My Argument, Part XXVIII

There has been a dramatic deterioration in the cash flow of each of the producers during this past year. That would seem to be the natural case with the very low commodity prices at the early part of 2016. However the fourth quarter did not seem to remedy the situation at any of the producers I reviewed. $4 natural gas and $53 oil were some of the healthiest prices that were realized in the past number of years. I think our proposed solution to the industries ailes is the correct remedy. A three fold revenue increase is the only thing that will solve the financial difficulties of any of the producers that I’ve seen. The only way in which to do that is to implement People, Ideas & Objects Preliminary Specifications decentralized production model and price maker strategy. Then producers will only produce profitable oil and gas and generate the cash flow to fund their operations.

We see continued resistance to this position in the industry. Bureaucrats do not believe that they have any impact on the prices of the commodities that they produce. Their actions are not part of the problem and therefore can’t be part of the solution. This is just a capitulation of responsibility and avoidance of the difficult task of implementing the Preliminary Specification. Bureaucrats know that they can’t fight the situation forever and they have no plans to do so. They’re involved in a limited engagement with People, Ideas & Objects to ensure that they maximize their personal revenues from the industry before they begin their mass migration out.

So whether it is the “jarring gong of self preservation” that everyone hears that precipitates the necessary actions to fix the industry. The bureaucrats migrate out. Or the investors express their frustration with their investments poor performance by acting to correct these issues. It will be one of these three scenarios that will be the manner in which the necessary changes are made in the industry. Oil and gas has carried on for far too long with its “muddle along” strategy. Things have changed fundamentally with the development of shale. The business model of the current producers is incapable of dealing with the abundance of the resources that are available through shale reservoirs. The commodity markets are overwhelmed by the volumes of reserves of oil and natural gas. They are overwhelmed by the volumes in inventory and the production that is presented each and every day. Producers don’t discuss these points, they just continue to overproduce and drill for more.

There is now mention in the markets that the Saudi’s will be changing their production strategy once they’ve completed the IPO of Saudi Aramco. Moving back to full production for the long term. This flooding of the markets is consistent with the thinking of BP’s Chief economist who said that only mid-east producers would be profitable in the abundant, oversupplied oil markets. And this would be the case until 2050. If North American producers were smart they would circumvent the Saudi’s motivation to do this while they still have the ability to materially impact prices in both oil and natural gas. If mid-east producers just flood the market until 2050, will there be any opportunity to implement the price maker strategy? Producers should ask their investors if they want to take that path with them. There will come a time when all solutions fail to solve this problem for the North American producer.

The bureaucrats will have moved on by then so you should be careful who you ask. Is it wise to have North America unprofitably produce oil and gas for the next generation? I don’t think so and that is why I think it’s very important that we implement the Preliminary Specification in the industry as soon as possible. The past generation produced oil and gas unprofitably and look at the disaster that is.

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 XXVII

If it is that we are to hobble along paying one screaming, nasty creditor after another. Spend our time on the phone trying to convince people to give us another chance, to support the firm in its hour of need. Ask employees to do a bit more each week. Camping out at the bank. Selling the next in an never ending parade of crown jewel properties to keep afloat. Then oil and gas is doing all that we could ever have expected of it. When the operational problems arise or the pipelines leak, then those unfortunate producers can show the world those skills and capabilities that’ve been so well honed over the past years and troubleshoot the problem with a package of Band Aid brand bandages. We all know they’re that good. But lets look at the bigger picture.

The opportunities and issues that we face in the next 25 years will be the greatest this industry has ever faced. Hobbling along with our muddle along strategy is the vision that the industry has put forward to meet these challenges. That’s not good enough. The investors and bankers who have seen their investments in the producers themselves perform very poorly will no doubt reconsider their investments. This reconsideration is different than looking up the price of the stock on the exchange. That is not how you evaluate the investment in the producer. In most cases the book value of the producers interest is nothing. Their investments have been eroded away by the chronic losses and the apathy of the bureaucrats. Bank and bond holders have taken the hit in terms of settling at less than face value on their investments.

Expecting these people to then step up and fund the next round of $20 to $40 trillion in investment over the next 25 years will be laughed at. The industry doesn’t have the performance necessary, or the integrity to ask for that. Besides the expectation that that volume of money would be available is ridiculous on its face. What the industry needs to do is to change its business model to the Preliminary Specification and begin the self funding that most businesses do. A business model that also recognizes that shale has changed the industry from one based on scarcity of the resource to one in which there is an abundance of the resource. The reliance on investment capital to provide consumers with a subsidy on their energy consumption is over. The producers are broke. Bureaucrats have fundamentally run the business into the ground. This being the beginning of what should be the industry's golden years.

As with every industry the forces of creative destruction are at work. Eventually all industries fail to produce any value from the business model that they employ. During the downturn in 2008 GM was clearly failing in the marketplace. Something that it had been doing since the Japanese began introducing vehicles in the 1970’s. Until the investors saw the whole in their portfolios did anyone do anything about it. And I’m not holding GM out as an example of productive creative destruction, clearly the firm needs more work. However the signalling event then, as it was with the banking crisis, was when the banks and investors were feeling the pain from their investments. Pain that was in excess of what their financial statements could handle.

As much as the oil and gas bureaucrats like to point to the reserves in the ground as the intrinsic value of the firm. They are worthless to anyone if they can’t be produced profitably. Currently the book value of the industry, based on all the financial statements of the producers is $0.00. The industry chronically loses money and demands cash in large quantities just to produce. This is in sharp contrast to the values represented on the exchanges for each individual producer. This variance will be corrected in the short term. And when the investors are presented with the fact that these bureaucrats have destroyed the industry, have no plans to undertake these golden years of opportunity and are demanding more money just to produce, then we may see the final act of the industry as it stands today.

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 XXVI

Over the past few decades it would be a fair question to ask, who’s been winning and who’s lost in the oil and gas industry. It’s difficult to see how anyone outside of the bureaucrats that run the producers can categorize their time, money and efforts over these past few decades as a success. Society in general has to realize the costs of the unemployed in oil and gas and the service industry. The loss in tax revenues from profitable operations and the royalties that would be paid if the products received fair value. The investors and bankers have seen the investment that they’ve made in the producers produce little to nothing in terms of value. No producer has performed in terms of their accounting. Their stocks may be high at present, but those have nothing to do with the value that is being generated by the producer. They are for all intents and purposes a different market. One which could collapse itself. And certainly the people who work in the industry have either been laid off or are having to make up for those that are no longer there. They wouldn’t count themselves on the winning side I’m sure.

The brokerage houses must have inventories of producers stocks that they’re trying to offload onto unsuspecting victims. I read an article yesterday stating how good a job Chesapeake had done and the glowing commentary had little to do with the facts of the firm. These comments coming the day before the producer would be publishing their fourth quarter results. Why would they comment the day before? Wouldn’t they be best served by waiting for the facts and provide their clients with those? Or were they thinking that the stock was going to be hit as a result of the inevitable poor quarter’s performance. Chesapeake has no money, no working capital, no cash flow, debts everywhere, and have lost $19 billion in 2015 and $3.9 so far in 2016. That’s a $3.9 billion loss on $5.8 billion in revenues. Results will be out soon after the posting of this blog post. Maybe the key factor when evaluating Chesapeake is that it’s 70% institutionally owned and some of those institutional investors are nervous.

As bad as the situation is in the United States you haven’t seen anything until you focus on the producers north of the border. Canada has much less “rigorous’ accounting requirements for producers. What you see in the U.S. is a reasonable, factual tale being presented based on the SEC requirements of Full Cost or Successful Efforts. The difficulty that I have is that producers have been reaching the limit of the ceiling test almost each and every fiscal year. The capitalization of any and all costs being the issue. In Canada you have to believe in unicorns in order to interpret the accounting. Cenovus, as an example, reported a profit for the fourth quarter. This as a result of negative depletion. Now I understand that this is possible, however, the company has outsized assets that will take 8.79 years to fully deplete at that rate. This is unreasonable. The CEO was also claiming in the text that cash flow was so strong that it funded capital expenditures and the dividends. This Cenovus categorically did not do.

Acceptance of this level of destruction throughout the industry is difficult. Acceptance of this level of misrepresentation is disheartening. What is going on in the industry? Lipstick on a pig? We were all led to believe that the difficulties in natural gas were about to expire and the industry would rebound. This “market rebalancing” being what has been expected since at least 2010. Natural gas prices were at almost $4 and have lately collapsed, once again, into the $2.60 range and are certainly headed lower at the speed and trajectory their taking. Oil inventories continue to build despite OPEC’s production cuts. North American producers have been increasing field activity and it may not be too long before we see declines in the oil markets. All as a result of overproduction and oversupply. Were we not just at this point six months ago?

The industry continues to swirl around the drain. 2016 is much worse than 2015. Prospects look very dim to me unless we obtain the three fold revenue increase these producers need. There is no discussion of the difficulties in the industry. Producers have their blinders on and only see their tiny part of the world and are unable to grasp the larger picture. Saying things are great isn’t going to make it so. This Ostrich like act is only leading to additional problems down the road as those who were in the industry are seeing less and less opportunity in the future, and are more motivated to get out of the industry permanently. We are not being productive but destructive. The forces of creative destruction are in operation throughout the industry. This is not a changing environment as much as the bureaucrats make it out to be. We will continue to cycle downwards until such time as we take control of the situation and that requires that the industry adopt the Preliminary Specification.

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 XXV

If we have no hope of ever producing oil or gas profitably, what are we doing? Producers believe that all of their value is represented in the reserves of oil and gas that they hold. At current prices they’re worth billions of dollars. What isn’t discussed anywhere in the industry, other than at People, Ideas & Objects, is that those reserves are not produced profitably. Never have been and never will be. Not under the current business model. It is flawed and only serves the bureaucrats who operate the industry on the basis that they know people will believe the value they create is in the ground. Unseen and unrealized. This is not a business. A business generates value. Oil and gas has destroyed the investments that have been made in the producers through faulty accounting and bureaucratic mischief. If the value that was represented in the reserves existed as is represented, then the industry would not be subject to these downturns or to the financial disaster that it’s in. Where is the value when the producer always has their hands out for more investment capital and is subject to the ups and downs of the commodity prices?

Cost estimates for the rebuilding and refurbishing of the industry and infrastructure are estimated in the $20 to $40 trillion range over the next 25 years. Are investors expected to line up, invest their money and marvel at it in the ground? The only manner in which the reserves in the ground have any value is on the basis that they can be produced profitably. If they can’t be produced profitably then they’re a drain on the cash of the owner of those reserves or more specifically its investors. Who wants to own that? And if the industry needs that much capital on a go forward basis, I believe, it needs to fund those capital expenditures from the value of those reserves sitting in the ground. And that means they have to be profitable to generate the cash to fuel that investment. Otherwise we are running a scam and kidding ourselves thinking that the money can come from somewhere else. Fools trying to scam innocent shareholders into a failed business model that has proven itself an abject failure.

There I go again. One would think I would be more successful in securing our budget if I didn’t call out the people who are responsible in this industry. You’re probably correct. The damage I see however is complete. And maybe I’m wrong, but I don’t think so. The people who are responsible for this level of damage don’t deserve the respect of anyone. They have deceived and misrepresented the situation and are actively doing it again. They have no plans or discussion about what to do or where to do it. It’s shake the furniture cushions once more and spend the money. It’s not a business, it’s a scam whose purpose is to enrich the bureaucrats and I’ve detailed how they account for their spending. When we see critical comments and news from opposite corners of the industry. Where BP’s Chief Economist says no one can make any money until 2050, where Exxon is concerned they will never earn any money in the oil sands and Lexin Resources operational capabilities have degraded due to financial difficulties to the point where regulators have to take them over, we know the pain is being felt everywhere and by everyone. Pain as a result of the overproduction from overinvestment as a result of over reported profits from faulty accounting. It's time for a new business model such as the Preliminary Specification.

If Exxon was really concerned about the profitability of the oil sands they would do something about it. They don't, they just announce that it won’t be profitable, ever, and that’s that. No one cares in this business. If they did I would have been funded a long time ago. Instead the only treatment I’ve received is repeated visits out back by the dumpster for another round with the baseball bats. They’ve done everything they could to try and silence me and will continue to do so. It’s not that I am unknown in this business, it’s that I am a nuisance. As I’ve stated before, the situation is untenable from the bureaucrats perspective. They're just milking the last few nickels and quarters out of the firms before they parachute out into oblivion and anonymity. Leaving the mess for others to clean up. Or, the lofty prices of the stocks of these producers will fall when the oil price declines. Which would then trigger the bureaucrats migration. Either way we have serious issue on hand.

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 XXIV

Late last week we had a number of announcements that fall outside of what a healthy industry would be involved in. On Thursday an Alberta regulator suspended licenses of Lexin Resources Ltd citing “Lexin has failed to comply with multiple orders, lacks sufficient staff to manage its 1600 sites…” Noting the company was in default on its obligations for site reclamation and other requirements. Reading some of the information about Lexin, the regulators were getting calls from residents in the area that equipment was disappearing. Upon questioning Lexin, they noted the equipment was sold. Lexin were also unable to source any resources from the service industry without first receiving payment. The service industry has been abused by the producers so badly in this downturn. I’m sure the service industry can only dream of the days when the producers just called them lazy and greedy, but at least paid the bills. Our Resource Marketplace module deals with the issues here. Producers should be ashamed of themselves in how they’ve treated the service industry throughout the 21st century. Bureaucrats at Lexin can now congratulate themselves on a job well done and most definitely know now that they withdrew all of the value out of the company. The second interesting piece of news was speculation of an upcoming Exxon announcement that…

In a signal that the threat is growing more serious, Exxon Mobil Corp. (XOM) is expected in the coming week to disclose that as much as 3.6 billion barrels of oil that it planned to produce in Canada in the next few decades is no longer profitable to extract.

The acknowledgment by Exxon, after the company spent about $20 billion to put the oil sands at the center of its growth plans, highlights how dramatically expectations have changed about the future prospects of the region.

I guess the point would be then to just walk away. Again the bureaucrats have done what they could to extract all the value they could for themselves and now have no plans or use for the properties. I think that they should find a new business model, one that’s based on the Joint Operating Committee and defined as the Preliminary Specification which would put the properties back in the black. A business model that provides the oil and gas producers with the most profitable means of oil and gas operations. The capitulation of a $20 billion investment is not unlike what I see throughout the industry. There is no accountability or desire to do anything. Who cares? It’s at best an engineering exercise to build the biggest and best plants that you can imagine, better than your neighbours, run it until the bureaucrats can’t make themselves anymore money and wait for the regulators to take it over. That’s the oil and gas business.

Drilling rig increases continue on their upward trajectory in North America. Activity is the name of the game here. You must be doing something in order for the investors to believe in the scam. Another 10 rigs this week, but this time it’s different, this time the producers say they have “discipline” and won’t destroy the commodity market prices. I see the price of oil falling as a result of the upward trajectory in rigs. It won’t take to much more to convince the market that the real issue is the North American producers and their bad business behaviour causing all the commodity price difficulties. Who will the producers blame then? OPEC have shifted the focus to where the issue lies and people will see that.

Going back to what BP’s Chief Economist stated a few weeks ago about none of the production outside of the middle east being profitable until 2050. The question that I would have is, if more drilling is being done, but none of it is expected to be commercially viable until 2050, why? The answer is because this has never been an economic exercise. This is a scam so that the bureaucrats can live the good life. Some like Exxon were not so involved, at least they’re being honest about it. Others like Lexin’s bureaucrats are now unknown and unknowable.

Who’s that idiot that’s been jumping up and down for the past decade or so. Screaming about profits in the oil and gas industry. Everyone sure had a good laugh about him haven’t they. I seek to please my audience at all times and I’m glad you’ve enjoyed the show. The seriousness of the issue maybe coming into focus for some. The next six months will not be positive in my estimation as I’ve heard that “jarring gong” of self preservation in late 2016. As more and more people hear it, I hope they’ll find the opportunity that exists for those that feel that they can make a difference. There is more opportunity here at People, Ideas & Objects, working to correct this mess, and to build a better industry.

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. 

Alberta Family and President's Day

No posting today.

My Argument, Part XXIII

These commodity prices just refuse to listen to the producers demands that they stay where they are. The prices only seem to respond to the overproduction of the North American producers. Oil inventories are at record highs. Should have seen that one coming. Natural gas is under $3, which is also somewhat predictable. 2016 was a good year for crude oil prices. Nymex prices were up 49% year over year to $53.26 from $35.42. It has been suggested that I cut the producers a break in my criticism of the industry. That 2016 prices were terrible at the beginning of the year and were much better in the second half. Which is the case of course. My argument is one of degree. A 49% increase in oil prices isn’t adequate to deal with the industry's issues. What is necessary is a tripling of prices from today’s values.

Capital expenditure budgets are being settled and to no one's surprise the North American producers are looking to increase their spending by 50 to 100%. Should have seen that one coming. As the volume of these announcements begin to accelerate over the next month, we should watch the price of oil and natural gas fall back into the abyss that they seem to feel most comfortable in. Producers have no idea what’s going on. I only question where they think the money will be coming from to fuel these capital expenditures. It’s one thing to announce a budget in this stressful time, another thing to have it funded. I should know, I am wholly unsuccessful in having my budget funded. It would be my suggestion that the producers think for two minutes about the business they’re in and instead of increasing their production profile, enhance their business capabilities by funding the Preliminary Specification. Doing so would provide them with the most profitable means of oil and gas operations.

If producers did invest in People, Ideas & Objects and were able to make their businesses viable, they believe that the higher prices of the commodities would introduce alternative forms of energy production into the equation. This myth has perpetuated itself over the decades and is one of the reasons that nothing is ever done. If man can create energy sources that can compete with oil or gas then they should be developed. What we need to do is run the business. There are reputed to be 23,200 man hours in a barrel of oil. That’s a little under 15 man years of physical effort for $53 U.S. Deal of the century to me, and it would continue to be so if the price was $159.

As I mentioned I've heard that “jarring gong” of self preservation and it’s getting awfully loud. I don’t know if it will be the bureaucrats that’ll be the first ones to leave their post at the producers, or the investors who abandon the free falling stock prices of the producers. If one goes, the other is sure to follow. I’ve fought these bureaucrats on all these issues for more than the past decade. They’ve had every opportunity to remedy this. And that, in addition to what I said yesterday regarding storing costs of past production as property, plant and equipment, these two points are what makes this a scam. None of these losses were necessary and the issue, now, is as plain as the nose on their faces. The big problem for the producers is there is not much choice in terms of what to do. The choice consists of waiting for the end, or implementing People, Ideas & Objects Preliminary Specification.

Bouncing around from topic to topic today I note that Devon Energy has achieved a milestone in their fourth quarter report. They have now lost $42.07 / share in the past two fiscal years. What is particularly disconcerting to the shareholders is that the stock is trading at $44.23. Which is 13.6 times cash flow. I do have to give them full credit for catching the religion that I have been spewing here about storing costs of past production as property, plant and equipment. They’ve moved their number of years that they were depleting their assets from 1.93 years down to 1.79 years since just the third quarter. This is the appropriate footing for a capital intensive industry. Turn that capital over repeatedly so that it can generate cash and be used to fuel future capital expenditures, pay dividends and reduce debt. Investments should be made on the basis that they provide returns, not sinkholes. But I'm preaching. The only thing that Devon now needs to learn is that they have to sell their products for enough cash to cover the costs of the property, plant and equipment that they’re recognizing in their annual depletion. That’ll take the decentralized production model of the Preliminary Specification to be in place, and who knows maybe budgets do get funded.

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 XXII

Keeping our focus on the left coast we have one of the major integrated oil producers located in the balmy state of California. Chevron hasn’t avoided the difficulties in oil and gas. However first, I find the inability of producers to publish full financial statements on a quarterly basis dumbfounding. They seem to understand exactly the level of data that needs to be published to not provide any real information. We know they prepare financial statements. We know that they’re required to publish financial statements. What’s the difficulty in just publishing the financial statements instead of providing about one sixth of the data that shareholders need. There seems to be a trend in terms of the quality of disinformation coming out of these producers.

I’ve commented before that Chevron is the most aggressive that I’ve seen in terms of storing the cost of past production as property, plant and equipment. Their total stands today at one quarter of a trillion dollars. At current rates of depletion that will take 13 years to realize all of these costs, assuming that no more is spent on capital expenditures. That’s a lot of money and Chevron doesn’t produce a lot of money. Their cash flow for 2016 was $13.4 billion. That’s 5% cash generation from a quarter trillion investment. Another difficult to accept number is that 59.04% of that cash flow is dedicated to maintaining their dividend. Free cash flow is negative $9.032 billion. These last three points support People, Ideas & Objects conclusion that oil and gas production needs a tripling of oil and gas commodity prices in order to avoid further financial disaster and industry degradation. The only means in which to achieve this is through the Preliminary Specifications decentralized production models price maker strategy.

If we flip over to the other coast we find another household name in Hess Corporation. Here we have the biggest disaster of the fourth quarter reporting season, so far. We’ve only seen the beginning of the ongoing catastrophe, there are about 60% of the firms yet to report. To Hess’s credit, as I am seeing in a number of producers, they’re reducing the number of years in which they are depleting property, plant and equipment. Moving from 6.83 years to 5.04 years in just the three months since the third quarter. This is the kind of progress that I am seeing at a handful of producers. It is time to rectify this issue and Hess are moving in the right direction on this issue. Still at that, $24 billion in assets generating $795 million, or 3%, in cash flow. These are poorly performing assets. You could buy bonds and be further ahead, particularly when you see that Hess lost $6.173 billion in 2016.

Most of the Hess loss is attributable to taxes payable. Oil and gas companies are expert at deferring their tax liabilities. You can pay your taxes at the time you earn the money, or defer them, and have them come due at the most inopportune time. All this and Hess gets an overall reduction in their production profile of 15% from 368,000 bopd to 311,000 bopd. Their dividend is keeping their valuation in the marketplace around four times what a normal valuation based on cash flow would be. They too are currently trading at 22.6 times cash flow.

If you’re not concerned about the financial health and survivability of these producers and the industry then you haven’t been listening. Here are three household “blue chip” names that have been run into the ground as a result of the overproduction and oversupply of oil and gas. The decline in oil and gas prices have eaten away at the core of these producers and there is nothing left. If we assume that 75% of property plant and equipment are costs that are attributable to past production. Which is what I feel is a reasonable and representative assessment. Then the writing down of those assets would eliminate all of the share equity of each of these producers. I think that is a reasonable way to look at the situation. The assets are not productive in any sense, they should flow to the income statement as a result. What you have left are heavily indebted producers. If they were able to dedicate all of their cash flow towards paying down their debts, it would take each of them four to six years to accomplish that. A lifetime to pay off their debts in their current configuration.

The sum total of all of this is it doesn’t matter if you’re Chevron, Hess, Occidental or Bob’s Oil and Gas. You don’t receive enough for the products that you produce. Through accounting trickery over the past four decades and overproduction these producers have convinced themselves that they were doing something productive. Now it is clearly evident that they’re not and haven’t been for a long time. Storing costs on the balance sheet is a scam that needs to stop. What it represents is the subsidy that the energy consumers have received from the investors of the oil and gas producers.

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 XXI

I am shocked at the state of affairs at all of these producer firms. The financial performance of these producers in 2016 was tragic and unsustainable. Looking at Occidental Petroleum, with a history of being a first class operation, they have as little as six months to get their ship in order. As with all producers the only way in which to right the ship is to triple the revenues of their existing oil and gas production by tripling the price of the commodities. Occidental has cash flow of $2.519 billion. Negative free cash flow of $247 million. And dividend payments that are $2.309 billion for a cash drain of $2.556 billion. Everything they’re doing is to support the dividend payment. If they should cease to do so, their lofty $53 billion market cap may crash to six times cash flow or $15 billion. They consume a billion dollars in working capital each quarter and have two billion remaining in both cash and working capital. Six months, then what?

Asset sales in the first quarter of 2016 were very successful in offloading some of the poorest performers. They received $300 million for properties that were losing $428 million per year. What is clearly evident from their report is that the market for assets has dried up. Nothing was initiated in 2016. Although Occidental did purchase about $2 billion in assets in the fourth quarter. The generosity of the banks in lending almost $3 billion during the year might be questionable to continue for 2017. Occidental are recording reasonable levels of depletion in the current period. Total depletion, impairments, etc were 80.8% of oil and gas revenues. Even at that pace of depletion the company's assets are being depleted over 6.27 years. The company has retained earnings of $22.9 billion, down from $35.3 billion in the first quarter of 2015. Thirteen billion dollars has been lost in the last two years, fully one third of the value of the company.

Overall the deterioration has been everywhere within the firm. If we assume the People, Ideas & Objects point of view that most of the assets recorded in property, plant and equipment are costs associated with past production. That producers have recorded everything they can as an asset to bloat their balance sheet and over represent their value. Then we have the walking dead. The $32 billion in assets are therefore overstated. The loss of $574 million is understated and the cash flow reported for each of the past number of years and the 2016 $2.5 billion are all overstated. The real numbers are unknown but $32 billion in assets generating $6.3 billion in annual revenues, or 19.6% of assets, 80.8% of which the oil and gas revenues are being recognized as depletion, or 3.76% of assets are net revenues, this money is not performing.

The conclusion that I came to in my analysis late last year was the industry needed a threefold increase in revenues. It was the only solution to get these producers out of these difficulties. That demands that the industry adopt the Preliminary Specification with its decentralized production model and price maker strategy as that solution. Otherwise selling assets requires the answer to two critical questions. How many assets need to be sold and to whom? Simply all the assets need to be sold, and to companies that are not currently in the oil and gas industry. Because those in the industry don’t have any money. Or, having the bank's continue to hang on and keep the firm's cash balance up would end up with the banks owning the industry. Look at the encumbrances that the banks already have. They already own the industry and may soon be managing it. Investors don’t have that much money to give to producers to fritter and waste on overhead, interest and being scammed. All of these solutions, except the Preliminary Specification, put a Bandaid on the critical patient.

The dichotomy is that the producers market valuations are obscenely overvalued. As indicated above Occidental is currently 3.5 times the traditional 6 times cash flow valuation. They are trading at 21 times overstated cash flow. Someone is expecting miracles to arise from the oil and gas industry and that is the difficulty that producers have to deal with. No one is going to provide them with any additional investment dollars on the basis of pricing an offering at 21 times overstated cash flows. So once again we are presented with a chicken and egg situation. Who is the first to bail out of this situation. The investors or the bureaucrats? I’m putting my money on the bureaucrats being the first to bail. Ironically they have the most to lose as they have their personal situation in jeopardy by staying. Investors may have already lost all that they’re going to lose. Whom ever is last, please turn out the lights, and don’t let the door hit you on the way out.

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.