Receh.in - Elnusa ($ELSA) has achieved a remarkable growth in revenue and profits in FY22, with a respective increase of +51.2% YoY and +247.3% YoY. This positive trend continued into 1Q23, where revenue grew by +28.5% YoY and net profit rose by +53.4% YoY.
There are two specific reasons for this rapid growth, namely:
Recovery in the upstream oil and gas business segment and oil and gas support services, driven by an 11% YoY increase in investment in Indonesia's upstream oil and gas sector in 2022. This investment growth has led to an increase in upstream oil and gas activities, ranging from exploration to exploitation. In 1Q23, ELSA's net profit from the upstream oil and gas segment reached 24 billion rupiahs, surpassing the segment's net profit realization in FY22, which amounted to 16.8 billion rupiahs. During the same period, the oil and gas support services segment experienced a net profit increase of +16.7% YoY.
The distribution of oil and gas business, which tends to be stable, also continues to grow. From 2012 to 2022, the net profit of ELSA's energy distribution and logistics services grew at a CAGR of +24.4%.
With a target investment growth in upstream oil and gas of +26% YoY, reaching 15.5 billion US dollars in 2023, and ELSA's stock valuation with a P/E ratio at 5.76x, approaching the lowest level in the past 5 years, is ELSA stock worth buying?
A Brief Overview of ELSA
ELSA is an oil and energy company and a subsidiary of Pertamina Hulu Energi. Currently, ELSA's business activities encompass three segments:
1. Upstream Oil and Gas Services:
Providing integrated services in exploration, exploitation, and well maintenance for oil and gas activities. This segment consists of two divisions: upstream services division, which offers maintenance and field management services, seismic investigation and processing services, and engineering, production, and construction - operation & maintenance division, which provides maintenance for producing oil wells. The performance of the upstream oil and gas services segment is highly dependent on upstream oil and gas activities in Indonesia, including exploration and drilling. When upstream oil and gas activities, such as oil drilling, are active or intensively conducted, the performance of this sector has the potential to improve, and vice versa.
2 Oil and Gas Support Services:
This segment provides various services to support exploration and exploitation of oil wells, including data management and processing services, offshore service vessels (OSV) for offshore activities, fabrication, and construction services. ELSA is supported by its subsidiaries in conducting business in this segment. Similar to the upstream oil and gas services, the oil and gas support services segment is also influenced by activities in the upstream oil and gas sector in Indonesia, but with historically lower revenue volatility.
3. Energy Distribution and Logistics Services:
Unlike the other two segments that are sensitive to upstream oil and gas, the energy distribution and logistics services segment focuses on downstream oil and gas services, such as storage, trading, distribution, and marketing of oil and gas products in Indonesia. Due to its involvement in the downstream industry, this segment exhibits relatively stable growth compared to the other two segments.
Over the past 8 years, the performance of ELSA's upstream oil and gas services segment has experienced a decline due to a decrease in upstream oil and gas activities in Indonesia. The decrease in work volume and equipment rental rates has resulted in a decline in net profit margin in this segment, leading to losses in 2017-2018 and 2020-2021. The upstream oil and gas services segment of ELSA indeed exhibits fluctuating profit margins in line with the increase and decrease in equipment rental rates and upstream oil and gas activities.
On the other hand, the energy distribution and logistics segment continues to experience revenue growth. From 2012 to 2022, this segment has achieved nearly a 5-fold increase in revenue, approximately +392.7%. Over the past 11 years, this segment has maintained a net profit margin ranging from 2% to 7%.
Impact of Indonesia's Upstream Oil and Gas Performance: How Does It Affect ELSA?
The past decade has witnessed a decline in investment in Indonesia's upstream oil and gas sector, further exacerbated by the geopolitical conflict between Russia and Ukraine. This has resulted in an energy crisis in several countries, prompting them to strive for energy self-sufficiency. Consequently, global upstream oil and gas activities have seen a significant increase since 2021.
In Indonesia, the government has historically made efforts to enhance energy independence. However, the country's high domestic energy demand still necessitates the importation of oil and gas from other nations. In 2022, Indonesia imported 15.26 million tons of crude oil, marking a 10% year-on-year increase compared to 2021.
The upstream oil and gas services, as well as the supporting services provided by ELSA, have the potential for continued growth in the future. The Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) aims to boost domestic production with a target lifting capacity of 1 million barrels of oil per day (bopd) and 12 billion standard cubic feet of gas per day (bscfd) by 2030. As a point of comparison, Indonesia's crude oil lifting in 2022 amounted to only 612,300 bopd, with gas lifting reaching 5.347 million standard cubic feet per day (mmscfd).
In 2023, SKK Migas targets a crude oil lifting of 660,000 bopd and a gas lifting of 6,160 mmscfd. The government also aims for investments in the upstream oil and gas sector to reach $15.5 billion in 2023, a 26% year-on-year increase. Exploration activities are expected to receive $3 billion in investments (compared to $0.7 billion in FY22), and the drilling of development wells is projected to reach 919 wells (compared to 760 wells in FY22). These targets hold the potential to contribute positively to the growth of upstream oil and gas activities in Indonesia this year.
As of 1Q23, investment realization in Indonesia's upstream oil and gas sector has grown by 25.2% year-on-year, reaching $2.6 billion (compared to $2.1 billion in 1Q22).
Optimizing Procurement and Local Content Requirement: Tailwinds for ELSA
The increased activities in the upstream oil and gas sector have the potential to drive up the volume of work and equipment utilization for ELSA, thereby enhancing the performance of the company's upstream oil and gas and supporting services segments. Both segments exhibit a positive correlation with upstream oil and gas activities.
Furthermore, the 57% Local Content Requirement (TKDN) for drilling in the upstream oil and gas sector provides assurance for ELSA's future performance. With this TKDN obligation in place, private contractors engaged in cooperation contracts (KKKS) will consider ELSA as a provider of upstream oil and gas services capable of meeting their procurement needs for exploration and drilling activities in Indonesia while fulfilling the minimum TKDN requirements.
ELSA's Financial Performance in 1Q23
ELSA achieved a remarkable growth in net profit, recording a +53.4% year-on-year increase to IDR 115 billion in 1Q23. This accomplishment was supported by a +28.5% YoY growth in revenue, reaching IDR 3.1 trillion, combined with an expansion of profit margins, resulting in a more significant growth in net profit.
Let's take a look at the performance of each segment of ELSA in 1Q23:
Upstream Oil and Gas Services Segment
The upstream oil and gas services segment contributed the most to ELSA's net profit growth. In fact, the net profit from this segment in 1Q23 exceeded the achievement of the entire FY22, which amounted to IDR 16.7 billion.
The segment recorded a net profit of IDR 24.7 billion in 1Q23, a turnaround from a loss of IDR 6.4 billion in 1Q22. This realization was driven by a +11% YoY increase in revenue to IDR 986 billion, coupled with an expansion of the gross profit margin to 11.4% (compared to 5.7% in 1Q22).
On a quarterly basis, despite a -21.7% QoQ decrease in revenue, a more significant decline in cost of goods sold (-25.3% QoQ) resulted in a +25.6% QoQ growth in gross profit.
The revenue from the upstream oil and gas services segment contributed 31% to ELSA's total revenue, with net profit contributing 21.5% to the total net profit.
Based on the information from ELSA's annual report, which stated that equipment utilization had reached nearly maximum levels, and the relatively insignificant capex for exploration in 1Q23, it indicates that the increase in ELSA's revenue in 1Q23 was driven by improved rental rates, leading to an increase in the overall margin for the upstream oil and gas services segment.
Oil and Gas Support Services Segment
In the oil and gas support services segment, ELSA achieved a +16.7% YoY growth in net profit, supported by a +46.7% YoY growth in revenue. However, a more significant increase in cost of goods sold (+49.9% YoY), final tax expenses (+77.4% YoY), and income tax expenses (+44.6% YoY) resulted in a decline in the net profit margin in this segment.
On a quarterly basis, the oil and gas support services segment turned profitable, having previously incurred a loss of IDR 3.2 billion in 4Q22. The +15.5% QoQ revenue growth, a moderate increase in cost of goods sold (+10.7% QoQ), and a decrease in general and administrative expenses (-16.8% QoQ) contributed to the growth in net profit.
The oil and gas support services segment accounted for 15% of ELSA's total revenue, with a net profit contribution of 17.5% to the total net profit.
The growth in the oil and gas support services segment is aligned with the growth in the upstream oil and gas segment, as both segments benefit from the expansion in the upstream oil and gas sector.
Energy Distribution and Logistics Segment
The energy distribution and logistics segment experienced a +9.3% YoY growth in net profit, amounting to IDR 70 billion in 1Q23. This growth was driven by a +28.5% YoY increase in total revenue to IDR 1.8 trillion. However, a more aggressive growth in cost of goods sold (+30.1% YoY) resulted in a decrease in the gross profit margin to 6.6% (compared to 7.8% in 1Q22).
On a quarterly basis, despite a -20% QoQ decline in revenue, a higher net profit margin (3.9% vs. 4Q22: 3%) contributed to a +6% QoQ growth in net profit.
The energy distribution and logistics segment was the largest contributor to ELSA's financial performance. This segment accounted for 56.9% of ELSA's total revenue, with a net profit contribution of 60.9% to the total net profit.
During an interview with the Stockbit team in April 2023, ELSA's management stated that the revenue growth in the energy distribution and logistics segment was driven by the non-subsidized fuel sales to industrial and marine (InMar) customers, which have lower margins. Therefore, the margin in the energy distribution and logistics segment continued to decline throughout 2022.
Valuation
ELSA's positive performance in 1Q23 is noteworthy, considering the suspension of oil well drilling due to safety inspections and work safety training (safety stand-down) conducted by Pertamina in February-March 2023. However, with the lifting target set by SKK Migas and efforts to catch up from the safety stand-down in 1Q23, upstream oil and gas activities have the potential to increase in the upcoming quarters.
Nevertheless, the impact of the Eid al-Fitr holiday, which results in fewer working days, may potentially hinder ELSA's growth in 2Q23.
As of May 31, 2023, ELSA is traded at a valuation of 5.76x PE TTM, slightly below its -1x Std. Deviation Band over the past ten years.
If we consider only the net profit from the distribution and energy logistics segment, ELSA's current valuation represents an 8x PE Ratio TTM, still lower than AKRA's valuation, which is currently traded at an 11x PE Ratio based on consolidated earnings. If we factor in the potential net profit from the upstream and supporting oil and gas services segments, ELSA could be traded at an even lower valuation.
Compared to its global peers, such as Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB), Halliburton is currently traded at a valuation of 13.19x PE TTM, while Schlumberger is traded at 17.91x PE TTM.
Considering the potential and risks ahead, does ELSA's lower valuation compared to its peers make it an attractive buy?
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