Canadian energy stocks have unseated resource stocks as the main driver of the stock market this year. Elevated crude prices fueled by the Iran war have sparked a rally in energy stocks that is projected to drive the equity market’s upward march for the near term.
The Morningstar Canada Energy Target Market Exposure Index has gained about 32% in the year to date, outpacing the nearly 8% advance for the Morningstar Canada Index, as of May 14.
Against that backdrop, three energy stocks in Morningstar’s Canada coverage had their fair value estimates raised by a meaningful amount following first-quarter earnings reports. While high oil prices provided a constructive sector backdrop, Morningstar analyst Adam Baker increased his fair value estimates on two of these stocks primarily due to an improvement in their cost of capital assumptions. The third stock’s fair value upgrade was underpinned by higher energy prices and production estimates. Two of the stocks are trading in fairly valued territory following the revisions, and one is seen as overvalued.
Two other energy stocks had their fair value estimates increased by smaller percentages: Canadian Natural Resources (C$56 from C$55) and Pembina Pipeline (C$58 from C$56).
Here’s a closer look at the valuation increases on the three Canadian energy stocks:
Enbridge
- : C$75.00Fair Value Estimate
- : 1%Discount to Fair Value
- : NarrowMorningstar Economic Moat Rating
- : StandardMorningstar Capital Allocation Rating
- : ★★★Morningstar Rating
Canadian energy heavyweight Enbridge operates across the US and Canada. Its pipeline network comprises the Canadian Mainline system, regional oil sands pipelines, and natural gas pipelines. The company also operates regulated natural gas utilities and owns a small renewable energy portfolio of wind projects.
Enbridge’s stock has gained over 16% in the year to date, as of May 12.
The company’s performance is primarily driven by its liquids pipelines segment that contains the critical Mainline Pipeline system, responsible for moving about 75% of Canada’s crude exports, linking producers to US refineries, says Baker.
Enbridge benefits from the fact that its pipelines are deeply embedded in the US energy infrastructure, where “refiners have optimized their facilities to process Canada’s heavy crude as opposed to American light oil produced in shale regions,” he adds.
The company recently reported better-than-expected quarterly earnings of C$5.8 billion, higher than the C$5.7 billion PitchBook estimate. It also reported approval of its USD 700 million renewables project, Cone. This project is part of a renewed partnership with tech giant Meta META to supply renewable energy for its data centers.
“Renewable investments show the preference of Meta but also the acute tightness of new power generation,” says Baker, adding that there are more opportunities in renewables “than we initially expected a year ago.”
Baker recently raised the stock’s fair value to C$75 from C$66, after applying the new 5.6% cost of capital assumption, lowered from 5.8%, following Enbridge’s quarterly earnings report.
Explore detailed analyst commentary on Enbridge.
TC Energy
- : C$80.00Fair Value Estimate
- : 12%Premium to Fair Value
- : NarrowMorningstar Economic Moat Rating
- : StandardMorningstar Capital Allocation Rating
- : ★★Morningstar Rating
Energy infrastructure company TC Energy owns and operates natural gas transmission assets across North America. The company also operates power generation assets, with the largest being the Bruce Power nuclear plant in Ontario.
TC’s stock price has climbed more than 16% so far this year.
“With strong growth in natural gas demand, both incremental and from power plant conversions, the outlook looks robust,” says Baker. “This growth, combined with TC’s wide footprint, will result in many new opportunities for investment.”
The firm reported first-quarter earnings of C$3.09 billion versus a C$3.04 billion PitchBook estimate, and a committed backlog of C$23.2 billion, a C$2.1 billion increase.
“Management continues to commercialize projects, as demand for gas accelerates,” says Baker, who raised the stock’s fair value to C$80 from C$68, driven by the new 5.8% weighted average cost of capital assumption, lowered from 6.2%.
A lower weighted average cost of capital reflects reduced financial costs and improved profitability for a company.
The stock’s fair value upgrade is also partly driven by the newly announced Appalachia project, Baker says, referring to the USD 1.5 billion natural gas pipeline expansion in the US, designed to capitalize on strong demand.
Explore detailed analyst commentary on TC Energy.
Tourmaline Oil
- : C$57.00Fair Value Estimate
- : 15%Premium to Fair Value
- : NoneMorningstar Economic Moat Rating
- : StandardMorningstar Capital Allocation Rating
- : ★★★Morningstar Rating
Tourmaline Oil is primarily a natural gas company but also produces natural gas liquids, condensates, and oil. Through several acquisitions, the firm has become the largest natural gas producer in Canada.
Tourmaline’s stock has navigated significant fluctuations in natural gas prices in recent times and has soared more than 8% since the beginning of the year.
Following Tourmaline’s strong quarterly results, Baker raised the stock’s fair value to C$57 from C$54, after incorporating improved commodity prices for 2026 and 2027, “mostly tied to oil and natural gas liquids,” resulting from the Iran war.
In addition, production so far this year has exceeded estimates, raising full-year production expectations, he adds.
“Tourmaline Oil is focused on boosting production and building out the necessary infrastructure to support it,” says Baker. “The current capital plan, should market dynamics justify it, envisions increasing production by 170 thousand barrels of oil equivalent per day by 2031.”
Tourmaline is “very much commodity driven,” which positions it well to benefit from these price and production dynamics, Baker says.
Explore detailed analyst commentary on Tourmaline Oil.
