Energy stocks rally on oil surge with more upside ahead

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Daniel Greenspan, CIBC Asset Management, senior analyst and portfolio manager 

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Canadian energy companies have performed well year-to-date, with shares in the upstream producers generally up 40% to 50%, and shares in the pipeline in midstream companies up 15% to 20%. Clearly, some of that strength in the equities reflects the strong move higher in the oil price that has come as a result of the conflict in the Middle East. 

The question now is if the recent stock price performance reflects a temporary geopolitical risk, or if we see a lasting upward shift in valuation for Canadian energy producers. Realistically, we think the answer to that question is a little bit of both. Clearly, there is some geopolitical premium being baked into the oil price and, to a lesser extent, into the Canadian equities. 

Since the conflict in the Middle East started in late February, the price of oil has spiked from around $65 a barrel before the fighting started, to plus $100 a barrel now. Some of that price spike is likely being priced into Canadian energy equities as well, but the equities have not moved nearly as aggressively as the oil price has since the start of the conflict. 

Despite some of the geopolitical risk getting priced in, at the same time, we see potential for a lasting upward shift in valuations for Canadian energy producers for a couple of different reasons. Firstly, on the oil price itself, even if the conflict were to end tomorrow, we would not expect the oil price to revert back to pre-war levels in the short- to medium term. We expect that a premium would remain baked into the commodity price for the foreseeable future. 

Some of that premium would likely reflect damage to critical infrastructure in the region from the conflict that could take months or years to repair. And some of that premium would also likely reflect the realization of the fragility of supply from a critical producing region. 

It’s important to note that around 20 million barrels per day of oil were transiting the Strait of Hormuz before the conflict started. That accounts for around 20% of global oil supply. Since the conflict started, that flow of oil through this critical choke point has slowed to barely a trickle. The ability to take 20% of the world’s oil supply offline signals to the market that oil should be baking in a structurally higher geopolitical premium into the price for the medium term. 

It’s also important to note that this is the second major oil disruption of supply since 2022, when Russia invaded Ukraine. Before the Middle East conflict started, we were expecting oil to trade in a $55 to $65 a barrel range in 2026. If the conflict ended today, we would expect oil prices to be in a $75 to $85 per barrel range for the remainder of the year. 

Secondly, in terms of the impact on the valuations of Canadian energy producers, while we would expect stock prices to continue to perform in a higher oil price environment, we also think there would be a premium for producers in stable jurisdictions with consistent operations, such as what we have in Canada. We expect the market will recognize this advantage and reward Canadian E&Ps with a premium valuation. 

At the same time, even if the market doesn’t recognize and reward the structural advantage that the Canadian producers have, these companies will be generating significant free cash flow at the elevated oil price. With balance sheets already in very good shape, and with well-defined capital return programs in place, we expect shareholders will be rewarded with dividend growth, special dividends and share buybacks that will help support stock prices. 

We saw that these capital return initiatives benefited the Canadian energy producers in 2025. Last year, for example, the oil price was down 20%, but the oil producing equities were up 8%, reflecting solid execution on their business plan, and the ongoing capital returns to shareholders. So, with that 2025 stock performance in mind, we remain structurally bullish on Canadian energy companies for reasons that are independent of our outlook on the underlying commodity price. 

Fundamentally, Canadian producers have superior assets, lower decline rates, longer reserve lives and a competitive cost base, all in a stable geopolitical environment. When you combine that with management teams that have embraced a philosophy focused on cleaner balance sheets and competitive shareholder returns, we expect free cash flow to continue to be returned to shareholders, and the stocks to continue to perform. The fundamental reason we favour Canadian energy producers have only been reinforced by the conflict in the Middle East. 

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With oil in the Middle East at least temporarily impaired, can Canada meet rising global demand for energy products given its infrastructure constraints? Realistically, the answer to that question over the near to medium term is no. We expect measured supply growth from Canada of around 3% to 5% per year. 

Firstly, shareholders in these companies are not looking for — or demanding — growth from the producers. The message to the companies over the last number of years has consistently been modest growth in capital returns, and for the most part, producers have stuck to that script. 

Secondly, there’s only limited incremental oil pipeline capacity to fill in Canada, and most of the infrastructure currently in place to move oil points to the south. There are a couple of modest growth projects in the works that seek to enhance the existing infrastructure in place, but realistically, a new pipeline that could take significantly more crude oil off the continent is many years away at best. 

That said, there are meaningful opportunities for Canada, and the energy sector to benefit in the medium to longer term. There’s no shortage of oil or gas in Canada. This country is home to the fourth largest oil reserves in the world, just behind Venezuela, Saudi Arabia and Iran. Perhaps the latest crisis in energy markets brings some capital to the country that supports infrastructure development that helps move oil or LNG off the continent. Certainly, if there was an investment in critical infrastructure like that, we would expect Canadian energy producers to look at opportunities for growth. 

One area of energy outside of oil where Canada has an opportunity to capitalize on would be in liquefied natural gas. LNG Canada is the first large-scale facility in this country. It started up and loaded its first cargo in June of 2025. The first phase of the project is producing 14 million tons a year from two trains, with the majority of that production sold into Asian markets. 

Phase two of the project could double capacity, making it one of the largest LNG facilities in the world. Other projects, like Cedar LNG and Woodfibre LNG, are in development. There are opportunities to add more LNG facilities down the road. With approximately 20% of the world’s LNG currently going through the Strait of Hormuz, Canada has an opportunity to grow its LNG output and offer Asian buyers a steady, reliable source of supply outside of the Middle East. 

Finally, one other area of the energy trade that may be flying under the radar right now is nuclear. The disruption of oil and LNG markets has again highlighted the need for countries to develop internal energy security, and we view nuclear as a strong option to provide low-carbon baseload power around the world. We think Canada has the opportunity to be a global leader on nuclear with exposure to new builds and maintenance of the existing fleet, and through exposure to high-quality uranium production in Saskatchewan. 

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Turning to the equities, for the Canadian energy producers right now, the biggest opportunity for share price performance is to stick to the script. By that, we mean deliver operationally, show modest growth and return excess free cash flow to shareholders. This was the playbook that worked well for the companies in 2025, when the commodity price was falling, and we expect that it’s a playbook that will work again in 2026 in a stronger price environment. 

In terms of the equities themselves, our top picks amongst the Canadian oil producers are Cenovus and Whitecap, and our top pick in the midstream infrastructure segment is Keyera. As well, our top pick in nuclear is Cameco. 

Starting with Cenovus, this is a company that we think has hit a significant positive inflection point in mid-2025, particularly regarding its downstream operations, which had been a primary area of concern for the market over the past two years. Our analyst here recently toured the Toledo Refinery and was encouraged by his observations. He expects to see continued improvements in downstream performance following the completion of turnaround activities and substantial changes in personnel. Given the recent increase in downstream crack spreads due to the conflict in the Middle East, Cenovus is expected to generate meaningful free cash flow from its downstream operations. 

Also, Cenovus recently closed its acquisition of MEG Energy, which is anticipated to generate substantial synergies for the company. In our view, the MEG deal adds high-quality upstream assets that will underpin Cenovus’ growth strategy. The balance sheet at Cenovus is approaching its target, and we expect to see meaningful improvements in shareholder returns as these milestones are achieved. At the current valuation, Cenovus is our top pick in large-cap Canadian energy. 

In the mid-cap space, our top pick is Whitecap Resources. Whitecap has high-quality, low declining assets and is led by an experienced management team. We like the recently completed deal to buy Veren. We think the assets the company acquired are complementary and fit well into the Whitecap portfolio. We also think the synergy potential is understated, and could see Whitecap deliver more value from the deal than the market currently expects. The company has been a consistent operator and offers investors exposure to quality resource plays. We think the multiple can continue to expand as Whitecap continues to deliver consistent quarterly results. And as a result, the company is our top pick in the mid-cap oil sector. 

In midstream and infrastructure, our top pick is Keyera. While the stock has performed quite well year-to-date, we do think there’s more upside when the company closes its transaction for the Plains Canada NGL business. There’s been some market hesitancy as the deal has taken longer to close than expected. That said, we see further room for outperformance after the Plains deal closes, as we expect to see multiples normalized as Keyera delivers on the integration of the new assets into the portfolio, and the market gets comfort with the new business. 

Finally, in nuclear, our top pick is Cameco. We view Cameco as a scarce and unique business, offering investors exposure to uranium and the nuclear value chain in tier-one jurisdictions. We see transformative tailwinds for nuclear energy that are of benefit to Cameco that are expected to persist over the medium term. Specifically, as countries and companies seek to reduce greenhouse gas emission targets, we expect nuclear to play a significant role in carbon reduction plans. 

As well, as it relates to the situation in the Middle East, an enhanced focus on energy security is another tailwind for nuclear and for Cameco, as countries seek to develop internal sources of consistent baseload power, which we expect will include nuclear energy. With Cameco’s unique exposure to uranium and safe jurisdiction, we believe the company can continue to perform as these structural tailwinds are expected to persist over the medium to longer term. 

We also view the Westinghouse acquisition in late 2023 as a positive for Cameco. We believe Westinghouse will add a level of stability to Cameco by vertically integrating the company through the nuclear value cycle, and delivering steady cash flows unlevered to the uranium price. Cameco is our preferred equity exposure to uranium and nuclear.

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