Oil Market Dynamics: Implications for the Market Value and Attractiveness of Canadian Small-cap Oil Companies

Jacob Reppien Zøhner-Pedersen

Student thesis: Master thesis


This thesis explores and provides an extensive analysis of strategic oil market fundamentals, i.e., demand and supply, combined with in-depth financial valuation of five selected small-cap Canadian oil companies to determine if these companies are undervalued from an investor perspective. Moreover, four main hypotheses are investigated, supported by extensive academic research providing a reference point, to assess and explain the logic for the companies’ valuation.
Analysis highlights that the oil market will enter into a supply deficit shortly and consequently that the market is moving closer towards a structural imbalance between supply and demand, i.e., due to massive underinvestment’s for years in oil exploration, radical changes in capital allocation strategies, and combined with increasing oil demand, despite the massive investments in green energy technologies. In addition, financial analysis showcase, that the Canadian small-cap oil companies are significantly undervalued and generating attractive returns, i.e., delivering massive free cash flows, are almost debt free, and has implemented a very investor friendly payout policy in the form of substantial share buybacks and dividends.
In summary, the study suggests that there is a fundamental market strategic and company specific financial rationale, and thus evidence for stating that the selected Canadian small-cap oil companies are significantly undervalued. In depth analysis of the hypotheses highlights that the causal explanations for the undervaluation of the companies can be attributed to: 1) the market value of the oil companies is closely correlated with the oil spot price, down to the very hour, 2) the financial market for oil trading is highly speculative in nature and massively impacts the oil spot price and thus the market cap of the companies, despite the value of an oil company being based on its free cash flows over a substantial period of time along with its oil reserves, 3) the ESG-score of oil companies impacts the market cap negatively, and finally, 4) clear evidence of the existence of a “small-cap premium” cannot be documented.
Consequently, the real value creation potential of Canadian small-cap oil companies will only become visible and reflected in the market cap over time—when the company’s quality and fundamental financial performance speaks for itself in a context where speculative behaviour does not blur long-term financial perspectives and return potential. Time will unfold the real value creation and reward the patient investor, but the journey will be bumpy.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2023
Number of pages116