TSX’s energy sector started strong in 2025, but momentum was interrupted by trade tensions and a Middle East war. Oil prices surged in June during the military operations launched by Israel and Iran against each other. As of this writing, energy (-0.19% year to date) is among the two primary sectors struggling the most.
However, the world oil supply has risen in the post-military conflict. On August 13, 2025, the International Energy Agency (IEA) reported that oil supply will rise more rapidly than anticipated this year. More crude was added to the market as the Organization of the Petroleum Exporting Countries (OPEC), Russia, and other allies decided to unwind their output cuts earlier than scheduled.
In IEA’s view, supply is rising far faster than demand. Due to data showing lacklustre demand across major economies, the agency stated, “Oil market balances look ever more bloated.” If oil prices continue to plummet or go ballistic, a pair of TSX energy stocks should be on your watchlist.
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Solid financial results
Baytex Energy (TSX: BTE) remains in negative territory, despite the solid operational and financial results in the second quarter (Q2) and the first half of 2025. The share price of $2.77 is absurdly cheap, although the year-to-date loss is nearly 24%. Its 3.25% dividend yield is the compensating factor for the stock’s weakness. The dividends should be safe, given the low payout ratio of 19.15%.
The $2.13 billion crude oil and natural gas producer operates in the Western Canadian Sedimentary Basin and in Eagle Ford in the United States. In the three- and six-month periods ending June 30, 2025, net income increased 45.9% and 146.1% year over year to $151.5 million and $221.1 million, respectively.
Its president and CEO, Eric T. Greager, said Baytex remains committed to disciplined capital allocation, prioritizing free cash flow (FCF) and strengthening the balance sheet. For 2025, management forecasts approximately $400 million in FCF. The plan is to allocate 100% of FCF to debt repayment after the quarterly dividend payments.
While an immediate price recovery is uncertain, market analysts’ 12-month average price target for BTE is $4, a potential 44.4% upside.
Premium investment opportunity
Attractive and sustainable returns from a world-class asset base are the compelling reasons to stay invested in ARC Resources (TSX: ARX). This large-cap stock ($15.7 billion market cap) is a pure-play Montney producer. Montney is the largest source of natural gas in Canada.
Thus far in 2025, ARX has endured industry headwinds. At $26.95 per share, current investors enjoy a +4.76% year-to-date return on top of the ultra-safe 2.82% dividend. In the first half of 2025, net income climbed 88.5% to $800.8 million compared to the same period in 2024.
To counter low natural gas prices and eliminate cash exposure to Western Canadian prices, ARC curtailed natural gas production in Q2 2025 to between 75 and 200 million cubic feet (MMcf) per day. Furthermore, for the third consecutive year, management has committed to returning all free funds flow to shareholders through the base dividend and share repurchases. The amount reached $188 million in the second quarter.
Viable options
Baytex and ARC Resources remain viable options for income-seeking investors, notwithstanding the energy sector’s underperformance in 2025. Market analysts maintain a bullish sentiment for both stocks, including an eventual recovery when the oil market rebounds.
