The Zacks Oil and Gas - Exploration and Production - Canadian industry faces mixed dynamics. Weaker Chinese consumption, a critical factor in global oil pricing, has prompted OPEC+ production cuts. If China's demand remains subdued, oversupply could further pressure prices. Additionally, the rise of renewables and EVs presents long-term challenges, with technology advancements steadily reducing fossil fuel dependence.
Yet Canada’s energy infrastructure received a boost from the Trans Mountain Pipeline Expansion, which alleviates crude bottlenecks and enhances global market access. This milestone strengthens the nation’s upstream sector, offering better pricing opportunities and bolstering economic growth. Despite headwinds, stocks like Canadian Natural Resources, Ovintiv Inc. and Baytex Energy remain well-positioned to navigate shifting market dynamics.
About the Industry
The Zacks Oil and Gas - Canadian E&P industry consists of companies primarily based in Canada, focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand is the fundamental driver of this industry.
In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - Canadian E&P Industry
Impact of Weakening Chinese Consumption: China's demand for crude oil remains a key determinant in global oil prices. Although government stimulus measures aim to boost economic growth, recent signs of slower demand growth from China have prompted OPEC+ production cuts. If demand from China does not recover as expected, global oil prices could remain subdued due to a combination of ample supply and restrained demand.
Boost to Canada’s Energy Infrastructure: The Trans Mountain Pipeline Expansion (‘TMX’) has started shipping oil, marking a significant milestone for Canada’s energy sector. Originally built in 1953, this upgraded pipeline increases transportation capacity, reducing longstanding bottlenecks in crude oil movement. By improving access to global markets, the project enables Canadian upstream operators to reach more buyers and secure better pricing, delivering a substantial economic lift to the nation’s oil industry and overall economy.
Growing Renewables and EVs Threaten Oil Demand: The global shift to renewable energy and electric vehicles (EVs) presents a long-term challenge for oil demand. While renewable infrastructure growth is gradual, advancing technology and rising EV use are expected to reduce reliance on fossil fuels, potentially lowering oil prices. In China, rapid electrification is driving oil demand to peak earlier, with imports at 11.4 million barrels per day in 2023 projected to plateau by 2026 and then decline, furthering the global supply surplus and pushing prices downward.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas - Canadian E&P is an 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #158, which places it in the bottom 37% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2024 have gone down 35.3% in the past year, the same for 2025 have fallen 41.4% over the same timeframe.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms S&P 500 & Sector
The Zacks Oil and Gas - Canadian E&P industry has fared worse than the Zacks S&P 500 composite as well as the broader Zacks Oil – Energy sector over the past year.
The industry has moved up 3.3% over this period compared with the broader sector’s increase of 10.3% and the S&P 500’s rise of 33%.
Industry's Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month EV/EBITDA ratio, the industry is currently trading at 4.8962, significantly lower than the S&P 500’s 18.54. It is, however, above the sector’s trailing 12-month EV/EBITDA of 3.52X.
Over the past five years, the industry has traded as high as 14.49X, as low as 2.91X, with a median of 5.20X.
3 Stocks in Focus
Baytex Energy: An energy producer based in Western Canada, Baytex focuses on a high-quality and diversified oil portfolio across multiple plays, spanning Peace River, Duvernay, Lloydminster and Viking. The company is also active in the Eagle Ford shale. Banking on its strong execution and disciplined capital allocation, BTE prioritizes free cash flow generation. Baytex is also relentlessly working to improve its leverage ratios and enhance shareholder returns.
Calgary, Alberta-based BTE has a market capitalization of $2.3 billion. The Zacks Consensus Estimate for the company’s 2024 sales indicates 17.6% year-over-year growth. BTE, carrying a Zacks Rank #2 (Buy), has seen its stock go down 21% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Canadian Natural Resources: This Calgary-based energy major boasts a diversified portfolio of crude oil (heavy as well as light), natural gas, bitumen and synthetic crude oil. CNQ’s balanced and diverse production mix facilitates long-term value and reduces risk profile, thereby lending its results a high level of stability. Lower capital expenditure needs, accretive acquisitions and improving operational efficiencies have been the other positives in Canadian Natural’s story, which allowed it to generate a significant free cash flow of C$2.8 billion (post capital spending and dividends) in the first nine months of 2024.
CNQ beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in the other. It has a trailing four-quarter earnings surprise of roughly 3.9%, on average. Canadian Natural shares have gained 6.5% in a year. The stock carries a Zacks Rank #3 (Hold).
Ovintiv: Ovintiv is an independent E&P operator with an attractive oil and gas production portfolio in three major North American unconventional basins: Montney, Anadarko and the Permian. Following the Newfield acquisition in 2019, the company has achieved a higher liquids focus, greater scale and cost synergies. Ovintiv has done a commendable job of cutting its expenses in a disciplined manner, which should boost free cash flow generation. Ovintiv’s cash flows will also receive downside protection from attractive oil and gas hedges.
Ovintiv beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 25.4%, on average. The #3 Ranked company’s Value and Momentum Score of A and B, respectively, help it to round out with a VGM Score of B. With a market capitalization of around $11 billion, OVV has increased 2% in a year.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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