Canadian Upstream and Integrated Oil & Gas Outlook

We are releasing our updated outlook commodity assumptions (consistent with our recent commodity update) and equity outlook/key themes and investment trends for 2025 and beyond. 

In summary, we believe that navigating near-term policy related risks (and the potential range of outcomes for commodity pricing and volatility, and associated impact on equity returns) will be one of the most material challenges/uncertainties energy equity investors will have to navigate entering H1/25 at this time with investors grappling with the potential impacts of tariffs (both directly on commodity price and netback impacts but also global economic demand), a Canadian Federal government increasingly hawkish on industry emissions (but facing significant internal and external political challenges), and potential strengthening sanctions of Russian and Iranian crude exports. 

Despite all this, we expect continued strong medium- and longer-term investment appeal for the Canadian upstream and integrated oil and gas sector given the relative asset quality and inventory depths. These near-term challenges generally see our 2025 forecasts for industry FCF yields well above long-term averages but modestly lower than 2024 (with the impact of downward revisions largely reflective of the modest decrease in our 2025e WTI pricing relative to our forecast) and 2023 levels. Over the past year, the market has continued to clearly differentiate between higher and lower quality business models, driven by an M&A cycle that has instructively placed a premium on inventory in transaction multiples, with a particular focus on condensate and liquids rich inventories.

As a result of modestly weaker crude price forecasts (inferring higher near-term valuations) and greater valuation differentiation, we continue to view stock picking within the sector as inherently more difficult for investors as we head into 2025, with investors having to continue to weigh a trade off between lower quality and higher risk business models and assets at cheaper valuations and higher quality lower risk assets at more expensive valuations, and investors will require a particularly sharp focus on asset level performance data given the heightened impact of operational and financial surprises we have observed on equities in recent quarters.

We continue to favour higher quality business models/strong operational executors, at opportunistic valuations and favour AAV, ARX, CNQ and TVE, inflation insulated equities (PSK, TPZ), as well as high quality outsized resource bases (KEC, KEL) at this time. See full report for further details and sensitivity analysis to our 2025 views. 

Highlights:

Operational and Financial Execution Increasingly Under the Microscope 
As energy equity valuations have cyclically improved from 2022 to today, operational risk profiles have also shifted, in our view. For perspective, we project total shareholder returns (FCF/EV Yield + PPS Growth) for our oil sands and large cap group to average 13.3% and 16.0%, respectively, relative to a 2022-2024 average of 17.8% and 21.5%, respectively. 

With valuations still attractive, but also with a lower degree of margin of safety, operational execution and efficiency will be much more in focus for investors, with beats and misses of guidance and investors expectations likely to increase upside and downside returns. As a result, a focus on operational data points, particularly public production data, will become increasingly important, in our view, with ARX, CNQ, TVE, and WCP as key focus names that demonstrated strong operational track records in 2024. 

Focused M&A Activity
The E&P sector saw noteworthy M&A activity throughout 2024, with notable transactions in our coverage universe such as CNQ’s acquisition of CVX’s Alberta assets, POU’s (POU-T; Restricted) disposition of its liquids rich Montney assets, and TOU’s acquisition of Crew Energy; we believe this pattern of consolidation will persist in 2025.

M&A transactions were abundant in H1/24 on a value basis, especially in the US, but there have also been numerous key transactions in H2/25, especially on the Canadian front. We believe there is more room for consolidation for optimal development of the resource, and believe that high inventory liquids (particularly condensate) rich assets will be most coveted near term, with KEC and KEL as particular standouts relative to this 2025 investor theme.

Continuation of Multilateral Activity and Waterflood Trend
We expect the proliferating multilateral drilling technology trend to continue into 2025 following the technologies expanded use in 2024. Multilateral drilling initially gained notoriety in the Clearwater play in Alberta, but has subsequently seen expansion in utilization, primarily in conventional and cold flow heavy oil reservoirs, in particular the Mannville stack in 2024.

We are now observing the technology expanding to marginal/periphery oil reservoirs (WCP recently noted its Frobisher State A multilateral pilot producing an IP90 of 224 boe/d (73% liquids - in line with it Tier 1 type curve)) and Spur (Private) announced a two-leg Pekisko pilot at Haro in NW Alberta as the technology continues to proliferate and expand resource opportunities.

In the Clearwater, focus on waterflood recovery will continue to increase, with both TVE and HWX expected to aggressively expand waterfloods in 2025, with reserve engineering firms increasing comfort level in waterflood results a potential positive tailwind for year end 2024 reserve reports. 

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