E&P budgets—the lifeblood of oilfield service companies—will be down again in 2016, with North American spending falling by 27%, according to the Barclays Capital Global 2016 E&P Spending Outlook.

That follows an overall decline of 35% in 2015. Barclays said the outlook, released Jan. 13, is more of a snapshot as of mid-December. About 15% of E&Ps have released formal 2016 capex budgets.

For others directly affected by those cuts—such as oilfield services and states that rely on production taxes—reduced spending will likely spell more trouble. Tax revenue in oil producing states has fallen significantly, particularly in Alaska.

Tudor, Pickering, Holt & Co. said that equities are in free fall, debt yields continue to expand and conversations with investors are focused on balancing cash flow to capex in order to “survive” the downturn.

If oil prices remain at current levels, spending could fall even more—by as much as 20%.

In that case, “this will be the most severe downturn we have seen in quite frankly the recorded financial history of the oilfield services industry,” said J. David Anderson, analyst with Barclays, in a Jan. 14 conference call.

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Even companies such as Diamondback Energy Inc. (NASDAQ: FANG), which analyst said had a “stellar” fourth quarter, are turning down the rig volume.

Diamondback said it expects to run two or three rigs and complete up to 80 gross horizontal wells with capex of $280- to $375 million, down 18% at the midpoint from 2014. In order to pay off debt and fund ongoing spending, Diamondback sold 4 million shares in a public offering that was later upsized.

In 2015, E&Ps had a difficult time sticking to their capex plans.

“Despite vows of capital discipline, spending cuts couldn’t keep up with oil prices last year,” Anderson said. Large-cap E&Ps spent 135% of cash flow and small/mid-caps 188%.

E&Ps may have outspent because they “couldn’t cut spending fast enough,” he said.

In 2016, North American budgets are being trimmed significantly. Large-cap E&P budgets are down 35%, small/mid-caps 28% and privates companies reduced by 36%, Barclays said.

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Hedges will play a larger role in 2016 as well. Oil prices will mean more than ever since large-cap E&Ps have hedged about 13% of production, Anderson said.

Small- and mid-cap companies are not much better off. Those E&Ps hedged only 29% of 2016 oil volumes, far below the 47% of oil volumes hedged in 2013 and 46% in 2014.

State Shortfalls

As E&P revenue falls, so do tax levies.

Several states rely heavily on severance tax revenue based on the volume or value of oil, natural gas, coal and other natural resources.

On average, severance taxes accounted for less than 2% of tax collections in 2014. However, in Alaska, North Dakota and Wyoming severance taxes provide a much larger share of total state tax revenue, the U.S. Energy Information Administration (EIA) said.

Alaska’s revenues from oil and natural gas production account for up to 90% of its budget.

Several states that collect significant revenue from severance taxes on fossil fuel extraction are re-evaluating current and upcoming operating budgets and taxation structures to address revenue shortfalls.

EIA said six states have been strongly affected by the budget squeeze: Alaska, Texas, North Dakota, Wyoming, Oklahoma and West Virginia.

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Contact the author, Darren Barbee, at dbarbee@hartenergy.com.