A Fundamental Valuation of Lundin Petroleum AB: An Independent E&P Player in the Upstream Oil Industry

Gustav Anton Larson & Carl Jacob Troedsson

Student thesis: Master thesis


The aim of this thesis is to conduct a fundamental analysis of Lundin Petroleum AB as per 31st of March 2020. Lundin is an independent exploration and production company, with its origins in Sweden, operating on the Norwegian continental shelf. Since 2001, the Lundin share (LUPE) has been publicly traded on the Stockholm Stock exchange and has to this date provided investors with good returns.
By conducting strategic and financial analyses, a profound understanding of the oil industry in general and Lundin in particular is achieved. The strategic analysis is consolidating several widely known theories and frameworks, e.g. PESTEL, Porter’s five forces and the resource-based view. The strategic analysis shows that the oil industry is characterized by advanced technology, large corporations, high capital expenditures, big rewards with high risks and high regulations where licenses are awarded to companies from state governments. Furthermore, companies operating in the industry are highly affected by the oil price, something uncontrollable by specific actors, and rather affected by political, economic and social factors. The biggest threat to the oil industry is the emergence of renewable energy sources, which puts pressure on the oil industry to cope and adapt to changing market conditions. However, for the coming decade(s), oil is assumed to be of importance in terms of transportation and non-combustion as no substitute solutions are within sight.
The financial analysis is based upon the DuPont model, which decomposes profitability ratios for further analysis. A liquidity analysis was conducted to assess Lundin’s financial health and the future outlook. The financial analysis showed that Lundin is currently operating with a risky financing structure, albeit presenting greater profitability margins than its peers. Despite a high level of debt, cash flows from operations are sufficient to meet the financial obligations, thus, no significant liquidity risk is identified.
The valuation was primarily conducted with a discounted cash flow model, complemented and sanity checked with the economic value added model and a relative valuation. By forecasting Lundin’s cash flows in a time horizon of 10 years, discounted with a critically derived cost of capital, the estimated fair value of Lundin’s shares is equivalent to USD 37,7 (SEK 379,7) per share. Based on the actual share price (SEK 190,5), it is concluded the share of Lundin is mispriced. The valuation was followed by a sensitivity analysis, revealing that minor changes in the variables, e.g. WACC and terminal growth rate, has significant effects on the estimated share price. The conclusion derived from the multiple analysis suggests that Lundin is either overvalued or has better prospects. Drawing upon the strategic analysis, it was concluded that the latter was more reasonable than the former.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2020
Number of pages134
SupervisorsOle Vagn Sørensen