PHOENIX - Alaska and California issuers are among those at risk of downgrades after U.S. oil prices tumbled this week, Fitch Ratings said Tuesday.
The new report examines "oil patch" issuers in Alaska, California, Texas, Louisiana, and Arkansas and how they can respond to a sharp drop in the price of the oil that is a key revenue driver for those municipalities. U.S. oil prices fell again Tuesday in what many observers said was a response to market volatility in China, the world's second biggest oil consumer. Prices have fallen sharply in the past few months, to less than $45 per barrel from more than $60 back in June. That decline came after a very steep drop last year, when oil at one point stood at more than $100 per barrel.
"The dramatic fluctuations in oil prices over the past 12 months demonstrate clearly the inherent volatility of this economic sector," Fitch said. "The price swings likely will have implications for economic and revenue trends for certain cities, counties and single-purpose districts in oil-producing states. The magnitude of the impact will be determined largely by a municipality's location, the nature of its participation in the oil and gas industry and its revenue framework.
Fitch said that local governments should "generally" be able to respond to a bottoming-out of energy prices, responding with tax increases, cost-cutting, or a combination of those. But an examination of data going back to the 1980's demonstrated that the relationship between local government revenues and oil prices is "generally consistent across Fitch-rated local governments in energy states, the exceptions being those governments that either had sufficient economic diversity to buffer weak energy prices or responded promptly through tax increases," the report found.
Included in the report are case studies examining specific issuers that include Alaska's North Slope Borough and Anchorage.
The borough, home to the United States' largest oil field at Prudhoe Bay on the arctic northern coast of the state, has some $455 million of outstanding general obligation debt, according to disclosures in a 2014 bond offering document. North Slope's portfolio is "the most oil concentrated in Fitch's portfolio," the report said, with about 98% of its assessed value coming from oil companies. But that value is based on the depreciated value of oil infrastructure rather than oil in the ground, the report added, meaning that fluctuations in oil prices don't powerfully affect its tax base.
"The impact of the 2014 oil price collapse is not yet noticeable in borough revenues," Fitch wrote. The borough does not levy a sales tax and relies almost exclusively on property tax revenues.
A prolonged oil price crunch could limit new infrastructure investment, and that would take its toll on the borough's tax base, according to Fitch. Anchorage is not as energy dependent, but could still see its AA-plus rating put in jeopardy.
"An extended period of very low oil prices that reduced employment at oil company headquarters and the professional services and retail concerns that serve the oil industry could have a negative impact on the rating," Fitch said.
Other issuers listed by Fitch as threatened by the oil price situation include A-plus rated Kern County, Calif., which is centered on Bakersfield. Texas, the largest oil producer among the states, had the most issuers on the threatened list.
