National Bank While National Bank Financial analysts Dan Payne and Travis Wood remain “optimistic” about the outlook for Canada’s energy sector, they emphasized recent policy decisions and building narratives from U.S. president Donald Trump during his first few days in office leave them “somewhat tepid in the shorter term.”
“After marking-to-market Q4, our price assumptions remain unchanged and continue to characterize 2025 as a stock picker’s market, where shorter-term duration ideas will have the potential to generate alpha for the year,” they said in a research note titled Elephants in the Room.
During the approaching fourth-quarter 2024 earnings season, the analysts expect the uncertainty surrounding the implementation of U.S. tariffs as the top topic of discussion among both executives and investors. They’re currently projecting 6-per-cent earnings gains on average from the third quarter, falling largely in line with the Street.
“Sequentially we generally see the biggest opportunity in the gas and liquids-weighted peer groups,” they said. “Outside ARX and TOU (which we touch on in the tariffs section below), we continue to like gas-weighted names such as KEL for its significant and immediate value-expansion profile (set to provide for 40% production growth, largely in H1/25) and PEY for its attractive risk-adjusted returns and optionality on account of its strong hedging program, while we flag that the Canadian gas producers in general trail the U.S. peer group by a 2-turn discount on average (approximately 6 times vs. 4 times).
Also, as reflected in our recent rating changes, we increasingly favour AAV and BIR given their compounding long-term value propositions (and exposure to AECO upside), with AAV offering high-impact value through vertical integration of net zero gas to power, and BIR offering high-value impact through vertical integration towards LNG off-take and global pricing.”
The analysts also named several companies that they think are “less exposed on a relative basis to the threat of tariffs, as well as highlight those names with relative upside should the tariffs not come to fruition.”
“In general, we see lighter crudes as more likely to attract tariffs given the available substitutes in the U.S. from domestic production, but in terms of those names that are less impacted, or sheltered from potential tariffs, we flag SU, IMO, ARX and TOU as names to watch,” they said. “For SU and IMO, these names sell a large portion of SCO barrels with most, if not all, of their refinery operations more insulated here in Canada (while SU remains one of our top picks which we believe is most likely to continue to experience multiple expansion this coming year given its relative discount and likelihood of posting earnings beats), while ARX and TOU send LNG volumes abroad, with Canadian condensate revenues sheltered due to the shortage of condensate in the basin.
“In regard to who has torque if tariffs do not materialize, we flag MEG, ATH, CVE and TVE as names that have traded downwards recently (down 4 per cent on average year to date as of January 28) due to their expected relative exposure to potential tariffs (and sizable short interest for certain names), and which screen well in this scenario.”
With their annual total return implying an average of 43 per cent, the analysts made these target adjustments:
- Arc Resources Ltd. (“outperform”) to $34 from $32. The average is $32.78.
- Cenovus Energy Inc. ( “outperform”) to $28 from $29. Average: $30.
- Freehold Royalties Ltd. ( “outperform”) to $16 from $15.50. Average: $17.10.
- Imperial Oil Ltd. (“sector perform”) to $110 from $109. Average: $101.51.
- Kelt Exploration Ltd. ( “outperform”) to $10 from $9. Average: $9.33.
- Lycos Energy Inc. ( “outperform”) to $4.75 from $5.25. Average: $4.69.
- Meg Energy Corp. ( “sector perform”) to $28 from $27. Average: $31.93.
- Ovintiv Inc. ( “outperform”) US$56 from US$51. Average: US$59.45.
- Prairiesky Royalty Ltd. ( “sector perform”) to $33 from $32. Average: $30.91.
- Suncor Energy Inc. ( “outperform”) to $68 from $65. Average: $61.85.
- Vermilion Energy Inc. ( “outperform”) to $19 from $18. Average: $17.38.
- Veren Inc. ( “outperform”) to $13 from $12.50. Average: $11.29.
- Whitecap Resources Inc. ( “outperform”) to $14.50 from $15. Average: $13.54.