Juneau, Alaska

(907) 699-6788 ed.king@kingecon.com

Alaska by the Numbers – September 2019

Here’s your monthly briefing of what happened in the financial news and how it impacts Alaska’s economy and fiscal situation.

Your $1,606 PFD is Coming on Thursday

It’s official. The Department of Revenue has announced that the amount of 2019’s (FY20) PFD will be $1,606 for each eligible Alaskan. Not too far from what I calculated last month at $1,608.

While it’s not the $2,910 that the statutory formula would have produced, expect your bank account to get a little boost this week.

Investment Returns Saw a Slow Start to the Fiscal Year

The Alaska Permanent Fund Corporation (APFC) financial report for August is now available. It shows a loss of $643 million in stocks during the first two months of the fiscal year. Fortunately, the bond and private equity portions of the portfolio posted positive values over the same period. Combined with regularized income, the net change in earnings is a positive $169 million through the first two months.

If the rest of the year follows the same path, we would see a return of $1 billion (a 1.5% return on the year). But, the stock market rebounded in the month of September. So, hopefully, we are on track for a bigger number than that.

The fund needs to earn $2.933 billion to maintain its beginning year value.

The APFC Increased Its 10-year Earnings Projection

The APFC also posted its updated earnings projection on its website. The Corporation appears to be a little more optimistic than it was a year ago. The 10-year average return was increased from 6.55% to 7%.

For this fiscal year, the projection range is between a $0.5 billion loss to a $9 billion gain, with a middle estimate of $4.2 billion of earnings.

Using the new earnings projection, the PFD formula for next year works out to an estimated $3,025 per eligible Alaskan. Of course, history tells us not to expect that much.

Oil Markets Shrugged Off the Largest Oil Supply Disruption on Record

Saudi Arabia was attacked by drones on September 14th – targeting the largest oil processing facility in the world. Panic and speculation ensued. But, traders had about 18 hours to get a handle on the situation before markets opened.

While there was still a record single-day bump (about 20%) when markets opened on Sunday night, level heads realized that the shut-down was temporary and the shortage could be met by draws from storage. That was an important point to ensure that deliverability questions didn’t sink the value of the upcoming Saudi Aramco IPO.

By the time the closing bell rang on the first ANS assessment after the attack, prices were just under $70 a barrel (a 12% increase over the previous close). A day later, the entire issue basically faded away. And by the next week, pessimism returned to the forefront.

A lingering scenario in which retaliation would lead to escalation, ultimately causing another war in the Middle East, held off fears of deepening demand decline. But, with Saudi Arabia now saying they will agree to a cease-fire in Yemen, the war premium disappeared last week.

Oil Prices are on Pace for $61

ANS oil prices bounced between $59.89 and $69.59 during the month of September, ending the month at an average price of $63.83. That brings the 2020 fiscal year to date average to $63.61 through the first quarter.

Looking forward, current options trading suggests that the FY20 average price will be $61 +/- $9.

Traders appear to be concerned about two big unknowns, which provide conflicting views of the future for oil prices.

Shale Uncertainty

First, shale production from the US midcontinent continues to receive conflicting projections.

Some analysts point to declining productivity growth as a sign that the end of shale is near. If true, and combined with lower investment levels (rig counts are on a downward trend and “free cash flow” is becoming the buzzword in the patch), it could trigger a rally.

Others view the party as just getting started. The resource potential is well known, although not well understood. So, the question may be one of willingness to invest. Enter the majors.

With the recent $10 billion purchase of shale assets by BP, which comes on the heels of a bidding war over Anadarko’s assets, some view a wave of mergers and acquisitions at the door. This raises the fear that a supply glut will persist and prices will stay around where they are now.

Recession Fears

Regardless of what happens with light-tight oil, most analysts are laser-focused on a lack of demand growth putting downward pressure on prices through next year. Projections for future demand continued to be downgraded this month.

On balance, global recession fears and ample supply continue to suppress the market’s enthusiasm in the near-term. Even to the point of shrugging off major disruption events.

The Labor Market Continued to Improve

Alaska’s economy added jobs again in August, although at a slower pace. The Department of Labor reported a net increase of 400 jobs over last August. That brought Alaska’s unemployment rate down to a new record low at 6.2%.

However, the details are always more complicated than the bottom line. August saw an increase in oil and construction jobs, but those gains were offset by losses elsewhere, including a total of 300 state and local government jobs across the state.

But, an increase in firefighting activity this summer pushed up the federal numbers by 400 jobs over last summer. That boost in unpredictable activity makes the numbers look a little better than they were.

Still, the economy is growing by all accounts (the topic of next week’s article). And, this pattern of offsetting impacts should continue through the rest of the fiscal year.

Increases in the oil sector are expected to pick up during the winter and a slight recovery in retail is projected to begin during the holidays. Those gains will more than cover the losses in the public sector.

Overall, FY20 is still looking to post a slight increase in jobs (as predicted). With 17% of the year’s data in the books, the alarmist rhetoric during the last budget cycle still appears unfounded.

ANWR Was All Over the News

The Department of Interior released a Final Draft Environmental Impact Statement this month. The 500-page document justifies the leasing of lands within the Arctic National Wildlife Refuge Coastal Plain.

The next (and final) step is a “Record of Decision” that would authorize the lease sale. That can happen as early as October, once the mandatory public comment period on the draft EIS is complete.

Those that would prefer the oil stays in the ground are mounting attacks from multiple fronts. Lawsuits will surely slow the process down to a crawl. And, Congressional efforts to block the process will probably continue.

So, it is unclear if and when a lease sale will actually happen. Early indication from the Interior was a target of December 2019.

It’s also not clear how much interest a lease sale will draw. The authorization of the lease sale contemplated over a billion dollars in bonus bids. But, concerns about the ability to develop resources, and uncertainty about the taxes on any development projects that are allowed, may deter investors.

For example, a well-respected oil insider (Philip Verleger) voiced a belief that the lease sale is somewhat pointless. In his view, the amount of money required to develop ANWR is better spent elsewhere. Alaska simply doesn’t compete for that kind of investment – at least not in his mind.

Still, the USGS thinks there is at least 5 billion barrels of economically recoverable conventional oil waiting to be found. And, the Energy Information Administration sees production rates of 880,000 barrels per day coming from ANWR by 2031, if development is allowed.

In a world becoming increasingly skeptical of the hydraulic fracturing that allows shale plays to compete will conventional oil fields, perhaps ANWR assets will provide a hedge.

ANS Oil Production is Still on Track for a 1% Increase

Data from Alyeska Pipeline shows that an average of 462,762 barrels of oil per day moved down TAPS in September. That suggests that the summer maintenance cycle is wrapping up and we are moving toward winter rates.

AOGCC data is available through August. That allows us to see where production this year so far compares to last year-to-date.

Most notable is that Prudhoe Bay had a bigger turn-around this summer while Colville River had a smaller one. Combined, the daily rate from the North Slope is up slightly over this time last year. And, we expect the final tally to be slightly higher than FY19.

However, our model suggests DNR should reduce the FY20 forecast rate when the Fall update comes out. We are still waiting for production from Mustang to begin appearing in the AOGCC data. Milne Point and Greater Moose’s Tooth appear to be a little behind their drilling schedules. And Point Thomson is posting disappointing rates again.

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