As the largest Alberta-based financial institution, ATB Financial has been a key player in this province’s energy industry for decades. Today, it has one of the largest dedicated energy financial service teams in Canada, financing companies in oil and gas exploration and production, drilling, oilfield services, midstream, pipelines, utilities and renewables. Indeed, energy is one of ATB’s core verticals, along with agriculture, real estate and diversified businesses.

Given this long history, ATB’s team has first-hand experience with the cycles experienced by Alberta’s energy industry, from boom to bust to boom again. Always along for the ride, it has a uniquely informed perspective.

“Alberta’s energy industry has never been better,” declares Jon Horsman, senior executive vice president, Business, ATB Financial and CEO, ATB Capital Markets. “We’re in a period of consolidation again in part due to the material increase in the scale and intensity of capital programs required for companies to compete in the industry. Many of these new technologies and processes that we’re deploying have a laser focus on cost reductions. Also, because of various movements globally around ESG, better economies of scale are required to face an ambiguous changing regulatory and disclosure environment.”

It’s a cycle Horsman, who has been with ATB Financial since 2003, has seen before, previously in the early 2000s. Consolidation then was due to the risk of losing Alberta head offices to the U.S. during the so-called ‘brain drain’ to south of the border. “We needed to put a fortress of corporate entities together and concentrate our capital, knowledge base and understanding of our own basin into Calgary head offices,” he explains. The merger between Alberta Energy Corporation and PanCanadian Petroleum Ltd. to form EnCana in 2002 is a prime example.

After that consolidation cycle came a period of fragmentation, driven by a wave of risk capital coming into the oil patch from income trusts. Companies broke up, predominantly into separate development, exploration, and operating companies, and a ton of capital was consumed.

“We unlocked energy self-sufficiency in North America with some of our great innovations,” Horsman recalls. “SAGD, fracking technologies. We demonstratively changed the production profile of the North American energy complex and it was good. Many E&P businesses during that time were focused on growth and often outspending cash flow. Today, the narrative has shifted with businesses focused on sustainability and governments on energy security. We’ve been working through a resetting of the industry since then.”

That fragmentation cycle saw ATB expand its breadth and depth in the industry. “As the number of companies grew and proliferated, we grew in size and capabilities as well,” he says. “By the end of the cycle we were probably the most prolific (on a count basis) financier of the Canadian energy patch.”

And just like after the last fragmentation cycle, Horsman believes a consolidation cycle is on the horizon. ATB is ready for the shift.

“We’re moving with industry,” he says. “For example, in 2010 there were 249 oil and gas issuers regulated by the Alberta Securities Commission. Today we’re down to under 137. Major consolidation. And we’ve moved our business with that trend. We have fewer clients now. Whereas we might have had a book of 300 clients a decade ago, we’re now down to about a third of that. But we have higher loan commitment amounts per client than in the past. Our financial support to the industry is actually roughly similar. However, we have expanded our offerings from lending to full capital market services and are now even more relevant to the industry.”

As an Alberta-based financial institution, ATB tends to ride the industry cycles in opposition to the big Canadian and international banks. Whereas the latter tend to expand their scope during upcycles and retreat in downcycles, ATB grows in times of contraction and defends its market share in times of expansion.

“We’ve built some great relationships and identified some good companies and find ourselves always expanding through these down cycles,” Horsman notes. “I don’t fault our competitors because they give ATB the opportunity to grow, expand and stay relevant.”

Adapting to the changing broader trends in the industry has meant some changes to ATB’s strategy too. For example, the bank took loan losses in the juniors’ sector during the 2016/17 downturn; as the underlying economics of those business models changed, so did the cost and form of capital necessary for those companies to survive and thrive.

“Those companies have changed and so have we,” he says. “It’s inappropriate to lever up companies and then put them into bankruptcy. So those companies are now more properly financed or have consolidated into larger entities. The consolidators are presently the catalyst that will drive us into the next cycle of putting new business models to work, to take advantage of opportunities in the marketplace, including those associated with energy industry transformation around ESG initiatives.”

A number of ATB’s clients are also in renewables (wind, solar and natural gas conversion), a growing sector thanks in part to Alberta’s deregulated electricity market. This has provided opportunities for developers and some oil and gas producers to move into the production of electricity.

“Alberta will end up, I think by 2025, the most prolific renewable electricity producer in all of Canada,” Horsman opines. “It’s a huge opportunity for us since a lot of international companies are looking for renewable electricity production, which they can’t find elsewhere. They’re investing in Alberta because we can provide it. Amazon’s recent off-take announcement is a good example.”

In addition, he says, Alberta is well-positioned to deliver on the Canadian goals of net zero emissions. “We have the technology and expertise to do so but more than anything, we have the geology. We can move the entire patch from an emission emitting industry to a net-zero emission industry. Canada has some of the most responsibly produced energy in the world, and we are getting exponentially better and cleaner.”

He notes high-emitting industries around the world are also looking at Alberta as a place to achieve zero emission targets. “We can actually be a hub of driving not just our own industry, but global industries, on a net-zero basis.”

Coming out of the COVID-19 pandemic, Horsman notes demand for energy is expanding while at the same time, supply constraints are driving commodity prices up. For companies that made it through the last downturn, he says the opportunity is ripe to supply the world with Canadian energy. “This will spark a reinvestment cycle of both renewable and traditional energy to build supply up to the level of consumption and demand. This is always the most interesting part of the cycle because it’s the growth or expansion cycle.”

For everyday Albertans, it’s good news.

“Many people don’t appreciate the value of energy security and how Alberta has changed its production profile,” he continues. “The front-end capital investment in the oil sands, between 2008 to 2014, gives us a rock-solid production profile that doesn’t change through time. These are 10- to 20-year production profiles, very stable supply, something we’ve never seen before. And we’ve done most of the capital investment. Going forward it’s mostly just operating and maintenance costs.”

This production profile is incredibly valuable for the world, for North America and for Alberta. “Stability is predictability, which means less risk, which means more stable cash flows, more stable production profiles,” Horsman explains. “The commodity price will go up and down, we can manage that. But the stability of production is deeply interesting to a world in need of energy security.”

Add to this the fact that many oil sands projects are moving into full royalty payments (after completion of cost-recovery of the initial investment), which further pads Alberta’s pockets.

He notes the provincial budget in late February, which was balanced, as a sign of better times ahead. “We’re one of the few jurisdictions on the planet, coming out of COVID, with a balanced budget. Part of it is the commodity price. But it’s also about good policy and the stability of the production profile.”

More than a lending hand to Alberta’s energy industry, ATB is an integral part of the industry. As we enter the next cycle, it will be there, providing experienced financial leadership to many. Exciting times lay ahead.