• Indonesia Energy has an equity capitalization of $64.7 million, but it only has 5 oil wells.
• Total revenue so far this year is just $2.33 million with an operating loss of $1.92 million.
• Their drilling program has been put on hold for 12 months.
• They are selling additional shares under an ATM deal to raise needed cash.

Indonesia Energy’s (NYSE:INDO) stock price has dropped about 65% since my article last May, but it is still way too high relative to their operations. The current equity capitalization is $64.7 million, which is completely irrational since they only have 5 low producing oil wells that generated $2.33 million in revenue for the first six months of this year and an operating loss of $1.92 million. They will need to continue to sell new stock in order to raise cash to cover their negative cash flow going forward. This is an update to my May article.

Update on Balance Sheet Activity

L1 Capital

First, I need to remind readers that Indonesia Energy Corp. Ltd. (Cayman Islands) is a foreign company that is not subject to normal SEC filings. Their disclosures are, therefore, very limited. As I covered in my prior article L1 Capital provided financing earlier this year via a convertible note. As of June 30, L1 Capital converted $9.6 million of the $10 million note in INDO stock at $6 per share. On August 18 they converted an additional $300,000 and exercised 185,000 warrants at $6 per share. On August 29 they exercised an additional 90,000 warrants. The company received a total $1.65 million cash via the warrants being exercised.

It is unclear if L1 Capital has sold any INDO shares because L1 Capital Global Opportunities Fund is a foreign hedge fund that does not report their holdings to the SEC. An amended F-1 was filed on May 20 and a prospectus was filed on June 2 covering the potential selling of the shares from converting the note and exercising the 767,240 warrants.

New INDO Stock Sales

Because of their distressed financial condition, they really can’t get conventional bank financing, so they are raising needed cash from selling additional INDO shares under a July 22 ATM with H.C. Wainwright to sell up to $20 million in new stock. On August 25 they sold 177,763 shares at $10.7407 and an additional 280,612 shares at $10.109. These sales brought in $4.55 million cash. Since these sales actually increased the book value per share, they really did not dilute the other current INDO shareholders. Collectively these ATM sales and the actions by L1 Capital have resulted in increasing the total number of INDO shares outstanding to 10,142,694 based on my calculations.

On September 19 they paid their $980,452 overdraft. This bank loan is unconventional in that it required INDO to have a $1.0 million deposit securing the overdraft. This is something similar to a secured credit card where a customer deposits a certain amount and then gets a credit line for the same amount. As of September 15, they had $7.87 million unrestricted cash. (See further below regarding future cash issues.)

Six Months Financial Results

Since oil prices have been very high for much of the first six months of this year, their financial results for the first six months are very disappointing. As I covered in my prior article their executive pay is outrageous compared to revenue and actual oil operations. We don’t have the latest number on executive pay for 2022, but in 2021 the top executives’ pay was 41% of total 2021 revenue. We also don’t have actual oil production numbers.

The operating loss of $1.92 million is actually the key metric. The final bottom line numbers are significantly impacted by various warrant items that do not really reflect operations and are just bookkeeping items, in my opinion.

Six Months Income Statements 2022 and 2021

INDO burned $3.06 million cash from operations during the first six months. They used $1.512 million to drill two new wells and most of the other cash was used to pay overhead, especially executive pay. I assume that there were additional well drilling expenditures after June 30 because Kruh 28 drilling was not completed until September.

Cash Flow 2022 and 2021

Drilling Update

Management keeps kicking the can down the road regarding their drilling program. In March 2021 they announced a program to drill 18 wells – 5 in 2021, 6 in 2022, and 7 in 2023. According to their October 20 press release they now expect the 18 new well drilling program will be completed by the end of 2025. They also announced that they are planning some seismic testing, which is expected to last 12 months. After this testing is completed, they are then planning to restart the drilling. Earlier this year they stated they plan to start drilling another Kruh well in June – July, but it that never happened. I feel very comfortable about these changes. Is there the potential for more oil or is this a delaying tactic to avoid a reality check? (I have been investing in Indonesia for decades and I have learned to be very cautious about statements from management. Their rules/regulations are not as strict as in the U.S.)

They finally finished Kruh 28 on September 16 at a depth of 3475 feet. They did discover oil and stated they expect product to start by the end of November. They also claim they “found evidence of a potential natural gas bearing reservoir”. There was no mention if this could be economically productive natural gas production or just some nominal amount. The money spent of the two Kruh wells drilled this year as of June 30 was $1.512 million. I am “guesstimating” that they spent about another $500,000 to finish Kruh 28, which implies about $1.0 million to drill a well in that field.

They have never actually stated production numbers and only stated “as previously disclosed, wells drilled that average production of 100 barrels of oil per day over the first year of production…” and continued on about covering costs of drilling. They never stated that their wells actually average 100 barrels per day. I also have not been able to find any updated information about Kruh 25 that was damaged by flooding. Using $60 as an average oil price, their six months total revenue figure would imply an average of 215 barrels of oil per day total production and using $80 the implied average would be 161.

Since they have very limited disclosure in their filings, it seems that Kruh 26 and Kruh 27 are currently producing, but no metrics have been given. As can be seen from the income statements, they are not even close to breakeven based on current production. Some other Indonesian oil companies do report proved (P1), probable (P2), and potential (P3) reserve numbers. I assume that INDO can’t afford to pay for professionals to estimate these figures.

Future Cash Needs

If the stock price remains significantly over $6 per share to make the exercise of the remaining 442,240 warrants at $6 profitable, they should raise an additional $2.65 million cash. Plus, there is $15.45 million potential cash, before the sales agent commission, from selling shares under the ATM deal. This cash should be sufficient to cover negative cash flow from operations in 2022 and 2023, especially if they do not restart their drilling program until 4Q 2023. If they launch a major drilling operation in 2024 that is when they may have a cash problem trying to finance those wells.

If INDO stock traders finally become rational and the stock price drops, then they will not get cash from the warrants and selling additional shares under the ATM could depress the stock price even more. Unless management is willing to sell additional shares at very low prices, they could face a cash problem late in 2023. In addition, it is expected they will also continue to report losses going forward. At this point I just do not see when they will ever report any actual earnings and if they do, it will be just a token amount per share given their already large number of shares outstanding that is expected to continue to increase.

Comparing INDO to Another Indonesian Oil Company

There is a small Indonesian oil & gas company, Energi Mega Persada Tbk PT (ENGR.JK), that is an interesting comparison to INDO. ENGR currently has an equity capitalization of about $531 million, which is about 8x INDO’s $64.7 million. (ENGR last trade was 338 Rupiah on the Jakarta Stock Exchange.) Look at their first six months financials below.

Energi Mega Persada Six Months Financial Data 2022 and 2021

ENGR is an established oil and gas company that had an average production of 4,789 barrels of oil per day and 208 million cubic feet of natural gas per day in 2022. Readers can compare the various metrics between these two companies and see that INDO’s equity capitalization should be much less than 1/8 the amount of ENGR. I would compare revenue and equity capitalization. ENGR’s six months revenue of $230.2 million is almost 100x INDO’s revenue of $2.33 million. Would the appropriate equity pricing mean that INDO should be 1/100 of the $531 million? This $5.31 million would mean that INDO stock should sell at about $0.52 per share instead of $6.38.

Trading in Indonesia also is sometimes very irrational, but eventually the market again fairly values a company. ENGR traded over 11,000 Rupiah about 15 years ago, but the world’s Great Recession of 2008-2009 brought the stock back to earth. I expect reality will also eventually hit INDO stock trading.

Conclusion

The reality is that Indonesia Energy is still significantly overpriced even after dropping sharply since my May “sell” article. They only have very limited current oil production and since they have put their drilling program on hold for 12 months, it is unlikely production will increase significantly anytime over the next couple of years. The company has been able to take advantage of irrational meme trading to raise needed cash from selling additional shares at high prices and being able to raise cash via a convertible note since they can’t get conventional bank financing.

I consider INDO a “sell”, but because the borrowing rate is often over 150%, I would not consider it a short sale idea.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I often trade ENGR.IJ, but I currently have no positions.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• The effective Indonesia Energy’s equity capitalization is over $150 million compared to only $2.45 million revenue in 2021.
• A major portion of their annual revenue is used just to pay their top executives.
• They had a loss of $6 million in 2021 and continue to burn cash.
• A large shareholder is trying to sell shares.
• This is another example of irrational meme trading.

Indonesia Energy Corp Ltd. (NYSE:INDO) is a tiny Indonesian oil company that got the attention of meme investors earlier this year as oil prices soared. Buyers of this stock clearly didn’t actually do any research before buying and were only looking at it as a vehicle to trade oil prices. At the yearly high in March, their total capitalization was $665 million and that does not even factor in shares potentially used for debt payments, compared to a loss of over $6.0 million on only $2.45 million revenue in 2021.

Irrational Trading

As oil prices surged in March, traders started buying any and all oil companies. As the price on Indonesia Energy’s stock rose some traders started shorting the stock. Because insiders own most of the stock, there is very little float and borrowing shares became a serious problem, which caused a short squeeze.

INDO Stock Price and WTI Oil Spot Price Year-to-Date

Corporate Business Structure

Indonesia Energy Corp is actually incorporated in the Cayman Islands, which owns another company in Hong Kong and that entity owns a number of different Indonesian oil companies. Being incorporated in the Cayman Islands is not really a problem, but given the increased issues in China, the Hong Kong ownership could become a future issue.

Ownership Structure

Because it is a foreign company they are not required to make many SEC filings that investors often use when analyzing companies. For example, they are not required to file Section 16 insider trades and holdings with the SEC. When they have made required filings there have been issues with some of those filings. Their original IPO filing in November 2018, for example, did not become effective until late December 2019 because of many, many amendments required by the SEC.

Then there is the issue of Indonesia. I have been trading in Indonesia since the late 1990’s and I have become used to some rather unusual issues associated with investing in that country. Even in Indonesia Energy’s 20-F risk disclosure discussion they mentioned:

“We operate in Indonesia, which is a jurisdiction known to be challenged by corruption. As such, we are subject, however, to the risk that we, our affiliated entities or our or their respective officers, directors, employees and agents may take action determined to be in violation of such anti-corruption laws.”

So it looks like they are even admitting their officers might get into trouble. Indonesia Energy in their investor presentation noted in the biography of one of their directors that he “holds the Certified Anti Money Laundering Specialist (CAMS-ACAMS) credential”. Evidently they assumed that this was important for investors to know. A number of years ago for a different Indonesian company in their discussion of results mentioned that their margins were squeezed in that period because of much higher “consulting fee” payments.

Their IPO was on December 23, 2019 at $11.00 per share for 1,363,637 shares, which raised a gross amount of $15 million. They originally wanted to raise $23 million. There are currently 7,647,788 shares outstanding. MADERIC Holdings Ltd owns 68.27% of the stock and Indonesia Energy’s CEO Dr. Wirawan Jusuf controls MADERIC. Another insider, HFO Investment Group, owns 4.42%, which is down from 5.85% after they sold some shares right after the meme stock price surge.

Oil Operations

First, Indonesia Energy does not own their oil or even the oil reserves. The oil is owned by the Indonesian government. They are just operators that explore and produce oil. All their oil is delivered via a pipeline to the Plaju refinery, which is owned by Pertamina – a government owned oil company. The government also sets the prices.

Their contract with Pertamina for Kruh Block, which is their producing operations, was changed effective May 2020 to a KSO – Kerja Sama Operasi (Joint Operation Partnership) from a different contract type (Technical Assistance Contract). The reported income statements, therefore, before May 2020 can’t really be compared because the terms are so different. I have not been able to get an actual copy of the agreement, but there seems to be a baseline non-shareable amount that decreases as a well ages that is solely for Pertamina and only the amount over that is split. Their average revenue per barrel in 2021, based on their income statement and disclosed production numbers, was $40.05, which compares to the average Indonesia Oil price in 2021 of $67.02. It would seem that this would imply a total effective split of about 59.8%, which I assume factors in the non-shareable amount.

Their KSO is for only 10 years. I often read that many KSOs are for 20 years. I am not sure if there is an issue here or not, but these can be renegotiated with Pertamina. Anytime there are negotiations with the Indonesian government, directly and indirectly, there are potential “issues”, in my opinion based on my experiences investing in the country.

Indonesia Energy also has a contract for a different field, Citarum Block. This is under a PSA (Production Sharing Contract) with the government that goes until 2048, but there are a number of conditions that require continued expenditures on exploration. Currently they have no wells/production in this field.

They only have 5 producing oil wells. In their 2020 20-K filed in June 2020, they stated they planned to drill 11 wells in 2021. That never happened. Their oil production in 2021 decreased to 60,637 bbl from 72,524 bbl in 2020. One of the two wells they are planning on drilling this year did encounter oil sands according to a May 11 press release. There is some tables in a filing that indicated they were planning on drilling 4 wells in 2022, but I do not see where they would get the cash to drill a total of 4. The problem is this field is old and oil production drops quickly after the first month’s production and therefore, does not generate a lot of cash flow over a long period of time.

Income Statements

Given the INDO stock price and total market capitalization, their income statements are shocking, in my opinion. They are also burning cash. At the end of 2019 they had over $16 million cash, but according to their recent 20-F, they had only $1.91 million cash as of April 26, 2022 and this even after raising new money earlier this year (see below) and much higher oil prices.

Income Statements

Annual Cash Flow

A major red flag, in my opinion, is that the top executives’ pay collectively in 2021 was 41% of revenue, which was actually an improvement from 75% in 2020. What does the CEO do to be paid $297,000? The chief investment officer (he is not the CFO – that is a different person) gets paid $240,000. Where are Indonesia Energy’s “investments”? This is in Indonesia where the cost of living is much cheaper than the U.S., which makes these payments even more shocking. They only have 5 wells and their drilling and exploration activities are tiny.

Dilution Problem

There is some confusion over a pending F-1 registration to sell up to 9,100,574 shares. At first glance one would think that Indonesia Energy is trying to raise about $135 million using the latest INDO stock price. Wrong! None of the proceeds from the sale of INDO shares would go to the company. This registration would enable a shareholder to sell their shares.

The number of shares is also confusing. The number is “up to” 9,100,574. L1 Capital, a Miami Beach based fund, wants to be able to sell INDO shares that they will receive over the next 14 months from multiple financing deals earlier this year and to sell shares from 767,240 warrants. The loans are being paid back by either cash or stock. Since Indonesia Energy does not have the cash, it is expected INDO stock will be used to back the $10 million loans. The value of the stock is the lessor of $6 per share or 90% of the stock price, subject to a $1.20 floor. So the lower the stock price, the more shares will be used to pay off the loans.

In theory, they could get up to 8,333,334 shares for their loans, assuming the $1.20 minimum value per share. Since INDO is trading around $15, it would currently seem that they would get 1,666,667 shares using the $6 per share figure. In addition, L1 Capital would get 767,240 INDO shares for their warrants. This totals to be 2,433,907 shares worth $36.5 million using the latest INDO price of $15. That is a very nice profit on a $10 million financing deal. This would create significant dilution for the current 7,647,788 shares outstanding, but converting the warrants at $6 per share would raise about $4.6 million for the company.

This sale of these INDO shares could result in a total of more 10 million shares outstanding, which would have a $150 million capitalization using the latest trading price. This compares to only $2.45 million in total revenue in 2021. This begs the question about what happened to efficient markets?

Conclusion

I looked at Indonesia Energy as a possible oil investment over the years, but their payments to their executives was a red flag. It seems they exist just for a select group of executives, in my opinion. I understand that Indonesian businesses have their own set of standards that are different than in the US and I understand that “consulting fees” are frequently paid to get things done. I do not, however, see how they can drill enough new wells to justify the current stock price. I also question where they would get the cash to finance these drilling projects.

I think that just buying an oil stock because of the expectation of higher oil prices without actually doing some basic due diligence is completely irrational. While meme traders don’t care, real investors should care. I rate Indonesia Energy a sell, but because of the very small float I would not consider selling short.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Indonesia Energy Corporation is an oil and gas E&P business with an outstanding team comprising large players in the United States.
• The company believes that production could increase sufficiently to deliver a cash flow increase of more than 200% y/y.
• With the new information about the drilling of INDO’s producing block, I believe that the NPV of this asset could be worth $380 million.

Indonesia Energy Corporation Limited (NYSE:INDO) is spiking up after management reported new information about the drilling process in the Kruh Block. In addition, the recent increase in crude oil price is moving the market. I counted the total production of crude oil from the Kruh Block, and believe that the company could be worth more than $380 million. If we also assume the exploration of the Citarum Block and the Rangkas area, the valuation could be even more significant.

Indonesia Energy Corporation: Current Team And The Kruh Block May Explain The Recent Increase In The Stock Price

Indonesia Energy Corporation is an oil and gas E&P business with an outstanding team comprising large players in the United States.

Among the members of the board and the management, I would highlight the profile of the President, who is a former President of Texaco. Another well-known veteran is the CFO, who was also the CFO of PEDEVCO (PED). I decided to conduct research on the company after reviewing the team. Readers may want to do the same:

Along with the team, the reason to explain why the current valuation is at its maximum level comes from several numbers delivered very recently. As of March 10, 2020, management reported that it had successfully mobilized the drilling rig to drill 2 back-to-back producing wells. Besides, management expects that each well would generate $2.6 million in net revenue in its first twelve months:

Indonesia Energy Corporation announced that the company has mobilized the drilling rig to drill 2 back-to-back producing wells at its 63,000-acre Kruh Block. Based on the terms of IEC’s contract with the Indonesian government and an oil price of $95.00/barrel (which is 15% below yesterday’s closing price for Brent), each well is expected to generate $2.6 million in net revenue in its first twelve months, which is enough to recover the cost of drilling the wells in the first year of production. Source: Indonesia Energy Mobilizes Drilling Rig to Commence

The new information and the recent massive stock price increase interested me quite a bit. I decided to assess the valuation and potential production of Indonesia Energy’s Kruh Block.

The Net Present Value Of Kruh Block Could Reach $380 Million

In order to assess the valuation of Kruh Block, I noted certain assumptions made by management. First, the company believes that production could increase sufficiently to deliver a cash flow increase of more than 200% y/y:

Another critical information that I obtained from a recent presentation to investors is the fact that management works with an average production cost of $24.51 per barrel. The figure may be a bit old as economies of scale could apply. With that, I will be using this financial figure because it is the only indication about the cost per barrel that I could find:

From the company’s website, I obtained a combined proved developed and undeveloped gross crude oil reserves of 4.99 million barrels. I also assumed that the company could be producing more than 9,900 barrels of oil per month. It means that we would be talking about almost 0.119 million barrels per year:

Kruh Block covers an area of 258 square kilometers (63,753 acres) in Sumatra, Indonesia. This block produced an average of about 9,900 barrels of oil per month. Source: Company’s Website

Out of the total eight proved and potentially oil bearing structures in the block, three structures (North Kruh, Kruh and West Kruh fields) have combined proved developed and undeveloped gross crude oil reserves of 4.99 million barrels. Source: Company’s Website

I used the previous information and assumed that the block will operate until 2030. I also assumed that the oil price will range from $130 in 2022 to $40 in 2032. With the production per barrel at $25 and a WACC of 5%, I obtained a total net present value close to $380 million. Hence, I believe that there may be even more upside potential in the stock price:

The Market Capitalization Could Increase Even Further Thanks To The Exploration Citarum Block And The Rangkas Area

I do believe that we can see increases in the market capitalization if Indonesia Energy does relevant exploration work in the Citarum Block and the Rangkas Area. The team running Indonesia Energy is exceptional, and reports a lot of expertise and know-how obtained from large companies in the United States. So, I am quite optimistic about the company’s exploration activities:

We currently have rights through contracts with the Indonesian government to one oil and gas producing block (called Kruh Block) and one oil and gas exploration block (called Citarum Block). We have also identified a potential third exploration block, known as the Rangkas Area, and we may seek to acquire or otherwise obtain rights to additional oil and gas producing assets. Source: Operating Review For The Six Months Ended June 30, 2021

Great Expectations And The Income Statement Indicate That Expenses Are Increasing At A Large Pace

With most analysts out there expecting triple-digit sales growth in 2022, I don’t believe that reviewing what happened in the past is very relevant. With that, I need to note one thing about the total expenses reported by Indonesian Energy:

In the last prospectus, INDO reported a significant increase in the total amount of general and administrative expenses. In my view, this is a great signal. More expenses mean that INDO is exploring more, and paying more personnel for oil production. As a result, I do believe that revenue growth will likely accelerate too:

Balance Sheet

INDO’s balance sheet looks healthy with an asset/liability ratio of 3.7x. Cash in hand also represents 45% of the total amount of assets, so the company has liquidity to invest in capital expenditures in the coming years. Interestingly, oil and gas properties increased quite a bit in 2021:

I am not concerned about INDO’s total amount of debt. I only saw a bank loan worth less than $1 million, which is significantly lower than the current amount of cash in hand:

Risk From Geographic Concentration Of Exploration And Production As Well As Supply Contracts In Indonesia

The company highlighted the fact that it is mostly based in Indonesia. If anything very relevant happens in the country, the revenue line may decline. In my view, if management really wants to receive investments, it will need to diversify its exploration efforts a bit more:

Our business focus is on oil and gas exploration in limited areas in Indonesia and exploitation of any significant reserves that are found within our license areas. As a result, we lack diversification, in terms of both the nature and geographic scope of our business. We will likely be impacted more acutely by factors affecting our industry or the regions in which we operate than we would if our business were more diversified. If we are unable to diversify our operations, our financial condition and results of operations could deteriorate. Source: F-1

INDO will have to negotiate under a jurisdiction that is very different from that of the United States, which is a significant risk. Under the agreements that INDO will have to sign, there is the take-or-pay arrangement, which could make the company lose a significant amount of money:

The common clause in gas supply contracts is a “take-or-pay arrangement” in which the buyer is required to either pay the price corresponding to certain pre-agreed quantities of natural gas and offtake such quantities or pay their corresponding price regardless of whether it purchases them. Under certain circumstances, such as industrial or economic crisis in Indonesia or globally, the buyer may be unwilling or unable to make these payments, which could trigger a renegotiation of contracts and become the subject of legal disputes between parties. Source: F-1

Without Sufficient Financing, INDO May Not Be Able To Finance CapEx, Which May Lower The Expected Production

If INDO raises less capital than expected, the company’s expected production figures may be lower than initially projected. If analysts do notice that the company will not deliver the expected cash flow, investors may sell their stakes, which may make the stock price fall. I would say that the company could fail to touch even INDO’s cash per share:

We cannot assure you that we will have sufficient capital resources in the future to finance all of our planned capital expenditures. This is particularly the case as we raised less funds than we had anticipated in our December 2019 initial public offering, which has required us to modify our drilling and other operational plans during 2020 and 2021. Source: F-1

Conclusion

INDO benefits from the increase in the crude oil price. In my view, the market does like quite a bit the team of professionals inside the organization. With the new information about the drilling of INDO’s producing block, I believe that the NPV of this asset could be worth $380 million. But that’s not all. If management is also successful in the exploration of the Citarum Block and the Rangkas area, the total valuation could be even more significant. Yes, there are also some risks. In fact, I will be following INDO in any case.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Indonesia Energy Corporation Undervalued Due To Oil Price Increases And Drilling In The Kruh Block appeared first on Up2info.com.

• Indonesia Energy has filed proposed terms for a $15 million U.S. IPO of its common stock.
• The firm is an oil exploration & production company with assets in Indonesia.
• INDO has produced unpredictable and high variable financial results, so I’m passing on the IPO.

Quick Take

Indonesia Energy (NYSE:INDO) has filed to raise $15 million in gross proceeds in a U.S. IPO of its common stock, per an amended registration statement.

The company is an exploration and production firm with assets in Indonesia.

INDO is a tiny company with widely fluctuating financial results. I’m avoiding the IPO.

Company & Technology

Jakarta, Indonesia-based INDO was founded in 2014 and currently holds two oil and gas assets through its operating subsidiaries in Indonesia, namely the Kruh Block, a producing block, and the Citarum Block – an exploration block.

The firm has also identified a potential third block located in the Rangkas Area.

Management is headed by Co-Founder, Director and CEO Dr. Wirawan Jusuf, who previously co-founded and served as a Commissioner of Pt. Asiabeef Biofarm Indonesia.

INDO acquired rights to the Kruh Block in 2014 and started its operations in Nov 2014 through its local subsidiary Green World Nusantara, under a Technical Assistance Contract [TAC] with Pertamina – Indonesia’s state-owned oil and natural gas corporation – until May 2020, after which operatorship of the block will continue as a Joint Operation Partnership [KSO] for 10 years until May 2030.

The Kruh Block, located 25 km northwest of Pendopo, Pali, South Sumatra and covering an area of 258 square km (or 63,753 acres), is capable of producing an average of approximately 9,000 barrels gross of oil per month.

Below is an overview map of the Kruh Block and its producing fields:

Source: Company registration statement

Since 2014, the company has increased its Kruh Block gross production from 250 Barrels of Oil Per Day [BOPD] in 2014 to 400 BOPD gross in early 2018, which management believes the company achieved by the drilling of three new wells and upgrade of the production facilities.

The Citarum Block covers an area of 3,924.67 square km (or 969,807 acres) and is located onshore in West Java, only 16 miles away from Jakarta, Indonesia’s capital.

INDO is focused on the acquisition of medium-sized blocks as they are mostly overlooked by major oil and gas exploration companies who compete with larger oil assets.

Market & Competition

According to a 2018 market research report by The Asean Post, the Indonesian oil and gas industry accounted for nearly 25% of the country’s economy in 2006 and had decreased to 3% in 2016, as shown by the chart below:

The main factors driving market decline were falling demand for oil as well as an oversupply of the commodity, which resulted in a decline of prices per barrel from $115 in June 2014 to under $35 by the end of February 2016.

Moreover, investments for oil and gas exploration in Indonesia had fallen from $1.3 billion in 2012 to $100 million in 2016.

The country has launched initiatives to revitalize the sector, while the report cites its Energy and Mineral Resources Minister, Ignasius Johan, who forecasts $200 billion in investments over the next 10 years through incentives, including tax-free imports of drilling equipment and cost recovery.

Despite that, Southeast Asian oil analyst Johan Utama says that Indonesia’s constantly changing regulations inspire the feeling of an unstable industry, which would serve to drive investors away.

A PwC report titled Oil and Gas in Indonesia 2017 put a highlight on Indonesia’s challenge of depletion in oil resources and the availability of new reserves.

According to the International Energy Agency [IEA], Indonesia is the third-largest geothermal power producer in the world while the country’s Energy Ministry plans to increase the nation’s geothermal production capacity to 5,000 MW by the end of 2025.

Major competitors for the acquisition of new oil blocks include Pertamina, Indonesia’s state oil corporation, and other major oil and gas companies that operate in the country.

INDO’s recent financial results can be summarized as follows:

• Variable topline revenue, contracting in the most recent period

• Fluctuating gross profit

• A swing to operating loss

• Varying cash flow from operations – most recently negative

Below are relevant financial metrics derived from the firm’s registration statement:

Click to enlarge

Source: Company registration statement

As of June 30, 2019, the company had $6.2 million in cash and $8.5 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2019, was $1.2 million.

IPO Details

INDO intends to sell 1.5 million shares of its ordinary shares at a midpoint price of $10.00 per share for gross proceeds of approximately $15.0 million, not including the sale of customary underwriter options.

It is customary for foreign domiciled firms to sell American Depositary Shares to U.S. investors as a convenience, so the lack of this element is a negative signal.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $70.8 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 20.0%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We plan to use the net proceeds of this offering primarily to fund the development of the Kruh Block and exploration of the Citarum Block as part of our strategy for adding new reserves and developing the field after discovery, and for general working capital and corporate purposes.

However, the registration statement has left blank the percentages of the net proceeds that the firm will devote between the two blocks.

Management’s presentation of the company roadshow is available here.

The sole listed underwriter of the IPO Aegis Capital Corp.

Commentary

INDO is seeking a tiny IPO transaction on U.S. markets at a challenging time for any company to go public, let alone an unknown Indonesian energy company.

Perhaps management has private investors lined up to buy the IPO so it can float its shares.

The firm’s financials are very spotty, with a high degree of variability even in light of the fluctuating price of oil in various markets.

Aegis Capital Corp. is the sole underwriter and there is no data on IPOs the firm has been involved with over the last 12-month period.

The production opportunity for the firm’s assets is interesting, so maybe INDO will hit a ‘gusher’ and prove me wrong.

In the meantime, I’ll be watching this IPO from the sidelines.

Expected IPO Pricing Date: To be announced.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post IPO Update: Indonesia Energy Files Terms For $15 Million U.S. IPO appeared first on Up2info.com.

• Indonesia Energy has filed its initial registration statement for a U.S. IPO.
• The firm is developing oil & gas resources in Indonesia.
• INDO is tiny, but turned a profit in 2018 and has potential for more growth.

Quick Take

Indonesia Energy (NYSE:INDO) has filed to raise gross proceeds of up to $23 million from a U.S. IPO, according to an F-1 registration statement.

The firm operates as an oil and gas exploration and production company focused on Indonesia.

INDO is a small company with promising resources but a short operating history and subject to significant currency swings.

I’ll provide an update when we learn more IPO details.

Company & Technology

Jakarta, Indonesia-based INDO was founded in 2014 and currently holds two oil and gas assets through its operating subsidiaries in Indonesia, namely the Kruh Block, a producing block, and the Citarum Block – an exploration block.

The firm has also identified a potential third block located in the Rangkas Area.

Management is headed by Co-Founder, Director and CEO Dr. Wirawan Jusuf, who previously co-founded and served as a Commissioner of Pt. Asiabeef Biofarm Indonesia.

INDO acquired rights to the Kruh Block in 2014 and started its operations in Nov 2014 through its local subsidiary Green World Nusantara, under a Technical Assistance Contract [TAC] with Pertamina – Indonesia’s state-owned oil and natural gas corporation – until May 2020, after which operatorship of the block will continue as a Joint Operation Partnership [KSO] for 10 years until May 2030.

The Kruh Block, located 25 km northwest of Pendopo, Pali, South Sumatra and covering an area of 258 square km (or 63,753 acres), is capable of producing an average of approximately 9,000 barrels gross of oil per month.

Below is an overview map of the Kruh Block and its producing fields:

Source: Company registration statement

Since 2014, the company has increased its Kruh Block gross production from 250 Barrels of Oil Per Day [BOPD] in 2014 to 400 BOPD gross in early 2018, which management believes the company achieved by the drilling of three new wells and upgrade of the production facilities.

The Citarum Block covers an area of 3,924.67 square km (or 969,807 acres) and is located onshore in West Java, only 16 miles away from Jakarta, Indonesia’s capital.

INDO is focused on the acquisition of medium-sized blocks as they are mostly overlooked by major oil and gas exploration companies who compete with larger oil assets.

Market & Competition

According to a 2018 market research report by The Asean Post, the Indonesian oil and gas industry accounted for nearly 25% of the country’s economy in 2006 and had decreased to 3% in 2016, as shown by the chart below:

The main factors driving market decline were falling demand for oil as well as an oversupply of the commodity, which resulted in a decline of prices per barrel from $115 in June 2014 to under $35 by the end of February 2016.

Moreover, investments for oil and gas exploration in Indonesia had fallen from $1.3 billion in 2012 to $100 million in 2016.

The country has launched initiatives to revitalize the sector, while the report cites its Energy and Mineral Resources Minister, Ignasius Johan, who forecasts $200 billion in investments over the next 10 years through incentives, including tax-free imports of drilling equipment and cost recovery.

Despite that, Southeast Asian oil analyst Johan Utama says that Indonesia’s constantly changing regulations inspire the feeling of an unstable industry, which would serve to drive investors away.

A PwC report titled Oil and Gas in Indonesia 2017 put a highlight on Indonesia’s challenge of depletion in oil resources and the availability of new reserves.

According to the International Energy Agency [IEA], Indonesia is the third-largest geothermal power producer in the world while the country’s Energy Ministry plans to increase the nation’s geothermal production capacity to 5,000 MW by the end of 2025.

Major competitors for the acquisition of new oil blocks include Pertamina, Indonesia’s state oil corporation, and other major oil and gas companies that operate in the country.

Financial Performance

INDO’s recent financial results can be summarized as follows:

• Growing topline revenue

• A swing to positive operating profit and operating margin

• Small comprehensive income

• A swing to positive cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Click to enlarge

Source: Company registration statement

As of December 31, 2019, the company had $2.9 million in cash and $4.8 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was $1.9 million.

IPO Details

INDO intends to raise $23.0 million in gross proceeds from an IPO of its ordinary shares.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

We plan to use the net proceeds of this offering primarily to fund the exploration of the Citarum Block as part of our strategy for adding new reserves and developing the field after discovery, and for general working capital and corporate purposes.

Management’s presentation of the company roadshow isn’t available yet.

The sole listed underwriter of the IPO is Maxim Group.

Commentary

INDO is seeking to raise a small fund to explore its Citarum Block of potential resources, which covers an area of 3,924 square kilometers in West Java, about 16 miles south of Jakarta, the capital city of Indonesia.

Indonesia is a country with significant energy and energy management challenges. Just recently the country faced a nine-hour blackout in the Jakarta and Java regions.

INDO’s financials show a very small exploration firm that has swung to comprehensive profit and positive cash flow, likely a function of the recovering price of oil combined with an impressive increase in total production for 2018 versus 2017.

Management also disclosed that its average production cost per barrel of oil dropped in 2018 to $21.34, making the firm more efficient in the process and able to produce profits at relatively low sale prices for its oil, even taking into account transportation costs.

Also, the firm’s currency is the Indonesian Rupiah [IDR], which has been subject to fluctuations against the US dollar, losing 17.6% of its value in the past five year period, as shown in the chart below:

INDO is a tiny firm with only a few years of operating history and little in the way of operations. When we learn more IPO details from management, I’ll provide an opinion.

Expected IPO Pricing Date: To be announced.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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