Arkansas severance tax tally on record pace, but low prices could end run

Arkansas’ severance tax collections hit a record for the month of December, but plummeting natural gas prices and declining rig counts could threaten the state’s incredible run of good fortune and production in the Fayetteville Shale, recent industry reports show.

Gross natural gas severance tax revenue during December rose a whopping 81% to $7.8 million compared to $4.3 million a year ago. For the three month period ended Dec. 31, 2014, collections were up 41.6% from $14.1 million for the same quarter of fiscal 2013, according to tax data compiled by the Revenue Division of the Arkansas Department of Finance & Administration.

The monthly and quarterly totals are a record for those respective periods, as new drilling techniques and high well production continues to fill state tax coffers. At the end of fiscal 2014, which officially ended on June 30, 2014, severance tax collections in Arkansas reached an all-time high of $77.3 million. That pace has continued through the first six months of fiscal 2015 with collections at an all-time high of $44.8 million at the halfway mark.

However, there are signs at the wellhead that weakening commodity prices are causing some shale producers to reduce capital spending on oil and natural gas drilling.

There were 1676 rigs in use across the continental U.S., down 74 from a week ago and 101 fewer rigs than were operating at the same time a year ago, according to Baker Hughes’ weekly rig count. In Arkansas, the state’s rig count last week fell from 13 to 11. Both of the rigs taken out of use came in the Fayetteville shale, where the rig count is now down to single digits at nine.

FAMILY FUEL SAVINGS
Meanwhile, the U.S. Energy Information Administration’s (EIA) new short-term forecast doesn’t show much improvement for natural gas and crude oil prices in 2015. The Energy Department’s statistical arm forecasts that Brent crude oil prices will average $58 per barrel (bbl) in 2015 and $75/bbl in 2016, with annual average West Texas Intermediate (WTI) prices expected to be $3 to $4 per barrel below Brent.

Driven largely by falling crude oil prices, U.S. weekly regular gasoline retail prices averaged $2.14 per gallon on Jan. 12, the lowest since May 4, 2009. U.S. regular gasoline retail prices are projected to average $2.16 a gallon in the first quarter of 2015. EIA expects U.S. pump prices, which averaged $3.36 per gallon in 2014, to average $2.33 per gallon in 2015.

“The average household is now expected to spend about $750 less for gasoline in 2015 compared with last year because of lower prices,” the Energy Department said.

For natural gas, the EIA expects the Henry Hub spot prices to average $3.44 per million British Thermal units (MMBtu) in 2015, compared with $4.39/MMBtu in 2014. In trading today on the New York Mercantile Exchange, light, sweet West Texas crude was down 14 cents to $48.55. Natural gas was down 12 cents at $3 per MMbtu. 

SOUTHWESTERN MAY REDUCE FAYETTEVILLE SHALE PLANS
On Friday, in a report on Fayetteville Shale leader Southwestern Energy Corp., Fitch Rating service noted that spot natural gas prices at Henry Hub, La., have come under pressure because of “better than expected supply response in 2014 following the polar vortex and relatively mild start to winter.”

“(Southwestern) management has indicated that it could scale back its near-term capital plan to approach free cash flow neutrality by reducing/eliminating its exploration efforts, rationalizing Fayetteville drilling activity, and, if necessary, moderating southeast Appalachia development efforts,” the report said.

Southwestern Energy recently announced that its capital spending program in 2015 will jump slightly to $2.6 billion, compared to $2.4 billion in 2014. The Houston-based low-cost natural gas driller has shifted the lion’s share of its capital program from the Arkansas shale to the company’s oil and gas liquids plan in the Marcellus and Utica share plays.

In December, Southwestern completed a $5 billion deal to acquire a huge stake in Chesapeake Energy’s oil and gas assets in West Virginia and southwest Pennsylvania. Of its $2.6 billion capital budget, Southwestern plans to spend only $755 million in the Fayetteville Shale, down $145 million from a year ago. The Houston driller’s capital budget for the Marcellus and Utica shale plays will nearly double to $1.4 billion.

And although Fitch expressed concerns that the “aggregate scale” of the recent transactions was uncharacteristic of Southwestern, the rating’s service said the recent deals reflected the current size and growth of the company and the increasing competitiveness for attractive, but limited shale assets in the U.S.

“Fitch views the transactions as complementary to the company's other assets in the Marcellus Basin and recognizes it provides management with an opportunity to apply its operating expertise to maximize development and production efficiencies in an attractive, lower risk position,” the report said. “Fitch believes the acquisitions make strategic sense from an asset, production, operational, and growth prospective.

Despite the current BBB- credit rating of Southwestern’s senior unsecured debt, Fitch maintained its rating outlook on Southwestern as “stable,” noting that the company’s “credit conscious financial policy and strong operating history that has resulted in the achievement of drilling efficiencies and competitive production (profile).”