3 Reasons to Avoid Indonesia Energy for Now

Stocks to sell
  • Indonesia Energy (INDO) has been less consistent than many of its peers.
  • Elevated oil prices due to the Russian invasion of Ukraine won’t last forever.
  • Dilution and poor financials make INDO stock less interesting as an investment than other energy stocks.
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Indonesia Energy (NYSEAMERICAN:INDO) may have surged into the public eye in the wake of Russia’s invasion of Ukraine, but I would avoid it here for three key reasons.

The oil price rally that followed the invasion may have pushed the stock of this small-capitalization company to parabolic price action. But INDO stock lacks consistency in its business operations, the war premium in oil prices won’t buoy it forever and the financials aren’t anything to write home about.

So if you had to choose between two companies — one that is consistent in generating revenue and another that is showing hardly any evidence of existing business operations — which one would you spend more time (and likely money) on? All odds are in favor of the firm with a consistent trend in sales, as it is less risky from the beginning. Which is why I think there are better options than INDO stock in the energy space.

 INDO Indonesia Energy $25.34

INDO Stock Is a Dormant Company That Just Woke Up

Indonesia Energy reported revenue of $1.98 million in 2020, $4.18 million in 2019, and $5.86 million in 2018. This information is taken from the latest form 20-F, dated May 17, 2021.

Why did I mention Indonesia Energy as a dormant company, you may ask? Because it had that large decline in revenue in 2019 and 2020, while simultaneously experiencing a large increase in general and administrative expenses. In 2020, general and administrative expenses reported were almost nearly 2.7 times higher than 2019 — that’s $6.53 million versus $2.43 million.

General and administrative expenses are the daily costs a business must pay to operate, regardless of manufacturing products or generating revenue. Typical G&A expenses include costs like rent, utilities, and salaries for administrative and management staff.

The combination of those expenses increasing while seeing a severe decline in revenue is highly negative. It should be the other way round for a business to thrive.

Nevertheless, there is good news recently — the energy company announced back in January 2022 that it “expects to commence drilling of its next two (2) new wells at IEC’s 63,000-acre Kruh Block within 30 days. Additionally; IEC plans to commence drilling of a third new well at Kruh Block before the end of the second quarter.”

The expectations are for that well to eventually produce 450 barrels of oil per day, and with oil prices then near $80 per barrel, the company expected to become cash flow positive. Now that oil prices are near $110 per barrel, things look even better for Indonesia Energy.

My concern there, though, is that oil prices should become much more volatile soon.

Oil Prices Could Be Volatile

Oil prices have rallied lately because of the high geopolitical risks due to Russia’s invasion of Ukraine. There is too much speculation now, as well as a clear supply-demand imbalance. The war hopefully will end soon and this will eventually restore a state of relative calm in global markets.

I estimate that oil prices will fall significantly at that point since oil is a commodity and there is a seasonality pattern attached to it. As we move past summer, demand should slow down. And the end of the war in Ukraine, when it occurs, will be a positive shock for oil prices for consumers. The war premium will be over, and this should be reflected in the price.

Indonesia Energy Financials: Nothing to Cheer About

In 2020 and 2019 Indonesia Energy reported losses of -$6.95 million and -$1.67 million respectively, while it increased its shares outstanding by 22% to 7,395,120 shares in 2020 from 6,048,568 shares in 2019.

And the five-year trend of free cash flow is not positive either as in four out of five years as Indonesia Energy burned cash. The new wells could turn things around, but I would still avoid INDO stock for now due to these three factors. The risks are too high to ignore.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.

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