- Although mineral-producing states are poised to rebound economically, five will be in the bottom decile among states nationally in terms of GSP growth in 2021.
- Texas' growing and diversifying economy leads the pack and is forecast to grow faster than the nation as a whole, ranking seventh among all states in 2021.
- While active management helped preserve overall credit quality, we revised our outlooks on three states to negative and downgraded one partly due to the weakness of the energy-producing sector.
As the effects of two enormous economic shocks--an oil price rout and the onset of a public health crisis--continue to soften following their peak intensity a year ago, U.S. mineral-producing states face uncertainty whether recent positive momentum will last. In S&P Global Ratings' opinion, recent stabilization of oil prices has reduced economic pressures on states relying on the battered oil and gas sector, but smooth sailing may not be in the short-term forecast.
S&P Global Ratings has long held that outsized budget reserves of oil-producing states has provided an effective fiscal cushion during a transition to lower oil prices. Over the past year, we observed prudent budget management across most mineral-producing states as oil prices collapsed. Coupled with extraordinary federal aid—-to states, individuals, and businesses-—mineral-producing states received a helping hand to navigate what otherwise may have been insurmountable fiscal challenges. Although recovery from the depths of the pandemic-induced recession continues, many may lag their peers even as economic momentum builds. (For more on federal aid, see "Across U.S. Public Finance, All Sectors Stand To Benefit From The American Rescue Plan," published March 18, 2021, on RatingsDirect.)
Evolving Industry And Political Risks Are Escalating With No End In Sight
Oil- and other mineral-producing states face ongoing risk from increasing regulations of carbon emissions and an accelerating energy transition to renewable energy. Over time, we expect these evolving credit risks to exert negative pressure on state operating environments.
In January, S&P Global Ratings revised its industry risk assessment for the oil and gas exploration and production and integrated industry in corporate and infrastructure ratings to moderately high from intermediate. Analysts noted this was due in part to "[T]he increased environmental threat posed by greenhouse gas (GHG) emissions, evolving government policies and emission standards, and the rising share of renewables, supported by their cost-competitiveness." (For more, see "ESG-Driven Industry Risk Assessments Update For Corporate And Infrastructure Ratings," Jan. 27, 2021.) Among the early executive orders from the current administration was the temporary suspension of new leasing on federal lands and a review of the federal leasing program. While the vast majority of onshore drilling activities occur outside of federal lands and did not affect existing leases, at a minimum, those actions put the sector on notice that more policy directives could ensue. (For more, see "How The Executive Order Suspending New Leasing Of U.S. Federal Land Will Affect Oil And Gas Companies," Feb. 8, 2021)
According to the Department of the Interior, approximately 22% of U.S. oil production and 13% of natural gas production comes from federally owned land/water. In our view, New Mexico, Wyoming, and the Gulf of Mexico would be particularly pressured given their exposure to federal acreage. While we do not anticipate sectoral changes occurring overnight, states with a comparatively greater concentration of oil and gas activities stand to face heightened headwinds absent proactive measures to adapt to this changing environment. Over time, many, we note, have created policies and programs to address the boom-and-bust cycles typical of the volatile energy sector. For example, North Dakota's (AA+/Stable) Legacy Fund--funded by severance taxes--guards against a dependence on such a volatile revenue stream while building resources for future generations. At the end of 2020, the balance slightly exceeded $8 billion and can be used for budgetary relief with legislative approval. Texas' (AAA/Stable) economic stabilization fund (ESF) is funded by severance taxes. It was established following the oil bust in the late 1980s to limit the direct budgetary effects of revenue volatility from oil and gas production taxes and to serve as a budgetary bridging tool on "rainy days." The state has used the fund throughout its existence; its balance stood at $10 billion at fiscal year-end 2020.
Rebounding From The Bottom But Not As High As Most
S&P Global Economics forecasts 2021 U.S. gross domestic production will rebound to 6.5% (annual) after a 3.5% contraction in 2021 and revised its risk to recession in the next 12 months down to 10%-15% from 20%-25%. However, the country's economic recovery will likely remain uneven. Without exception, all mineral-producing states were affected by the dual shock of the pandemic-induced recession and the global energy rout last year, with five of them in the bottom 20% of all states in 2020 for economic growth. By the end of 2021, five states are expected to remain at the bottom of list, and only Texas is likely to be among the 10 best-performing states, ranking seventh in the nation, according to IHS Markit. By 2022, only Alaska and West Virginia are forecast to rank in the bottom 10 states. States that have a high reliance on mining activity and less diversified economic profiles may see prolonged economic recovery compared to the rest of the sector.
|Real Gross State Product Data For Major Oil-Producing States|
|Year-Over-Year Real Gross State Product (GSP)|
|2018-2019||2019-2020||2020-2021 (P)||2021-2022 (P)|
|Growth rate (%)||Rank||Growth rate (%)||Rank||Growth rate (%)||Rank||Growth rate (%)||Rank|
|S&P Economics U.S. Forecast||2.16||(3.50)||6.5||3.1|
|IHS Markit U.S. Forecast||2.16||(3.50)||5.69||4.15|
|(P) -- Projected. Real gross state product (2012 US$, SAAR). Ranks are shown from 1 (fastest growth) to 50 (slowest growth). Sources: Bureau of Economic Analysis; IHS Markit; S&P Global Ratings.|
Prospects For Accelerating Job Growth In 2021 Look Good, But The Mining Sector Lags
The employment picture remains mixed but the trend of sliding payrolls in the mining and logging sector has persisted since the fall 2014 peak. Total employment in the mining and logging sector--which captures a large share of oil and gas activities--is roughly two-thirds the size it was then. However, we expect that the oil states in our survey will benefit from broader economic growth and add jobs at a faster pace in 2021, even if cumulative employment in these states continues to lag that of the U.S. as a whole (see chart 1). As of February 2021, the seasonally adjusted unemployment rates in the oil states ranged from 8.3% in New Mexico to 4.4% in Oklahoma, with the jobless rate in five of the states at or exceeding the national 6.2% rate (preliminary).
Isolating Oil And Other Mining Activities' Effects On State Budgets
In table 2, we have provided a summary of key price and budgetary assumptions among the 10 main oil-producing states' levels of direct fiscal dependence on oil-related revenue. We've observed that even a comparatively low direct reliance on oil-related revenue does not preserve a state's budget from the fiscal fallout related to an overall slowing economy. What made 2020 slightly different is that all states revised their revenue assumptions to reflect the effect of the public health crisis and more mineral-producing states did so in response to the added weakness in the sector. Even with generous federal relief funds, those states with a heavy direct reliance on oil-related revenue have had to contend with some immediate budgetary challenges.
Beyond oil, other mining activities such as coal and natural gas extraction can play a significant role in state budgets. For each of the states below, we provide additional detail on how oil production may affect budgets.
|Energy-Dependent Stated General Fund Expenditure Change|
|* Estimated. Sources: National Association of State Budget Officers (NASBO), FY 2020 State Expenditure Data.|
|Key Data For Major Oil-Producing States|
|Fiscal 2021||Fiscal 2022|
|Price assumption at budget enactment ($/barrel)||Price assumption (revised) ($/barrel)||Oil-related revs as % of operating revs||Reserves as % of expenditures||Price assumption ($/barrel)||Oil-related revs as % of operating revs||Reserves as % of expenditures|
|* Alaska's price assumptions are based on the Fall 2020 Revenue Sources Book. Reserves (Constitutional Budget Reserve + Earnings Reserve Account fiscal year-end estimated balance), revenue, and expenditure assumptions are based on the governor’s proposed fiscal 2022 Fiscal Summary. Our view of expenditures and revenues include all funds less estimated federal revenues and appropriations. ** Louisiana's data as presented to the Revenue Estimating Conference in Janurary 2021. § Montana assumes WTI oil prices adjusted for transportation discount. Montana's revenue includes oil and gas. The state budgets on a biennial basis. † New Mexico's figures are from the state Legislative Finance Committee mid-2021 budget session forecast. New Mexico oil-related revenue percentage includes oil-, natural gas-, and other mining-related revenue attributable to the general fund from combined severance tax and mineral leasing and royalties as a percentage of recurring general fund revenue as presented in the 2021 Mid-session Update. §§ Texas' oil & gas-related revenues as a percentage of operating revenues exclude federal revenues and other dedicated revenues. In November of each year, transfer is made from the general revenue fund equal to 75% of the excess of the prior fiscal year net collections for oil and natural gas production taxes over 1987 collections. The transfer amount of each production tax is calculated separately and must be in excess of the 1987 threshold. Reserve percentages for Texas are based on the biennial revenue estimate as the biennial appropriations are not yet available. Reserve levels reflect the estimate at the end of the current bienium. †† Wyoming budgets on a biennial basis. Percentages are calculated based on annualized biennium revenues or expenditures for comparability and include the general fund, the legislative stabilization reserve account, the budget reserve account, and the school foundation program. *** Oklahoma's price assumption reflects oil-related revenue only. Combined oil and gas [gross production] revenue makes up 5.1% of operating revenue and 7.8% of operating revenue, respectively, for fiscal years 2021 and 2022. Oklahoma's revenue and reserve assumptions are based on the state Board of Equalization's Feb. 16, 2021 revenue certification (revised from December 2020 estimates). Calculation of reserves includes current reserve balances in the state's constitutional reserve and revenue stabilization funds, totaling $229.9 million. ‡ North Dakota's total oil and gas-related revenues reflect the revised legislative estimate from March 2021. Total available reserves for the biennium include the general, budgetary stabilization, and strategic investments and improvements funds. They do not include the state's estimated legacy fund ending balance for the 2019-2021 biennium of roughly $7 billion; the legislature may appropriate up to 15% of the principal and all of the interest of the fund in any biennium. †† Wyoming has a biennium budget. Percentages are based on one-half of two-year 2021-2022 biennium forecasted operating funds, including the general fund, school foundation program, 1% severance tax account, and budget reserve account. Assumes oil revenues from federal mineral royalties without bonus payments are the same percentage as for mineral severance taxes. N/A=Not applicable.|
Alaska's fiscal 2022 amended budget proposal shows an improved revenue outlook as oil prices increased over the past year, although significant risks remain. The Office of Management and Budget's (OMB) fiscal summary estimates an unrestricted general fund (UGF) deficit of $879, or 19% for fiscal 2021, which closed with use of the state's Constitutional Budget Reserve. The proposed fiscal 2022 budget shows a deficit of $81 million, or 2% of UGF expenditures, but also incorporates a 6% reduction in UGF expenditures. Petroleum related revenues is estimated to be only 20% of fiscal 2022 UGF revenue compared to nearly a decade ago when it was 100% of revenue. The budget includes full payment of the statutory dividend to residents with a draw from the Earnings Reserve Account of $3.1 billion, or 72% of UGF revenue. Over the long term, the state continues to grapple with sustainable budgeting. While total reserves remain very strong, additional revenue sources will be needed as expenditure reductions have been virtually exhausted over the past several years. The governor's plan recognizes a need for new revenues in fiscal 2023, but it is unclear what that may entail. The state currently does not levy a statewide sales or income tax.
Texas' constitutionally required transfer of severance taxes to the ESF and state highway fund limit its direct reliance on these revenues for operations, which we view positively. According to the comptroller's biennial revenue estimate, oil and natural gas production taxes will make up 5.4% and nearly 3%, respectively, of total net general revenues for biennial period covering fiscal years 2022-2023. Relative to the preceding biennium, oil and natural gas production taxes are estimated to increase 10.1% and 66.9%, respectively, reflecting in large part the comptroller's view of an economic recovery after a material hit in 2020. While collective severance tax collections are outpacing the state's revenue forecast by slightly over 53% for the fiscal year, relative to fiscal year-to-date 2020, they are down 30.7%. In our view, the recovering economy and oil and gas sector will translate into stronger revenue trends and ultimately into a larger deposit into the state's reserves. The balance is estimated to grow to $11.55 billion absent any draws by the legislature by the end of the next biennium (August 2023).
The Louisiana Revenue Estimating Conference's (REC) latest revenue forecast adopted in January reflects cautiously positive momentum for the next fiscal year (2022), with total tax revenues estimated to grow 1.2%. The REC's oil price assumptions for fiscal years 2022 and 2023 are $40.1/bbl and $44.65/bbl, respectively, and marginally unchanged from the previous forecast. Severance taxes for fiscal years 2022 and 2023 were revised down by $83 million and $107 million, respectively, from their previous estimates and forecast to total $416 million (2022) and $490 million (2023). Recognizing the volatility in the oil and gas sector, officials remain cautious about relative improvement in prices within the past year. The state has significant offshore drilling activity, which is less sensitive to short-term drops in oil prices than that of shale plays, but federal policy changes could add pressure longer term should they limit or effectively ban further development on the coast. Oil and gas volatility aside, the state's budget and economy have proven resilient through the pandemic. Reserves are estimated to be $503 million, or 5.4% of general fund appropriations by the end of the current fiscal year.
The state's current biennial budget projects $3.62 billion in direct oil-related revenues of which about $400 million is deposited in the general fund. The remainder is disbursed to various separate funds following a prescribed flow of funds. The forecast assumes WTI crude oil prices of $51.5/bbl as of March 2021, a revision from the estimate in November 2020 of $32/bbl. For the state's next biennium, prices are expected to gradually transition to $53.5/bbl by June 30, 2022, and fall to $48.75/bbl in fiscal 2023. Production is forecast to be roughly 1,100 barrels per day through the final quarter of the state's fiscal 2023. With the assumed gradual improvement of the state's economic base, total general fund revenues are estimated to increase slightly over 2% from revised 2019-2021 levels, to $3.82 billion. As observed in previous periods of depressed prices, the linkages between the state's oil industry and broader economy are quite strong, which has resulted in softer economic trends for North Dakota. We expect the energy sector to remain an anchor of the state's economy and its ability to recover from the current shock will have a significant bearing on the rating over time. The improvement in prices and general revenues is a welcome development, but a deceleration in North Dakota's economy remains an elevated risk given the sector's outsized effect on the state.
New Mexico (AA/Negative)
On May 19, 2020, we revised our outlook on the state's 'AA' general obligation rating to negative from stable due to a weakened energy market. About one-third of New Mexico's general fund revenue derives from oil and gas production; around half from direct severance taxes and mineral rents and royalties deposited in the general fund; and about half indirectly from gross receipts taxes on oil and gas activity. Its mid-session consensus revenue update reflects an unaudited ending balance of $1.56 billion, or 21.7% of recurring appropriations for fiscal year 2021 and $1.76 billion, or 23.6% of ongoing appropriations in 2022. However, a new risk that the state has assessed involves potential changes in federal policy that curtail or materially alter production operations on federal land. The Consensus Revenue Estimating Group (CREG) considered two scenarios resulting from federal policy changes that would lead to 10% and 20% production declines, respectively. The CREG notes that the resulting loss in gross receipts taxes, severance taxes, and federal mineral leasing payments could range from $33.5 million-$43 million in the current fiscal year and $130 million-$235 million in fiscal 2022.
Montana's budget is primarily funded through individual income tax revenue, historically over 50% of general fund revenues, and derives only 1%-2% of revenues from direct oil and gas-related receipts. This excluded other resource-based income from metal and coal mining such as the state's coal severance and metalliferous mines taxes, which, on a combined basis, contribute less than 1% of general fund revenues. However, high-paying jobs in the oil and gas industry still produce meaningful economic effects directly and indirectly as evidenced by state corporate and individual income tax collection that has fluctuated in recent years in concert with energy price volatility. Oil and gas production taxes are forecasted to contribute slightly above 1% of general fund revenues in fiscal years 2021 and 2022. Fiscal year-to-date oil and gas production tax revenue collections through March 2021 represented about half of the prior-year levels due to the decline in oil prices and similar decline in production during the same period; however, cumulative year-to-date collections are tracking at 112% of the budget forecast.
Oklahoma's budget performance stumbled through the final three months of fiscal 2020. The state's Board of Equalization (BOE) declared a revenue failure of $416.7 million (or 6% below budgeted appropriations) in April 2020, and fiscal year-end general revenue fund collections were $716.1 million, or 10.2% below its enacted budget. Oklahoma responded to the revenue failure with non-recurring budget measures, and the state authorized transfers of $504 million from its constitutional reserve and revenue stabilization funds to close the general revenue budget gap. Its revised February 2021 BOE certification indicates better-than-expected revenue conditions ahead, but Oklahoma must still contend with how to restore structural balance and rebuild reserves as the state reduces its use of non-recurring budget stabilizing measures implemented for fiscal 2021 and incurs new expenditures, including expanding Medicaid coverage.
Pennsylvania, one of the nation's leading producers of both natural gas and coal, is the only major gas-producing state that does not impose a severance tax on its extracted resources. The governor has proposed instituting such a tax on natural gas drilling each year since taking office in 2014, but has been met with opposition by legislators. The governor's latest proposal as of February 2021, called Back to Work PA, is estimated to generate $3 billion, if passed, for workforce development initiatives. Over the long term, IHS Markit expects the Marcellus Shale natural gas deposit, which runs through the commonwealth, to be a long-term asset for Pennsylvania and the region.
West Virginia (AA-/Stable)
The governor's proposed fiscal 2022 general fund budget totals $4.6 billion, with severance tax making up 7% of revenues ($320 million). This represents a 27.5% increase over prior-year estimates, due in part to increasing natural gas demand and prices. Severance tax in the state is based on coal, natural gas, and other mineral resources. Collections have also been affected by tax changes, including the reduction in the severance tax on steam coal, which will further decline to 3.0% on July 1, 2021. We note the state's severance tax collections has shown volatility and contributed to budget pressures in some years. Within its own forecast, the state notes "significant downside risk to the steam coal market offset by some potential gains in metallurgical coal and natural gas liquid markets." Following the forecasted increase for fiscal 2022, the state projects severance taxes would see modest decline, but level out in later years. Despite such tax volatility, West Virginia has been able to maintain strong budgetary performance and flexibility with the help of timely budget adjustments while shifting some of its reliance on the tax to other mining activities. Over time, the state's severance tax revenue is expected to become less dependent on coal.
Wyoming's economy and severance taxes have been hurt by long-term decline in the state's coal mining industry, formerly a major employer and tax generator, as electric generation migrates to cleaner and cheaper natural gas. A potential ban on new mineral leasing on federal land could hit Wyoming especially hard, as 88%-90% of coal production, 70% of oil production, and 79% of state natural gas production are on federal land. During previous energy booms, the state built up reserves equal to more than annual operating expenses. These have been drawn down in recent bienniums, but still remain substantial, at more than half of annualized biennium expenditures. The state does not have a personal income tax and has relied historically on mineral-related taxes to balance its budget, so that the decline in mineral-related revenues has opened up a long-term structural deficit. Wyoming's legislature recently ratified mid-biennium cuts proposed by the governor in a just ended mid-biennium budget session, which will help reduce imbalances in the state's general fund, but school aid operating and capital funds have been left with substantial projected operating deficits. It is currently unclear to what extent operating deficits in the state's school aid funds might be temporarily alleviated by recently enacted one-time federal aid. For a while, high oil prices and production took up some of the slack from decreased coal production, but declines in oil prices have affected oil production too. Oil rigs in operation fell from over 30 in calendar 2019 to six active rigs at the end of December 2020. The state projects oil production will fall 17.6% in calendar 2021 compared to 2020, although with a forecasted moderate recovery in 2022 and beyond. However, predictions could be revised depending on the outlook for mineral leasing on federal lands.
This report does not constitute a rating action.
|Primary Credit Analysts:||Oscar Padilla, Farmers Branch + 1 (214) 871 1405;|
|Timothy W Little, New York + 1 (212) 438 7999;|
|Secondary Contacts:||David G Hitchcock, New York + 1 (212) 438 2022;|
|Jillian Legnos, Hartford + 1 (617) 530 8243;|
|Kevin R Archer, San Francisco + 1 (415) 3715031;|
|Thomas J Zemetis, New York + 1 (212) 4381172;|
|Sussan S Corson, New York + 1 (212) 438 2014;|
|Research Contributor:||Vikram Sawant, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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