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Latest Perspective on Canadian Upstream Industry: CNQ, OVV, BTE
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The Zacks Oil and Gas - Exploration and Production - Canadian industry is experiencing a mix of trends that shape its outlook. The Trans Mountain Pipeline Expansion Project is a significant development, enhancing Canada’s crude transportation capacity and enabling upstream operators to reach broader markets with better pricing. This infrastructure improvement is poised to strengthen the industry’s global competitiveness. However, challenges persist, such as the struggle to push oil prices beyond $70 per barrel due to slowing demand and economic concerns. Despite the headwind, Canadian upstream operators remain resilient, with a focus on shareholder returns. In this environment, companies like Canadian Natural Resources Limited (CNQ - Free Report) , Ovintiv (OVV - Free Report) and Baytex Energy (BTE - Free Report) stand out as stocks to watch, offering a balance of growth potential and shareholder returns against a complex market backdrop.
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
The Trans Mountain Pipeline Effect: In a major breakthrough for Canada’s energy sector, the Trans Mountain Pipeline Expansion Project (“TMX”) recently started shipping oil. An enhancement to the capacity of a crucial infrastructure originally built in 1953, this initiative aims to bolster Canada’s crude transportation capabilities, directly impacting the country’s economy and its oil industry’s global reach. The expanded pipeline is aimed at alleviating the bottleneck in Canada’s oil transportation network, thereby helping upstream operators gain access to a broader range of buyers to sell their products at better rates.
Slowing Demand and Economic Concerns: Pulled down by multiple factors, Canadian oil prices have been struggling to get past the $70-a-barrel level. The EIA's revised forecast of global crude consumption at 104.5 million barrels per day for 2025, down 200,000 barrels from prior estimates, reflects concerns over a potential U.S. recession and a decelerating Chinese economy. With a reduced demand growth rate of 1.6%, these factors have been exerting downward pressure on oil prices, highlighting vulnerabilities in global oil demand driven by economic uncertainties in major markets.
Prioritizing Shareholder Returns: Despite gyrations in the energy market, Canadian upstream operators offer a low-cost way to gain broad exposure to leading blue-chip energy stocks, which have demonstrated strong free cash flow generation and attractive dividend growth. In particular, cash from operations is on a sustainable path, with revenues stabilizing and companies slashing capital expenditures from the pre-pandemic levels amid commodity realizations at a healthy enough level for market participants. To put it simply, efficiency improvements over the past few years helped the E&P firms generate significant “excess cash,” which they intend to use to boost investor returns. In fact, more and more energy companies are allocating their increasing cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Canadian E&P is a six-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #60, which places it in the top 24% 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 fairly strong 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.
Considering the encouraging dynamics 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 Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Canadian E&P industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 14% over this period compared with the broader sector’s increase of 3.5% and the S&P 500’s rise of 28.4%.
One-Year Price Performance
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 4.89, significantly lower than the S&P 500’s 18.89. It is, however, above the sector’s trailing 12-month EV/EBITDA of 3.13X.
Over the past five years, the industry has traded as high as 14.49X, as low as 2.91X, with a median of 5.38X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
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 is on track to generate substantial free cash flow in this commodity upcycle. Baytex is also relentlessly working to improve its leverage ratios and enhance shareholder returns.
Over the last 60 days, the Zacks Consensus Estimate for Calgary, Alberta-based BTE’s 2024 earnings has moved up 40.9%. The Zacks Consensus Estimate for the company’s 2024 sales indicates 21.6% year-over-year growth. BTE, carrying a Zacks Rank #2 (Buy), has seen its stock go down 8.9% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: BTE
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$6.9 billion (post capital spending and dividends) in 2023.
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 7.2%, on average. Canadian Natural shares have gained 19.3% in a year. The stock carries a Zacks Rank #3 (Hold).
Price and Consensus: CNQ
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 three of the last four quarters and missed in the other. It has a trailing four-quarter earnings surprise of roughly 7.8%, on average. The #3 Ranked company’s Value and Growth Score of A and B, respectively, help it to round out with a VGM Score of A. With a market capitalization of around $11.3 billion, OVV has decreased 7.8% in a year.
Price and Consensus: OVV
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Latest Perspective on Canadian Upstream Industry: CNQ, OVV, BTE
The Zacks Oil and Gas - Exploration and Production - Canadian industry is experiencing a mix of trends that shape its outlook. The Trans Mountain Pipeline Expansion Project is a significant development, enhancing Canada’s crude transportation capacity and enabling upstream operators to reach broader markets with better pricing. This infrastructure improvement is poised to strengthen the industry’s global competitiveness. However, challenges persist, such as the struggle to push oil prices beyond $70 per barrel due to slowing demand and economic concerns. Despite the headwind, Canadian upstream operators remain resilient, with a focus on shareholder returns. In this environment, companies like Canadian Natural Resources Limited (CNQ - Free Report) , Ovintiv (OVV - Free Report) and Baytex Energy (BTE - Free Report) stand out as stocks to watch, offering a balance of growth potential and shareholder returns against a complex market backdrop.
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
The Trans Mountain Pipeline Effect: In a major breakthrough for Canada’s energy sector, the Trans Mountain Pipeline Expansion Project (“TMX”) recently started shipping oil. An enhancement to the capacity of a crucial infrastructure originally built in 1953, this initiative aims to bolster Canada’s crude transportation capabilities, directly impacting the country’s economy and its oil industry’s global reach. The expanded pipeline is aimed at alleviating the bottleneck in Canada’s oil transportation network, thereby helping upstream operators gain access to a broader range of buyers to sell their products at better rates.
Slowing Demand and Economic Concerns: Pulled down by multiple factors, Canadian oil prices have been struggling to get past the $70-a-barrel level. The EIA's revised forecast of global crude consumption at 104.5 million barrels per day for 2025, down 200,000 barrels from prior estimates, reflects concerns over a potential U.S. recession and a decelerating Chinese economy. With a reduced demand growth rate of 1.6%, these factors have been exerting downward pressure on oil prices, highlighting vulnerabilities in global oil demand driven by economic uncertainties in major markets.
Prioritizing Shareholder Returns: Despite gyrations in the energy market, Canadian upstream operators offer a low-cost way to gain broad exposure to leading blue-chip energy stocks, which have demonstrated strong free cash flow generation and attractive dividend growth. In particular, cash from operations is on a sustainable path, with revenues stabilizing and companies slashing capital expenditures from the pre-pandemic levels amid commodity realizations at a healthy enough level for market participants. To put it simply, efficiency improvements over the past few years helped the E&P firms generate significant “excess cash,” which they intend to use to boost investor returns. In fact, more and more energy companies are allocating their increasing cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Canadian E&P is a six-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #60, which places it in the top 24% 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 fairly strong 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.
Considering the encouraging dynamics 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 Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Canadian E&P industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 14% over this period compared with the broader sector’s increase of 3.5% and the S&P 500’s rise of 28.4%.
One-Year Price Performance
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 4.89, significantly lower than the S&P 500’s 18.89. It is, however, above the sector’s trailing 12-month EV/EBITDA of 3.13X.
Over the past five years, the industry has traded as high as 14.49X, as low as 2.91X, with a median of 5.38X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
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 is on track to generate substantial free cash flow in this commodity upcycle. Baytex is also relentlessly working to improve its leverage ratios and enhance shareholder returns.
Over the last 60 days, the Zacks Consensus Estimate for Calgary, Alberta-based BTE’s 2024 earnings has moved up 40.9%. The Zacks Consensus Estimate for the company’s 2024 sales indicates 21.6% year-over-year growth. BTE, carrying a Zacks Rank #2 (Buy), has seen its stock go down 8.9% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: BTE
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$6.9 billion (post capital spending and dividends) in 2023.
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 7.2%, on average. Canadian Natural shares have gained 19.3% in a year. The stock carries a Zacks Rank #3 (Hold).
Price and Consensus: CNQ
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 three of the last four quarters and missed in the other. It has a trailing four-quarter earnings surprise of roughly 7.8%, on average. The #3 Ranked company’s Value and Growth Score of A and B, respectively, help it to round out with a VGM Score of A. With a market capitalization of around $11.3 billion, OVV has decreased 7.8% in a year.
Price and Consensus: OVV