Amid Soft Prices, 3 Canadian E&P Stocks Keep Their Edge

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 like gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand are the fundamental drivers 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 uncertain.

4 Key Investing Trends to Watch in the Oil and Gas - Canadian E&P Industry

Rising Global Supply Risks Pressuring Prices: A key challenge for Canada’s oil and gas producers is the mounting risk of a global oversupply. OPEC+ and non-OPEC producers, including the United States and Brazil, are boosting output, with total additions exceeding 2.7 million barrels per day in 2025. Meanwhile, demand growth remains modest and could slow further if global economic activity weakens. Analysts already warn of a potential glut extending into 2026, with forecasts of Brent crude dipping toward $50 per barrel. Such pricing pressure could erode margins for Canadian producers and discourage new investment.

Persistent Market Volatility and Cost Inflation: Canadian upstream operators face persistent volatility in crude prices, which have swung between the high $50s and mid-$70s in recent quarters. This instability, compounded by exchange rate fluctuations and rising input costs, strains planning and capital efficiency. Even with hedging programs, maintaining profitability becomes difficult when energy prices decline sharply while operational costs remain sticky. Cost pressures from labor, materials and regulatory compliance continue to rise, limiting free cash flow flexibility and constraining reinvestment across the sector.

Canada’s LNG Debut Opens a New Era for Energy Exports: The launch of LNG Canada marks a defining moment for the country’s energy sector. For decades, Canadian producers were tied to the U.S. pipeline network, facing steep price discounts and limited market access. The first LNG shipment to South Korea — part of the $40 billion Kitimat project — now changes that dynamic, giving Canada a direct route to premium Asian buyers. As exports ramp up to 14 million tons per annum and potentially double in Phase 2, this diversification is expected to narrow the long-standing price gap with U.S. hubs and support stronger natural gas prices over time.

Electric Vehicles and Green Policies Reshape Oil Demand: The pace of global oil demand growth is set to slow sharply after 2026. The rise of electric vehicles, cleaner fuel use in freight transport and a continued shift away from fossil fuels in power generation are key factors. Oil demand could peak as early as 2030, creating long-term uncertainty for prices. As gasoline and diesel consumption levels off in advanced economies, investors may become more cautious about financing large-scale oil projects. This trend could hurt oil producers that depend on high prices and steady output growth, potentially weighing on their stock valuations.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil and Gas - Canadian E&P is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #162, which places it in the bottom 33% of 243 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 outperform 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 2025 have gone down 2% in the past year, the same for 2026 have fallen 19.4% over the same timeframe.

Despite the dim near-term prospects of the industry, we 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 down 13.7% over this period compared with the broader sector’s decrease of 0.1% and the S&P 500’s rise of 17.4%.

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 4.99, significantly lower than the S&P 500’s 18.68. It is also slightly below the sector’s trailing 12-month EV/EBITDA of 5.04X.

Over the past five years, the industry has traded as high as 14.49X, as low as 2.95X, with a median of 5.13X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)

3 Stocks in Focus

Canadian Natural Resources: It is one of the largest independent energy producers in Canada, with a diversified portfolio spanning crude oil, natural gas liquids, and natural gas. Its operations extend across Western Canada, the North Sea, and offshore West Africa, giving it a strong global footprint. Canadian Natural has built a reputation for effective, efficient operations and a balanced mix of long-life, low-decline assets that provide steady production and cash flow visibility.

CNQ’s disciplined capital allocation, operational excellence and commitment to low-cost production have been central to its success. With a focus on maximizing free cash flow and shareholder returns, Canadian Natural continues to maintain financial flexibility and resilience across commodity cycles. The Zacks Rank #1 (Strong Buy) operator has a market capitalization of around $63 billion. Canadian Natural carries a Value Score of B, while the stock has lost 14.9% in a year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: CNQ

Arc Resources: ARC Resources is Canada’s largest pure-play Montney producer and the country’s third-largest natural gas supplier. Known for its reliable operations and strong financial discipline, the company holds an investment-grade credit rating. ARC continues to prioritize cost efficiency, organic condensate growth and exposure to expanding LNG markets. Its large, high-quality asset base underpins steady long-term production. Looking ahead, ARC plans to triple its free funds flow per share by 2028 by enhancing operational efficiencies and scaling its business for higher profitability.

Notably, the Zacks Consensus Estimate for AETUF’s 2025 earnings per share indicates 11% year-over-year growth. It has a trailing four-quarter earnings surprise of roughly 24.5%, on average. Arc Resources shares have gone up 8.2% in a year. The stock carries a Zacks Rank #3 (Hold).

Price and Consensus: AETUF

Baytex Energy: It is a Canadian exploration and production company with a strong oil-weighted portfolio spread across Canada and the United States. Baytex Energy’s key Canadian assets include the Duvernay, Viking, Peace River, Peavine and Lloydminster areas, while its U.S. operations are concentrated in Texas’ Eagle Ford basin — now accounting for roughly 60% of total production. This balanced footprint allows Baytex to leverage both light and heavy oil opportunities while maintaining operational flexibility.

The company remains focused on disciplined capital management, using free cash flow to strengthen its balance sheet and reward shareholders through dividends and buybacks. A conservative hedging program supports stability amid commodity price swings, while low leverage and prudent debt reduction underscore financial resilience. With a mix of strong assets and sound execution, Baytex continues to navigate the energy cycle with an eye toward sustainable returns and growth. The #3 Ranked company carries a Value Score of A and also a VGM Score of A. With a market capitalization of around $1.7 billion, BTE has decreased 22.8% in a year.

Price and Consensus: BTE

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This article originally published on Zacks Investment Research (zacks.com).

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