U.S. states with energy sectors that account for over 5% of their GDP (Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia and Wyoming) have maintained solid financial profiles amid extremes in oil and natural gas prices over the last three years, says Fitch Ratings. Although energy markets have markedly weakened in recent months, we do not expect any negative rating implications resulting directly from short-term declines in oil and natural gas prices.

These energy-producing states limited core spending growth while paying down debt and other long-term liabilities from 2017 to 2021. This translated into higher cash and reserve cushions after a multi-year period of depressed crude oil and natural gas prices that ended in 2017.

Severance tax revenues are directly linked to natural resource extraction volume and price. Natural resource markets also have indirect effects on state tax revenues based on economic linkages. For example, Oklahoma estimates that approximately 25% of state GDP relates to natural resource markets, well above the 14% GDP directly attributable to the sector.

Combined with disciplined budgeting and strong growth in other state tax revenues, the recovery in severance taxes that began in 2017 has supported state credit quality by boosting rainy day reserves and overall cash balances. While most states use a portion of severance tax revenue to build reserves, other uses differ. Alaska, North Dakota and Oklahoma use severance taxes to fund general operations, while Texas uses them primarily to fund highway capital programs.

Severance and gross production tax collections YTD continued to record double-digit growth through April 2023 in many states, including Oklahoma (oil severance tax collections 53% above estimate); Texas (oil and gas severance taxes up 6.8% and 8.1% yoy, respectively) and West Virginia (oil and gas severance taxes 311% above estimate). Weaker energy prices could ultimately bring FYE collections closer to original budget estimates. West Texas Intermediate (WTI) spot prices have declined by about a third since the beginning of the year, and Henry Hub spot prices are down by roughly 40%.

Oklahoma (AA/Stable) rebuilt its rainy-day fund (RDF) to the constitutionally-capped level of 15% of general fund collections for FY22, its strongest fiscal position since 2014 when the RDF balance equalled 9% of collections. The state increased other statutory reserves and cash by over $1 billion at FY22 year-end including an additional deposit of $171 million, equal to 2.5% of general revenues, to the revenue stabilization fund.

Alaska (A+/Stable) is uniquely exposed to energy market fluctuations among U.S. states because petroleum taxes and royalties account for about 44% of unrestricted general fund (UGF) revenues as of FY23. Alaska sets aside portions of its energy revenues in the Alaska Permanent Fund and to provide budgetary cushion via its two main budget reserve funds, the constitutional budget reserve (CBR) and statutory budget reserve (SBR). State budget officials have projected that combined balances in the CBR and SBR will fall from $2.6 billion at FY22 year-end to $2.1 billion by FY23 year-end and to $1.2 billion in FY24 as additional draws are made to balance the UGF.

While Texas (AAA/Stable) generates over 50% of the nation’s state oil and gas severance taxes, these taxes accounted for only 12.8% of Texas’s tax collections in FY22 due to its highly diversified economy. By contrast, severance taxes accounted for over 50% of state tax collections in Alaska and North Dakota and between 30% and 35% of collections in New Mexico and Wyoming in FY22. As a result, Texas’s revenues are less vulnerable to oil and gas price volatility than its energy state peers.
Source: Fitch Ratings