Desjardins Desjardins Securities analyst Chris MacCulloch remains “extremely cautious on the prospect of tariffs on Canadian energy products being imposed by the incoming Trump administration,” however he’s “otherwise constructive” on the broader sector moving into 2025.
“After finally catching a break on egress with TMX and the upcoming commissioning of the LNG Canada project, Canadian oil & gas producers are facing a unique threat from the potential imposition of tariffs by the incoming Trump administration,” he adde. “Whether they are a serious policy consideration or a convenient negotiating tactic remains a mystery. As is the question of whether they would apply to Canadian energy products. We are tempted to wax poetic about the deep integration of the North American petroleum sector, highlighting U.S. Midwest and Rocky Mountain refiners’ dependence on Canadian heavy oil feedstock (and the lack of domestic substitutes), which would presumably result in US motorists sharing in at least some of the pain of cross-border tariffs. Even a casual observer of US politics would note that voters in those regions were one of the key electoral blocks propelling Trump’s return to the White House. If there is one thing we have learned during his political career, it is to take his threats seriously (but not literally), particularly as his commentary has recently shifted from border security to the scale of the U.S. trade deficit with Canada. Even if he is merely bluffing with his threat to place a bomb under a U.S.$150-bilion cross-border trading relationship in energy products, investors need to at least contemplate the possibility, ridiculous as it may seem.”
In a 2025 outlook released Wednesday titled “You ain’t seen nothing yet”, Mr. MacCulloch emphasized the year ahead will “bring another significant milestone for industry with first LNG export capacity from the LNG Canada project, fresh on the heels of this year’s commissioning of the TMX pipeline, which has helped tighten WCS differentials.”
He said that access to global markets “comes not a moment too soon in light of renewed geopolitical uncertainty stemming from our neighbour and closest trading partner.”
From an investing perspective, Mr. MacCulloch sees the sector “attractively valued, both in absolute terms and relative to U.S. peers, particularly in view of record capital returns supported by robust balance sheets.”
“With heightened geopolitical and commodity price uncertainty, we believe investors should exercise extreme discretion with respect to stock selection,” he said. “We remain biased toward producers with modest sustaining capex requirements, strong balance sheets and shareholder-friendly capital allocations. We also expect sector consolidation to remain highly topical and are predisposed toward companies that are better able to capitalize on opportunities to counter-cyclically expand their asset portfolio in a more challenging environment. These factors tend to favour larger-cap producers, which offer sufficient asset diversification to craft a reasonably balanced Canadian oil & gas portfolio. Simply put, we don’t see much incentive for investors to move down-cap, where risk levels are heightened and trading liquidity is frequently limited, but without meaningful diversification. That said, the SMID-caps remain attractively valued within the historical context and there are select opportunities in what we increasingly view as special situations offering exposure to material operational catalysts and additional torque to commodity prices.”
He named a pair of top picks for 2025:
* ARC Resources Ltd. (with a “buy” rating and $35 target. The average is currently $31.75.
Analyst: “We reiterate ARX as our overall top pick in the Canadian energy sector. Despite strong performance in 2024 whereby the stock advanced by 24 per cent year-to-date (prior to factoring in dividends), we believe the company is primed for another strong showing in 2025. Last year’s bullish thesis primarily centred on the financial impact of Attachie Phase I—a statement which still holds true, with the project expected to deliver a massive boost to corporate FCF in 2025 following its recent commissioning earlier this fall. In the absence of material capital spending associated with Attachie Phase II, which is not expected to commence until 2026, incremental FCF will be allocated toward shareholder pockets through the recently enhanced base dividend (3.1-per-cent yield) and share repurchases, the latter of which are expected to land above the $1.0-billion level next year based on current strip prices. For context, this pace of buybacks could retire more than 7% of total outstanding shares on a fully diluted basis. ARX thus continues to offer one of the most compelling value propositions within the Desjardins E&P coverage universe, currently sporting a 4.7 times strip EV/DACF multiple (2025E)—a nearly two-turn discount vs the large-cap peer group (6.5 times)—along with the second-highest capital return yield (9.7 per cent) and the top total shareholder return (21.7 per cent) under coverage.”
* Cenovus Energy Inc. with a “buy” rating and $30 target. The average is $31.69.
Analyst: “To say that CVE disappointed our expectations as a top pick in 2024 would be a severe understatement. The company delivered a series of lacklustre results from its downstream manufacturing segment, which propelled a wave of negative sentiment which continues to weigh upon the stock. The results were particularly galling within the context of consistently strong operational and financial performance by the company’s three largest Canadian competitors (CNQ, IMO and SU), which drove funds flow out of the stock. That said, we continue to believe the core upstream business remains fundamentally sound, underpinned by best-in-class thermal oil sands assets and an offshore segment poised to deliver robust organic production growth moving into the back half of the decade. Admittedly, we expect the manufacturing segment to continue underperforming in 2025 and have tried to factor that into our model through conservative assumptions. Downstream pressures would be amplified if the incoming Trump administration carries through with its tariff threats on Canadian energy products, which could force the company to pay tariffs on its own heavy oil feedstock after crossing the 49th parallel for refining in the US. However, we also note that CVE offers some protection from tariffs as the largest contracted supplier on the TMX pipeline, which provides an opportunity for the company’s marketing team to offset potential losses in the downstream manufacturing segment. Although negative market sentiment toward refining will likely persist, we are optimistic that progress is being made on reliability and maintenance optimizations, which should support gradual improvements in margin capture and more consistent cash flow contribution, all else remaining equal. Finally, we should also caution investors of the potential threat looming over the Liwan gas project if China eventually carries out its long-anticipated invasion of Taiwan.”
Mr. MacCulloch named the following companies “worthy of honourable mention”: Canadian Natural Resources Ltd. (“buy” and $57.50 target), Suncor Energy Inc. (“buy” and $66 target), Tourmaline Oil Corp. (“buy” and $77 target), Advantage Energy Ltd. (“buy” and $12.50 target) and Spartan Delta Corp. (“buy” and $5 target).