With an ever-increasing global population and burgeoning middle class in many of the world’s developing economies, all forms of energy production must increase to meet global demand. The Canadian oil sands will play a key role in meeting this need for decades to come; they are one of the largest oil reserves in the world and home to some of the most advanced technologies used to retrieve oil from the ground.
Three the major players in Canada’s oil sands are Suncor Energy Inc. (TSX:SU)(NYSE:SU), Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG), and Baytex Energy Corp. (TSX:BTE)(NYSE:BTE). We can use three valuation metrics to help us determine which company offers us the best value on a relative basis by comparing how much investors are willing to pay for a dollar of each company’s sales, cash flow, and net asset value. To do this, we will use the price-to-sales (P/S), price-to-cash flow (P/CF), and price-to-book (P/B) ratios.
The P/S metric provides a valuable tool in our analysis; while oil hovers around $50 per barrel, sales will prove to be more stable and reliable than current earnings. Suncor, Canada’s largest oil sands producer, has a 2.5 times P/S ratio, meaning investors are paying $2.50 for every $1.00 of Suncor’s sales. Crescent Point’s sales are valued even more richly with a 3.2 times P/S ratio, while Baytex boasts a P/S ratio of only 1.2 times, less than half the price of the other two. Here, Baytex gets the edge.
Cash flow is a vital element of any company’s strategy as a healthy cash flow stream is needed to fund capital expenditures and future expansion as well as finance any dividends being paid to current shareholders. A prospective investment in Suncor shares would require the investor to pay 11.7 times the company’s current cash flow, while an investment in Crescent Point would cost prospective investors 4.9 times its cash flow. Baytex, meanwhile, offers the best value among the three, currently trading at 3.9 times P/CF.
The P/B ratio has long been used by investors to help uncover hidden gems. Net asset value, or book value, is particularly important in our analysis here as the value of these three companies is largely determined by the physical assets they own. Using this metric, Suncor is priced at a 1.5 times P/B, while Crescent Point is priced at 0.8 times P/B. Baytex, once again, is even cheaper at 0.5 times book value.
Which should you buy?
Baytex appears to be the cheapest by measures of all three valuation metrics. However, it is important to remember that sometimes stocks that appear cheap on the surface have good reasons for being so. In this case, Baytex is not expected to post a net profit this year, while Suncor and Crescent Point are. Still, for investors willing to look past short-term performance in favour of long-term value, Baytex appears the best bet in the oil sands today.
