Financial and Strategic Valuation of Lundin Petroleum AB

167 Pages·2014·2.7 MB·English

COPENHAGEN BUSINESS SCHOOL
Financial and Strategic
Valuation of Lundin
Petroleum AB

Master thesis
Program: Msc in Finance and Strategic Management
Supervisor: Jeppe Schønfeld
Number of pages and characters: 117 pages, 263 875 characters
Date of Submission: 9th of December 2014
Ludmila Cebanov
Victoria Mattsson
Copenhagen Business School 2014
Executive Summary

The aim of this thesis is to find the fair share price of Lundin Petroleum AB on the 1st of April 2014.
Lundin Petroleum is a Swedish company operating in the oil and gas exploration and production
industry with operations all over the world. The Lundin share was listed on the Stockholm Stock
Exchange in 2001 and has so far been an exceptional  stock  to  have  in  an  investor’s portfolio. The
stock grew by 2 459.6 % from its listing in 2001 to the valuation date 1st of April 2014, far
outperforming the average stock on the Stockholm Stock Exchange.
To assess the fair value of the stock, an in-depth analysis of the company was carried out from a
strategic and financial  perspective.  The  strategic  analysis,  including  a  PESTEL  and  a  Porter’s  five  
forces framework revealed general characteristics inherent to the environment in which Lundin
operates and underlined the challenging external factors influencing its performance. Factors with the
highest impact on the future evolution of the entire sector include pressure from renewable energy
sources, higher competitiveness from alternative fuels such as shale gas and an interplay of economic,
financial and political forces. On the other hand, the strategic analysis focused on the company itself
revealed that Lundin holds crucial strengths such as internal know-how, good track record in
exploration and discoveries and valuable assets promising future oil and gas. The financial analysis
assessing the financial performance of the past 5-years revealed that the company managed to evolve
from a negative to a positive net income and managed to secure a considerable amount of financing
that will both help support its future endeavours by continuing investments but also adds higher
financial risks to its operations through a heavy debt burden.
The results of the strategic and financial analysis was then used to make a realistic 10-years forecast of
Lundin’s  performance.  The  forecasted  cash  flow  was  discounted  by  using  the  DCF  method  obtaining  a  
value of 18,89 USD per share, indicating that the current market is slightly overvaluing the Lundin
stock. To sanity check the calculated share price a sensitivity analysis was done assessing the
sensitivity in the assumptions driving the resulting share price, showing that changes in the oil price
and WACC are the biggest factors affecting the Lundin price. To triangulate the share price a
multiples analysis was conducted showing that the most applicable multiple to this particular industry
– the EV/EBITDA – also reveals the closest result to the DCF valuation and to the market price. In
contrast other multiples, that were used for comparison purposes revealed much higher variations
around these values.
Although  there  are  many  factors  that  can  affect  a  stock’s  price  in  the  future  and  many  of  the  
influencing variables are extremely hard to predict, the report concludes that the stock price today is
slightly overvalued.
Definitions
2P Proved and probable reserves
ATO Assets Turnover
Boe Barrels of Oil Equivalents, Natural gas converted to barrels of oil equivalents 6 mcf=
1boe
Boepd Barrels of Oil Equivalent Per Day
BP British Petroleum
CAPM Capital Asset Pricing Model
CAPEX Capital Expenditures
DCF Discounted Cash Flows
E&P Exploration and Production
EIA Energy Information Agency
EBIT Earnings Before Interest and Tax
EBITDA Earnings Before Interest, Tax, Amortization and Depreciation
EV Enterprise Value
FCF Free Cash Flow
IEA International Energy Agency
LNG Liquefied Natural Gas
MMboe Million Barrels of oil Equivalent
MMSCFPD Million Standard Cubic Feet Per Day
MUSD Million US dollars
NOK Norwegian Kronor
NOPLAT Net Operating Profit Less Adjusted Taxes
NWC Net Working Capital
OECD The Organization for Economic Co-operation and Development
OPEC Organization of Petroleum Exporting Countries
P.A Per Annum
PESTEL Political, Economical, Social, Technological, Environmental, Legal
PPE Property, Plant and Equipment
ROCE Return On Capital Employed
ROIC Return On Invested Capital
RONIC Return On New Invested Capital
SEK Swedish Kronor
Toe Tonnes of Oil Equivalent
USD US Dollars
WACC Weighted Average Cost of Capital
List of Tables
Table 1: Research Questions .............................................................................................................................. 2
Table 2: Lundin Production (Own illustration based on Nilsen & Glover, 2014) ........................................... 39
Table 3: Lundin Discoveries (Own illustration based on Nilsen & Glover, 2014) .......................................... 39
Table 4: Lundin Reformulated Balance sheet .................................................................................................. 46
Table 5: Lundin Reformulated Income statement ............................................................................................ 48
Table 6: Lundin Historical Free Cash Flow ..................................................................................................... 51
Table 7: Lundin Return on Invested Capital .................................................................................................... 53
Table 8: Lundin NOPLAT margin ................................................................................................................... 55
Table 9: Lundin Asset Turnover ratio .............................................................................................................. 55
Table 10: Lundin consolidated income statement trend analysis ..................................................................... 60
Table 11: Common size analysis between 2009-2013 (average of percentage of revenue) ............................. 61
Table 12: Common size analysis percentage of revenue 2013 ......................................................................... 62
Table 13: Production forecast, p.a. production based on: daily production * 365 days ................................... 73
Table 14: Lundin Revenues .............................................................................................................................. 74
Table 15: Oil price scenarios ............................................................................................................................ 74
Table 16: Gross Profit ...................................................................................................................................... 77
Table 17: NOPLAT Forecast ........................................................................................................................... 79
Table 18: Free Cash Flow Forecast .................................................................................................................. 83
Table 19: Valuation Models ............................................................................................................................. 85
Table 20: Regression results ............................................................................................................................. 93
Table 21: Estimates of Lundin's Beta (Thomson One, 2014. Bloomberg terminal, 2014. Financial
Times, 2014. Reuters, 2014)..................................................................................................................... 94
Table 22: Summary of forecasting period and valuation results ...................................................................... 99
Table 23: Lundin share value ......................................................................................................................... 101
Table 24: Sensitivity analysis I ...................................................................................................................... 102
Table 25: Sensitivity analysis II ..................................................................................................................... 103
Table 26: Sensitivity analysis III .................................................................................................................... 104
Table 27: Valuation with 95 USD per barrels of oil....................................................................................... 104
Table 28: Valuation with 105 USD per barrels of oil..................................................................................... 105
Table 29: Valuation with 110 USD per barrels of oil..................................................................................... 105
Table 30: Valuation with 115 USD per barrels of oil..................................................................................... 105
Table 31: Multiples analysis ........................................................................................................................... 107
Table 32: EV/EBITDA multiple, * I USD = 6,2 NOK .................................................................................. 107
Table 33: EV/Sales multiple, * I USD = 6,2 NOK ........................................................................................ 108
Table 34: P/E multiple, * I USD = 6,2 NOK.................................................................................................. 109
List of Figures
Figure 1: Organizational structure of Lundin
Figure 2: Lundin Stock development
Figure 3: Shareholder Structure
Figure 4: Reserves Growth
Figure 5: Geographic segmentation of oil production 2012
Figure 6: Geographic segmentation of Oil production 2035
Figure 7: Geographic segmentation of natural gas production 2012
Figure 8: Geographic segmentation of natural gas production 2035
Figure 9: Energy consumption by region 2012
Figure 10: Energy consumption by region 2035
Figure 11: Energy consumption by region 2012
Figure 12: Energy consumption by region 2035
Figure 13: Oil and gas market in BOE
Figure 14: Oil and gas market in USD Billion
Figure  15:  Porter’s  five  forces
Figure 16: Energy consumption by sector 2012
Figure 17: Energy consumption by sector 2035
Figure 18: Oil and Gas market segmentation 2012
Figure 19: Oil and gas Market segmentation 2035
Figure 20: Energy consumption 2012
Figure 21: Energy consumption 2035
Figure 22: Crude oil prices are more sensitive to geopolitics
Figure 23: Reserves 2013
Figure 24: Reserves History
Figure 25: Contingent Resources 2013
Figure 26: Contingent Resources History
Figure 27: Lundin Production
Figure 28: Lundin reserves
Figure 29: Production of peers
Figure 30: Du Pont scheme
Figure 31: Lundin Revenues
Figure 32: Revenue drivers
Figure 33: ROIC
Figure 34: ROCE
Figure 35: EBITDA margins
Figure 36: CAPEX/Revenue ratio
Figure 37: NWC
Figure 38: Current ratio
Figure 39: Net debt/ Assets
Figure 40: Financial leverage
Figure 41: Lundin production forecast
Figure 42: Lundin revenues for different oil price scenarios
Figure 43: Profitability Analysis of Lundin
Figure 44: Lundin EBIT margin
Figure 45: EBIT margins
Figure 46: Lundin net sales and NOPLAT
Figure 47: Lundin forecasted FCF
Figure 48: Stock price comparison with 5% over and under the estimated price
Table of Contents

Introduction ....................................................................................................................................................... 1
Problem Statement ......................................................................................................................................... 2
Structure of the paper .................................................................................................................................... 3
Methodology...................................................................................................................................................... 3
Theory ........................................................................................................................................................... 3
Reliability and Validity ................................................................................................................................. 4
Scope ............................................................................................................................................................. 4
Limitations ..................................................................................................................................................... 5
The company ..................................................................................................................................................... 6
History ........................................................................................................................................................... 7
Corporate governance .................................................................................................................................... 7
Recent developments ..................................................................................................................................... 8
Share price ..................................................................................................................................................... 8
Strategic Objectives and Business Model ................................................................................................... 10
Strategic Landscape and Peer Overview ..................................................................................................... 11
Strategic Analysis ............................................................................................................................................ 14
External Analysis ......................................................................................................................................... 14
Political Factors ....................................................................................................................................... 14
Economic and Social Factors .................................................................................................................. 16
Technical Factors ..................................................................................................................................... 18
Environmental Factors ............................................................................................................................. 19
Legal Factors ........................................................................................................................................... 20
Industry Analysis ......................................................................................................................................... 20
Porters Five Forces ...................................................................................................................................... 21
Important value drivers ................................................................................................................................ 29
Oil Price ................................................................................................................................................... 30
Oil and Gas Properties ............................................................................................................................. 33
Lundin’s  Products  and  Markets ................................................................................................................... 35
Lundin’s  Operations ................................................................................................................................ 36
Operating performance compared to peers .............................................................................................. 40
Financial Analysis ........................................................................................................................................... 43
Quality of financial statements .................................................................................................................... 43
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Reformulation of financial statements ......................................................................................................... 43
Reformulation of Balance Sheet .................................................................................................................. 44
Reformulation of Income Statement............................................................................................................ 47
Profitability analysis .................................................................................................................................... 52
Peer group benchmarking ............................................................................................................................ 56
Key value drivers ......................................................................................................................................... 57
Risk Analysis ............................................................................................................................................... 62
Operating risk .......................................................................................................................................... 62
Financing risk .......................................................................................................................................... 63
SWOT Analysis ............................................................................................................................................... 68
Forecasting ...................................................................................................................................................... 69
Forecasting period ....................................................................................................................................... 69
Forecasting method ..................................................................................................................................... 70
Forecasted items .......................................................................................................................................... 70
Income statement forecast ....................................................................................................................... 70
NOPLAT ................................................................................................................................................. 79
Free Cash Flow ........................................................................................................................................ 80
Forecasting reality check ............................................................................................................................. 83
Valuation ......................................................................................................................................................... 85
Method ......................................................................................................................................................... 85
DCF ......................................................................................................................................................... 85
Relative valuation .................................................................................................................................... 86
Contingent claim ..................................................................................................................................... 86
Liquidation .............................................................................................................................................. 86
Replacement cost ..................................................................................................................................... 87
Capital structure ........................................................................................................................................... 87
WACC ......................................................................................................................................................... 88
Cost of debt .............................................................................................................................................. 89
Cost of equity .......................................................................................................................................... 91
Explicit Forecasted Period ........................................................................................................................... 97
Terminal value ............................................................................................................................................. 97
Final Value ................................................................................................................................................ 100
Sensitivity Analysis ....................................................................................................................................... 101
Multiple Analysis .......................................................................................................................................... 106
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