These Are Not the Earnings We're Looking For, Part VIII

One of the concerns that we’ve expressed here at People, Ideas & Objects is the fact that North America holds 17% of all shale formations. What happens when the rest of the world begins to deploy the shale based capabilities that have been available somewhat exclusively to the North American market? The past number of years we’ve seen these technologies successfully deployed in Argentina, what happens when the rest of the world catches on? How will the industry be profitable when the abundance that we’ve seen in North American oil and gas commodity markets becomes the case elsewhere? It is this abundance in both oil and gas that have led to steep declines in the price of oil these past four years. And created a comprehensive market collapse in the natural gas market over the past decade, or should I say decayed.

Bahrain is a small country in the Middle East that has a population of 1.45 million people. Recently it held reserves of 125 million barrels of oil and 3.25 tcf of natural gas which provided for their consumption and Bahrain's primary export. To contrast, it’s neighbor Saudi Arabia has oil reserves that are in the region of 266 billion barrels. An order of magnitude difference. Bahrain recently contracted Schlumberger to drill a shallow offshore well in a tight formation that has been independently evaluated to hold 80 billion barrels of oil and 13.7 trillion cubic feet of natural gas. (Of note Halliburton will be drilling the next few wells.) How much of that oil could be produced is unknown and the completion of that well, particularly the fracing of the shale, offshore would be technically difficult. Although these technical and other issues will delay the development of these reserves, there are oil and gas shale reserves held in areas other than the North American marketplace. Not all of them will be as difficult to discover or produce as those in Bahrain, which is a small country. What we can be assured of, knowing the status quo’s muddle along strategy and do nothing operating procedure, in the decades to come, is that more than just North American producers will be exploring and producing expensive shale resources unprofitably.

Eventually, unquestionably and definitively there will be a need for a methodology of production allocation that is fair and equitable to all. People, Ideas & Objects have chosen the profitability of the property as that fair and equitable production allocation methodology. Only the decentralized production model of the Preliminary Specification can provide that. Producers need to implement our production allocation methodology within the North American marketplace as soon as possible and ensure that it is available to other regions as the high cost, tight formations around the world begin to be produced. Otherwise oil and gas will continue with this status quo for decades, which can best be described as a non-commercial operation where capital goes to die.

Conventional producers are happy with the price of oil today. Saudi Arabia’s cost to produce is well under $10 / barrel. They’re also happy to sit and wait while the North American producers prove to the rest of the world that their accounting has not only been suspect but deceptive and their earnings never existed, ever, we believe in the past 4 decades. OPEC for all intents and purposes will remain profitable in the conventional resource plays they produce. North American producers at some point will have to prove their claims of profitability and financial health. Something that they’re having difficulty doing even today at these commodity prices. It’s a slow bleed and the producers are the only ones that seem to be “allegedly” fooled by their accounting statements.

The claims of North American producers profitability in today’s marketplace have two deceptive elements to them. One is the shell game of stating that today’s “lower” drilling and completion costs apply to the historical cost that were incurred in prior fiscal years. Your costs are historically fixed, they don’t go down. Today’s costs may be lower but they can’t be retroactively adjusted to what was paid for in prior years. Secondly the fact is that their costs of capital per barrel this year are lower than last years. Which is a direct contradiction of what I just said. However that second point is not an accounting statement, nor is it an accounting statement being made by the people in industry when they say their costs are going down year over year. Reserves are booked on the basis of their commercial viability based on the current market price. The number of the reserves volumes are much higher when the price is $100 and much lower when the oil price is $29. That is to say that the reserves volumes change on the basis of the prices that are realized. As the price increases more reserves are able to be produced “commercially” and as a result the reserves value of the producer is increased by both volumes and prices. So when we look at the capital cost per volume of the reserves at $29 or at $100 we have a much different picture in terms of the capital cost per barrel of oil. This is not part of the accounting function and as I stated this is what is being quoted by the press when producers claim that their costs have come down in an environment of increasing oil prices from the high twenties to the low sixties.

Accounting is about measuring performance based on historical cost. Accountability by the engineers and geologists is based on their terms and understanding of reserves. Hence the two basis of discussing the oil and gas industries financial dynamics. It is People, Ideas & Objects opinion that the development of reserves is the appropriate approach for the industry to pursue, no question. However, development of the reserves within the business community it operates in is a necessity. Reserves are essentially useless if they remain terminally unprofitable. Ignoring the producers performance based on a reasonable accounting evaluation of what the owners of the firm invested and what was left after paying the bills is the only way in which to evaluate the commercial performance of the firm. It is on that basis that we state that these are not the earnings we’re looking for. Oil and gas needs to compete for the capital resources it requires as a capital intensive industry. Turning over its capital once every two decades is not adequate in the 21st century, nor is it going to be adequate in dealing with the low cost producers from OPEC or future global shale producers.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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 Time Off

I will be taking some time off, returning April 9, 2018

These Are Not the Earnings We're Looking For, Part VII

As much as I think the message has been getting through regarding “bloated balance sheets” and not recognizing the capital costs of past production by the producers. A few producers have reduced their periods of depletion from many decades to within single digits in some cases. What we see in those producers is that the effect has been minimal in terms of retiring the balances of property, plant and equipment. These producers and the industries balances are still outsized. Even after the hit they took to earnings as a result, they’ll need to redouble their efforts from here. For example Hess has been aggressively moving in this direction at great cost to their profitability which has created conflict within their boardroom with some shareholders.

Now that we’re seeing the “harvesting” of the investment that was made in oil and gas being undertaken by the shareholders and bankers. For all of the screaming and yelling I’ve done about this issue, with respect to the existing producers, it’s probably a moot point now. What they do in recording their performance is irrelevant to the shareholders and bankers, and nothing is going to change their minds in terms of their strategy of “harvesting” their oil and gas investment. Once these types of decisions have been made they’re not revisited or reversed. Therefore it’s time to turn towards the future and start building the new oil and gas industry.

In terms of the establishment of the new oil and gas industry, based on the new producer firms there is much to do. In reading the Preliminary Specification we find that there are two business models in the way these new producers generate revenues and deal with their costs. We have discussed the decentralized production model here many times and will only note that this is the manner in which the dynamic, innovative, accountable and profitable oil and gas producers ensure that only profitable production is produced. The second business model deals with generating revenues from two of the four competitive advantages of an oil and gas producer, those being the earth science and engineering capabilities. The producers other competitive advantages are its land and asset base.

In terms of the earth science and engineering capabilities of the producer, these become revenue generating activities within this new industry we’re creating. First recall that overhead of the administrative and accounting resources won’t exist within the new producers because these resources have been reallocated to the service providers who are charging for their services directly to each individual Joint Operating Committee. Any overhead of this type will be as a result of profitable oil and gas production and charged to the Joint Operating Committee. The revenues from the earth science and engineering capabilities are generated as a result of the time of these resources being charged directly to the Joint Operating Committee as well. Whether that is a property that the producer has an ownership interest in, or is conducted on a consulting basis to other producers who are in need of the specific competitive offering of the producers earth science and engineering capabilities.

With the potential shortage of earth science and engineering resources in the future. The industry needs a method in which to deal with how they’ll be able to profitably expand the throughput of the industry. With the retirements and the lack of new graduates this may become a protracted issue for many decades. To expand the deliverability of the industry we can rely on an expanded division of labor and specialization both in terms of the professions and the activities of the producer firms. Expanding the division of labor and specialization of geology and engineering are never ending demands due to the complexity of the science basis of oil and gas. The difficulty here is that the ability and capability of each producer to cover off the full scope and scale of these professions diverse offerings will ensure the new oil and gas producers remain unprofitable attempting to support an ever expanding specialized resource. Therefore specialization within each producer firm will be necessary with a pooling of capabilities of the producers involved in the Joint Operating Committee becoming a necessity. Those Joint Operating Committees that are not fully represented by its ownership producers capabilities will need to invite other producers with the requisite specialization into the Joint Operating Committee on a consulting basis to ensure full coverage of what is required. Note that the concept of operatorship has never been a part of the Preliminary Specification.

It is the understanding and expectation that the charging of the geological and engineering resources of the producer firms directly to the Joint Operating Committees is the other business model of the producer. The charging to the Joint Operating Committee will be generating the revenues necessary to support the specialization and capability as if it were a stand alone enterprise. It is within the modules of the Preliminary Specification that this business model is included with the Work Order system capturing and invoicing the time of these resources to the Joint Operating Committee.

The ownership understanding and development of these producers specialization needs to be a deliberate act when these new producers are formed. We believe the specializations will be such that the building of the firm around specific capabilities in terms of facilities and resources will have to be done. Formation of these organizations are the beginnings of the new oil and gas industry.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part VI

If, as we discussed yesterday, industry is considered to be a sunk cost by the monied people, which I would propose is the decision that has been made, cash flow will take on an entire new meaning for those that administer the oil and gas industry. We saw the banks were able to poach the cash from the bank accounts of the producers in the fourth quarter, leaving them to increase accounts payable in order to deal with their loss of cash. Banks will have the same attitude for the next decade or so, that is until they feel their loans are paid in full for the money they’ve lent the producers. Shareholders will be of this mindset too. There was only one reason that Conoco was touting the return of 61% of cash flow to shareholders. It was outsized in terms of where the firm's cash went and he had no choice in the matter. What he didn't say was that the banks were also paid 111% of Conoco’s cash flow. These payments made possible through the sales of Canadian oil sands to Cenovus. The days where bureaucrats determined what was done in the industry are over. It's the monied people’s turn. They want their money back. And I’ll guarantee you they’ll get it. Somewhat of a different perspective, let’s say an outsider's perspective on bloated balance sheets in a capital intensive industry.

The monied people will be saying thank god for shale. It guarantees that the producers will be able to maintain their production profile with higher probability. Ensuring that cash will continue to flow into the producer firm. Then there will be sales of properties. We’ve seen how over the past two years that producers property sales have enabled them to keep the lights on, the doors open and the money flowing to the bank and shareholders through high levels of dividends and share buy backs. If this sounds like drudgery then you’re right. There were plenty of opportunities to fix the situation and nothing was done. Now it’s a sunk cost as far as those who have the real power are concerned and they’ll get their money out over time. It’s not that they think that producers can’t turn the situation around, its that they don’t believe what producers say. Nothing that has been stated in the past decade ended up being true.

Last year People, Ideas & Objects set out our Argument, Our Plan and what we believed to be the Best Business Opportunity, Ever. Conceptually none of these have changed other than Our Plan does not contemplate our software developments startup. We will wait to see the commitment from the ownership and the financial resources we need to hit our bank account before we implement any of our software development plans. Secondly, our current focus is on the development of the user community which provides us with the greatest leverage in terms of affecting our software release date. No user community, no developments.

The cash flow the monied people will receive from the existing producers can be used to recapitalize their new start up oil and gas organizations that will be the replacements to the existing producers. Much of these dollars can be used to purchase the premium properties being sold by the existing producers in order to establish a strong oil and gas producer for the future. We believe that these transactions can effectively transfer the title of the properties to the new owner complete with a management agreement executed between the existing and new producers. This management agreement providing the day to day management of the properties until such time as the new properties owner can establish themselves with the appropriate needs within their organization, i.e. the operational Preliminary Specification, our user community and service providers.

This will ensure that, eventually, all of the oil and gas production in North America is profitable, always. With the development of our software and the services of the service providers, these new oil and gas producers will not have to develop the administrative and accounting capabilities within their organizations. They will be using the existing producers to manage their properties under a management agreement, and when the time comes to switch over to the Preliminary Specification the service providers will be in place to ensure that their operation continues without any difficulty. This will see the cancellation of the management agreement as the point in time in which the new producer will go live on the Preliminary Specification. Providing time for the service providers to conduct the industries implementations on to the Preliminary Specification in a timely fashion.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part V

The business model that the oil and gas industry operates under is unprofitable. The lack of profitability is systemic, cultural, has been the operational model for at least four decades and has destroyed the value that was established in prior periods. Nothing will remediate these issues until such time as the business model that the industry operates under is revised to deal with the current issues. People, Ideas & Objects propose the Preliminary Specification with its two business models for the producer firms and industry operations. These are designed to deal with the chronic unprofitability and ensure that every drop of oil or gas is produced profitably from here onwards. With the value that is inherent in oil and gas commodities. We owe it to future generations to ensure that our consumption of these valuable resources are produced profitably.

This is the point that needs to be addressed by producers. Investors are not coming back until they see some material steps to cure what is causing the industry to decline. Talking around these issues and stating that they’re organizations are profitable when clearly their balance sheets and income statements don’t support those statements is not hurting their credibility, it’s also not earning it back. Time to act has past. Significant destruction has occurred throughout the oil and gas, and service industries. Now is not the time to continue to sell the story line that all is well. The future jeopardy of the producers and industries are much higher as a result of the depleted capacity to deal with issues, the lack of support of investors and bankers and the fading interest in the producers health by the general public due to this chronic decades long crisis. It is down to the industry itself to pull up its socks and make the changes needed to right the ship.

The fact of the matter is that throughout this self inflicted crisis the producers and industry have been lucky. The OPEC production cuts, Trump tax cuts, etc. etc. Will this continue? What steps have, or are being taken to deal with the potential downside of OPEC abandoning their production sharing agreement? Drilling more wells will not be the answer. Or is it that those in authority and responsibility will stick around until their luck runs out? Without any evidence either way what are people to assume?

All of this can not be fixed with the quick and easy remedies that were responsible for starting all of these problems. The size of the balances in property, plant and equipment can only be dealt with in one way. To recognize them and their bloated nature. Oil and gas has systematically over reported their profitability by not recognizing the largest cost in this capital intensive industry, the cost of capital. The balances of property, plant and equipment have distorted the amount of bank debt the producers were able to undertake, and the bankers now find they’re too heavily exposed to oil and gas. Investors were led to believe their annual investments were building growing organizations when in reality it was an accounting sham. For all the reporting of false profits in the industry our sample of 23 producers have still only managed to generate $80.8 billion in retained earnings as of December 31, 2017. That represents their lifetime of activity. They still hold over $478 billion in property, plant and equipment. If it has taken a lifetime to generate $81 billion it will take six more life times for industry to deal with these costs. If this doesn’t concern you then nothing will.

I fully understand and comprehend that many billions of dollars have been written off to the income statement in the process of establishing that $81 billion in retained earnings. Looking just at property, plant and equipment, it is disproportionate to the remainder of each account of the individual enterprises. The amount of debt that is carried in relation to the size of the revenues. The disproportionate weighting of short vs. long term assets. These support the fact that the number of years depletion that producers carry of their property, plant and equipment account reflects a mindset of others people’s money is cheap, easy and meaningless when it’s depleted over decades. Capital is a resource that should be turned over in an organization repeatedly and as quickly as possible. It should not hit the balance sheet and effectively die for decades. Capital is a resource that is costly in reality and is not an asset to be admired on ones balance sheet for years, it is a cost that is incurred by the organization. The dynamic, innovative, accountable and profitable oil and gas producer will reduce their capital demands by turning their capital over repeatedly. They will out compete other producers by having their balance sheets stuffed with liquid assets available to be deployed at the opportune time, not remain stagnant for decades on the belief that the CEO has the biggest balance sheet on the block. The time to stop considering these as assets and dealing with them as costs has past for the oil and gas industry. The problem is that these balances were built up over decades of spending. These balances won’t expire in the next 15 minutes, and is a legacy that will haunt these producer organizations for the next decades if they’re not addressed and dealt with. In other words if you like your oil and gas industry today, then do nothing.

The “controversial” manner in which the Preliminary Specification deals with these costs is that we recover them through increased oil and gas prices. These costs represent past investments that have been made in the oil and gas industry. They are the unrecognized capital costs of past production. If producers want to redeem themselves they can capture these costs and return that capital. The only way they’ll be able to do that is through higher commodity prices. This demands that the price maker strategy of the Preliminary Specifications decentralized production model be implemented. Instead of shrieking at the thought of making prices, producers need to deal with the issues at hand, these two working hand in hand, and recognize their costs through higher commodity prices. Or, be treated as a sunk cost by those that matter.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part IV

I realize the pressures on CEO’s are substantial and the difficulty of the oil and gas business does not necessarily fall within the four walls that are occupied by that CEO’s firm. Overproduction by the industry is the issue that can’t be solved by any individual producers action, other than by implementing the Preliminary Specification and enabling all producers to produce only profitable production. Nonetheless a little more candid conversation regarding these issues and the situation within their firm may lead to a more productive environment and relieve them of some of the difficulties they’re under. Producers, who say they can produce the Permian for $12 / barrel, are setting unreasonable expectations when the industry as a whole doesn’t earn that much money from North America. Everyone knows the situation in oil and gas is not positive. Telling the press and your shareholders that everything will be fine is what was stated five years ago and more or less ten years ago too. The people you told then still remember that and are waiting for the good times to happen, not for the same story to be recycled again and again.

The pressure is building on these firms with evidence almost everywhere you look in the fourth quarter of 2017. The banks contributed a net $10.6 billion of bank loans to two major heavy oil acquisitions. Outside of this participation there was no major bank participation that was noticeable in any of our 23 sample producers. There was however $12.6 billion in debt reductions in 2017, $7.3 billion of that just in the fourth quarter. In order to deal with these difficulties producers expanded short term liabilities by $7 billion during the fourth quarter. The cash crisis continues and the banks are getting out as quickly as they see any cash accumulating. Poaching it from the checking account without notice to the producer. This has also been known as a short leash. People, Ideas & Objects believe the high volumes of property, plant and equipment are offset with high volumes of bank debt, not equity. (ie. overcapitalized, ergo over indebted.) And therefore the lack of performance is reflected acutely when the bankers assess the performance of their oil and gas loans.

No one seems immune from the pressures being applied to these firms. Conoco is the largest independent. I used to think that independent meant that they were immune to certain pressures. Their CEO, Ryan Lance was quoted as saying that Conoco had a “very successful year.” Losing $2.6 billion prior to the Trump tax cuts is not what I consider successful. This is on top of losses in 2016 of $3.6 billion and $4.4 in 2015. A grand total of $10.6 billion in losses. Yet that’s not all, the sale of their heavy oil assets to Cenovus earned them a $2.177 billion gain on disposition which is included in 2017’s revenue, and without this their losses would have been $4.78 billion, higher than any of the past, much worse years. Conoco also claims they returned 61% of cash flow to shareholders through dividends and share buybacks. Selling the company to meet the demands of the shareholders and bankers is not a business. Performance in terms of profits would be a better method of generating a “very successful year.” Thanks to the sale of the heavy oil assets Conoco maintains healthy cash and working capital balances of $6.3 billion and $7.1 billion. Which should carry them for another three months of paying off the shareholders and bankers. The question is what will they do when that cash is gone. If selling properties to satisfy shareholders and bankers is the best that the largest independent can do to produce a “very successful year,” then I’ve been far too kind to the bureaucrats in this business.

Another producer that has had a “very successful year” is Cenovus. They were the purchaser of the Conoco heavy oil assets that were previously held 50 / 50 with themselves and Conoco. Their accountants were the most creative by far in the industry during 2017 when they took the purchase price of the Conoco assets, and the book value of their share of the heavy oil assets, and realized a $2.555 billion “revaluation gain” on their second quarter income statement. Only in oil and gas can the purchaser gain more of a profit than the seller can in a sales transaction! If we take the “revaluation gain” out of the remaining earnings that we calculated yesterday, we end up with just $2.9 billion in earnings for the sample of 23 producers.

None of these transactions that we’re adjusting our sample producers earnings for are getting to the heart of the matter. That being oil and gas is not, and has not been in the last four decades, recognizing the real costs of oil and gas exploration and production. The amount of depletion that has been deducted is a subjective number which is as good a guess as anyone else's, I guess. Few industries are provided with the luxury of capitalizing assets for decades and recognizing them when and if they feel like it. The only criteria that oil and gas is held to is the value of the assets remain below the current value of the firms reserves. A ridiculous number that each producer seems to approach every year. Though People, Ideas & Objects have been critical of this procedure, oil and gas producers have not changed their ways. What they had been doing for many decades is taking money from investors, spending it in order to produce oil and gas and hand that production over to consumers at discounted prices. Investors have learnt that lesson and suspended any further participation in the industry. For example revenues for our sample of producers were $161 billion in 2016 and $222 in 2017. Yet for some reason depletion was $75.6 billion in 2016 and $69.9 in 2017. If they were really interested in providing a clear picture of their operations they might have allocated the same amount of depletion for each dollar of revenue. Any subjective measure is good. If so, they would have recognized a total of $104 billion of depletion which would have brought our running balance of their profits in to losses of “only” $31 billion for all of 2017. More than the $30.2 billion in losses they recorded in 2016.

In terms of what People, Ideas & Objects recommend is that these bloated asset balances need to be eliminated as soon as possible. We recommend the next 30 months. This would bring the 2017 losses to $173 billion which is ridiculous of course. Just as ridiculous as the methodology of these producers listing and depleting their property, plant and equipment for the past four decades. The point here is that the legacy of this capitalization policy has to be dealt with. Ours is the most reasonable methodology from the point of view remediating the bloated balance sheet issue and having the industry move on. It also happens to be the most honest. The fact is the industry will have difficulty continuing with this albatross unaddressed and unrecognized. What we see here is that the bureaucrats haven’t learned anything. That’s because they don’t care, and by the way their fine.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part III

I’m curious as to where as an industry we go from here. Will OPEC implement a further cut in their production to offset the coming “explosion” of North American shale production? Or will the banks revisit their restrictive lending policies and resume the good old days of lending as much as is desired? The producers themselves will certainly continue to display their production “discipline” and “this time is different” ways. They may be able to find further room to deplete less of their capital costs per barrel. And claim once again that those “cost reductions” were innovative reductions in costs, as they were able to do in 2017. Or maybe, the investors will be satisfied that all is well and there’s no cause for concern in oil and gas, and resume their annual investment and dilution rituals? Prices of the commodities might go higher, as they did in 2017, which would make it all that much better. The fact of the matter is the producers have had a run of good luck in terms of dealing with this crisis. OPEC did the impossible and have shown the market two things. That oil and gas commodities are subject to the principles of price makers. And the problem lies with the North American shale producers who have no business sense or understanding. What will the lucky lottery prize be this time that gets the producers another year of “muddle along” and “doing nothing” as their strategy and operating procedure?

Earnings of our 23 producer firms stand at $15.25 billion for the year. An increase of $7.85 billion over the $7.4 billion that was earned up to the third quarter. Or have they? Oil prices were certainly the highest they’ve been for years and producers were claiming to be profitable at as little as $12 / barrel. Is this what was expected from an investment of $460 billion? If we take a more reasonable allocation of capital from property, plant and equipment, what would the earnings have been? People, Ideas & Objects suggest that the industry needs to retire these excessive balances of previously unrecognized capital costs from past production on a timely 30 month schedule. If producers were to do that then losses would be ridiculous and not representative of a commercial industry. Which has been what we’ve asserted on many occasions. As fast as the $460 billion in property, plant and equipment was depleted, and that is only for the 23 producers in our sample, additional capital would be spent that would replace at least $153 billion in the property, plant and equipment account. Would this balance be a more representative balance for our sample producers to reflect their property, plant and equipment assets? The point here is that no matter what producers do, these excessive balances that have been built up over the past decades will be their legacy.

Assuming, once again, that the industry was a viable going concern with commercial operations and the producers were generating adequate revenue to cover all of their costs. These incremental charges for depletion would be reflected in higher working capital of approximately the same amount of the increased depletion being recorded. If we look at the working capital of our sample producers at the end of 2017 it’s $648 million less than what it was at the end of 2016. The cash crisis continues as a result of the shareholders and bankers lack of participation in the continued farce that is the oil and gas industry.

I guess we can mark down the fact that the producers were able to generate some luck once again when it came to generating their financial statements. Although they report $15.25 billion in earnings, which is an improvement over the third quarter, it has been a disaster these past three months. The luck they seemed to have earned comes in the form of President Donald Trump’s tax cuts that generated $9.7 billion of those $15.25 billion in earnings. Therefore in the fourth quarter our sample producers actually lost $2.3 billion and for the 2017 year our sample producers only produced $5.5 billion in earnings. The bureaucrats would believe that this is a good performance that entitles them to continue for as long as they want. I don’t believe they have the time. And I think others have lost their patience too.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part II

What is clear as a result of the publication of the fourth quarter reports of the oil and gas producers. Is that it’s time to take the keys to the Ferrari back from these teenagers. I’ve been saying that none of the efforts up to this point where going to make any difference. Things would only get worse. And the scope and scale of the problems that I see are well beyond what can be healed in normal approaches to business issues. Disasters have been left to fester for years and in natural gas for over a decade. Leaving the situation as is when faced with this level of difficulty is dangerous. We are much worse off as a result of the fact that the bureaucrats can’t, won’t and will not do anything about this situation, ever. Where is this long term damage being represented?

The universities Geological and Engineering faculties have been hollowed out of students. Producers are claiming they can’t get enough frac crews into the Permian leaving too many wells drilled but not completed. The service industry has been fundamentally destroyed by the withdrawal of activity and the long payment periods of the producers. Jumping at the snap of the producers fingers isn’t generating any interest in the investment community when so many rigs lay idle and representative of the wholesale devastation in the service industry. We saw this in the software industry in the late 1990’s. There were dozens of ERP providers looking to provide oil and gas ERP solutions. The producers thought they could get the ERP providers to spend their own money to prove to them that they were committed to the oil and gas marketplace. Some did, and once they produced the software the producers knew that they could have the ERP vendor for a song. Anyone seen an oil and gas ERP software investor outside of the lunatic that’s writing this? The damaged reputation of the oil and gas producers with the service industries investors will be something that haunts the oil and gas industry for many decades. And lastly the people in oil and gas and the service industry. They are searching for ways out. Whether they still have a job in industry or not, they’ve had enough.

The financial condition of almost all of the producers is well beyond what can be remediated. Being a capital intensive industry, cash flow has always been strong. For the past four decades that was all that was required. Earnings were irrelevant. What cash flow represents is the investors money being returned to the business to be reinvested, pay down debt or returned to the shareholders. None of that happened in the past four decades. What did happen is the circus became ever bigger and more robust. The ability to fund current capital expenditures from new investors, with the associated dilution never being an issue to the bureaucrat, was all the rage. The cash flow was diverted from its proper role in the firm to support the overhead and interest with the new capital funding the capital expenditures and dividends. A little sleight of hand that carried on for many decades. Then natural gas prices fell, followed on by oil which exposed the game to the investment and banking community. Their strike continues and it doesn’t look to me like anyone is going to be jumping back in. Back when cash flow was being diverted, the industry was slowly being drained of any and all value. If not for the producers capitalization of every possible cost to hide the fact that these organizations were actively draining the value that the investors were pumping in each year, no one would have touched anything within the industry.

Today the industry is a wasteland representing no value. The service industry is a wasteland representing no value. There are trillions of dollars needed to maintain and expand the deliverability of North America. How and with what? If the sum total of everything is unable to generate any value. And indeed drains the ownership of further value each year. Who is going to make this industry function as it should? This is the sad result that these self interested, spending mad bureaucrats have created. Nothing, only it's far worse than that, it's nothing that takes billions each year just to keep it running. If these producer organizations bureaucrats were and are unwilling to fix these issues by implementing the Preliminary Specification why are they still around and what are they doing?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part I

I’ve argued that oil and gas is in a state that is in permanent and terminal decline. The way in which I see things is reinforced by the fourth quarter reports of the 23 producers that we follow. I think now is the time to act by making the decision to build and implement the Preliminary Specification and therefore I will be making my case here in this series of blog posts. The first issue we’ll be discussing is the capitalization policies of the producers.

Until recently it was the size of the asset values of the producer firm that was the basis of success in the industry. CEO’s would brag about the growth of their assets and maintaining a “strong balance sheet” based on the large volumes of property, plant and equipment. Cash flow from these investments enabled them to pay the overhead and interest and there was an ever expanding pool of investors that were able to provide future capital to spend to maintain and grow the producers deliverability. Over time producers learned that what was included in property, plant and equipment were large percentages of those interest charges, overhead costs of the accounting and administration of the firm, including the receptionists time, phone service and Post-It-Notes. Few of the producers costs don’t end up in the property, plant and equipment account. Which has been the way of the industry for the past four decades. It is culturally ingrained with the leadership and management and that is the way it is done.

Oil and gas is a capital intensive industry. Therefore the largest cost incurred are the costs of drilling, completion and equipping. Our argument is that recognition of these costs in a timely fashion would be in the best interest of the dynamic, innovative, accountable and profitable oil and gas producer. They would seek to outperform their competitors by recognizing their capital costs as quickly as possible. Converting their property, plant and equipment investments back into cash via increased cash flow that would fund further investments, pay down debt and issue dividends to their shareholders. This assumes they were operating a commercial enterprise that was generating the revenues necessary to cover their costs. The current environment has their capitalization policies leading to high asset values and large profits. Over the past four decades these large profits have attracted overinvestment in the industry, increased the deliverability of the industry and collapsed the oil and gas commodity prices. In reality though, what was believed to be high asset values and large profits were just accounting magic that deceived the producers, industry and investors into believing that value was being generated. When in fact, as a result of these policies, the industry was using the capital generated from new investors each year to subsidize consumers for their consumption of energy. The amount of the subsidy accurately captured on the producers property, plant and equipment balance on their balance sheet. This activity has been able to continue for the past four decades due to the highly distorted policies of capitalization by the producers. This accounting game has now become obvious to the oil and gas investors who are unsatisfied with the performance and are actively withholding their participation in the industry.

The second element of this overcapitalization anomaly is the speed in which these assets are depleted. Currently producers allocate the costs of exploration and production across their known reserves. Therefore only a small percentage of the firm’s property, plant and equipment are recognized as costs in the current year. From an accounting basis this may make sense from a purely theoretical point of view. From a 21st century, high performing organization point of view it doesn't make any sense to be deferring the recognition of your capital costs to as much as 27.79 years as Cenovus has done in the second quarter of 2017. The demands for capital in the capital marketplace, and the performance of the firms that are successful in the 21st century are not provided with such luxuries. If the investors knew that they were being deceived by the accounting magic being discussed here, they would have withdrawn their investments far earlier.

When this overinvestment through chronic annual share distributions created overcapacity. The commodity prices were not going to be adequate to cover the real costs of oil and gas exploration and production. The deferral of the recognition of these costs into several decades therefore caused the producers to destroy value in the industry. The industry today has been hollowed out of its value and is incapable of providing, building or sustaining value. The subsidy to the consumers has quietly and effectively reduced the industry to the point where it demands a subsidy of several billion dollars each and every year to continue just to function. There is no residual value left anywhere. What the producers have done is they have listed on their balance sheets in the property, plant and equipment account the capital costs of past production. It has been easy to manage a firm on this basis. Now with bloated balances throughout the industry, the tough part begins. The recognition of the past productions capital will be difficult for producers to deal with and account for.

Bureaucrats will claim these are just accounting charges. They do not affect the cash flow of the producer. Ok, we’ve heard that before and they have the accounting mechanics correct. What they’re essentially saying is keep the spending machine going. Let them issue more stock and continue spending that to “build” the organization. What they never want to do at any point in time it seems, is account for that money that they keep spending and recording in property, plant and equipment. It’s a great game until the investors get wise to it. I truly don’t see where the producers go from here. Oil and gas has not been a commercial operation for the past four decades. This spending machine is becoming more obvious to more people every day. As that is what it is, a spending machine, nothing more.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

User Community Developments, Part VIII

Oracle has developed a term that I’ve recently come to appreciate. One that is consistent with the needs of People, Ideas & Objects, our user community and the service providers. That term is “rip and replace” when discussing transitioning between ERP systems. Our concern here is for the integration and implementation of the software, technologies, data and services that are necessary to make the oil and gas producer achieve the most profitable means of oil and gas operations. These will be the responsibilities of the service providers specifically and will have to be a key consideration of the user community members when they’re working with our developers. How will these changes be implemented within the producer firm and industry? The user communities objective of providing state of the art leadership and capabilities would include the change management leadership during the integration and implementation phase of installing the software within the oil and gas sector. It would also include their change management leadership during times when the software they’ve enhanced or improved requires their service provider organization and its producer clients to make the necessary changes.

The user community members development work with our software developers will involve the capture of the needs and understanding of what, how and why the software they’re designing will need to be developed. User community memberships are part-time positions with the bulk of the members earnings being generated as a result of the interest that they own in the service provider(s) they’ll create and operate. Working with the oil and gas producers during the initial software development phase will be necessary in order to determine what it is the producers are looking for in terms of the software that we’re building. This would fall under the part-time work that the user community member would be conducting. These part-time revenues are paid for out of the People, Ideas & Objects user community portion of our budget. Preparation and planning for the changes, training and the myriad different things that are going to have to be done in order that a “smooth” integration and implementation occurs when the software is complete and operational. These fall under the responsibility of the service providers and therefore ultimately the user community member.

These would be revenue generating activities and the bulk of the service providers revenues in terms of their pre-software operations. The allocation of costs and revenues of the user community member and service providers is pretty clear in my mind. As it will be in everyone else’s. It’ll just be that none of us agrees with one another. Another reason that we need to be moving forward soon. We have a diversity and scale of work that is well beyond anything that has been done in industry before. Is it impossible? It’s always impossible until it’s done. I do not see the continuation of the status quo oil and gas producer for much longer. Considering the work that we need to do I think it's reasonable to assume that we’ll soon be under pressure to get things done yesterday. Which is unfortunate but is the way that things get done.

Another area that both the user community member and service providers will be involved in is the fact that we have everything fully defined at this point. Which of course we don’t and never will. What unknown’s are unknown are probably kept that way, however we can be assured that they are growing in scope and scale each and every day. Where I see these fall under is the user communities responsibilities. People, Ideas & Objects have limited their specialization and division of labor in this effort to research, Intellectual Property and software development. For us to tackle anything more is lunacy. What and how the user community and service providers fill in the needed voids are their business models and opportunities. They’ll be entrepreneurs building their own businesses. What we’re all doing is creating a new sub-industry in the ever widening gap that has formed between oil and gas and the Information Technology industries. There is a relatively new area within management that deals with the specifics of these unknown unknowns. That is Program Evaluation, which is not research but its own discipline. Instead of researching to determine something new, Program Evaluation undertakes a study of which is the best option. That would be my summary of it. This has to fall under the area where the issues and opportunities have the means of being resolved by those who have the power and tools to resolve them, the user community.

We will be taking a short break from our series on user community developments to discuss the fourth quarter performance of the producers.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.