Michael Heim, Senior Vice President, Equity Research Analyst, Energy & Transportation, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Indo extended its Kruh Block contract five years with an increased after-tax split. Indo’s contract with Pertamina, the state-owned oil and gas company, now extends to September 2035. The amended contract increases Indo’s after-tax split to 35% from 15%. The extension, while not unexpected, comes after Indo had suspended drilling in the Kruh Block to complete a well workover. The favorable extension helps justify Indo taking its time in the Kruh Block as it completes a 3D seismic program to optimize drilling locations. We believe the government was willing to agree to the settlement as a way to spur Indo to increase drilling activity.
An operational update provides little new information. The company also updated investors regarding drilling plans in the Kruh Block and the Citarum Block. Management reiterated plans to drill 14 additional wells in the Kruh Block by the end of 2026 with the next well starting in 2024. Management did indicate that it expects to receive an environmental permit for seismic activity in the Citarum Block in 2023-4Q with work to begin in 2024-1Q. Our models assume one well drilled in the Citarum Block and two wells drilled in the Kruh Block in 2024.
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This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Michael Heim, Senior Vice President, Equity Research Analyst, Energy & Transportation, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Indonesia Energy Filed Its 20-F (Foreign) Document with the SEC Providing Financial Data. Due to drilling and production delays, revenue growth has been slower than projected. The company continues to report negative cash flow and earnings as limited revenues are hard pressed to cover G&A costs. The result was a $4.5 million loss from operations for the year, an EBITDA loss of $3.5 million, and negative net income of $3.1 million ($0.35 per share). The results were below our expectations, although the Indo story is really one of operating developments, not near-term results.
Operations are quiet. The filing largely repeated previously stated plans for drilling in the Kruh Block (4 in 2024, 6 in 2025, and 4 in 2026). INDO has drilled four wells in the Kruh Block, the last of which is still awaiting final flow test results but expected to be put in production mid 2023. After the last well, the company put new drilling on hold to complete additional seismic studies. Importantly, limited production has meant that it may not be able to fully recover costs spent under the revenue sharing agreement (INDO has filed for an extension).
Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
Could Small Oil Companies Perform Especially Well With OPEC’s Reduced Output
Earlier this week, OPEC+ announced the cartel’s plans for production cuts. Saudi Arabia and other oil-producing members of OPEC+ defied expectations by announcing they would implement production cuts of around 1.1 million barrels a day. Prices of WTI and Brent crude quickly moved higher in the futures market – energy stocks followed. The increased cost of petroleum directly impacts the price of fuel and plastics and indirectly impacts goods that involve transportation – which is mostly all goods.
The decision by OPEC+ is highly likely to put upward pressure on CPI and PPI inflation measures as early as April. The CPI report for April will be released on May 10, and PPI on May 11. Id there good news for investors in the OPEC decision? What stocks might investors look at as potentially benefiting, assuming the OPEC countries adhere to the new production levels?
Background
U.S. markets were not open when the Organization of Petroleum Exporting Countries announced the large cut of over one million barrels per day. When regular trading resumed in the U.S. on Monday, oil prices jumped up 6.3%, and crude oil prices breached $80. Energy stocks, as measured by the Energy Sector SPDR (XLE) rose 4.5%. The price of crude based on futures contracts and the XLE have remained near these levels.
With change comes opportunity. Investors and traders are now trying to determine if this is the start of a new upward trend for the energy sector and, if so, what specific moves may benefit investors most.
One consideration they may have is that, although OPEC is cutting production, the members aren’t the only producers. Historically, domestic production was increased in N. America when prices climbed. This has been less so in recent years as the number of U.S. rigs operating hasn’t increased as might have been expected.
Will this dramatic price spike now prompt action from domestic producers? In his Energy Industry Report published on April 4, titled Why Domestic Producers Cannot Offset OPEC Production Cuts, Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, says that oil is produced in the U.S. at around $30-$40 per barrel. Heim says in his report, “If producers had the ability to ramp up drilling, we would have thought they would have done so even at $60/bbl. prices.”
Possible Beneficiaries
According to the Noble Analyst, large producers have been constrained from growing their oil operations which stems from political and even shareholder pressures to move away from carbon-based energy products. However, Heim says in his report, “Smaller producers face less pressure. Companies with ample acreage and drilling prospects are best positioned to take advantage of a prolonged oil price upcycle.”
In a conversation with the analyst, he shared that when oil prices spiked during the second half of the pandemic and later had added upward movement with the start of the Russia/Ukraine war, many small oil companies took in enough additional revenue to strengthen their finances. Some even began paying dividends for the first time, while others increased their regular dividend to shareholders.
These smaller oil producers not in the political spotlight that may reap additional benefits from OPEC’s cut could include Hemisphere Energy (HMENF). This company increased production by 55% in 2022. According to a research report by Noble Capital Markets initiating coverage on Hemisphere (dated April 3, 2023), “proven reserve findings and development costs are less than C$12/barrel, providing an extremely attractive return on investment for drilling.” It continued, “Hemisphere’s finding and development costs are among the lowest of western Canadian producers and reflect its favorable drilling locations and the company’s experience drilling in the area.” The increase in price per barrel could enhance cash flow for this North American producer, allowing it to expand production.
Permex Petroleum (OILCD, OIL.CN) is a junior oil and gas company that already had a significant upside potential before the jump in per-barrel prices. This boost in cash from higher oil prices and a possible uplisting to the NYSE, could work to benefit shareholders.
InPlay Oil (IPOOF) increased annual production last year by 58%. InPlay is an example of a smaller producer that has been able to increase drilling when prices rise. It has used increased cash flow to lower debt levels by 59% and pay shareholders with its first dividend payment.
Indonesia Energy Corporation Ltd. (INDO) is an oil and gas exploration and production company operating in Indonesia. The company plans on drilling 18 wells in the Kruh Block (four have been completed). Covid19 steps in the region where Indo Energy operates have pushed back drilling that was expected in 2023-2024 one year.
Take Away
With change comes opportunity. Higher oil prices will impact all of us that must still occasionally stop our internal combustion engine vehicles at gas stations. But the oil price increase may lead to a melting up of some stocks.
There are arguments that can be made that smaller, more nimble producers, not burdened by the political spotlight and perhaps enjoying a better financial position from the last run-up in oil, are worth looking into. A Channelchek search returned over 200 companies that may fall into this category. This search result is available here.
Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Kruh Well 28 finds oil formation in addition to previously announced gas reservoir. Indo reported reaching final depth in its fourth well in the Kruh field. As has been the case with the other three wells, oil has been discovered, this time with a wider oil band that had been expected. The company previously reported discovering natural gas at shallower levels as had been the case in Kruh Well 27. We view drilling in the Kruh Field as largely developmental so the successful discovery of hydrocarbons was not a surprise. It will take at least a month to complete the well before we can learn flow rate information, but management maintains that the wells have a twelve-month payback at current oil prices.
Well success prompts further seismic studies. Indo is planning to conduct new seismic operations across the entire Kruh Block to optimize drilling locations. The company still plans on drilling 18 wells in the block (four have been completed). Seismic studies will push back the drilling program twelve months into the 2024-25 time frame and will not begin until Kruh 27 and 28 have been brought on line. We had modeled six wells in 2023 and eight in 2024 and are pushing all drilling back a year. Indonesia Energy has faced a series of delays in its drilling program due to COVID, weather, and other factors.
This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).
*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision.
