West Texas oil-hub hospital district plans to refinance BABs
Amid a pandemic and a collapse of oil prices in the heart of Texas’ producing region, the Ector County Hospital District will seek to lower debt service costs by refunding its $35.87 million of outstanding debt on Aug. 11.
All of the taxable Build America Bonds issued in 2010 will be converted to tax-exempt, officials said. The new bonds, which reach final maturity in 2035, will represent the district’s only long-term debt.
After the worst of the crisis in April, when gross revenues fell 41.5%, the tax-supported district's operating numbers improved steadily through July.
“We have survived this very well, and we’re well positioned to handle any surge that comes in the future,” said Russell Tippin, chief executive officer of the Medical Center Health System operated by ECHD.
Chief Financial Officer Steve Ewing said the hospital has regained its footing after the first wave of cases in March and has not seen similar losses in the second wave that has hit the state.
“I think as a hospital system, we’ve been better able to prepare for this second round,” he said. “As we’re continuing to live in this COVID-19 pandemic, we’re not experiencing the kind of net patient revenue losses and other top-line stats that we did in early April.”
The crisis has left the district, which holds S&P Global Ratings’ lowest investment-grade rating of BBB-minus, with a negative outlook.
“While MCH has made significant cost reduction efforts and received some funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, we do not expect these actions to fully offset the hospital's revenue shortfall,” S&P analyst Luke Gildner said, forecasting a second “substantial” deficit in the current fiscal year.
Moody’s Investors Service has a stable outlook on its Baa2 rating.
“The stable outlook reflects the expectation that significant financial assistance provided to the district by the federal government since the end of March will fortify the district's finances, given material revenue loss in April and May,” Moody's analyst Kenneth Surgenor explained. “Additionally, we believe operational changes to improve the revenue cycle and cost-cutting measures enacted by the district's new management team will improve operating margins and help the district return to balanced operations as service levels begin to recover.”
Exposure to the volatile oil and gas industry is a key factor in the district's rating, Surgenor said.
The district is considering insurance on the deal, given the economic uncertainty, said Steve Whitt, the district’s municipal advisor at Samco Capital.
“We expect feedback from Assured Guaranty early next week, although they are somewhat hesitant with respect to hospitals at this time,” Whitt said in a pre-sale roadshow.
Odessa, the county seat of Ector County, is a neighbor to similar-sized Midland in Midland County.
The district operates Medical Center Hospital, a 402 licensed bed tertiary care facility in Odessa that serves as a referral center for the 17-county Permian Basin region. The county's estimated population as of 2018 was 158,000.
When the pandemic hit, a Brookings Institution study said Midland ranked first among cities in the country for jobs at risk of being lost, with Odessa ranked fifth.
“We are at the heart of the Permian Basin,” Tippin said. “We are the nation’s leader in natural gas and oil production, and I like to say West Texas’ leader in healthcare as well.”
The study determined five "high risk" industries: transportation, travel arrangements, hospitality, employment services, and oil and gas. All of the district’s 10 largest employers, led by Halliburton, serve the oil and gas industry.
Futures prices for benchmark West Texas Intermediate crude have gradually risen to the $40 per barrel range since hitting a record negative $37.63 on April 20.
After five years of growth in its tax base, the district expects to see a 2% reduction in the coming fiscal year to $16.1 billion. In 2017, three years after the previous oil collapse, the district saw property values fall nearly 9.8%. Since then, the tax base has grown nearly 27%.
“We all know that commodities, such as oil and gas, can fluctuate, but the residential and commercial properties seem to be holding their value and increasing in Ector County,” Tippin said. “So, we are happy with that. Of course, we like $80 per barrel oil. We like it when it’s up there.”
President Trump recently visited both cities on a fundraising trip that included praise for the region’s role in oil exports and for his administration’s negotiation of production cuts with Russia, Saudi Arabia and the Organization of Petroleum Exporting Countries, now known as OPEC-Plus because of its inclusion of Russia.
“This action stabilized world oil prices that had been in a free fall, and saved millions of energy jobs, and frankly, it saved your industry,” Trump said at a Double Eagle Energy drilling site. “Four months ago, people were very, very concerned about that industry. And now it’s just going to be a question of how fast will you put people on?”
Telling the audience of energy executives that Democrats want to destroy their industry, Trump took credit for saving the region and oil and gas production.
“And since my election, oil and gas production in the Permian Basin has more than doubled,” he said. “Under the Trump administration, the United States has increased oil production by 3.1 million barrels per day. That’s some number. Never been anything like that number.”
Since mid-March, when oil prices plummeted in response to low demand because of the pandemic and stay-at-home orders, the U.S. fleet has lost nearly 560 rigs, or 67% of its bulk, according to S&P. Since mid-June, weekly rig declines have been in the single digits.
Last month the Permian Basin registered its first rig count gain in nearly five months, rising by six to 137 in the week ending July 22.
Last week, Exxon-Mobil reported losses of $1.1 billion in the second quarter. The Irving, Texas-based oil giant brought in $32.6 billion in revenue during the second quarter, less than half of what it brought in at the same time last year.
As of last month, 23 exploration and production companies had filed for bankruptcy, including shale pioneer Chesapeake Energy, according to the Dallas law firm Haynes & Boone.
The U.S. oil industry has lost more than 100,000 jobs since February, with 45,000 of those jobs shed by upstream oil and gas companies in Texas alone, according to consulting firm Rystad Energy.
“And now we’re back, and now we’re just going to keep expanding,” Trump said. “It’s happening. But we really did — we did a great job.”