Severance Tax Collections Hit All-time Annual High, But Shale Spending Cuts Lead To Decline

Arkansas severance tax collections tumbled nearly 59% in the first month of state’s fiscal year 2016 as Fayetteville Shale drillers were unable to sustain production levels due to continued weak natural gas prices, spending cuts and fewer operating rigs.

According to monthly tax data compiled by the Revenue Division of the Arkansas Department of Finance & Administration, state tax revenue for natural gas production in July (the first month of fiscal 2016) came in at $3.48 million, compared to $8.4 million a year ago.

In the past, state revenue officials have said that reported severance tax amounts are based on the “revenue month, not the report month.” That means that the July numbers could also be partially affected by record severance tax collections of $9.1 million in June, which closed out fiscal year 2015 with the highest natural gas revenue tally since April 2014.

Overall, Arkansas still ended fiscal year 2015 with the highest several tax collections for natural gas since the state began keeping such records.

Severance tax revenue rose slightly to $78.6 million for the fiscal year ended June 30, compared to collections of $77.3 million in fiscal 2014, state revenue data shows.

STATE RIG COUNT TALLY AT 10-YEAR LOW
Meanwhile, Arkansas’ rig count is now down to only four platforms as drillers and oilfield equipment companies have cut back substantially on upstream oil and gas capital projects for the remainder of the fiscal year.

According to the Baker Hughes weekly rig count, the number of rigs operating in Arkansas is now at levels not seen since the summer of 2005, more than a decade ago. Just a year ago on Aug. 15, 2014, there were 11 rigs actively drilling for oil and gas across the state of Arkansas.

That tally has continued to slide over the past year after Southwestern Energy, BHP Billiton and other drillers and oilfield service companies have announced drastic spending cuts in the Arkansas shale play.

Nationwide, the total number of rotary rigs exploring for oil and gas in the U.S. is at 866, down more than 53.7 % from year ago levels of 1,841. Of That total, 672 are drilling for oil, 211 for natural gas and one for other purposes.

Overall, the number of natural gas-directed rigs is down 74% from its recent peak of 811, achieved in 2012. The all-time high of 1,606 was reached in late summer 2008. A year ago, there were 321 active natural gas rigs operating across the U.S.

Among the major oil and natural gas drilling states, Texas leads the pack with 389 operating rigs, followed by Oklahoma (103) and Louisiana (78). Arkansas and Utah are at the bottom of the list with four operating rigs each.

WEAK NATURAL GAS PRICES TAKE TOLL
As Arkansas tax revenue collections continue to move downward, Fayetteville Shale leader Southwestern Energy has seen a similar slide in profits and operating income. In the second quarter, Southwestern reported a net loss of $815 million, or $2.13 per share, in the second quarter, compared to net income of $207 million, or 59 cents a year ago.

For the first six months of fiscal 2015, the Houston-based oil and gas firm’s exploration and production segment reported an operating loss of $1.6 billion for the first six months of 2015, down 61% from $627 million during the first six months of 2014.

“The decrease was primarily due to lower realized natural gas prices and increased operating costs and expenses from higher activity levels, partially offset by the revenue impacts of higher production volumes,” the company said in its second quarter financial statement.

During the first six months of 2015, Southwestern said it invested nearly $923 million in its E&P business, including $343 million in the Fayetteville Shale, $320 million in Northeast Appalachia, and $191 million in Southwest Appalachia. The Houston-based natural gas driller said it plans to spend a total of $560 million in fiscal 2015, well off its billion dollar-plus Fayetteville Shale capital budget in 2014.

Southwestern’s net gas production in the quarter from the Fayetteville Shale was 121 billion cubic feet (Bcf), compared to 124 Bcf in 2014. At the same time, the company placed 65 horizontal wells into production during the second quarter of 2015, compared to 95 in the first three months of year.

Southwestern’s financial performance has also been affected by continued tepid natural gas prices, which have languished below the $3 level since early spring except for a few days in May when Henry Hub spot prices rose to $3.04 per thousand cubic feet (Mcf).

During the first six months of 2015, the Texas driller averaged realized natural gas price of $2.60 per Mcf, which included the effect of the company’s hedging arrangement. That was down 35% compared to the company’s realized price of $3.98 per Mcf in the first six months of 2014.

In Tuesday’s session on the New York Mercantile Exchange, natural gas futures slid 2.4 cents to end the day at $2.704 per Mcf. In its current short-term natural gas prices outlook, the U.S. Energy Information Administration (EIA) forecasts average spot prices at Henry Hub through October will remain lower than $3 per million British thermal units (MMBtu), which is equivalent to NYMEX’s metric Mcf calculations.

The projected Henry Hub natural gas price for the rest of 2015 will average $2.89 MMBtu in 2015 and $3.21 MMBtu in 2016, the EIA said.