Favourable policy and business environment boosts optimism for energy investors

Canadian energy stocks have had a notable year, with the S&P/TSX Composite Energy Index up about 37 per cent since January. Even with those gains, investors betting on the Carney government’s ambitious plans for new pipelines and other major infrastructure say there’s room to grow as the potential benefits of those projects have yet to be fully baked into stock prices.

ATB Cormark Capital Markets’ Fall 2026 Energy Sector Survey suggests confidence in the energy sector remains high, with 78 per cent of institutional investors saying Canadian energy stocks are undervalued.

Tim Monachello, ATB Cormark’s managing director of institutional research and author of the report, says the optimism is about more than the prospect of new pipelines. Investors are also responding to the possibility of increased foreign investment into Canada and a more favourable business environment.

That includes a new federal “mega deduction” introduced in September that allows companies to write off the full cost of eligible capital investments from their taxable income immediately rather than having to spread the expense out over years, making new projects more financially attractive.

“The survey points to pretty strong sentiment that we’ll see increased foreign direct investment in the sector,” Mr. Monachello says. “You have the mega deduction, which is certainly pro-business. All those things suggest it’s a better investment landscape for energy in Canada than it had been.”

But for investors hoping to capitalize on the momentum, there may be a catch. New pipelines take years to complete and there’s no guarantee they’ll come to fruition. With the significant gains already clocked this year, investors may need to weigh the prospect of further growth against the risk of a pullback in commodities prices.

Jerome Hass and Andy MacLean, partners at Toronto-based mid-cap investment manager Lightwater Partners Inc., say they see further upside for Canadian energy stocks.

They say stock prices aren’t fully reflecting the earnings potential of Canadian oil producers at current commodity prices.

Mr. MacLean says many producers appear to be valued on the assumption that oil will trade at roughly US$65 to US$70 a barrel, even though current prices are significantly higher.

But that could also work against investors if oil prices retreat. Although producers may be generating stronger earnings at current prices, a decline could reduce their cash flow and put pressure on share prices.

Still, Mr. Hass says many Canadian producers remain financially attractive even at considerably lower oil prices.

“These companies, even at US$60 [a barrel], are cranking out cash flow and they’re returning it to investors,” he says.

The pair says Canada’s oil and gas reserves give its producers an advantage after years of underinvestment in the sector globally that’s resulted in record-low reserves.

“Canada is fortunate in that we have very long-lived assets and the world is starting to discover that’s what you need,” Mr. Hass says.

He adds that investors shouldn’t overlook the smaller companies in the sector, such as oil producer Surge Energy Inc. (SGY-T), one of Lightwater’s largest holdings.

Mr. Hass points out that the company trades at less than half Suncor Energy Inc.’s (SU-T) valuation relative to earnings.

For Mr. MacLean, service energy providers are an area of opportunity as many are trading at attractive valuations. He points specifically to Precision Drilling Corp. (PD-T), which he says trades at roughly one-third of the valuation that a comparable industrial company outside the energy sector might command relative to earnings.

David Szybunka, senior portfolio manager and managing director of the energy team at Canoe Financial LP, says Canadian energy stocks are only partway through a much longer growth cycle. But after this year’s substantial gains, he’s becoming more selective about where he puts his money.

“Everyone’s now positive because of government policy and all these things,” he says. “Now, you’re buying some of these stocks up 100 per cent on the year because [the] government policies [that have] come our way.”

As a result, Mr. Szybunka says he’s reduced exposure to some of the stocks that have enjoyed particularly strong gains and is looking at opportunities in less popular parts of the energy sector.

“There’s still an opportunity in some of these mid-cap oils relative to the large-cap oils,” he says.

Mr. Szybunka is also bullish on Canadian natural gas producers, which he says remain significantly undervalued despite growing international demand for the commodity.

He argues that investments by major international energy companies demonstrate interest in Canada’s long-lived natural gas resources.

Mr. Hass is more cautious, as he says Canadian natural gas producers face a fundamental obstacle in their limited ability to transport gas to markets where prices are higher.

“There are a lot of factors that are weighing against them, the most important being there’s a lack of egress to get their product to market,” he says.

Despite those challenges, Mr. Szybunka says the renewed interest in Canadian energy reflects something bigger than a rally in commodity prices.

“This isn’t just an oil rate of change,” he says. “This is a Canada rate of change.”