These Are Not the Earnings We're Looking For, Part XXXVII

The volume of bureaucrats that are leaving the industry has begun and we’re definitely seeing both the quality and quantity of exits that show this will be the future. They include,

Imperial oil CEO Rich Kruger, September 17, 2019

Marathon CEO being pushed out by Elliott Management, September 27, 2019

BP CEO Bob Dudley, October 4, 2019

Obsidian CFO David Hendry October 21, 2019

Apache SVP Worldwide Exploration Steven Keenan October 23, 2019

Pengrowth Energy bailing out through company sale for 5.4% of their 52 week high, and 0.192% of their all time high. November 1, 2019

Chesapeake providing the cover story that they’re not a going concern. Enabling the exits of their bureaucrats. November 5, 2019

You have to consider the sacrifice that these bureaucrats are making. Giving up on the gravy train that has kept them well compensated for the past number of decades at the expense of pretty much everyone else in society. That, and we should not concern ourselves with what it is they’ve been doing, they’ve done nothing constructive for the past few decades. As for the service industry, after financing the producers field activity for the past 18 months, at fire sale prices which cannibalized their fleet and now with little hope of collecting their accounts receivable. It’s not that they knew they were financing the producers activity, it’s just that they thought they were dealing with reputable firms who would pay their bills. They of course will be fine, they have a lot of equipment that can be cut up for scrap metal and sold. When you consider the financial damage everywhere, the disastrous situation in the field with diminishing capabilities and equipment, the nonchalant attitude of the producers parroting that this is how the business is. You have to wonder how the expectation that investors will just return and make everyone whole again is based on any foundation of reality. Investors look to the future, to industries that provide plans and opportunities that intrigue and excite them. Industries that will provide profits and cash with as minimal risk as possible. All you have in oil and gas is guaranteed high risk and never any return.

If we think back to the 2008 / 2009 financial crisis. And I would recommend that everyone watch the movie “The Big Short” for a refresher on the history of that period. What are the parallels to the oil and gas industry today? I see many. Mostly the denial that is rampant throughout oil and gas, assuming that things will turn around, as it has done many times before. We are far beyond just a financial crisis. We have been losing money and destroying value in oil and gas since the late 1970’s. The inherent residual value that exists in the industry is inadequate to support itself financially. The situation has carried on to the point where the capabilities of the producers has diminished. This is represented best in Calgary by having greater than ⅓ of all office space empty. The service industry has been for all intents and purposes destroyed and will require a dedicated effort by the producers to rehabilitate it. A rehabilitation based on the understanding that the service industry exists for no other purpose than to provide capacities and capabilities to the oil and gas producers. Universities in the faculties of engineering and geology have been cleared out of any interested students. People in general don’t like working in remote dirty areas that are far from their families. People are now working in other industries that provide them with adequate compensation and a lifestyle that makes them never want to return to the “big money” days of oil, of which they have nothing left of anyway. How is this pain going to be solved and where are the financial resources coming from to make the industry whole again? Where is the plan?

As during the financial crisis no one would stand up and say there was a problem until it was obvious. Only a handful of people were seeing the situation correctly and hence were benefiting from their foresight. Yet those individuals were run into the ground by those insiders who refused to listen and change their ways in the face of such obvious issues. We see this same situation in oil and gas today and just as these crisis don’t start at the drop of a dime, they take decades of dumb regulations to manifest themselves. Just as Lehman Brothers, Bear Stearns, Country Wide and AIG’s collapse eventually brought the house down around everyone. I think we are eerily close to a similar triggering point today. What is it that we’re waiting for, is there any clearer sign that our trajectory is downward, steep and unrecoverable? Has it not been proven that the current configuration of producers can’t, won’t and will not ever change?

When I suggest that we need to rebuild the industry on the vision of the Preliminary Specification so that producers, the industry, the service industry and everyone associated with it can begin the process of putting it back together. A new North American oil and gas industry that provides for the most profitable means of oil and gas operations. Real profits, not the ones of the past 40 years. Then we’ll have a dynamic, innovative, accountable and profitable oil and gas industry that will provide for the needs of society in a competitive and exciting world that is what our future promises. What is it exactly that the current producers are offering that’s so compelling?

People, Ideas & Objects continue with our plans to raise our ICO in what will soon be two and one half years time. Review of our white paper will show that this is the only reasonable method in which we’ll be able to access the resources necessary to build the Preliminary Specification. At the same time this is not a positive period for the cryptocurrency market. These plans are also well beyond the time frame the industry has and as a result put many greater unnecessary risks into play. Our dealings and our competitors dealings with the producers regarding the development of ERP software over the past thirty years is documented in our white paper. I’m not deviating from our plans to raise the ICO in our time frame. I am certainly open to suggestions on alternatives that may reduce our timelines to deliver our products and associated services. 

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

These Are Not the Earnings We're Looking For, Part XXXVI

Picking up where we left on Friday. I noted that on a number of the Canadian producers 3rd quarter financial statements that they’ve incurred the dreaded ceiling test write downs. It appears natural gas prices in some areas have been forecast to decline on the horizon. Precipitating the ceiling test write downs of some of the producers property, plant and equipment. Although it seems that we were just there in 2016 when most producers had to record write downs of their assets as a result of the decline in commodity prices. It seems the constant and chronic bloating of the balance sheets demands that we need to start this process once again. How widespread these writedowns will be is unknown. What we do know is that there is further deterioration in the long term natural gas prices as a result of the chronic oversupply and overproduction that has gone on unchallenged by those bureaucrats in the producers firms since at least 2010. If we expect to see further deterioration of the natural gas markets then there will be more than just Chesapeake questioning their viability as a going concern.

Some are calling shale a failure! That’s all, no solutions, no arguments or alternative points of view expressed by anyone in the industry. What better way to exit the disaster than to have it argued that “shale is a failure” and you’re therefore justified in seeking more prosperous industries outside of energy. After all as “one individual bureaucrat you weren’t responsible, and the attempts that you made to clear it up were not listened too.” We’ll have more to say about the beginning of the mass exit of the C suite in subsequent posts, today I want to focus on the viability of shale.

If we consider that oil and gas is a business that seeks to cut costs everywhere and always to ensure the consumer pays the lowest costs for their energy. That commodity prices have risen substantially from the prior century, multi-lateral fracing and other service industry innovations having unleashed untold reserves. That the costs have been wrung out of the system to the extent that they can and are still unable to provide a commercial operation in any shale basin. Then yes, most definitely, shale is a failure. What producers fail to consider is the value proposition that is provided to the energy consumer. They believe that consumers are paying full value for their oil and gas and as a result see no justification for analyzing the situation as it stands today. They’ll just use this time to make their exit from the industry in as quiet a fashion as is possible.

However, People, Ideas & Objects believe it is this lack of responsible actors that makes up the industry's difficulties and the conclusion that shale is a failure in oil and gas today. The consumers value proposition from oil and gas is substantial. Each barrel of oil equivalent provides them with 23,200 man hours of mechanical leverage. Enabling every human to expand their physical efforts by 87 times. For $60 U.S. / bbl that’s not a bad deal. What producers think is, if the price should increase too high above $60 then they’ll put themselves out of business with renewables coming in to take away market share. “If that should be the case then most certainly we should sell unprofitably everywhere and forever,” I assume is their thinking. Nonetheless, this is the best example that we have of the scope and scale of thinking in the industry.

What we believe is that producers should undertake an evaluation of the role they take in society of providing the energy for the advanced methods of organization and capabilities we as a society have obtained and currently enjoy. Without energy our standard of living will drop precipitously. How does the viability of shale’s commercial capability become a factor in this discussion? Energy is as vital a resource to the world as is the oxygen and water that we consume each day. If we exist in a market economy then we should listen to what the markets have to say about oil and gas commodities. Markets provide one thing and only one thing, a price. If a producer, whether shale or conventionally based, can make a profit at the price the market is telling them, they should produce. How does the “shale is a failure” come into question here? The only question is, does the property produce a profit, based on a reasonable accounting, and if so then it should produce? There is no magic solution to providing the market with some technical breakthrough that will drop the cost below what the consumers expect to pay. Consumers will always expect to pay the lowest possible cost. And I believe they will also pay the cost, which includes an element of real profit for the industry, and all of those who are represented in that industry, if the alternative is to give up in a comprehensive fashion their advanced standard of living.

Instead we are treated to this ludicrous and elementary level of discussion being undertaken by the producer bureaucrats. Which doesn’t surprise me. It may be the first indication that I can say that reflects some level of thinking by the producers bureaucrats since the collapse of natural gas prices in 2010. I guess the bigger question has to be is why are we waiting for those that are responsible for this mess, and its continued deterioration from chronic inaction, to do something about this? Theirs is not the thinking that is going to provide us with a solution or direction out of this. The difficulties that we’ll face if we accept their willing acceptance of their failure, is that our way of life will fail as well.

We will document in tomorrow's post the volume of people who are exiting the industry in the past month. If producer bureaucrats are shrugging their shoulders, declaring their companies are not “going concerns,” walking away and accepting that they’ve failed, what is it that we’re waiting for? We need to be building the Preliminary Specification in order to replace this serious threat to our societal way of life. Or, alternatively the little white men in the little white suites can come and take me away!

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

These Are Not the Earnings We're Looking For, Part XXXV

In the producers third quarter reports we see the continuation of the issues that are detailed in our white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” There is much activity in the marketplace as these issues become more mature with producers reporting a number of actions in an attempt to mitigate them. I feel their most important issue is cash and working capital. Nothing has been done to stop the flow of cash and working capital from diminishing in this industry. Under their current business model there is nothing that will stop these resources flowing out of the industry. It is the producers capitalization policies that create this situation. First, all the activities in the field, other than operations and royalties, are capitalized. Overhead and interest are also capitalized at material percentages. I believe the industry average maybe as high as 85% however there is no verifiable proof of any of these claims. Just as there is no one who can provide verifiable proof otherwise. The last element of capitalization that is draining cash is all of these capital costs are allocated to each molecule in the reserve base and only those reserves produced in the current period will have their allocated capital costs depleted on the income statement. This is the case whether the reserves will be produced this month, this year, this decade or century.

The effect of these capitalization policies is that it allows the producers to build the handsome balance sheets their so proud of. When all you do is spend, and then recognize only a portion of that spending as a cost in the current period you’ll always look profitable, even today, but the cash is being left in the ground for the month, year, decade or century to pass before that cash is returned to the producers. The capitalization of overhead is done too, I think, hide their size and uncontrollable, fixed nature. Many people in the industry believe that overhead costs may be as little as 4.94% of revenues. as our sample of 22 producers report. If this was the case why would any cost cutting layoffs ever occur? A 10% percent staff reduction would create a 0.5% reduction in overhead costs. These don’t account for the “billions” in cost savings that are alleged. And as we noted in the white paper, taking a view of all the buildings in the downtown cores of Calgary, Dallas, Houston, and Oklahoma city would conclude, understanding that these strata of people on those floors are paid handsomely, that does not total 4.94% of the revenues of the industry. Our estimate is the well rounded number of 20%.

What we have is all of these costs, which are the majority of the costs of the producer firms, being expended each month. With smaller portions of those costs being returned by way of depletion. Therefore we can conclude as a result of these accounting methods, the full cost of capital is not being recognized in the pricing of the oil and gas commodity products that are sold to the consumer. Most of these costs are being deferred, and continually so, to the future. Leaving the pricing of the commodities deficient in recognizing the full cost of exploration and production. They do cover the royalty and operations but the majority of the capital and overhead are not cost into the commodity prices that are realized by the producers. Therefore the producers are not generating a “float” of capital, overhead and interest costs that are returned to them in the form of cash on a 90 day basis from the prices of their sold commodities. Therefore they consume cash constantly and in spectacular fashion. Investors finally realized this and stopped enabling this foolishness by replenishing the cash balances of these bureaucrats each year. The scope of this cash consumption is not as severe as it was in the past, however, it will still lead to the demise of the producers. For the nine months ended September 30, 2019 our sample of 22 producers, invested cash flow of $67.9 billion and depletion of $39.8 billion, a $28.1 billion cash drain for the nine months ended September 30, 2019. It is also notable that these producers have $520.4 billion in property, plant and equipment requiring on average 8.3 dedicated years in which to eliminate. Dedicated meaning no additional capital expenditures would be spent for 8 years in order to fully realize the amounts that are currently recorded. At the current pace they will take decades to actually remove the current balances due to the additions under the current business model. This is the justification for the cultural propensity to “build the balance sheet.” Think of this balance as what it is, a $520.4 billion or one half of a trillion dollars of cash sunk in the ground by these 22 producers. This at a time when producers starve for cash yet report great profitability. Profits, profits everywhere, but not a nickel to spend.

Certainly there is cash flow, however over the decades of this type of business model, value has steadily eroded out of the industry. Allowing the built up value that was in the industry, and the subsequent investments made by investors to seep out of the industry into the hands of the energy consumer. Which equals the amounts recorded as property, plant and equipment on the producers balance sheets. Hence for the producers to generate adequate cash flows to cover the costs of this monthly claim on cash eventually diminishes. Cash flows have become proportionally smaller and cover less of these costs today than in prior years. There is less residual value in the industry generating the value needed to sustain itself. As a result, it begins to produce less to the point, where I think we are today, that it begins the process of value destruction. Anybody want to propose a solution to this situation? How about a new business model built on resolving these systemic, cultural issues such as the Preliminary Specification does.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.