DALLAS – All of the energy-producing states in Standard & Poor's survey still have a higher oil price forecast for 2016 than S&P's $40 per barrel estimate, the ratings agency said in a report issued Thursday as oil futures hovered around $30.
"This suggests that as they head into budget season, fiscal pressures in these states could be more intense than what their official forecasts currently anticipate," analysts Gabriel Petek and Eden Perry wrote.
Perry, who will lead a panel discussion about the impact of energy on municipal bonds at The Bond Buyer's Texas Public Finance Conference in Austin Feb. 2, cited three factors in evaluating credit: the percentage of revenue derived from oil and gas; an issuer's assumptions about the price of oil; and how well-positioned the issuer was before the price of oil fell.
"For states with greater budgetary reliance on oil-related revenue, the unrelenting decline in prices places a larger burden on state lawmakers to identify and enact corrective fiscal measures," the analysts said.
Overall job growth from among the oil producing states is now materially lower than for the nation as a whole, the report said.
"Whereas total nonfarm payroll jobs increased 1.9% during the 12-month period through November 2015, the eight states in our survey saw job growth of just 0.9%," the report said. "Not surprisingly, lower than expected job and economic growth is showing up in the recent revenue data reported by Texas, North Dakota, Louisiana, and Oklahoma, where collections have fallen short of the budget forecast."
Public assistance expenditures in Texas are running ahead of budget in fiscal 2016 while tax collections are lagging fiscal 2015 receipts through the same date, analysts said.
"This environment contributes to our belief there is potential for an uptick in rating volatility in the state sector during 2016," the report said.
Texas Comptroller Glenn Hegar told the Texas Legislature's House Select Committee on Transportation Planning Jan. 20 that falling oil revenues would mean diminished funding for transportation projects under a constitutional amendment approved by voters in November 2014.
The constitutional amendment added $2.5 billion from a portion of oil and gas tax revenues to the highway fund. During the 2015 legislative session, lawmakers also diverted about $600 million a year of gas tax revenue to road construction and maintenance under another constitutional amendment approved by voters.
In October, Hegar reported that falling oil prices would reduce Texas revenue in the current budget cycle by $3 billion.
In the current fiscal year, Texas is pumping $1.1 billion in oil and gas severance taxes into the State Highway Fund, Hegar said. However, falling oil prices mean those revenues drop to $594 million in fiscal 2017 before rising to $740 million the next year.
Hegar said Texas' diverse economy should insulate the state from the impact of falling oil prices.
S&P concurs.
"Oil production taxes comprise only 4% of general revenues in the fiscal 2016-2017 biennial revenue estimate, with natural gas production taxes comprising another 2%," Petek and Eden wrote. "In our view, declines in oil and gas revenues will limit the increases in the economic stabilization fund -- also known as the rainy-day fund -- and state highway fund, but have a more limited impact on general revenue spending."
At greater risk than Texas are the oil producing states of Alaska, New Mexico and Oklahoma, according to S&P.
"Reflecting its linkage to the commodity markets, Alaska's economy has begun to contract and is out of step with the U.S. economy, which continues to expand," the analysts said. "Absent a course correction, we believe the state's present fiscal trajectory points to potentially weaker credit quality."
In North Dakota, where some producers of lower-grade crude are experiencing negative prices, "oil taxes have a limited direct impact on the state's general fund, as the amount that flows directly into the general fund is capped at $300 million per biennium, or about 5% of the fiscal 2015-2017 general fund budget," S&P said.
For the first five months of the 2015-2017 biennium, North Dakota's general fund tax revenue was $152 million, or 8.9% below budget, with a 26.5% decline in sales tax revenues as the largest driver of lower revenues, the report said.
Dallas Federal Reserve President Robert Kaplan warned in a speech that the U.S. energy sector will see more bankruptcies, mergers and restructurings this year given the outlook for continued low oil prices.
"The overall tone in the oil and gas sector has soured, as expectations have decidedly shifted to an 'even lower for even longer' price outlook" in the wake of the December OPEC meeting.
Economists at the Dallas Fed forecast that global excess inventories aren't likely to begin falling until 2017, and there is a risk that it will take longer.
About 30 companies with a collective $13 billion of debt have already filed for bankruptcy protection so far during this downturn, according to law firm Haynes & Boone.
Morgan Stanley has warned that an energy market "worse than 1986" could occur. The current downturn is now deeper and longer than each of the five oil price crashes since 1970, according to Morgan Stanley analyst Martijn Rats.
Hegar told Texas lawmakers that the current downturn will not have the catastrophic effects of the 1986 collapse because the state is more prepared and more diverse. The creation of the rainy day fund came after Texas suffered through the 1986 crash that devastated the state's banking sector and led to the collapse of the savings and loan industry.
A new federal law allowing the export of oil from the U.S. is unlikely to have more than symbolic impact on the prices, experts say. At the time Congress lifted the 40-year ban on U.S. exports in 2015, West Texas Intermediate crude oil still sold at a lower price than North Sea Brent produced in Europe. However, the global collapse in oil prices has erased that advantage.
On Dec. 31, the first U.S. export left the port of Corpus Christi bound for Italy.
John LaRue, executive director at the port, hailed the shipment as a key development in the port's expansion.
"Infrastructure improvements at Port Corpus Christi have placed our port in a unique position as a critical component in the export of U.S. crude and condensate," said LaRue, who is scheduled to appear on The Bond Buyer Texas Public Finance conference's energy panel.
In addition to private investment in export facilities, the Texas Department of Transportation is working to finance a $1 billion Corpus Christi bridge to replace the current structure that limits the size of ships that can pass through the span.
