Alberta’s energy companies are battle hardened and ready to thrive
By ATB Financial 1 April 2021 4 min read
Alberta’s energy companies are battle hardened after the last six years of challenges, says William Lacey, Managing Director and Head of Research, ATB Capital Markets.
Now, with vaccinations underway in the province, industry leaders are turning their focus to recovery. To support it, ATB and MNP partnered earlier this year to develop a comprehensive content series that evaluates challenges and opportunities towards economic recovery. The series shared local perspectives on how to address challenges across key sectors, including aviation and logistics, energy and cleantech, financial services, technology and data, tourism, petrochemicals and agriculture.
The energy industry faced challenges years before the pandemic hit and compounded difficulties companies faced. For Lacey, the harsh realities brought on by less capital, fewer investors, and a rise in environmental, social and governance (ESG) expectations has made energy companies more resilient, efficient and better positioned to outperform expectations in the years to come.
Capital starvation drove operational discipline
In 2014 when the price of oil plunged, Alberta’s energy companies had to double down on their operational discipline both to survive the market volatility and also as a response to investor activity.
“For the last six years companies have been starved for capital,” says Lacey, in part, because institutional investors were less interested in energy companies. Lower oil prices, a shift away from hydrocarbon extraction investing, and an increased focus on requiring companies to demonstrate good ESG practices in order to access capital made energy companies less appealing in the eyes of investors.
The lack of capital led to two key outcomes for the energy industry in Alberta.
First, energy companies have learned to do more with less.
“They’ve learned to be exacting and rigorous with the management of their business,” he says. Second, companies had to figure out how to appeal to institutional investors and tap into capital. These things, in turn, have helped to drive recent consolidation trends, which can reduce operational costs for companies through streamlined workforces and improve efficiencies.
"Increased scale has become much more important and it's not just because of the efficiency on the production side, but it's also from the investor side as well. For a company to be relevant to an investor, bigger scale is required."
Managing Director and Head of Research, ATB Capital Markets
Lacey says the realities of the last year have pushed the operational discipline even further and now, as recovery begins, energy companies are positioned to be highly favourable investment targets.
“Last fall we were talking about whether the industry was going to make it. A lot of companies were underwater with cash flow. Now that we’ve moved to $60/barrel, it’s gone from one of survival to one of free cash flow,” he says. “Those that used to be over leveraged are hitting their debt paydown targets this year. It’s happening way faster than anticipated. They have done such a good job at controlling costs that now every dollar is going straight to cash flow and it's changing businesses in a very material way.”
Pressure is driving innovation
The pressure on energy companies to do more with less, combined with the calls for greater ESG practices, has led to continuous innovation in the industry.
“From the end of the drill bit all the way back to corporate headquarters, [energy companies] are actively pursuing innovation to do a better job.” says Lacey.
When it comes to ESG, energy companies are embracing technology and developing creative approaches to reduce greenhouse gas emissions. Lacey points to Suncor who recently invested in carbon capture technology company Svante Inc. and has projects underway in cogeneration and wind turbines to meet carbon reduction targets.
Lacey says many companies are looking at technology to reduce their carbon footprint - from reducing fugitive emissions, to carbon capture, utilisation and storage (CCUS).
“Canadian energy producers have been at the forefront of investment in clean tech—including innovations in carbon sequestration and methane reduction.” he says.
One example Lacey refers to is Whitecap Resources Inc. using CCUS to increase oil extraction efficiency while reducing their carbon footprint. The company says it is carbon negative when it comes to direct and indirect emissions from its activities.
Why Alberta’s energy companies are appealing to U.S. investors
While capital investment in Alberta’s energy companies may not return to the pace in decades past, Lacey expects there to be renewed interest from U.S. investors in the near term.
First, the U.S. Federal government is rolling out less favourable policies and regulations for the domestic oil and gas sector. This shift makes the Canadian energy industry more attractive, says Lacey, as the industry has already adapted to many of the changes that are just beginning to happen in the U.S.
Second, the operational discipline has demonstrated that Alberta companies are resilient and durable. Companies have demonstrated that they can run successful businesses with minimal opportunities for additional capital. When they do approach investors, it's for a strategic use that investors can appreciate and support. And when they do want capital is for a very specific use that investors can wrap their heads around says Lacey. He points to deals like Tamarack Valley Energy and Spartan Delta as examples.
“What we’re seeing now is a real resonance with companies who have a free cash flow model. They have the ability to pay down debt, pay their shareholders through increasing dividends, and buy back shares. To investors, that’s become a lot more attractive as they understand the operational leverage these companies have in a $60/barrel business model,” he says. “We also have a culture that really understands risk in terms of investing and we know how to develop industries and be able to create enormous amounts of wealth.” says Lacey.
Years of difficult economic realities have demanded Alberta’s energy companies embrace innovation, push ESG forward and drive greater efficiency—and they’ve stepped up to the challenge. Now, they’re ready to apply the lessons learned to contribute to accelerating Alberta’s recovery.
“The sector will emerge as a stronger, more efficient and profitable venture for investors to participate in going forward.” says Lacey.