My Argument, Part XXII
I’ve commented before that Chevron is the most aggressive that I’ve seen in terms of storing the cost of past production as property, plant and equipment. Their total stands today at one quarter of a trillion dollars. At current rates of depletion that will take 13 years to realize all of these costs, assuming that no more is spent on capital expenditures. That’s a lot of money and Chevron doesn’t produce a lot of money. Their cash flow for 2016 was $13.4 billion. That’s 5% cash generation from a quarter trillion investment. Another difficult to accept number is that 59.04% of that cash flow is dedicated to maintaining their dividend. Free cash flow is negative $9.032 billion. These last three points support People, Ideas & Objects conclusion that oil and gas production needs a tripling of oil and gas commodity prices in order to avoid further financial disaster and industry degradation. The only means in which to achieve this is through the Preliminary Specifications decentralized production models price maker strategy.
If we flip over to the other coast we find another household name in Hess Corporation. Here we have the biggest disaster of the fourth quarter reporting season, so far. We’ve only seen the beginning of the ongoing catastrophe, there are about 60% of the firms yet to report. To Hess’s credit, as I am seeing in a number of producers, they’re reducing the number of years in which they are depleting property, plant and equipment. Moving from 6.83 years to 5.04 years in just the three months since the third quarter. This is the kind of progress that I am seeing at a handful of producers. It is time to rectify this issue and Hess are moving in the right direction on this issue. Still at that, $24 billion in assets generating $795 million, or 3%, in cash flow. These are poorly performing assets. You could buy bonds and be further ahead, particularly when you see that Hess lost $6.173 billion in 2016.
Most of the Hess loss is attributable to taxes payable. Oil and gas companies are expert at deferring their tax liabilities. You can pay your taxes at the time you earn the money, or defer them, and have them come due at the most inopportune time. All this and Hess gets an overall reduction in their production profile of 15% from 368,000 bopd to 311,000 bopd. Their dividend is keeping their valuation in the marketplace around four times what a normal valuation based on cash flow would be. They too are currently trading at 22.6 times cash flow.
If you’re not concerned about the financial health and survivability of these producers and the industry then you haven’t been listening. Here are three household “blue chip” names that have been run into the ground as a result of the overproduction and oversupply of oil and gas. The decline in oil and gas prices have eaten away at the core of these producers and there is nothing left. If we assume that 75% of property plant and equipment are costs that are attributable to past production. Which is what I feel is a reasonable and representative assessment. Then the writing down of those assets would eliminate all of the share equity of each of these producers. I think that is a reasonable way to look at the situation. The assets are not productive in any sense, they should flow to the income statement as a result. What you have left are heavily indebted producers. If they were able to dedicate all of their cash flow towards paying down their debts, it would take each of them four to six years to accomplish that. A lifetime to pay off their debts in their current configuration.
The sum total of all of this is it doesn’t matter if you’re Chevron, Hess, Occidental or Bob’s Oil and Gas. You don’t receive enough for the products that you produce. Through accounting trickery over the past four decades and overproduction these producers have convinced themselves that they were doing something productive. Now it is clearly evident that they’re not and haven’t been for a long time. Storing costs on the balance sheet is a scam that needs to stop. What it represents is the subsidy that the energy consumers have received from the investors of the oil and gas producers.
The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.