Comparison to Past Downturns
Bruce E. Edgelow
Vice President
June 11, 2015
This presentation is confidential and propriety to ATB Corporate Financial Services and may not be disclosed,
reproduced, distributed or used for any other purpose by the recipient without our express written consent.
The information and any analysis contained in this presentation are taken from, or based upon, information
obtained from publicly available sources, the completeness and accuracy of which has not been independently
verified, and cannot be assured by ATB Corporate Financial Services. The information and any analyses in these
materials reflects prevailing conditions and our views as of this date, all of which are subject to change.
To the extent projections and financial analyses are set forth herein, they may be based on estimates and are
intended only to suggest reasonable ranges of results. The printed presentation is incomplete without
reference to the oral presentation or other written materials that supplement it.
Discussion Topics:
I.
Who is ATB Financial
II. Cyclicality of the O&G Industry
III. Lessons Learned from Past Downturns
IV. What has Changed Since the Last Downturn?
V. Summary
Snapshot of ATB
•
Established in 1938, ATB is a Crown Corporation wholly-owned by the Government of Alberta
•
Independent Board of Directors
•
$37.7 billion asset value, full-service financial institution headquartered in Edmonton, Alberta
•
Over 5,000 Team Members serving over 697,000 Albertans in 242 communities, through 172 branches and
130 agencies
ATB’s Areas of Expertise
The oldest and single largest financial institution in Alberta
ATB’s Energy Team
• The Energy Group lends to
Upstream, Midstream,
Downstream and Alternative
Energy sectors
• Authorized energy loan
portfolio of over $9.3 billion
• $2.8 billion in deposits under
management
• Strong partner of industry
associations
º EPAC
º CAPP
º CAODC
º PSAC
Providing financial solutions to the entire value chain of the energy industry
ATB and AltaCorp Partnership
••
•
•
•
AltaCorp is a full service brokerage providing
equity, M&A, and corporate finance advisory
services to corporations
in any stage of the life cycle
Focused on the key drivers of the Western
Canadian economy and overlapping
subsectors of Energy, Agri-Industry
and Energy Infrastructure
& Industrials
AltaCorp has over 60 employees
between Calgary (head office) and Toronto
Mergers/
Acquisitions/
Divestitures
Start-up
Private
Equity
Financing
Global
Institutional
Sales & Trading
Follow-on
Private
Equity
Grey Market
Trading
‘Private Liquidity
Market
Making
IPO/
Financings
High Yield
Debt
Institutional
Equity Research
•• AltaCorp
AltaCorp has
has formed
formed aa strategic
strategic
alliance
with
alliance with ATB
ATB Financial
Financial to
to provide
provide
corporate
and
institutional
clients
corporate and institutional clients the
the
full
full spectrum
spectrum of
of advisory,
advisory, equity
equity capital
capital
markets
markets and
and financial
financial services
services
•• ATB
ATB is
is Alberta’s
Alberta’s single
single largest
largest and
and
oldest
full-service
financial
oldest full-service financial institution
institution
with
with assets
assets over
over $37
$37 billion
billion and
and 5,000
5,000
Associates
across
the
province
Associates across the province
•• ATB
ATB has
has aa 77
77 year
year history
history providing
providing
Personal,
Business
Personal, Business and
and Agricultural
Agricultural
Financial
Financial Services,
Services, Investor
Investor Services
Services and
and
Corporate
Financial
Services
Corporate Financial Services to
to more
more
than
than 697,000
697,000 Albertans
Albertans
ATB owns a 29.74% equity interest in AltaCorp;
Our partnership provides a one-stop shop for lending and capital markets needs
Cyclicality of the Oil & Gas Industry
Cyclicality of the Energy Industry
• This is now the 7th downturn since 1980, with a cycle typically occurring every 5-6 years (average length of
227 days).
• The last price decline of a comparable magnitude was in 2008, but the last supply induced drop in
commodity prices occurred back in Nov 1985.
• It is worth noting that the average price of oil over the last 100 years is around $50 / bbl. Furthermore, it is
only within last decade that prices have exceeded $50, largely due to increasing demand from China.
Historical WTI Spot Prices
$160
$140
$120
$100
$80
1985 – 1990
$60
$40
2014 - ?
$20
Source: ATB, Canadian Society of Petroleum Geologists, Morgan Stanley
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
$0
Stability during the global economic crisis
• As a solely Alberta based financial institution, we understand the effect of these price cycles.
• During the financial crisis, ATB:
º
Experienced a surge in liquidity as a result of the flight to quality and our AAA rating
º
Redeployed this liquidity for the benefit of existing and new clients
Loan Growth During Financial Crisis
70%
Loan Growth
35%
0%
-35%
-70%
2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Syndicated Loans Canada
ATB Corporate Lending
When the going gets tough, the tough stay put. Through the credit crunch, depressed
commodity prices and global economic turmoil, we’ve done just that. We never
left the side of the people who’ve made Alberta an economic powerhouse, and we
continue to custom build solutions to help them do what they do best…lead.
Because Alberta means the world to us.
Source: ATB Financial Reports, Bank of Canada
Lessons Learned from Past Downturns
Lessons Learned
• When times are good it is important to remember how quickly these cycles can occur. Prudent companies
will layer-in hedges to provide revenue certainty, maintain efficiency, and keep a close eye on leverage
(both as a function of cash flow and net asset value).
• Similarly, when times are bad it takes courage to remember that downturns do not last forever.
• However, in any downturn companies need to be proactive, and cannot sit back with the expectation that
commodity prices will quickly bounce back.
• Companies that have successfully weathered previous downturns displayed the following actions /
attributes (among others):
• Solid management teams.
• Proactively controlled leverage, including potentially raising equity at difficult valuations.
• Strong relationships with suppliers and capital providers.
• An eye on preserving cash by reducing distributions, cutting capex to within cash flow, focusing on
costs to weather the downturn, and selling non-core assets to reduce debt and/or free-up capital.
• Continue to undertake actions to maintain asset value.
Source: ATB
Lessons Learned
• Although capital is currently available to certain management teams, companies must be aware that this
can quickly change.
• Traditional sources of alternative capital (ie – asset sales) may also not be available. During past downturns
companies have pursued the following non-traditional sources of capital (among others):
• Joint ventures.
• Sale lease-back transactions.
• At times, management will need to make very tough decisions to act in the best interest of shareholders.
• Although many lessons from past downturns are still relevant today, it is also important to distinguish how
this downturn differs from past cycles:
• Low oil and gas prices.
• Oversupply rather than reduced demand.
• The structural changes in the business towards high-decline wells with high capital costs.
• New regulatory challenges and uncertainty - including LLR and a royalty review.
Source: ATB
What has changed since the last downturn?
Crude Oil Oversupply
• While previous downturns were demand induced, this supply induced downturn indicates a drawn out oil
price recovery. It took nearly 5 years for prices to recover from the last supply induced downturn in 1985.
• World supply points are changing, and we can no longer simply look to OPEC for needed production/price
adjustments. The world political landscape is changing, and what happened in the past may not be a
precursor for the future
• Many industry forecasts call for a sustained period of low commodity prices, with almost all demand
growth forecast to come from non-OECD countries.
Crude Oil Forecast (Bentek)
Source: IEA, Citi, First Energy, Betek, ATB
Dual Commodity Price Downturn
• In past years producers were able to partially mitigate low gas prices by switching their focus towards oil
and natural gas liquids plays.
• However, gas prices remain low and below the full-cycle breakeven cost for many producers. NGL pricing
has also been reduced in conjunction with oil prices.
Henry Hub Spot Prices
Mont Belvieu NGL Prices
$18.00
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Source: ATB, AltaCorp, EIA, Bentek
Structural Shift
• Over the past few years we have been experiencing a structural shift in the industry:
• New technology has unlocked material reserves, but has also significantly increased capital costs.
• Gone are the days of raising seed capital from friends and family for a junior start-up
• In 2008-2009, the industry was first starting to actively develop some of the high-decline oil plays.
• With some wells now having first-year decline rates of >75%, there is a much higher capital commitment
required to maintain production.
• Peter’s & Co reports that companywide decline rates in its junior/intermediate coverage group is
30% relative to 24% in 2008.
• Due to completion well cost structure and rapid price collapse, winter activity was quickly curtailed. Not
something we had experienced in the past.
• A structural shift is also occurring in the oilsands from large mega-projects (ie – greenfield mines) to
phased in-situ facilities that are more easily modularised. This “design one - build many” strategy is
exhibited through:
• Suncor’s Meadow Creek East project (JV with Nexen).
• Cenovus’s new oilsands developments at Christina Lake, Foster Creek, and Narrows Lake.
Source: ATB, Peters&Co, DOB
E&P Leverage
• Canadian E&P leverage entering the downturn was generally higher than in 2008, with median net debt to
cash flow of ~1.7x (vs ~1.0x in 2008).
• US shale producers are more highly levered, with many US firms running at 4-5x debt to cash flow.
Canadian E&P Debt to Cash Flow (Median)
Canadian E&P Total Debt to Production (boe/d)
24.0
1.8
1.6
22.0
1.4
20.0
1.2
18.0
1
0.8
16.0
0.6
14.0
0.4
12.0
0.2
0
Q3 2008
Q3 2014
10.0
2007
2008
2009
Senior
Source: ATB, Canoils, AltaCorp
2010
2011
Intermediate
2012
2013
Junior
2014
Total
2015
New Challenges - LLR
• LMR = Deemed Assets / Deemed Liabilities. An LMR ratio <1.0 will result in the operator having to post a
deposit to the AER to avoid being shut-in.
• In March 2013 the AER announced changes to the LLR program that would generally double
abandonment and reclamation costs over 3 years (May 2013, May 2014, and May 2015).
• This regulatory change is having a significant impact on the junior market:
• No new drilling results in declining cash flow and increasing liabilities, which will increase the
required deposit for companies that may already be capital constrained.
• Capital available to juniors has been further reduced, and presents an additional hurdle when selling
assets.
• AER may not permit an asset sale if the remaining assets in the company generate insufficient cash flow to
satisfy associated abandonment and reclamation costs.
• Number of orphaned wells in Alberta has quadrupled over the past year (from 162 to 702), and at the
current reclamation rate it will take 20 years to remediate this year's supply.
• This could be the most underappreciated issue with the largest consequences.
Source: ATB, CBC
Consolidation
• These structural industry changes are reflected in the consolidation that has been taking place across the
industry.
• The number of public juniors has shrunk by more than half since 2007.
• Junior companies with high leverage and limited hedging entering the downturn will struggle. Expect
increased insolvency proceedings to hit this sector.
55
Number of Companies (Public Producers)
50
45
40
35
100-1000
30
1,000-10,000
10,000-50,000
25
>50,000
20
15
10
Source: Canoils, Bryan Mills Iradesso, ATB
Change in Government
• The sweeping change in provincial government comes at a time when energy investors are desperate for
some form of stability.
• Federal election this fall may give rise to further policy changes.
• Regulatory delays have continually presented a major industry hurdle:
• Export capacities have been a concern for years - Keystone is in its 7th year of review.
• LNG also faces strong opposition. The Lax Kw’alaams native band rejected a >$1 billion offer from
the Petronas backed LNG project (Pacific Northwest).
• When will Energy East become a much needed reality?
• Our new Premier has said she will not advocate on behalf of the Keystone XL or Northern Gateway
pipelines. This increased uncertainty presents a real concern for the industry.
• Stated intended change to environmental policies have yet to be announced.
• By failing to maintain a stable and investable business environment, Alberta producers will incur a higher
cost of capital and investors will look elsewhere. Access to capital could be the biggest issue facing
producers and service companies over the next year(s).
Source: ATB, AltaCorp
Summary
Summary
• Comparison to previous downturns is becoming more difficult, given the structural the changes that have
occurred in the industry over the past few years and the potential for a prolonged commodity price
downturn.
• Marginal price rebound (15%) is not expected until the back half of 2016 and will be choppy in the
interim. Over 3,000 wells not completed in North America last winter.
• However, the general keys to success still apply:
• Strong management teams that may need to make tough decisions to act in the best interest of
shareholders. Need to push through entrenchment issues.
• Prudent action to control costs and leverage.
• Maintain strong relationships / communication with suppliers and capital providers
• Take actions to protect your business, rather than waiting (hoping) for prices to increase.
• Comfort is provided by the surprising resiliency of the energy industry that has dealt with many challenges
over the past few years (ie – high differentials due to transportation constraints, competition for labour,
scarcity in the equity markets, low gas prices, etc).
• In general, companies have shown the ability to adapt to tough industry conditions. However, some
companies will also have to proactively adapt to new realities.
Source: ATB, AltaCorp
Thank You
Bruce E. Edgelow
Vice President
Phone: (403) 974-5736
E-mail: Bedgelow@atb.com