In recent months oil has seen a recent surge in price, reaching highs not attained since 2018 of almost $80.00 per barrel. Many investors may dismiss this rise in oil price because of most companies transitioning away from fossil fuels to more environmentally friendly renewable energy sources, however, this would be a mistake. The reality is fossil fuels are still the main energy source across many parts of the globe, and although renewable energy is where the focus lies in the long-term, the transition to these renewable energy sources will be a long and arduous journey. And some cases in particular, a select few countries are increasingly relying on oil and gas to support their growing economy.
Indonesia is currently one country that is trusting heavily on their oil and gas sector to provide energy to both ordinary citizens and businesses alike. And although Indonesia is perhaps not the most well-known or thought of country for investors looking for market beating returns, the countries reliance on oil and gas is presenting an incredibly interesting investment thesis for investors to capitalize on.
Company Profile
One such company that is poised perfectly to benefit from higher oil prices and an increased demand of energy consumption in Indonesia is Indonesian Energy Corp (INDO). Through its subsidiaries the company operates as an oil and gas exploration and production company with major operations across Indonesia. The company’s strategy is to build out a portfolio consisting of both medium sized producing blocks, as well as exploration blocks that present substantial potential resources to be exploited into the future.
Indonesian Energy currently has 3 major projects in their portfolio including their flagship project the Kruh Block, which, covering an area of 258 square kilometres has been producing 275 BOPD since 2019 and is owned by Indonesian Energy until 2030. The company’s other block Citarium has a 1-million-acre appraisal which will be controlled by Indonesian Energy until 2048, and with being only 16 miles from the capital of Indonesia Jakarta, there is significant pipeline infrastructure already in place. This Citarium block also presents a substantially de-risked opportunity for Indonesian Energy with both a long history of successful drilling within the past 10 years and being very close to major gas consumption areas within the country.
Indonesia Energy Set to Benefit from both High Demand of Energy and New Partnership with Government Administration
Indonesia has a fast-growing economy that is relying heavily on the oil and gas industry to supply their rising demand in energy. Initial estimates are showing a 740% expected increase in demand of electricity by 2050, 6.3% growth in natural gas/year, and a 5.3% total energy demand increase/year, with much of this demand taking place in West Java (very close to Indonesia Energy’s major operations). Indonesia Energy is looking to capitalize on this opportunity by adding a new and potentially very lucrative new block called the Rangkas Block. Located in West Java, adjacent to their Citarium block, Rangkas is a new opportunity the company believes holds large amounts of crude oil due to its proven petroleum system and crude oil deposits to the northwest.
The company has entered into a joint study program with the Government of Indonesia to identify the structural geology and potential of this new property. Only three wells are known to have been drilled within this area dating back to World War II, with all having indicated the presence of hydrocarbons.
This joint study program with the Government of Indonesia is only the first of many new initiatives the government is implementing to help their countries energy sector prosper. The government will also be introducing a new Production Sharing Contract (PSC) plan which is designed to allow oil and gas companies flexibility in operational activities with the intention to promote cost efficiencies and reduce delays in supply.
Indonesia Energy’s Flagship Kruh Block Continues to Outperform
Indonesia Energy has also recently announced back-to-back discoveries in their main Kruh block project. The company plans to conduct stimulation work and to commence production of both wells (“Kruh 25” and “Kruh 26”) this October. With both wells proving to be sizeable discoveries Indonesia Energy anticipates after full production has been achieved (which should be completed by the end of October) that their daily oil production and revenues will increase by at least 100%.
The company is truly flexing their operational muscles with these wells by taking only 18 days to finish drilling, which was approximately half the time leadership originally anticipated. Additionally, around 111 ft of oil sands were encountered in their latest mine between the depths of 3,100 and 3,228 ft, this oil-bearing interval was much larger than originally thought, meaning the total reserve is likely to be much bigger than originally anticipated.
Mr. Frank Ingriselli, Indonesia Energy’s President, commented on the exciting news by saying “The Kruh 26 well is a significant achievement for our company, which has now completed 2 discovery wells in less that 60 days. The plan is to now stimulate and commence production next month from both wells, which is expected to double our company’s daily revenue and production. This will set us up to drill the third well for the 2021 drilling program, known as “Kruh 27″, in the fourth quarter. We look forward to continuing to deliver on our development plans and maximize returns on our investments to grow shareholder value.”
Key Takeaway
Indonesia Energy’s 2021 operating plan was ambitious to say the least. The company planned to drill 5 producing wells on the Kruh block, achieve a production increase of 400%, finish conducting the appraisal and development activities of the Citarium block and fund new projects from free cash flow of existing projects. The company has more than delivered on these plans and is showing investors the strong tailwinds they have heading into 2022. The combination of increased energy consumption within Indonesia, rising oil prices and the favourable political policy set in place to help bolster capacity of domestic oil and gas companies one can start to see that Indonesia Energy has the infrastructure, strong leadership team and favourable market conditions to succeed in the coming years. And finally, with a market cap of only $31.86 million and trading at a meager 3.08 price to book ratio Indonesia Energy has the low valuation and strong growth potential to produce market thrashing returns.