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Effect of Texas Energy Patch Woes Spreading

As if the plummeting rig count weren't enough to signal more troubled times ahead in the Texas energy patch, state production tax revenues are way down, unemployment is creeping up and lawyers are preparing for more bankruptcy/merger and acquisition (M&A) work ahead. The "worse before better" expectation has clearly settled in.

On Tuesday, Texas Comptroller Glenn Hegar released January sales tax collection data. Revenue was down 4% from January 2015, but revenue from oil and natural gas production taxes was down a whopping 45.1%, to $193.4 million. "As expected, reduced spending in oil- and gas-related sectors resulted in a fall in total sales tax revenue," Hegar said.

"Collections from industries mainly driven by consumer spending, including retail trade, restaurants and services, continued to grow, as did receipts from the construction sector. I would also note the sales tax collections in January 2015 were a record high and represented a double-digit percentage increase over January 2014, meaning this month's collections are being compared to unusually high collections from a year ago."

What Hegar didn't say: it remains to be seen how much energy patch activity declines will impact retail tax collections in the months ahead.

Also on Tuesday, Texas Oil & Gas Association (TXOGA) President Todd Staples reminded reporters covering the industry how much it contributes to the Lone Star State's economy. According to TXOGA data, the industry paid $13.8 billion in state and local taxes and state royalties in fiscal 2015, the second-highest such collection from the oil and natural gas industry in Texas history.

"In spite of global economic challenges, all Texans continue to benefit from tax and royalty revenue paid by the oil and natural gas industry," Staples said. "The oil and natural gas industry contributes more than a half billion dollars annually to the state's Permanent School Fund, which supports Texas K-12 public schools. And the state's Rainy Day Fund is funded almost exclusively by oil and natural gas severance taxes...

"Yet the falling price of oil reminds us that this state and local revenue isn't guaranteed. Texas has fostered a robust oil and natural gas industry by embracing sensible and predictable regulations that are protecting the environment and encouraging investment in our state. Staying the course with sound, science-based policy will ensure investment dollars and jobs continue to come to Texas."

In an update released at the end of January, the Federal Reserve Bank of Dallas said the Permian Basin region shed jobs last year, with employment dropping 3.9% to 172,600. This is the first annual decline for the region since 2009, the Fed said. "In December, the unemployment rate stood at 4.2%, up from 2.7% a year earlier. Although unemployment has been inching up in recent months, it remains below the Texas rate of 4.6% and the U.S. rate of 5.0%."

Staples pointed to the petrochemical industry as one bright spot in the current Texas energy picture. It is benefiting from low-cost fuel and feedstock, thanks to output from Texas oil and gas producers. Manufacturers are also enjoying lower-cost energy.

Dow's fourth quarter earnings are an indicator. The chemical giant reported fourth quarter earnings per share of $2.94, or operating earnings per share of 93 cents. This compares with earnings of 63 cents/share in the year-ago period, or 85 cents/share on an operating basis. "We believe low energy prices are a net benefit and will help overcome negative investment sentiment in other sectors," CEO Andrew Liveris said.

Another segment of the economy poised to benefit from the current upstream malaise is legal and consulting services targeting the energy industry.

Texas bankruptcy attorneys expect business bankruptcy filings and restructurings to increase 30% in 2016, according to a sampling of the state's bankruptcy practitioners by Houston-based business valuation, litigation, consulting and financial restructuring firm HSSK LLC.

The bankruptcy attorneys' forecasts ranged from business filings remaining flat in 2016 to a 100% increase, and averaged a 30% rise. In addition, a majority (60%) expect the number of individual bankruptcy filings to be unchanged in 2016.

"A 30% increase in cases would produce Texas' fourth-highest level of business bankruptcy filings in 12 years," said HSSK President Marc Schwartz. "Based on the average amount of liabilities involved in the responding attorneys' cases, a 30% rise would mean that more than $84 billion of assets and 800 Texas companies will face the risks and uncertainties of bankruptcy or forced restructuring during the next year."

"It is likely that the lessons of the 2008 oil price crash -- which produced a 46% increase in business bankruptcy filings in the following year -- may help to moderate the current downturn's effects. If these respondents' estimates are correct and the 2016 rise in bankruptcy filings is one-third below that of 2009, it would reflect a better level of preparation for a downturn by many E&P [exploration and production] and services companies, banks, investors and financial professionals."

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