Suncor Energy garnered lots of attention from investors when Warren Buffett added a position in the company to his holdings at Berkshire Hathaway. So, many investors who may not have been familiar with the company have now been trying to see what this Canadian oil giant is all about and whether or not to pick up shares. To help you get a better picture of why Suncor might be a good investment, let's take a look at how the company stacks up against the competition and if shares are trading at a price worth buying today.

Suncor's case that it's the best investment today 

It's tough to compare Suncor Energy to many other integrated oil and gas companies because its operations are so unique. In reality its bitumen mining and upgrading to synthetic crude oil is much more reminiscent of coal or metals mining than traditional oil and gas production.

That isn't a bad thing, though, because it also means that Suncor isn't as vulnerable to the biggest challenge of oil and gas producers -- constantly battling the decline curve. Instead of producing oil from wells that are slowly declining as reservoir pressure is relieved, oil sands mining and in-situ extraction facilities can provide steady cash flows for decades without major additional capital. This graphic give you an idea of what the cash flows from an oil sands project look like in comparison to both a tight oil and an offshore exploration well.

Source: Suncor Investor Presentation

These steady, very long-term production rates mean that Suncor's cash flow is much more predictable than other companies who perpetually fight the decline. Management at Suncor is making this cash flow predictability into one of the most compelling reasons to buy the stock. Over the past 14 quarters the company has been one of the top performing free cash flow generators per barrel of oil produced in the oil and gas industry.

Source: Suncor Investor Presentation

The one thing that is peculiar about these numbers is that Suncor's return on capital has been rather modest in comparison to others such as ExxonMobil or Chevron. One possible reason for that is because the company recently wrote down a few investments that affected earnings and return on capital employed. As Suncor gets further away from these less successful projects, it should see its earnings and return numbers increase rather significantly. 

Scouring through the numbers

Investors who are new to the energy space can get fooled that they are buying a company for a great value because it is cheap when compared to the S&P 500 average. Here's the problem with that theory; the energy sector habitually trades at a discount to the broader market because oil, gas, or any other type of energy is a commodity and is therefore likely to suffer cyclical booms and busts. Just to give you an idea of this deep discount, the Robert Schiller adjusted price-to-earnings ratio for the entire energy sector sits at only 16.0 times while the broader S&P 500 has a Schiller adjusted P/E of 26.2x. 

Now that we have lowered your expectations, here's a look at the numbers for Suncor. Compared to similar companies -- those that have more than just oil and gas production assets -- Suncor sits right in the middle of the pack when it comes to just about every valuation metric with the exception of P/E where it trades at a slight premium.

Company Price/Earnings Enterprise Value/EBITDA Enterprise Value/Total Revenue Price/Tangible book value
Suncor Energy 15.5x 5.5x 1.7x 1.7x 
ExxonMobil 12.6x 5.9x 1.1x 2.3x
Chevron 12.2x 5.3x 1.2x 1.6x
Canadian Natural Resources 15.6x 6.9x 3.5x 1.9x
Occidental Petroleum 13.7x 5.8x 3.4x 1.9x

Source: S&P Capital IQ

When you look at it from a historical perspective where we take the average valuation over the past 10 years, though, shares of Suncor are trading at a pretty hefty discount. 

Suncor Energy valuation Historical median value (last 10 years)
Price/Earnings (TTM) 28.49x
Enterprise Value/EBITDA 10.51x
Enterprise Value/Total Revenue 2.39x
Price/Tangible book 3.03x

Source: S&P Cap IQ

Let's keep this high historical valuation in context. For a couple years prior to the financial crisis, shares of Suncor were trading at wildly high valuations as investors saw oil prices headed through the roof and many of Suncor's oil sands projects were not yet in operation -- so there were lots of people speculating on the future of the stock. 

The Buffett barrier

Perhaps a better way than looking at historical averages for Suncor is likely to look at it through the lens of Warren Buffett. In the second quarter of 2013, Berkshire Hathaway made a greater than $500 million purchase of Suncor. At the time, this is what the average valuation for Suncor looked like.

Suncor valuation Period during Berkshire Hathaway's acquisition
Price/Earnings (TTM) 10.66x
Enterprise Value/EBITDA 4.69x
Enterprise Value/Total Revenue


Price/Tangible book 1.28x

Source: S&P Capital IQ

This may not be a foolproof method for establishing a time to buy shares of Suncor, but it's a pretty good one. Also, when compared its historical averages, this may be a better way to gauge the timing of your purchase than historical averages since Suncor was so overpriced for many years. 

What a Fool believes

If you're looking for something you can hold for years, and if Suncor can maintain its superior free cash flow generation, then the company should definitely be on your radar. To realize a gain based on that style of investing, though, you need to have the patience to not only hold through the good times and bad, but to also have the patience to buy at a time when shares are trading at a reasonable price. 

Personally, Suncor is one of those stocks that I'm going to keep a very close eye on. I'm not quite ready to buy it today because I think I can be patient and potentially get a better price further down the road, but I'm certainly going to keep some cash in my portfolio to be ready for that event.

Tyler Crowe owns shares of Berkshire Hathaway. You can follow him at under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

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