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

Big numbers continue to be produced when it comes to anything associated with the Permian basin. The volume of associated gas production is stratospheric at approximately 10 bcf / day. The expectation is that this may exceed 16 bcf / day when all the screaming and hollering is done. That is more natural gas production than all of Canada. As it stands today Permian gas competes directly with Marcellus gas for the least expensive gas in the U.S. This being a result of the lack of take away capacity in the region. Almost 8 bcf in pipeline capacity will soon be coming on line to move the Permians associated gas to LNG facilities. Producers are sitting around waiting for these pipeline companies to build this new takeaway capacity at which time they will be able to release that trapped gas into the larger U.S. market. As I’ve stated before I think that’s what they’ll be doing, moving their trapped gas from low priced, depressed areas like the Permian and Marcellus to flood the market and depress the natural gas prices across the country. Unleashing the constrained gas in the Marcellus and Permian may have the unintended consequence of overwhelming the rest of the continent’s natural gas market with suppressed deliverability about to come online.

Recently Concho Resources announced a merger with RSP Permian Inc that is subject to both firms shareholders approval and is scheduled to be closed in the third quarter of 2018. Concho’s acquisition of Permian is valued at $8 billion. Concho has about $13 billion in total assets generating $2.5 billion in revenue per year. To give you an example of how far gone these oil and gas companies are, and how far I think they’ll need to travel in order to right themselves. It would be my opinion that Concho should have $2.5 billion in property, plant and equipment generating $13 billion in annual revenues. Since the merger deal includes the value of the debt, it would seem the premium paid for Permian is about $2 billion. Concho or the merged entity will have $21 billion in assets and approximately $3.5 billion in revenues. The only game in oil and gas is to have the biggest balance sheet, which will enable the CEO to strut like few before him.

Neither of these firms has ever truly been profitable. They collectively have reported almost $1 billion of those oil and gas type of earnings between them over the lives of their firms. Even over the long term considering an inflation induced business model. Under People, Ideas & Objects Preliminary Specifications decentralized production model the most effective use of a producer's time, energy and money would be to return their inventory of shut-in, unprofitable properties to profitable production. This would be done through the hard work and innovations of the producers earth science and engineering capabilities. Only when they have no inventory of shut-in properties would it be reasonable or justified for them to turn to the marketplace for more land, production or acquisitions. This rushing of everyone into the asset that grabs most of the press headlines has been part of their inflation induced business model and has been going on for 40 years. It’s almost like gaming the stock price is the objective. Today it’s the Permian, recently the Marcellus, prior to that any shale formation, heavy oil had its day and before that it was SAGD. On and on the spendaholics rush around with sirens ablaze that they’re in a panic to acquire the only thing of value. Chesapeake was the prior darling of the day. Acquisition of reserves at any price to boost the balance sheet is the name of the only game that is ever played in oil and gas. Reserves are useless if they can’t be produced profitably. What the acquisition of Permian by Concho shows is that this fact has not been learned and the status quo that has brought these very difficult times in this industry remain well entrenched.

What I think this merger looks like is two swimmers who are in jeopardy of drowning, then decide they have a better chance of survival by holding on to each other. Maybe these mergers will become the strategic flavor of the day! My suggestion would be for the industry to look northward to the pleasant business environment in Canada. I haven’t held out much hope for Canada these past few years. The business model here has been the same as in the U.S. Although the U.S. is much larger, they may be able to learn that continuation down this same old, same old road will present similar difficulties to the ones now being faced in Canada. More or less it’s get out of Canada as quick as you can. Shareholders are fleeing, Pipelines under development are being stopped and maybe the smart producers are moving to the states. There is nothing much for anyone here in Canada except for the bottom feeders. It is far easier to bail on the Canadians then it ever would be to bail on the American producers. Which doesn’t mean it can’t and won’t happen. I’ve been saying oil and gas is in serious jeopardy for a few years. It just doesn’t have to be this way.

What will the Canadian producers do to fix this? They like the rest of the industry have certainly done nothing so far. The problem still exists even after a decade of natural gas overproduction. Market rebalancing, discipline and every other excuse has been put forward and nothing has been done. Now it’s expected that we’ll just leave them alone and they’ll do their thing? What if these are the good times? What if the next 5 years present more difficulties than the past 5 years? Oil prices peaked at $145.29 and natural gas at $13.58 on July 3, 2008. Both collapsed as a result of the financial crisis to well below $45 for oil and $4 for gas. Neither has truly recovered since, but oil did have 2011 to 2014 in which the price averaged almost $100. We’re all aware of the sharp decline in prices since then and the efforts of OPEC to “rebalance” the market. If producers future is dependent on their stock price matching the changes in commodity prices. Is it reasonable to think the future is theirs? If just drilling more wells is their future, what could go wrong?

Natural gas as a business has been fundamentally destroyed by overproduction. Nothing is being done about that, or even discussed. Oil prices are up therefore drilling for oil is the “thing” to do. Around 1,000 rigs are operating now. Up from the days when oil collapsed. What is important to understand is that there’ve been innovations in the service industries. The speed and overall time to drill and complete a shale well has collapsed. Therefore on an annual basis those 1,000 rigs will drill and complete more wells. Oil prices are high today. Certainly not high enough to make the reserves profitable. But no one in the industry will be concerned about that until the commodity prices collapse again.

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 X

Bureaucrats have a point about the Preliminary Specification. It’s expensive. Which is also one of the few things that I agree with them about. What producers should be concerned about is the value proposition that the Preliminary Specification provides them. The $25.7 to $45.7 trillion in additional revenues they would earn in the next 25 years as a result of using the somewhat expensive, $6 billion Preliminary Specification. $20 to $40 trillion of those industry revenues cover the costs of what are believed to be the future capital costs that the industry needs to incur in order to meet the consumers energy demands. These capital cost estimates are from a variety of sources. Under the current business model the bureaucrats expect shareholders will fund these capital expenditures. Just as they’ve done for the past four decades. People, Ideas & Objects believe that these costs need to be incurred by the consumer. In doing so these capital costs will need to be recaptured by the producers through their revenues as a result of using the Preliminary Specifications price maker strategy. More or less it is this point that is the fundamental difference between the producers existing business model and the business models contained within the Preliminary Specification.

Having systems that are mission critical developed in the vision of the Preliminary Specification is difficult and risky. I would also agree with that statement if it were 1998, 2005 or even 2010. Today I believe the technical risks being incurred by the producers in developing the Preliminary Specification have been mitigated by the maturation of Information Technologies. Producers believe that their current systems, such as Qbyte, which was conceived of in the pre-Internet era of DOS, will continue indefinitely. At some point it is necessary to deal with these 30+ year old systems. When the business model of the producers and the industry has fundamentally failed, what better time to address this?

The industry and producers future demands will not be met by today’s software offerings. It is rumoured that iTunes, which is 15 years old, is in need of, and being rewritten, Qbyte which is 30+ years old is just beginning in its infancy in oil and gas. If a non-mission critical music application has had its best days and is being rewritten, why wouldn't a 30+ year old ERP application? In addition People, Ideas & Objects are providing the industry with a software development capability that is permanent and a key part of our business model. We are change based software developers. Changes in the Preliminary Specification are accommodated by the existence of the permanent user community and our permanent software development capability. If the Preliminary Specification needs to be replaced by a new business model People, Ideas & Objects, our user community and service providers will be the ones that make it happen.

Bureaucrats will no doubt look towards Artificial Intelligence and Machine Learning to solve their problems. Big data is the clue to the solution! Putting their house in order and getting organized profitably for the future is contrary to the health of the bureaucrats, which is why building the Preliminary Specification is more of a concern and priority for them to avoid than it is a wise strategy. It’s best that the bureaucrats remember that no one believes anything they say anymore. Their credibility is shot and if bureaucrats shop these Information Technology based ideas around then people will know their circus still has more dates on its calendar. “It’s the business, stupid,” Bill Clinton I believe once said.

If you were to build a bridge you wouldn’t expect the manager to initiate a corporate entity to raise capital and generate a business that will support the investment that needs to build the bridge. People, Ideas & Objects is a capital project where the vested interests, the producers, need to pay for our costs to enable their profitable future. This endeavor is not a commercial operation from the regular perspective of a corporation. It is very much a project with a business model to support the user community and software developments after initial commercial release. This is the manner in which the oil and gas industry has to be approached in terms of the development of ERP software. Building the Golden Gate Bridge on speculation wasn’t practical or necessary a century ago. Building ERP software for the oil and gas industry on speculation is not practical today. Only bureaucrats believe it to be necessary.

With our Preliminary Specification in place for 2018. We have calculated based on our sample of 23 producer firms 2017 fiscal years financial statements. That the prices necessary to be profitable were $135.67 / boe on average throughout the year. The industry generated actual industry-wide revenues of $430.8 billion, whereas if these same volumes were produced at our proposed prices, they would have generated $1.243 trillion. An overall differential of $812 billion. From this we would assume the following. 25% royalties of $203 billion on that differential. Gross taxes at 21% for $127 billion on that differential. Distribution to the Coin Holders that provide the funding to this project of $158 billion, or 33% of the net after taxes and royalties. Leaving the industry with an incremental $322 billion in net revenues. Industry wide capital costs of $215 billion would be fully funded. Leaving $107 billion in debt reductions and dividends. Of note 2017’s capital expenditures are down from about one half trillion only a few years ago. And the amount of industry wide property, plant and equipment is estimated to be $1.642 trillion. After all the bureaucrats and I are only arguing small differences on the margin. And they wonder why their having such difficulty in their business?

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 IX

During this annual report and general meeting season bureaucrats will focus on their diligent and ethical spending of shareholders money on their capital projects. This has been the case in oil and gas for many decades. Producers claim that capital discipline is one of their key attributes which makes them such a good investment. If only integral capital spending was the only attribute needed for a profitable operation. The thing they won’t, and don’t, talk about is the spending of the resources that are returned from those investments. The revenues that the oil and gas investments earn for all intents and purposes are for the bureaucrats to do with as they please. This being another reason why the annual shareholder fleecing, or offering, was such a mandatory part of the oil and gas producers operation. Nothing they did with these revenues have any impact on the profitability / loss of the operation as the costs of capital would rarely ever pass through the income statement during their tenure. And there were always new shareholders available for next years capital expenditure needs. We need to ask which is the higher cost, drilling, completion and equipping wells (capital) or the electricity for the pump jack (operations). Therefore these oil and gas revenues were to be done with as the bureaucrats pleased. Oh, did I say that out loud?

The first priority of the oil and gas bureaucrat and the first thing for them to utter anywhere is their efforts to reduce their costs. Cost reduction is the holy grail of accountability and responsibility. This in an industry whose costs fit conveniently and profitably under a 1970 oil price of $1.72. A period in which the general economy has experienced 640% inflation, yet the price of oil is 3250% higher. And remember it’s People, Ideas & Objects claim that the producers have also been taking these annual shareholder proceeds as compensation for the discount that they’ve continued to provide the energy consumer in the form of lower oil and gas prices. At 3250% the current oil prices are understated in our opinion. We’ve calculated they need to be $135.67 / barrel which would be 7887% inflation. It has been much easier to provide the consumers discount at shareholder expense than to run a truly profitable operation. In an environment where costs are escalating rapidly it is a necessity for the producer to recognize their capital costs quickly. It is on the basis of the failure of their cost control that these bureaucrats should be summarily fired for incompetence. There I got that out of my system, we can finish the rest of this post. My other point would be that any attempt to control costs in an industry where the costs of oil and gas exploration and production will be higher as a result of the never ending increase in effort necessary to bring the commodities to market, is futile is it not? In an increasing cost environment it should be a concern to these producers that these ever increasing costs are recovered quickly and profitably. Pushing the recognition of your costs out beyond a decade would be a deception in an environment of rapidly escalating costs. Bureaucrats would be looking to inflation to reflect their performance over time as opposed to earning real profits.

Today producers have lost the point. Concerned that they don’t get more expensive than solar or wind energy. Concerned that the public will get angry if they are perceived to be raising prices to cover the costs of oil and gas production and exploration. They are stricken with brief attention spans that fluctuate with the daily changes in direction of the price of oil and gas. Change is too difficult for them to undertake, its unwanted as it conflicts directly with the bureaucrats best interests and as far as their concerned, not needed now. The ability of the existing producers to execute the necessary changes has now proven to be impossible. Oil and gas producers are not competitive, they’re stale, chronically overproducing into the marketplace. We’ve noted that only 5 of the last 32 years have been “good years” for the oil and gas industry. Bureaucrats have enjoyed 32 “great years.” For everyone else it hasn’t been so prosperous during any of that time. Come to think of it things weren’t that much better before 1986 either. When will the industry begin to be managed as a viable going concern?

This reporting season will be the same as it has been for 32 years. “Prices are low, oh whoa is me and please send cash.” It could be different however. People, Ideas & Objects enables producers to capture their capital costs quickly and profitably. Providing them with the capital to fund their capital expenditures, reduce their debt and issue dividends to investors. By only producing profitable production and recognizing all of their costs within a reasonable time frame producers would maintain a mature, yet profitable industry for the long term. One that investors, service industry representatives and the people who have invested their careers in oil and gas would be able to prosper in everywhere and always. Where these people who work in oil and gas would not have to be subject to the same kind of seniority that a common laborer out of high school experiences. There will be losers however. The Preliminary Specification disintermediates the bureaucracy, eliminating them from the scene, which is why they’ve chosen to run the industry into the ground instead.

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 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.