Extrinsic Value

People, Ideas & Objects value proposition captures the difference in commodity prices under the current administration and those that would be realized with our price maker strategy. The difference between the $50 realized today and the $151 we have detailed that are the producers current costs. A variance that I think should be of material concern to the producers. There is the concept of intrinsic value and extrinsic value of a company, or in this case the producers. What bureaucrats should be concerned about is the intrinsic value that is attainable through their distinct competitive advantages. Anything else is a distraction. Pursuit of the extrinsic value which would include our value proposition is not within the competitive advantages of any of the producers and the bureaucrats would therefore have a valid argument not to pursue it. That is until it’s realized that ERP systems are a business necessity of the functioning producer firm. And that producers in North America face an existential crisis as a result of the chronic low commodity price environment that they’ve found themselves in for an extended period of time.

It’s easy to see how the $100 / boe in extrinsic value that is our value proposition equals $25.7 to $45.7 trillion over the next 25 years. Bureaucrats are currently compensated adequately and to search for this value would require substantial effort for them to achieve. Something I don’t think their oriented too. Besides “market rebalancing” will soon arrive and the party will once again begin. This bureaucratic complacency and lack of caring in the face of such destruction is amazing. I would argue that my point of view, as expressed in yesterday’s post, is not news to any of the bureaucrats. My claim that there may be no plans in place could also be incorrect. There could be plans, it's just that none of the bureaucrats plans involve the producer firms. Bailing out of a situation that is deemed to be unfixable is the history that has been recorded by bureaucrats throughout their existence. Maybe they’ve changed their ways.

I’ve always worked in oil and gas and understand the difficulties and complexities of the producer firm. The risk is extremely high, however producers never have to face the market risk that most other types of companies have to face. Will the market want or need my product? Will there be enough demand to make the business viable? These are never faced by the producer. Any oil or gas that is produced finds a readily available market anytime and anywhere. So why in the world would we ever sell any oil and gas, products that are as difficult to discover and produce as anything, unprofitably? A product that we have a limited supply of in terms of the lifetime of the oil and gas era. However have an abundant current inventory that floods the market and collapses the prices to the point where they barely cover the variable costs. Who would do such a thing, and why would they call that a business? I think that maybe selling oil and gas below cost is the foolish and lazy man's way to a false prosperity. I think the oil and gas investors may now share my point of view. This the bureaucrats would say, is one of my controversial issues. Not that I called them lazy and foolish but that oil and gas should never be sold unprofitably.

Producers should be active participants in the oil and gas markets. They’re not passive idiots are they? Why do they just stand around, take whatever is offered, and then mouth the words “market rebalancing.” They would have to be foolish and lazy to conduct themselves in such a fashion. They’ve done this now for decades and don’t seem to realize the damage they’ve done and are doing. Within the industry itself it’s all sunshine and rainbows. There is not a hint that anything is happening that is problematic. As far as the North American producer is concerned it’s only a matter of time before OPEC realizes they have to heal to them and to cease all production. Is it viable to assume that OPEC will continue to reduce production in the face of continued increases in North American production. Is this viable or reasonable, who other than the producers would believe that? OPEC’s costs of production are single digit percentages of our costs. They’re still highly profitable at today’s prices. The North American producer likes to think the Saudi ministries need the petro dollars to keep their society going. And that might be true. Then for comparison sake the North American producers should adopt the U.S. and Canada’s federal debt and deficit.

There’s a theory that the Saudi’s are only playing nice with the production sharing agreement until such time as they’ve completed the IPO of Saudi Aramco. Then they’ll be free to produce at whatever production profile they choose. If the Saudi’s are truly profitable at $50, but also at $20 whatever happens to the price will be of little consequence to them. The North American producers, who are not currently profitable at $151 and are facing the end of their days, will then be expected to put up the good fight? The days in which the North American producers have their extrinsic value available to them and the intrinsic value under their control is very limited. I would say until September 25, 2017, and then depending on their actions maybe beyond 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. 

Sunshine and Rainbows

Subsidizing energy consumers through low commodity prices is People, Ideas & Objects claim of what producers have been doing for four decades. To make up for the resulting cash shortfall producers have gone to the investors for this cash on at least an annual basis for the past number of decades. The ability to raise money at will was supported by the bloated balance sheets and alleged earnings of the producer as a result of not recognizing any of the costs of oil and gas exploration and production. These producers appeared to be doing well as a result. Making their operations attract disproportionate investment by the investment community in comparison to other industries. These high levels of investment enabled producers to stampede into developments that would otherwise not have been developed if there was, as I suggest, a proper accounting. This stampede of producers has led to a systemic overproduction and oversupply that is reported as being profitable when in reality it is anything but.

In our sample of 23 producers it is reported that they have earned a total of $2.4 billion in the second quarter. This “spectacular” earnings performance is on the cumulative investment in property, plant and equipment of $479.3 billion. These “earnings” are on the basis that everything that was spent within the firm was capitalized. Imagine if the producers were reporting earnings on a more coherent accounting basis. For example, of that $479.3 billion investment in property, plant and equipment these producers have generated lifetime earnings, post dividend, of $71.3 billion. No matter how you look at this performance, the only conclusion that you can objectively state is that the industry has never performed. Performance is not inherent in the culture of the industry or the management of the producers. To adjust for this, moving a large portion of property, plant and equipment to the income statement as depletion is necessary in order to rectify the accounting methodology that is used in the industry. I would suggest at least three quarters of property, plant and equipment would be the minimal amount that should be transferred to the income statement. With the associated effect on retained earnings being a cumulative loss of $282.2 billion. This loss reflecting the chronic selling of oil and gas well below cost for decades.

The industry now has these capital costs as their legacy. They’re not going anywhere unless the wholesale bankruptcy of the industry occurs. Which of course could happen if no corrections are made or plans are implemented in the near term. You can’t put lipstick on this pig and sell it as something that people will want. You’ll need to remediate these organizations through operations over the long term. This issue didn’t happen overnight and it certainly won’t go away overnight. I could be mistaken but there doesn't seem to be much interest in these producer firms from the investment community. Maybe that will change and producers will be able to continue on in the manner that has brought us to this point. That is wishful thinking. A better plan and strategy would be to seek the necessary funds to remediate the industry from the commodity prices of oil and gas. And this can only be done through the price maker strategy of the Preliminary Specification.

Based on the financial statements of our sample of 23 producer firms. Producers would currently need commodity prices in the range of $151 U.S. / boe in order to cover their costs. This would be on the basis of retiring their existing property, plant and equipment balances in the next 30 months. Then keep the last 30 months or less of capital expenditures as property, plant and equipment. This currently amounts to $84.51 / boe of depletion for our sample producers. The remainder of the costs include royalties at 25% or $37.75, operating, transportation and purchases of $24.65, overhead that wasn’t capitalized of $1.75 and interest of $1.82. This reflecting how badly managed the industry currently is that these costs are this high and they brag that their profitable. A little honesty about their operations and their consumption of cash would be refreshing.

$84.51 isn’t money that should be used to line the bureaucrats wallet. Something else that the industry is famous for. Oil and gas is a capital intensive business, prudent management of that capital demands that it’s turned over much quicker than the industry has. This cash flow should be used to fuel capital expenditures, pay down debt and issue dividends. During the alleged “good times” it is this “cash flow” that was not managed prudently. Producers claim they have good capital discipline. That meaning they are disciplined in the spending of money and not investing in anything that isn’t able to provide a reasonable return based on reasonable risk. What they need now is to obtain production discipline with our price maker strategy. And prudent cash management to ensure that the $84.51 that each barrel of oil equivalent is returning in cash flow is managed effectively. That it doesn’t go to bureaucratic compensation of bonuses and stock options. Which is where the money in the “good times” historically went.

If bureaucrats are unhappy with the situation and the manner in which I speak about it here then change it. If they feel that it's bad now, and chose not to participate in our developments, these will feel like the “good old days” in short order. I have new plans for September 26, 2017 and they’ll like those even less.

These two long term problems, excessive asset balances and low commodity prices won’t be remedied in the short term. And without a plan for success, they’ll never be remedied. Producers ability to weather anymore of this storm is highly questionable. Action is required in the form of a plan. These two long term issues dominate the producers today. With the addition of shale reserves, this assessment suggests that nothing of value is being generated by the industry and indeed, much of everything in terms of value has been destroyed. Excessive asset balances of property, plant and equipment have enabled consumers to avoid paying the real costs of the commodities. The amount of the consumers discount is the aggregate of the industries property, plant and equipment. This money should have been collected in the form of higher commodity prices and is now irretrievable. Producers were kidding themselves when they reported profits by deferring the recognition of property, plant and equipment. All of their costs of past production were never recognized and are now sitting in property, plant and equipment. Now they have an issue that is systemic and catastrophic in nature. Little to no cash, no working capital, excessive debt, no bank support, no investor support and the only source of cash being production which makes the problem of low commodity prices worse. An iterative and destructive cycle that will not end. An issues who’s paradox is unsolvable. Without a plan such as the Preliminary Specification, which we propose developments begin on September 25, 2017, the industry will fall into a terminal state of decline. But then that is my biased opinion.

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. 

And We're Back...

With a little less than one month to our September 25, 2017 deadline. Our plan is to develop the Preliminary Specification with the support of the industry. This involves the producers getting together to fund our first year's budget needs of $100 million. Has anyone else recently realized that’s it's now three years in which oil prices have been depressed. Just as in the past decade with natural gas, nothing will change until such time as the producers change by adopting the Preliminary Specification. Only then will they be able to prosper. The systemic and chronic overproduction and oversupply should be obvious to everyone now. The question that everyone must be asking is why don’t the producers just shut-in their unprofitable production? The answer is they can’t. They don’t know which properties are unprofitable, and shutting in any production will only cause their losses to grow much larger as their overhead is fixed.

With the Preliminary Specification producers overheads become variable based on production. Therefore they are able to shut-in any and all unprofitable production. And they will know what is unprofitable because their actual overhead costs are charged directly to the property, not the corporation. Therefore they can vary their production profile to any level, determined by profitable production, and remain profitable at all times. Any shut-in properties will incur a null operation, no profit but also no loss as a result of the Preliminary Specification making all of their costs variable. Ensuring that their profitable properties are no longer diluted by their unprofitable production.

Producers state they earn a return on their bloated balances of property, plant and equipment. I would argue they don’t. Capital, which consists of anything and everything in oil and gas, including the Post-it-Notes and phone service charges of the receptionist. Capital just accumulates in property, plant and equipment and therefore the real costs of exploration and production, in the capital intensive oil and gas industry, are never recognized. Therefore profits in oil and gas will always be highly overstated as a result. Making the return on those bloated assets balances also appear overstated than what they would be if they recognized the real cost of exploration and production. In the second quarter of 2017, reports of the 23 companies that we follow, their asset life increased from 8.94 years to 9.58 years. An increase of .64 years during the passing of .25 years. And reported second quarter earnings of $2.4 billion. This sleight of hand shows the industry deferred the recognition of $32 billion of losses, in my opinion, and is only one of the many methods used by producers to conceal the reality of the situation and never recognize their costs.

Being honest about your costs does not’ help the return argument nor the fact that investors have shunned the industry for the past number of years. Since June 30, 2017 these 23 producers have experienced a further drop of $27.3 billion in the value of their stock. Recording a market capitalization of $391.6 billion down from $523.8 billion only ten and one half months ago, a loss of $132.2 billion. Fully one quarter of the value of the producers is gone in just this single year’s mindless drift of “market rebalancing.” What it also shows is that no one is buying these financial statements anymore. The systemic capitalization of every conceivable cost is well known by the marketplace and what those policies implications are on the financial statements. Only the producers seem unaware that the cash shortfall that these policies create, which were funded by the annual investor fleecing, which are all but distant memories now.

Take a critical look at the state of affairs in the industry and you will see that there is no choice for the industry today. They must implement the Preliminary Specification in order to survive. These are hollowed out carcasses that have little residual value outside of the Post-it-Notes on the receptionists desk. These accounting shenanigans have hid the fact that the industry probably never once made any money in the past four decades. All of the money that was raised from investors went to subsidize consumers use of energy through lower prices. And that money is irretrievable. Tomorrow we’ll look at the prices producers need to “make” with the Preliminary Specification to resurrect themselves from their current walking dead status.

Or I could be wrong and there’s a fresh batch of investors waiting to put their money into these producers. To give them another chance and allow the bureaucrats to live the highlife just a little bit longer. Investing on the basis of a shareholding that is supported by those bloated balance sheets. Where these investors will end up paying a huge premium for each share their granted due to the wasteful spending that has occurred in the previous decades and represented in those “well defended balance sheets.” Wasteful spending due to the inability of any of these producers to stand on their own without systemic investor or banker cash infusions. The industry as a whole is unproductive and is a cash drain. The wool has been pulled over so many people’s eyes in the past four decades by the oil and gas industry, that the only ones that can’t see this new reality are the producers themselves. What I’m saying here on this blog is not rocket science, it’s basic business understanding. Basic it would seem to anyone outside the bureaucracy of the oil and gas producer. If we took a walk down the road to where we expired these obscene balances of property, plant and equipment what would happen? That’s right, the total asset balances of the producers would remain the same. The configuration of their assets however would be different. They would have very small balances of property, plant and equipment and vast amounts of cash and marketable securities. So why is it such a hard sell to convince these producers to do the right thing?

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. 

Another Week, Returning August 28, 2017

Second Quarter Analysis, Part IV

Producers are feeling satisfied now that the second quarter reports have been digested by the markets. There are no tragedies to report, however there are a few laggards still left to submit their reports. Average depletion per barrel recorded for the first half of 2017 of our sample of 22 producers was $21.68 / boe vs. what our proposed methodology of turning over the producer's capital base on a minimum three year basis would be, which would have these producers recognize depletion of $70.25 / boe. A material difference in the two methods of recognizing costs. One can see the ability of oil and gas producers to defer the recognition of their capital costs, in a capital intensive industry, is highly effective to their bottom line and their desire to have these bloated asset values. When you have unlimited and unquestioning support from the investment community and the banks. You can defer the recognition of these costs for a decade or more. When you don’t have that support from the investment community and maintain these policies, which subsidizes consumers and never recognizes the real and actual costs of oil and gas exploration and production, you have an extended cash crisis.

Muddling along in a cashless industry continues to plague these producers. Annualized operating cash flow of $55 billion is inadequate to fuel the needs of these producers. Only $5.4 billion in cash is being generated and working capital diminished by $3 billion. Outside of the two mega oilsands deals no real bank debt or investment capital was raised. I am yet to read about the cash issue in the industry or how it is proposed to be dealt with. It seems the assumption is that all will soon return to normal and investors will come back investing into these operations like ever before. The problems that the producers don’t seem to understand is that the investors already own too much of the producers stock. Secondly, there was and is no discussion outside of People, Ideas & Objects, our user community and service providers of how to make the industry profitable in the shale era. Producers need to stand up and explain how they’re going to make shale commercial. There’s fifty years of abundant supply of oil and gas available. No one is going to invest in an industry with this level of poor, or abysmal performance, without an answer to such questions.

Whether the producers pick up the option to develop the Preliminary Specification on or before September 25, 2017 or not, is their last chance to prove to the investor community and banks that they have an answer to shale’s commercial viability. After that date, as a group, we will be unable to help these producers. Although my scenario of the declining oil price, losses on operations being reported in the second quarter and bureaucrats leaving seems unlikely at this point, we still have a month and a half left of summer. And if anyone wants to explain to me how these financials are something to be proud of, they aren’t dealing with a full deck. In my opinion producers were foolish to try to represent the situation in the way that they did in these second quarter reports. The situation in the industry is not positive in any sense and the inability to reflect the reality of the situation is only more disconcerting to the people who are watching what their companies are doing.

There is a persistence in the producers message. We are not changing. We will wait until the situation improves and the “market rebalances.” Even with no access to capital they continue to overwhelm the oil and natural gas commodity markets with production. If they were given more capital they would drill twice as much and destroy the commodity prices even further. What then would be the purpose of throwing more money at the producers. The investors already own too much of the producers. The inability to rehabilitate themselves during this period in which this industry has been in a challenged environment. Since 2008’s financial crisis, the decline in natural gas prices and subsequent oil price decline. The window of opportunity granted to these producers to deal with this problem is quickly closing. As a result of their inaction they are putting ownership of these producer firms into the hands of the banks. Investors will defend their interests and I think the time to do so will be the end of this summer as a result of the chronic inactions by these producer firms.

As I noted yesterday the hedge funds are fleeing the oil and gas industry. The stock price of these producers has always correlated with the commodity price. The management's provide no incremental value. A precipitous decline in the price of oil will bring about a commensurate decline in the value of the investor's holdings. Will that be the impetus for action on the Preliminary Specification? Or will it be the time in which to pack one’s bags for rosier climates in other industries. The overproduction and oversupply of oil and natural gas by North American producers can continue for as long as the shale era exists. If nothing is done by these producers before September 26, 2017 something will be done by someone else soon afterward.

I will be taking the week of August 14 - 18 2017 off returning August 21, 2017.

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. 

Second Quarter Analysis, Part III

How is it that the Obsidian’s, Pengrowth’s and Chesapeake’s are capable of continuing on? Having lost more money than they were ever able to raise, how is it that these companies are able to continue to function in an environment of no cash, no working capital and minimal cash flow? Simple, in a capital intensive industry the cash flow will always be adequate to pay the bureaucrats. The question is where’s the upside? Of course the analyst community think you should be buying these stocks as the future of the industry is only upwards. And that’s why over 20 hedge funds have packed up and left. I’m sure they’ll be back, never.

Something that I’m noticing here in the past few months may have a significant impact on the health and welfare of the oil and gas industry. It seems that the media and John Q. Public are less concerned with the industry's activities then in the past few years. When natural gas prices collapsed, soon everyone found other points of interest to occupy their minds and time. Does anyone get out of bed in the morning to hear the news of what’s happening in the natural gas marketplace? What is the news in the natural gas marketplace? It would seem that we’re headed down the same alley with oil doesn’t it? What used to be the top news of the day in oil and gas was also the top news in the business world. That doesn’t seem to be the case anymore. The “market rebalancing” story is the only thing coming out of the industry and everyone has heard that repeated many times. It’s as if no one cares what the industry does now.

The second quarter’s authors reflect a deep knowledge and understanding of the level of concern for the industry. The boldness of their statements stands out to me. Reporting profits and cash flow of any kind, no matter how it’s calculated, is the only game in town. They know that no one is going to raise any concern in the middle of the summer. They know that nothing is expected of them. They know to keep their mouths shut and lay low so that they can keep the gravy train rolling for a while longer. The industry today is indecisive, incapable and irresponsible. Mostly it’s unchanging. The next 25 years will remain the same if we leave the situation in the hands of those that are in charge today. It’s not that they’ll lose what they have, it's that we have to take it from them. To do that we need to begin the slow process of building the momentum towards the alternative in the Preliminary Specification. You can maybe tell that I’m not very hopeful at all of industry meeting our deadlines. If they do or not is irrelevant at this point. We need to act in the best interests of society's needs for long term stable and affordable energy.

Many people didn’t sign on to live in a dull grey day-to-day existence. Those that were pushed out in the downturn have already found greener pastures in other industries. The Trump economy is picking up and will soon start to draw people into areas that are a little more dynamic than oil and gas has been since 2008. The fact of the matter is there’s a cheap, abundant supply of oil and gas for the next 50 years. What concern could anyone have? I think it becomes rather risky when everyone turns its back on an industry and just assumes that these products will be available in abundant fashion. Already we’ve lost most of the important long term players like the investors and bankers. The bureaucrats will be the next to move on and then what’ll we have. Who’s going to pick up the pieces and rebuild it brick by brick and stick by stick?

I’ve suggested here that this summer we’ll see a continuation of the losses and difficulties for the oil and gas producers, a precipitous decline in the price of oil and the bureaucrats moving on to seek greener pastures in other industries. If so, who cares? I think this is where People, Ideas & Objects, the user community and service providers come in. There are many things we can be doing despite what the bureaucrats are not doing today. Every day I struggle to accomplish anything during the day. Yet when I look back over the past six months, I can see that much has been accomplished. This is how this project is going to be developed from this point forward. Brick by brick, and stick by stick. The way anything worthwhile develops. No earth shattering announcements. Just people going about doing the things that need to be done, those things that are not getting done in an oil and gas industry that everyone seemingly has stopped caring about.

The current management have capitulated. It won’t be a fight between us and them for control. They’ve given up and don’t care. We know what their not doing, what is it that we don’t know they’re not doing. These should be the areas of our primary concern. If we’re to assume the administration of the industry at what point does theirs end and our’s begin? We undertake to do it as a replacement on the basis of the underlying vision of the Preliminary Specification. Member’s of our user community need to consider what their actions will be if the producers do not participate in our development and our September 25, 2017 deadline. A highly probable scenario. Nothing in that future will happen without our user communities involvement. Everything hinges on the user community. There maybe other initiatives that pop-up as a result of the continued decline in the industry. Will they have the user community focus of People, Ideas & Objects? Will they be timely? If you want user community driven ERP developments in oil and gas then this is your opportunity. Our user community vision is the appropriate foundation for a user community to approach the issues and opportunities that are faced in oil and gas. Whatever happens in the next few months we have work to do.

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. 

Second Quarter Analysis, Part II

Yesterday I mentioned the five letter “F” word again regarding the quality of the oil and gas accounting financial statements. The extent of the accounting misrepresentation that goes on in the industry is only getting worse, based on my review of their second quarter's performance. Instead of dealing with the issue and beginning the process of getting ahead of it, the producers doubled down on the extent of their fairy tales. In any other industry, if the reports were prepared in this manner, there would be purpose built prisons to house the culprits. In oil and gas the anomaly is the SEC is the one that authored the games to be undertaken in the late 1970’s by enabling the producer to record property, plant and equipment at any value under the reserves times the current commodity price. Or the future net revenues of the firm. Accounting is about performance and concerned about measurement. It is not an attempt to emulate the market value of the company. That is for others to do. Shuffling all your costs to the future, to never be realized is a game that is played by those of ill repute. The extent of this game being played in oil and gas today is as sophisticated and entrenched as it could be. It is the culture of the industry and the majority of the people who work in the industry do not know or understand the implications of what it is that they’re doing.

Dan Loeb, a hedge fund manager is now shorting industries that he feels are involved in what he calls “accounting games.” Oil & gas and retail are the two that he feels are involved in this activity. Oil and gas because of shale and retail because of Amazon. At no time has the oil and gas industry addressed the investors concern for commercial viability of shale reservoirs. Shale has fundamentally changed the industry and destroyed the producers who were raised in an environment of resource scarcity. In an environment of abundance they are unable to operate effectively. Yet, all they do is produce financial statements that are the rosiest picture that could possibly be painted. Leaving the question of the industry's viability unaddressed and draining their cash and working capital further. Last week we heard Andy Hall of Antenbeck, a hedge fund based on commodity trading had shut down his fund. Suffering from one third losses as a result of wrong way bets on the price of oil this summer. He feels that shale is maybe more of a variable than what is understood by the marketplace. They used to refer to him as “God” due to his accurate predictions.

In this day and age it's not comforting to know that the costs of today’s Post-it-Notes and the phone service for the receptionist at Cenovus will still be recognized as a cost of the operation in the year 2045. Cenovus has increased the number of years that it’s depleting its property, plant and equipment from the ridiculous number of 10.8 years to the surreal number of 27.79 years. This of course being the most obscene example of our sample producers but the average for all 22 producers in our sample has now moved over the ten year mark. The only purpose in doing this is to inflate the earnings of the producer. I can assure you every cost, including royalties in Penn West's case, are being capitalized to some degree to property, plant and equipment. These costs are then allocated over the entire reserve base of the producer, and then based on what production there was, that will be your depletion. All that capital that was invested in oil and gas is expected to be used the one time in 10+ years on an industry average, and over 27 years at Cenovus. No wonder there’s always a cash shortage. The industry's main problem today is they’ve run out of investors to fleece.

If we take the miraculous $2.85 billion in earnings that Cenovus reported out of the total of our sample of producers. Cenovus earnings based on a deemed disposition of their key core property. The industry then produced nothing in terms of earnings. And this lack of earnings is on the basis of the fictitious methodology of reporting almost no costs. For example Southwestern’s capital expenditures were 270% higher than their rate of depletion. Anyone want to guess which direction the property, plant and equipment account is moving?

This lack of recognizing the real cost of oil and gas exploration and production shifts the burden of its costs from the consumer onto the investor. They have been the one’s that have subsidized the consumer for the past four decades due to a lack of recognizing the real costs of oil and gas operations. This is best reflected in the cash situation in the industry. Since the investors became wise to their role in the industry. The cash crisis has been fierce. Cash in the quarter continued to drain rapidly with cash generated of $6.6 billion. We have CNRL, Conoco and Cenovus in our sample so we captured three of the four producers involved in the two big heavy oil transactions. Nonetheless those deals raised over $10 billion in debt and $10 billion in stock offerings. Therefore the cash drain would have otherwise been as bad as it ever has been. Or more accurately stated. Outside of those three producers the cash crisis is becoming worse.

The Preliminary Specification rectifies this by recognizing the real cost of oil and gas exploration and production. Each property will generate their own financial statements to determine the profitability of the property. After recognizing the costs of operations, overhead and a reasonable allocation of its capital, if the property is profitable it will continue producing. If it is unprofitable it will be shut-in to save the reserves for a time when they can be produced profitably, lower the costs of those reserves by not adding each successive years losses to those costs, enable the producer to be more profitable as profitable properties will no longer be diluted by unprofitable properties and remove the marginal production from the commodity markets. Allowing those markets to find their equilibrium price. This is our price maker strategy which involves common sense and business understanding. It has also been rejected wholesale by the industry as the Preliminary Specification threatens the bureaucrats by removing them from the scene. In a classic technological disintermediation that is affecting all industries, oil and gas is not immune.

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. 

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