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Former Shale Gale Blows A Cold Wind on State Revenues

Low natural gas prices and a consequent pullback from drilling have hit Arkansas hard. During the fiscal quarter ended Sept. 30, gross natural gas severance tax revenues were less than half what they were during the year-ago period. Arkansas isn't alone, but the oil/gas downturn is affecting producing states differently, Fitch Ratings said.

With crude oil and natural gas prices likely to remain soft, U.S. energy states' weakened revenue prospects are likely to persist well into next year, Fitch said in a note published Tuesday.

With crude oil prices languishing in the $40-50 range for months now, losses in related revenue sources that underpin energy states' budgets are on the rise. "Stagnant commodity price trends are dampening energy states' economic growth and are eating into economically sensitive revenue sources such as sales and personal income taxes," said Fitch Senior Director Marcy Block.

States with more diverse economies and revenue resources should be able to weather prolonged commodity price declines more effectively than those states that rely more heavily on commodity production. This means states such as Alaska, North Dakota and Wyoming are more directly in the cross hairs of the energy commodity price downturn, Fitch said.

In the energy capital of Houston, the Business-Cycle Index compiled by the Federal Reserve Bank of Dallas declined at an annual rate of 1.9% in August, the Dallas Fed said in a note last Thursday. The growth rate for July was revised downward to 4.4% from 5.9%.

In Houston, "upstream energy (oilfield-related employment and manufacturing) weakness continues to be at least partially offset by strength in downstream energy (refining and petrochemicals)," the bank said.

According to Texas state comptroller data cited by Fitch, natural gas tax revenues for the fiscal year ending Aug. 31, 2015 were 20.6% below a January 2015 estimate and declined 32.6% year over year (yoy). "The decline was somewhat offset by oil production tax revenue that was 4.2% ahead of the January estimate yet declined 26% yoy," Fitch said.

"The situation is similar to Oklahoma, where total revenues in August were 5.3% below projections, reflecting below-forecast severance tax collections and spillover effects of low prices and corresponding energy sector adjustments, according to the state's secretary of finance."

In July, the number of Texans on oil and gas industry payrolls averaged 285,500, according to a recent analysis of Texas Workforce Commission estimates, which was about 4.5% less than in July 2014 and nearly 6.4% less than the record of 305,000 Texas oil and gas employees recorded in December 2014, according to industry economist Karr Ingham (see Shale DailySept. 8).

In its note last week, the Dallas Fed said year-to-date declines in Houston energy industry employment have been felt entirely in the area of support activities for mining -- oilfield services and related activities having lost 5,100 jobs. "In contrast, oil and gas extraction and pipeline transportation employment in Houston has increased slightly since December," the bank said.

However, Fitch noted declines in sales tax revenue in both Texas and Oklahoma and blamed, in part, declining oil/gas industry employment. Texas August sales tax revenue was down 0.4% from the year-ago period, while for the same month in Oklahoma, sales tax revenue was 10% below prior estimates and was down 6.1% from a year ago.

"Fitch believes these declines reflect changes occurring among production workers in these states that have impacted consumption purchases," the ratings agency said, adding that continuing unemployment claims were up 19% year over year in Texas and 37% in Oklahoma.

Nevertheless in Texas in September, sales tax revenue ticked up 1.9% from the year-ago period, according to the state comptroller's office. This was due to "stronger growth in collections from the retail trade, restaurant, services and construction sectors [which] offset declines from the oil- and gas-related industries," the comptroller's office said.

Back in Arkansas -- home to the now much quieter dry gas Fayetteville Shale -- gross natural gas severance tax revenue was nearly $10.88 million during the July-September period, representing a 54% decline from the year-ago period when it was nearly $23.87 million, according to the Arkansas Department of Finance and Administration.

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