Energy stocks offer income stability amid volatile markets

Canadian energy stocks are drawing investor interest as hedging, strong balance sheets and improving natural gas fundamentals help offset geopolitical and commodity price volatility.

BNN Bloomberg spoke with Aaron Bilkoski, an analyst at TD Cowen, about his oil and gas stock picks and why dividend stability, infrastructure advantages and LNG-linked demand underpin his outlook.

Key TakeawaysHedging programs are helping stabilize cash flow and support dividends amid ongoing geopolitical and commodity volatility.Infrastructure ownership and low operating costs are driving strong free cash flow for select Canadian gas producers.LNG Canada’s ramp-up is expected to improve Canadian natural gas pricing and basin fundamentals over time.Market reactions to short-term operational issues can create valuation gaps in otherwise high-quality producers.Royalty-based energy models offer low-risk exposure to production growth with minimal capital requirements.Aaron Bilkoski, analyst at TD Cowen Aaron Bilkoski, analyst at TD Cowen

Read the full transcript below:

ANDREW: Time for Hot Picks, and we’re looking at energy stocks. Our guest has Peyto Exploration as his top idea and has just increased his target price. Let’s get more from Aaron Bilkoski, an analyst at TD Cowen. Aaron, thanks very much for joining us.

AARON: Thanks for having me. There’s been an incredible amount of geopolitical uncertainty this year, and that has created a lot of volatility. What I wanted to focus on today are a few names that are defensive to that global macro environment and also have catalysts coming. Peyto absolutely checks that box.

ANDREW: Sorry to cut you off there, Aaron, but they’re a classic natural gas play in Canada, right?

AARON: Absolutely — about 90 per cent natural gas. They have assets in the Alberta Deep Basin. Peyto’s momentum as a company really started to accelerate in 2023 when it acquired the conventional assets of Repsol. That was pivotal because those assets were very undercapitalized, and Peyto, as a high-quality and competent operator, applied its own field practices to those properties. We’re now seeing the benefits of that.

The company has significantly increased average well productivity in those areas and driven costs down. There are a few things that really make Peyto special within its peer group. It has the lowest corporate capital costs and the lowest corporate average gas expenses, despite being primarily a dry gas producer. It also has the highest full-cycle cash margins compared with peers.

Peyto also has excess infrastructure. It has roughly twice the natural gas processing plant capacity that it needs today. Many peers are spending capital to build new gas plants to grow, whereas Peyto already owns these facilities and can simply optimize and fill what it has. As a result, the business is generating significant free cash flow that is being redirected toward about nine per cent year-over-year production growth and a roughly six per cent dividend yield.

Cash flow is very stable. As you mentioned in your introduction, about half of production is hedged this year at around $4 gas. As those hedges roll off, they should roll into a higher Canadian natural gas price environment. That outlook improves further as LNG Canada continues to ramp up and as we potentially see additional projects come on stream.

ANDREW: Let’s move on to your next name, ARC Resources. They’re also well known for gas exposure. What draws you to that stock?

AARON: ARC is a classic example of where the market has overreacted to a relatively small operational disappointment. The background here is that ARC has been building out a new area called Attachie over the last couple of years. It was expected to ramp up to about 40,000 barrels of oil equivalent per day, but it has been tracking closer to 30,000.

Quite honestly, that’s been an uncharacteristic hiccup for a very high-quality operator. But it’s important to put that into context. ARC produces more than 400,000 barrels of oil equivalent per day, so we’re talking about a shortfall of less than two per cent of total production. Despite that, the stock has underperformed peers by roughly 30 per cent since those challenges became apparent in mid-2024.

None of that changes what makes ARC special. It is the single largest Montney pure play in Canada and the country’s largest condensate producer. It is also the only Canadian independent producer with a direct supply agreement with LNG Canada, and it has signed additional LNG-linked agreements with projects in Canada and the U.S. Gulf Coast.

Looking ahead, the share price is supported by healthy free cash flow. At current prices, ARC pays a dividend yield of about 3.5 per cent and can repurchase roughly two per cent of its shares outstanding this year using excess free cash flow. That provides support while investors wait for more data points showing improvement at Attachie and as Canadian natural gas fundamentals improve with LNG Canada ramping up.

ANDREW: Just to clarify, Attachie is what exactly?

AARON: Attachie is a Montney area in northeastern British Columbia. It’s a condensate-weighted Montney play that ARC has been developing for the last couple of years.

ANDREW: Finally, let’s move on to PrairieSky Royalty. The yield is around four per cent. Is that what attracts you?

AARON: That’s part of it, but the bigger picture is that owning energy assets through royalty entities is a very attractive model. It’s essentially how governments around the world receive value from oil and gas resources.

In simple terms, PrairieSky owns mineral interests across roughly 20 million acres of land, much of it held in perpetuity. PrairieSky leases that land to oil and gas companies, which do all the operational work and assume the risk. PrairieSky then takes a portion of production from those lands.

Unlike traditional oil and gas producers, PrairieSky has no recurring capital costs, no operating costs, no transportation expenses and no end-of-life abandonment liabilities. Outside of modest general and administrative costs and cash taxes, nearly all revenue converts directly to free cash flow. That cash is used to pay dividends, repurchase shares or make tuck-in acquisitions.

Despite those advantages, PrairieSky trades at a free cash flow yield of about 5.5 per cent, which is better value than Canadian integrated producers or conventional E&Ps, which trade closer to five per cent. In my view, that represents a mispricing of risk. From a shareholder perspective, investors receive roughly a four per cent dividend yield while the business grows about four per cent year over year without deploying its own capital.

ANDREW: We’ll have to leave it there. Aaron, thank you very much. That was a lot of information in a short space of time. Aaron Bilkoski, analyst at TD Cowen.

DISCLOSUREPERSONALFAMILYPORTFOLIO/FUNDPEY TSENNYARX TSENNYPSK TSENNY

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This BNN Bloomberg summary and transcript of the Jan 12, 2026 interview with Aaron Bilkoski are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.