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Indonesia Energy Undervalued Due To Oil Price Increases (NYSE:INDO)

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Indonesia Energy Corporation Limited (INDO) is spiking up after administration reported new details about the drilling course of within the Kruh Block. In addition, the current improve in crude oil worth is transferring the market. I counted the full manufacturing of crude oil from the Kruh Block, and imagine that the corporate may very well be value greater than $380 million. If we additionally assume the exploration of the Citarum Block and the Rangkas space, the valuation may very well be much more important.

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 fuel E&P enterprise with an impressive group comprising giant gamers within the United States.

Among the members of the board and the administration, I’d spotlight the profile of the President, who’s a former President of Texaco. Another well-known veteran is the CFO, who was additionally the CFO of Pedevco (PED). I made a decision to conduct analysis on the corporate after reviewing the group. Readers might wish to do the identical:

Presentation To Investors January 2022

Presentation To Investors January 2022

Along with the group, the rationale to elucidate why the present valuation is at its most stage comes from a number of numbers delivered very just lately. As of March 10, 2020, administration reported that it had efficiently mobilized the drilling rig to drill 2 back-to-back producing wells. Besides, administration expects that every properly would generate $2.6 million in internet income in its first twelve months:

Indonesia Energy Corporation introduced that the corporate has mobilized the drilling rig to drill 2 back-to-back producing wells at its 63,000-acre Kruh Block. Based on the phrases of IEC’s contract with the Indonesian authorities and an oil worth of $95.00/barrel (which is 15% under yesterday’s closing worth for Brent), every properly is anticipated to generate $2.6 million in internet income in its first twelve months, which is sufficient to get better the price of drilling the wells within the first 12 months of manufacturing. Source: Indonesia Energy Mobilizes Drilling Rig to Commence

INDO price

Ycharts

The new data and the current large inventory worth improve me fairly a bit. I made a decision to evaluate the valuation and potential manufacturing of Indonesia Energy’s Kruh Block.

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

In order to evaluate the valuation of Kruh Block, I famous sure assumptions made by administration. First, the corporate believes that manufacturing may improve sufficiently to ship a money circulate improve of greater than 200% y/y:

Presentation To Investors January 2022

Presentation To Investors January 2022

Another vital data that I obtained from a current presentation to traders is the truth that administration works with a mean manufacturing price of $24.51 per barrel. The determine could also be a bit outdated as economies of scale may apply. With that, I might be utilizing this monetary determine as a result of it’s the solely indication about the price per barrel that I may discover:

Presentation To Investors January 2022

Presentation To Investors January 2022

From the corporate’s web site, I obtained a mixed proved developed and undeveloped gross crude oil reserves of 4.99 million barrels. I additionally assumed that the corporate may very well be producing greater than 9,900 barrels of oil per thirty days. It implies that we’d be speaking about nearly 0.119 million barrels per 12 months:

Kruh Block covers an space of 258 sq. kilometers (63,753 acres) in Sumatra, Indonesia. This block produced a mean of about 9,900 barrels of oil per thirty days. Source: Company’s Website

Out of the full eight proved and doubtlessly oil bearing constructions within the block, three constructions (North Kruh, Kruh and West Kruh fields) have mixed proved developed and undeveloped gross crude oil reserves of 4.99 million barrels. Source: Company’s Website

Presentation To Investors January 2022

Presentation To Investors January 2022

I used the earlier data and assumed that the block will function till 2030. I additionally assumed that the oil worth will vary from $130 in 2022 to $40 in 2032. With the manufacturing per barrel at $25 and a WACC of 5%, I obtained a complete internet current worth near $380 million. Hence, I imagine that there could also be much more upside potential within the inventory worth:

Qingshan capital Management

Qingshan capital Management

Ycharts

Ycharts

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

I do imagine that we will see will increase available in the market capitalization if Indonesia Energy does related exploration work within the Citarum Block and the Rangkas Area. The group working Indonesia Energy is phenomenal, and stories quite a lot of experience and know-how obtained from giant corporations within the United States. So, I’m fairly optimistic in regards to the firm’s exploration actions:

We presently have rights by way of contracts with the Indonesian authorities to 1 oil and fuel producing block (known as Kruh Block) and one oil and fuel exploration block (known as Citarum Block). We have additionally recognized a possible third exploration block, referred to as the Rangkas Area, and we might search to accumulate or in any other case get hold of rights to further oil and fuel producing belongings. 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 on the market anticipating triple digit gross sales progress in 2022, I do not imagine that reviewing what occurred previously may be very related. With that, I want to notice one factor in regards to the complete bills reported by Indonesian Energy:

Market Screener

Market Screener

In the final prospectus, INDO reported a big improve within the complete quantity of basic and administrative bills. In my view, it is a nice sign. More bills imply that INDO is exploring extra, and paying extra personnel for oil manufacturing. As a outcome, I do imagine that income progress will seemingly speed up too:

Operating Review For The Six Months Ended June 30, 2021

Operating Review For The Six Months Ended June 30, 2021

Balance Sheet

INDO’s steadiness sheet seems to be wholesome with an asset/legal responsibility ratio of three.7x. Cash in hand additionally represents 45% of the full quantity of belongings, so the corporate has liquidity to spend money on capital expenditures within the coming years. Interestingly, oil and fuel properties elevated fairly a bit in 2021:

F-1

F-1

I’m not involved about INDO’s complete quantity of debt. I solely noticed a financial institution mortgage value lower than $1 million, which is considerably decrease than the present amount of money in hand:

F-1

F-1

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

The firm highlighted the truth that it’s principally based mostly in Indonesia. If something very related occurs within the nation, the income line might decline. In my view, if administration actually needs to obtain investments, it might want to diversify its exploration efforts a bit extra:

Our enterprise focus is on oil and fuel exploration in restricted areas in Indonesia and exploitation of any important reserves which can be discovered inside our license areas. As a outcome, we lack diversification, when it comes to each the character and geographic scope of our enterprise. We will seemingly be impacted extra acutely by components affecting our trade or the areas wherein we function than we’d if our enterprise have been extra diversified. If we’re unable to diversify our operations, our monetary situation and outcomes of operations may deteriorate. Source: F-1

INDO must negotiate below a jurisdiction that may be very completely different from that of the United States, which is a big threat. Under the agreements that INDO must signal, there may be the take-or-pay association, which may make the corporate lose a big sum of money:

The frequent clause in fuel provide contracts is a “take-or-pay arrangement” wherein the client is required to both pay the value akin to sure pre-agreed portions of pure fuel and offtake such portions or pay their corresponding worth no matter whether or not it purchases them. Under sure circumstances, corresponding to industrial or financial disaster in Indonesia or globally, the client could also be unwilling or unable to make these funds, which may set off a renegotiation of contracts and turn out to be the topic of authorized disputes between events. Source: F-1

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

If INDO raises much less capital than anticipated, the corporate’s anticipated manufacturing figures could also be decrease than initially projected. If analysts do discover that the corporate is not going to ship the anticipated money circulate, traders might promote their stakes, which can make the inventory worth fall. I’d say that the corporate may fail to the touch even INDO’s money per share:

We can’t guarantee you that we are going to have ample capital assets sooner or later to finance all of our deliberate capital expenditures. This is especially the case as we raised much less funds than we had anticipated in our December 2019 preliminary public providing, which has required us to change our drilling and different operational plans throughout 2020 and 2021. Source: F-1

Conclusion

INDO advantages from the rise within the crude oil worth. In my view, the market does like fairly a bit the group of execs contained in the group. With the brand new details about the drilling of INDO’s producing block, I imagine that the NPV of this asset may very well be value $380 million. But that is not all. If administration can be profitable within the exploration of the Citarum Block and the Rangkas space, the full valuation may very well be much more important. Yes, there are additionally some dangers. In truth, I might be following INDO in any case.

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