Elnusa

The Jakarta Composite Index (JCI) began its journey in 2016 through a bumpy road. When this article was written, the index is still dropped 1.5% in year to date. Although the decline is still much better than the decline in China and United States, where the Shanghai Index and the Dow Jones fell 18.0 and 8.2% respectively, but several stocks in the oil and gas and mining sectors had fallen significantly, in line with the decline in price of oil to as low as US$ 30 per barrel. One of the stocks, Elnusa (ELSA), recently closed at Rp200 per share, dropped almost 20% since the beginning of the year.

And not only in Indonesia, but the stocks pf of global-scale oil and gas companies such as Royal Dutch Shell, Exxon Mobil, BP, Chevron, Total SA, all of them also fell. But interestingly, not long ago Berkshire Hathaway disclosed that they add their holdings in Phillips 66, an oil refinery company headquartered in Texas, USA. We certainly familiar with the style of Opa Warren who likes to buy shares of a company precisely when most people avoid it, and in this case by buying shares of oil companies when oil prices continue to slide down. But the question is, is this a signal that smart money has begun to enter the game as the majority of investors have been desperate with the oil business? About the decline in the stock of Elnusa earlier, is this an opportunity?

Elnusa at a Glance

ELSA is a subsidiary of Indonesian state-owned oil company, Pertamina, which is engaged in oil services. Yep, ELSA does not produce oil, but provide land seismic, drilling, fabrication etc. for oil and gas companies who operate in Indonesia. Some company’s customers are Pertamina Hulu Energi, Pertamina EP, Medco, Pertagas, Total Indonesie, and Chevron Pacific Indonesia. Especially for land seismic services, ELSA is one of the pioneers who has been experienced since 1974, and currently hold the status as market leader in the country.

Since I entered the Indonesian stock market for the first time in 2009, the oil and gas sector in the IDX has never had good fundamentals, even when the oil price was above US$ 100 per barrel, thus I never found investment opportunities in this sector (but actually it wasn’t without explanation, you can read it here). And by the way, Perusahaan Gas Negara (PGN) can not be classified as an oil and gas company, or oil and gas services company, because it is only a distributor of gas.

However, compared to some other listed oil companies such as Ratu Prabu Energi (ARTI), Benakat Integra (Bipi), Energi Mega Persada (ENRG), or Medco (MEDC), ELSA has relatively good fundamentals, though still below the standard of ‘good’ of my version. But if you are interested to follow the step of Buffett who buy oil stocks at low prices, then the option that make most sense is, of course, ELSA. And with PBV of 0.6 times at the price of Rp200 per share, if in next time oil prices rebound, the stock may generate a quick profit.

However, for a serious investment in the long term, ELSA is not a best choice. Since 2010 until now, the company's revenue was stagnant at about US$ 400 millions per annum, and the increase in company’s net profit was only driven by the increasing efficiency of, but even until today the profit margin is still below 10%, aka fairly low. Then, as the oil prices declined since the beginning of 2015, ELSA’ revenues also got oppressed that until the third quarter, it only about US$ 210 million, so it is possible that for the whole year of 2015, the revenue will be less than US$ 400 million, and indeed the management only estimate that ELSA’ net earnings will only be US$ 30 million for 2015, down significantly compared to 2014 which was US$ 38 million. In the public expose held by the company when the oil price was US$ 45 per barrel, the management has said that the company's financial performance, while down, but not as deep as the decline in oil and gas industry in general, because in contrast to the other oil and gas companies in the country, ELSA has a relatively small debt.

Decreasing Performance

But the key word is that ‘the company’s performance is going down in line with the decline in oil prices’. And since the oil price is now at US$ 30 per barrel, then well.. Good bye! About the stock, back in 2011, when the price of oil was at US$ 120 per barrel, ELSA instead suffered losses US$ 4 million, so that the stock tumbled from 350’s to 160’s. But since 2012 until 2014, the company succeed in making earnings, and it continued to increase up to US$ 38 million at the end of 2014, so that the stock rose until touched Rp700 per share, aka scored gains of more than three-fold in less than three years.

Entering 2015, the efficiency of the performance of ELSA, which had been a problem in the past, might been better, but the problem still lies in the inability of the company to increase its revenue, so the profit is still dropped, and also the stock.

So, ELSA could climb back up if one of these two occurs: 1. Oil prices rebound, and 2. The company's performance shows improvement. For the first point, it can happen anytime and when that happens, then the stock will rise very sharply, may be up to several tens of percent in just one or two days, but only for a moment before then dropped again (because eventually, people will see the financial statements). For the second point, it will only occur in the end of April when the company releases its financial statements of the First Quarter 2016, and of course the performance would improve only if the oil price has rebounded before.

In conclusion, I do not know with others, but I will not buy ELSA, not now. When Opa Buffett bought Phillips 66, perhaps it is because the company, until the third quarter of 2015 still posted a profit of US$ 3.6 billion, or relatively equal to the same period in 2014 although the oil price was under pressure in that period, while the performance of other oil companies are already on falling even since 2013. While ELSA? Well, he’s not that good, at least for the moment, so it's better to wait unless you’d like to speculate on the price of oil which could bounce at any time. But, well, I certainly do not advise you to ‘invest’ in that way.

PT. Elnusa Tbk

Rating of Performance until Third Quarter of 2015: BBB

Rating of share price at 200: A

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