Indonesia Energy Is a High-Risk Gamble on Higher Oil Prices

Indonesia Energy (NASDAQ:INDO) is a Jakarta-based oil and gas company. The company was originally formed in 2014. It completed its initial public offering in New York in 2019. INDO stock opened trading around the $11 per share market in late 2019.

petrochemical plant in night time with reflection over the river, Indonesia. INDO stock
Source: arhendrix / Shutterstock

Soon, though, Covid-19 made its impact felt on the oil market and INDO stock plunged to just $4 per share in 2020. It would remain there until early 2022, when Indonesia Energy shares suddenly skyrocketed from $4.50 to as high as $86 per share in a matter of days. The stock has cooled off considerably since that peak, however, shares are still up more than 600% year-to-date. That’s even after the recent pullback.

Even back here at $24.75 per share, Indonesia Energy is no bargain of an investment. Here’s why investors should be cautious on the name for the rest of 2022.

Not a Large Business

Indonesia Energy has been producing oil from its fields in Indonesia for quite awhile now. However, it has failed to ever reach a meaningful scale of operations.

Here are Indonesia Energy’s full-year revenues over the past few years. In 2017, the company generated $3.7 million of sales. This rose to $5.9 million in 2018 and dipped to $4.2 million in 2019 before plunging to $2.0 million in 2020. The company’s 2021 annual report with full-year results hasn’t been filed yet. Presumably, however, results be up dramatically compared to 2019 and 2020 given where oil prices are today.

Even if revenues surpass 2018 levels, which could well happen if oil prices remain elevated such as they are now, the company wouldn’t generate much in the way of profits. That’s because the company spent $6.5 million on general and administrative expenses alone in 2020. That’s more spent on overhead than the company has ever generated in a full year’s worth of revenues.

Valuation Is Generous Given Current Status

As of year-end 2020, according to the company’s latest investor presentation, it had roughly 2.6 million total net barrels of proven crude oil reserves. This is tiny by global oil and gas standards. For a comparison’s sake, ExxonMobil (NYSE:XOM) produces close to 2.4 million barrels of oil and equivalents every single day.

No one is expecting Indonesia Energy to compete with Exxon anytime soon, of course. However, it’s important to highlight just how small Indonesia Energy’s current reserves are for a company with a market capitalization of more than $150 million. INDO stock is putting an awfully high price tag on a company that has never generated more than $6 million of annual revenues nor has all that much in the way of proven developable crude oil assets.

The company is targeting more growth through additional drilling. That is certainly more promising in a $100+ price of oil per barrel world, no doubt. However, all the risks are still there in terms of operating in an emerging market that is not typically been one of the premiere destinations for oil and gas investors historically.

INDO Stock Verdict

Traders latched onto INDO stock, I’d assume, because it had a low share price and a small stock float. This made it easy for Indonesia Energy to get some real positive momentum going once buying interest came in.

And at $5/share, you could make a reasonable argument for Indonesia Energy as a speculative play. There, the market cap was closer to $30 million. Was $30 million a pie-in-the-sky price for a small oil wildcatter that might be able to do $10 million or more in revenues in 2022 if oil prices stay high? No, that’s not too crazy. I can see the case for that bet.

Up here above $20/share, however, people are putting a simply massive premium on Indonesia Energy’s existing assets and operations. Sure, Indonesia Energy may be able to discover significantly more oil at its exploration blocks in that country. However, that’s true of many oil and gas exploration companies that are trading at much more normal valuations today.

I see little justification for a sharp premium in INDO stock versus the rest of its industry. As such, don’t be surprised if Indonesia Energy shares continue to retreat back toward the $10 or $15 per share level in coming weeks.

On the date of publication, Ian Bezek held a long position in XOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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