These Are Not the Leaders We're Looking For, Part IX
Introduction
North American producer firms need to ask themselves how they’ll address the issues present in their business. How will they reestablish a basis of building value throughout the greater oil & gas economy. People, Ideas & Objects Preliminary Specification provides oil & gas producers with the most profitable means of oil & gas operations, everywhere and always. Last week People, Ideas & Objects detailed some of the issues producers need to undertake to deal with the natural gas price issues. Noting our Preliminary Specification will provide accounting information to determine each individual North American properties profitability. Therefore providing the ability to determine why a property is unprofitable and the justification for shutting-in of any unprofitable production. And how there may be dozens of other natural gas price related issues that need to be addressed by producer officers and directors. Issues such as excessive storage capacity and LNG’s propensity to realize substantial unclaimed value from natural gas producers exploration and production.
We noted producers will need to invest substantial efforts in rehabilitating the natural gas marketplace due to the damage reflected there. These are but a brief listing of what is necessary to deal with just the natural gas price issue. What producer officers and directors should be concerned with would include a list of serious issues possibly in the hundreds when considering the full scope of their business. To mouth the words “muddle through” and issue a few promises in another press release, ignores and avoids the significance of the issues, the state of affairs in oil & gas and the dire scope of their consequences.
“Muddle Through”
Nothing is being done to identify these issues in the industry. When the value of the industry is believed to be generated by drilling wells. Solely involved in the spending of money. What could go wrong and what more could there be to do? This has carried on to the point that serious damage began to be realized throughout the industry. Beginning with the July 1986 oil price collapse. If “muddle through” was not the strategy and operating procedure of the industry this should have been the first fire alarm that called everyone to immediate action. It was not.
It’s 2024 and I can say that there does not seem to be any difference in the attitudes and behaviors of the leadership in oil & gas. As a result they have lost on a comprehensive basis throughout the industry the faith, goodwill, trust and belief they’ll be able to do anything about the situation they’ve stumbled blindly upon, being the consequences of their own inaction. It is incomprehensible that since 2015 their own investors have denied them additional capital due to the inability to understand what it is they’ve done. Officers and directors assumed, given time, their investors would see the wisdom of their ways and relent to once again forward the proceeds to continue their “muddle through” ways.
Dividends?
The one change investors have been able to achieve is to discipline producers to be paying dividends on a regular basis. I would suggest calling these dividends is a bit of a stretch for me. The performance of the industry has been so degraded through the process of “muddle through” as to be about 40% of what a competitive industry would be able to perform. I’ll address why in the next paragraph. What I want to do here is focus on why dividends are important to the health, prosperity and competitiveness in the industry. The following is a quote from Milton Friedman in his book “Capitalism and Freedom.”
Dividends to shareholders keep the firm competitive and fit. Right or wrong, good or bad decisions are made. The question is who should be the one making the bad decisions? The corporation or its owners with their own money? The answer for me is obvious, you should do what you want with your money. If producers want or need money, it should be within their domain of understanding that they can have all they ever wanted by running a competitive and profitable business.
Capitalization Policies
Where the performance of the oil & gas industry is and why People, Ideas & Objects assess it as abysmal. Capitalization under SEC guidelines permits a producer to include costs up to the present value of the proven reserves. This is the limit of what is acceptable under the guidelines for oil & gas exploration and production. North American producers treat it as a target to be reached by the producer each year. Seemingly unaware it would be the most competitive producer who had retired their costs in their property, plant and equipment account. For every dollar that is recorded in property, plant and equipment that would be considered an overvaluation from any reasonable point of view. And therefore has an equal amount of overreported profitability. Based on this method of SEC reporting, it creates a situation where the spending of money is literally profitable.
When profitability is reported with little effort outside of just spending money. It has a number of insidious effects on the organization. Who is going to criticize those involved, who is going to demand better and why would they ask such questions? Those who are endowed with the authority to spend money take on the aura of having the midas touch. Investors who see the profitability as what they assume it means, real profits, provide the spenders with more. The point of this is the SEC regulations came into being in the late 1970s and since then this culture of spending has driven a deterioration in competitive performance of the North American producers.
The Consequences
Overproduction of North American oil & gas is chronic with intermittent outright collapses and even negative commodity prices. We can assume that over the past 45+ years there has been overproduction, or unprofitable production as we describe it, in the North American market throughout that period. Therefore commodity prices have been depressed everywhere and always. Secondly, any spending is less efficient than what would otherwise be the case. And I may only be thinking about the creative executive compensation when I state that. Time slips from the point of view of deadlines and what is acceptable in terms of individual contributions. These become cultural norms and are eroded further as time goes on and there is no one left to say otherwise. Claiming to be innovative while ignoring commodity price collapses for 38 years, and People, Ideas & Objects Preliminary Specification for 33 years doesn’t qualify anyone to call themselves innovative.
Therefore, what is the level of competitive performance in North American oil & gas? Extremely poor due to the fact that capital assets are depleted over decades in almost every producer's case. When other industries provide the opportunity to process investments in one to two years and not only double but pay out their money. A ten percent dividend on a 40% performing business model with bloated assets which return the capital over a 10 to 15 year period is an uncompetitive performance in today’s capital markets.
When investors cut funding, this too should have been an immediate call to action and focused the officers and directors attention. The significance of the investors' action and its consequences has created no discussion outside of this blog for almost a decade! When individuals start organizations, such as People, Ideas & Objects for example. To address these points and offer solutions that would remedy these issues. Warning of dire, trillion dollar consequences if not addressed. And these people are only laughed at, run out of town and dealt with violently. That is my 33 year history of attempting to provide solutions for them to fix their business. In 2023 People, Ideas & Objects documented the fact that North American producers lost $4 trillion in natural gas revenues in the past 17 years. Only recently has attention towards these issues begun. And only in the form of enhanced volumes of press releases. Four companies were moved to the point of issuing press releases claiming action will be taken. Not one call to People, Ideas & Objects however.
What we can state unequivocally today is that there has been no commercial value gained from the production of 764 TCF of natural gas produced during this period. Attempting to shut-in production today, when producers' systems are inadequate to identify the source of any unprofitable production will prove futile. People, Ideas & Objects suspects this may be the reason behind this activity and is designed to prove the Preliminary Specification ability to shut-in production doesn’t work. (Please review the prior post.)
This culture has grown to become one of inaction and acceptance of failure. Smoothing things over with the opaque nature of their accounting and systems that were conceived of in the 1960s. Systems and accounting which have subsequently developed on the basis they were a waste of money that could be better spent in drilling and completion. And to avoid at all costs and over the course of the time since their design. Producers' lack of accountability has created incoherent accounting information that is not used or relied upon. Where their understanding of their business and business terminology is so poor as to account for errors in the trillions of dollars. We should note here, that producers are therefore the ultimate victims of their own conspicuous designs.
Conclusion
Homogenized financial statements of producer firms makes it impossible to discern a producer's performance. All financial statements are of a cookie cutter formula based on the size of the production profile. Who’s the hero, and who’s the zero? Field operations being managed through reserve reports to ascertain the performance internally. No reliance or faith in the accounting information provided. Producers accounting and the few ERP software vendors' budgets are scaled back to such levels that they are barely functioning. Are these budgets designed to save money or are they to maintain the lack of accountability that the industry has now become so well known for. The quality of the information produced is not granular enough to know the dynamic implications of any actions within the organization. All that is known is drilling exposes more reserves. Reserves are valuable. People, Ideas & Objects have consistently asked if the reserves are not profitable. Where the industry demands outside forms of cash each year to sustain operations. The value of the industry is at best $0.00, and more likely substantially negative. With a future that is far more important to society than it has been in the past. A future that is far more innovative, complex and dynamic than in the past. An industry's speed that will accelerate at a much quicker pace now. The lethargy of three decades of inaction or more to finally issue a press release is unacceptable. The time that has passed, and the time it will take to determine what, how and why the industry will operate is at least a decade of difficult research ahead. Or, the Preliminary Specification that provides oil & gas producers with the most profitable means of oil & gas operations, everywhere and always is available now.