A steady rise in oil prices is improving the economies of most energy producing states, but for some, fiscal resiliency has become weaker, according to Fitch Ratings.
“Economic growth and tax revenues tied to higher prices and production have risen,” according to analyst Marcy Block, who authored the Fitch report, released Thursday. “However, financial operations for many could remain tight as the fallout from successive one-time actions, including substantial reserve use, applied in recent budgets in response to the multi-year price and production downturn continue to challenge them.”
The oil bust that began in mid-2014 could also temper those states' expectations of a long-term turnaround in the industry, Block noted.
The U.S. oil industry's rise has lifted the economies of Alaska, Louisiana, New Mexico, North Dakota, Oklahoma and Texas, the report said.
Alaska, rated AA by Fitch, Texas, rated AAA, and North Dakota (not rated by Fitch) all increased their fiscal 2018 forecast for non-recurring revenue by over 20% from earlier expectations, while AA-rated Oklahoma’s improved by 16% and New Mexico's (not rated by Fitch) by 10%.
The oil bust brought Fitch downgrades to three states. Alaska dropped a notch to AA from AA-plus, Louisiana fell to AA-minus from AA, and Oklahoma sank to AA from AA-plus.
A more modest 3% revenue revision for Louisiana points to the current recovery primarily taking place in U.S. shale formations rather than along the state’s principal Outer Continental Shelf or its conventional oil fields, Block said. Louisiana still enjoys benefits from hydraulic fracturing (fracking) operations in the Haynesville Shale play.
“The recovery provides significant benefits to the state, as increased production flows through its 18 oil refineries that account for nearly one-fifth of the nation’s refining capacity and delivers product to its extensive deep-water port system that supports the U.S. role as a net exporter of refined petroleum products,” Block said. “The shale by-product of inexpensive natural gas has also been a boon to the state’s extensive petrochemical manufacturing industry.”
The U.S. has seen 38.5% growth in the natural industry’s gross domestic product since 2008, Fitch said.
The U.S. oil industry's production grew by 11% in 2017 on the expansion of shale companies' production after the 2014 price plunge that bottomed at $26.21 per barrel in February 2016.
An agreement between Russia and the Organization of Petroleum Exporting Countries to limit production and growing global demand have pushed oil prices up beginning in 2017 from $52.33 per barrel to $59.64 by year's end. The 2017 acceleration boosted US rig counts to 930 at the end of the year; up 36% from January 2017, but still far below the 1,904 rigs in service in September 2014.
Fitch and the U.S. Energy Information Administration forecast a 1 million barrel per day increase in U.S. production in 2018 from 2017. The EIA expects a 2018 average of 10.3 million barrels per day in production, rising to 10.8 million in 2019.
Growth regions identified by the EIA include the Permian region in Texas and New Mexico and in the Gulf of Mexico. Production in Alaska is expected to remain flat in both 2018 and 2019. Fitch's forecast for the West Texas Intermediate crude price is $50 per barrel for 2018 and $52.50 for 2019.
“The long-term forecast is a subdued $55 per barrel, reflecting the high level of market uncertainty and lower global production costs that are unlikely to result in a sustained period of materially higher prices,” Block said.
The Federal Reserve Bank of Kansas City’s fourth quarter 2017 regional energy survey cited improved indexes among energy firms for wages, employee hours worked, and business activity in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, Northern New Mexico, and Western Missouri.
“Oklahoma has had considerable difficulty in closing a current year revenue shortfall that developed due to a litigation loss and it forecasts a fiscal 2019 budget gap arising from the shortfall, use of one-time funds in fiscal 2018, and increasing spending obligations,” Block said.
“Louisiana’s impending $1 billion-plus fiscal 2019 fiscal cliff reflects the falloff of temporary tax measures enacted to close a large fiscal 2016 budget gap partly attributable to the downturn,” she added. “Energy states with more diverse economies continue to fare better, such as Texas and Colorado. Yet, ongoing budget and revenue adjustments by energy states are expected to remain a feature of the budget landscape as markets remain turbulent and as many of these states seek to rebuild their reserves.”
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Corrected January 25, 2018 at 4:22PM: The original version of the story inaccurately said that North Dakota is rated by Fitch. Fitch does not rate North Dakota.