Second Quarter Analysis, Part I

We have a sample of producer firms that we follow here at People, Ideas & Objects. 21 of the 22 companies have now reported their second quarter of 2017 and our understanding of what is going on in oil and gas is made clearer, or more current. One major correction that I’ve made is in the volume of deliverability of these 22 companies. In the previous quarter I noted the deliverability was 7.688 million barrels of oil equivalent per day. A spreadsheet error was discovered and the deliverability is restated as 9.272 million barrels of oil per day. There were no other errors discovered this past quarter.

Actual market capitalization is down by $23.6 billion from the first quarter of 2017. Continuing a deterioration that is now totalling $104.7 billion over the past three quarters. This may be the slow drip, drip, drip of the demise of the industry. The market cap of these producers as at June 30, 2017 totals $418.9 billion. This valuation continues to be over $85 billion in excess of the cash flow multiple of the producers. That overvaluation is down dramatically from the $333.6 billion overvaluation recorded in the third quarter of 2016. Reflecting two things, the cash flow increase from higher commodity prices and the market still somewhat believing the story regarding “market rebalancing” but is beginning to lose faith.

One of the implications of the People, Ideas & Objects capitalization policies that we published last month is that more of the traditional capital costs are recognized in the current period as operations. This has significant implications on the calculation of a producer's cash flow. By capitalizing everything under the sun you defer the recognition of these costs in terms of determining the profits of the producer. You also increase your cash flow numbers from operations due to the fact that what is hitting the operations accounts in the current period are lower in the current methodology. The change to the People, Ideas & Objects methodology of asset capitalization will therefore reduce the market capitalization of a producer when it is done in comparison within the same operating environment. This would be as a result of recognizing more of the intangible capital costs in the current period as operations. Within the environment where the Preliminary Specification is operational, and as a result with higher commodity prices made by our price maker strategy, the profitability of the producer will be substantially higher as will the cash flow due to the higher volumes of capital being recognized in the form of our rapid depletion recognized in any period. Therefore the comparison of these two methodologies in their different operating environments would have the producers market capitalization much higher in the Preliminary Specification model.

Of the companies that we follow one of the most interesting has been Pioneer. For all intents and purposes they’ve kept their nose clean in this down market. They have positive working capital and low debt, are reasonable in terms of their capitalization of property, plant and equipment. Not aggressive in their accounting, in my opinion. That does not preclude them from my general argument, it is that they run a better shop than others in a poorly performing area. Pioneer attempts to run an integrated operation by owning and operating their own drilling rigs. People, Ideas & Objects allows producers to focus on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base. If you were to be integrated today then you would have to manufacture your own drill bits from your steel mills which sourced iron ore that you mined yourself. Integrated operations are foolhardy, in my opinion.

Pioneer ran into some operational difficulties in the drilling of some shale wells. These oil wells seem to experience some rather large gas kicks that caused the operations to take much longer than expected or budgeted. As a result of these operational difficulties Pioneers stock was hammered the hardest of all of the oil and gas producers. Losing 18% of its value over two days. What I would suggest, and have always suggested here, is that the decline in real profitability, the removal of financial support from investors and bankers has the potential to seriously degrade the capabilities and capacities of the industry. I think Pioneer is symptomatic of that, as is the loss of the Petronas investment in LNG facilities in Canada. How financial health leads to operational capabilities and capacities is not something new, it's a given. The problem with these losses in the capabilities and capacities of the industry is that it is the express goal of “market rebalancing” being the attrition of deliverability. The only way you're going to atrophy your capabilities and capacities is by starving them. Profitability is the only manner in which to operate the industry in the short, mid and long term. Everything else is just accounting fraud.

In terms of innovation we have to hand it to Cenovus for their accounting innovation in reporting $2.85 billion in earnings. If other producers were to take Cenovus’ lead by revaluing their assets based on the specious argument of over paying to increase their working interests, and recognize an equal amount on the income statement as a revaluation gain. We would have dealt with the lack of profitability in the industry for the past number of years. Although I don’t think that will avoid the atrophy of the capabilities and capacities we seem to be heading into. We can also assume that our sample of 22 producers which hold approximately $1 trillion in market value of oil and gas assets. These producers currently carry net property, plant & equipment of $460 billion, therefore they too could recognize upwards of $540 billion in incremental earnings in the third quarter of 2017. Although this transaction doesn’t do anything to increase a producer's cash or working capital or reduce its debt or pay dividends or fund capital expenditures. It does provide a material increase in retained earnings. If the industry did what Cenovus has shown the way forward with, they could realize an increase of 849% in retained earnings. Which is far more lucrative than the 367% increase in retained earnings that Cenovus experienced.

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. 

Civic Holiday

Third Friday Off

The Paradox of Producer Participation

When it comes to whether the small and startup oil and gas producer would use the Preliminary Specification, I don’t think it would take much time for them to choose. The cost to administer oil and gas is highly burdensome on these producers. The startup particularly needs to have sourced several million dollars a year for several years just to cover the overhead of the operation before anything serious can be undertaken. This burden remains disproportionate, in my opinion, until the producer is able to generate in excess of 10,000 barrels of oil equivalent per day. Therefore to be paying the service providers, which use the People, Ideas & Objects software to manage the producers accounting and administration, for the costs of administering the producers organizations stops being the fixed cost that it is today, and takes on the variable characteristics of the service providers fees, based on production. The Preliminary Specification shifts the reliance on the producers fixed capabilities for administration and accounting, to a reliance on the industries variable capabilities for administration and accounting.

Therefore we can sign up all the startup and small producers we want and generate maybe 10% of our budget requirements based on their deliverability. The real paradox of participation is what’s in it for Exxon, Shell, BP and Chevron. As well as the international intermediates which are too numerous to mention. The third tier mid sized oil and gas companies which also make up a large percentage of the deliverability of the industry. What is it that makes any of these producers want to move from developing and maintaining the fixed administrative and accounting capabilities that they currently have, to in turn access the variable capabilities of the service providers under the Preliminary Specification?

Many of the producers may believe that they don’t really need People, Ideas & Objects, why not just do it themselves. Even with the scope and scale of Exxon’s operation they’re not going to be able to benefit from the savings from using industry based service providers. To focus on the individual processes and to specialize on them to the level that People, Ideas & Objects service providers are able to do across the industry will not generate the benefits that we’re able to offer. Also by doing it themselves the costs to manage those processes for Exxon will always be 100% of their overhead costs at whatever level of deliverability. The people who are managing those processes will still be Exxon people. Under People, Ideas & Objects the service providers are independent entrepreneurs who are providing the service for a fee. If Exxon shuts-in a property, no data will therefore be sent to that service provider, no work will be done and no billing will be rendered to Exxon from the service provider. Making all of Exxon’s costs variable based on production. Administrative and accounting cost control will have shifted from the oil and gas industry, where it has never been able to be controlled, to the service providers. Service providers will realize that at anytime they may experience a drop in revenue as a result of the shut-in inventory of the industry. This drop in revenue is something that they can manage and budget for on an annual basis.

There are two other advantages to having all of the producers costs become variable. First, if the property becomes unprofitable then it can be shut-in which will increase the profits of the producer. Profits are higher because they’re not diluted by losses on unprofitable properties. Enabling the producer to reduce their reserves costs by not having to include the costs of each years losses to be recovered from the reserves. Saving those reserves for when they can be produced profitably. And most important of all, removes the marginal production from the market in order to find the commodities marginal price. The second advantage to having all the producers costs variable is, it will protect producers from what we all know the source of the overproduction and oversupply problem is, which is that it's the “other producers” that are responsible. Producers don’t know which ones specifically, and the producers are sure their operations are profitable from stem to stern. So by participating in the development of the Preliminary Specification those profitable producers will enable the unprofitable producers to shut-in their production, increase their profits and stop the overproduction and oversupply that is hurting the industry to the extent that it is. If Exxon, Shell, Devon or Southwestern try to solve this on their own they may achieve something. However, we all know it’s all the “other producers” that are the issue. The only way to solve that is to have all the profitable and unprofitable producers working together with People, Ideas & Objects, our user community and service providers.

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. 

The Paradox of Profits and Production

Exxon reported handsome, but not my kind of “real,” profitability on a declining base of oil and gas deliverability. As a result the stock was down. Granted Exxon has the luxury of a very narrow trading range. This however speaks to the paradox that all producers face. They have always been handsomely rewarded by investors for increases in their deliverability. And I can assure you in an environment where shale will dominate the marketplace, where overproduction and oversupply is the risk that every producer faces from now on, growth in their deliverability will continue to be the expectation of their investors. The difficulty, or the paradox, and its not that oil and gas is not a difficult enough business as it is. The paradox will be that you have to grow your deliverability profitably. Otherwise we see what happens. Everyone loses when one incremental barrel is added to the commodity markets supply beyond what exists in terms of demand.

So how do producers deal with this paradox. Those with the size two hat need to cease reading from this point forward. The muddle along strategy and the convoluted methodology of accounting for capital have enabled those with the size two hat to establish themselves in the industry with somewhat handsome deliverability. Discerning who and where these producers are is not hard for those that know what it is they are doing. For the rest of the world, I would suggest that the financial statements make every producer look the same no matter how well managed. When everything you spend is capitalized. When every drop of oil produced is profitable. Discerning who’s who is a science that hasn’t been invented. Everyone looks brilliant. Is it any wonder that I’ve had such difficulty when I threaten to take away the means in which they think they’ve been successful?

When everyone acquires the production discipline of the marketplace to produce only profitable production those with the size two hat will struggle the most. That is why production allocation based on profitability is the only fair and equitable means in which to allocate production in any industry. Those that can’t won’t. They’ll be weeded out. If they continue to produce unprofitably in a marketplace where others are growing their production profitably, they will have a hard time in business for the remainder of time that they’re in business. Anyone want to guess what will happen to those producers that are producing profitably and increasing their deliverability? Life in oil and gas has never been that good for any producer that I am aware of in the past forty years.

Being profitable in the environment where the Preliminary Specifications decentralized production model’s price maker strategy exists implies that all costs are considered. Operations, overhead and a reasonably quick turnover of the producers capital base. If the producer is recognizing a large portion of their capital costs and is still profitable they are cash flow positive in a manner that no producer has been in the industry before. Judicious management of their cash will become a competitive advantage. They will be able to pay down debt, send dividends to their investors and fund whatever capital expenditures that they may desire to expand that profitable deliverability. All from internal cash flow. This is the implied difference between the Preliminary Specification and the manner in which the industry is destroyed today.

The ability of the producer to expand their deliverability is the tough part of the paradox, for that there will be no doubt. Profitability shouldn’t be an issue if they’re capable, but how do they expand their deliverability. It is reasonable to assume that not all of the producers properties are producing. Some do not qualify for production due to their lack of profitability. It is there that the Preliminary Specification enables the application of the sciences to that inventory of shut-in properties. Increasing the reserves base of the property, reducing the costs or expanding its deliverability. There are also always new frontiers in terms of new properties, technologies and partners to explore as well. Under the Preliminary Specification these are the identified and supported key competitive advantages of the dynamic, innovative, accountable and profitable oil and gas producer. Those being their earth science and engineering capabilities and their land and asset base.

Investors will be investors and no one says their right, but that’s what they want and that’s what they’ll get. What we need to do is run oil and gas as a business. I do not understand what it’s being run as today. An exercise? Activity for activities sake? The purpose is to build value in the long run and currently the industry demands cash on a wholesale basis to function on an annual basis. That is not sustainable at any point and should never have occurred. However, due to an accounting aberration it has manifest itself into a heap of nothing with no support from investors or bankers. Commodity markets have collapsed and all that can be said or done is to point the finger or blame someone else for our troubles. And there are those warm winters too. It’s become the darkest time in our history. One in which the Preliminary Specification is proposed as the solution to remedy these specific issues. September 25, 2017 is the deadline for these producers to fund these developments. Or we’ll pass into an even a darker stage and we’ll have to pick up what pieces that are left behind.

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. 

The New World Champion!

It was only last Monday that I thought Encana was stretching their financial statements beyond reason. Reporting a 32% profit margin in an environment where every other producer seems to be losing their shirt. I guess I wasn’t that surprised when Encana 2 or Cenovus put their financial statements out last Thursday. Recall that Encana split into Encana and Cenovus a few years ago for some contrived reason that the CEO thought was interesting at the time. Anyway Cenovus profit margins make Encana look like pikers. 38% profit margins is the new height that Canadian producers will go to deceive the marketplace. Deceive may be too kind of a word. I think I said it best on Twitter when I tweeted “.@cenovus accounting fraud of the Bernie Madoff standard and quality.” So let’s take a moment and review what it is that Cenovus has done.

I have to say there’s been a general trend in terms of the deterioration in the integrity of this companies reports. In the fourth quarter of 2016 they reported profits by booking negative depletion. Not that that’s wrong but why would you do that if you were following appropriate oil and gas capitalization policies as we spelled out last Thursday. In the first and second quarter of 2017 they’ve boosted their working capital by as much as $3.3 billion by listing their unsold properties for sale as current assets. That is certainly much better than showing a working capital deficiency of $1.3 billion isn’t it. I think we’re seeing the beginnings of a boldness and creativity that has not otherwise been shown in an industry that is all about bloating the balance sheet beyond recognition. Cenovus feel quite confident that these types of transactions are acceptable and the ability to boost earnings, as in 2016, or working capital in early 2017 shows they fear no one. As they state in their financial statements they are in compliance with all the regulations, but when did reasonableness become unreasonable?

It was in the first half of 2017 that Cenovus purchased the other 50% working interest in the FCCL Partnership from Conoco. It would appear that in that transaction Cenovus paid Conoco a market price of approximately $5 billion more than what the actual partnership had incurred in building the facility. Cenovus owning the other 50% of the partnership therefore realized a market gain of about $2.5 billion as a result of their purchase of the Conoco assets, assuming they could find another willing buyer to purchase their assets at the price they paid Conoco. If Cenovus we’re to sell their original 50% interest in the FCCL Partnership they would realize the $2.5 billion gain on the disposition. Therefore in order to realize that gain in the second quarter of 2017 they would have to, for accounting purposes, “deem” that property to be disposed. Which is what they did on the financial statements. This enabled them to increase goodwill by $1.8 billion and recognize a gain on the income of statement of $2.524 billion. Enabling Cenovus to report $2.851 in after tax profits.

Now the industry knows how to turn around this downturn! Cenovus have applied IFRS 3 to a “Joint Venture” which IFRS 3 specifically precludes Joint Ventures from this accounting treatment. Therefore I would not have done this. It also shows the world that you're willing to pay a lot for otherwise unprofitable assets. When your real working capital, adjusted for the property, plant and equipment that isn’t selling, is $5 billion less than what it was three months ago, and your debt is twice the size, the only friend you have is the Canadian government who appreciate the $700 million in taxes that were sent as a result of this transaction. I fail to understand how this accounting treatment didn’t catch on fifty years ago. This type of transaction has been conducted 50 million times in the history of oil and gas and at no time am I aware of the reclassification of assets and profit in this manner.

The rest of the industry is probably sighing with relief over these Cenovus financials. Who will the SEC set their sites on now is pretty obvious. In my opinion. There is however another definite trend occurring in 2017. The American companies are beginning to clear out their bloated balance sheets of property, plant and equipment. Of the producers that have reported in our sample of 22 companies the amount of depletion per barrel for American producers is already averaging $38.93 per boe which is materially higher than what the Canadian producers are reporting at $18.81 per boe. Maybe we’re getting through to some people.

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. 

Recruiting for our Leadership Teams Part II

Our user community has a very large leadership team made up of the many different talents necessary to make an oil and gas ERP system successful. The user community needs a full board of directors, a complete C suite of its own and what I think may be 20 or more of what are called product owners. Recruiting of these individuals will begin September 26, 2017, hopefully with the full support of the oil and gas industry and their resources. If we don’t have that support then we’ll be travelling our own road to provide the future oil and gas producers with the most profitable means of oil and gas operations. The earnings that are being reported in the second quarter should be evidence that oil and gas is far from healed, or on the road to recovery. It truly is a desperate situation and if the producers are unable to do anything for themselves at this point, then there won’t be a point in the future in which they’ll turn to us.

I foresee these losses continuing. OPEC this past week boosted the oil price in the short term. The question is for how long. I foresee a precipitous decline in the price of oil sometime this summer. One that will retrace the precipitous decline that occurred in the price of natural gas once the overproduction and oversupply issue was deemed hopeless and chronic by that marketplace. These producer losses and further commodity price declines will lead to the exit of the bureaucracy whose only response has been “market rebalancing.” They will exit the scene because they have no answer and the situation in the industry has become untenable. I think this nightmare scenario is what is probable for the industry prior to our September 25, 2017 software development start date. What we need to commence our software developments is our first year's budget of $100 million to be forwarded by the producers. Whether we receive those funds or not is not at issue with respect to the recruitment of the leadership teams for both the user community and People, Ideas & Objects.

The user communities board of directors will undertake the interesting task of determining how the user community should evolve over time. This will be an interesting development as the industry must be comprised of oil and gas producers that are dynamic, innovative, accountable and profitable. These being the underlying means in which it will be successful in the long run. The user community process needs to enable this. User communities could also be the future bureaucracy that achieves the further destruction of the industry. This will need to be managed by the members of the board of directors and ensure that the appropriate steps are taken to avoid the bureaucratic nightmare that user communities have and can become. There will be other responsibilities to be sure, this is the one that I am most concerned about.

The roles and responsibilities within the C suite are very well defined. Essentially don’t fail. Whether we take the path with the industry support or not is not our decision. It is our responsibility however to ensure that the option we have with the Preliminary Specification is delivered to the marketplace in a timely fashion. The industry has no other option than to adopt the Preliminary Specification. Society will need shale reservoirs and therefore shale needs to become commercial. The only way in which to make shale commercial is through the Preliminary Specification decentralized production model’s price maker strategy. Currently there is our solution and the ongoing destruction of the marketplace in which to choose from. Therefore we need to act accordingly and ensure that we do everything that we possibly can to deliver our product as quickly as possible to the industry. We have given the bureaucrats every opportunity possible. We can’t be blaming them for our own failure to deliver what we are now responsible for.

I’m including the product owners in our leadership team as their primary responsibility is the product that they’re assigned to. We will have at least 20 product owners, one for each of the modules of the Preliminary Specification, the user interface, the data model, mobile, test data, etc. These people will be part of the software development team in the agile software development methodology. They are responsible for representing and ensuring that the user communities needs are met and the overall quality are what’s required. A unique and critical role in the software development world and one which is enabling user community developments to be successful.

If any of these roles appeal to you please contact me. We are moving forward with the development of the organization September 26, 2017 with or without the existing producers and therefore, these positions are open now. I’m not expecting anyone to quit their job tomorrow and join these team’s. There will be a transition period where the work will be of a part-time nature with a full commitment necessary upon our funding being secured. There is no need for anyone to incur any career risk. And it is in that sense that all information will be held in confidence.

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. 

Recruiting for our Leadership Team's, Part I

In addition to the work that the user community and our developers will be undertaking in the first year of our developments. We will also be securing the full complement of individuals to fill out the needs of our leadership teams. There are two teams that need to be developed, one for People, Ideas & Objects and the other for the user community. The user community being a separate and distinct organization that is exclusively dedicated to the ERP needs of the oil and gas producers. The recruitment of these teams will begin September 26, 2017 whether or not the producers, as they stand today, join us. Our September 25, 2017 deadline is an opportunity for the oil and gas producers to deal with the overproduction and oversupply issues. With the companies being in the financial condition that they’re in. With their financial community taking a wait and see attitude. If the producers don’t come up with a plan on how to deal with the abundance of shale and the profitability of the industry. Then I believe, after September 25, 2017, if the producers haven’t proceeded with the developments of the Preliminary Specification, other producer organizations will be developed to replace the current producers.

Producers may believe that “market rebalancing” is right around the corner, and for all that anyone knows they could be right. They will have however lost the faith of the marketplace which will be looking to others if this current bunch can’t move off the tired and destructive process their on. Every opportunity has been given to these producers. September 25, 2017 which is the deadline I’ve set for the producers to participate in developing the Preliminary Specification. If they let this deadline pass then it will be for all intents and purposes, their last chance. Therefore, until the 26th of September we will assume that they’ll come to their senses and deal with their issues and propose a plan to the financial community of how they’ll move forward in a dynamic, innovative, accountable and profitable manner. And turn shale into a commercial operation by adopting the Preliminary Specification. When the financial community loses faith, rapid action is the only solution.

Effective September 26, 2017, should we not receive the support of the industry we will be dropping our offer of funding only the first years developments, and once again, expect that our full development budget be secured before we start any development work. Our value proposition is real, anyone can see the amount of value that is being destroyed as a result of chronic, sustained overproduction and oversupply. Trillions of dollars have been wasted already and many more before we’re finished. Our budget is not the issue in an environment where bureaucrats can be so wasteful and foolhardy. Our offer is therefore rescinded September 26, 2017, and we will expect the full proceeds of our budget to be provided before any work will be done.

Therefore our Leadership teams will be developed under one of the two possible scenarios that People, Ideas & Objects continues under. One being that the producers participatie under our current offer of providing the first years development budget by our deadline. Or we begin with the development of the leadership teams in anticipation of the full force of creative destruction dealing with the remnants of the oil and gas industry. People who are interested in these leadership positions should contact me and we can begin the process.

Within People, Ideas & Objects we will be recruiting as our first priority a CFO that is capable of managing a firm with our scope and scale. Although we will always be a private firm we have many responsibilities to the user community and the producers to ensure that our product is delivered successfully in the manner that the user community and producers expect. The strength of the CFO to undertake this task will require a senior individual with extensive experience in the role. The financial strength of People, Ideas & Objects will be one of the underlying foundations of our success and the CFO will be a critical element in ensuring that success comes about.

Our COO will be the one who heads up the software development team. This will be based in Houston and that individual will need to organize and build the Preliminary Specification under the direction of the user community. The COO will be responsible for the budget in terms of the People, Ideas & Objects development team requirements and deployment of Oracle’s portion of our budget. On Monday we will discuss the user communities leadership team and what roles are available 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. 

Oil and Gas Capitalization Policies

I’m certainly one to criticize the producers for the manner in which they capitalize everything that they touch and then never recognize any of those costs. It has become the only game being played by the producers and has led to the many distortions that we see in the marketplace. It is so misguided, in my opinion. The ability for a firm to turn over its capital in a rapid and repeated fashion would be considered a competitive advantage. In oil and gas you raise the money and retire it for the remainder of life on earth. It will just sit on the balance sheet for decades and never provide any subsequent value to the producer. Instead of passing these costs on to the income statement, where if they were receiving enough of a price to cover the cost of operations, overhead and capital, then they would have that capital being returned to them in a timely fashion for reuse in the payment of debt, issuance of dividends or future capital expenditures. The producers balance sheet would not have accumulated bloated balances of property, plant and equipment but instead, have a handful of accounts that balance off those assets in the current asset category. Cash, short term investments and other liquid assets would replace those otherwise stale and decaying, wasted property, plant and equipment balances.

So what would we do. People, Ideas & Objects think moving the majority of the costs to the income statement in a timely manner is the appropriate thing for the producer to be doing. In the high cost shale era, with its steep decline curves, deferral of the recognition of those high costs to the next decade is ludicrous. There are a number of changes that we would make to the way producers recognize the capital costs of oil and gas exploration and production. The first would be to reduce the period in which these costs are realized down to two or three years. That will provide a return of the capital that has been deployed within a reasonable time frame. The current excessive balances of the producers should be treated in this manner. That will also determine the costs of production of each property, which will be very high, and therefore under the Preliminary Specification shut-in much of the production in both oil and gas. Rehabilitating the oil and gas commodity markets as quickly as possible, I would suggest during the three year period that I mentioned. Then with the bloated balances of property, plant and equipment finally extinguished, normal operations will dictate somewhat lower prices that can be accommodated by a lower capital structure.

Secondly we stop capitalizing everything. All overhead in the Preliminary Specification is allocated directly to the property. This is through the service providers billing the specific property in which their accounting or administrative service was rendered. Recognizing the actual costs to administer a property is not capital its overhead and the recording of this as such will better represent the performance of the producer and the property. In the future only controllable material will be capitalized. The cement used to cement the casing and the casing itself are not retrievable. They are appropriately called intangibles. I propose we expense intangibles in the current period. These would include the costs of day work and fracing. How can so much of the costs of a well be recovered when they are intangible? I would even go further than this. Asking, if the producer increased their production profile then their capital was deployed effectively. If it was deployed to only maintain the production profile, why are we calling this capital?

Bloated balance sheets don’t explain or prove what the producer is worth. Accounting is not about determining the value of the company. The value of an oil and gas company is clearly presented in the reserves that it owns and the prices that it realizes. The historical cost is irrelevant, accounting is about performance. How much money are you making on the basis of a fair and equitable evaluation. Are you fooling yourselves by hiding all your costs in the future or are you retiring your costs effectively in the current term and therefore effectively deploying your capital? These are the points that should be discussed in the boardrooms of the producers. Not how “big” we can make the company by issuing more stock and spending money like drunken sailors. It’s all become so surreal that it has no basis in value any more and it's a farce. The investors don’t buy it, the banks don’t buy it and the industry should be wiser to it.

If we retroactively applied these policies to today’s producers on a pro-forma basis we would have a fundamentally different industry. Today’s producers wouldn’t be around. Removing 75% of their property, plant and equipment and processing that through 2016’s income statement would have eliminated retained earnings in all cases of the producers. It would also have eliminated the share equity. There would not have been the associated gain in cash as the prices the commodities were sold for was inadequate to truly generate a profit. Therefore these companies have been run into the ground by adopting a ridiculous capitalization policy. They have no money, they generate no earnings and the cumulative asset base of the industry isn’t worth anything worthwhile as it would require a trillion dollars each year to fund the cash shortfall.

By proactively putting this policy in place we would then be able to tell which producers are being run by the guy in the size 2 hat. The people who know what they’re doing from an engineering and geological point of view are going to have financial statements that stick out like sore thumbs compared to those with the size 2 hat. Today I couldn’t tell you which company is run by who. They all look the same and their performance is abysmal.

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. 

Some Thoughts on Integrations

The other day I read an article from PwC about ERP integrations. It was on Oracle’s website if you want to search for it there, I wouldn’t bother though. In it the author suggests that most ERP integrations failed. That as a result of these failures the overall scope of the integrations have reduced the financial commitment to within the range of $10 to $100 million. That many of the reasons for these failures was the lack of business focus of the implementation, many being driven by IT. It seems that not a lot has changed since the mid 1990’s in the world of ERP integration. I have a lot to account for in light of these facts. The Preliminary Specification is outsized and is breaking the mold of the traditional ERP integration. I think that’s a good thing. The one key advantage that I assert the Preliminary Specification has going for it is that most ERP integrations don’t have the gun to the head of their client. The producers have little choice in the world, it's build the Preliminary Specification or die, in my biased opinion. There are no alternatives that provide a solution to the overproduction and oversupply issues. And failure is not an option.

Lets address the elephant and the gorilla first. Our budget of $6 billion is different. Outside of the People, Ideas & Objects profit and my royalties our costs are $2 billion. A much larger number than what PwC is saying is the norm. The key difference is that we need to be looked at from the industry point of view. We are providing an ERP integration for all of our service providers who will be undertaking the accounting and administrative processes for the producers, the North American producers themselves and finally deeply integrating their interactions with the service industry. Not one individual producer. Therefore our costs are going to be much higher. If you take the $2 billion and divide it by the number of producers you’ll get a number that, on average, falls well within the lower range of the PwC numbers. However, we are covering off a much larger scope and scale of ERP application than under the current failed methodology. Each producer is currently attempting to integrate their ERP with those much smaller budgets. Therefore each producer is having to suddenly become “expert” at ERP integrations which is part of the reason for high failure rates. And as we have stated on many occasions the costs of overhead in the oil and gas industry, costs that are unshareable between producers, is one of the reasons for the lack of “real” profitability.

User community participation is another reason why we’re different than the standard integration. One third of our budget is allocated to the costs of building and maintaining this user community. As soon as the final edited version of the Preliminary Specification was published in December 2013 we began our user communities development. Our vision and the policies that support how our user community was established, what will make them a success were defined, and the recruitment of participants all began. We have been at this now for over three and a half years. Nothing will be done by People, Ideas & Objects developers that isn’t directed by our user community. They are the holders of the Intellectual Property of the Preliminary Specification, the research that went into that and the derivative work that they will generate. Lastly it is the user community participant that the dynamic, innovative, accountable and profitable oil and gas producer will be in exclusive contact with to have their needs, in terms of what the software needs to do, or how the integration is working in their operation. These four elements are the keys to how our user community is different than any other ERP integration and how we have planned on making the Preliminary Specification a success.

Our key constraint at this time is the speed in which our user community can think. Some may think it’s the speed in which the producers can act. I disagree. I used to think that, and before that I used to think that the underlying technologies were not robust enough to undertake an application of our scope and scale. The technology can now handle the type of application that we’re building. The user communities speed is at an infantile pace where it is unable to crawl at this time. Which is to be expected. However, in comparison to where it needs to be in terms of addressing and resolving the issues and opportunities of the oil and gas producers that is inadequate. The primary issue is money. Producers can’t expect, which has been their modus operandi, that someone will do this much work for them for free and expect to get paid when they deliver it. Read our Revenue Model for how we’ve addressed this. We’ve played the producers game before and think we’ll sit the “next time” out. So for the user community to develop at the speed that is necessary to approach this issue we are going to need to see some of that industry cash. It’s not the user communities problems, it's the producers.

I’m sure many bureaucrats will undertake integrations in the next year to try and deal with the issues and opportunities that they face. It might provide them with an excuse to appear to be doing something to fix what ails their company. In their “cost control is everything” mindset they will pay the $10 million and get what they paid for. Who knows they could even get lucky!

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.