Permission Rights, Part I

Profits make the world go round. My criticism of oil and gas producers profits is that they’re inadequate to sustain the industry. People are losing their jobs. New positions are not being created. Government’s are not generating all of their tax revenues from the producers, or from the employees that no longer work in the industry. The service industry has had its worst downturn with no sign of any upturn. The only happy people are the bureaucrats. Producers are cashless with their investors and bankers the most concerned they’ve ever been about any investment. The profits that have been reported by the producers don’t make for a viable industry. They have been false profits as a result of never recognizing the costs of oil and gas exploration and production. People, Ideas & Objects Preliminary Specifications focus on real profits will resolve these issues and the oil and gas industry will prosper as a result of the changes implemented by the Preliminary Specification.

The real profits that will be earned within the oil and gas industry are attributable to the increased commodity prices as a result of the application of People, Ideas & Objects Preliminary Specifications price maker strategy. The difference in these prices and those that are available today is the source of our $25.7 to $45.7 trillion value proposition. We noted last week that this makes up some of the extrinsic value of the oil and gas industry. It is this extrinsic value, our value proposition, which is the focus of our next plan should the producers decide to pass on our September 25, 2017 deadline to develop the Preliminary Specification. If they do pass on our deadline our Revenue Model as it has existed for many years is unable to provide us with the funds to make People, Ideas & Objects a viable going concern. We will therefore be writing a new Revenue Model that sources the necessary financial resources to develop the Preliminary Specification by monetizing this extrinsic value of the oil and gas industry. It is this extrinsic value that the producers either don’t care about or are not interested in. People, Ideas & Objects have done everything to convince the bureaucrats of the benefits of moving to this new business model. They’re not interested and have, or will, pass on our deadline leaving this option open to us.

We feel that without the development of the Preliminary Specification the current producers do not have a future. In order to fund People, Ideas & Objects software developments we will be looking to issue Permission Rights that we are creating to access the Preliminary Specification when it’s built. We have always stated that it’s not enough to own the oil and gas asset anymore. It’s also necessary to have access to the software that makes the oil and gas asset profitable. The Permission Rights holders will be the only ones granted access to use the Preliminary Specification. These rights will be able to be assigned, leased or rented to producers in order to have their administration and accounting conducted on the software defined by the Preliminary Specification, by the user community and service providers. Permission Rights will be distributed after September 25, 2017 to cover the production profile of the North American oil and gas deliverability.

People, Ideas & Objects Permission Rights will hold two extrinsic values to the holder of the right. One is the access privileges to the Information Technology and infrastructure of People, Ideas & Objects our user community and service providers. The second element of extrinsic value will be what we are currently representing in our value proposition. The differential between today’s oil and gas prices and those that are necessary to earn a real profit in a prosperous oil and gas industry. These price differences are the value that Permission Rights holders will have in order to negotiate with producers to process their administrative and accounting requirements. Permission Rights holders will have earned these rights through the financing of the development of the Preliminary Specification. Our budget, the Preliminary Specification, our user community and the service provider all remain the same, the only change we will be making is to our Revenue Model.

Permission Rights will be administered from the very beginning and through each month’s accounting process through blockchain technology. Each Permission Rights holder will therefore be able to see the origin and disposition of each transaction involved between the producer, Permission Rights holder and People, Ideas & Objects. Contracts for the administration of the Permission Rights will be through the Smart Contract feature of the blockchain.

Members of the user community and their service provider organization may be interested in participating in the Permission Rights market. It would be an incremental value add to the lines of business that they’re involved in with People, Ideas & Objects. Producers may also find that participation in the Permission Rights market would be to their benefit. In the future, whomever the producers are, Permission Rights holders will be able to implement the Smart Contract feature of the blockchain.

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. 

Why...

Determining why it is that I see the current state of the North American producers as being terminal is sometimes difficult to relate. Accounting is numbers and has no effect on the operations of the producer firm, many would argue. Why would accounting cause the terminal effect that People, Ideas & Objects claims. It is inevitable, just as it was “easy” to have the producer perform in its early days by deferring the recognition of its costs to the future, the future comes about and the momentum of the unrecognized costs becomes more than what the operation can withstand. That is essentially where we are today, unable to deal with the bloated balance sheets of the producers. The impact of the policies that were used over the past four decades have materially distorted the financial statements. They have raised a culture that is based on a performance that was not determined on the real performance of the assets.

In the early days everyone could call themselves an oil and gas producer. Those with a size two hat were indiscernible from those oil and gas men who were able to conduct productive oil and gas exploration and production. Everyone was profitable due to the fact that no one had to recognize any of their costs. Everything is capitalized. Any drilling, completion, equipping, gathering and plants are capitalized. The overhead from those cities like Houston, Dallas, Oklahoma City and Calgary, all of those people and all of those building with all of their activities are capitalized on average of about 80%. The few costs that do hit the income statement directly are such things as the electricity for the pump-jacks. Some may say I’m drawing an extreme example here but I don’t think I am when you do this consistently throughout the industry for decades. Then the recognition of those capital costs are done over an expanding time period that begins at ten years, and in the case of Cenovus extends over 27.79 years.

If I as an investor was asked to invest in your oil and gas operation. And it was implied in your financial statements that you would be taking my money, investing it and waiting 27.79 years for that capital to be returned to be reinvested I would run away faster than I ever had. That implies that you’ll sit on that investment and expect it to perform at the lowest possible criteria possible. I should buy 30 year government bonds, they have essentially no risk in comparison. In this day and age to compete for capital you need to make it perform. Yes you should earn a return on that each and every year, that is the profit that People, Ideas & Objects constantly harps about. You would also need to reinvest that capital as it is returned to you by the business into other areas to increase the size of your organization and achieve some internal growth. As it is the North American producer expects that next year and each and every year after that they’ll be back in the capital markets for a further infusion of cash to fund that years capital expenditures. This only frightening the investor even more that a) nothing is expected of their investment and b) that their interests will be diluted annually by subsequent stock offerings.

Cash flow is the basis that the oil and gas industry operates under. Cash flow is predominantly the amount of capital that you’ve depleted in the current fiscal year. This is the return of capital that is achieved by the operation. The amount producers currently realize is inadequate to fuel capital expenditures, pay down debt and issue dividends and is therefore used for just one of these purposes and the stock offering is used to provide for the other two. If the producer firm was recognizing more of their costs in a timely manner they would be more honest about the performance of their operation and they would be generating much higher cash flows. Enough to sustain the operation without the cash infusions being done on an annual basis. Returning healthy dividends to their investors and not diluting them each and every year.

This all assumes that the prices for the commodities that are sold will be adequate to cover all of the real costs of oil and gas exploration and production. Which in the past number of decades it has not been. The deferral of the recognition of the capital cost of each barrel of oil has enabled the producer to subsidize the consumer with lower energy costs. This subsidy has occurred as a result of the overinvestment that was attracted by the “profits” that were alleged to have been earned in the industry. That overinvestment of course has led to an overcapacity and overproduction of oil and gas causing the prices to fall precipitously. This has triggered the innovativeness of the producers in the past few years of pushing the number of years that they'll recognize their capital costs out even further. These “innovations” have enabled them to continue to claim they’re profitable.

These producers now have the enviable position of being heavily weighted in terms of their capital assets. Their revenues are very poor as a result of the collapse in commodity prices. Investors and bankers see the inevitable outcome of these past policies and are concerned for their investments. No one is investing in the industry and the only source of cash is new production. Causing the prices to remain depressed. Shale being the other variable that will never keep the pressure off of prices. A vicious cycle downwards that has shown no solution to be forthcoming from the producer firms and only the extension, or doubling down, on the reporting of profits by the producers. Extending the vast and useless property, plant and equipment balances higher and for longer periods. Just to be clear, I am not aware of any other industry that can defer their costs in this manner. I believe this anomaly is unique to oil and gas.

You would have thought there would have been a solution implemented by the producers by now. The amount of value that has been destroyed is complete. The only solution in the market is People, Ideas & Objects Preliminary Specification. Producers can only solve this problem through years of profitable operations through our price maker strategy. That is the only way in which I can see this being solved. The investors are gone and besides they don’t have enough money to solve this. People, Ideas & Objects have persevered in attempting to have the industry adopt our solution in a timely manner. Our deadline of September 25, 2017 for the producers to participate remains open. We’ve identified this as their last chance to deal with the problem as we expect that these issues will consume them soon after our deadline. I think we’ve been patient and if they do not participate we will be proceeding with alternate plans. We will be detailing those plans in the next few days so that the producers will know the consequences of their inactions.

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. 

Labour Day

Third Friday Off

Planning for Profits and Success

While I was off in August I was making plans for the next quarter. If there is the support of the industry forth coming for the development of the Preliminary Specification then I will be the last to know and the most surprised. I’ve seen no change in the behavior of the producers. It’s as if they feel they’re in control of the situation and everything is going well. Oil and gas is all about drilling and what goes on in the field. The financial statements are what accountants do after they’ve paid the bills. They’re unimportant and mostly irrelevant. As long as the producers asset balances continue to grow, what could go wrong? People, Ideas & Objects new plans will begin on September 26, 2017 should the producers decide to pass on the development of the Preliminary Specification. I therefore see this next month as the producers last chance to put their house in order. After September 25th there will be no way in which we will be able to help.

Our plans will be of particular interest to our user community and service providers and will not be popular with the existing producers. A key assumption that we will be adopting is that the North American producers are no longer viable going concerns. They are terminal as a result of the inactions of the bureaucrats to act in the best interests of the health and welfare of the industry. I could always be wrong and often am however the lack of financial support of the producers will continue. I would suggest that even if the producers had the typical financial support that they became accustomed to prior to 2015, it would be too little and too late to make any impact on their survivability in their current configuration. It’s been over two years in which the industry has been shut out of the capital markets and nothing has been done by the producers to address this issue. No discussion or remedial action has been taken to address the glaring problems that the producers have chosen to ignore. I agree I’ve been curt and aggressive with my discussion of the situation here. If that’s the reason that these producers are choosing not to proceed with the developments of the Preliminary Specification, then I will gladly take the blame and proceed with our alternative plans effective September 26, 2017.

People, Ideas & Objects have also been patient. Probably too patient as the issue is at a crisis level here and now. We undertook to initiate the developments of the Preliminary Specifications on September 25, 2017 in order to act in the best interests of the industry. Otherwise our complaints were nothing more effective than the complacency we criticize in the bureaucracy. By giving them until September 25 we are acting to solve the problem but also being courteous, shall I say, to the bureaucrats by giving them their last chance. If they choose not to take it then they’ll never do anything about the situation. Our plans and actions up to this point have been very passive in comparison to what we’ll be doing in the next few years.

Ours is a plan for profits and success for the oil and gas industry. One in which the oil and gas producer is only producing profitable production, always. The Preliminary Specification will reconfigure the industry in a manner that will change the culture and structure of the industry permanently. Without the constraints of the current organization's needs People, Ideas & Objects, our user community and service providers will be able to move further, faster and with fewer obstructions and less stress. If producers adopt the Preliminary Specification as their plan by September 25, 2017, our plan would be their only plan, otherwise they’re operations are terminal in my opinion.

Our actions will be a continuation of the development of the new alternative organization and technology infrastructure that the industry will need in the very near future. If the current organizations are going to fail, and soon, we have an obligation to begin to build what will be needed to replace the current bureaucracy. As theirs declines our’s will take over. I’ll be outlining more of these plans starting next Tuesday.

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. 

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.