Chicago, IL – May 5, 2025 – Today, Zacks Equity Research discusses Tourmaline Oil TRMLF, Arc Resources AETUF and Ovintiv OVV.
Link: https://www.zacks.com/commentary/2460984/tariffs-hit-hard-but-3-canadian-upstream-stocks-hold-up
After a tough year marked by price volatility and policy headwinds, the Zacks Oil and Gas - Exploration and Production - Canadian industry finds itself at a crossroads. Oil weakness, driven by U.S. tariffs and OPEC+ output hikes, has slowed drilling and squeezed cash flows. Meanwhile, a downward revision in global demand forecasts and rising clean energy adoption add to long-term uncertainty.
The industry has underperformed, falling nearly 25% over the past year—well below the broader energy sector and the S&P 500. Yet, opportunity exists. The upcoming launch of LNG Canada could revitalize the natural gas segment by opening new export routes to Asia and lifting Alberta prices. Drilling activity has already shifted toward gas, showing a clear response to this potential catalyst.
Valuation also looks appealing, with the group trading at just 4.75X EV/EBITDA. In this evolving landscape, Tourmaline Oil, Arc Resources and Ovintiv stand out for their scale and fundamental strength.
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.
LNG Canada Launch Signals a Turning Point for Canadian Natural Gas: Canada's E&P industry is entering a promising new phase as the long-awaited LNG Canada project nears operation. Set to process 1.9 billion cubic feet per day, the facility is expected to ease the long-standing price discount on Alberta natural gas by redirecting supply from the U.S. to Asia. The timing couldn't be better.
With China cutting off U.S. LNG purchases due to trade tensions and demand for the fuel expected to rise across Asia, Canadian producers are uniquely positioned to fill that gap. This shift is already reshaping drilling behavior: natural gas well licenses surged 26% in the first quarter of 2025, while oil well licenses dropped 24%.
As LNG Canada ramps up, it offers a powerful catalyst for higher gas prices, improved margins and long-term export diversification. If managed well, it could add as much as C$75 billion to the national economy annually—redefining Canada's role in global energy markets.
Oil Price Volatility and Tariff Risks Undermine Industry Confidence: While gas prospects are improving, the broader Canadian E&P sector remains under pressure due to falling oil prices and global trade headwinds. Western Canadian Select crude dropped from $59 to $50 per barrel in April alone, driven by a combination of U.S. tariff escalations and OPEC+ output hikes.
This volatility not only reduces cash flow for producers but also discourages new oil development. The shift in licensing trends underscores the industry's growing caution. Uncertainty around U.S. trade policy, especially under President Trump's tariff-heavy approach, has further clouded the outlook.
OPEC Revises Oil Demand Outlook: The latest monthly report from OPEC shows that the cartel has revised its global oil demand growth forecast for 2025 downward for the first time since December, now projecting an increase of 1.3 million barrels per day (bpd) — 150,000 bpd less than previous estimates.
The revision stems largely from slower-than-expected consumption and new U.S. tariffs that have rattled trade dynamics and economic sentiment globally. As President Trump ramps up tariff measures, including a 125% levy on Chinese imports, investors are growing increasingly wary about how this might dampen energy demand, particularly in emerging markets.
Clean Energy Shift Poses Long-Term Risk: The global energy transition is gaining momentum, with renewables and electric vehicles (EVs) steadily positioning themselves as viable alternatives to fossil fuels. As EV adoption accelerates and technological advancements drive down clean energy costs, traditional oil demand could face a structural decline. While renewable infrastructure is still scaling and high upfront costs remain a barrier, steady policy support and innovation are narrowing the gap. If these trends continue, oil consumption could see material erosion over the next 5 to 10 years.
The Zacks Oil and Gas - Canadian E&P is a 10-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #156, which places it in the bottom 37% of 247 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 outperforms 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 26% in the past year, the same for 2026 have fallen 19.3% over the same timeframe.
Despite the dim near-term prospects 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.
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 24.9% over this period compared with the broader sector's decrease of 12.9% and the S&P 500's rise of 8.7%.
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 4.75, significantly lower than the S&P 500's 16.43. It is, however, above the sector's trailing 12-month EV/EBITDA of 4.30X.
Over the past five years, the industry has traded as high as 14.49X, as low as 2.95X, with a median of 5.18X.
Tourmaline Oil: Tourmaline is Canada's top natural gas producer, with operations spread across Alberta's Deep Basin, Northeast British Columbia's Montney, and the Peace River Triassic Oil play. The company pursues long-term growth through disciplined capital allocation, operational efficiency, and strategic acquisitions. As the country's fourth-largest gas processing midstream operator, Tourmaline generates leading cash flow metrics and robust free cash flow. Backed by a BBB investment-grade credit rating, it offers investors a compelling mix of scale, cost efficiency, and strong exposure to top-tier Canadian natural gas assets.
TRMLF has a market capitalization of $16.6 billion. The company's expected EPS growth rate for three to five years is currently 27.6%, which compares favorably with the industry's growth rate of 17.9%. Tourmaline Oil, carrying a Zacks Rank #3 (Hold), has seen its stock go down 7.4% in a year. You can see the complete list of today's Zacks #1 Rank stocks here.
Arc Resources: ARC Resources stands as Canada's largest pure-play Montney operator and ranks third in the nation for natural gas production. The company has built a solid reputation for consistent operational execution and strong financial performance. With an investment-grade credit rating, ARC focuses on maintaining cost leadership, growing its condensate production organically, and capitalizing on LNG market opportunities. Its sizeable, high-quality asset base supports sustainable long-term output. ARC aims to triple its free funds flow per share by 2028, leveraging efficiencies and scale to drive profitability.
Notably, the Zacks Consensus Estimate for AETUF's 2025 earnings per share indicates 43.1% year-over-year growth. It has a trailing four-quarter earnings surprise of roughly 3.8%, on average. Arc Resources shares have edged up 1% in a year. The stock carries a Zacks Rank of 3.
Ovintiv: Ovintiv is a leading North American independent E&P company with a diverse portfolio spanning the Montney, Anadarko, and Permian basins. Its 2019 acquisition of Newfield Exploration added scale, improved its liquids weighting, and unlocked operational synergies. The company has maintained a disciplined approach to cost reduction, supporting improved free cash flow generation. Ovintiv also benefits from a proactive hedging program that provides downside protection in volatile commodity markets, reinforcing its ability to deliver stable cash flows across cycles.
Ovintiv beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 25.5%, on average. The #3 Ranked company carries a Value Score of A and a VGM Score of B. With a market capitalization of around $8.7 billion, OVV has decreased 33.3% in a year.
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Arc Resources Ltd. (AETUF) : Free Stock Analysis Report
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