass, granules, sand, bitumen) that could then be resold in the market or in the case of bitumen shipped to the company’s Nevada refinery for processing. While there remain questions about the company’s path to commercial operations at the PR Springs facility, the company is bringing fresh ideas to a market where landfills are still the primary solution, and that makes it an interesting company to watch.

Sky Quarry’s shares have a very short trading history having just completed its IPO in mid-October and valuation measures are meaningless at this point in the company’s evolution because investors are investing in the concept of a shingle recycling facility rather than projected cash flows from the refinery or oil sand leases. Investors will likely focus on the company achieving milestones while monitoring for potential dilution if the company seeks additional financing to complete the work necessary at its PR Spring facility.

The current approach to asphalt shingle disposal is to send them to a landfill, where the decomposition of this material can take well over 300 - 400 years. Sending an asset rich in raw materials back into the ground makes little sense. However, the fragmented nature of the roofing installation industry has slowed the adoption of other alternatives like recycling. The opportunity in front of Sky Quarry is significant but there remain many challenges along the way that the company will have to overcome.

Sky Quarry has a unique approach to the challenge of shingle recycling but executing this vision will require time and capital. However, investors watching the sustainable energy space should have Sky Quarry on their radar.

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^{1. https://www.asphaltroofing.org/asphalt-shingles-raising-the-b-a-r/}

^{2. https://attotime.com/blog/roofing-industry-statistics}

^{3. https://www.generalkinematics.com/blog/asphalt-shingle-recycling-process/}

^{4. https://erefdn.org/analyzing-municipal-solid-waste-landfill-tipping-fees/}