Valuation of the Equity of Det Norske Oljeselskap ASA: Assessing the Value of an E&P Company Through Three Different Lenses

Gard Kirkerud & Aasmund Lunnan Bjoernstad

Student thesis: Master thesis


The modern day Det Norske Oljeselskap was born in 2014 with the acquisition of Marathon Oil Norge, andpositioned the company as a strong market participant with ambitious exploration programs and significantownership stakes in the unparalleled Johan Sverdrup oil field, as well as other low cost oil fields.The analysis of the historical financial statements of both Det Norske Oljeselskap and the selected peer groupshowed inconsistency across time and peer companies in terms of both profitability and liquidity, due to thehigh dependency on selected oil fields. Det Norske Oljeselskap is highly levered, with low profitability in thepast years as many of the oil fields in the portfolio are either in a decline phase, or under development.Alongside projections of future production levels in the current oil field portfolio, and extensive strategicanalysis, we were able to forecast the future financial statements of Det Norske Oljeselskap.As the world has been shaken by plummeting oil prices, companies in the oil exploration and productionindustry have encountered declining revenues and large upheavals in their operating environment. However,in this changing industry, some factors are kept constant, with demand for petroleum products expected tobe sustained in the future due to the high dependence upon these resources in industrializing economies,and the traditional transporting sector. The consistency in future demand coupled with extensive explorationprograms and increased focus on the less saturated Barents Sea basin leads us to believe that future supplyof petroleum from Det Norske Oljeselskap is very plausible, despite petroleum being a non-renewableresource.For the purpose of valuing the company we apply a residual operating income (ReOI) model, net asset value(NAV) model, and real option (ROV) model. The model choice relies on the investor’s assumption of how thecompany will operate in the future, whether or not it can exist in all eternity, as well as whether themanagement has flexibility in undertaking oil field projects. Our ReOI and NAV uses a deterministic approachto assess the future price of oil, whereas the ROV is based on a stochastic joint-diffusion process of the oilprice and the convenience yield, where the latter of the two is mean reverting. The ROV concludes that theoption is an American call, where a least Square Monte Carlo method is applied to assess the final value ofthe option to develop an oil field.With a share of Det Norske Oljeselskap ASA’s equity trading at NOK 62 per share as of 31.03.2016, the ROVmodel is by far the most pessimistic at NOK 9.99 per share, whereas the ReOI model is most optimistic atNOK 86.68 per share, and the NAV model is in between at NOK 76.33 per share. We argue that in a countrywith reliable and publicly accessible information about oil fields, the NAV is superior to the two comparedmodels, resulting in a target share price for Det Norske Oljeselskap ASA at NOK 76.33 per share.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2016
Number of pages228