Texas Oil Patch Towns Feel Price Decline as Bond Downgrades Loom

In the west Texas plains that are home to the nation’s biggest oil field, low energy prices mean residents...

In the west Texas plains that are home to the nation’s biggest oil field, low energy prices mean residents are paying more and getting less.

To make ends meet, Pecos County officials increased property taxes nearly as much as state law allows and shelved a $35 million bond sale to expand the local hospital. Midland, about 325 miles (523 kilometers) northwest of San Antonio, last year scrapped a 3 percent bonus for city employees.

“We’ve maxed out our tax rate,” said Joe Shuster, the top elected official in Pecos, a 15,000-person county in the Permian Basin, where the assessed value of oil-rich property has tumbled along with the market price. “Next we may have to cut services and people.”

With the price of crude at about $37 a barrel, little more than a third of what it was less than two years ago, the fiscal impacts are building in Texas, the largest U.S. producer, which once boomed when production soared. This month, Moody’s Investors Service said it may cut the ratings on $477 million of debt issued by 11 local governments — including Pecos — because of how much their economies and revenues depend on the energy industry.

“We’re seeing more cutback in drilling and production at these lower prices,” said Julie Meyer, an analyst with Moody’s. “Now these local governments will see their flexibility tested. How well they respond will affect their ratings.”

The oil-industry downturn is being felt broadly by governments across the U.S., and it has already triggered downgrades this year for Louisiana, Alaska and North Dakota because of the widening shortfalls left in their budgets as expected tax revenue fails to materialize.

While Texas’s economy has continued to expand, the shutdown of oil rigs is extracting a toll on the government’s finances. Sales taxes, the state’s biggest revenue source, from September through February dropped by 3 percent from a year earlier to $14 billion, according to the Texas Comptroller.

In some areas, the decline has been much bigger. In more than two dozen Texas cities and counties, sales taxes dropped by more than 50 percent in January and February from a year earlier. Midland and Odessa, which are among those at risk of a downgrade from Moody’s, have seen their revenue drop by a lesser degree.

“As bad as this last year was, people are bracing for it to be a whole lot worse,” said Lonnie Hunt, spokesman for the Texas Association of Counties in Austin. “Counties dependent on oil and gas are going to be hit hard.”

The pressure has led investors to push up the yields on some Texas bonds relative to top-rated debt. Texas’s 10-year bonds yield 2.12 percent, about 0.25 percentage point more than benchmark securities, up from as little as 0.13 percentage point in early January. That gap on a Midland bond maturing in 2033 was 1.34 percentage point on March 11, compared with 1.1 percentage point soon after it was first issued in January 2014.

Despite fear of rating cuts, David Jaderlund of Jaderlund Investments in Santa Fe, New Mexico, said he has long snapped up bonds from Permian Basin borrowers, which have the ability to weather lean times because they were cautious about running up debt during the good ones.

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“I love them and bid on them all the time,” said Jaderlund.

Because production costs are higher in Texas than elsewhere, more operators are cutting back there, Robert Kaplan, president of the Dallas Federal Reserve Bank, said in a speech at Dallas-Fort Worth International Airport on March 4. He said 2016 “is going to be a tough year for the oil sector.”

Pecos started feeling the impacts last year. After its property-tax base fell 27 percent because of the diminished value of oil and gas-related land, the county raised the real-estate tax rate 11 percent to near the maximum.

Reserves Stockpiled

With little ability to raise taxes further, it may have to cut services and jobs when it works on its next budget later this year, said Shuster, the county official. Yet it has a sizable financial buffer: The county, with the second-highest credit rating from Moody’s, still has $13.5 million in reserves, enough to cover about 40 percent of the current year’s budget and is about to pay off its remaining debt.

In nearby Reagan County, about 90 miles east of Fort Stockton, the county seat of Pecos, pressure is coming to bear on the hospital district. Reagan Hospital District in Big Lake, which has the second lowest investment-grade rating from Moody’s, depends on energy property for about 90 percent of its tax base.

Before the oil crash the population of Big Lake had more than doubled, forcing 4,030 new residents to live in motels, trailer parks, campgrounds and recreational vehicles. Reagan County’s property tax base had risen by 71 percent along with the boom, prompting borrowing by schools and the hospital district. The county’s property-tax base fell in 2015 and officials later this month will learn how much more it will erode this year.

“They’re going to drop with the lower price, we know that,” said Stephanie Wilson, the county’s chief tax appraiser. “We just don’t know how much yet.”

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net. To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net, William Selway

By: Darrell Preston

©2016 Bloomberg News

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