Best Business Opportunity, Ever, Part XXIX
Eventually, as can be easily predicted, this game with the accounting came back to bite the producers. You can only grow your balance sheets to such a size where the depletion of those assets becomes material to your income. On an industry wide basis we hit that point, then we discovered the means to produce shale. Some may feel now with the significant write downs that this accounting situation has passed and is behind us. Nothing could be further from the truth. The end of the beginning may have started, but we have a long distance yet to travel down this road.
In many cases, even with the large writedowns of assets over the past two years, the producers are still sitting with large asset balances. Although I suggested the other day that these balances represent the amount that the investors have subsidized the consumers in their consumption of energy. Which is the best way to look at it. It also represents the amounts of the future losses that the producer will be incurring. Or to put it another way, the industry will be in a state of consistent financial losses due to finally recognizing the capital costs they incurred in the past, in a capital intensive business. As an investor where do I sign up?
Many people will say these are not real losses that affect the cash situation of the producer. And I understand that argument. It is the same argument that has been used now for decades. The fact of the matter is the cash in the industry today is critically tight due to the bankers and investors seeing that the industry as a lost cause. Unable to generate a profit. If it continues to report that it’s unprofitable, will that change the bankers and investors mindset? I feel this strikes the point of why the industry has never achieved the religion of profitability. As long as there was cash no one cared what was happening to the business. Now that the business is caput, there are no earnings and no cash, with no foreseeable future of either turning around. Accounting is about reporting the performance of the management of the producer. For four decades the producers in the industry chose to defer accounting for their capital costs of a capital intensive industry. Now the importance of the role of accounting in oil and gas may be learned.
The past forty years was a heck of a good party though wasn’t it. From a physical point of view the production and infrastructure of the North American industry is impressive. However, functionally, literally and financially it is worthless because it depends on hundreds of billions of dollars per year in investment to operate. And that will continue for the foreseeable future. The next 25 years could be the most interesting and dynamic time in the industry. Do you see a way through that period with the assets and organizations that are in place? The culture of the industry is contrary to commercial, productive interests. Where will the money come from to fuel this future of the existing oil and gas industry.
As a startup oil and gas producer the opportunity to purchase this production and infrastructure of the North American industry is about to be put on sale. At firesale prices. Just last week Conoco put $8 billion of properties on the market. Expect to see much more of this happening in the very near term. Rehabilitating these assets as a startup producer. To make them always profitable is the first order of business for the startup. They can do this by implementing the Preliminary Specification. Which will ensure that they obtain that old time religion of profitability. Secondly they can organize themselves to approach the opportunity of expanding their deliverability to achieve profitable energy independence in North America. A worthwhile and attainable goal.
Remediating what exists in the industry and in the hands of the producers today, particularly after the battle that I have had in selling them the Preliminary Specification, isn’t possible. They didn’t think the issue was material to their operations. They were more concerned with the impact the Preliminary Specification had to their job security and did not want to work that hard. Building the Preliminary Specification will be difficult and it will eliminate the redundant elements from the existing industry. That is my assessment of the past twelve years that I’ve tried to solve this problem. But then I’m biased.
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.