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Producing States Hedged -- For Now -- Against Price Squeeze, S&P Says

Among the teeth-clenching and numbers-crunching as oil prices continue to slide, Standard & Poor's Ratings Services (S&P) has found some slivers of hope for the nation's predominant oil and natural gas producing states, noting that for the short term they are prepared for the downturn.

States with significant oil production, such as Texas, North Dakota and Alaska, can weather the oil price dive in the near term with robust reserves and alternative revenue streams, S&P noted.

The credit ratings agency did a state-by-state analysis that found "even those with economic concentration in oil production have accumulated protective reserves or don't rely extensively on oil-related revenues to fund [state] operating budgets."

In Texas, by far the nation's biggest producer, oil production taxes comprise only 4.8% of the general revenues in the state budget, and natural gas taxes account for another 2.6%. On the other hand, Alaska has a recently updated budget gap of $3.5 billion because of lower oil prices, equating to 57% of its general fund expenditures. However, even in Alaska,its budget reserves and investment earnings from reserves provide "ample options" to fill the gap.

In North Dakota, S&P noted oil taxes have a limited direct impact on state general funds, but excess taxes go to benefit local and state reserve funds and special funds. Those funds could be reduced from the impact of lower oil prices, said S&P's primary analyst Gabriel Petek.

Similar findings came out of S&P's look at Louisiana, Mississippi, Montana, New Mexico, Oklahoma and Wyoming, with consumers feeling the benefits of lower oil prices.

"From a credit perspective, we have long been aware of the role that oil extraction plays in these states' economies and fiscal arrangements," Petek said. "As a result, despite headlines that might suggest otherwise, for these states, the plunge in oil prices is a contingency that we have accounted for in our ratings."

The report, however, also noted the oil-producing states are not likely to be immune for a long-term slide in oil prices, and much will depend on the future direction of those prices as well as the fiscal management response of the states.

In the future, analysts will be watching three key things:

  • Oil prices and production levels assumed in each state's budget;
  • Extent to which a state's operating budget relies on oil-related tax revenues; and
  • Whether a state has used the recent past period of high prices and production to accumulate reserves.

"The oil price decline came on fast and by most accounts, state revenue forecasters didn't anticipate it," the report said. "While the rapid price drop does not bode well for these states, from a credit perspective, S&P has for a long time known the role oil production plays in each of the states' economies and fiscal management."

States with similar oil production industries could still be impacted in vastly different ways depending on how they have handled the three key factors.

According to S&P, among eight of the oil-producing states, assumed oil prices for this year varied from a high of $105/bbl (Alaska) to a low of $50/bbl in Wyoming; Wyoming’s is a recently revised estimate lowering Wyoming's original $87/bbl estimate.

States varied greatly in the percentage that oil-related revenues represent in the operating budgets. In Alaska it is 79%, and in North Dakota, Oklahoma and Texas it is 4.4%, 4.9% and 6.4%, respectively. No state, except Alaska, is more than 17%.

Alaska projects that in fiscal year 2015, it will end up with $9.6 billion of budget reserves, or 157% of expenditures. Projections in the fiscal year also call for reduced investment earnings of $270 million in the state's Constitutional Budget Reserve Fund (CBRF) and $3.3 billion from the state's permanent fund.

"These amounts, if the legislature voted to make them available for appropriation, would approximately cover the revised budget gap [$3.5 billion]," S&P said.

For now, S&P rates Alaska, North Dakota, Texas and Wyoming as “AAA” with stable outlooks.  The other states assessed have “AA” or “AA+” and are stable, except for New Mexico, with an “AA+” and “negative” outlook. New Mexico’s prolonged downturn in prices "could impact employment and ultimately other state revenue."

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