My Argument, Part VIII

There is always a possibility that I am incorrect in my assessment of the oil and gas business. There could always be another commodity super cycle that would make the current producers business model valid for a while longer. Or investors and bankers could be using oil and gas for purposes other than profit. What those would be I'm not aware of or pretend to understand. What People, Ideas & Objects needs is that “jarring gong” of self preservation to hit the industry before any action will be taken to develop the Preliminary Specification. My argument is to provide the oil and gas industry with the most profitable means of oil and gas operations. We have the Preliminary Specification to provide the business model for when people do realize that the status quo is untenable. Which brings to mind the Milton Friedman quote.

Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.

I am pleased to say that with the Preliminary Specification we are prepared to deal with the future of the oil and gas industry. One that is profitable, innovative, dynamic and accountable. An industry that will have discarded its “muddle along” strategy and took proactive actions to bring about energy independence in North America. There is much talk about this possibility. Shale makes it real however with the financial performance of the producers we will never achieve that objective. The current business model is too dependent on investors to fuel all of the capital demands of the industry. The investors have subsidized the consumers of energy for the past four decades and I am at a loss to see how, with the state of affairs as they are, we are going to move forward from here on the financial base that we have, the operational base is incapable of being profitable, and yet we believe we can just wish energy independence into existence?

If as I suspect, Donald Trump will be the president for the next eight years, or as long as he desires. We have seen in the few months since he was elected a new business attitude begin to develop. Just this week, with the full power of the white house, more has happened than in the past eight years. Our long protracted progressive nightmare is over. As more and more success is attributed to the president's policies, the more garbage he will be able to wipe away. This progressive nightmare began in the 1960’s and has continued since then. We’re now getting back to business and it's about time. Hollywood and Madonna will be upset but they’ve had their run.

So what would happen if producers changed their minds regarding People, Ideas & Objects and the Preliminary Specification. That producers heard that “jarring gong” and realized that these alternatives to the existing policies were necessary. I’ll be the first to admit that there is no way in the world that the Preliminary Specification will ever be implemented in a normal environment. It is politically impossible for it to be adopted by healthy, profitable organizations. The crisis however is here. That is my perception but also the reality if you critically read the financial statements of the producers. There has been a rapid deterioration in the health of all of the producers over the past few years where many are carcasses strewn across the landscape.

Yet the producers behaviours haven’t changed. This week we heard of a sizeable gain of 67 new rigs being deployed in the United States. OPEC, I believe became tired of being the scapegoat for the oil price collapse. Certainly they changed their policies and created the downturn in the price of oil. However the downturn in the price of oil was inevitable. The U.S. producers had doubled their production of oil in only a few years. If OPEC didn’t act to hold market share, they would eventually lose that market share which would be difficult to reclaim. The story in the past year became it was OPEC’s fault. The U.S. producers had nothing to do with it. Now we see OPEC reducing production and the U.S. producers rushing in to fill the void being made by the cuts from OPEC’s agreement. I think we can now see clearly the behaviour of the U.S. producers is unchanged and the source of the issue of overproduction and oversupply unresolved. When we also see that producers depend on willing investors, I think, the continuation of that behaviour may be a bit much to ask. There is no discipline in the industry, overproduction will resume very shortly. Does anyone doubt that, and do we really have to go there?

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. 

My Argument, Part VII

One of the areas that I have difficulty in accepting about the cash flow numbers of the oil and gas producers. Is what I believe to be an overstatement of those values as a result of the accounting that is done. If we look at the capital expenditures of the producer firm. And we look in hindsight at the production profile we see that not all of the capital expenditures were dedicated to increasing the firm's production profile. The reality of oil and gas is the ever present decline curve, particularly in shale. Should we look more critically at the capital expenditures of a producer and determine which dollars were spent in maintaining the production profile, and those dollars that were spent in expanding the production profile.

This goes to the heart of the issue of capitalizing everything under the sun. If capital expenditures are to maintain the production profile why would they not be considered operating costs. If they were they would reduce operating cash flows substantially and more accurately capture the activities and value that the firm is engaged in. This would immediately reevaluate the company's market capitalization and enterprise value in today’s environment. These reduced cash flows would more accurately relate to the state of the industry and producers would have to realize the three fold increase in revenues to record commodity price levels in order to better evaluate their firm. Having everything deemed to be a capital expenditure makes the cash flow overstated, in my opinion, just as capitalizing everything to the balance sheet will overvalue the firm's assets.

As we can see everything in oil and gas accounting is skewed to overvaluation. Assets, cash flow and earnings all are affected by the policies that are in place within the industry. This industry “norm” has enabled producers to believe that they are productive, contributing members of society when in fact they have been a financial disaster. It is only after four decades of this accounting treatment that the evidence of the issues in doing their accounting in this manner is becoming evident. Essentially the value that is contained within the entire industry's infrastructure, that is the entire producing infrastructure in North America, isn’t worth anything as it is a cash flow drain with catastrophic losses. The only measure in which to turn the industry around from this point is to triple the revenues to record commodity price levels of the producers for a sustained period. These revenues would be able to remediate the destruction that occurred these past four decades. Investors and bankers have invested in good faith, now own an industry that is a drain on their resources, and have indeed subsidized the consumer for their energy needs for these past four decades. The amount of the consumers subsidy accurately reflected as property, plant and equipment on the producers balance sheets.

Oil and gas is a capital intensive business. The way it is run today is the capital is raised, spent and sits for generations on the firm's balance sheet in their entirety. Turning around the capital to be used again and again is never done. It has always been believed that you just raise more money each and every year. Spend that, and then add it to the pile of never depleted assets on your well defended balance sheet. Whatever that means exactly, I don’t know. Producers have to begin to turn their financial resources over in a much quicker fashion. By doing the above, recognizing that most of their capital expenditures are to maintain their production profile, having those capital expenditures recorded as operations will return that capital back into cash within the current fiscal period. That is with the one big qualifier. If the firm is run like a profitable business and not an engineering exercise. It employs the price maker strategy of the Preliminary Specification and realizes the prices that make the producer a truly profitable operation.

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. 

My Argument, Part VI

One might see a pattern in the activities of the producers in this current era of difficulties. Commodity prices go up, producers are giddy with anticipation of the coming good times. However, inevitably the commodity prices do go back down again. Primarily as a result of their overproduction and oversupply. This pattern is random and is subject to a variety of inputs, such as the six month agreement with OPEC. Another pattern that can be seen that is very predictable is the quarterly results that each of the producers issue to their shareholders. For the past number of years the losses that these producers have recorded have been catastrophic. There is no other way to describe them. If you read the text of these releases though you would think that times have never been better. I don’t know how long that these two patterns have been playing out in the industry. We have to be coming up to almost a decade in natural gas, and closer to five years in oil. That nothing is done, that nothing is discussed to be done, and I think they can’t, won’t and will not ever do anything about this is a mistake that the producers management is making. Which brings to mind a quote from Cicero.

Any man can make mistakes, but only a fool persists in his error.

I have to say that I enjoy the relationship that I have with the oil and gas industry. I find it very liberating. I seek to provide them with profitable operations, they seek to destroy me while they also destroy the money they’ve been entrusted with. One party is constructive, the other destructive.

If we look at that horizon spread out to 2040 we can be satisfied in knowing that our producer friends will continue in their destructive ways, and will do so with the archaic technologies that they currently employ. It’s 2017 and there has been a revolution in Information Technology. I don’t know how it is those office buildings that the producers occupy don’t pancake as a result of the weight of the paper that resides in these firms. The point being from an ERP basis, we are talking about the dark ages in terms of implementation of any value added technology. Remember oil and gas is an engineering exercise not a business. If you spend money on an ERP implementation it will leave the producer with less to spend on drilling.

I have provided producers with a tangible means in which to earn profitable operations by implementing the Preliminary Specification. Our value proposition for the next 25 years is valued in the $25.7 to $45.7 trillion. Incremental dollars to the industry. And I do that without drilling one well myself. It involves the application of today’s technology to the oil and gas business. That’s two things, technology and a focus on the business, that this engineering exercise is missing, and are the root cause of its destruction. But that is just one man’s opinion.

All the technologies in the world are only as good as the people who implement them. And the producers have hired my competitors to ensure that they tick the ERP box off on the list of things to have. I’m not imputing there is a symbiotic relationship between the producers and the technology providers that they’ve hired. I’m stating it unequivocally. And this is the issue in all technology implementations. People, Ideas & Objects have addressed this issue explicitly by providing the ERP systems, the software development capability and the user community.

To make the same mistakes as have been made in implementing ERP before would be foolish. That is why we are providing a permanent software development capability to the oil and gas industry. Software supports and defines the organization. It cements it in an unchanging environment. The only manner in which to change the organization is to have the software development capability and user community become a permanent feature of the industry. Otherwise all we’ll do is seal the industry in the Preliminary Specification definition and have them experience any deficiencies in that model without the ability to make the necessary changes. That’s not our plan. Someone should ask to see the producers plan.

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. 

My Argument, Part V

Everything in the oil and gas industry is believed to be getting better now, not because the producers have done anything productive, only because the time that has passed is consistent with what previous downturns have taken to remedy themselves. We are, or have been through the worst downturn in the industries history and nothing of remedial action has been taken by any of the producers. That is because it’s not a business, its an engineering exercise and we can see the beginnings of that once again in the heightened drilling activity of the producers. They are preparing to drill, complete and equip more wells in order to catch more revenues. Cash has never been so desperately needed by producers as it is these days.

The only thing that will make the producers change the way they operate is that the situation becomes so difficult none of the producers can proceed in the marketplace. The point that we call “the jarring gong.” We have to hit the wall in order for people to give up on the ways that these producers are operating today. That they destroy value and there is nothing left is of little to no concern to them. That they can’t fund anything, that there is no support from investors and bankers is what is necessary and what is required for them, and the rest of the industry to see the need for the changes to the Preliminary Specification. As Winston Churchill described the “jarring gong,” he stated the following in reference to the point in time when Hitler invaded France.

When the situation was manageable it was neglected, and now that it is thoroughly out of hand, we apply too late the remedies which then might have effected a cure. There is nothing new in the story. It is as old as the Sibylline books. It falls into that long dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong -- these are the features which constitute the endless repetition of history. 

Just as no one today would buy a Motorola or Nokia flip phone, neither of those firms are providing commercially viable products. They’re also no longer independent entities that are supported solely by their own activities. They’re dependent on their parent firms for their survival and will be for the foreseeable future. These phone companies were unable to make the transition to the smartphone era. Oil and gas producers today are proving that they have been unable to make the transition to shale. A transition that has seen the industry turn from scarcity to an abundance of the resource. Operationally they can drill and produce shale. However the business has been run into the ground as a result of the overproduction and oversupply of shale production on the oil and gas commodity markets. Continuation of the current environment will see every current producer eventually leave the business due to financial failure. Many have wiped out all of the money that was ever given to them during their entire history. They are heavily indebted, especially when you consider that their asset balances are bloated to begin with, and their debt levels are measured against those assets. They have no, or negative, working capital and the cash crisis continues in the industry. The only source of cash is production which of course is the leading cause of the overproduction and oversupply issue.

Multilateral fracing in shale formation began as late as June 2002. I have been writing this blog since late 2005, focused on using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. The Preliminary Specification is the current status of my efforts. Although the business has changed, the way the business has been managed has not. There is no belief by the producers that the business needs to change. The war that has been waged between industry and People, Ideas & Objects is evidence that they don’t believe any change is warranted. And if they did, it would have occurred by now.

“If you mind the operation and conduct state of the art engineering, everything else will take care of itself. Markets will correct themselves if they’re out of balance.” The producers would say and these are their attitudes. They believe that markets are mythical beings that will do things for the producers without their involvement. Nonsense, markets simply provide users with information in the form of price. If you can make money at the market price then you produce. If you can’t then don’t produce. Producing everything and hoping, believing, dreaming or thinking that markets will deal with it is foolish. What is needed is the industry to adopt a business focus so that this doesn’t continue to happen.

Somehow the valuation of oil and gas producers became materially overvalued! My analysis showed that each producer firm was substantially overvalued in terms of their financial performance and their stock price. To generalize, up to three and four fold what these producers should be trading at. I’ve commented on the verbiage coming out of the brokerage houses and how it resembled the noise coming out of the bank’s prior to the banking crisis. Whether the stocks do drop or not, at these valuations what’s in it for the investor to participate in any new offering? Paying lofty valuations to provide the producer with a short term aid in their working capital deficiencies isn’t going to generate much attention. Either way the producers have a lot to lose as far as I’m concerned.

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. 

My Argument, Part IV

Shale is the nuclear weapon of the oil and gas industry. Once the technology is known, it changes everything and there is nothing that can be done to go back to the way things were before. Multi-lateral completions are the obvious evolution of the technologies that we were headed to. However, the business didn’t see these changes and hasn’t adapted to them. This initial phase of the technology has proven its capability to overwhelm the marketplace with overproduction and oversupply from just the United States. Recall the U.S. holds only 17% of the global shale based reserves. Does the future look bright for these producers? Producers who are currently in desperate financial condition as a result of their overproduction and oversupply.

Everyone can have deliverability growth with inexhaustible, supportive investors. The industry has proven that 1,000 times in the last four decades. Now with shale, producers have to have deliverability growth that's profitable. And do that without inexhaustible, supportive shareholders, but to be beholden to them for past promises. They’re still around and they have crystal clear memories embedded in the paper documents and prospectuses producers published. This transition from wholly dependant on investors to being a viable going concern is what all producers must now undertake. And just as the DNA of a mouse isn’t fundamentally different from that of a horse, to make a mouse run like a horse is a difficult task. Something I look forward to watching in these next few years.

Production allocation across the industry is a necessity today as it has been for the past few years of shales existence. But who produces what? Should the government tell who has the privilege of producing? Maybe we should just consolidate the producers and create a monopoly producer? Why not just ensure that any production meets the basic criteria that it only occurs if it’s profitable. If production is profitable, then it produces, otherwise it doesn’t. This is the methodology that is inherent in the price maker strategy of the decentralized production model of the Preliminary Specification. Instilling this production discipline in the industry is the production allocation methodology that People, Ideas & Objects believes is the appropriate one for a market based economy. It would seem that People, Ideas & Objects are wholly inconsistent in this regard with the rest of the oil and gas industry. Theirs is a comfortable, unchallenged business model currently in operation that has worked well for the bureaucrats, but no one else.

What is the cost of this downturn? In Calgary ⅓ of all office buildings are empty. Representative of the number of people who no longer commute to, or work. The service industry has taken its traditionally much harder hit than the oil and gas industry itself. Royalty holders are suffering. Government tax revenues are down from corporate tax, payroll tax, and income taxes. The investors, bankers and if I could solicit sympathy for the junk bond investors, all of these people are losing money, unnecessarily so, as the Preliminary Specification has addressed this issue for long enough to have resolved it. The insistence of the producers to muddle along, do nothing, and accept the devastation that society is suffering today, is business as usual.

If we accepted People, Ideas & Objects Preliminary Specification and the elements contained within that software definition. Assume that commodity prices resumed their record highs. The damage that is being done to the industry would be stopped. The future would be stable and people could plan and evaluate their investments and careers on the basis of a reliable and appropriately managed industry. Society would have a reliable source of energy that is proven. Those firms in the industry would be profitable and healthy. They would pay royalty holders and they would of course pay taxes. The service industry would see that they have a reliable source of work that will be done over a consistent period without the boom and busts that have so devastated their firms. Profitable oil and gas operations provide society with significant value.

One of the reasons that producers don’t do this today is they don’t know what's profitable. Their accounting is inaccurate from the point of view of determining which property is profitable and which is not. The overheads within the firm are all consumed by the firm themselves and are allocated on a basis between operations and capital expenditures. Therefore gross overheads for the year are allocated 60% to capital and 40% to operations. Or whatever the numbers maybe. None of the actual overhead costs are allocated to any of the properties. Overhead in today’s market can range from 10 to 40% of the properties revenue. Natural gas is much more difficult to administer than oil. Operated vs non-operated have differences. Some properties are systematically problematic. Others aren’t. All of these costs are dumped into the two accounts, one on the balance sheet the other on the income statement. The properties never see how much a production accountant or any other overhead item costs. And as a result the firms never know what is or isn’t profitable. And there isn’t a soul in the industry, or the planet, that can tell you the real cost of overhead of any property.

It is lazy thinking by the producers that we will “muddle through” and “it's the way of the markets” or “market rebalancing.”  They are correct that these commodities are markets and they’re sending information in the form of price. That price information says that you can’t produce profitably at these prices and therefore you shouldn’t produce. But that is too much for them to consider. It is their minds that hold us back from reaching our potential and we continue on in an accounting nightmare that is false and foolish. Where fudge is the name of the game. In a devastated industry that points the finger at others as to who’s fault it is. Doing something themselves. Acting in their own best interests is something that has not been done for four decades and as long as there are investors around it will continue to be the case. Or will it?

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. 

My Argument, Part III

Many believe that the industry will resume normal operations as a result of the six month OPEC agreement, and the conclusion of what could be considered a bad year in 2015. It is also reasonable to believe that I don’t think so. Unless we see that three fold increase in revenue over a sustained period, these producers will continue to be in desperate financial condition. No amount of investment or debt will be able to provide them with any resolution of their difficulties. This is a permanent condition that will not be resolved without the price maker strategy of the Preliminary Specification. The damage that has been done over the past four decades has been extensive and has gutted these firms of any and all value. There will be chronic, systemic overproduction from now on as it is a feature of the current business model, not a bug. Until we change that business model, we will not have changed the industry. Therefore we are stuck in this malaise until terminal liquidity of the industry occurs, or the Preliminary Specification is built. I therefore see the Preliminary Specification being adopted as a result of the terminal liquidity of the industry. Creative destruction in its finest form.

2015 was the worst year for the industry on record. 2016 was no prize. Oil and gas prices are up. The service industry has been run over by a truck. The cash crisis continues throughout the industry and I predict it will continue to do so. This chronic cash shortfall being a bug of the business model, not a feature. The bankers and investors who usually filled that cash sinkhole are tepid, to say the least. So yeah, party on! At least that is what the producers are promoting. If going through the process of the past few years has taught us anything it's that the producers can’t, won’t and will not ever change. Not a word is spoken about anything regarding the business of the business and what changes need to be made. Status quo rules! Other than the futile jabs and occasional left upper cut that I sustained from the industry over the past few years. The industry is not in good fighting shape. They are weary from the battle and I have hit them too hard too many times. However, they have not thrown in the towel yet and are prepared to go the distance.

The most devastating counterpunch I can throw at this time is to mention the year 2040. Is the continuation of this “muddling along” strategy all that we are to look forward to? The same old same old as we have had for the past four decades? Should everyone continue to count on one good business year out of ten? Is this the best that producers can offer? And is this the only thing that they’re offering? I’m afraid it is. Everyday we are hearing of pipeline leaks and other operational issues from equipment that needs to be replaced. Almost the entire energy infrastructure needs to be replaced in the next few decades. Some have claimed this will range in cost from $20 to $40 trillion. As an investor, where do I sign up to volunteer my money? I want to get with the people who will raise that entire $20 to $40 trillion, spend it foolishly just the one time, never turn that capital over, and watch their spending glow bright and bold as property, plant and equipment year after year after year on their well defended balance sheets. All this while these producers report accounting profits that are of their traditional mythical and magical standards. My god as an investor, I want to sell everything and get into the oil and gas business! Just to be with those that say that is where it's at.

The sober, judicious, intelligent and responsible people have been watching the industry and its activities from afar. Whose perspective do you think they see? The one thing that can be said about these people is they don’t like to be bothered. They have other things to concern themselves with. And when they do get bothered they generally express themselves in spurts of anger towards those that have caused their attention to be diverted. That nothing was done, other than to blame OPEC, during these past two years, and nothing continues to be done for the future is most disconcerting to them. What they will therefore do is quietly make the changes that need to be made and move on to resume their normal lives. In the very near future producers may feel like they’ve been left behind by those that used to be in their corner. But that’s the way it is in the fight business, sometimes you win and sometimes you lose.

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. 

My Argument, Part II

Oil, and for that matter natural gas prices are up, problem solved. Or has it been. The analysis that I did over Christmas showed that more investment will do absolutely nothing but waste more good hard earned money. What is needed is an increase in revenues. Everyone in the world would agree on that. And therefore the focus on the OPEC agreement and its success in moving oil prices into the low $50 range should be celebrated by everyone. Except for me that is. I see it as a matter of degree. Prices are up and that’s good but what I see is the need for more revenue, and lots more revenue. My overall concluding assumption from the review that I completed is that the industry needs three hundred percent more revenue than it is currently realizing. You read that right. If I took any of the companies I looked at, tripled their revenue, you would come to the conclusion that the company would be able to operate as a viable going concern.

That however, did not get them out of the bushes or necessarily deal with the legacy issues of four decades of bad management. They would still have the legacy costs of the past in terms of debts and disgruntled shareholders who have been fleeced repeatedly. Moving their outsized asset balances of property, plant and equipment would also leave many in a losing situation for many years yet. For those few producers that still read this blog, I am not proposing that you triple your production profile in order to achieve that higher revenue. That would not resolve the issue in anyway. I’m saying we need to triple the oil and gas prices from where they are today in order to resolve the issues that plague the industry. These commodity prices would then be close to their all time highs. There is only one option to do this and that is to implement the price maker strategy of the Preliminary Specification.

One of the errors in my communications over the past few years is the scope of the difference between what the industry considered a “price increase” and what I determined a healthy producer should consider a necessary “price increase.” Everyone knows shale is expensive and is an order of magnitude higher in cost than conventional oil and gas. In the Preliminary Specification each producer must evaluate each individual property of theirs on the basis of an accurate, detailed, actual accounting of whether it is profitable. If it’s profitable then it produces. If it is not profitable it remains shut-in until such time as the prices rise, the costs decline or the deliverability increases. And the determination of those costs will include the capital used in this capital intensive business on a basis of being recognized in a timely fashion. Allocating the capital to the proven reserves never releases those costs to the income statement where that investment can be recycled repeatedly into cash and new investments. As a result of this change your capital costs are going to hit your income statement in the future as if you were spending money like a drunken sailor. The price increases that I am proposing would therefore cover the cost of capital in a dynamic industry where the capital is turned over repeatedly.

The business model that exists today is one in which the capital is raised by debt or equity and is deployed once and only once. The money goes into the producer and never comes out. These producers are slugs, they’re not dynamic in terms of their use of capital. They raise it once, spend it once, and sit on it for a lifetime. An accounting anomaly allows them to report that they are profitable irrespective of what they do. The more they spend the more they appear to know what their doing. The price of the commodities go up, the stocks go up, the prices of the commodities go down, not so good. They provide no value outside of what the commodity price provides. This is a tragedy that is of epic proportions and one I admit that is difficult to see. However, after four decades there is no solution other than People, Ideas & Objects Preliminary Specification.

When we look at a producer, we see many amortizing the life of their property, plant and equipment over as much as 12 years. Which is very common! Turning this depletion period down to a maximum of three years, and including the capital costs of the current fiscal year will show the hit to the income statement is going to need that three fold increase in revenues to report any profits. It is also going to explode your cash flow from operations. Which is necessary in order to pay back the money you borrowed, and the money the investors gave you to build the business. This operating cash flow will be strong enough in order to provide for the retirement of the debt used in the development of those specific assets over the long term, provide for a handsome dividend to your shareholders and if you know what you’re doing, also fuel your future capital expenditures. There will be no need for producers to make any further demands of the banks or the investors. Producers may never need bankers or investors with the amount that they’ve already been provided with. Those amounts that are sitting like cherished collectables in property, plant and equipment on the producers balance sheets, will be moved to the income statement and will be recognized, finally, as the costs of the business.

Producers are famous for stating that they will defend their balance sheet. Defend what, a fundamental lack of business understanding, or just sheer stupidity? Under the Preliminary Specification, the producers balance sheet should strive for a zero balance of property, plant and equipment. Accounting is about performance not valuation. Your balance sheet does not represent the value of your company. Ever. Those current property, plant and equipment balances, in the above People, Ideas & Objects Preliminary Specification process, will be replaced by cash balances. Then recycling this cash into property, plant and equipment, and back into cash for future investment should be achieved as quickly as possible for the bloody obvious reasons. Taking investor and bank money, year after year after year, never realizing the costs of doing business for four decades is insane and needs to stop. This has only led to losses of tragic proportions throughout the industry, investment and banking communities. Happiest of all are the energy consumers whose real cost of energy consumption is very accurately recorded on the producers heavily defended balance sheets. What we should really do is change property, plant and equipment to read “consumers subsidy.”

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. 

My Argument, Part I

Fiddling while Rome burned was too frustrating and therefore I’m back earlier than I expected. I’ll be writing under this series title of “My Argument” for the next while in order to assert People, Ideas & Objects point of view regarding the current situation in the oil and gas industry. Our producer friends have been successful in convincing many people that they have things under control. The six month OPEC agreement is holding, and production from those countries is being reduced as we speak. Has anyone else noted the rig counts in the U.S. began their upward trajectory around the time of the OPEC agreements announcement this past summer. Producers can’t, won’t and will not ever change.

One of the items that we’ll be discussing at length in this series is the analysis that I completed regarding the situation in the industry. Prior to Christmas it seemed I was the only one concerned about the lack of profitability in oil and gas. Was I wrong about my assumption supporting the need for the Preliminary Specification. Had I misunderstood the basis of how the industry operated, and not understood the role of cash flow in the industry? Therefore I undertook this comprehensive assessment in order to determine, in as objective manner as I possibly could, what the situation was in the industry. I comprehensively reviewed 21 companies. Big ones, little ones, American ones, Canadian ones, startups, integrated’s and all style of independents. There are a number of similarities in all of these producers current situations. We’ll discuss my findings and the reasons why the Preliminary Specification is necessary in the marketplace and to what degree.

We have sought to provide the oil and gas producers with the most profitable means of oil and gas operations. The Preliminary Specification does this. The question that needs to be asked is why in the world would any oil or gas ever be produced unprofitably from this point forward? The commodities are too precious and valuable to be throwing them away in the manner that they have been these past four decades. If we are to burn these commodities let's at least make sure that they’re produced profitably. I think we have an obligation to our future to be at least that responsible.

I watched a couple of movies while I was off. Moneyball with Brad Pitt, and The Big Short with Brad Pitt. I found these two movies had some interesting commentary about how change was implemented in other industries. And we can learn much from them. In Moneyball the owner of the Red Sox said “that the vested interests would go bat shit crazy fighting you.” I can attest to that. And in “The Big Short” you can map out fairly clearly where we are in the change process in oil and gas, by the events that took place during the 2008 financial crisis. I’ll give you a hint where I think we are. The point where the CDO’s were known by everyone in the banking industry to be worthless, but nothing happened. Other than the fact the banks began unloading their positions on their John Q. Public customers. The pertinent quote from Christian Bale's character was "that we may be in a completely fraudulent system." Only after the banks were able to get out of most of their positions did the system take the hit that it did.

The analysis that I did over the holidays determined that the valuations of the producers were severely extended. Almost on a wholesale basis you could say that oil and gas producer firms are trading at three to four times their current cash flow multiples. I’ll restate that for clarity, three to four times what they are traditionally valued at. If you read what has been said since the implementation of the OPEC agreement we are on the verge of a new energy investment nirvana. All of the recommendations on these oil and gas stocks from the analysts in the banks and brokerages have been excessively bullish. Reading many of them, I was unable to match what was being said by the analyst and what the company had reported in their financial statements. It would seem to me that the investment houses have been putting one over on John Q. Public as a belated 2016 Christmas gift.

The past four decades has been a time in which the oil and gas industry has not suffered from a lack of investors and bankers. To the contrary, the industry has been supported handsomely by a willing and cooperative investment community. Therefore it is reasonable to conclude that more investment into the industry at this time is not going to be the solution that solves the issues that the industry suffers from today. If the producers and the analysts at the banks and brokerage houses are putting one over on John Q. Public, putting lipstick on a pig as it were, then the crisis that precipitates the implementation of the Preliminary Specification is within sight.

OPEC was never the issue. Overproduction and oversupply from North American shale producers in both oil and gas are the issue. Producers, without the Preliminary Specifications decentralized production model to allocate production profitably, can't control themselves from chronic, systemic overproduction. With the new OPEC agreement, their members have shifted the focus onto the North American producers behavior. If these North American producers continue to overproduce and lose money at tragic velocities then the world will know who the real culprits are. I wonder how our friends the producers stock prices will do then?

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. 

Best Business Opportunity, Ever, Part XXXIX

We have an Opec agreement, for now, that is for the next six months. We’ll see if it lasts that long and if it has any effect on the global oversupply and overproduction of oil. Opec have agreed to “targeted” production cuts of 1.2 million boe / day and expect to see 600,000 boe / day in cuts to come from non-Opec producers. Six month agreements, after seven months of negotiating are one thing, implementation is another. Nonetheless, from the producers point of view this is a resounding win. They feel they’ve been fighting Opec for the past two years and have succeeded in surviving and asserting that they’ll not take the price maker role in the oil markets. What I do know now is that there will be no dealing with them whatsoever. Not that they were listening anyways. For the producers winning at all costs was the game plan and that has certainly been the case.

Producers will feel vindicated and have established themselves as the force to be reckoned with in the oil markets. That is until the next payroll is due. The reality on the ground may be that this is a hollow victory. What I saw in the third quarter financial statements would be nothing to be proud of. Will Opec agreements change the investors and bankers opinion on the viability of an oil and gas producer? The cash that is needed to keep the operation going is not being generated and these organizations have internal problems that have not been addressed or recognized for decades. Movement of the oil producers, and particularly the shale producers stock prices was dramatic yesterday. Reflecting that the business is more about the stock price as opposed to the underlying performance of the firm.

The issues of oversupply and overproduction are just symptoms of the larger cultural issues that are systemic throughout North America. Premised on the SEC’s determination that reserves are the value of an oil and gas producer and financial performance is irrelevant. You can’t run an industry for very long on that basis, and oil and gas has been operated on that for over forty years. The value that has been destroyed has been epic, and this has to be addressed before anything positive will be coming out of this industry. Producers stock prices aside.

The prolific nature of shale is already being promised to fill the volumes that Opec is “targeting.” Restoring the imbalance in the marketplace. And this will continue for the history of the industry until there is no oil or gas left. It’s a science experiment, not a business. There is no discipline, and no basis of business understanding supporting any discipline in terms of what produces and what’s shut-in. Commodities markets are not mythic creatures that exist on their own. They send information in the form of price. If your profitable at the prices offered, you produce.

Does anyone question that Opec did everything that could be done? What will it take to try again when the six months are up? Oil prices were up almost 10% as a result of the agreement. I have always asserted that Opec, in this drawn out agreement process, were trying to show North American producers that oil was subject to price maker characteristics. If I was right, then I would expect to have this agreement fall apart in the next 10 days. Then we will see the price fall 10% or more. These price changes show that the removal of marginal production from the marketplace would be the appropriate thing to do. It doesn’t make a lot of sense for Opec, the lowest cost producer, to be taking production off the market. Does it. Particularly when North American producers are all recording epic levels of losses. This issue isn’t over.

To me a decision needs to be made. Whether we travel along to hear that jarring gong or not is a pretty risky proposition. But that is certainly where we’re headed. The adults in the room need to stand up and take control of the situation. That would be my recommendation. I’m taking some time off. Screaming at the wall these past few months has become deafening. I also need some time to think about the next phase of what and where we’re going as an industry. Therefore we’ll see you back here on January 23, 2017. Have a happy holidays and if you need to contact me I’ll be around.

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. 

Best Business Opportunity, Ever, Part XXXVIII

The cost and competitive structures of the existing oil and gas producers have been destroyed through the process of ignoring the industries issues. Muddling along has eroded the value in the industry and the individual producers are carrying legacies of past spending and unprofitable operations with them. From a cash position they’re unable to generate any value that would be considered a normal environment. If any value is produced from operations it will be consumed in servicing the debts and satisfying the legions of shareholders that participated in the annual ritual of issuing more stock. This being the kind of place that future investors willingly leap into in order for their money to be voluntarily incinerated. These organizational tragedies will limp along selling assets, in a market filled with producers who are operating in likewise fashion, where the buyer of the property can pick and choose like at no other time in the industries history.

Leveraging a business is the appropriate manner in which to manage any enterprise. It provides the means in which to increase the return to the shareholders. However, in oil and gas leverage on the assets that represent the past spending orgies are not appropriate. The assets on the balance sheet have ballooned to unreasonable levels due to the SEC’s accounting methodologies. What may be an appropriate percentage of debt to take on in a business would be excessive levels of debt in an oil and gas producer due to the assets representing every cost being capitalized. Capital and operating costs in the field, overhead and interest costs leave very few costs left to pass through to the income statement. Reflecting high balances of assets and high profits. Yet never any cash. That always had to be provided from the investors each and every year.

This has gone on for four decades and many in the industry don’t understand why or how it’s wrong. They were brought into the industry on this basis and know nothing else. It’s just the way the business was run. Since President Elect Donald Trump was elected it is clear that people have stopped sitting on their hands in the United States and are looking to do some business. The fear of being penalized for existing under the Obama administration is about to stop. As a result market rates of interest are beginning to move substantially, anticipating the demand for capital in a growing economy. This is very good news except for those that may have been excessively leveraged due to bad accounting policies, and are suffering in a low commodity price environment. We have a high probability of normalized interest rates within one year.

Even if Opec will, or has, put together an agreement, these higher interest rates will cause the oil and gas producers difficulties to linger. They are in no position whatsoever to be taking on an increase in a major cost such as interest rates. I recall in the last downturn the oil and gas producers created large volumes of unsubordinated debt. That being the amount of interest that wasn’t able to be paid and as such the debtor turned the outstanding interest itself into a another debt obligation. Expect to see the term unsubordinated debt start to creep into the vocabulary of the oil and gas producer in 2017.

All of these costs, the capital costs that were incurred in the past. The debts that are still outstanding on those assets. The volumes of shareholders that an existing oil and gas producer has are impediments, legacy constraints to the current operations and their growth prospects. Producers will at best be frozen in time as a result of the manner in which the industry has been managed for the past four decades, the muddle along strategy and these cost structures. You can’t fool all of the people all of the time. And the oil and gas producers have been able to fool a lot of people for a long time. However, the investors and bankers are wise to the game and can read the outcome of the financial statements these producers are putting out. I still think there’ll be hell to pay when these producers continue to say they’re profitable at $45 but produce financial statements that show greater than $15 billion in losses. Is this a scam or are you really that lost?

A clean slate approach to the industry is the only solution. That is the startup organization. Buying properties off of the existing producers will be the way in which they are able to grow quickly and profitably. Buying at rock bottom prices due to the volume of properties on the marketplace and the desperate situation of the vendor. Keeping their debt and shareholders within reason, they will use profits to fuel the business. Providing the means to drive forward with the most profitable means of oil and gas operations and a healthy industry. Society will be relying on the startup oil and gas organizations to remediate the assets and turn the industry into the profitable industry it should be. It will be obvious during this time that not much will be done in terms of field operations to bring on new supply. But then the overproduction is the issue. Once the transfer of the assets from the old to the new is complete, then drilling can resume.

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.