These Are Not the Earnings We're Looking For, Part XXII
For the second quarter of 2018 our sample of 23 producers cash was reduced by $4.8 billion to $19.8 billion. Working capital was reduced by $7.6 billion to $7.0 billion. Working capital was $18.9 billion at the end of 2017. What is particularly disconcerting is that Conoco, Husky and Hess makeup $10.0 billion of working capital on their own. Meaning the remaining 20 companies have a working capital deficiency of $3.0 billion. The sample of 20 producers have capital assets of $489.6 billion and a working capital deficiency of $3.0. To me that definitely puts the balance in the “well defended” balance sheet. Investors and bankers have only been on strike for three years and the net effect on the liquidity in the industry is this?
There are some interesting changes happening in the industry over the past six months. The investors and bankers have been active in drawing their share of the proceeds from the business. Dividends, share buybacks and bank loan payments have been tremendous. The boards of directors of these producers, it would seem, have been put on very short leashes. The investors and bankers realize that as long as the producers have money to spend then they’ll spend and ignore the business issues that stare directly at them. Cash is being drawn out of the industry at a remarkable rate considering the state of affairs. Dividends paid totaled $5.3 billion, share buybacks totaled $5.9 billion and debt reduction totaled $7.7 billion, all of these for just the three months ending June 30, 2018. In the three months of the first quarter the amount of these were $2.5, $2.5 and $4.2. Reflecting that the industry has paid out $28.2 billion in the last six months. It’s interesting to note that paid in capital totals $195 billion, long term debt is $154.3 which means producers will only have to go through this cash draining scenario for another 6.2 years which by then everyone will have been paid off.
It would seem that the investors have caught on to the claim of the bureaucrats that it’s not about profits, its all about cash flow. And therefore have begun the process of removing the cash of the producers for their own purposes. Implying that the industry is now a “mature” business if you like. Just as we noted that oil prices won’t be moving up anytime soon with the OPEC+ production sharing agreement no longer in place. We can say that the investors and bankers won’t be investing any money either. Neither are interested in filling the gap of any working capital deficiency. Investing good money in a firm should at least be done on a prospective basis. By funding the working capital deficiency investors and bankers are only covering off past sins, buying the management more time in which they don’t have to deal with the issues that are creating the cash shortfall and allowing good money to be flushed down the toilet. Therefore in addition to the oil prices not reaching new heights, investors will continue to suspend their active participation in any future share issuances, continue the return of cash to the investors and bankers and the cash situation in the industry is only going to become much worse.
We know things will only get better because the bureaucrats have been hoping for that to happen for at least a year. At least that is what I hear in the media. I’ve always expected that the oil price will eventually mimic the fundamental collapse that occured in the natural gas market and then the credibility of the industry will have been shot. The only way in which to rehabilitate the natural gas price and mitigate any further loss in the price of oil is through a sustained effort to do so. Meaning the implementation of the Preliminary Specification. Until then bureaucrats will have no measure of believability.
The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.