Canadian Upstream 2026 Outlook

We are releasing our updated outlook, commodity assumptions and key equity themes and investment trends for 2026 and beyond. As we transition into 2026, we see the Canadian E&P sector characterized by improving structural egress outlook for Canadian natural gas as LNG Canada reaches expected more-consistent operations, and WCS fundamentals remain firm on a current 2026 strip differential of US$12.80/bbl.

Sustainable capital returns and M&A momentum will likely slow amid a softer WTI strip (~US$57/bbl) y/y; with the compounding power of share buybacks impacted by lower CF but expanded valuations following strong 2025 equity returns and a potential slowdown in Canadian E&P M&A with asset sellers still seeing limited balance sheet stress as a motivating factor and a limited appetite for crystallization at low end of the commodity price cycle; the primary driver of 2026 M&A activity will be the solidification of long-term inventory positions for the buyers of assets.

That being said, following a significant consolidation cycle from 2022 through 2025, we see fewer remaining high-quality inventory-rich targets that will be more actively coveted, and industry trending towards a transition of value recognition that increasingly focuses on inventory depth and reflects NAV-based valuations over CF multiple accretion, providing strong read-through value for producers that have been rapidly expanding land bases as they undergo buildouts, like ATH, SDE and POU. Historical return analysis shows that both dividend-focused models and buyback-heavy/mixed-return frameworks have been able to create outperformance; entering 2026, we believe top-tier shareholder return performance requires balancing sustainable and well-telegraphed consistent ROC, favouring equities like TVE, ARX and WCP.

Finally, we believe that investors will be closely focused on two key Canadian oil egress issues in 2026 - the progression of the Alberta MOU with the Canadian Federal government, and TMX toll negotiations (with a status update expected in early February), with the potential to see CNQ and CVE benefit from lower long-term TMX tolls.

Return of Capital Performance 
Price returns (inclusive of reinvested dividends) over the last two years illustrate the strength of various capital allocation models, with focused dividend-heavy strategies from PEY, HME, POU, SCR, and CJ delivering >70% returns (POU and SCR both returned large special dividends to shareholders in 2025 following Montney asset-dispositions).

Alternatively, share repurchases and mixed ROC frameworks also drove significant outperformance for TVE (>180%), ATH (>65%) and IMO (>60%) as these producers utilized consistent NCIB exhaustion and base dividend growth (for IMO and TVE) to navigate market dislocations. As we transition into 2026, we believe a transparent, income-focused distribution framework remains essential for downside protection, though top-tier performance will likely require balancing aggressive shareholder returns with pershare operational growth (DAPPS) and FCFPS stability; particularly weaker commodity prices and improved equity cost of capital attenuate the compounding per share power of share buybacks in 2026 relative to 2025.

With both active strategies for shareholder capital return seeing considerable positive reactions from the market over the last two years, we see the preferred trend for returning capital in 2026 by investors, whether it be through buybacks, base dividends, or opportunistic specials, as well-telegraphed and consistent returns of capital throughout the commodity cycle.

M&A Focus on High Quality Inventory
We anticipate a modest slowdown in Canadian E&P M&A activity through 2026 following three very active years of consolidation within the space. This expected decline in M&A momentum is due to two key factors, including 

1. limited remaining high-quality M&A targets with adequate scale and inventory, 
2. weakness in oil commodity benchmarks heading into 2026 with the current WTI 2026 strip at ~US$57/bbl and limited appetite for crystallization at the bottom of the commodity price cycle. 

We believe the industry has shifted towards a NAV valuation thesis given better intrinsic capture of asset value and inventory levels relative to shorter-term CF metrics. The recent filing by NVA noted seven producers entered the confidential data room as a part of its sale process, a strong indication of the value being placed on high-quality, durable inventory, especially as concerns of L48 inventory degradation continue to percolate. This will favour remaining high inventory business models, notably SDE, POU, and KEL in our view. A positive FID for one or more Canadian LNG projects in 2026 will support investor interest in deep gas inventory business models such as BIR and PEY.

Pipeline Buildout and Egress Expansion
The 2026 outlook for the WCSB is defined by a structural shift in egress capacity and market access. The landmark Memorandum of Understanding between the Governments of Canada and Alberta has established a cooperative framework to accelerate infrastructure, targeting a new bitumen pipeline to the West Coast with at least 1 mmbbl/d of capacity. While near-term optimizations on the Enbridge Mainline and TMX bridge the gap through 2028, the MOU de-risks long-term growth for heavy oil and condensate producers by mandating a July 1, 2026, proposal deadline and streamlined approvals.

In addition, investors will be closely focused on two key Canadian oil egress issues in 2026 - the progression of the Alberta MOU with the Canadian Federal government, and TMX toll negotiations (with a status update expected in early February), with the potential to see CNQ and CVE benefit from lower long-term TMX tolls.

Simultaneously, Canadian LNG markets reach a critical inflection point as LNG Canada transitions to base load demand in 2026. Despite recent Train 2 commissioning delays (no send-out noted since December 12th), the facility is expected to structurally improve AECO basis as it ramps toward its 1.84bcf/d Phase 1 capacity. 

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