Showing posts with label Earnings. Show all posts
Showing posts with label Earnings. Show all posts

Wednesday, August 16, 2023

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

 Issues surrounding the recording of capital costs are complex and the implications across the industry cause many tragic difficulties. The consequences are being realized today in what I consider serious fallout in every area of the industry. Officers and directors believe these are accounting issues and will affect the accounting debits and credits and not much else. Misunderstanding the business aspect of the discussion and the underlying subtleties. Accounting is about performance. It’s not about bookkeeping or "building balance sheets" or recording the volume of cash being put into the ground. These are serious issues and the toll on the industry is plain to see. I feel we’re headed towards a grave downward step in our performance trajectory, are ignorant of what the future holds and our leadership is wandering about in and out of the industry, selling themselves as heroes to one another and have comprehensively failed everyone else. Did I miss anything?

At the same time I have not been able to convey the subtlety of the issues in coherent form to those that refuse to listen or consider an alternative point of view. They contrast my arguments with their peers at the golf club and the response they received when visiting their Ferrari dealership. "They built the oil & gas industry." They are the chosen few who find these others have leached from their achievements and efforts. Others do not appreciate the science and skill put into what they do." Theirs is a myopic view of the world where they occupy the center and will do nothing to explain their point of view to those who they feel have no ability to comprehend. I think I’ve covered it. 

One of us may be right or there may be a hybrid of the two perspectives. Oil & gas is a business first and foremost. It has not been a business since the 1970s. The culture that formed around that time does not understand the difference between what is done, what should be done or why. A capital intensive industry will always generate adequate volumes of cash that overwhelm anyone’s objective thinking. When you deceive yourself by never recognizing the capital nature of the costs incurred, everything appears to be profitable, organizations have no reasonable measure to assess their performance against, they find themselves intoxicated by their ability to achieve alleged success at every corner in anything they try. They soon lose perspective and become unreachable and unteachable. As time passes, the culture becomes intractable.

I saw what was happening to the business and the need for change in 1991. As I said, mine has been a single voice in the wilderness for the better part of that time. That’s not the case anymore, and the level of damage and destruction is clearly seen by most people in the industry outside of those officers and directors. The details of what I’ve been concerned about are evident in the solution we propose in the Preliminary Specification. This solution is discussed repeatedly on this blog and the wiki. 

Let me be clear. This is not Joe Biden's or Justin Trudeau’s responsibility. If you want to accuse them, they’ll be responsible for all the good the industry has accomplished. They have done neither. It is not the service industry. They have given everything and have nothing left to give. They have no motivation, no desire and no need to be in the oil & gas service industry. Pipeline companies are in the same boat. They are regulated companies and are therefore protected financially. It is not the fault of investors who can earn superior returns in other industries and invest their money there. Those who today see that nothing will happen after eight years of waiting for those responsible for the damage and destruction fail to act. Employees of producers who have tried everything but are powerless without leadership. It is, and always will be the leadership of the producer firms as represented by the officers and directors. There is no one else with the authority and responsibility to ensure that all contributors profit, prosper, and serve their purpose. And do not let them say they made a mistake, they didn’t know or they’re sorry. For two decades they sought others to blame, excuse and created viable scapegoats for the damages from their “muddle through" strategy. Did nothing to correct their actions. And there was an alternative for them that began in August 2003 and continues today. They did nothing but choose to eliminate People, Ideas & Objects from the marketplace and try to steal our Intellectual Property outright 5 times. 

I’ve been reading Professor Richard N. Langlois's recent book “The Corporation and the Twentieth Century: The History of American Business Enterprise.” He has some fascinating information within the book and I highly recommend it to everyone. Professor Langlois suggests the Twentieth Century Corporation benefited from primary industries such as coal, oil & gas. Oil & gas' mechanical leverage today is between 10 and 25 thousand man hours per barrel. This was realized through innovations and developments in machines and tools deployed by 20th century businesses. And on the other hand, WWI, the Great Depression, WWII, and the Vietnam War each presented organizational issues that markets were too unsophisticated and unable to approach. Government and big business therefore found a role for the bureaucracy and the question needs to be asked, what exactly is the benefit of today's bureaucracy from the structured hierarchy? Its benefits do not seem relevant since Internet-supported markets are sophisticated enough to accomplish what bureaucracies cannot. Moreover, coal, oil, and gas are unable to realize the significant gains on an annual basis that offset outright the cost of bureaucracy. This is in terms of what I think has always been bureaucracies' forte. Negative productivity. I feel it's clear we don’t want or need them anymore.


Tuesday, August 15, 2023

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

 Our sample of producers' second quarter reports have been published and I have to say that I’m quite surprised with the producers' outcome. There appear to be some changes in the industry. These changes reflect officers' and directors' behavior, and second, the disenchantment it has produced. What I’m stating is that all the tricks used to make producers look more attractive in the past have been resurrected and are fully employed again. The disheartening aspect of this is investors who have been patient with producers since the beginning of their refusal to give them more money. It has been eight years. Are now giving up on waiting for producers to turn the ship around. That's the oil & gas ship, not clean energy or any other industry the officers and directors may find interesting on a Monday morning. This act alone probably sealed their fate with their investors. Producers' inability to compete on the North American capital markets affects investors' commitment to the industry. Other industries are positioning themselves for substantial upside in the long term and hanging around in the deadzone with zombie management doesn’t seem to have a future. Therefore investors are walking. 

Production discipline is a key issue. Natural gas prices ranged from 25 to 1 and 40 to 1 in 2023. Not a word is heard about the absolute catastrophe this is. Natural gas prices broke down from their historical 6 to 1 pricing in 2009. What we’ve seen is another step down in 2023 of natural gas prices from the revised pricing established in 2009. This direction seems mindless. Arguing that it's casing head gas or associated gas that is the issue, they don’t pretend to look at that issue from the point of view of resolving it. At the same time they continue to see the service industry unwilling to commit the resources needed to supply oil & gas producers with their needs for the long term. Who could blame them for that based on the treatment they’ve received over the past decades? Nothing will happen until producers commit to rebuild the service industry. And that means supporting them with generous philanthropic efforts. Producers broke it, producers need to fix it. This occurs at the same time they dump natural gas as a byproduct onto the market with catastrophic losses hoping to make it up in volume, or "oil prices are healthy enough to cover the loss," or "build balance sheets,” or “put cash in the ground.” Officers and directors may find my arguments repetitive, because they are. Imagine how their investors feel about them.

In terms of oil prices, the understanding is that oil & gas is a capital intensive industry which generates strong cash flows. As a result these strong cash flows enable officers and directors to keep the lights on and the circus moving. This argument is lost on producers. Most importantly, it provides strong executive compensation. The problem is that it's not profitable. Specious accounting, which we'll discuss later, is back in vogue, and I don't mean to suggest it ever left. Oil prices are too low to be profitable. They are certainly not enough to compensate for natural gas losses. What producers fail to consider is that Saudi Arabia has two million barrels of oil per day withheld from the market at this time. Will this reduction continue? Will a recession begin soon? What will be 2024s oil price?

Only People, Ideas & Objects, our user community and their service provider organizations configured with Oracle Cloud ERP in our Cloud Administration & Accounting for Oil & Gas have a proposed solution to chronic oil & gas overproduction. Production discipline is attained in the Preliminary Specifications decentralized production model. A proposed solution we have discussed since January 5, 2007. Natural gas volumes speak of this unconstrained production nightmare. Our method uses profitability to allocate production. We can therefore ensure oil and gas production in North America is profitable. This is a strong foundational element of our value proposition. What is clear is what has been stated simply as: “Think of it this way: If you've got a leaky bucket, you're better off fixing the leak before pouring water in the top." From January 5, 2007 until today, what would be the differential between the specious cost of oil & gas production reported and the revenue received? Vs. the comparison to the actual cost of oil & gas exploration and production, what revenues should have been received to be profitable in the real sense?

In the land of what could have been. Theoretically when interest rates are low it is capital intensive, labor saving productivity that firms should invest in. Overreported capitalization due to “building balance sheets” and “putting cash in the ground” enabled producers to leverage their positions excessively during two decades of low interest rates. Adding to the difficulties of chronic overproduction or unprofitable production. Creating a future crisis due to extreme debt levels during a period of normalizing interest rates. Officers and directors have now achieved neither benefits of these worlds.

We hear in the press about producers' phenomenal efforts to reduce debt. At the end of 2016 our sample of producers' debt percentage was 55.9%. As of the second quarter of 2023 it’s 61.7%. (Our numbers include short and long term liabilities.) Here for example is their previously tried and tested method of "hysterical" accounting. From Reuters.

To get a picture of how much improved the cost efficiencies are in 2023, conventional greenfield unit development costs (development cost divided by the reserves developed have been curbed by 60%, from US$16.1/boe in 2014 to US$6.5/boe today. It is claimed that oil wells generate nearly three times more production for the same unit of capital than in 2014. 

And later in the article.

“Contrary to popular opinion, the world is investing appropriate amounts of money in fossil fuel production to satisfy demand. Cost savings mean operators can produce the same amount of oil at a lower cost…” 

The issue is twofold. Producers should not celebrate the ability to force discounts on the service industry due to officers and directors treating them abhorrently. Doing so over a number of decades deserves special recognition however. The second issue is that the statement is false. These are historical costs, not recycle costs as producers call them. Capital costs are not variable based on what can be done in the field today. That is what producers think they can show profitability at, the $6.5, but can’t compete based on their actual, factual and historical cost of $16.1. And long term readers know I have significant difficulty accepting the $16.1 / boe cost being assigned to each of the 30 to 40 years of reserves as anywhere close to what capital markets provide from other industries. What we know is that shale exposes prolific reserves and the capital costs incurred to explore and produce them are allocated to each molecule of those reserves. Shale has steep decline curves demanding costly rework and recompletions assigned to the entire reserve base. Capital costs are never reasonably realized or passed on to the consumer. They are for the sole purpose of “building balance sheets” or “putting cash in the ground.” What they cannot understand is that running a truly profitable operation would provide them with all the financial resources they could ever need. It's easier for officers and directors to wait until investors finally see the brilliance of producers' unknown and unseen plans than to do something about these issues. Yet all investors see are mice scrambling for their daily cheese.

People, Ideas & Objects proposes the following. First, the current production cost is what the replacement cost will be. Ultimately, that's the cost of replacing the product. Oil & gas are unique products in that they are irreplaceable and irretrievable. This demands a different approach if we are to manage the industry appropriately. With the decentralized production model these costs will be recognized in the product price, passed to the consumer and therefore recovered as cash to be distributed for future capital expenditures, dividends and bank debt. Profitable operations seek to realize costs appropriately and on time to fund future operations. 

At times people argue that I contradict myself, recycle costs are production replacement costs. I disagree. My arguments are that a dynamic, innovative, accountable and profitable oil & gas industry, as a primary industry, has a responsibility for the service and other industries. This is to ensure that they are healthy, well-paid, and prosperous. Cutting the price of the services because they can get another drilling rig for half price because all producers have slashed activity levels, only drops the rig operators' revenues into the low teens. Cannibalizing those that work directly for you may not be an effective long-term strategy. Secondly, recognizing the actual cost of production by competing in the capital markets for capital, demands that capital costs be recognized on a performance basis that is in quarters, not decades or centuries. Certainly competitive with other industries.

We’ve seen over the past few years our sample of producers report hedging losses of $109.7 billion. Yet as of 2023 reported hedging gains of $2.863 billion. My argument regarding hedges is that it sets the high water mark for organizational performance. It also sets the low water mark for organizational performance. So why would any of the staff do anything other than what the officers and directors do in the form of “muddle through?" Conversely you could have honed your organization to operate at the peak of perfection as a producer. However, what good are you in a sea of sludge? Officers and directors foster and enable a culture of failure and shrugging shoulders at each and every other producer firm.

In what I call their bankruptcy business model. Officers and directors at Chesapeake survived this otherwise terminal process and were rewarded with $25 million in bonuses following their bankruptcy declaration. There is only one conclusion to be drawn here: the loser is the investor. Who was the fool in the oil & gas firm management transaction? In addition to "muddle through," specious accounting, dilution by repeated annual stock issuances, and now dilution by consolidation. These are cultural, time-honored traditions. 

Officers and directors should also be commended for their actions towards innovators, entrepreneurs, and thinkers. Companies such as Packers Plus and coil tubing providers have suffered through their own persecution and prosecution by producers. Though we have not brought a commercial product to the market at this time, we have brought more ideas to the administrative and accounting areas. In terms of solving profitability related issues and value generating ideas we’ve been working on some promising leads. We’ve seen 5 attempts by officers and directors to use our Intellectual Property in an unauthorized manner. All while receiving nothing but the wrath of the officers and directors and their desire to maintain control of the sinking ship. My argument here is that these should not be seen in isolation. Others see these actions and think, I’ll shrug my shoulders and “muddle through” as well. Eliminating initiative and therefore nothing gets done.

This is the environment, the culture and the status quo of what North American oil & gas producers want to be known for. There was a video I came across that suggested Canadian producers should stop listening to their investors because what they’ve said was wrong for them. Although I cannot find the video, it was on Yahoo! I'll continue to look for it or others as it seems to have that old familiar twist we’ve seen many times before from producers. If there is a recession in our future, if the Saudis reverse their production cuts, these are all the risks we need to face on a day-to-day basis. When we assess the North American oil & gas industry it's at times difficult to get a handle on my perspective, I’ll admit. The industry operates on hope and possibility. Never accounts for the way things are or who’s responsible. To reconcile yourself to my perspective however, only asks the question, where do we proceed from here, and how?

Friday, March 11, 2022

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

 Scrambling to find as many high quality viable scapegoats as possible seems to be the only strategy being deployed by our good friends the oil and gas producer bureaucrats. And their investors are the ones being offered up to the public for their looming failure to meet the markets demand for energy. Producer bureaucrats' flat footedness and lack of response to the need for additional oil and gas production can not be met and they’re very aware of the reason this is the case. To suggest they’re not capable of doing so would never be stated as that would be counter to their best interests. The fact is they’ve used and abused the industry for the past forty five years. Symptoms of their abuse have been evident since the 1986 oil price collapse and all of the subsequent boom / bust cycles since. The cultural response of the North American based producers developed in the late 1980s and 1990s to where the expectations were that outside investors would fuel all of their capital investment needs. To the point where this became their dependence as the business itself atrophied around their chronic mismanagement due to their chronic and systemic overproduction. We all remember the days when the producers that were viable were those that had abundant access to sources of capital. If they didn’t they wouldn’t be around long, and if they didn’t meet their production targets, investors abandoned them and they would quickly disappear due to their lack of financial viability. This is the dismal history of the North American producer up to the point of 2015.

After a decade of throwing additional and vast volumes of investment into shale, investors began to see clearly that their money was nothing more than fuel. Putting additional cash into the industry only created larger flashes that quickly died down with the only residual being the demand for more cash to put on to the next even larger flash. Not only was their investment being diluted and incinerated, the cumulative value of all the prior years industry “activity” wasn’t generating enough to keep the lights on at the head office. Investors felt it was time to stop this wasteful “activity” and instill some rational, inward thinking so that oil and gas producers would make the necessary changes. That was seven years ago, and the producers were given a list from the investment community of what was expected of them. One of those points is that the industry must become accountable and install tier 1 ERP systems such as the Preliminary Specifications use of Oracle Cloud ERP. Nothing on that list that the investors expected in 2015 has even been discussed in the industry. Nothing has been done but to invoke the holistic, catch-all strategy of “muddle through.” 

This leaves the industry in a dire position financially and from a base of value to leverage its position forward that is structurally too weak and probably non-existent in most of the producers. Highlighting the status of the service industry is the only necessity here as the capacities and capabilities of these firms have been deliberately run into the ground in order to subsidize the lifestyles of these producer bureaucrats. Any source of value in these past seven years has seen these bureaucrats attack it as if it was a hungry mosquito. When investors left it was the remaining credit available on their bank lines. Then they continued their field operations and paid the service industry after 18 months. When these expired it was onto increasing production until oil hit negative $40. The list continued as the bureaucrats' needs and hunger is insatiable. 

Where this leaves us today is with a seven year lead time with no work in progress. As in all industries there are lead times in which companies operate. Hitting the switch to increase production is what John Q. Public sees and expects but there are massive undertakings to get to that point. When investors and bankers are no longer willing, when cash and working capital has been as short, as we’ve documented in this series of seventy six posts, to non-existent. Which area is cut first, this year's drilling operations or the activities involved in year one of the seven year lead time needed to drill future wells. And in the second year of a lack of cash, what is the next decision regarding priorities: cut the first and second year of lead time or stop the drilling. We’re in our seventh year of no new investment and maybe the producers will begin to think about hiring those who were involved in the first through to the seventh year of the lead time needed to drill a well. If they can find them. It’s been a while since anyone has seen them of course. Have we ever discussed shale’s notorious decline curve before? We're not only behind in our lead times, we’re also behind in shale’s decline curve. 

This is all “Ok” however. Producer bureaucrats now have what they need in order to make these past forty five years easily forgotten and eliminate the history of never making any money. Rahm Emanuel said it best when he coined the phrase, “never let a crisis go to waste” to take political advantage of a crisis situation. We’ve consistently documented their desire to blame, and as we euphemistically call what they do their excuses, but most of all the growth in the population of their viable scapegoats. We’ve also chronicalled their aspirations to get as much couch / recliner time as possible. Doing nothing is an art and science for these people. Evidence of this is contained in the fact that oil and gas is a primary industry. Where all of its secondary and tertiary industries have been financially pancaked by these producer bureaucrats greed and lust for financial gain and power. So yes, let's not think of that now, we have a crisis on our hands. Convenient isn’t it. 

To quote another famous politician “At this point, what difference does it make?” We’re asserting the producer bureaucrats think it’s the windfall of all windfalls. They’ve proven to be incapable of managing an enterprise. Incapable of uttering anything close to the truth at any time and incapable of getting up off the couch other than to visit the Ferrari dealership. Although a crisis is a fantastic plan and one I’m sure will solve the problem for them, who else is it going to be good for? What right do these bureaucrats have to put us in this treacherous position, especially when People, Ideas & Objects, our user community and their service provider organizations have been actively warning about this as the ultimate outcome of their actions. Warning that societal damage is the outcome of the breakdown of such organizational dissonance and the minimum of 10,000 man hours / bbl of oil equivalent contained in each barrel consumed. Mechanical leverage is an issue that this blog has been actively discussing since July 11, 2008. They’ve had every opportunity since August 2012 to proceed with the development and implementation of the Preliminary Specification yet have chosen to do nothing but ostracize and vilify this opportunity since August 2003 when these ideas were first proposed. 

Recently they had the opportunity to pursue “Profitable, North American Energy Independence -- Through the Commercialization of Shale,” in the People, Ideas & Objects July 2019 white paper. Unfortunately that involved them getting involved in effort and hard work. Then in as little as nine months they chose to produce oil at negative $40 and in 2021 summarily abandoned the oil and gas business to pursue clean energy instead of accepting any idea there's an issue or their responsibility in creating it. Since they wanted to leave the business it’s time we said goodbye to them. If they can’t accept the fact they’ve never made any money in the North American oil and gas business, what is the probability this crisis will facilitate their transformation of their business to the dynamic, innovative, accountable and profitable industry we need? This crisis has precipitated the need to increase production, they’ve not articulated the need to make money in the process, just for the investors to send cash. And they’re telling the public it's the investors fault they don’t have the money to drill. What we can say about their administration over the past forty five years is they’ve always done the exact opposite of what should have been done. Adding to all these difficulties we’re now hearing nothing but a litany of viable scapegoats of why they can not respond to the increased demand for energy! If the consumers can’t rely upon them, is that not the ultimate failure? Most importantly none of the producers have reached out to People, Ideas & Objects to inquire about the Preliminary Specification ever, and I just checked, not in the past month either.

What we need to do is to begin with the development and implementation of the Preliminary Specification, our user community and their service provider organizations as the alternative to this madness. This will be the quickest route through our difficulties and the most effective financially, giving us a highly performative industry for at least the next 25 years. One in which the North American producer is provided with the most profitable means of oil and gas operations everywhere and always. What surprise will the crisis management focused bureaucrats spring for us next year or the year after that. Do we really believe that we can trust them to do the right thing during their current manufactured crisis?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Wednesday, March 09, 2022

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

 The uncaring nature of producer bureaucrats towards their business profitability has been on display for decades. The state of their business is in decline and severely deprecated in terms of its capacities and capabilities due to the long term financial damage sustained at their hands. That their business is in decline is not a concern for them and that is evident in the response we received to our July 4, 2019 white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” This paper was the most widely distributed document that I’ve ever produced and was wholly rejected by the bureaucrats. Why? When only nine months later oil traded as low as negative $40. History shows that since their rejection of the opportunity People, Ideas & Objects, our user community and their service providers were offering. Instead of seeing the effort needed to make oil and gas profitable everywhere and always, and shale commercial, we witnessed bureaucrats 2021 statement that shale was never financially viable and that clean energy was their future. I find it interesting to question what it is in these three events that reflect what the bureaucrats' motivation and desire is. They don’t want to consider making themselves “Profitable, North American Energy Independence -- Through the Commercialization of Shale,” concern themselves or even care about the day to day of their operations as they slip into negative $40 oil prices and prefer to ultimately abandon the industry in pursuit of other industries of which they have no understanding, capabilities or capacities. Maybe Elon Musk should be looking over his shoulder for his next competitors in space? The absolute shame of these officers and directors of the North American based producers!

As Russia is emphasizing to the world the importance of oil and gas, North American producers have declared they’re sauntering off into the sunset with dreams of solar panels and windmills. Seeking the ultimate environment of unaccountability in the clean energy industry that has never and will never perform. An industry where no one has generated anything of value and lives off the good graces of government largess. Where the ultimate viable scapegoat of, “we haven’t solved the commercial side of this business yet, but we’re close,” will be adequate to keep them in their familiar personal lifestyle of comfort and grace. And lastly let's recall that nothing was submitted or approved in these fundamental transitions of the focus of these producer firms. Transitions that are the polar opposite of the oil and gas business. An opposite that is best represented in the bureaucrats' decades-long allegation that they had to make sure that petroleum prices remained low enough to ensure clean energy never gained a competitive foothold. What they perceived as a looming, threatening competition in the form of clean energy and one in which they were willing to destroy their existing businesses through low prices to stop, is now the viable scapegoat they willingly invoke to justify sauntering off to. Is today’s flatfooted response to deal with North America's demand for more energy, where it seems that all of the consolidated producers have claimed they’ll not be responding in any way to increase their production, just a continuation of the muddle through we’ve seen from them these past decades? 

Overnight Germany has come around to the lack of any logic in their prior misguided multi-decade energy policies. The rest of the world seems to be waking up to the fact that oil and gas is critical to our existence as well. With war breaking out in Europe over the supply and delivery of natural gas. It will be interesting to see the final outcome of this initial conflict. Isn’t it also good to know that we have a dynamic, innovative, accountable and profitable industry here in North America? The mainstream media have been mouthing the words of any and all such nonsense for so long they don’t know what the facts are in anything. It’s their opinion that North America will just export what oil and gas we have to solve the energy difficulties of Europe. The fact that oil and gas is now the focus of the world has not and probably will not permeate the minds of these bureaucrats. The reason things are quiet on their front, with no comment about the situation may be due to their concern about looking directionless, leaderless, unknowing what to do and most of all uncaring about whatever business they may currently declare themselves to be in. It just so happens they can’t remember at the moment. It could also be a concern about what business they’ll have to shift to in the next quarter if things change again. “Probably best then just to muddle through.” If I sound disappointed with the performance of the North American oil and gas producers, I don’t know what gave it away. I obviously don’t see the opportunity in front of these producers in the fact that Russia provides the potential of such a high quality, long term viable scapegoat for them. And in terms of discussing new, sustainable, viable scapegoats, producers were quick to establish the Biden administration as another reason they’re unable to respond, while at the same time including their shareholders holding back capital from them to expand drilling but lets not forget the service industry. What they see is the crisis they’ve always depended on to “strike up the band” and get their party started. This time they know however, they’ll need to "turn it up to eleven." From World Oil. and here.

U.S. shale has a litany of complaints with the Biden administration, from pipeline permitting to leasing, and is still producing less oil and gas than before Covid-19 struck two years ago, even though prices for both are much higher. Shareholder demands to harvest the elevated prices for dividends and buybacks is the main driver for their conservatism, but executives claim a long-term commitment from the U.S. government to back fossil fuels could unlock more capital investment in fresh production. 

Vicki Hollub, CEO of Occidental

The world’s energy markets can’t rely on major growth in the Permian Basin U.S. shale patch to ease oil prices, according to Occidental Petroleum Corp. Chief Executive Officer Vicki Hollub.

It’s a “dire situation,” she said, adding that supply-chain constraints are severely limiting companies’ efforts to grow in the world’s largest shale basin. 

The Permian is also suffering from labor shortages, she said. Companies also don’t have enough rigs to support strong growth, and they’ve already used up most of the drilled-but-uncompleted wells that provided a quick uplift in growth in previous up cycles.

“The call for increased production from the U.S. at this point, especially with supply-chain challenges, can’t happen at the level that’s needed,” Hollub said. 

 OPEC meets with U.S. shale

Outgoing head of OPEC Mohammad Barkindo met with U.S. shale producers Monday night in Houston and said both groups are aligned in how they see the challenges posed to the oil industry by underinvestment.

“There’s no doubt we need to engage the investment community, the financial community, to address the encumbrances that are turning out to be obstacles on our way to access capital,” Barkindo said in an interview following the dinner meeting.

“The world is gradually but dangerously running out of spare capacity,” he said. “This is a function of the massive underinvestment in the industry in the last 10, 15 years.”

And then finally some sanity and focus.

OPEC Secretary General Mohammed Sanusi Barkindo 

It’s an oil civilization, and we cannot see, in all projections, where this will diminish.”

When asked if OPEC was concerned about losing market share if the U.S. and Canada ramp up shale exports, Barkindo said he is more concerned about meeting global demand, and at the end of the day, all oil producers are in the same boat.

It is important to now discuss my primary disagreement with how the producer bureaucrats account for the capital costs of their production. People, Ideas & Objects assert that a capital intensive industry will have a large component of the cost that is passed on to the consumer being capital in nature. Producers believe that building balance sheets and putting cash in the ground is their primary corporate objective. Theirs is a point of view which seeks to have the property, plant and equipment account emulate the value that is reported in the independent reserves report. Ours is the appropriate use of accounting as a measure of performance in the timely and accurate recognition of all of the costs of exploration and production. Their perspective is derived from their misinterpretation of the late 1970s SEC’s mandate that Full Cost accounting be used to value capital assets in oil and gas. They’ve misinterpreted this as the value must not exceed the reserves value, however they feel they need to come as close to the reserves value as possible. By doing so with all manner of spending by the producer capitalized as property, plant and equipment. We believe the most competitive and performant producers would seek to aggressively reduce the value of their property, plant and equipment account in order to achieve the lowest costs of any producer. The natural inverse of their method of overcapitalization is the overreporting of profitability in equal amounts. Leading to the overinvestment that has occurred with the systemic and culturally persistence North American overproduction that has been evident since the initial 1986 oil price collapse. The source of this chronic overproduction is easy to trace when we classify overproduction as being the same as unprofitable production. By recording literally everything that is spent as a capital cost of exploration and production, only operations and royalties were deducted from revenues with a sliver of depletion being the capital costs recognized for the years production volumes against the decades their reserve volumes will remain for that property.

And then came shale reserves. Which are highly prolific, high in their deliverability, massive in their scale of reserves over conventional reserves. Shale also has a much higher cost structure and a roller coaster ride of a decline curve. This decline curve begins as early as 18 months and can see the production deliverability collapse without substantial capital costs being incurred to remediate the decline. Only then to face the same decline curve in as little as 18 months. It is the high capital costs of the drilling of shale wells and the enormous costs of fracturing the formation that costs are so high. These capital costs are allocated across the reserves that are exposed to the well bore. And it is here, with the massive volume of those shale reserves that consume these high capital costs down to the relatively small dollar amount for each barrel of oil equivalent that is produced. It is then shale's precipitous decline curve that demands additional, extensive capital costs. Which of course is added to the capital costs of the reserves. Whether that is drilling additional laterals and fracing those or just re-fracing the existing lateral. What we know is that shale producers have been able to build their balance sheets handsomely in the shale era by putting an abundance of cash in the ground through shale operations. This accounting treatment in the financial statements is what investors, much like myself, were never able to fully appreciate, quickly learned it was as they suspected, and caused investors to begin their strike of the industry beginning in 2015. 

In 2020 the value of the reserves of the producers took a bit of a hit in terms of their value due to the prices of the commodities being severely depressed. Our sample of producers in 2020 were forced to recognize their capital costs on a more appropriate basis and that saw on a straight mathematical basis the amount of depletion being recognized over 4.0 years. Down from 7.43 years in 2019 and what we have in 2021 of 9.18 years. Who says bureaucrats are not culturally constrained. We see here that there is no desire to reduce their costs to lay claim to the lowest cost producer by continuing with the 4.0 years or lower. The opportunity to recognize greater volumes of capital costs due to the higher commodity prices is evident but not taken by any of the sample of producers. Regression back to the mean is their method of accounting operations. Nothing can, will or ever change, it is standard operating procedure.

I want to draw special attention to Crescent Point Energy and their financial statements for 2021. Crescent Point has raised $16.7 billion in their short existence. As of December 31, 2021 they had achieved retained losses totalling $11.3 billion, yes even in this specious reporting environment. In 2021 they recorded “profitability” of $2.376 billion Canadian. Which is a result of a 2021 reversal of a 2020 impairment charge to the reserves of $2.514 billion. Therefore in reality they actually lost $138 million during 2021 which in this reporting environment makes their performance disconcerting. What we now know of all of the producer bureaucrats from the 2021 financial reporting is that this movement back from 4.0 years in 2020 to 9.18 in 2021 is a simple continuation of the past, culturally this industry can’t, won’t and will not ever change. 

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Monday, March 07, 2022

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

 As the bureaucrats find they can now ease back into their couches and relax again, they’re finding that all along their couches were actually recliners! Life is good again and others' absolute care and concern for things has proven to be unwarranted. They say they’re fine and thank you for asking, and somehow they’ll continue to muddle through. They think they’re in the catbird seat and will ride out the consequences of their inaction to their ultimate personal prosperity. The message we should take from the fourth quarter 2021 reports is that the probability they’ll do anything about their ERP systems is now an exponent of zero.

What we also can determine is that the damage and destruction that is present in the industry has had the greatest impact on the service industry. This is only reasonable considering the methods used by the bureaucrats to hoard the financial resources of a primary industry within the producer themselves. Those other secondary and tertiary industries who are wholly dependent on these resources, were on their own when the bust aspect of the boom / bust economy came into play, there just wasn’t enough to go around. The effect their treatment has finally caused has been tragic and the service industry will take some deliberate, long term action in order to resuscitate it to the level necessary for a viable, profitable, energy independent North American oil and gas industry. As we’ve discussed here for the last many years, the next shoe to drop after the decline in the financial performance of the producers was the capabilities and capacities of the service industry and then it would move on to where we find ourselves today, having a broad, general impact on society. 

People, Ideas & Objects have been pointing out repeatedly the impact that oil and gas has in terms of man hours of its mechanical leverage in our extremely advanced economy. We’ve seen in many of the recent press reports that bureaucrats are satisfied with their production forecasts and will continue with their quite limited efforts to increase production. As to who consumers should turn to source their energy needs? There are 750 million barrels of oil in the strategic petroleum reserve. That’s at least two months supply! And that Russian guy, Vladimir has some extra he might want to sell. Check with him. We saw the producers were unable to source their needs to drill adequate volumes of oil and gas wells due to the lack of capacities in the service industry. This quote from World Oil quoting EOG Resources

Most of the best drilling rigs and fracking fleets already are under lease, Chief Operating Officer Billy Helms said: “There are not a lot of new pieces of equipment that can come into the market.”

Needless to say this quote, among other similar quotes, shot past all the other viable scapegoats used by bureaucrats these past decades, to score number one on our list of viable scapegoats of all time. I guess what we will have to do if we should ever see the mythic oil and gas service industry employee again. Is to give them a piece of our mind for messing up the producers future. It’s here in the cold hearted thickness of not being able to look past their own skin, accept any responsibility for their duty, their mistakes or to work to mitigate any prior errors that consumers can seek the comfort they need in knowing that they will be alone freezing in the dark with the half dead breaking down their front door searching for food. After all, the producer bureaucrats will be fine, pointing out your failures from a safe distance.

It’s also at this time that “things” are prosperous for our good friends, the producer bureaucrats. People will begin asking them once again what about People, Ideas & Objects and their Preliminary Specification? There was a time a few years ago when we reached the peak of our impact in the market. We had traction and were farther ahead than we are today in terms of seeking funding for the implementation and development of the Preliminary Specification, our user community and their service provider organizations. This was when the bureaucrats went to town on our solution and claimed that it would never work. That it was a crazy solution and would not be viable in the marketplace. I don’t raise this point for the petty reasons bureaucrats will accuse me of. I raise it due to the fact that this was their allegation then and it will be their allegation once more as I suspect People, Ideas & Objects are on a trajectory that will soon exceed that previous high point. 

The point is raised due to the fact that the alternative they did pursue was nothing and were shown to be uncaring and unsympathetic to the destruction and damage being realized throughout the greater oil and gas economy in North America. Even with the full knowledge of the issue as we identified for them. That which has been predicted here at People, Ideas & Objects as a consequence of the bureaucrats inaction regarding systemic North American oil and gas overproduction. Overproduction is the primary issue resolved in the Preliminary Specification, our user community and their service provider organizations. An issue we’ve noted its origins in the late 1970s with symptoms beginning to show as early as 1986. Our solution addresses these core issues and provides the most profitable means of oil and gas operations. Recall at the time the bureaucrats belittled our solution and repeatedly laughed at our focus on profits, they stated that “no one cared about profits.” Profitability is the methods and means of the operations that the Preliminary Specifications value proposition defines. One which we have stated since its publication in August 2012 that we provide the most profitable means of oil and gas operations. A value proposition whose differential to the history of the past decade of the Preliminary Specifications existence would have provided potentially a $1 trillion in incremental value add if it would have proceeded. My value propositions assertion may be laughed at now and alleged to be crazy by said bureaucrats however can be easily proven valid against the base case of their performance which includes a history of negative $40 oil and other such antics. I personally find selling oil for negative $40 to be quite crazy! Dare they take the opportunity to once again attack People, Ideas & Objects when asked about the Preliminary Specification I would hope that people remember this short bit of history and the legacy of this management's performance. One quarter's initial performance in the fourth quarter of 2021, due solely to commodity price increases, does not entitle a bureaucrat the means to regress back to their culturally destructive methods.

The inability to address, acknowledge and take responsibility for the situation we find ourselves is disconcerting. The Cheshire smiles, winks and nods between said bureaucrats reflect their imminent return to the good old days is not supported by the facts on the ground. They will feel and be emboldened and entrenched by their perseverance through these past years of their difficulty and their capacity to cling to power. They’ll feel, act and behave as if they’re invincible and be as obstinate and uncaring as could possibly be. If someone suggests there’s an issue, they will have already acted on that. If a new development arises in a discipline, they’ve implemented it already. Their capacity for dishonesty saw no depth of deception was too deep when excuses, blaming and viable scapegoats convinced at least themselves. It is the only reason I can see for their current delusion. Issues such as the small and junior producers no longer being viable will not be their domain of concern, even though they authored it. They’re consolidated and entrenched in a centralized world where every piece of paper has a home and a body keeping it warm and moving it to its final destination. 

What could have been is not what I want to think about People, Ideas & Objects as. Our job is becoming more difficult and the damage that we foresaw more tragic. The inverse to this tragedy is the personal compensation these chosen few of inactive bureaucrats are reaping now that they continue unobstructed. What I think we can show in these next few posts is the level of accountability that had been sought in the past has been for naught. Regression to the cultural ways has caused them to return to their means of accounting deception that I’ve criticized in this series repeatedly. Profitability is stellar, as reported, it's just not fully a real profitability that would stand up in comparison to other industries performance in terms of competing for capital. I do admit there are small elements of real profitability however, did you hear commodity prices are up! Profits will soon not matter again, “its reserves in the ground and they’re now worth more than last time we reported so be happy, sit down and shut up” they’ll say. That’s where we’re headed, and now we can include the consumer in these one way discussions. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Tuesday, November 09, 2021

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

 The perspective in which People, Ideas & Objects see the performance of the North American oil and gas producers stands in stark contrast to the culture that drives the industry. We believe that a capital intensive industry would have large elements of capital costs included in the cost of the commodities passed to the consumers. That profitability is necessary everywhere and always for a prosperous and healthy oil and gas, service and associated industries. The industry culture has developed over the past four decades to the level where it’s best represented by the claims of “building balance sheets” and “putting cash in the ground.” Where cash flow is deemed to be adequate as a performance measure, and that profitability doesn’t necessarily represent where the value is generated. Industry culture believes the value is represented in the reserves that are released as a result of the exploration and production conducted to expose them to the market. People, Ideas & Objects believe that reserves are useless and valueless if they can’t be produced profitably. The reserves present value today is negative as they demand cash in order to be produced. The industry is therefore worthless. A conclusion that industry leadership has also reached after decades of feigned self deception and aggressive, specious accounting. A leadership that has now capitulated on oil and gas’ viability to saunter over to clean energy and give it a try. Funded by oil and gas revenues that belong to shareholders who the leadership never hesitated or felt any remorse betraying before. 

Our sample of producers' third quarter financial statements show that culture is persistent and unchangeable. Left to itself it will continue with its status quo operation. This is affectionately known as “muddle through” in oil and gas. For People, Ideas & Objects Preliminary Specification to instil a culture of profitability everywhere and always within existing producers is an impossibility as the force of the existing culture would eventually consume everyone. It’s not going to happen and will not happen, we’ve known that from the beginning, and so have those that have prospered from the culture they’ve cultivated. Ours is a rebuilding of the industry brick by brick and stick by stick in the vision of the Preliminary Specification. A renewed method of how the industry interacts within itself and how its processes are conducted. Both in terms of the ERP software, administrative and accounting services. If you change the process you change the outcome. What is the status of the producers as they stand today? No one would deny that the oil and gas future has never been in such great demand. Society's ability to mechanically leverage a barrel of oil to at least 10,000 man hours of labor is the reason we’re able to live the luxuries that we do. At the same time the challenges to industry have never been greater. There are incremental issues that are far more complex than what has been faced before. And we have the alleged leadership of the North American producers sauntering off the stage in an active capitulation of responsibility to avoid the accountability they know they’ve used and abused. 

All of this speaks to the scope and scale of the damage that has been experienced and realized by these producers. The continuation of poor performance and deterioration of basic financial health of producer firms continues to decline as reported in their third quarter financial statements of 2021. There is no acceptable reason on earth why oil and gas should continue to operate under the fallacy of the “boom/bust” cycle. It is wholly attributable to bureaucratic laziness and sloth. The thought that oil and gas commodities are subject to price taker characteristics and “markets” somehow magically take all the production that producers could produce was the myth and general thinking. Markets do one and only one thing, pass information about that market in the form of its price. If that price is adequate to make a profit, then produce. The method used in the Preliminary Specification. This blog first raised the point that oil and gas commodities are subject to price maker characteristics in a post entitled “Times Like These Calls For…” on November 11, 2008. Thirteen years ago and industry bureaucrats have done nothing about it. Information that could have been used to generate the trillions of dollars of needed and necessary value to maintain a healthy, viable, prosperous and above all profitable oil and gas, service and associated industries. What’s your definition of sloth, or are these just opportunity costs as bureaucrats assert? Maybe I should bite my tongue but in the face of such unnecessary destruction within the industry I find it increasingly difficult to do so. Now, as we step into the broader societal damages these bureaucrats will never accept and hold themselves responsible or accountable for what prudent management or even just the ability to read a blog would have ensured was avoided.

I still don’t see the majority of these producers surviving these financial damages. The scope and scale of the wrought they’ve authored is well entrenched within the producers financial statements. What I see is the disproportionate size of their assets valuation as a result of “building balance sheets.” These assets have become disproportionate in terms of the overall size of the revenues they're generating. Accepting that these long term assets are bloated, conversely short term assets are abysmal. The level of debt being carried by most of the producers is unacceptably high. To clarify, that’s too much debt on asset valuations that are bloated disproportionately. Which is something that their banks appear to agree with. We believe the bloated asset balances more accurately represent the amounts that investors have subsidized consumption. Instead of passing these costs on, they were collected on the “well built, bigger, beautiful, balance sheet” so the CEO could strut down mainstreet and gloat about their spending. Where are the strategies? Where are the plans? Caught flat footed, again, just as they were in 2015 when their investors began their exit. Bureaucrats can conveniently ignore these issues as they replace them with larger, more urgent and critical ones. 

This is the frustrating aspect of all of this for me. Accepting that oil and gas commodities are price makers. Ensuring that the capital costs associated with exploration and production were passed on to consumers in a timely and accurate manner. These being the two basic principles of accounting. Producing only profitably as described above. This is the method that we’ve defined for the oil and gas producers within the Preliminary Specification. (Please recall it was published in its entirety in December 2013.) This would have ensured that the “cash they were putting in the ground” was being returned to them in a timely manner. Giving them the means in which to operate their organizations as businesses and pay down debt, fund their capital expenditures and dividend the appropriate earnings to their shareholders. It was just so much easier to continue duping investors. Where are their strategies today? Where are the plans? Caught flat footed, again, just as they were in 2015 when their investors began their exit. Bureaucrats can conveniently ignore these issues as they replace them with larger, more urgent and critical ones. 

Existential issues, enhanced complexity, cultural impedance and leadership abdication. Yet all I see for oil and gas is the most spectacular opportunity to produce profitably everywhere and always, and in the real sense of the word, to achieve energy independence on the North American continent and ensure that we remain the most powerful economy for the remainder of the century. Instead these facts were used as proof as far as the bureaucrats were concerned, that I’m crazy, that the Preliminary Specification wasn’t viable and they otherwise had this in hand. The only question I have is do these bureaucrats have the gumption to ask for another chance?

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here

Monday, November 08, 2021

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

 Elections for the U.S. House and Senate will be held in early November 2022. The premier issue will be the price of gasoline in the United States. OPEC+ seems to have learned the detrimental lessons behind the overproduction of commodities that follow the principles of price makers. They continue to supply the market with reasonable increases each month. A more moderate approach than what has been done before. North American producers may have learned the same lesson, although the financial devastation they’ve caused their producer firms, the “hilarious” comments from the Biden regime, or clean energy being bureaucrats true calling. The lack of response to the higher commodity prices is difficult to discern why their response is as muted as it is. There is one other possibility, the lack of capacities and capabilities in the service industry. And although producer bureaucrats did so much of the hard work and effort that was needed to turn the business around and to report their specious profits in the third quarter of 2021. The same kind of profits they’ve been reporting since as early as 1983. They seem to know and understand that they’ve authored their own demise to coincide with these escalating commodity prices, the democratic party vaporizing and gasoline prices revealing the fallacies of the green agenda. It’s a different quarter but with a new twist, hedges. Those current, non-cash items that don’t appear in their “non-gaap” earnings quoted in the markets. 

It could be argued that I see the financial situation in oil and gas a bit differently than most. My bias arises as a result of opinions formed decades ago and the fact that I’ve banked everything I have on what I believed to be an existential issue that would eventually destroy the North American producers and everything, that is everything associated with it. As of a few years ago I believed we reached the point where the financial damage was so detrimental that nothing, that is absolutely nothing, could return North American producers under their current administration to prosperity, ever, and I mean for all time. 

It is through the review of our sample of producers' third quarter financial reports that I see a trend where accounts payable are ballooning by 10.46% just from the third quarter of 2021. Which I realize now is its own 20.84% increase in accounts payable for just the second quarter! A 33% increase in 6 months. Why? We saw this a few years ago when producers sought to continue their capital programs by using the good will of the service industry. Paying for their capital expenditures programs on an extended 18 month payment cycle. Capital programs producers were unable to finance in any of the more “traditional” ways. Due to their financial current position and the volume of capital expenditures that are now being undertaken we know that’s not happening again. So what is causing this bloating of accounts payable? I believe it is the inter industry trade payables and receivables associated with the joint interest billing between producers. Accounts receivable in the third quarter of 2021 is up 6.56% in the third quarter. The second quarter was also up by 14%. One would not rise without the other if it wasn’t the joint interest billings. Operators who are in some cases incurring the operating costs on behalf of the joint account are also leveraging their gas and oil contracts for all of their working interest partners' production in the property. The more production they control on behalf of their partners the better terms they can negotiate with buyers. Therefore the joint interest billings represent the net operational proceeds of the production for the property. These payments are made monthly to their partners based on the prior production months accruals. People, Ideas & Objects suspicion is that these are the reasons why these a/c payables accounts are ballooning, and why the associated accounts receivable are doing the same, somewhat in concert. In terms of materiality, accounts payable have now ballooned beyond the amounts during the abuse producers exercised against the service industry. The question therefore is why would producers, if our suspicions were true, be holding the net proceeds of their partners? The counter argument of the consolidation of producers may not hold when it is realized that production of our sample is up 0.21% in the third, and 9.45% in the second quarter.

I have argued against the use of hedging before. With People, Ideas & Objects there would be no need to have such derivatives contracts when all production is produced profitably everywhere and always. The implied guarantee of the Preliminary Specification. I see that hedging is used by bureaucrats to instill the level of mediocrity that they seek. If the producers see that the outcome of the firm is predetermined to be x profit based on a hedged price of $60. Why would they seek to outperform or enhance the producer's performance? They wouldn’t because they knew they couldn’t. The only thing they risked was making mistakes that ended up costing them and they’d be responsible. The mindset that has spawned the “muddle through” strategy. When it was learned many decades ago that specious accounting enabled profits to be whatever “management” determined them to be, they knew they could call upon any performance criteria they needed to satisfy the demands upon them. Hence the industry's cultural degradation commenced. This led to the first overproduction related oil collapse in 1986.  

Many of today’s futures contracts were entered into by the producers just after April 2020 when the price of oil dipped to negative $40.00. Spooked and looking for some solid ground the majority of the contracts are substantially below the current commodity prices. Placing the producers on the hook for paying a reasonably high differential in comparison to the current price of $82.50 for oil and $5.50 for natural gas to the hedged price. The value of these losses, both realized and unrealized, for our sample of producers in the third quarter increased from the second quarter's loss of $8.964 billion to $16.879 billion. Almost a doubling of the losses with the majority, about 80% being unrealized. Recall our sample of producers represent a diversity of the North American based producers that are responsible for 11.007 mmboe / day. Many of these contracts extend for many years, however continue almost unanimously through 2022. Causing an enhanced demand for cash, during a time when investors and bankers are not interested in helping out. Seeking financial assistance to cover the differential on these contracts is not going to draw either of those parties back to the table. The reason this is such a material issue is to the larger point of not being able to and having no capacity to increase production to meet resurgent demand. At the same time OPEC+ are slowly returning their production to market. Causing further upward pressure on prices throughout the next few years, and hence larger losses on these contracts.

As we’ll see when producers turn to cannibalizing their working interest partners we can only think it’s time. I could always be mistaken about my suspicions. However, I would put my record of accuracy in identifying issues and providing solutions such as the Preliminary Specification against the bureaucrats' lack of caring about the business and self aggrandizement over these past 30 years. Their renewed vision of clean energy and capitulation of North American oil and gas’ viability, including shale. These latter points are almost secondary or minor points in my argument. 

Please note that Conoco is a member of our producer sample. They do not hold any of these contracts. Have therefore not incurred any of these losses and their working capital represents 109% of our samples total. Their cash is approximately $10 billion and are by far the healthiest position of all the producers we sample. Interestingly their accounts payable and receivable accounts also escalated in concert with the other producers. (13.45% in the second, and 28.21 in the third quarter. Concho’s acquisition was completed on January 15, 2021 causing Conoco’s a/c payable to increase 33.88% during the first quarter.) Showing this is an industry related, possibly trade payable / receivable issue associated with their joint accounts. I doubt Conoco would want to be the only one paying their bills in the industry. For three quarters our sample of producers had revenues of $195 billion and accounts payable were $76 billion. Representing 3.5 months of the producer's annual production or 255% of 2021 capital expenditures incurred to date. At a time when some commodity prices are healthier than they’ve been for a decade. Payables and receivables are ballooning uncontrollably, cash and working capital outside of Conoco are in decline. Cash and working capital deterioration have been a constant and systemic issue we’ve been arguing here at People, Ideas & Objects. If you don’t have “real” profitability you’re not building value and investors were used until 2015 to backfill the bureaucrats' personal take. I believe this current action is the bureaucrats reading the writing on the wall and attempting to shore up some cash by feeding off their own partners. No more excuses, no more blaming and no more viable scapegoats. It's a simple matter of eat, or be eaten. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here

Wednesday, November 03, 2021

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

 Producers are having their bluff called in their third quarter reports of 2021. None other than Royal Dutch Shell came under criticism from Third Point hedge fund manager Dan Loeb who has taken a position of $500 million to a $1billion in the company. What producer bureaucrats have done to themselves is quite evident in a series of articles on the subject. To start things off Mr. Loeb sent an Investor Letter that stated.

Shell has too many competing stakeholders pushing it in too many different directions, resulting in an incoherent and conflicting set of strategies attempting to appease multiple interests but satisfying none.

At this point no concrete actions are recommended by Mr. Loeb, such as new directors or proxy action. He did suggest that as many as four divisions, or separately traded entities should be the result of the breakup of Shell. I see this more as an invitation for other investors to join him. The title of the CNBC article is “Shell vs. Dan Loeb: It’s Open Season for Investors on Big Oil’s Future,” spelling out a rather interesting next few months. 

People, Ideas & Objects have been arguing that producer moves into clean energy investments are unauthorized and wholly unacceptable. If investors believed in clean energy they’d sell their oil and gas producers and buy into the clean energy industry. They don’t need bureaucrats to make those decisions for them. Nor do they ever desire to have bureaucrats make changes in the focus of the organization, whether that is a change into clean energy or to compete with WalMart. I’m still waiting for the fire proof set top boxes for Enron’s broadband Internet service. Taking revenues from oil and gas to fund other businesses is inappropriate, should never be done and certainly never without the express authorization of shareholders. Of the North American based producers, I’ve seen none of them authorized in such ways. The facade of a board of directors vote in last year's Exxon annual meeting I feel was a contrived effort to show the world that Exxon was moving into the clean energy direction at the behest of its shareholders. Again if shareholders want to invest in clean energy there’s nothing stopping them. Reflected in the CNBC article Shell’s bureaucratic attitude is on display. 

“A very significant part of this energy transition is going to be funded by the legacy businesses that we still have,” Shell CEO Ben van Beurden said on the call with reporters from multiple publications on Thursday. “If you want to exclude us from it, I don’t think it will go as fast as it would otherwise go.” Being able to replicate its strategy would be more difficult across multiple companies, he said, but the argument that the balance sheet of the legacy firm is critical to energy transition remains harder to prove in the short-term when the majority of its cash management goes back to shareholders as in the Permian deal.

The Permian deal was Shell selling all of its Permian assets to Conoco for $9 billion. $7 billion of which was a dividend and $2 billion was believed to be committed to clean energy. Later in the same article it shows the pickle that bureaucrats have put themselves in. Why People, Ideas & Objects are against the diversion of oil and gas revenues. And why it's no longer acceptable that corporations make these types of decisions on behalf of their shareholders, since at least the 1980s. 

The traditional ethos of the oil and gas investor is to hold the stock with the expectation that you will suffer through bad years in the cycle when oil prices are low but when things go back up you will be rewarded and compensated for the additional volatility risk. And because of that, “it’s hard to say we won’t be able to compensate you now, you have to be patient,” Dalman added.

Shell is the first producer to be faced with the fact that any diversion of revenues from oil and gas into clean energy is never going to fly. This Forbes article, which is as consequentially titled as the CNBC article, “One Foot on the Dock, Why Breaking Up Shell May be Just the Beginning” goes into great detail as to why Loeb’s Third Point hedge fund is acting in its best interest in suggesting the breakup of Shell. Forbes analysis is based on the history of many other such attempts in other industries and their failed outcomes. Although it does not mention Enron’s broadband investment.

Recently in congressional hearings Shell’s North American President Gretchen Watkins did her best deer in the headlights routine when a congresswoman presented her with a mason jar full of M&M’s to demonstrate Shell’s capital expenditures in clean energy vs oil and gas. Not taking the opportunity to fully explain her point about reliable energy investments, and the mortal dependence the congresswoman's constituents had on the reliability of oil and gas. This is the failure of all the producer bureaucrats and they’re therefore the product of their own undoing. As Dan Loeb indicated, their conflicting objectives make them mute and unable to utter a coherent statement. Particularly in the face of such ridiculous presentations involving M&M’s. Their past promises to oil and gas investors who built these companies with the other “stakeholders” Loeb is discussing, are not fulfilled when the fruits of their efforts are used surreptitiously by unaccountable bureaucrats. But the ultimate conflict comes about by the fact that this entire contrived clean energy initiatives were alleged to have been at the behest of their shareholders. So now they’ll either have to ignore these same shareholders who bureaucrats claimed told them to focus on clean energy? Or tell the world their shareholders are now lying and their story has changed by wanting to break up the company. 

Notably Loeb stated the oil and gas part of Shell was being valued at close to nothing. When the CEO’s hide from their job of selling what it is they’re doing, pretending to be in other businesses, why would anyone place any value on that. Bureaucrats should welcome the changes that Loeb is initiating. It provides them with their much sought after and welcome home in clean energy. A clean divorce from dirty oil. A place where they’ll be able to live in peace and harmony with the environment and save the planet. Able to continue with their well entrenched “muddle through” and “do nothing” strategy and operating procedure in their chosen clean energy business. Well not so fast, they’re now stuck in startup organizations with no revenues and little prospects of profitability or ability to generate value. Let’s wish them luck nonetheless.

This is their ultimate conflict and contradiction. Shareholders have been demanding producers build value for them where their dividends and yields are competitive in the North American capital markets. In addition, shareholders have demanded producers begin using tier 1 ERP providers, of which the Preliminary Specification uses Oracle Cloud ERP as the base of our solution. Investors are aware of the nature of the accounting related problems in the industry. Investors are fully aware of the nature of how they were treated pre 2015. Investors know that producers can’t, won’t and will not ever approach the oil and gas business constructively. Bureaucrats don’t know how to make money and the damning consequence of the long term effect of this is their culture has no understanding of why, how or what to do to make a profit. They don’t have the necessary ERP systems available to tell them to determine what’s profitable and what’s being produced at a loss. The devastation they’ve orchestrated throughout the primary, secondary and tertiary industries affiliated with oil and gas are all severely damaged. For the past four decades the only prosperous area of the industry is the innovative executive compensation that has been paid to those who never had anyone but their own interests in mind. Those who had the responsibility and authority to profitably build the industry, and those who chose to silence and eliminate anyone that raised any issues.

Will investors be successful in their desire to break up these firms between clean energy and oil & gas? The ultimate message investors can send to management is to cut off a firm's funding. Oil and gas investors began doing this in 2015. Six years of “muddle through” later we see nothing has been done to acknowledge or address the specific issues and deal with the concerns their investors raised. The only thing leadership did was declare their favored shale investment and all of oil and gas to be untenable, prompting their move to clean energy. Diverting revenues to unauthorized and unrelated businesses where they have no competitive advantages, capacities or capabilities. Industries that have been proven to be financial sinkholes. Therefore I think it’s clear what will happen. Bureaucrats will be sent packing to their preferred destination. When the alleged leadership has other ideas and a direction that is counter to the business they’re in, don't listen or act, what choices are there? None. The entire oil and gas industry in North America and its secondary and tertiary industries have been devastated and cannibalized by the lack of profitability being generated in the producer firms. Bureaucrats may think they deserve another chance, I think that opportunity passed them by many decades ago. Back when they were passing their management off as value generating, when they culturally slipped into the abyss of not knowing what profits are, where they were being made or lost or how exactly to earn them within their organizations. Instituting a culture unwilling to change for any purpose and never at the behest of their investors. Their investors they’ve refused to respect or even acknowledge their existence. All in order to ensure the bureaucrats franchise of self aggrandizement remained intact. But then I’m biased. The one thing I hope to see more than anything is the officers and directors asking for a seat at the table. And as I was told by them when I initially proposed the use of the Joint Operating Committee in August 2003, they may find they’re “persona non grata.”

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here

Friday, August 13, 2021

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

 My producer bureaucratic friends will be looking at the title of the post and saying Part LXX, same as Part I through to Part LXIX. And they would be right. The officers of the oil and gas producers do not understand my argument. My repetitiveness is attributable to their thickness and obstinacy in terms of understanding and accepting the argument. We can be sure they’ll stop reading now. The tragedy and devastation that is the North American oil and gas industry is by a substantial margin the largest, most protracted and difficult issue that it has ever faced. Trillions of dollars have been destroyed in the process of misunderstanding the point that I’ve had to repeat ad nauseum. Consider for a moment the most devastating action that can occur to a business or industry is that the investors and bankers lose faith and walk. We’ll be into our seventh year of this event occuring in North American oil and gas. Nothing has happened. The issue is not discussed, as it appears there is no issue other than covid, OPEC or the moon. A failure to accept the basic business cause and effect that has been known and understood for the many hundreds of years that accounting has been established isn’t understood. I think the best way to recruit oil and gas personnel is to hold up a pack of 3M Post-it notes and ask them if it’s an asset or a cost. If they say it’s an asset then you should hire them for the oil and gas producer immediately. You have a potential corporate officer in your midst. Yes I’m afraid this is representative of the issue that has led to the damage and destruction that has caused trillions of dollars of waste, rendered the industry valueless as it takes capital to just operate it at a loss and has no viable future beyond the absolute current horizon. Let me summarize once again therefore, the issue as it stands for our good friends the producer bureaucrats and why this has happened. Please read the second paragraph of this post carefully. Your career and personal financial health is in jeopardy. 

Overproduction throughout North America has been caused through the inappropriate recording of the majority of the producer's costs, outside of operations, as capital assets in property, plant and equipment. At the same time maintaining those costs as assets on the balance sheet for decades in an annual contest to determine who’s built the biggest balance sheet. Simply, over reported assets create the exact and equal amount of over reported profit attracting over investment, eventually leading to chronic overproduction. This overproduction is also represented in oil and gas through the breakdown of oil and gas commodity prices that fall under the economic principle of price makers. People, Ideas & Objects assert that overproduction is also defined as “real” unprofitable production. Which has consistently occurred for thirty five years that we’ve documented through the inappropriate accounting methods of recording most of the costs outside of operations as oil and gas assets. Which has been necessary due to the depressed oil and gas commodity prices. The costs that should be captured and passed on through the commodity prices to the consumers, in a capital intensive industry, should reflect that the majority of those costs are capital in nature. Instead producer bureaucrats collect assets on the balance sheet in a vain contest to see who will be this year's biggest spendaholic. And to chronicle the dollar amount on their balance sheets of the amount that investors have been forced to subsidize consumers consumption. 

This accounting game has been played throughout the industry since the time that the SEC instituted their Full Cost accounting methods for oil and gas in the late 1970’s. These regulations seek to establish the outer limit of what is acceptable in terms of asset valuation on the balance sheet. Producer bureaucrats have used them as targets to be met every year by any means possible. I’ll need to be shown any evidence of a producer that is the exception. It is times such as 2021 that we see the means in which this is done. 

As of December 31, 2020 our sample of producers had recorded property, plant and equipment of $407.235 billion. For 2020 they recognized depletion and incurred significant levels of impairments (breaches of the SEC regulations acceptable outer limit) due to the covid induced price collapse of $101.753 billion. On a straight mathematical basis this level of depletion would retire that balance of property, plant and equipment in the subsequent four years assuming no further capital expenditures were incurred. What I would assume to be a more representative amount of annual depletion in today’s capital markets, of a capital intensive business, would be a 30 - 36 month depletion schedule. 

In 2021 we have a different situation with prices of the commodities supporting a larger capitalization of the assets on a producers balance sheet based on the oil and gas reserves valuation. A bureaucratically deemed necessity to become a contestant in each year's balance sheet beauty contest. Therefore for the six months ended 2021 we have property, plant and equipment of $448.825 billion, depletion and impairments of $22.982 billion, or $45.784 billion of depletion and impairments on an annualized basis. Implying that those assets would be retired over the course of 9.8 years on the same simple mathematical basis. Buried in this number are property, plant and equipment increases of $41.867 billion in acquisitions that our sample of producers undertook during the first half of 2021. These acquisitions are immaterial to the point I’m making. The extension of the depletion rate is the other half of the method that bureaucrats use to achieve their objectives of building balance sheets and are subsequently able to continue reporting their “profits” for 2021. This method adopts the fact the U.S. has approximately 63 years of technically recoverable resources of natural gas, shale has had a similar effect on oil reserves. I’ve consistently failed to understand the business case for depleting assets over the life of these reserves. How oil and gas reserves are connected in any way to the financial performance of the producer, particularly with regard to a four decade history of the reserves inability to produce a “real” profit. Accounting is about performance, not value. What we’re being provided with today is a solution in the form of consolidation of failed bureaucracies into larger bureaucracies which will somehow overcome the four decades of established culture of bureaucratic systemic, failed behavior? 

There is a fundamental difference of opinion between the producer bureaucrats and People, Ideas & Objects way of thinking regarding the recording of property, plant and equipment, depletion and impairment. We see the producers' interpretation and the methods they use. Ours is that the most competitive producer would seek to maintain a balance of $0.00 in property, plant and equipment. Achieving the lowest cost of capital at all times. The implications of our method may not be appreciated by the producer bureaucrats so I’ll spell them out. This $0.00 balance of course would be unattainable but the objective is to reduce any balance as quickly as possible and would reflect that the producer had recognized their costs of capital in a capital intensive industry, in a competitive environment faster than other producers due to their higher profitability and better performance. Under the Preliminary Specification, Joint Operating Committees will be evaluated as to their determination of profitability to produce and if unable to be produced profitably they’ll be shut-in. A high performing producer may therefore achieve profitable production all the time at 100% of their production profile, and would be retiring their property, plant and equipment account faster than a profitable producer who was able to produce only 80% of their production profile. Let’s not forget the validity of the bureaucrats' claim that you wouldn’t recognize any capital in an environment where there were business difficulties or hardships, in the short term. We concur with this and have applied it in its proper context, in the short term. When the decision is made to produce or shut-in a property due to its profitability as proposed in the Preliminary Specification the shut-in properties will not attract any of their costs of capital during these times of hardship. This contrasts with the bureaucrats method of deferring the majority of their recognition of capital costs, or as we call them today “the unrealized capital costs and losses of past production” from their balance sheet for eternity on the basis that it’s another bust year in their capitulation to a boom / bust business cycle that every other industry has worked out of their business model. 

People, Ideas & Objects defined competitive game is the inverse of the beauty contests best built, big, beautiful, balance sheet. The benefits of our business approach include higher levels of cash flow, their favorite measure would be ballistic and enable them to pursue opportunities in the market at their discretion and on their terms. Investors would be more than satisfied, bank debt would be employed for its appropriate purpose of leveraging the organization's capital structure and not deemed as “liquidity” from unused lines of credit as they are today. Cash and working capital would be highly problematic due to their “bank” like abundance. They’ve never considered that if they weren’t carrying assets as property, plant and equipment they would be carrying assets of some form in a commensurate amount, would they not? (See Apple’s cash management difficulties and pathetic level of property, plant and equipment. Who does Apple think they are?) 

This prosperous environment would be a constant state where the costs of oil and gas, due to its ever escalating and capital intensive nature, are always being captured and passed onto the consumers in a reasonable, timely, accurate and profitable manner. Providing the producers employees with the confidence and knowledge they need to commit to a career in oil and gas without the substantial risk to their family and mortgage. The service industry would be able to count on a consistency in the demand for their service to be better able to serve their customers, the oil and gas producers. And on down the line throughout the greater oil and gas economy. This is the vision that I see of what’s possible and what I assume would be considered the normal course of the industries business operations. That this is not within the realm of consideration or the current industry's objectives is a tragedy. Our vision is a polar contrast to what exists today, the past four decade history and bureaucratic legacy. This is what I’ve always considered as the bureaucrats' ongoing damage and their cumulative destruction. What do they call it, “muddle along?” And what we get instead is a refusal to hear People, Ideas & Objects message, absolute harmony in the “building of balance sheets” and “muddle along” strategy seeking to satisfy what bureaucrats believe they hear from their investors. Investors are only interested in “real” profitability. Environmentally woke directors at Exxon, elected under a contrived voting ritual aren't representative. The message that People, Ideas & Objects offers the producer bureaucrats is creative destruction and disintermediation of their personal interests. That is the issue that is being decided at the board of directors this month. And as of today I’ve still heard nothing, so we can assume they’ll continue in their ways. 

Back to the point of the expansion of the number of years of depletion of capital assets. We saw in the second quarter of 2021 a reversal of some of the 2020 impairments having an impact as well. One of our sample producers reversed $2.5 billion of 2020s reported impairments on their $1.029 billion in the first half of 2021 oil and gas revenues. The amount recorded as depletion and impairments for 2021 was therefore negative $2.165 billion which miraculously corresponds exactly to the $2.165 billion in profit that was reported. Math is so much easier when you understand how it can work for you. 

The number of share buybacks was much lower than I was alleging in my “Managed Industry Hypothesis.” There were only $2.2 billion in share buy backs by our sample of producers. However, the producers that did participate were the few with cash balances and those that were active in the acquisition market. Was I wrong about these hypothese? Yes, I think I was unable to comprehend the potential for the success they’ve achieved. The only lingering unanswered question I have is why were the values of the acquisitions done at the inflated prices of property, plant and equipment when the asset market prices were so impaired? Even Chesapeake’s acquisition of Vine on Wednesday was at 1.97 times Vine’s market capitalization? There must be significant competition in the market for these oil and gas producers! My associated abandonment hypothesis is also out as it would seem bureaucrats have regained the confidence and control they need with the current higher commodity prices. They certainly have their swagger back. The question remains will that alleviate the pressure on the directors and allow them to pass on the decision we’ve asked of them in our July RFP Response process? In this game I call life I say no. Clearly no change in behavior is evident in the bureaucratic mischief being displayed in the second quarter reporting of 2021. We’ll get what we’ve been getting for decades if the director's action is not taken. And after the “record cash flow” period being experienced today eventually leads once again to negative oil prices, we’ll relive the horror once again. I will once again quote General Eric Shinseki, Former U.S. Army Chief of Staff. “If you don’t like change, you’re going to like irrelevance even less.” To which side of the fence this applies, the directors or the bureaucrats is to be determined. I’ll remind directors that the two highest costs an organization incurs today are time and errors, particularly uncorrected errors.

The only solution as it stands today, from a creative destruction and disintermediation point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

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, everywhere and always. 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. We’ve joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here