DALLAS – Oil-dependent Midland, Texas absorbed a one-notch downgrade from Moody's Investors Service, which maintained a negative outlook on the financial hub of the Permian Basin in West Texas.
The one-notch downgrade to Aa2 "reflects the city's economy's high concentration in the oil and gas sector which has experienced a dramatic decline over the past 18 months, and which is unlikely to recover to pre-decline levels over the near term," analyst Denise Rappmund wrote.
"The effects of the low oil price environment will challenge the city's ability to balance its financial operations given the city's significant reliance on economically sensitive sales tax revenues," she wrote.
Midland was one of 11 credits in the oil patch that Moody's placed on watch for possible downgrades March 4.
Friday's downgrade came three days before oil prices again fell below the $40 threshold after talks in Doha, Qatar, failed to produce a plan to reduce oil supplies.
Some analysts predicted that the failure amid intense competition between Saudi Arabia and Iran could send prices of U.S. oil to as low as $30 a barrel.
"Moody's expects soft prices over the next three years topping out in the mid-$40 range," Rappmund wrote. "Based on the general cost structure in the Permian Basin that has come down along with the entire industry over the past eighteen months, a price level of $35- $45 per barrel is considered approximately breakeven for larger or well-established oil and gas companies."
According to data from the Midland Development Corporation, the residential market is showing declines with home prices down approximately 7.5% year-over-year through January 2016 and residential development nearly halted. Sales tax revenue has also fallen sharply over the past year.
The Midland-Odessa metro area is estimated to have lost 14,500 jobs in 2015, and additional layoffs are expected in 2016.
"Nearly a third of employment for the region remains concentrated in oil and gas with many additional jobs in businesses that serve or benefit from the strength in oil and gas including construction, restaurants and hotels," Rappmund wrote. "Despite the job losses, there is no evidence of significant out-migration from the metro area and enrollment in Midland Independent School District has remained stable."
Population in the city as of 2015 was approximately 129,000.
With about $129 million of outstanding debt, Midland is considering issuing bonds to build a convention center.
