There has been a strong recovery in Brent crude prices after the ease of the global lockdown measures resulting in increased travel and transportation activity. There have been supply concerns in the past associated with tensions between Yemen and Saudi Arabia and the prices are facing a strong upward momentum given the expected increase in fuel consumption in the US, Europe, and China in the summer of 2021 after the easing of the Covid-related restrictions. Given this background, we believe that our readers at SmallCapsDaily can seize a particularly interesting oil and gas opportunity – Indonesia Energy (AMEX:INDO). The company has a high-quality management with excellent field expertise and a large base of tangible assets associated with the value of its drilling sites. Moreover, it is the only oil and gas company from the huge Indonesian oil and gas market that is listed on the American stock exchanges which is why it is a particularly unique opportunity for our readers.
Indonesia Energy – A Quick Recap
Indonesia Energy is an integrated energy resources development company engaged in the oil and gas business that operates primarily in Indonesia. The company’s foremost assets include Kruh Block which is a stable cash-generating oil asset and its Citarum Block, a natural gas block with the potential to produce 450 million standard cubics of gas per day. In addition, the company also conducted a joint study program to acquire an area called the Rangkas Area that is expected to hold large amounts of crude oil. Moreover, the company has been recognized by Pertamina, the state oil and gas company, as the top three performers in 2020 among 19 oil and gas producing companies in Indonesia.
Drilling Campaign At The Kruh Block
Indonesia Energy announced on April 22nd that the company commenced the drilling of 3 new back-to-back oil-producing wells on its 63,000-acre Kruh Block
that are expected to average about 173 barrels of oil per day over the first year of production. The management believes that these wells have the potential to grow the production and cash flow of Indonesia Energy by almost 400% in the next 12 months owing to a higher demand for oil in the coming years and the excellent infrastructure of pipelines in Indonesia. If we look ahead even further, the management plans to drill a total of 18 new wells on Kruh Block within 3 years. It is worth noting that every well provides a triple-digit rate of return given the fact that the unit level are approximately $1.5 million for each well but it has the potential to generate a net cash flow of $3.3 million dollars. As per the management, the company’s drilling operations are expected to decrease the production cost to below $20 per barrel which is much below the prevailing crude oil price. This will contribute significantly to the top-line growth of the company in the years to come.
The management stated that as soon as the company completes a well, the oil starts to flow immediately which means after almost 30 days of drilling the company actually has cash coming in. This swift revenue generation is the reason why Indonesia Energy is expected to have enough cash on its balance sheet to keep drilling wells further. Given the fact that Indonesia as a country is a net importer of oil, the management believes that the demand for energy products is expected to rise and Indonesia energy is well-positioned to benefit from this by increasing its production as well as lowering its costs.
Citarum & Rangkas Upside
Citarum block is another valuable asset of Indonesia Energy which is operated under a production sharing contract with the Government of Indonesia based on a gross split regime until July 2048. Located 16 miles from Jakarta, this 1 million acre block has a proven hydrocarbon presence with growing gas demand and an established gas pipeline infrastructure network. According to the management Citarum’s economic model assumes a conservative 28% exploration success rate, producing in 8 out of 28 prospects in the block which gives the company an opportunity to acquire significant market share via the Citarum appraisal and development program. The company continues to perform extensive analysis of the underground structure and believes that the field is commercially viable.
Citarum was previously managed by Pan Orient Energy Corp that invested $40 million on development in this block and successfully discovered hydrocarbons. As a result, management considers this as a risk-free asset from which gas produced can be directly distributed into the market. It is worth mentioning that the Northwest Java basin, where Citarum is located, currently produces 45,000 barrels of oil per day and 450 million standard cubics per day of gas. The management stated that after getting the production license the company may start drilling its first well by the first quarter of 2022 and also believes that assets like Citarum have the potential to add enormous value to the company in the long run.
Apart from this, the company has also identified a potential third block which is an onshore open area called Rangkas Area. It is a high-quality hydrocarbon-bearing area adjacent to the company’s Citarum block and is expected to have crude oil reserves as well as the existence of multiple oil seeps and one gas seep.
As per the data of the American Petroleum Institute (API), the recovery in the demand for crude oil is underway after the pandemic and the supply concerns remain with the continued geopolitical tensions in the Middle East. There is a high probability that the years 2021 and 2022 could easily become the greatest bull run for oil prices all over the world which could heavily benefit companies like Indonesia Energy.
As we can see in the above chart, Indonesia Energy has appreciated by over 10% in the past 6 months with the oil prices recovering and there is a long way to go. It is an indication of the fact that the markets are gradually factoring in the high-growth potential of the stock. However, there is still plenty of steam left in it. The anticipated increase in demand for oil in a post-pandemic environment coupled with the possibility of partnerships with oil and gas giants like Chevron make Indonesia Energy a potential billion-dollar company in the coming years. It is definitely a compelling investment proposition for microcap investors who are looking for high-growth oil and gas companies in emerging markets.