Posted on 03/11/2016 9:25:51 AM PST by Rusty0604
Moody’s Investors Service placed 11 West Texas governments and municipalities under review for a potential downgrade last week.
The review will consider downgrading the credit ratings of 11 local governments, which include Odessa and Midland, Pecos County, and 7 hospital districts. The review would affect US$477 million in outstanding public debt.
Everyone knows a downgrade is bad news, but how bad is bad—really?
The Moody’s ratings have little forward-looking value, and are more a reflection of what the market already knows—that times are tough, and lending in this industry—or within the geographical boundaries of oil-dependent locations—comes at a risk.
Moody’s will consider the oil downturn and the ability of each government to adapt in this difficult environment. They review the debt burden and liquidity levels, and even management strategies. This particular review focuses specifically on the local governments and districts that have a proportionately high rate of tax exposure to the oil and gas industry—mainly from players in the Permian Basin.
Although a credit downgrade from Moody’s doesn’t spell doom and gloom for West Texas, the ratings do, to some extent, influence the confidence of lenders and investors with interests in the area.
But the fact that the oil industry is facing difficult times is not news. That the Permian Basin is in trouble is not news. That oil companies are cutting costs, reining in exploration activities, and laying off employees is also not news. That the tax bases of these locations are shrinking—again, not news.
Of the 11 entities now under review, the McCamey County Hospital District, just south of the City of Odessa, which is also under review; and Reagan Hospital District, just south-east of Odessa, have the least favorable ratings of those under review—a rating of Baa2, which is defined by Moody’s as “medium grade, with some speculative elements and moderate credit risk.” This is still considered an investment-grade rating, but a downgrade to the next rung on the ratings ladder to Baa3 is as low as it can go before it sits solidly in the speculative-grade rating.
A downgrade for these two nearly adjacent districts would likely mean higher interest rates on any debt, but little else. The market itself is more effective in stifling the economic activities within oil heavy areas.
To add perspective to this potential downgrade, Reagan County, Texas, has a total population of 3,601 as of 2013, while Upton County, immediately to the west and encompassing the McCamey County Hospital District, boasts a population of 3,372. The largest city in Reagan County is Big Lake, population 3,139. Other than oil wells, Big Lake has a Subway, a courthouse, a hardware store, an auto parts store, a small grocery store, and a smattering of other businesses, many of which have shuttered within the last year.
What Reagan County does have is a day population of 12,000, with 115 currently producing operators, and 1,573 producing leases. Big Lake has 13,235 wells on file—about four times its resident population, and was responsible for producing 9,542,592 MCF of gas and 2,442,882 barrels of oil in 2015. In 2014, Big Lake votes approved a $32 million bond for a new hospital—a move in response to the increased demands placed on the city by the oil industry.
The people-to-oil ratio in nearby Upton County is similarly situated, with 81 current operators, 4,341 leases, and 16,002 wells.
Moody’s reported that the review may take up to 90 days to complete.
I can remember back in the late 1970’s when there were 3 or 4 cafes in Big Lake. 2 or 3 greasy spoons and one Mexican. I guess the 90’s bust drove them OOB.
I sell welding supplies to stores out that way- the last year has been tough!
These headline writers love to spread doom and gloom. The headline says “11 Texas towns see credit downgraded”. The second sentence says:
The review will CONSIDER downgrading the credit ratings of 11 local governments
I went thru there a few times in the seventies, had lunch there one time. There is no big lake.
Yes it has.
Go south towards Ozona. The big shallow playa lake there will have water on very infrequent occasions after real heavy rains.
Anyway the brilliant “conservative Republican” politicos in Ector and Midland Counties have each indebted them for nearly a billion dollars in bond debt and usury apiece.
Texas taxing entities owe a third of a trillion, maybe more.
Also, the bonds are never sold to the locals but only to giant banks and investment houses.
There was supposedly lakes all over the whole area with fish and everything, and that’s why the oil is there today.
I don’t live far from there now since I moved back to TX, but haven’t been to Big Lake or Ozona in decades.
A lot of them are junk bonds now.
The lake used to stay filled back before the 30’s. My Dad said there was a spring that kept it filled, but seismic testing in the oilfields shut it off and irrigation drained the aquifer that fed it.
Interesting.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.