National Bank Financial analysts Travis Wood and Dan Payne do not see “the same magnitude” of catalysts in the Canadian energy sector in 2025 as evident this year, predicting “more of a stock pickers market, where trading around core positions throughout the year should help drive incremental return.”
“2024 confirmed our thesis that FCF, valuation, balance sheet attention and return of capital can drive outsized returns regardless of sluggish commodity prices,” they said. “Despite domestic oil and gas prices trading flat, to down for much of 2024, the energy index generated 11 per cent, while our best ideas generated 20-40 per cent.”
In a research report released Thursday titled 2025 Outlook: Same, Same But Different, the analysts said “decision-making around the use of free cash flow will be met with scrutiny (this likely becomes a nuanced differentiator).”
“We continue to believe that a sustainable return of capital model is only as successful as the assets and capital discipline behind them, therefore we expect corporate level returns will emerge as an investing benchmark for 2025,” he said. “Leveraging these broader themes with more micro-based themes such as growth, re-rate potential, sustainability and balancing Trump (and potential tariffs) should provide a decent playbook for Canadian energy in 2025.”
“Similar to 2024, the sector provides opportunity despite what appears to be a directionless macro backdrop. Valuations remain attractive, balance sheets are pristine, FCF is resilient, baseline dividends and capital programs are sustainable and relative value exists.”
The analyst also emphasized Donald Trump’s return to the U.S. presidency on Jan. 20 will have significant and currently unclear consequences across the sector.
“There are various upside and downside risks to the names within our coverage, but outside of tariffs, we believe they skew more heavily to the bullish side (in large part due to public companies’ unwillingness to grow for the sake of growth),” he said. “From a macro perspective, supply risk to Iran, Russia and Venezuela could support prices, while renewable subsidies could bolster demand. We also believe that Trump will lift Biden’s pause on LNG export permits, providing additional catalysts for natural gas prices on the continent due to the incremental access to more lucrative markets abroad (and provide some of the growth implicit in his plan). Furthermore, despite his repeated claims of “Drill, Baby, Drill” and opening the taps, public companies continue to prioritize capital discipline and returns above growth. While the tariffs on imported oil could be extremely problematic and costly, we believe they are not likely to be implemented given the knock-on effect they would have on American energy prices (going against his desire for lower energy costs).”
In the report, the analysts released their 2026 estimates, but they noted their valuations remain based on a 2025 estimated enterprise value to debt-adjusted cash flow multiple “due to longer-term uncertainty surrounding the commodities and macro-related trends.”
“We believe 2025e remains representative of the long-term fair value in a more normalized price environment (mid-cycle),” they said. “Our target multiples are supported by historical forward-looking multiples, in this case we have leveraged historical multiples from 2017-2019 where applicable, given the similarities we see from a price environment perspective.
“On average, our 12-month target prices have decreased by 4 per cent, driven largely by our revisions to our commodity price assumptions, target multiple adjustments in addition to recently published 2025 guidance for select names. We see 57-per-cent and 36-per-cent total return potential across our Outperform and Sector Perform rated names, respectively.”
Mr. Payne and Mr. Wood also unveiled their top picks for the year ahead:
- Arc Resources Ltd. ( “outperform” and unchanged $32 target) and Tourmaline Oil Corp. ( “outperform” and $75 target, up from $72.50), noting “growth and FCF ramp helped by C5+ exposure while LNG exposure continues to expand.”
- Cenovus Energy Inc. ( “outperform” and $29 target, down from $31), citing “value and re-rate through only a modest downstream improvement.”
- Suncor Energy Inc. (“outperform” and $65 target, down from $76), emphasizing “continued re-rate momentum vs. historical and relative value as execution and cost compression plays out.”
- Headwater Exploration Inc. ( “outperform” and $9 target, down from $9.50) and Tamarack Valley Energy Ltd. ("outperform” and $6.75 target, down from $7) on “compounding value momentum in the Clearwater.”
- Kelt Exploration Ltd. ( “outperform” and $9 target, up from $8.75), Logan Energy Corp. (“outperform” and unchanged $1.50 target) and Spartan Delta Corp. (“outperform” and $6 target, up from $5.75) on “pursuing meaningful liquids-oriented value through growth.”
- Topaz Energy Corp. (“outperform” and unchanged $33.50 target), noting “solid risk-adjusted returns through a diversity of high-quality exposures.”