TORONTO, June 1 (Reuters) - Investors see less risk in Alberta’s bonds, brushing aside a recent credit rating downgrade, as surging energy prices boost the outlook for the province’s finances and oil sands operators begin to address the sustainable investment trend. Alberta, which accounts for about 80% of Canada’s crude output, has seen its fiscal position deteriorate since the 2014-16 collapse in oil prices, with matters made worse by the coronavirus crisis and last year’s historic oil price fall. Last month, S&P Global Ratings lowered the province’s credit rating to A from A+. Still, that rating is above the triple-B level that some investors cannot hold, while portfolio managers say the risk of owning the bonds is reduced by growth in the province’s resource revenue. It’s forecast by the government to double to C$5.9 billion ($4.9 billion) in two years. Oil has rallied nearly 40% this year on prospects of global economic recovery. Alberta’s 10-year yield was 2.08% on Monday, compared with the Canadian 10-year yield of 1.50%. The Alberta yield was 5.5 basis points above the 10-year yield of Ontario, Canada’s economic engine. This was the lowest since September 2019. The spread has tumbled from nearly 40 basis points in April last year. “It’s more a commodity play, especially the firmness in energy prices, that has added support to Alberta spreads,” said Darcy Briggs, a portfolio manager at Franklin Templeton Canada, which owns the province’s bonds. “We really do see oil prices being supported at this level.” Alberta’s net debt has surged over the last five years to 24.5% of GDP, but it’s much less than some other provinces, including Ontario. The province’s high-carbon oil sands have uncertain long-term prospects, particularly after Prime Minister Justin Trudeau announced in April Canada’s new plan to cut greenhouse gas emissions by 40-45% within nine years. But potential revenue shortfalls in future years could be offset by other revenue streams, such as a sales tax on goods and services. Alberta is the only province not to impose one. Meanwhile, efforts by oil sands producers to reduce their carbon footprint could assuage the worries of some investors. Last week, Suncor Energy Inc said it plans to cut its emissions by more than one-third. Moves to cut emissions could “make Alberta very attractive” for institutions that may not have previously included the province in their provincial bond holdings,” said Earl Davis, head of fixed income and money markets at BMO Global Asset Management. Canada’s biggest pension managers boosted their equity stakes in the country’s major oil sands companies in the first quarter of 2021. Investors say demand for the bonds is also underpinned by the global hunt for yield and potential support from the Bank of Canada if financial markets become stressed. “International investors, if they are looking for opportunities, Canadian provinces represent that, in terms of incremental return without having to take on a lot of risk in terms of default risk,” Briggs said. ($1 = 1.2072 Canadian dollars) (Reporting by Fergal Smith; Editing by Cynthia Osterman) Our Standards: The Thomson Reuters Trust Principles.