Investment Case: Lundin Petroleum: A Regional Specialist on the Norwegian continental shelf C o

Petter Ledsaak & Marie Christophersen

Student thesis: Master thesis


Lundin Petroleum is a Swedish medium-sized E&P company with a specialized focus on the Norwegian continental shelf. Since 2010, Lundin has made several high impact oil discoveries, among others Johan Sverdrup, which is the largest oil field discovery in the North Sea since the 1980s. This has established Lundin as a Regional Specialist on the Norwegian continental shelf. Due to high investments, Lundins ROIC has been declining over the past few years. Investments will also be high in the coming years as the construction of Johan Sverdrup is set to start during 2015. The investments Lundin has made in the past few years will come into production from 2015 and onwards, and will help secure a strong improvement in ROIC from 2017. The oil market collapsed in the second half of 2014, and has stayed at low levels since. The oil price drop was due to a strong increase in US production, as technological improvements and high oil prices have made unconventional oil production more profitable. We believe that the oil price will bounce back from the current levels, but that technological developments will make unconventional production even cheaper and hereby bring more supply into the market, which will put a cap on the long-term oil price at USD 90 boe. Based on our NAV model our estimated value of Lundins equity is SEK 134.2 as of the 7th of April 2015. This implies an 8% upside from the closing price at SEK 124. We decide to give Lundin a hold recommendation with 6-12 months target price of SEK 134.2. E&P companies closely correlate with the oil price. Lundin is the company among its peers which has seen the lowest decline in value following the oil price drop. We believe this is due to Lundins strong balance sheet, and their strong pipeline of new fields coming in the next years. If an investor sees a big upside potential in the oil price and is looking for a medium sized E&P company to invest in, one of Lundins peers would most likely be a better investment, since Lundin is less sensitive to oil price changes. On the other hand if an investor is more uncertain about the future oil price Lundin would the safest investment. Given the strong decline in value of E&P companies during the past year, we believe there are opportunities for companies that look beyond today’s low oil prices to secure growth through acquisitions. We believe that Lundin can use this opportunity to secure a stronger position for the future by acquiring their closest peer, Det norske oljeselskap. We look into the possible synergies that could arise from a merger, but we find that integration cost associated with a merger will outweigh the synergies that we are able to locate. Therefore we would not advise Lundin to acquire Det norske oljeselskap. Another possible scenario is that a larger E&P player which seeks to gain a stronger position on the Norwegian continental shelf would look at Lundin as a possible takeover target. We analyze different medium-/large sized E&P players and find that Mærsk Oil, with their strong balance sheet, strong knowledge of the North Sea and a production target that as of now looks to be out of reach, is the most likely acquirer of Lundin.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2015
Number of pages254