My Argument, Part XVIII

Taken in its entirety the industry isn’t worth a nickle. It drains cash and loses money on a wholesale scale. Its producer organizations are immune to action to correct the issue due to the fact that its bureaucrats are well fed and adequately housed. The past has shown these people expect little of themselves and muddle through. If they score a winning year every decade or two that would be considered superior performance. The reality of the situation is that shale has fundamentally changed the business from scarcity to abundance. Overproduction and oversupply are now permanent fixtures of the existing organizations outcome. What we see today we should expect to see from now on. Waiting for something better to happen is believing in Santa Claus.

Those investors who in good faith provided the funds to the producers so the bureaucrats could spend them and watch those costs glow on the producer balance sheets for decades. Were soon joined by the bankers who were lined up behind the investors and loaned money based on the outsized balance sheets. Leaving the producer with outsized assets and unreasonable levels of leverage. Essentially outsized levels of debt in comparison to the performance of the firm. In a low interest rate environment high levels of debt may be acceptable for a short period of time. However, a plan to deal with that high debt when interest rates do rise would be appropriate for a firm that is so heavily indebted. I’m sure that debt plan is sitting on someone's shelf, along with all the other plans the producer has regarding the other issues they ignore.

The costs of past production remains unrecognized in the property, plant and equipment account on the balance sheets of the producers. For decades they have capitalized every cost they could possibly conceive of and bloated their balance sheets to the level where the ceiling test was invoked. The ceiling test essentially says the asset value of the firm will be below all the future net revenues of the firm. Which is ridiculous. That means that most of those assets will never be produced profitably by the firm. Specifically the future actual overhead and interest costs that the firm will subsequently incur are not accounted for. In addition a producer firm subject to a ceiling test write down is an abject failure. Its spending is not covered by the value that is being generated.

This of course is all accounting speak and no one listens to accountants. That is what you’ll hear on the street regarding the situation in oil and gas. Accountants are retained in order to pay the bills, when they’re told. That is their purpose in the industry. Just as would be the case in any scam. Not recognizing the capital cost in a timely manner makes you look profitable in the short run. Capital assets or property, plant and equipment therefore represents unrecognized costs of past production. With the industry only generating a nickle in value overall, why is anyone carrying any value in property, plant and equipment?

The conclusion that I came to as a result of my recent analysis of the industry is that it needs a tripling of revenues. If so the industry may be able to remediate the damage that has been done and begin to build for the future. Otherwise we are headed directly at the brick wall. Which I think is happening currently. Our nervous system just hasn’t caught up yet. A tripling of revenue would enable producers to retire their remaining balances of property, plant and equipment, recapitalize themselves, retire debts to reasonable levels and be profitable for the long term. This of course assumes that all production is profitable at all times as a result of the implementation of the Preliminary Specification.

Once again I’ve set the bureaucrats hair on fire as a result of stating that we need a tripling of commodity prices. First those prices would be close to their all time highs. Second if it did establish a foundation in which alternative energy sources could be developed then let them develop them. Who cares! Is it worth the destruction of the industry, the service industry, people’s careers, investors and bankers capital, society's costs and the royalty holders diminished income to ensure that alternative energy sources don’t develop? No, besides I really look forward to pocket fusion reactors. The industry needs to quit being driven by myths that are destructive to their well being.

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 XVII

Watching this endless cycle of bubbly elation of the producers as the commodity prices show some slightly positive upward momentum. Only to find the elation vanish once the reality that shale producers will fill the void of any diminished overproduction. And the latest quarterly reports show that things are worse than even last quarter, and the worst year on record. Then the industry wide depression sets in and we all find the whole process maddening. Meanwhile the bureaucrats do nothing, plan nothing and just watch the weather for signs of severe cold.

Occasionally we hear one of the producers mention that they too are committed to energy independence in the North American marketplace. It is these attributes of the producers that make me know for certain that they are scamming their investors and the general public. To achieve energy independence, from where we are in the industry today, with every company in the worst financial position that they’ve been in decades. With a continued deterioration in the cash and working capital of all producers. With the investors and bankers looking to the industry with concerned expressions on their faces. Now is the time they chose to discuss the expansion of the industry to meet all of the continent's energy needs? This is not just a scam, this is the boldest scam that has ever been perpetrated on anyone in the history of commerce.

Astute readers will note that People, Ideas & Objects are promoting energy independence. The difference is we have a plan to achieve it. First we build the Preliminary Specification in order to establish profitability over the entire production profile of the continent at all times. Then we deal with the throughput of the industry. To increase our capabilities and capacities we are not going to get to where we want to go from the base that we have today. The people necessary to run the industry will have to be organized. The “big crew change” and other issues will have to be addressed. Such as the way the Preliminary Specification does in the Resource Marketplace module. Then we can approach the issues related to enhancing the throughput of the industry. This also needs to address the aging infrastructure that exists and the need to replace and refurbish much of that in the next generation.

Therefore talking about energy independence without a plan and a means to make the industry profitable. A plan that would seek to return the capital that is currently tied up in the industry, that which is “well defended” by the bureaucrats on those producers balance sheets. A plan that will provide for the return of any additional capital that is subsequently invested. Without these elements within the plan then the plan I would have to say is a scam. The bureaucrats at the producers know what they’re doing. It's a simple manner of holding out the prize to the prospective victims of this scam, without any details of the issues or the resolution of those points. You only have to capture people’s imagination for the scam to work!

We are at a critical point in this process. The scam isn’t really working anymore. As we have documented here many times the “jarring gong” of self preservation, as Winston Churchill called it, has rung. I think that happened in late 2017. The fact that nothing is being done about the situation is evidence of the scam and why I am writing about it today. The producers know that the situation is not sustainable on a go forward basis. They have been devastated by losses and the cash situation in the industry is hyper critical. Action is demanded however we don’t see a thing.

What we will see is the bailing of the bureaucrats from these producers in rapid fashion. Sticking around as the hero that saved the ship isn’t a) possible or b) consistent with the work ethic of the bureaucrat. Insurance companies will advise those directors who they cover for fiduciary duty purposes to bail as opposed to stick around. Once it becomes obvious that the directors are jumping ship, that will be the time when the receptionists and mail clerks step into action. Also known as, its over.

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 XVI

Everyone want’s to own stuff. The more you have when you die, there is supposed to be some benefit. That is the motivation behind the bureaucrats loading up their well defended balance sheets with assets. Companies with decades worth of capital expenditures sit in outsized fashion to every other aspect of the operation. This is what makes you the most efficient and effective oil and gas producer in the industry. If you can spend money, then you’re golden. Accounting seeks to balance the recognition of capital assets in a timely manner. Currently producers deplete their assets based on their production over their reserve base. This is why there is such a small amount of capital that is recognized on the income statement as depletion. Oil and gas reserves are constantly under evaluation and being developed further through additional work and effort. Rarely is a field shut-in and terminated. Therefore the property accumulates spending and releases it slowly over long periods of time. This may theoretically be the ideal that accounting is seeking to achieve, in reality decades of unrecognized costs is a subsidy to the consumers of the products being produced. Particularly when the prices paid by those consumers don’t cover the cost of the operation and additional investment capital is needed to help “build the business.”

Those that have been reading this blog know that I have a particular dislike to this methodology. Leaving assets for 12 to 15 years on the balance sheet disable the company from turning its capital over in an efficient way. That capital investment is just sitting their for 12 to 15 years before the money is ever returned. I believe, that none of the money in oil and gas has ever been returned as each year more is needed from the annual share issuance and the assets only grow in size and the period of time in which they are recognized. If producers were recognizing these costs in a more timely manner, I suggest a three year term, then the capital that was employed in developing those assets would be returned to them in that time frame. This of course assumes that they’re running a profitable operation which imputes that the prices are able to cover the costs of the operation and provide for that profit. This is where the bureaucrats fail to achieve any sense of a commercial operation. They spend and when it comes time to spend some more they go to the markets and raise some more capital. That’s not a commercial business operation. That’s what Pravda would call the five year plan. Or maybe what I’ve been talking about here lately, a scam.

What People, Ideas & Objects propose is that we recognize the cost of capital in the three year time frame mentioned. Returning the capital from the operation to be distributed to further capital expenditures, dividends and paying down debt. Literally a self funding operation, or business. In order to do that the industry has to stop the chronic overproduction and oversupply. In order to do that we have to recognize that the commodities of oil and gas are subject to the economic characteristics of price makers. That small changes in the volumes of oil and gas have large impacts on the prices. We do this by each and every property being evaluated monthly on the basis of whether it is profitable or not. Considering all of the costs of capital, operating, royalties, and detailed overhead. If it can’t be produced profitably then it should be shut-in where it will incur a null operation, no profit, but also no loss.

We would be able to incur these null operations as a result of the manner that the People, Ideas & Objects Preliminary Specification reconfigures the industry and what we call the service providers. The producer is a stripped down version consisting of the C class executives, earth science and engineering resources, some land and legal, and support staff. The remaining accounting and administrative resources are reallocated to service providers who focus on one process and service the entire industry as their client base. So that when the property that is not profitable is shut-in. None of the service providers are conducting any of the accounting or administrative work for that property during that month and the property records no capital, operation, royalty or overhead costs. A null operation. Overhead costs of any shut-in production will have been shifted from the industry itself to the service providers. Who, understanding at any time may see their revenues decrease by as much as 15%, or the amount of industries shut-in production, and are able to budget annually for this contingency. Oil and gas will therefore have a dynamic output of their product. Based on the demand level determined at the cost of the product. There will be no further subsidy of the consumer by the oil and gas investor. This is a business, or it should be. Let's start operating it as one.

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 XV

Accounting is the tool that is used to conceal the scam being perpetrated on its victims. In oil and gas accounting has achieved levels of creativity and obscurity that have pushed the envelope to new heights never believed achievable. We are seeing an exceptional performance from these bureaucrats, if only they would apply themselves productively. The lack of clarity has become somewhat of a competitive playground where the level of obscurity has become artistic and sophisticated. Here is a statement that was provided by one of the senior intermediates entitled “Reconciliation of adjusted corporate segment net expense.” Beautiful isn’t it. Who needs balance sheets, income statements and statements of changes when we can have as their replacement a reconciliation of something or other.

Accounting has been standardized and normalized across the continent. This is to make it comparable between companies. Companies in the same industry and companies in different lines of business. Understanding the standard way in which accounting has been prepared enables you to impute how the company producing those financial statements have performed. Accounting is about performance. Mostly about the performance of the money that has been invested by its shareholders and bankers. Was the management prudent and provide value? Or did they mismanage the resources they were entrusted with. With accounting being standardized the reader knows that certain things are done in a certain way. Accountants prepare financial statements based on prescribed policies and the audit firms audit to those policies. Standards.

So let's apply some standards to the “Reconciliation of adjusted corporate segment net expense” of this senior intermediate across the industry. We have no idea what these numbers mean and what they represent. No one else in the industry, or any other industry, is preparing a statement such as this. Therefore we are unable to determine any performance related information or meaning from this treasured statement. What is it and what does it do? I have no idea but it must be important because it replaced the balance sheet for that producer. I am seeing this slight of hand amongst the producers more and more during the 3rd and fourth quarter of 2016. I felt that it was out of control then but now it is epic. We have to remember that the cash situation in the industry is at a crisis level. Working capital is a term used in accounting, but not in existence in oil and gas. Debt is at disproportionate levels in terms of what the real assets values are. Debt covenants are in many cases coming into play. So yeah, why would you publish a balance sheet and announce to the world that you're in financial trouble?

You can’t send out a glowing press release stating that the company is doing so well and the future never looked brighter. That you’re literally walking two feet off of the ground. And then publish a balance sheet that shows you are in default on your debt with no working capital and your revenues are collapsing from production declines. So change the financial statements to reconciliations of something or other and put those out with that glowing press release. That is how you do it in oil and gas.

During the financial crisis Bernie Madoff continued to produce statements to his victims that showed he continued to perform as he had throughout his history. The world had seen a 50% decreases in the value of their holdings yet he was able to avoid everything and still earn what he had consistently earned. The parallel in oil and gas is that if you want consistent and comparable statements between periods of time and between producers don’t look to the financial statements, look to the press releases.

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 XIV

Thank god the groundhog saw its shadow. Otherwise I think that natural gas prices might have dipped below $3. Producers don’t know what to do, the “market rebalancing” myth in natural gas seems to be coming into effect. This as a result of the industries bureaucrats planning and implementing the destruction of the industry since 2009. Their current thinking is that maybe during 2018 the decline in natural gas deliverability will be precipitous, and as a result, the long awaited natural gas price increase will arrive. Until then we have groundhog’s to drive the business decisions. My money will be on shale gas once again overwhelming the markets if the price begins to increase. Remember that shale gas went from 10 bcf / day in 2010 to 45 bcf / day in 2016 to provide 64% of U.S. supply. That’s an incremental 5.8 bcf / day each year in just the initial phase of shales development, what could be done now? We should ask Punxsutawney Phil.

On a lighter note, ask a producer, any producer for that matter, what the historical cost per barrel of a property is. Detailed between capital, operations, royalties and actual overhead incurred to manage the property. If you by chance found an honest producer they would say, “we can’t, we only deal in fudge here.” You need to ask detailed questions about the overhead that is recorded at the property you're reviewing and the overhead that you know those layers of people downtown are incurring. Therefore ask to see the properties accounting charge for the production accountants time. There isn’t one. Overhead or G&A costs in the industry range from 2% to 20% of the revenues of a producer and are part of the total overhead that is charged directly to the producer who is the operator. Note none of the non operators participate in paying the actual overhead costs of the operator. The operator in turn charges overhead allowances based on the Council of Petroleum Accountants Society guidelines for overhead to the properties. These overhead allowances are inadequate in capturing the real cost of administering a property.

And what do you do with all the costs of those people in head office administering these properties if they’re not charged to the properties. Oh, there allocated between overhead that will show up as G&A on the income statement and overhead capitalized to property, plant and equipment on the balance sheet. Of course those overhead costs that are capitalized to the balance sheet will eventually be “well defended” by the officers of the corporation. I still don’t know what “well defended balance sheet” means, or even if it’s supposed to mean anything. Anyway, if we assumed that a producer was allocating their overhead costs 50/50 then the range of overhead costs for the industry would be more like 4 to 40% of revenues. Which makes these numbers much more believable.

Ever see those big buildings in the big cities where oil and gas companies have their offices. That’s where all the people work. People cost money. Buildings cost money. And people spend money. When you stack them up 40 floors at a time they must come at a discount because these costs don’t seem to be showing up anywhere in the oil and gas firms. Most of these costs are capitalized, which is a big part of the deception of telling people you can produce profitably. Never recognizing the costs of exploration and production, or overhead, for decades, allows you to say whatever you like. And as much evidence as I have, and the decades that I have worked in oil and gas, it would be difficult for me to tell if their “actual” accounting or their “recycle costs” were more accurate. The Preliminary Specifications decentralized production model eliminates this slight of hand and begins to detail the actual, detailed costs of oil and gas exploration, development and production. Capital, operations, royalties and detailed actual overhead. Then a producer can say it's profitable or not. And not being lying about it.

If there was a clear, detailed, actual accounting of what is going on in this business then the bureaucrats would have been shown the door a long time ago. Running a scam is the best that they can do until such time as they’re shown the door. They have completely destroyed the industry and the service industry. Destroyed people’s careers. Ran an unprofitable operation that hasn’t paid its fair share of taxes to provide for society's benefits. Short changed the royalty holders by destroying the commodity markets through over production. We talk about the point in time when action is required. The “jarring gong.” That has passed, and there is an “unproductive” motive driving these producer firms. I think I’ve been clear as to what I think that motive is. These bureaucrats are just hanging on until someone pushes them out of the way. So let's do that.

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. 

Third Friday Off

No posting today.

My Argument, Part XIII

Think of all of the investment capital that has been invested in oil and gas. And none of it produces a profit. What’s worse is that according to the financial statements being published now, oil and gas has never been produced profitably. We see this fact clearly when you consider that the bloated balance sheets of producers today, only hold the unrecognized costs of past spending binges of yesterday’s production. Yet at the same time retained earnings are rare, and in some cases shareholders equity is rare. All have been eliminated by the losses incurred by the bureaucrats. That is the extent of the damage to the industry. Yet these bureaucrats consider nothing is in need of attention. Its full, unconstrained promotion of the producer firms. You have a fundamental business change in the development of shale. The collapse of the commodity markets. Yet it’s no one’s fault because it can’t be OPEC’s anymore, now that they’ve implemented their agreement.

Commodity prices are showing weakness in the futures markets. Both oil and gas commodities are showing that current prices will be what’s available throughout the next eight years until 2025. Exciting isn’t it. The quarterly reports are all showing that each and every company is losing more than they were in 2015. The year that it was reputed to be the worst year in the industry. We can therefore conclude, with no change in commodity prices and the vast level of stored costs of past production sitting on producer's balance sheets, that no money will be made until at least 2025.

The escalation of drilling rigs since May of last year is indicative of the mindset of the producers. Like the junkie “more” is all that they can consider. It is claimed that these of course are being drilled “profitably” by each and every one of these producers. The costs of oil and gas exploration have decreased to the point where it’s profitable to produce at $30. Then why is everyone reporting losses at $53? With OPEC reducing output and North American producers rushing in to take up the slack, whom is it that’s responsible for the overproduction and oversupply?

We should revisit the producers friend the “recycle cost” that is the determinant of the $30 profitable oil. The last thing that the recycle cost is based on is historical accounting data. It is based on a wish list of optimistic possibles that might be the case. If the situation were to be those “best case” elements then maybe the cost of the operations would be as good as the recycle costs suggests. Historical accounting however shows that the actual costs are much different. Stating numbers that the producer would be profitable at, which do not have a historical cost basis, would be a scam being perpetrated by the officers of that corporation.

The producers will say, “the accountants would certainly have a different take on it. We don’t deal in sunk costs.” They never want to account for their spending. If they park all of their costs on to the balance sheet for decades why would you account for these costs in terms of the cost per barrel today? They don’t and the officers that parrot the “recycle costs” are knowingly deceiving their shareholders and the public. Their financial statements prove that. The determination of “recycle costs” are complex and sophisticated. The producer determines the current price of the commodity. States that there recycle costs are the price minus the profits they need, and the remainder would be the recycle cost. So today at $53 you would be profitable because your costs are $45. Presto! Some would call this lying, I chose to use the industry wide term of “recycle costs.”

As a result when a producer looks at their operation all they see are profitable properties. So when I suggest that the Preliminary Specifications decentralized production model would shut-in any unprofitable production they know, intuitively, that they will never have any shut-in production because all of their production is profitable at any price. Therefore there will never be any need for the likes of People, Ideas & Objects.

So there you have it, you’re stuck with what you have, producers who lose money faster than they can spend it, state falsehoods at any time about critical business facts, who will never accept their role in today’s and tomorrow’s problems and continue on in their own personal best interests with your money. They call it the oil and gas industry, I call em as I see em.

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 XII

The bureaucrats aren’t happy with me. Exposing their scam doesn’t sit well with their plans to keep their gravy train rolling. What other conclusion can you come to when you see that the business, as it currently stands, is not only unprofitable but also doesn’t offer a future. Where the accounting, which has been suspect for four decades, and like all accounting scandals, skewed the businesses development in negative ways. With the officers out pitching the next great thing, actively selling their producer firms as the strongest ever, with the best opportunities. Meanwhile the only reasonable critique of this scam, People, Ideas & Objects, is getting the baseball bat treatment out back by the producers dumpster. I could forgive this if I saw a plan, something that addressed the difficulties presented by the changes brought about by shale. Something that would make shale commercial, but it's just another day to these bureaucrats.

People, Ideas & Objects Preliminary Specification has a value proposition that is in the trillions of dollars over the next 25 years. Currently assessed in the $25.7 to $45.7 trillion range it provides this through two critical elements that are missing in the current producers business model. The first is our decentralized production model’s price maker strategy. We believe that oil and gas prices need to be at record levels in order to cover the costs of exploration and production, and the price maker strategy enables producers to only produce profitable production. Any unprofitable production is shut-in and as a result it incurs a null operation, no profit but also no loss. As a result the oversupply and overproduction is ended and the prices will seek the market equilibrium. The second element of our value proposition is that the capital that will be used to rebuild the industry during the next 25 years, and the capital that has been used in the past, will be returned to the shareholders.

Our value proposition is skewed towards the investors in the industry. A profitable oil and gas industry is also an overall benefit to society in general. There is however, nothing in our value proposition of material value for the bureaucrats. There compensation is fixed and they earn it whether the industry is doing well or it’s in the dumpster. Nothing can affect the value that they’re able to extract from their producer firms. There is also no upside in terms of the producer's output. If the producer is highly profitable and efficient, that only means the bureaucrats are working that much harder. And when we discuss the implementation of the Preliminary Specification, that empties the room over talk about the level of effort necessary to make it successful. Bureaucrats never want to work that hard. Why, they have a good thing going.

They’ve done nothing, yet had every opportunity to do something. When I pointed out several years ago that the current situation was where we were heading, they laughed stating profits were not important in oil and gas. Things were great then as far as they were concerned. Now that things are as bad as they are they think, as their experience with so many other bad times before, the good times will soon arrive. I’m not so certain of that. Shale has changed the business in fundamental ways. From scarcity to abundance.

Desperate times lead to desperate people. Cash has been the rarest commodity in the industry for the past year or more. The scam is getting to the end of its days in terms of its effectiveness in convincing investors. And we know that the principles in these producer firms are innocent of any wrongdoing. They were unaware and ill advised. Just like those in the prison system today that claim that 90% of all of the prisoners are innocent. Undertaking the fiduciary duties of an officer of an organization is done with the understanding that the responsibilities and obligations are hardly ever invoked, our friends the bureaucrats would say. Claiming innocence is the first step to ensure that is the case. The second is to tender your resignation. My message to these officers is that whatever you do, make sure you don’t say you didn’t understand. Ignorance of the law is no defence. If you say that they’ll come after you for sure.

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 XI

The trick for the current oil and gas producer will be to not read the prior two posts of this blog. There is nothing positive there for you, and I advise against reading them. And for that matter, if I were them, I’d probably skip reading this post as well. Don’t let anyone say I don’t play fair, I won’t have it.

The situation we detailed on Friday was that the business was untenable. BP’s Chief Economist noted that it would be in the best interest of the OPEC producers to produce what they have and provide the market at whatever price is offered for the next 32 years. With the abundance of supply on hand, stated as being double what is needed to 2050, those low cost producers would find that they would be profitable, but their margins would be slim. For high cost producers like those in North America, you’re out of business. That in essence was the message.

Monday we detailed the methodology behind accounting scandals, past and present. How the innocent were usually caught up in trying to do the right thing, being falsely accused and spending time in prison. Those that may have read the detailed histories of Worldcom and Enron may have seen how unfairly those companies were treated. That there are parallels to the oil and gas industry and People, Ideas & Objects hope that none of the bureaucrats in this industry are ever sent to prison. After all they were only doing what everyone else was doing. They were only competing within the industry and they didn’t know that it was wrong at the time. Give them a break.

Today, with those two posts in mind, we note the narrative in the industry is rainbows and unicorns. The times could not be better and the opportunities never so strong. If you as an investor bet your money, or is it invest your money, I can never remember anymore, you could win the biggest prize of all. Coming from Calgary I have to say that we’re probably better known for the scandals and scams then we are for any business success. We’ve seen them all. Back in the early 1990’s we had this Gold mining company named BreX. If you're interested you can catch Matthew McConaughey’s new movie Gold which is based on that story. What BreX did was find an unbelievable gold mine in Indonesia. It was only unbelievable because they were salting the samples that they sent to the lab to determine how much gold was held in reserve. The scam only fell apart when someone went back to the samples and found that the gold in the samples was placer gold. Which is gold that is only found in rivers, not mines.

Kind of feels like the 1990’s to me in ways. Looking behind the cheerleaders the producers are putting out in front of the investors is rather distracting. However, I have to admit effective. The show must go on. And it is. We spoke of the market capitalizations that my analysis over the holidays showed of the industry. That producers were very highly valued in comparison to their cash flow numbers. Those overvalued cash flow numbers, just like the overvalued earnings and assets. Those are financial performance over valuations. Here I’m talking about the price of the stock being overvalued on the order of three to four times. I suggested that this enabled positions to be liquidated and John Q. Public left holding the stock while it crashes and the company's officers skedaddle. With the earnings reports I’ve seen so far, I think this is highly probable.

Does anyone doubt that shale changed the business? What changes in the methods of operation have the producers undertaken to deal with shale? How have they made shale commercial? What plans do they have to rebuild the aging infrastructure? Deal with the big crew change? Or just move on in a manner that is viable? I haven’t seen anything. But when someone invites me into a dark room I generally run the other way. So they maybe talking amongst themselves about these things in that dark room and we’re just not aware of them. I’m sure that’s what’s going on.

The challenges and opportunities moving forward are the most significant in the industries history. Those were somewhat detailed in BP’s Chief Economists comments about double the supply of oil to 2050. Where’s the plan? What are we doing? I have proposed the Preliminary Specification and have been ostracized for it. Producers have done everything in their power to keep me quiet over the last decades. Why, am I screwing up the scam? Apparently so.

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 X

At the turn of this century we were blessed with a number of accounting scandals that made for interesting reading in the business papers. Two that captured the hearts and minds of everyone were companies by the name of Worldcom and Enron. Click on their names to be taken to the Wikipedia page of their rather checkered histories. These were public companies that were subject to annual audits by the likes of the first class accounting firms such as Pricewaterhousecoopers and Deloitte & Touche. At the time there was another premier audit firm by the name of Arthur Andersen who did the audit of Enron. When difficulties began with the company and questions began to be asked of the auditor, Arthur Andersen did what any prudent first class accounting firm would do. They shredded the Enron audit files. And that is why there is no Arthur Andersen in the marketplace today. There is however, one of the best advertisements ever.

To draw a parallel to our current troubles in oil and gas to those accounting scandals at the beginning of the century might be what people think I’m imputing. Let me be clear. There are strong parallels between the Worldcom and Enron accounting scandals and the systemic way that accounting has been done in oil and gas. The other day I detailed how the assets, earnings and cash flow of the producers are all overstated. Materially and for the past four decades. Using the SEC’s requirement that the value of the assets recorded on the balance sheet of the producer will not exceed the independently evaluated oil and gas reserves, times the current commodity price, at any time. This has led to all manner of recording of every conceivable cost as an asset on the balance sheet. Costs such as interest expense and overhead are systemically charged to property, plant and equipment. Once there, these costs never leave and will only move to the income statement after decades in some, and in most instances.

Although the SEC states that this is the accounting requirement. It does not provide license for each and every producer to reach that level, known as the ceiling test, each and every fiscal year. The value reached by recording the assets at just below the threshold of proven reserves times current prices. Is essentially saying that the assets are just slightly less than the entire future revenues of the producer. This being useless information, ridiculous and anyone with a brain in oil and gas knows that. Who has benefited as a result of the ability of these producers to overstate asset values, earnings, and cash flow? And where are Arthur Andersen’s competitors in applying some level of reasonableness to the process? Do they not have a stake in the credibility and integrity of the accounting information that is put out by an industry such as oil and gas? Or did Arthur Andersen establish the new standard?

I think we all heard that distinct sound of a paper shredder starting up. No worry we still have the .pdf’s. Earnings season has begun once again. If you compare Chesapeake to the history of Worldcom you’ll find that Chesapeake’s history is eerily similar, but far more advanced. Where Worldcom was forced into bankruptcy, Chesapeake was only beginning. Their current CEO states that they’ve never been in better financial position. Which is a statement that can’t be supported by any fact and I would advise him to be careful!

There is a mechanical methodology to accounting. That although you can massage the numbers in the short term for your benefit, there will be some commensurate pain that has to be realized in the future. Producers have avoided recognizing their costs for so long that they now have them being recognized at the wrong time and at the wrong velocity. What I have seen so far on the earnings front is making 2016 look like the worst year in oil and gas, not 2015. But still no one is acting responsibly. People, Ideas & Objects have given them every opportunity to correct their ways by implementing the Preliminary Specification, why haven’t they? Telling isn’t it. In the movie the Big Short the quote “Tell me the difference between stupid and criminal and I’ll have my brother in law arrested” is appropriate here. Producers will say that they had to compete. That everyone was doing it. Or they didn’t know. Bernie Ebbers the CEO of Worldcom and Jeffrey Skilling the CEO of Enron are spending the rest of their lives in prison for this kind of stupidity.

So here’s the big problem. That over reporting of earnings has created a rush of investment into the industry. That over investment has created overproduction, which on a real basis does not perform as economically as it is reported to be. This has been on the sustained basis of the past four decades. Now the industry must deal with these three major issues. No performance on their invested capital, overproduction, and the accounting scandal that has been perpetrated against the investors by the producers. Investors even have a name for this, they call it the roach motel, money goes in, nothing comes out. But let's be honest, the bureaucrats are happy.

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.