Two Good Examples

My discussions with the industry, or at least the Canadian part of the industry, continue to be frustrating and unfruitful. Talking to people who can make the decision to participate in People, Ideas & Objects development efforts receives the standard response, that they will join in when the product is fully developed. They say its not their job to participate in software developments. To which I ask if its their job to lose money? To which they repeatedly blink. Its this type of attitude that we are fighting in the industry. Why our appeal is to the investors to direct these people to fund our developments. To create our own permanent user community so that we never have to rely on these blinking people. They don't have the capacity to see the problems that are in front of them. They don't have the capacity to see the solution or to implement a solution that is offered. They are paralyzed and incapable of change.

I have two good examples today of how the situation is in the marketplace today. The first is our friends at PennWest Energy who recently announced their revised quarterly financial statements. Recall that they had to restate them for the purposes of revising the royalties back to operating costs from being capitalized. The second example is Noble Energy in the United States who recently went through a software implementation with Oracle. This was a custom one off implementation that is highlighted by Oracle as a success.

To the first example, PennWest Energy. The Press Release is here. Its interesting to note that the culprits that capitalized the royalties were the staff. At least that is what the press release says. We know the bureaucrats do nothing but sit around and point the fingers but rarely do they do it in a press releases. It might be that the staff did it but capitalizing royalties shouldn’t pass the laugh test beyond the first bureaucrat. And, its important to note, that the bureaucrats are keen to point out in the press release that they have reduced the payroll by almost 50% since this time last year. Therefore, I’m sure that it was the inspired staff after all. The pressure to make profits is quite strong and its coming from the investors in the industry. The bureaucrats way is to cut the staff by 50%. What rationale this supports is unknown to me. I'm just glad I don’t work in an oil and gas company.

Review of the PennWest financials has left me perplexed. The company appears more profitable than the previous statements. Reversing $200 million in capitalized royalties benefiting the bottom line is a bit confusing. But that seems to be the case. Maybe the most creative accounting I have ever seen. The comment from the Chief Executive is that the production, the land and the ability to execute are unaffected by the accounting crisis. The message that tells me is that the accounting is such a mess, probably because there is no one left, that we've given up, so should you.

With the following video from Oracle regarding a software development and integration for Noble Energy.

You can see that the entire focus of the company is on the ability to execute. Is that all an oil and gas company is today. Another project to execute? No appreciation that we are doing this work in a commercial environment. That we should be making money at this. It seems that the idea that this is a going concern and is part of a larger organization that is focused on providing that organization, the society that it operates in and the people within that society with an increase in value is lost. It’s all just activity for the sake of activity. Now there is discussion of the impact on the community, all the right buzz words spoken by all the right people, about the number of truck trips to reduce etc. It is however the responsibility of the oil and gas companies to be making profits. That is their role in society, not sitting in a sewing circle and singing kumbaya.

When I talk to someone in the industry, a decision maker, and I’m turned down because making money is perceived as someone else’s job. And at the same time I see the misguided adventures at PennWest. Or the lack of a clear focus of an enterprise at Noble Energy. I see why our focus on profits makes us the odd man out.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. 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. 

Capitalizing Royalties?

I certainly support any innovation in the oil and gas industry. However there was a bit of a dust up in Canada last week regarding PennWest’s treatment of their royalties over the past few years. It seems that their accounting will need to be restated for a few hundred million dollars of capitalized royalties. On what universe would a producer firm consider that royalties would be eligible to be capitalized? I know, its the only expense item that’s not capitalized! I guess that is what passes for logic in the rarified air of the bureaucracy in oil and gas these days. PennWest’s stock took a tumble as a result of this revelation and there was the comment by one investor that “if there’s one cockroach, there'll be others.” I think that investor has the substance of the issue appropriately in focus. Lets have a closer look at the facts as we know them.

A review of PennWest’s 2013 MD&A, Financial Statements and Notes reveals no discussion of any capitalization of royalties. Therefore no direct admission of the practice. The amounts quoted as being required for the restatement for 2013 were $70 million and are therefore material and would otherwise require disclosure. Unless they were Generally Accepted Accounting Principles used throughout the industry. Interestingly however there is no discussion of the amount of G&A that is capitalized either. Capitalized G&A is about as bread and butter an issue in oil and gas and I would be surprised if PennWest was not capitalizing any G&A, but capitalizing royalties. The logical conclusion is they are not disclosing the capitalization policies of any of their costs due to the fact that they are Generally Accepted Accounting Principles. Otherwise someone is in deep, deep trouble for nondisclosure of material misstatements.

Some discussion of the issue came out on Thursday July 31, 2014 between the past CFO Todd Takeyasu and the new CFO David Dyck who is the one who issued the press release about the restatement of earnings. The text of the conversation was run in the Globe and Mail and is as follows.

Penn West did not say which employees are “believed responsible” for these accounting practices, but noted they are no longer working for the company. The review arose from information brought to the attention of chief financial officer David Dyck, who started on May 1, taking over from Todd Takeyasu. In an interview, Mr. Takeyasu said the committee’s concerns could be a result of different interpretations of accounting methods. 

“Some of this stuff is grey, but I'm probably not at liberty to say much,” he said. “Some of that is possibly a matter of documentation.” 

He added: “The new people might just have a different view of it.” 

New board members and executive officers may have a “will to do things slightly differently,” he said.

Indicating that it would seem that there appears to be a different point of view on the treatment of capitalizing royalties between the two CFO’s. Of note it is important to point out that Mr. Takeyasu retired in March of 2014. That Mr. Dyck’s resume does not have him as the CFO of an oil and gas producer in any of his previous positions. Now I know Todd Takeyasu very well. Todd is the type of guy that has never taken a risk in his life. He would never have crossed the street unless the crossing guard whistled and motioned directly to him to cross, twice. And had a stamp from that crossing guard to prove it. Therefore it is reasonable to assume that this is not a rogue CFO blazing across the horizon looking for fame and fortune. Todd would have ensured that PennWest would have had this well documented. I have been personally witness to years of Todd’s audit files. And I'm sure Todd’s lawyer has copies of that documentation as well. The other conclusion to make from this is that the initiation of these ideas are a result of an industry wide initiative. The other roaches hiding in the background.

So lets conclude from this that we might look forward to an industry wide summer of restatements and late nights for the accountants in the energy industry. Their attempt to earn some profits might have seemed innovative to some, however, lets put this in perspective. You can fool some of the people some of the time, but you can't fool all of the people all of the time.

The Preliminary Specification and user community provides the oil and gas producer with the most profitable means of oil and gas operations. 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.