INDO Stock is a high risk bet on rising oil prices

Indonesia Energy (NASDAQ:INDO) is an oil and gas company based in Jakarta. The company was originally established in 2014. It completed its IPO in New York in 2019. INDO shares started trading around the $11 per share market in late 2019.

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Soon, however, Covid-19 made its impact felt in the oil market and INDO stock plunged to just $4 per share in 2020. It will stay there until early 2022, when Indonesia Energy shares plummet. suddenly skyrocketed from $4.50 to $86 per share. in a few days. The stock has cooled significantly since that peak, however, stocks are still up over 600% year-to-date. This is even after the recent pullback.

Even here at $24.75 per share, Indonesia Energy is not an investment bargain. Here’s why investors should be careful about the name for the rest of 2022.

Not a big company

Indonesia Energy has been producing oil from its fields in Indonesia for some time now. However, it never managed to achieve a significant scale of operations.

Here are those of Indonesia Energy full year turnover during the last years. In 2017, the company generated $3.7 million in sales. This amount 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 annual results n has not yet been filed. However, it can be assumed that the results increase significantly compared to 2019 and 2020, given the current oil price situation.

Even if revenues exceed 2018 levels, which could well happen if oil prices remain high as they are now, the company would not generate much profit. That’s because the company spent $6.5 million on general and administrative expenses in 2020. That’s more spent on overhead than the company has ever generated in a full year of revenue.

Valuation is generous given the current condition

At the end of 2020, according to the latest information from the company investor presentation, it had approximately 2.6 million net barrels of proven crude oil reserves. That’s tiny by world oil and gas standards. To compare, ExxonMobil (NYSE:XOM) produces nearly 2.4 million barrels of oil and equivalents every day.

Of course, no one expects Indonesia Energy to compete with Exxon anytime soon. However, it’s important to point out how low Indonesia Energy’s current reserves are for a company with a market cap of over $150 million. INDO shares put a terribly high price on a company that has never generated more than $6 million in annual revenue and doesn’t have many proven exploitable crude oil assets.

The company is aiming for more growth through additional drilling. It’s certainly more promising in a world where the price of oil is above $100 a barrel, no doubt. However, all the risks are still there in terms of operating in an emerging market that is generally not one of the main destinations for oil and gas investors historically.

INDO Shares Verdict

Traders latched onto INDO stock I guess because it had a low price and a little stock float. This allowed Indonesia Energy to gain real positive momentum once buying interest appeared.

And at $5/share, you could make a reasonable case for Indonesia Energy as a speculative game. There, the market cap was closer to $30 million. Was $30 million an extortionate price for a wild little tanker that could generate $10 million or more in revenue in 2022 if oil prices stay high? No, it’s not too crazy. I can see the case for this bet.

Above $20/share, however, people are placing a simply massive premium on Indonesia Energy’s existing assets and operations. Of course, Indonesia Energy might be able to find a lot more oil in its exploration blocks there. However, this is the case with many oil and gas exploration companies that are trading today at much more normal valuations.

I see little justification for a high premium in INDO shares relative to the rest of its industry. As such, don’t be surprised if shares of Indonesia Energy continue to decline towards the $10 or $15 per share level in the coming weeks.

As of the date of publication, Ian Bezek held a long position in XOM stock. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

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


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Felix J. Dixon