The price of oil has been in a relatively tough spot over the past year. And while it’s hard to tell what’s next for the Canadian energy patch, I do think that long-term investors have many reasons to be buyers rather than sellers, especially as oil awaits its next big move.
Indeed, with WTI (West Texas Intermediate) prices in the low-to-mid US$60 range, questions linger as to whether the cheap-looking energy producers are a great value at these levels. And while oil isn’t as hot as it could be, I still think the significant cash flows generated by the top producers are worth pounding the table on, especially for passive income investors who want to ensure they’ll be compensated for their patience as they ride out the choppier waters in the energy sector.
Indeed, the energy patch isn’t exactly the most exciting place to put new money to work so far this year, especially with the iShares S&P/TSX Capped Energy Index ETF (TSX: XEG) returning a market-trailing 7% gain versus the explosive 20% surge in the S&P/TSX Composite Index. Indeed, it’s been quite the comeback year for the Canadian stock market, and the big run, led by Canadian financials and materials sectors, may not be close to peaking yet.
Either way, I think the top energy stocks (most notably the producers, rather than the pipelines, which have performed exceptionally well in the past year) will need to heat up if the TSX Index is to pull off a repeat of beating the S&P 500 in the new year. Personally, I think it’ll be a tighter contest in 2026. Indeed, it’ll be a close call and one that I’m not yet willing to make.
In any case, I like the valuations and the setup for the less-appreciated energy names, which have a lot going for them at the company-specific level. The smooth operators that are committed to giving back to shareholders (think dividend hikes) are the ones I’d look to pursue in today’s mildly frothy, but not value-lacking market environment.
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Imperial Oil
Imperial Oil (TSX: IMO) stock has been leading the charge for the energy titans so far this year, with a whopping 42.6% gain clocked in year-to-date. As the firm moves ahead with its restructuring effort, which will reduce the workforce by around 20% by 2027 (that works out to around 1,000 or so positions), it’ll be interesting to see where one of the hottest TSX-traded energy plays goes next.
I believe the $65.3 billion energy play has what it takes to continue outperforming its peers. Indeed, Imperial Oil is an efficient operator that can do well, even in the face of tariff disruptions or a climate in which oil prices don’t nudge considerably higher from here.
In many ways, Imperial Oil has been what’s working well in the energy patch, and I just don’t see that changing anytime soon. With a growing 2.2%-yielding dividend and a mere 14.1 times trailing price-to-earnings (P/E) multiple, IMO stock has to be one of my top picks in the space right now, even with shares at new highs just shy of the $130 mark.
Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) stands out as more of a value play after shares flatlined on the year, clocking in 0% returns on a year-to-date basis. At least there’s a huge dividend (5.2% yield) for shareholders to collect. Either way, I think the sideways action has made CNQ an even timelier play going into the new year, especially after the decent second quarter that saw production rise.
Indeed, the company says it can break even in the event of an oil price plunge to US$40 per barrel. While I don’t see prices staying at such depressed levels, even in a more bearish scenario, it has to be comforting to know where the line in the sand is. With a wealth of long-lived assets and a mere 11.4 times trailing P/E, I’d stick with CNQ for the long run.
