The shares of Jakarta, Indonesia-based oil and gas exploration and production company Indonesia Energy Corporation Limited (INDO) have gained 61.9% in price over the past year and 169.5% over the past six months. The stock has gained 382.1% year-to-date to close yesterday’s trading session at $13.50. The company’s share price has been rocketing due to bullish sentiments surrounding the energy sector.

The rally in oil and gas prices due to the U.S.-Russia-Ukraine geopolitical crisis amid already tight supply from the OPEC+ favored INDO. Also, the company has outlined plans for drilling projects in 2022, which attracted investors’ attention.

Last month, INDO announced plans to commence drilling two new wells in its Kruh Block within 30 days. Also, it plans to begin drilling a third new well at the location before the end of the second quarter, with each well costing $1.50 million to initiate. INDO named these wells Kruh 27, Kruh 28, and Kruh 29. The company expects to produce approximately 450 barrels of oil per day after completing the first two wells and generate approximately $1.50 million in net revenue in their first year.

Here’s what could shape INDO’s performance in the near term:

Poor Profitability

INDO’s gross profit margin and EBITDA margin of negative 4.33% and 281.25%, respectively, is substantially lower than the 38.50% and 22.93% industry averages. Also, its negative 182.60% levered FCF margin is lower than the 9.36% industry average.

Moreover, INDO’s negative 51.30%, 44.56%, and 26.88% respective ROE, ROA, and ROTC compare with the 7.69%, 2.53%, and 4.19% industry averages.

Stretched Valuation

In terms of forward EV/Sales, INDO is currently trading at 18.47x, which is 649.3% higher than the 2.47x industry average. Also, its 18.98 forward Price/Sales ratio  is 1,177.6% higher than the 1.49 industry average.

Weak Financial Profile

INDO’s trailing-12-month revenues stood at $2.02 million, but its revenues have declined at an 18.8% CAGR over the past three years. Also, its gross profit came in at a negative $87,260, while its EBITDA came in at a negative $5.67 million. INDO’s trailing-12-month operating income was negative $6.36 million. Its net income and EPS were negative $6.32 million and $0.85. In addition, its trailing-12-month net operating cash flow and levered free cash flow stood at negative $3.78 million and $3.68 million, respectively.

POWR Ratings Reflect This Bleak Prospects

INDO has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Stability, which is consistent with its 24-month beta of 2.57.

INDO has a D grade for Quality. Its negative profit margins justify this grade.

Among the 53 stocks in the Foreign Oil & Gas industry, INDO is ranked #51.

Beyond what I have stated above, one can also view INDO’s grades for Sentiment, Growth, Momentum, and Value here.

View the top-rated stocks in the Foreign Oil & Gas industry here.

Bottom Line

INDO has garnered significant investor attention so far this year. However, its premium valuation is not justified by its underlying fundamentals. Furthermore, Wall Street analysts see a potential 40.7% downside in the stock. Although the company expects to generate significant returns from its new projects, it might take a while to reverse its losses and improve margins. INDO looks less attractive than its peers, and thus, we think it could be best to avoid the stock for now.

How Does Indonesia Energy Corporation Limited (INDO) Stack Up Against its Peers?

While INDO has an overall POWR Rating of D, one might want to consider investing in the following Foreign Oil & Gas stocks with an A (Strong Buy) rating: LUKOIL PJSC (LUKOY), TransGlobe Energy Corp. (TGA), and Gran Tierra Energy Inc. (GTE).

Note that TGA is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

INDO shares fell $0.98 (-7.26%) in premarket trading Tuesday. Year-to-date, INDO has gained 382.14%, versus a -8.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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