Friday, August 11, 2017

Second Quarter Analysis, Part IV

Producers are feeling satisfied now that the second quarter reports have been digested by the markets. There are no tragedies to report, however there are a few laggards still left to submit their reports. Average depletion per barrel recorded for the first half of 2017 of our sample of 22 producers was $21.68 / boe vs. what our proposed methodology of turning over the producer's capital base on a minimum three year basis would be, which would have these producers recognize depletion of $70.25 / boe. A material difference in the two methods of recognizing costs. One can see the ability of oil and gas producers to defer the recognition of their capital costs, in a capital intensive industry, is highly effective to their bottom line and their desire to have these bloated asset values. When you have unlimited and unquestioning support from the investment community and the banks. You can defer the recognition of these costs for a decade or more. When you don’t have that support from the investment community and maintain these policies, which subsidizes consumers and never recognizes the real and actual costs of oil and gas exploration and production, you have an extended cash crisis.

Muddling along in a cashless industry continues to plague these producers. Annualized operating cash flow of $55 billion is inadequate to fuel the needs of these producers. Only $5.4 billion in cash is being generated and working capital diminished by $3 billion. Outside of the two mega oilsands deals no real bank debt or investment capital was raised. I am yet to read about the cash issue in the industry or how it is proposed to be dealt with. It seems the assumption is that all will soon return to normal and investors will come back investing into these operations like ever before. The problems that the producers don’t seem to understand is that the investors already own too much of the producers stock. Secondly, there was and is no discussion outside of People, Ideas & Objects, our user community and service providers of how to make the industry profitable in the shale era. Producers need to stand up and explain how they’re going to make shale commercial. There’s fifty years of abundant supply of oil and gas available. No one is going to invest in an industry with this level of poor, or abysmal performance, without an answer to such questions.

Whether the producers pick up the option to develop the Preliminary Specification on or before September 25, 2017 or not, is their last chance to prove to the investor community and banks that they have an answer to shale’s commercial viability. After that date, as a group, we will be unable to help these producers. Although my scenario of the declining oil price, losses on operations being reported in the second quarter and bureaucrats leaving seems unlikely at this point, we still have a month and a half left of summer. And if anyone wants to explain to me how these financials are something to be proud of, they aren’t dealing with a full deck. In my opinion producers were foolish to try to represent the situation in the way that they did in these second quarter reports. The situation in the industry is not positive in any sense and the inability to reflect the reality of the situation is only more disconcerting to the people who are watching what their companies are doing.

There is a persistence in the producers message. We are not changing. We will wait until the situation improves and the “market rebalances.” Even with no access to capital they continue to overwhelm the oil and natural gas commodity markets with production. If they were given more capital they would drill twice as much and destroy the commodity prices even further. What then would be the purpose of throwing more money at the producers. The investors already own too much of the producers. The inability to rehabilitate themselves during this period in which this industry has been in a challenged environment. Since 2008’s financial crisis, the decline in natural gas prices and subsequent oil price decline. The window of opportunity granted to these producers to deal with this problem is quickly closing. As a result of their inaction they are putting ownership of these producer firms into the hands of the banks. Investors will defend their interests and I think the time to do so will be the end of this summer as a result of the chronic inactions by these producer firms.

As I noted yesterday the hedge funds are fleeing the oil and gas industry. The stock price of these producers has always correlated with the commodity price. The management's provide no incremental value. A precipitous decline in the price of oil will bring about a commensurate decline in the value of the investor's holdings. Will that be the impetus for action on the Preliminary Specification? Or will it be the time in which to pack one’s bags for rosier climates in other industries. The overproduction and oversupply of oil and natural gas by North American producers can continue for as long as the shale era exists. If nothing is done by these producers before September 26, 2017 something will be done by someone else soon afterward.

I will be taking the week of August 14 - 18 2017 off returning August 21, 2017.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Thursday, August 10, 2017

Second Quarter Analysis, Part III

How is it that the Obsidian’s, Pengrowth’s and Chesapeake’s are capable of continuing on? Having lost more money than they were ever able to raise, how is it that these companies are able to continue to function in an environment of no cash, no working capital and minimal cash flow? Simple, in a capital intensive industry the cash flow will always be adequate to pay the bureaucrats. The question is where’s the upside? Of course the analyst community think you should be buying these stocks as the future of the industry is only upwards. And that’s why over 20 hedge funds have packed up and left. I’m sure they’ll be back, never.

Something that I’m noticing here in the past few months may have a significant impact on the health and welfare of the oil and gas industry. It seems that the media and John Q. Public are less concerned with the industry's activities then in the past few years. When natural gas prices collapsed, soon everyone found other points of interest to occupy their minds and time. Does anyone get out of bed in the morning to hear the news of what’s happening in the natural gas marketplace? What is the news in the natural gas marketplace? It would seem that we’re headed down the same alley with oil doesn’t it? What used to be the top news of the day in oil and gas was also the top news in the business world. That doesn’t seem to be the case anymore. The “market rebalancing” story is the only thing coming out of the industry and everyone has heard that repeated many times. It’s as if no one cares what the industry does now.

The second quarter’s authors reflect a deep knowledge and understanding of the level of concern for the industry. The boldness of their statements stands out to me. Reporting profits and cash flow of any kind, no matter how it’s calculated, is the only game in town. They know that no one is going to raise any concern in the middle of the summer. They know that nothing is expected of them. They know to keep their mouths shut and lay low so that they can keep the gravy train rolling for a while longer. The industry today is indecisive, incapable and irresponsible. Mostly it’s unchanging. The next 25 years will remain the same if we leave the situation in the hands of those that are in charge today. It’s not that they’ll lose what they have, it's that we have to take it from them. To do that we need to begin the slow process of building the momentum towards the alternative in the Preliminary Specification. You can maybe tell that I’m not very hopeful at all of industry meeting our deadlines. If they do or not is irrelevant at this point. We need to act in the best interests of society's needs for long term stable and affordable energy.

Many people didn’t sign on to live in a dull grey day-to-day existence. Those that were pushed out in the downturn have already found greener pastures in other industries. The Trump economy is picking up and will soon start to draw people into areas that are a little more dynamic than oil and gas has been since 2008. The fact of the matter is there’s a cheap, abundant supply of oil and gas for the next 50 years. What concern could anyone have? I think it becomes rather risky when everyone turns its back on an industry and just assumes that these products will be available in abundant fashion. Already we’ve lost most of the important long term players like the investors and bankers. The bureaucrats will be the next to move on and then what’ll we have. Who’s going to pick up the pieces and rebuild it brick by brick and stick by stick?

I’ve suggested here that this summer we’ll see a continuation of the losses and difficulties for the oil and gas producers, a precipitous decline in the price of oil and the bureaucrats moving on to seek greener pastures in other industries. If so, who cares? I think this is where People, Ideas & Objects, the user community and service providers come in. There are many things we can be doing despite what the bureaucrats are not doing today. Every day I struggle to accomplish anything during the day. Yet when I look back over the past six months, I can see that much has been accomplished. This is how this project is going to be developed from this point forward. Brick by brick, and stick by stick. The way anything worthwhile develops. No earth shattering announcements. Just people going about doing the things that need to be done, those things that are not getting done in an oil and gas industry that everyone seemingly has stopped caring about.

The current management have capitulated. It won’t be a fight between us and them for control. They’ve given up and don’t care. We know what their not doing, what is it that we don’t know they’re not doing. These should be the areas of our primary concern. If we’re to assume the administration of the industry at what point does theirs end and our’s begin? We undertake to do it as a replacement on the basis of the underlying vision of the Preliminary Specification. Member’s of our user community need to consider what their actions will be if the producers do not participate in our development and our September 25, 2017 deadline. A highly probable scenario. Nothing in that future will happen without our user communities involvement. Everything hinges on the user community. There maybe other initiatives that pop-up as a result of the continued decline in the industry. Will they have the user community focus of People, Ideas & Objects? Will they be timely? If you want user community driven ERP developments in oil and gas then this is your opportunity. Our user community vision is the appropriate foundation for a user community to approach the issues and opportunities that are faced in oil and gas. Whatever happens in the next few months we have work to do.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, August 09, 2017

Second Quarter Analysis, Part II

Yesterday I mentioned the five letter “F” word again regarding the quality of the oil and gas accounting financial statements. The extent of the accounting misrepresentation that goes on in the industry is only getting worse, based on my review of their second quarter's performance. Instead of dealing with the issue and beginning the process of getting ahead of it, the producers doubled down on the extent of their fairy tales. In any other industry, if the reports were prepared in this manner, there would be purpose built prisons to house the culprits. In oil and gas the anomaly is the SEC is the one that authored the games to be undertaken in the late 1970’s by enabling the producer to record property, plant and equipment at any value under the reserves times the current commodity price. Or the future net revenues of the firm. Accounting is about performance and concerned about measurement. It is not an attempt to emulate the market value of the company. That is for others to do. Shuffling all your costs to the future, to never be realized is a game that is played by those of ill repute. The extent of this game being played in oil and gas today is as sophisticated and entrenched as it could be. It is the culture of the industry and the majority of the people who work in the industry do not know or understand the implications of what it is that they’re doing.

Dan Loeb, a hedge fund manager is now shorting industries that he feels are involved in what he calls “accounting games.” Oil & gas and retail are the two that he feels are involved in this activity. Oil and gas because of shale and retail because of Amazon. At no time has the oil and gas industry addressed the investors concern for commercial viability of shale reservoirs. Shale has fundamentally changed the industry and destroyed the producers who were raised in an environment of resource scarcity. In an environment of abundance they are unable to operate effectively. Yet, all they do is produce financial statements that are the rosiest picture that could possibly be painted. Leaving the question of the industry's viability unaddressed and draining their cash and working capital further. Last week we heard Andy Hall of Antenbeck, a hedge fund based on commodity trading had shut down his fund. Suffering from one third losses as a result of wrong way bets on the price of oil this summer. He feels that shale is maybe more of a variable than what is understood by the marketplace. They used to refer to him as “God” due to his accurate predictions.

In this day and age it's not comforting to know that the costs of today’s Post-it-Notes and the phone service for the receptionist at Cenovus will still be recognized as a cost of the operation in the year 2045. Cenovus has increased the number of years that it’s depleting its property, plant and equipment from the ridiculous number of 10.8 years to the surreal number of 27.79 years. This of course being the most obscene example of our sample producers but the average for all 22 producers in our sample has now moved over the ten year mark. The only purpose in doing this is to inflate the earnings of the producer. I can assure you every cost, including royalties in Penn West's case, are being capitalized to some degree to property, plant and equipment. These costs are then allocated over the entire reserve base of the producer, and then based on what production there was, that will be your depletion. All that capital that was invested in oil and gas is expected to be used the one time in 10+ years on an industry average, and over 27 years at Cenovus. No wonder there’s always a cash shortage. The industry's main problem today is they’ve run out of investors to fleece.

If we take the miraculous $2.85 billion in earnings that Cenovus reported out of the total of our sample of producers. Cenovus earnings based on a deemed disposition of their key core property. The industry then produced nothing in terms of earnings. And this lack of earnings is on the basis of the fictitious methodology of reporting almost no costs. For example Southwestern’s capital expenditures were 270% higher than their rate of depletion. Anyone want to guess which direction the property, plant and equipment account is moving?

This lack of recognizing the real cost of oil and gas exploration and production shifts the burden of its costs from the consumer onto the investor. They have been the one’s that have subsidized the consumer for the past four decades due to a lack of recognizing the real costs of oil and gas operations. This is best reflected in the cash situation in the industry. Since the investors became wise to their role in the industry. The cash crisis has been fierce. Cash in the quarter continued to drain rapidly with cash generated of $6.6 billion. We have CNRL, Conoco and Cenovus in our sample so we captured three of the four producers involved in the two big heavy oil transactions. Nonetheless those deals raised over $10 billion in debt and $10 billion in stock offerings. Therefore the cash drain would have otherwise been as bad as it ever has been. Or more accurately stated. Outside of those three producers the cash crisis is becoming worse.

The Preliminary Specification rectifies this by recognizing the real cost of oil and gas exploration and production. Each property will generate their own financial statements to determine the profitability of the property. After recognizing the costs of operations, overhead and a reasonable allocation of its capital, if the property is profitable it will continue producing. If it is unprofitable it will be shut-in to save the reserves for a time when they can be produced profitably, lower the costs of those reserves by not adding each successive years losses to those costs, enable the producer to be more profitable as profitable properties will no longer be diluted by unprofitable properties and remove the marginal production from the commodity markets. Allowing those markets to find their equilibrium price. This is our price maker strategy which involves common sense and business understanding. It has also been rejected wholesale by the industry as the Preliminary Specification threatens the bureaucrats by removing them from the scene. In a classic technological disintermediation that is affecting all industries, oil and gas is not immune.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Tuesday, August 08, 2017

Second Quarter Analysis, Part I

We have a sample of producer firms that we follow here at People, Ideas & Objects. 21 of the 22 companies have now reported their second quarter of 2017 and our understanding of what is going on in oil and gas is made clearer, or more current. One major correction that I’ve made is in the volume of deliverability of these 22 companies. In the previous quarter I noted the deliverability was 7.688 million barrels of oil equivalent per day. A spreadsheet error was discovered and the deliverability is restated as 9.272 million barrels of oil per day. There were no other errors discovered this past quarter.

Actual market capitalization is down by $23.6 billion from the first quarter of 2017. Continuing a deterioration that is now totalling $104.7 billion over the past three quarters. This may be the slow drip, drip, drip of the demise of the industry. The market cap of these producers as at June 30, 2017 totals $418.9 billion. This valuation continues to be over $85 billion in excess of the cash flow multiple of the producers. That overvaluation is down dramatically from the $333.6 billion overvaluation recorded in the third quarter of 2016. Reflecting two things, the cash flow increase from higher commodity prices and the market still somewhat believing the story regarding “market rebalancing” but is beginning to lose faith.

One of the implications of the People, Ideas & Objects capitalization policies that we published last month is that more of the traditional capital costs are recognized in the current period as operations. This has significant implications on the calculation of a producer's cash flow. By capitalizing everything under the sun you defer the recognition of these costs in terms of determining the profits of the producer. You also increase your cash flow numbers from operations due to the fact that what is hitting the operations accounts in the current period are lower in the current methodology. The change to the People, Ideas & Objects methodology of asset capitalization will therefore reduce the market capitalization of a producer when it is done in comparison within the same operating environment. This would be as a result of recognizing more of the intangible capital costs in the current period as operations. Within the environment where the Preliminary Specification is operational, and as a result with higher commodity prices made by our price maker strategy, the profitability of the producer will be substantially higher as will the cash flow due to the higher volumes of capital being recognized in the form of our rapid depletion recognized in any period. Therefore the comparison of these two methodologies in their different operating environments would have the producers market capitalization much higher in the Preliminary Specification model.

Of the companies that we follow one of the most interesting has been Pioneer. For all intents and purposes they’ve kept their nose clean in this down market. They have positive working capital and low debt, are reasonable in terms of their capitalization of property, plant and equipment. Not aggressive in their accounting, in my opinion. That does not preclude them from my general argument, it is that they run a better shop than others in a poorly performing area. Pioneer attempts to run an integrated operation by owning and operating their own drilling rigs. People, Ideas & Objects allows producers to focus on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base. If you were to be integrated today then you would have to manufacture your own drill bits from your steel mills which sourced iron ore that you mined yourself. Integrated operations are foolhardy, in my opinion.

Pioneer ran into some operational difficulties in the drilling of some shale wells. These oil wells seem to experience some rather large gas kicks that caused the operations to take much longer than expected or budgeted. As a result of these operational difficulties Pioneers stock was hammered the hardest of all of the oil and gas producers. Losing 18% of its value over two days. What I would suggest, and have always suggested here, is that the decline in real profitability, the removal of financial support from investors and bankers has the potential to seriously degrade the capabilities and capacities of the industry. I think Pioneer is symptomatic of that, as is the loss of the Petronas investment in LNG facilities in Canada. How financial health leads to operational capabilities and capacities is not something new, it's a given. The problem with these losses in the capabilities and capacities of the industry is that it is the express goal of “market rebalancing” being the attrition of deliverability. The only way you're going to atrophy your capabilities and capacities is by starving them. Profitability is the only manner in which to operate the industry in the short, mid and long term. Everything else is just accounting fraud.

In terms of innovation we have to hand it to Cenovus for their accounting innovation in reporting $2.85 billion in earnings. If other producers were to take Cenovus’ lead by revaluing their assets based on the specious argument of over paying to increase their working interests, and recognize an equal amount on the income statement as a revaluation gain. We would have dealt with the lack of profitability in the industry for the past number of years. Although I don’t think that will avoid the atrophy of the capabilities and capacities we seem to be heading into. We can also assume that our sample of 22 producers which hold approximately $1 trillion in market value of oil and gas assets. These producers currently carry net property, plant & equipment of $460 billion, therefore they too could recognize upwards of $540 billion in incremental earnings in the third quarter of 2017. Although this transaction doesn’t do anything to increase a producer's cash or working capital or reduce its debt or pay dividends or fund capital expenditures. It does provide a material increase in retained earnings. If the industry did what Cenovus has shown the way forward with, they could realize an increase of 849% in retained earnings. Which is far more lucrative than the 367% increase in retained earnings that Cenovus experienced.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Monday, August 07, 2017

Friday, August 04, 2017

Thursday, August 03, 2017

The Paradox of Producer Participation

When it comes to whether the small and startup oil and gas producer would use the Preliminary Specification, I don’t think it would take much time for them to choose. The cost to administer oil and gas is highly burdensome on these producers. The startup particularly needs to have sourced several million dollars a year for several years just to cover the overhead of the operation before anything serious can be undertaken. This burden remains disproportionate, in my opinion, until the producer is able to generate in excess of 10,000 barrels of oil equivalent per day. Therefore to be paying the service providers, which use the People, Ideas & Objects software to manage the producers accounting and administration, for the costs of administering the producers organizations stops being the fixed cost that it is today, and takes on the variable characteristics of the service providers fees, based on production. The Preliminary Specification shifts the reliance on the producers fixed capabilities for administration and accounting, to a reliance on the industries variable capabilities for administration and accounting.

Therefore we can sign up all the startup and small producers we want and generate maybe 10% of our budget requirements based on their deliverability. The real paradox of participation is what’s in it for Exxon, Shell, BP and Chevron. As well as the international intermediates which are too numerous to mention. The third tier mid sized oil and gas companies which also make up a large percentage of the deliverability of the industry. What is it that makes any of these producers want to move from developing and maintaining the fixed administrative and accounting capabilities that they currently have, to in turn access the variable capabilities of the service providers under the Preliminary Specification?

Many of the producers may believe that they don’t really need People, Ideas & Objects, why not just do it themselves. Even with the scope and scale of Exxon’s operation they’re not going to be able to benefit from the savings from using industry based service providers. To focus on the individual processes and to specialize on them to the level that People, Ideas & Objects service providers are able to do across the industry will not generate the benefits that we’re able to offer. Also by doing it themselves the costs to manage those processes for Exxon will always be 100% of their overhead costs at whatever level of deliverability. The people who are managing those processes will still be Exxon people. Under People, Ideas & Objects the service providers are independent entrepreneurs who are providing the service for a fee. If Exxon shuts-in a property, no data will therefore be sent to that service provider, no work will be done and no billing will be rendered to Exxon from the service provider. Making all of Exxon’s costs variable based on production. Administrative and accounting cost control will have shifted from the oil and gas industry, where it has never been able to be controlled, to the service providers. Service providers will realize that at anytime they may experience a drop in revenue as a result of the shut-in inventory of the industry. This drop in revenue is something that they can manage and budget for on an annual basis.

There are two other advantages to having all of the producers costs become variable. First, if the property becomes unprofitable then it can be shut-in which will increase the profits of the producer. Profits are higher because they’re not diluted by losses on unprofitable properties. Enabling the producer to reduce their reserves costs by not having to include the costs of each years losses to be recovered from the reserves. Saving those reserves for when they can be produced profitably. And most important of all, removes the marginal production from the market in order to find the commodities marginal price. The second advantage to having all the producers costs variable is, it will protect producers from what we all know the source of the overproduction and oversupply problem is, which is that it's the “other producers” that are responsible. Producers don’t know which ones specifically, and the producers are sure their operations are profitable from stem to stern. So by participating in the development of the Preliminary Specification those profitable producers will enable the unprofitable producers to shut-in their production, increase their profits and stop the overproduction and oversupply that is hurting the industry to the extent that it is. If Exxon, Shell, Devon or Southwestern try to solve this on their own they may achieve something. However, we all know it’s all the “other producers” that are the issue. The only way to solve that is to have all the profitable and unprofitable producers working together with People, Ideas & Objects, our user community and service providers.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, August 02, 2017

The Paradox of Profits and Production

Exxon reported handsome, but not my kind of “real,” profitability on a declining base of oil and gas deliverability. As a result the stock was down. Granted Exxon has the luxury of a very narrow trading range. This however speaks to the paradox that all producers face. They have always been handsomely rewarded by investors for increases in their deliverability. And I can assure you in an environment where shale will dominate the marketplace, where overproduction and oversupply is the risk that every producer faces from now on, growth in their deliverability will continue to be the expectation of their investors. The difficulty, or the paradox, and its not that oil and gas is not a difficult enough business as it is. The paradox will be that you have to grow your deliverability profitably. Otherwise we see what happens. Everyone loses when one incremental barrel is added to the commodity markets supply beyond what exists in terms of demand.

So how do producers deal with this paradox. Those with the size two hat need to cease reading from this point forward. The muddle along strategy and the convoluted methodology of accounting for capital have enabled those with the size two hat to establish themselves in the industry with somewhat handsome deliverability. Discerning who and where these producers are is not hard for those that know what it is they are doing. For the rest of the world, I would suggest that the financial statements make every producer look the same no matter how well managed. When everything you spend is capitalized. When every drop of oil produced is profitable. Discerning who’s who is a science that hasn’t been invented. Everyone looks brilliant. Is it any wonder that I’ve had such difficulty when I threaten to take away the means in which they think they’ve been successful?

When everyone acquires the production discipline of the marketplace to produce only profitable production those with the size two hat will struggle the most. That is why production allocation based on profitability is the only fair and equitable means in which to allocate production in any industry. Those that can’t won’t. They’ll be weeded out. If they continue to produce unprofitably in a marketplace where others are growing their production profitably, they will have a hard time in business for the remainder of time that they’re in business. Anyone want to guess what will happen to those producers that are producing profitably and increasing their deliverability? Life in oil and gas has never been that good for any producer that I am aware of in the past forty years.

Being profitable in the environment where the Preliminary Specifications decentralized production model’s price maker strategy exists implies that all costs are considered. Operations, overhead and a reasonably quick turnover of the producers capital base. If the producer is recognizing a large portion of their capital costs and is still profitable they are cash flow positive in a manner that no producer has been in the industry before. Judicious management of their cash will become a competitive advantage. They will be able to pay down debt, send dividends to their investors and fund whatever capital expenditures that they may desire to expand that profitable deliverability. All from internal cash flow. This is the implied difference between the Preliminary Specification and the manner in which the industry is destroyed today.

The ability of the producer to expand their deliverability is the tough part of the paradox, for that there will be no doubt. Profitability shouldn’t be an issue if they’re capable, but how do they expand their deliverability. It is reasonable to assume that not all of the producers properties are producing. Some do not qualify for production due to their lack of profitability. It is there that the Preliminary Specification enables the application of the sciences to that inventory of shut-in properties. Increasing the reserves base of the property, reducing the costs or expanding its deliverability. There are also always new frontiers in terms of new properties, technologies and partners to explore as well. Under the Preliminary Specification these are the identified and supported key competitive advantages of the dynamic, innovative, accountable and profitable oil and gas producer. Those being their earth science and engineering capabilities and their land and asset base.

Investors will be investors and no one says their right, but that’s what they want and that’s what they’ll get. What we need to do is run oil and gas as a business. I do not understand what it’s being run as today. An exercise? Activity for activities sake? The purpose is to build value in the long run and currently the industry demands cash on a wholesale basis to function on an annual basis. That is not sustainable at any point and should never have occurred. However, due to an accounting aberration it has manifest itself into a heap of nothing with no support from investors or bankers. Commodity markets have collapsed and all that can be said or done is to point the finger or blame someone else for our troubles. And there are those warm winters too. It’s become the darkest time in our history. One in which the Preliminary Specification is proposed as the solution to remedy these specific issues. September 25, 2017 is the deadline for these producers to fund these developments. Or we’ll pass into an even a darker stage and we’ll have to pick up what pieces that are left behind.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Tuesday, August 01, 2017

The New World Champion!

It was only last Monday that I thought Encana was stretching their financial statements beyond reason. Reporting a 32% profit margin in an environment where every other producer seems to be losing their shirt. I guess I wasn’t that surprised when Encana 2 or Cenovus put their financial statements out last Thursday. Recall that Encana split into Encana and Cenovus a few years ago for some contrived reason that the CEO thought was interesting at the time. Anyway Cenovus profit margins make Encana look like pikers. 38% profit margins is the new height that Canadian producers will go to deceive the marketplace. Deceive may be too kind of a word. I think I said it best on Twitter when I tweeted “.@cenovus accounting fraud of the Bernie Madoff standard and quality.” So let’s take a moment and review what it is that Cenovus has done.

I have to say there’s been a general trend in terms of the deterioration in the integrity of this companies reports. In the fourth quarter of 2016 they reported profits by booking negative depletion. Not that that’s wrong but why would you do that if you were following appropriate oil and gas capitalization policies as we spelled out last Thursday. In the first and second quarter of 2017 they’ve boosted their working capital by as much as $3.3 billion by listing their unsold properties for sale as current assets. That is certainly much better than showing a working capital deficiency of $1.3 billion isn’t it. I think we’re seeing the beginnings of a boldness and creativity that has not otherwise been shown in an industry that is all about bloating the balance sheet beyond recognition. Cenovus feel quite confident that these types of transactions are acceptable and the ability to boost earnings, as in 2016, or working capital in early 2017 shows they fear no one. As they state in their financial statements they are in compliance with all the regulations, but when did reasonableness become unreasonable?

It was in the first half of 2017 that Cenovus purchased the other 50% working interest in the FCCL Partnership from Conoco. It would appear that in that transaction Cenovus paid Conoco a market price of approximately $5 billion more than what the actual partnership had incurred in building the facility. Cenovus owning the other 50% of the partnership therefore realized a market gain of about $2.5 billion as a result of their purchase of the Conoco assets, assuming they could find another willing buyer to purchase their assets at the price they paid Conoco. If Cenovus we’re to sell their original 50% interest in the FCCL Partnership they would realize the $2.5 billion gain on the disposition. Therefore in order to realize that gain in the second quarter of 2017 they would have to, for accounting purposes, “deem” that property to be disposed. Which is what they did on the financial statements. This enabled them to increase goodwill by $1.8 billion and recognize a gain on the income of statement of $2.524 billion. Enabling Cenovus to report $2.851 in after tax profits.

Now the industry knows how to turn around this downturn! Cenovus have applied IFRS 3 to a “Joint Venture” which IFRS 3 specifically precludes Joint Ventures from this accounting treatment. Therefore I would not have done this. It also shows the world that you're willing to pay a lot for otherwise unprofitable assets. When your real working capital, adjusted for the property, plant and equipment that isn’t selling, is $5 billion less than what it was three months ago, and your debt is twice the size, the only friend you have is the Canadian government who appreciate the $700 million in taxes that were sent as a result of this transaction. I fail to understand how this accounting treatment didn’t catch on fifty years ago. This type of transaction has been conducted 50 million times in the history of oil and gas and at no time am I aware of the reclassification of assets and profit in this manner.

The rest of the industry is probably sighing with relief over these Cenovus financials. Who will the SEC set their sites on now is pretty obvious. In my opinion. There is however another definite trend occurring in 2017. The American companies are beginning to clear out their bloated balance sheets of property, plant and equipment. Of the producers that have reported in our sample of 22 companies the amount of depletion per barrel for American producers is already averaging $38.93 per boe which is materially higher than what the Canadian producers are reporting at $18.81 per boe. Maybe we’re getting through to some people.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Monday, July 31, 2017

Recruiting for our Leadership Teams Part II

Our user community has a very large leadership team made up of the many different talents necessary to make an oil and gas ERP system successful. The user community needs a full board of directors, a complete C suite of its own and what I think may be 20 or more of what are called product owners. Recruiting of these individuals will begin September 26, 2017, hopefully with the full support of the oil and gas industry and their resources. If we don’t have that support then we’ll be travelling our own road to provide the future oil and gas producers with the most profitable means of oil and gas operations. The earnings that are being reported in the second quarter should be evidence that oil and gas is far from healed, or on the road to recovery. It truly is a desperate situation and if the producers are unable to do anything for themselves at this point, then there won’t be a point in the future in which they’ll turn to us.

I foresee these losses continuing. OPEC this past week boosted the oil price in the short term. The question is for how long. I foresee a precipitous decline in the price of oil sometime this summer. One that will retrace the precipitous decline that occurred in the price of natural gas once the overproduction and oversupply issue was deemed hopeless and chronic by that marketplace. These producer losses and further commodity price declines will lead to the exit of the bureaucracy whose only response has been “market rebalancing.” They will exit the scene because they have no answer and the situation in the industry has become untenable. I think this nightmare scenario is what is probable for the industry prior to our September 25, 2017 software development start date. What we need to commence our software developments is our first year's budget of $100 million to be forwarded by the producers. Whether we receive those funds or not is not at issue with respect to the recruitment of the leadership teams for both the user community and People, Ideas & Objects.

The user communities board of directors will undertake the interesting task of determining how the user community should evolve over time. This will be an interesting development as the industry must be comprised of oil and gas producers that are dynamic, innovative, accountable and profitable. These being the underlying means in which it will be successful in the long run. The user community process needs to enable this. User communities could also be the future bureaucracy that achieves the further destruction of the industry. This will need to be managed by the members of the board of directors and ensure that the appropriate steps are taken to avoid the bureaucratic nightmare that user communities have and can become. There will be other responsibilities to be sure, this is the one that I am most concerned about.

The roles and responsibilities within the C suite are very well defined. Essentially don’t fail. Whether we take the path with the industry support or not is not our decision. It is our responsibility however to ensure that the option we have with the Preliminary Specification is delivered to the marketplace in a timely fashion. The industry has no other option than to adopt the Preliminary Specification. Society will need shale reservoirs and therefore shale needs to become commercial. The only way in which to make shale commercial is through the Preliminary Specification decentralized production model’s price maker strategy. Currently there is our solution and the ongoing destruction of the marketplace in which to choose from. Therefore we need to act accordingly and ensure that we do everything that we possibly can to deliver our product as quickly as possible to the industry. We have given the bureaucrats every opportunity possible. We can’t be blaming them for our own failure to deliver what we are now responsible for.

I’m including the product owners in our leadership team as their primary responsibility is the product that they’re assigned to. We will have at least 20 product owners, one for each of the modules of the Preliminary Specification, the user interface, the data model, mobile, test data, etc. These people will be part of the software development team in the agile software development methodology. They are responsible for representing and ensuring that the user communities needs are met and the overall quality are what’s required. A unique and critical role in the software development world and one which is enabling user community developments to be successful.

If any of these roles appeal to you please contact me. We are moving forward with the development of the organization September 26, 2017 with or without the existing producers and therefore, these positions are open now. I’m not expecting anyone to quit their job tomorrow and join these team’s. There will be a transition period where the work will be of a part-time nature with a full commitment necessary upon our funding being secured. There is no need for anyone to incur any career risk. And it is in that sense that all information will be held in confidence.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Friday, July 28, 2017

Recruiting for our Leadership Team's, Part I

In addition to the work that the user community and our developers will be undertaking in the first year of our developments. We will also be securing the full complement of individuals to fill out the needs of our leadership teams. There are two teams that need to be developed, one for People, Ideas & Objects and the other for the user community. The user community being a separate and distinct organization that is exclusively dedicated to the ERP needs of the oil and gas producers. The recruitment of these teams will begin September 26, 2017 whether or not the producers, as they stand today, join us. Our September 25, 2017 deadline is an opportunity for the oil and gas producers to deal with the overproduction and oversupply issues. With the companies being in the financial condition that they’re in. With their financial community taking a wait and see attitude. If the producers don’t come up with a plan on how to deal with the abundance of shale and the profitability of the industry. Then I believe, after September 25, 2017, if the producers haven’t proceeded with the developments of the Preliminary Specification, other producer organizations will be developed to replace the current producers.

Producers may believe that “market rebalancing” is right around the corner, and for all that anyone knows they could be right. They will have however lost the faith of the marketplace which will be looking to others if this current bunch can’t move off the tired and destructive process their on. Every opportunity has been given to these producers. September 25, 2017 which is the deadline I’ve set for the producers to participate in developing the Preliminary Specification. If they let this deadline pass then it will be for all intents and purposes, their last chance. Therefore, until the 26th of September we will assume that they’ll come to their senses and deal with their issues and propose a plan to the financial community of how they’ll move forward in a dynamic, innovative, accountable and profitable manner. And turn shale into a commercial operation by adopting the Preliminary Specification. When the financial community loses faith, rapid action is the only solution.

Effective September 26, 2017, should we not receive the support of the industry we will be dropping our offer of funding only the first years developments, and once again, expect that our full development budget be secured before we start any development work. Our value proposition is real, anyone can see the amount of value that is being destroyed as a result of chronic, sustained overproduction and oversupply. Trillions of dollars have been wasted already and many more before we’re finished. Our budget is not the issue in an environment where bureaucrats can be so wasteful and foolhardy. Our offer is therefore rescinded September 26, 2017, and we will expect the full proceeds of our budget to be provided before any work will be done.

Therefore our Leadership teams will be developed under one of the two possible scenarios that People, Ideas & Objects continues under. One being that the producers participatie under our current offer of providing the first years development budget by our deadline. Or we begin with the development of the leadership teams in anticipation of the full force of creative destruction dealing with the remnants of the oil and gas industry. People who are interested in these leadership positions should contact me and we can begin the process.

Within People, Ideas & Objects we will be recruiting as our first priority a CFO that is capable of managing a firm with our scope and scale. Although we will always be a private firm we have many responsibilities to the user community and the producers to ensure that our product is delivered successfully in the manner that the user community and producers expect. The strength of the CFO to undertake this task will require a senior individual with extensive experience in the role. The financial strength of People, Ideas & Objects will be one of the underlying foundations of our success and the CFO will be a critical element in ensuring that success comes about.

Our COO will be the one who heads up the software development team. This will be based in Houston and that individual will need to organize and build the Preliminary Specification under the direction of the user community. The COO will be responsible for the budget in terms of the People, Ideas & Objects development team requirements and deployment of Oracle’s portion of our budget. On Monday we will discuss the user communities leadership team and what roles are available there.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Thursday, July 27, 2017

Oil and Gas Capitalization Policies

I’m certainly one to criticize the producers for the manner in which they capitalize everything that they touch and then never recognize any of those costs. It has become the only game being played by the producers and has led to the many distortions that we see in the marketplace. It is so misguided, in my opinion. The ability for a firm to turn over its capital in a rapid and repeated fashion would be considered a competitive advantage. In oil and gas you raise the money and retire it for the remainder of life on earth. It will just sit on the balance sheet for decades and never provide any subsequent value to the producer. Instead of passing these costs on to the income statement, where if they were receiving enough of a price to cover the cost of operations, overhead and capital, then they would have that capital being returned to them in a timely fashion for reuse in the payment of debt, issuance of dividends or future capital expenditures. The producers balance sheet would not have accumulated bloated balances of property, plant and equipment but instead, have a handful of accounts that balance off those assets in the current asset category. Cash, short term investments and other liquid assets would replace those otherwise stale and decaying, wasted property, plant and equipment balances.

So what would we do. People, Ideas & Objects think moving the majority of the costs to the income statement in a timely manner is the appropriate thing for the producer to be doing. In the high cost shale era, with its steep decline curves, deferral of the recognition of those high costs to the next decade is ludicrous. There are a number of changes that we would make to the way producers recognize the capital costs of oil and gas exploration and production. The first would be to reduce the period in which these costs are realized down to two or three years. That will provide a return of the capital that has been deployed within a reasonable time frame. The current excessive balances of the producers should be treated in this manner. That will also determine the costs of production of each property, which will be very high, and therefore under the Preliminary Specification shut-in much of the production in both oil and gas. Rehabilitating the oil and gas commodity markets as quickly as possible, I would suggest during the three year period that I mentioned. Then with the bloated balances of property, plant and equipment finally extinguished, normal operations will dictate somewhat lower prices that can be accommodated by a lower capital structure.

Secondly we stop capitalizing everything. All overhead in the Preliminary Specification is allocated directly to the property. This is through the service providers billing the specific property in which their accounting or administrative service was rendered. Recognizing the actual costs to administer a property is not capital its overhead and the recording of this as such will better represent the performance of the producer and the property. In the future only controllable material will be capitalized. The cement used to cement the casing and the casing itself are not retrievable. They are appropriately called intangibles. I propose we expense intangibles in the current period. These would include the costs of day work and fracing. How can so much of the costs of a well be recovered when they are intangible? I would even go further than this. Asking, if the producer increased their production profile then their capital was deployed effectively. If it was deployed to only maintain the production profile, why are we calling this capital?

Bloated balance sheets don’t explain or prove what the producer is worth. Accounting is not about determining the value of the company. The value of an oil and gas company is clearly presented in the reserves that it owns and the prices that it realizes. The historical cost is irrelevant, accounting is about performance. How much money are you making on the basis of a fair and equitable evaluation. Are you fooling yourselves by hiding all your costs in the future or are you retiring your costs effectively in the current term and therefore effectively deploying your capital? These are the points that should be discussed in the boardrooms of the producers. Not how “big” we can make the company by issuing more stock and spending money like drunken sailors. It’s all become so surreal that it has no basis in value any more and it's a farce. The investors don’t buy it, the banks don’t buy it and the industry should be wiser to it.

If we retroactively applied these policies to today’s producers on a pro-forma basis we would have a fundamentally different industry. Today’s producers wouldn’t be around. Removing 75% of their property, plant and equipment and processing that through 2016’s income statement would have eliminated retained earnings in all cases of the producers. It would also have eliminated the share equity. There would not have been the associated gain in cash as the prices the commodities were sold for was inadequate to truly generate a profit. Therefore these companies have been run into the ground by adopting a ridiculous capitalization policy. They have no money, they generate no earnings and the cumulative asset base of the industry isn’t worth anything worthwhile as it would require a trillion dollars each year to fund the cash shortfall.

By proactively putting this policy in place we would then be able to tell which producers are being run by the guy in the size 2 hat. The people who know what they’re doing from an engineering and geological point of view are going to have financial statements that stick out like sore thumbs compared to those with the size 2 hat. Today I couldn’t tell you which company is run by who. They all look the same and their performance is abysmal.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, July 26, 2017

Some Thoughts on Integrations

The other day I read an article from PwC about ERP integrations. It was on Oracle’s website if you want to search for it there, I wouldn’t bother though. In it the author suggests that most ERP integrations failed. That as a result of these failures the overall scope of the integrations have reduced the financial commitment to within the range of $10 to $100 million. That many of the reasons for these failures was the lack of business focus of the implementation, many being driven by IT. It seems that not a lot has changed since the mid 1990’s in the world of ERP integration. I have a lot to account for in light of these facts. The Preliminary Specification is outsized and is breaking the mold of the traditional ERP integration. I think that’s a good thing. The one key advantage that I assert the Preliminary Specification has going for it is that most ERP integrations don’t have the gun to the head of their client. The producers have little choice in the world, it's build the Preliminary Specification or die, in my biased opinion. There are no alternatives that provide a solution to the overproduction and oversupply issues. And failure is not an option.

Lets address the elephant and the gorilla first. Our budget of $6 billion is different. Outside of the People, Ideas & Objects profit and my royalties our costs are $2 billion. A much larger number than what PwC is saying is the norm. The key difference is that we need to be looked at from the industry point of view. We are providing an ERP integration for all of our service providers who will be undertaking the accounting and administrative processes for the producers, the North American producers themselves and finally deeply integrating their interactions with the service industry. Not one individual producer. Therefore our costs are going to be much higher. If you take the $2 billion and divide it by the number of producers you’ll get a number that, on average, falls well within the lower range of the PwC numbers. However, we are covering off a much larger scope and scale of ERP application than under the current failed methodology. Each producer is currently attempting to integrate their ERP with those much smaller budgets. Therefore each producer is having to suddenly become “expert” at ERP integrations which is part of the reason for high failure rates. And as we have stated on many occasions the costs of overhead in the oil and gas industry, costs that are unshareable between producers, is one of the reasons for the lack of “real” profitability.

User community participation is another reason why we’re different than the standard integration. One third of our budget is allocated to the costs of building and maintaining this user community. As soon as the final edited version of the Preliminary Specification was published in December 2013 we began our user communities development. Our vision and the policies that support how our user community was established, what will make them a success were defined, and the recruitment of participants all began. We have been at this now for over three and a half years. Nothing will be done by People, Ideas & Objects developers that isn’t directed by our user community. They are the holders of the Intellectual Property of the Preliminary Specification, the research that went into that and the derivative work that they will generate. Lastly it is the user community participant that the dynamic, innovative, accountable and profitable oil and gas producer will be in exclusive contact with to have their needs, in terms of what the software needs to do, or how the integration is working in their operation. These four elements are the keys to how our user community is different than any other ERP integration and how we have planned on making the Preliminary Specification a success.

Our key constraint at this time is the speed in which our user community can think. Some may think it’s the speed in which the producers can act. I disagree. I used to think that, and before that I used to think that the underlying technologies were not robust enough to undertake an application of our scope and scale. The technology can now handle the type of application that we’re building. The user communities speed is at an infantile pace where it is unable to crawl at this time. Which is to be expected. However, in comparison to where it needs to be in terms of addressing and resolving the issues and opportunities of the oil and gas producers that is inadequate. The primary issue is money. Producers can’t expect, which has been their modus operandi, that someone will do this much work for them for free and expect to get paid when they deliver it. Read our Revenue Model for how we’ve addressed this. We’ve played the producers game before and think we’ll sit the “next time” out. So for the user community to develop at the speed that is necessary to approach this issue we are going to need to see some of that industry cash. It’s not the user communities problems, it's the producers.

I’m sure many bureaucrats will undertake integrations in the next year to try and deal with the issues and opportunities that they face. It might provide them with an excuse to appear to be doing something to fix what ails their company. In their “cost control is everything” mindset they will pay the $10 million and get what they paid for. Who knows they could even get lucky!

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Tuesday, July 25, 2017

Two Months To Go

It would be reasonable to assume that oil and gas producers have had two issues to deal with this past decade. The chronic overproduction and oversupply of both natural gas, initially, and subsequently oil. The second issue has been me on the sidelines barking and criticizing their every move. I have to say that I prefer this side of the fence. It’s been more enjoyable. Though the bureaucrats would love to have me removed from the scene that would do nothing to rid them of the overproduction and oversupply issue. It would have been easy for me to have walked away from this life consuming idea that I could fix the overproduction and oversupply issue. In what is our twenty-sixth year, the issue is ever present and the damage done to the industry is far in excess of what I ever thought it could be. I feel a compelling responsibility to continue. This hasn’t been beneficial to me in anyway. I have not received the support from the industry at any point during these past twenty six years. I put that down as the nature of software having all of the costs up front. If we get to the point where revenues are generated then I will benefit because of the material impact that we have in the oil and gas industry. My suggestion is that time is short and the need for the oil and gas producers to think clearly is necessary. I am not their biggest issue, life without me, may be.

Today is the 25th of July which means there are two months to go before the start of our developments. If you’re interested in joining our user community you should be actively preparing your application for submission anytime before then. We are looking for the first 100 of about 3,000 individuals that will participate in our user community. These are part-time positions that will define more of the Preliminary Specification in terms of the necessary detail. If you want user community based ERP systems in oil and gas then you know what you’ll have to do. There is nothing that will happen at People, Ideas & Objects without the explicit direction of the user community. People, Ideas & Objects are user community based, which is reflected in our overall vision. That is the only way in which to make systems usable and functional for you the end user and producers that need them. Everything else in my opinion would be a waste.

I am unaware of any response to our call to the producers to fund our first years developments. The level of deception that they’ve convinced themselves of is very evident in the Encana financial statements. Everyone in the world is looking to the North American producers for a response to the overproduction and oversupply of oil in the marketplace. The Preliminary Specification is the solution to that issue. It is not my solution, it is the solution. It is the result of ten years of research into what would be necessary if the industry used the Joint Operating Committee as the key organizational construct. And, there is nothing else available. Any other idea can not tread on my Intellectual Property and would take at least ten years of research to complete. Therefore the producers have backed themselves into the corner where they have no options. Lastly I would point out the Preliminary Specification is robust at 175,000 words and approximately 1.4 million words of research. The solution works and is a viable choice for the industry to solve the problems that it’s faced with today.

Blaming OPEC may hit a fever pitch again today. They begin their meeting regarding their production sharing agreement and what to do about the chronic overproduction of the shale producers. I don’t see a lot of pressure on them to do anything. The fault of the issue is now clearly on the North American producers. They can accept that or reject it and govern themselves accordingly. And OPEC can do whatever they like. Saudi Arabia’s cost of production is $3 / barrel, they can continue to produce profitably for a while longer. Whereas the North American producers break even point is at today’s prices. Which means they’re covering their production costs. The North American producers need to understand that with twice the volume of oil available for the market until 2050 a means of production allocation based on profit is a necessary element of their business. That is the Preliminary Specification. Otherwise OPEC will just produce what the world needs at whatever price that is offered. Putting the North American producers out of business. Which at this point, with these financial statements is about 15 minutes of miserable life left.

North American producers face an existential crisis. Act to develop the Preliminary Specification on September 25, 2017 or be eliminated from the marketplace through overproduction by OPEC and other lower cost producers. We see that OPEC are doing everything that they can and blaming no one for the difficulties. It might be suggested that Saudi Arabia’s costs are much higher, and that would be an academic argument based on the costs of their government. I would therefore suggest that the North American producers undertake to include the Federal debt and fiscal budgets of both the U.S. and Canada for comparison purposes.

I have argued here for an appropriate policy to deal with the issues as I see them in the industry. I have offered a solution to those issues in the Preliminary Specification and user community. My argument may have been acute at times, however that is only as a result of the bureaucrats behavior towards me and the continuation of the foolhardy way the industry has been run into the ground. I am not the enemy. I am the one trying to solve the industry's problems yet the bureaucrats are too thick to even acknowledge the issues. They point to OPEC, or the warm winters as the reasons that their performance and operations are so poor. Or they outright deceive themselves as Encana did last Friday with their comical financial statements. Their opportunity to deal with this is coming quickly. September 25, 2017 will arrive and there needs to be a solution underway by the producers otherwise we will be building it without them. It’s that stark and real at this time.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Monday, July 24, 2017

Encana, Perhaps the Most Profitable Company on the Planet!

Last Friday was the beginning of the second quarter reporting season. Encana and Husky started off the season with their reports. These being Canadian companies, it would be difficult to discern anything from their reporting. As bad as the recording of every transaction as an asset in property, plant and equipment is in oil and gas. The Canadian producers have made the preparation of financial statements a complete farce. They are far too extreme in their capitalizing of everything and recognizing nothing in terms of the costs of production. They make the rest of the industry look almost normal. As I’ve said many times it’s the regulations that allow the producers to book assets in this manner. The issue that I take is that it’s at obscene levels after four decades of practice in the industry, where every producer goes to the limit every fiscal year. The one positive is that revenues are up 50% which helps. That is however much lower than the 300% that we recommend the producers need in order to recover from the crisis and prosper.

Husky has $15.8 billion in property, plant and equipment, or as I call them, unrecognized costs of past production. These “assets” are generating $2.2 billion in revenues for the six months of 2017. Certainly oil and gas is a capital intensive industry. People, Ideas & Objects proposed policy would be to therefore realize the costs of that capital as quickly as possible. That imputes that the prices you would sell your products for would be adequate to generate profits. If the assets were unable to generate a profit then you would shut-in the property until such time as they could be produced profitably. Accelerating the depletion of their capital would therefore enable the producer to turn over their capital in rapid fashion. Enabling them to pay down their debts, declare dividends and fund their own capital expenditures. In the past four decades producers have raised capital from investors each and every year to pay down debts and fund their capital expenditures. Causing the industry to slump into a situation where it was consuming capital to discount the price of the commodity on behalf of the energy consumer.

The only recommendation that I can make after reading Encana’s financial statements is for everyone to sell their Apple stock and buy Encana instead. Encana have taken the ridiculous to the level of the surreal and then made a mockery of financial statements. Everyone should look at these as testament to the level of stupidity that this industry has become. Suddenly, Encana has 32% after tax profit margins! Their capital expenditures are 214% of what their depletion is. Yet, their production profile is constant in the first six months of 2017. Implying those capital expenditures did nothing to expand the production profile and, in my opinion, should therefore be considered operating costs. At the current rate of depletion they will take 11.25 years to eliminate the current property, plant and equipment balance of $8.5 billion. In addition, Encana has the audacity after carrying retained earnings of $12 million at the end of 2016, of increasing their goodwill by $23 million to $2.8 billion. The other feature of Encana’s cost control is their reduction in G&A from $140 million in 2016 to just $82 million in 2017. Anyone want to guess where that 42% reduction in G&A went to? Property, plant and equipment. This is how they’re able to generate these profit margins. By deferring the recognition of any cost in the current period to property, plant and equipment. And then stretch the recognition of those costs out well over the next decade and then some. And then finally, as if that’s not enough, allowing that account to balloon ever higher each year by spending twice as much money as they recognize in depletion.

One would assume that earning 32% profit margins would have provided the organization with difficulty in finding places to stuff all that money. Well except for Encana, or for any of the producers in the past four decades. The reason money was raised each and every year from investors and banks was to keep the energy consumer subsidized. Producers for the past four decades have consumed more cash than can be stacked in a pile to the next galaxy. In the case of Encana during the first six months of 2017, their $762 million profit consumed $439 million in cash to produce those earnings. Wow?

Where’s the integrity. Where’s the understanding that you're running a business and attempting to reflect the policies of the administration through the accounting that’s being reported. Every producer is hustling all their costs to future recognition so that their current quarter is as good as it could ever conceivably be. Meanwhile their contribution to the systemic industry wide overinvestment is overproduction that causes prices to be about one third of what are necessary. This Encana report is the most obscene one I think I’ve ever seen. They have so distorted the reporting of their operations that the business is a failure and they report it as perhaps the most profitable company on the planet. The deception is complete and thorough. The only problem is that the ones who produce the reports are the ones that’ve been deceived.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Friday, July 21, 2017

Thursday, July 20, 2017

Individual Actions

If you compare the effort that went into the research that was prepared for the Preliminary Specification, the Preliminary Specification itself, and the work that we’ll need to do to implement it, to the theory of “market rebalancing,” and all that it entails, we can see the attraction of it for our good friends the bureaucrats. The financial condition of the producers is beyond anything that can be rehabilitated. To put the producer firms in the proper perspective you must take 75% of the property, plant and equipment account and move it to depletion in the current period to reflect a true measure of the situation at any of the producers. Then you’ll know the futility of the activities these bureaucrats have been involved in. Storing unrecognized costs of past production as property, plant and equipment has become obscene and is reflected clearly when you adjust their financial statements. These producers will argue that it’s just accounting, and I say exactly. Accounting is about performance and I certainly would not want to be responsible for this either.

Without the wholesale changes brought about by implementation of the Preliminary Specification this culture of destruction will continue. “Where is the outrage” at this performance in the industry? It only exists at People, Ideas & Objects and our user community. The bureaucrats have bought into their self serving ways and have it so good that they would never make the change. We all know that these types of situations can never continue for ever. And the end is arriving later this summer. A time when we’ll see these bureaucrats exit the scene and the chronic unprofitable overproduction finally breaks down the oil price as it did the natural gas price almost a decade ago. So how does this get fixed. If we listen to what is said today, it's business as usual. There is not a concern on the horizon and everything is going to work itself out over time as it always has. There is, and always has been, a decided lack of leadership in oil and gas. Right now the business is about drilling wells, issuing stock and spending money. What more could be involved? Outside of this there’s been no leadership whatsoever.

So where does the leadership come from in the future under the Preliminary Specification. Instead of looking to the bureaucrats to act we will have the individual actions of those within the industry with the capacity and capabilities to act. Those individuals being the user community participants and the service providers in which they own and operate. Through the user community vision they have the means in which to act to make the changes to the process in which they manage in their service provider organization. They have the ability to change the Intellectual Property that makes up the ways and means of how the industry operates. And they will have access to the People, Ideas & Objects software developers to have their changes made in the software. Therefore no one will be sitting around wondering who to contact to make the changes that are needed in a certain process. It will be the user community participant at that service provider who operates that process. And they will be willing and capable to act.

Once we’ve implemented the Preliminary Specification we will have achieved the big changes that are needed to be made in the industry. The subsequent iterative changes will be able to keep the industry in the position where it will address its opportunities and issues proactively and constructively. Providing the oil and gas producers with the most profitable means of oil and gas operations. We’re now seeing how destructive the industry can be when the producers lose sight of what it is they’re doing. Without profits there is no money. Without money there are no jobs, no taxes to balance the government's budgets, no royalties and the rest of the difficulties that we are currently faced with.

The bureaucrats have been nothing but self serving for the past number of decades. This has been at the expense of the health and welfare of the oil and gas business. That is not to say that the user community participant and service provider will be living in acute poverty to serve the oil and gas industries needs for profit. Not in the least. I see these as very lucrative opportunities for those people. User community participants and service providers will be very profitable businesses. When the oil and gas industry is profitable, and profitable in the real sense, not the sense that has been contrived for the past four decades, then those that are able to provide real value for the producers will also be profitable.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Wednesday, July 19, 2017

Failure By Any Measure

I can suggest that I occupy an obscure corner of the Internet with my rantings and ravings about the bureaucrats. Which I do, there just are not a lot of people outside of oil and gas that come back to a website dedicated to oil and gas ERP systems. And the bureaucrats are frequent visitors who are well aware of what we’re doing and offering. They’ve known from the beginning, they must have because that’s when the beatings began. It’s also the time when other groups began publishing similar work to what we had published back in August of 2003, during our research and the Preliminary Specification. It appears that until then bureaucrats were unaware of copyright provisions and laws. However I’ve now informed and educated them. The point I’m making is that I may occupy an obscure area of the Internet but I am not unknown by the bureaucrats in the industry. It’s not that they didn’t have the opportunity, or didn’t want what People, Ideas & Objects and the user community have for themselves. Its that they don’t want to be challenged in their franchise and they don’t want to work as hard as the changes in the Preliminary Specification would dictate. They’ve had it pretty good before the Internet came along. They just wanted to keep it that way.

People, Ideas & Objects and our user community have a plan that builds the Preliminary Specification as a replacement to the current bureaucracy. Brick by brick and stick by stick. All as a result of the lack of action on the bureaucrats behalf and the destruction that they’ve caused in the oil and gas industry. There was plenty of time in which our remedy could have been implemented. Instead the only thing we’ve heard is the “market rebalancing” story that has no basis in fact or reality. It’s the lazy man’s excuse not to do any work and it has been very effective in oil and gas. Throughout the time that they have been singing in harmony about market rebalancing they’ve been fully aware of the Preliminary Specification and the fact that oil and gas commodities are subject to the characteristics of price makers. There’s has been a self serving and irresponsible mismanagement that has brought us to this point that we are in this summer.

Who knows, maybe oil and gas prices will rally in a new commodity super cycle. I’m not seeing oil and gas participating even if that were the case. Shale is a new variable in the market that requires new thinking and new actions to be taken by producers. Producing everything, always when the world has twice what it needs for the next 33 years doesn’t seem to be a viable business to me. Production discipline based on profitability is the only reasonable methodology to allocate production in a marketplace such as the North American producers. If the property is profitable, considering all of its costs, then it will produce. Otherwise it remains shut-in until some innovation can be developed by the producer to reduce the costs, increase the throughput or expand the reserves. Then it can be placed back on production profitably. But only then. This attitude of producing as long as the property breaks even is ludicrous. It maybe a tactic to be employed in the extreme short term in temporary crisis situations. It’s not a long term strategy for an industry to employ for decades. And that’s what has happened in North American oil and gas. Don’t believe me, just pull up an oil and gas producers financial statements. Look for the obscenely bloated property, plant and equipment and realize that these numbers represent the unrecognized costs of past production.

I am unaware of an industry's failure on the scope and scale of what I see the North American oil and gas producers facing in the next few months. Maybe it's just that the Internet has compressed our timelines and things happen much faster than they would pre-Internet. Faster and with more fallout. What you could maybe muddle through twenty years ago can’t be done anymore. There’s too much risk. The resiliency of the producers, the desire of the investors and bankers to step in and help the producers through the tough times will get the industry through about 15 minutes of the difficulties that we’re about to face. After that, what? What will the genius bureaucrats do when the oil price collapses and even they don’t get paid? All I can say is it’s going to be interesting. Our plan is to start developments on September 25, 2017. You should consider what you’ll be doing then?

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here