MUNI NATION invited Loop Capital’s Chris Mier, Managing Director, and Rachel Barkley, Vice President, to provide their commentary on the potential impact of current low oil prices on the muni market.
MIER & BARKLEY: Although falling oil prices have an impact on the national economy, certain states are particularly reliant on the industry. The top five oil producing states (Texas, California, Alaska, Oklahoma, and North Dakota) currently account for approximately 60% of total national production. Oil companies contribute various direct and indirect revenues to these states, including severance taxes and sales and corporate income taxes, depending on the state. Their employees pay applicable income, property, and sales taxes as well.
As illustrated in the accompanying chart, reliance on severance tax revenues, also known as production taxes, varies greatly among states. Today, Texas serves as the nation’s largest crude oil producer but has a relatively moderate reliance on severance taxes. California, meanwhile, does not currently levy an oil production tax. This contrasts significantly to the state of Alaska, which appears to rely on the oil industry for the majority of its revenues.
On a positive note, many states with a high concentration in the oil industry have applied lessons learned during the 1980s which may serve them well during the current oil downturn. State governments, including Texas and Oklahoma, have funneled oil revenues into reserves and funding for one-time capital projects, which can be delayed or cancelled in lean years. Alaska is particularly vulnerable to a prolonged downturn in the oil industry, although its lower overall outstanding debt seems to make it less of a concern for the majority of bondholders.
In our view, analysts should pay significant attention to declining oil prices as it is expected to have a notable negative impact on the economy and governmental revenues for several of the industry’s largest issuers. We also point out that while the decreasing prices are cause for concern, oil prices historically have reversed direction rapidly, which can make predicting future trends a challenging process.
Chris Mier, Managing Director, Analytical Services Division
Chris Mier is the Chief Strategist and Director of the firm’s Analytical Services Division (ASD). The ASD has five full-time professionals and is one of the largest analytics groups dedicated to investment banking. Under Mr. Mier’s direction, the ASD has built two proprietary option valuation models, as well as econometric models to forecast SIFMA, municipal bond volume, and other variables of interest. The group also provides analytics and commentary on the economy, monetary policy, and a variety of public finance issues.
Rachel Barkley, Vice President
Rachel Barkley joined Loop Capital as a Vice President in 2014 after serving as a Senior Municipal Analyst at Morningstar, following stints at Fitch Ratings as a Public Finance Director, and at PFM. She has covered the oil and gas sector extensively during the current downturn. Rachel covers credit conditions, pension performance, and financial developments in the state and local government sector for Loop. She also follows water, sewer, and other revenue bond areas.
Please note that the information in this post represents the opinions of Chris Mier and Rachel Barkley and not necessarily those of Van Eck Global. These opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results, or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation. Please note that Van Eck Global offers municipal bond exchange-traded funds. Please see the prospectus and summary prospectus for more information.