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

It was during 1986 that the price of oil collapsed to $10 / barrel. The political issues that caused the decline are not relevant to today’s discussion. What is relevant is that it led to a multi decade period of what I commonly refer to as the “oh whoa is me” era for oil and gas producers. Each year their annual report would show the difficulties that were created as a result of low commodity prices and the “oh whoa is me” discussion of the impact on their organization. I always believed that the decline in prices was a result of overproduction, just Google Sheik Yamani. If producers were to stop overproducing the prices would respond and provide a basis for profitable operations. The issue then as it is today is that the oil and gas producers are not configured to be capable of this seemingly simple task. Therefore I began this journey in 1991 in an attempt to resolve this. And here we are today with the Preliminary Specification that enables a reorganization of the producers and industry to enable the most profitable means of oil and gas operations. Ensuring that all oil and gas production everywhere on the continent is produced profitably at all times.

I didn’t read much of the text that was provided in the second quarter 2018 reports. What I read in the news about the industry is that everything is just fine. No mention of a cash crisis or any difficulties whatsoever. Therefore the producers have no need to come up with any excuses. Over the years we’ve had some great reasons to believe that they’ve got things under control. Remember they were praying for a cold winter when it was just natural gas prices that were low. We never hear about natural gas prices anymore do we. And the last couple of years discussion of “market rebalancing” was about as nauseating as could possibly get. Purposely waiting until their assets deteriorated to the point where they were not as productive as they are today, so that supply would fall back to meet demand. Such a brilliant and well executed plan for how to deal with industries issues.

The aggravating effect of shale has certainly made my life much easier. Without shale it is difficult to see the issue of chronic overproduction that is so plainly obvious today. Shale reserves have expanded substantially for each of the producers. Deliverability follows along in a relatively short period of time and the prices have been directly inverse to the volume of shale reserves and deliverability. I’ve always believed that the idea behind business was to generate value. What we have today is an industry with an abundance of oil and gas reserves that are absolutely worthless. They are incapable of making any money. They consume cash in order to produce and demand that investors and bankers blindly and faithfully invest just to keep the facade running. And after three years of the investors and bankers having said they’d had enough, the producers and media parrot a future so bright and prosperous that no one would want to miss out. Reality doesn’t have much chance of filtering into the producers message.

Speaking of the producers future, the one where they have no plan, no strategy, no organization and no financial capabilities or wherewithal to proceed into what has to be the most difficult 25 year period of the industry. The lack of any understanding or appreciation of profitability or its purpose in providing for an industries health and welfare has investors and bankers stepping over each other in an attempt to get their cash and exit as quickly as possible. Yes this is the future that the oil and gas producers have provided for themselves. Their focus on just drilling wells as their sole purpose, at the expense of any other aspect of the business has left the industry incapable of providing for itself. Pipelines were expected to magically appear where and when they were needed. Now the field resources are constrained in key places because the service industry were not as wise as the oil and gas producers in putting what was needed where and when. The execution of the operational framework of the oil and gas industry has to be assessed at well below substandard. And as for the political framework, producers have the politicians believing they can work miracles and are operational and financial geniuses. The media have told us this in almost every report. My assessment of the industry is therefore as follows. The financial framework is a fail, operational framework is a fail and political framework is a fail. We’ll discuss tomorrow what I think can be done about this and how the hard work can begin to rectify these issues.

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 XXII

So how bad is the cash crisis in oil and gas? $74 oil should have covered over a lot of sins, according to the bureaucrats. It was all that was needed to produce the handsome profits that they new they had in them. I’m sure these bureaucrats wish it was the old days, just a few short years ago, when they could state unequivocally “that profits don’t matter.” I remember those days well myself. I was saying that profitability should be the reason that properties produce and they would reply with each swing of the bat “that profits don’t matter.” I think they thought if they hit me hard enough I would change my tune. I guess that profits still don’t matter but what we can also conclude is that cash doesn’t really matter either. Let's look at the numbers/

For the second quarter of 2018 our sample of 23 producers cash was reduced by $4.8 billion to $19.8 billion. Working capital was reduced by $7.6 billion to $7.0 billion. Working capital was $18.9 billion at the end of 2017. What is particularly disconcerting is that Conoco, Husky and Hess makeup $10.0 billion of working capital on their own. Meaning the remaining 20 companies have a working capital deficiency of $3.0 billion. The sample of 20 producers have capital assets of $489.6 billion and a working capital deficiency of $3.0. To me that definitely puts the balance in the “well defended” balance sheet. Investors and bankers have only been on strike for three years and the net effect on the liquidity in the industry is this?

There are some interesting changes happening in the industry over the past six months. The investors and bankers have been active in drawing their share of the proceeds from the business. Dividends, share buybacks and bank loan payments have been tremendous. The boards of directors of these producers, it would seem, have been put on very short leashes. The investors and bankers realize that as long as the producers have money to spend then they’ll spend and ignore the business issues that stare directly at them. Cash is being drawn out of the industry at a remarkable rate considering the state of affairs. Dividends paid totaled $5.3 billion, share buybacks totaled $5.9 billion and debt reduction totaled $7.7 billion, all of these for just the three months ending June 30, 2018. In the three months of the first quarter the amount of these were $2.5, $2.5 and $4.2. Reflecting that the industry has paid out $28.2 billion in the last six months. It’s interesting to note that paid in capital totals $195 billion, long term debt is $154.3 which means producers will only have to go through this cash draining scenario for another 6.2 years which by then everyone will have been paid off.

It would seem that the investors have caught on to the claim of the bureaucrats that it’s not about profits, its all about cash flow. And therefore have begun the process of removing the cash of the producers for their own purposes. Implying that the industry is now a “mature” business if you like. Just as we noted that oil prices won’t be moving up anytime soon with the OPEC+ production sharing agreement no longer in place. We can say that the investors and bankers won’t be investing any money either. Neither are interested in filling the gap of any working capital deficiency. Investing good money in a firm should at least be done on a prospective basis. By funding the working capital deficiency investors and bankers are only covering off past sins, buying the management more time in which they don’t have to deal with the issues that are creating the cash shortfall and allowing good money to be flushed down the toilet. Therefore in addition to the oil prices not reaching new heights, investors will continue to suspend their active participation in any future share issuances, continue the return of cash to the investors and bankers and the cash situation in the industry is only going to become much worse.

We know things will only get better because the bureaucrats have been hoping for that to happen for at least a year. At least that is what I hear in the media. I’ve always expected that the oil price will eventually mimic the fundamental collapse that occured in the natural gas market and then the credibility of the industry will have been shot. The only way in which to rehabilitate the natural gas price and mitigate any further loss in the price of oil is through a sustained effort to do so. Meaning the implementation of the Preliminary Specification. Until then bureaucrats will have no measure of believability. 

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 XXI

I was re-reading the Preamble to the Preliminary Specification during the time that I was off. What is clear is the severe accounting distortions that are documented there. How those are responsible for the behaviours of the producers over the past decades. And why these are the cause of the difficulties in today oil and gas marketplace. In order to deal with these it’s also clear that the Preliminary Specification is the solution the industry needs and the Preamble details why we need to deal with it, how we need to deal with it and what to do about it.

One could understand the simple process of dramatically increasing commodity prices by just shutting in unprofitable properties. There are four direct benefits of doing so. First is the removal of the marginal production from the commodity marketplace allowing it to find the price necessary to sustain profitable operations. Second the producers profitable operations are no longer diluted by their unprofitable operations which increases their profitability. Third the  reserves are saved for a day when they can be produced profitably. And lastly those reserves will not have to carry the cost of prior losses that would need to be recovered in the future.  Nothing could be easier to do and healthy for the bottom line of the producers and industry. Allowing them to recognize the hoarded capital costs of past production that have been collected on the producers bloated balance sheets as property, plant and equipment. I’ve been discussing these points on this blog for more than a decade. The final edited version of the Preliminary Specification will be five years old this Christmas. I prepared these on the basis that the producers are configured in a way that by slapping this veneer of simple business logic on their organizations is impossible to do. Shutting in unprofitable properties starts with the first question. Which ones are profitable? And not a sole on earth has any idea as to what the answer is.

The issue comes down to the producers accounting is focused on the corporate reporting of accounting, tax and regulatory requirements of the corporation. Reporting of the properties are done with the partners of course, and that is through the Joint Operating Committee, however some ERP systems don’t even recognize the concept of a partner without substantial workarounds. And today’s overhead is where the issues become unmanageable. Overhead at the properties is based on allowances whereas most of the actual corporate overhead is capitalized and although People, Ideas & Objects believes that total overhead would be around 20% of revenues, no one knows the answer to that question either. Without the ability to have the specific overheads allocated to the specific property, how will you know which property is profitable? Natural gas is far more complex to administer than oil. Properties that are core to the producers strategy will be administered more efficiently than others, but what is the difference in terms of the administrative costs per barrel of oil equivalent? There are too many disparities between properties, products, partners and their capabilities to determine what the overhead that is being incurred at a specific property, therefore the overhead allowances were established throughout North America as the best guess.

Without the Preliminary Specification the changes necessary to bring about profitable oil and gas production will never happen. The need for a production allocation methodology to deal with the overproduction that is systemic and chronic will always be the case. Alternatively the government could tell who should and who shouldn’t produce. The fact of the matter is that People, Ideas & Objects Preliminary Specifications decentralized production model and price maker strategy are the most fair, equitable and reasonable means of production allocation available. If the property can produce a profit considering all of the costs, based on a reasonable accounting, then it produces. Otherwise we’ll continue as we are and every producer will continue to produce every barrel of oil they possibly can as they’ve always done. To suggest that producers employ our price maker strategy, which is the shutting in of unprofitable production, invokes the shrill response from the bureaucrats that this would be collusion. It’s not collusion to establish the ability to “make prices” when oil and gas commodities reflect the economic characteristics of price makers. Producers would have to be involved in a conspiracy to commit a crime. Using a system of organization that allows them to maximize profits, which is what the Preliminary Specifications decentralized production models price maker strategy does, is not collusion, a crime or a conspiracy. If making fundamental business decisions to produce or not, based on actual, factual accounting data, done in the best interests of the owners of the property is collusion, a crime or conspiracy then every business for all of time would have been sentenced to serious prison time, except for oil and gas producers of course.

Maybe it needs to be said explicitly. Those producers that have destroyed all of the money that was ever given to them. Please hand the keys over to their investors and turn the lights out. One has to wonder if the industry got together, bought these dead weight producers and shut everything in if that wouldn’t be the best investment ever. Next to funding the Preliminary Specification that is. Of course some of these producers, like Pengrowth are doing so on their own. The company exited 2015 with a production profile of 71,459 boe / day and reported a second quarter 2018 exit rate of 22,600 boe / day. It’s either the manifestation of killing off the dead weight or bureaucratic progress, your choice.

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 XX

Before our break I indicated that I thought the amount of depletion that would be recorded in the second quarter would be interesting. One thing about these bureaucrats is that they are predictable and shameless. On cue they took the opportunity to squeeze that extra bit of profitability out of their organizations by reducing the amount of depletion that they would or should have recognized. The point of the exercise is to spend money. But not to spend so much money that you breach the “ceiling test” and are forced to take a write down of your property, plant and equipment as an impairment charge. Spending is the first leg of this highly competitive race. The second leg of the race is to ensure that any and every cost that is incurred by the producer goes into property, plant and equipment. It’s important to note however that the SEC has recently frowned upon the recording of royalties as assets. Everything else in one form or another is fair game. The third leg of this race is to ensure that the minimal amount of depletion is reported at any point in time in the corporations history. It is the use of these three simple principles that govern the oil and gas bureaucrat. That is how we have producers with disproportionate asset values to all other aspects of their organizations.

In 2018 the first half revenues were $122.2 billion for our sample of 23 producers. In 2017 the same number was $104.6 billion. An increase of revenues of 17% year over year. If we used even a reasonable basis of allocating the amount of depletion based on revenues, the amount of depletion reported in the first half of 2017 of $35.9 billion would be $42 billion in 2018 based on that percentage. However it was reported that depletion was only $25.3 billion for the first half of 2018. A direct and material difference in the profitability of the producers in that the amount of profit reported of $9.2 billion would be reduced to a loss of $7.5 billion for the first half of 2018. The more revenues you earn the less depletion you recognize. That’s an interesting theory you have there. And it certainly works for the bureaucrats! Interestingly as well, the amount of capital expenditures for the first half of 2018 totalled $31.8 billion versus $23.8 billion for the same period in 2017. Therefore the more you spend also dictates that you’ll recognize less. People, Ideas & Objects recommends a rapid elimination of the bloated nature of property, plant and equipment. We would have preferred to have seen the balance of property, plant and equipment of $489.6 billion being recognized in a two and one half year time frame. That would dictate that the first half of 2018’s depletion would have totalled $96.6 billion. Fully 78.7% of revenues. Leaving a loss for the first half of 2018 of $87.4 billion. Please note at the end of the two years the balance of property, plant and equipment would be fully depleted, however capital expenditures at the current rate for two and one half years would leave that account with $151.9 billion. A far more reasonable number. It would also be expected that, if the Preliminary Specifications decentralized production model were implemented the cash generated, as the consumers would no longer be subsidized the capital costs of their energy consumption, would increment by the $489.6 billion.

What the bureaucrats don’t seem to appreciate or understand is that oil and gas is a capital intensive business. Implying that the capital costs are the largest part of the business. Property, plant and equipment expenditures are “retired” to the balance sheets through this three legged race to “building our balance sheet” bluster for the term of at least a decade. The mathematical average for our 23 producers increased from 8.18 years at the end of 2017 to sit at 9.35 for the period ending June 30, 2018. Remarkably a 1.17 years increase in the course of six months. That also implies that the cash that was used to spend on these capital costs is lost and not retrievable until such time as these costs are recovered through the process of recognizing the depletion of the $489.8 billion in property, plant and equipment by moving it on to the income statement. This therefore represents how much money the spendaholics have taken from investors and bankers, spent and buried into the ground to be recovered “down the road.” It also represents the total amount of the subsidy that the consumers have realized by the bureaucrats graciously storing the consumers capital costs on the balance sheet for no apparent reason other than to look good in some distorted view of reality. Now I’m not talking about taxes, and I’m not talking about anything other than the performance of the organization. How quickly does it turn over its capital and how does that capital perform. The important aspect of these questions is that the cash goes out and waits almost a decade for it to be returned to the bank account. In most businesses that would be a luxury that would be considered unspeakable. Generally businesses run on cash. However in oil and gas there had always been a willing investor or banker lining up to be fleeced. Cash issues were solved when the bank balance hit a threshold that triggered the stock offering. Except the investors don’t line up anymore do they?

The cash aspect of this “luxury” is hyper critical today. When all the costs of the organization are included in property, plant and equipment. And let’s be realistic, the only issue regarding capitalization is one of accounting creativity. Therefore all of the costs that the producer incurs will sit on that big bloated beautiful balance sheet for the next decade while investors are expected to keep the piggy bank full. And so on. Today the investors can say they’ve survived their strike on the oil and gas producers for a total of three years. They’ve also never felt so liquid or prosperous! They may see, as I do, a critical cash situation that will materialize some time in 2018 for each of the producers in the industry. A hypercritical cash situation that doesn’t appear anyone in the industry is aware of or concerned about. It really is a surreal situation to anyone outside of the industry looking in.

There is an understanding in the media and within the political arenas that there has been a phenomenal job done within the oil and gas industry. The deliverability of the industry has been quite remarkable with production records being established consistently. Or was it shale reservoirs that did that? We have always had this indirect, convoluted cash drainage issue in oil and gas. I started this project back in the early 1990’s. Shale only makes the situation far worse. The prolific nature of shale boosts the political fortunes of those in power and continues the delivery of low cost oil and gas to the consumers. However the industry has never learned that it was overproducing and was never a commercial operation at any time in its past four decades. It has survived on capital infusions of ever greater volumes to backfill the cash shortages created as a result of consumers not paying for the capital costs of the product. How could they pay for those costs when the bureaucrats keep hoarding them on their balance sheets! I guess it satisfies their ego. Now with the very expensive, prolific and steep decline curves of shale the bureaucrats continue to apply the old, unsuccessful business model to this new shale era and presto, in late 2018 the thing finally blows up. Maybe the most important point of this $489.8 billion in capital assets is this number is only what is attributable to the sample of 23 producers that we follow. They represent 9.553 million barrels of oil equivalent production in North America, or 28.73% of the North American production base. With a little rounding here and there, that comes to $1.7 trillion in cash sitting, whittling away in oil and gas that someone funded so bureaucrats could walk down the street with a big old swagger about how big their balance sheet is. That $1.7 trillion is also why this is a cash crisis.

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 XIX

Buddy could you spare a dime? I had a feeling that the second quarter 2018 financial statements were not going to be “healthy” for the oil and gas industry. Once again I was very wrong. The situation seems to be spinning out of control very quickly. What producers expected from the $74 oil prices didn’t materialize in any way. The alleged profitability of the producers remained mythical in its origins and validity, depressed and recorded an overall similar performance to the first half of 2017 for our sample of 23 producers. The first half of 2017 was a time when the oil prices were up to $30 lower. To hear the producers talk it’s as if they’ve worked miracles and resolved all the problems they’ve ever had. The issues that the Preliminary Specification addresses and resolves are material to the health and welfare of the oil and gas producers and industry. That bureaucrats don’t see it this way is an interesting phenomenon that I can’t speculate on its origin or motivation. There are serious issues at hand and will need to be addressed in short order. This is not normal or is it in anyway acceptable. There is a crisis that has been developing in the industry, I believe that it will manifest itself in the second half of 2018.

The one thing that we know for certain at this point is that there will be no further oil price upside due to the production sharing agreement being renounced by OPEC and Russia. The situation has also become very fluid and dynamic with China being severely affected economically by the U.S. tariffs and attempting to shift supplies away from the U.S. What was believed to be a spike in prices, to as high as $200 by some analysts, has now settled back to the same old, same old in terms of future prices. Commodity prices will not be moving up substantially from here in the short, medium or long term that I can see. What we know from our review of our sample of 23 producers is that the run up in prices from the $30 range to $74 has not healed what ailed the industry as the bureaucrats claimed it would. People, Ideas & Objects have always asserted that prices would need to be much higher with our calculated necessary oil price of $141 for the last quarter. And with cost escalation in the second quarter, the remaining 2018 prices will be needing to be in the low $150 range in order for the industry to begin profitability.

In a world of economic tightening, where the past decade has seen phenomenal expansion of the money supply. Oil and gas producers are faced with the luxury of a hypercritical cash crisis and bloated balances of property, plant and equipment that are supported by unreasonable and unsupportable levels of debt. Who would have thought? Producers may technically have good debt to equity ratios on their pristine balance sheets however if those balance sheets are bloated, then their debt is bloated as well. Investors, who have recently caught on to the annual dilution of their interests in these producer firms, are electing to pass on any further investment. Maintaining their current percentages of ownership of the firm instead of investing more and ending up, as a result of the dilution, with less. Banks are spooked too for the better part of the next generation or until they recover their money by poaching the bank accounts of any cash that comes in from the producers. So yes as we move into a normal interest rate environment where competition for the investment dollar will be very stiff, spendaholics with no “real” performance, plans or strategy but a stack of unaddressed issues to show for themselves will be having difficulties.

The more that today’s producers hold to the “profitability” and superior performance of their organizations the more fearful the investors become. The delusion that the industry is profitable when the capital asset values continue to bloat completely outside of anything that would be considered reasonable. Where the discussion of profitability at $40, $50, $60 then $70 oil was alleged to be boom times for the producers. With the producer organizations quickly dispelling the myth that they’ll be profitable at those prices as soon as those prices are achieved. Hanging on to these myths and fallacies that the industry is doing well in order to hope to have the investors return with their annual cash infusions into the producers is only frightening to those that would have participated. The industry appears to be the only ones that don’t understand the situation that they’re in. They’ll not be making it to Christmas at the rate they’re going and as I see it, the banks and investors are beginning to demand more cash returned before the ultimate, inevitable collapse.

What to do? The producers could provide the investors and bankers with a plan and strategy on how they would turn the industry around and move forward with profitable operations everywhere and all the time. By adopting the Preliminary Specification the investors and bankers, who are businessman and see the long term future, will accept that this plan will give a new and better future to the industry. One that is viable, profitable in the real sense and prosperous for all within the society that are affected by the industry. They would act in the best interests of the producers and fund their current shortfalls until such time as that future was here. I’m preaching to an uninterested and uncaring bureaucracy, I know, but I’m concerned for what I’m seeing. The reason I’ve been doing this for so long and so hard was to avoid what I think this issue could manifest itself as in very short order.

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 XVIII

With the rich endowment of shale technologies and reserves in the past decade. One would have thought that one of the producers would have challenged Apple for that trillion dollar milestone. Shale reserves however have been used in the same way that the traditional oil and gas industry operated. That being they’ve overwhelmed the commodity markets causing them to fundamentally collapse. Some might assert this was mismanagement on the bureaucrats behalf. Others would claim that the industry has not changed to meet the challenges and opportunities brought about as a result of shale. You may have read all of these claims in this blog and I would be honored to make them once again. The level of change introduced by shale can’t be dealt with by the current bunch and we can expect more of the “muddling along” and “do nothing” strategy and operating procedure that the bureaucrats have adopted as their religion. Please note my assertion here is that the reserves of the oil and gas producers are the real assets and value of these firms. And today the sum total of all the reserves of the industry are worthless as they produce nothing of value and indeed require cash infusions in order to function. If they held any commercial value, the possible trillion dollar valuation, they would have needed to be produced profitably. Their trillion dollar value derived from their performance as defined by their (real) profitability. Today the collective reserves of the industry have truly nothing to do with the unrecognized capital costs of prior production sitting on the balance sheets as property, plant and equipment of the producers. To be clear one should be an asset (the reserves) priced based on their performance, and would be emulated on the stock market as the market capitalization and the other are unrecognized capital costs of prior production. Producers today are in a highly competitive race to outspend themselves and “build their balance sheets” in order to represent they are more “valuable.” That is what they believe is the business. Any fool that looks to the accounting for the determination of value is a special kind of fool. Accounting is about performance. For example Apple has a book value of $349 billion of which $288.5 billion happens to be in the form of cash or equivalents. It therefore has only $60.5 billion in long term assets. Roughly the equivalent size of property, plant and equipment of an oil and gas startup.

We need to recall that the purpose behind these accounting shenanigans is to ensure that the capital costs of oil and gas exploration and production are incurred by the investors and not the consumers. By deferring the recognition of the capital costs for decades the producer achieves two key objectives. Their spending looks productive when assets continue to grow, profitability is achieved by any village idiot and cash flows are overstated too. And indirectly the burden for the cost of oil and gas is shifted from the consumer to the investors and bankers who supported the facade for so many decades.

It used to be that if you had a 100 bcf of natural gas reserves you were a force to reckoned with in the industry. Someone who understood the business and could build it. Now a startup could acquire a few tcf of natural gas in reserves in a few short years. The problem is that no one sees any value in that anymore. Primarily because there is no value in that anymore. The producers today have so eroded the value of the commodities prices that they’re incapable of earning a “real” profit, a profit that would be one that includes an increase in overall cash. That no one perceives any value in the oil and gas industry makes it a process of getting out, but before you do, make sure you take whatever you can get. If someone were to grant you their 5 tcf in gas reserves as a gift, you would probably have to throw it back. By accepting this gift you would be jumping in the deep end of the pool with a fresh pair of cement shoes.

One of the issues that I see in this second quarter reporting period is that producers have been telling the world their profitable for years. The fact of the matter is that they’ve been able to report these profitable operations because they hide their costs as assets on the balance sheet. Those costs are now so large as to have distorted every aspect of their financial situation as to permanently render them in a situation of perpetual losses from now on to make up for the fraudulent representation of profits in the past. To simplify the point I would say a corporations lifetime profitability is 100%. Producers today have now reported a grand total of 200% profitability. Therefore the performance of their assets will be bringing the reported performance back in line with actual performance of the organization. This is why accounting is a critical skill in determining the timing of its costs. Producers can solve most problems with the application of effort over a few quarters or years however this issue will take materially more effort than that. We don’t even see the recognition of this problem and the willingness to undertake a review. Note only the Preliminary Specifications decentralized production models price maker strategy can remedy this.

What I can state unequivocally in reviewing the second quarter financial statements of our sample of 23 producers. Is that they don’t know the oil and gas business, they don’t even know their business and don’t understand business in general! Which is probably the worst thing that anyone can say. Consider for a moment however that when oil was at $45 how $50 oil was going to be produced profitably. Then certainly $55 would be better and they stated it would be a windfall at $60. Predictions of these profits never arrive. Oil ended the quarter at $74.25 and the loss of cash, working capital, cash generated and profitability is epic.

I’m sure the industry argument that will be put across is that the amount of cash that is being spent on reducing debt, on dividends and share buybacks is consuming all of the cash the producers generate. And I would ask if they’re a recent university graduate? One that feels that socialism is the preferred method of organization. The fact that producers are paying out the cash to those people is because, anyone, anyone, that’s right it’s a business. And that is what businesses do. The fact that producers are now expected to act somewhat like a business is not a reason to cry about the drainage of cash by the bankers and investors. It’s time to implement the other aspects of “business” and make the industry profitable so that producers can do all of the things that businesses do. Those things that are involved in business that are beyond spending money.

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.

Second Quarter Results

I’ll be taking the next two weeks off returning August 13, 2018. By that time our sample of 23 producers will have reported their second quarter performance and we’ll begin our analysis. There are a few more things to be discussed with respect to the User Community Developments and we’ll finish off that series as soon as we’ve completed our review of the second quarter.

What is known at this time regarding the performance of the producers is unknown. They’ve certainly had their best quarter in terms of oil prices for the past three years. This has put a bounce in their step and led them to present a positive outlook towards the future. I believe this has been in anticipation of a prospective return of the investment community and the annual ritual of the shareholder fleecing to fund their next years capital expenditures. I am of the belief that investors won’t be back for a few years. They’ll need to see a steady performance of profitable operations before they’ll step back in the ring. These profits that they’re looking for will be the ones that they and I consider “real profits” and not the ones in which the bureaucrats report, which seem to always exclude the capital costs. It is therefore easy for me to predict, which is what I’ve done for so many years now, that the profits that are reported by the producers will not be tangible in the sense that they contributed any value to the producer firm. Without a constant cash infusion from the investors and bankers, the cash shortfall that has become hypercritical in the first quarter of 2018 will now surely be beyond what I could describe. Extension of accounts payable to completely unreasonable time periods is the only means in which to mitigate the producers loss of further cash. It will be interesting to see how its been done.

Certainly prices over $70 have helped substantially in terms of dealing with the cash crisis. The problem is that the producer does not generate any cash that is recovered in the current period. Cash in essence only goes one way, out. When most of the overhead is capitalized these costs, not assets, which are incurred each month require payment each month. Usually a firm has a revolving cash cycle that has the cash paid for its overhead returned to it from the products that they sell that month for use in the next month. When producers never recognize the capital costs of past production, which include the overhead costs, these costs sit as dead weight on their cash demands recycling themselves each month with the demand for new cash to pay next months overhead never being responded to by the business returning that cash. When the investors and bankers take a hike, which had provided the cash to fuel the payment of overheads for a year or more, then there is no money to pay for overheads. With $70 plus oil the amount that the producers are making from the sale of their products are generating more cash, however the amount that each barrel of oil costs in terms of cash out the door, based on our estimates from our first quarter 2018 calculations is in the range of $141. It is very stupid business policies such as these that the producers have been involved in for at least three decades, that investors have caught onto and the cash crisis is based.

One of the ways in which producers have learned to deal with the cash shortfall is to generate new flush production. Which is also known as “the business.” When increased volumes of oil or gas are delivered they’ve had in the past a temporary “free money” kind of tonic on the producers financials. This is also one of the reasons that producers continue to overproduce. To understand the phenomenon think of the gerbil in a wheel running in an attempt to reach its lunch. We’ve learned recently from the EIA that the highest rate of drilling in three years is currently underway. This is what accounts for the “discipline” producers acquired after they collapsed the oil prices into the $30 region.

I think the trend line on natural gas prices is disconcerting. Why the downward move at this time? There appears to be no reason for this and I am at a loss to determine the weakness. I had speculated previously that the pipeline constraints in many of the big shale gas fields, where prices had been severely depressed, were being alleviated. This has been the case and those constraints are now being cleared which is providing the overall natural gas market with incremental supply. As these constraints continue to be cured the industries overall natural gas revenues may drop once again as the natural gas prices begin to adjust to the increased supply.

Although I point these issues out it is clear that the bureaucrats couldn't be concerned in any sense. They’re fine thanks. They have a solution that has worked marvellously for the past number of decades. The solution is they’ll adjust the rate of depletion that they recognize. With higher oil prices the value of their reserves times the price of oil is much higher. Leaving them with much more space in which for them to operate before the ceiling test becomes an issue. Therefore, even though they are spending substantial amounts of other people's money on drilling, it will not approach that threshold of the ceiling test. Therefore they can reduce the amount of depletion recorded in the current period substantially. And that’s not all! They can even go back into the first quarter of 2018 and reduce the amount of depletion that they reported there. In fact I’m willing to predict that with the increase in oil prices for the second quarter we may see the recording of negative depletion for the second quarter of 2018 in some producers. That’ll boost earnings and get the investors back.

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 XXI

One needs to contrast the competitive advantages that People, Ideas & Objects user community and service providers provide the oil and gas industry in comparison to the administrative and accounting resources present in each oil and gas producer today. The key differential is that the user community and service providers provide the oil and gas producers with the most profitable means of oil and gas operations. That is verified through our value proposition which is available through use of the Preliminary Specification and these communities. We rely on the user community to provide the leadership within the industry to ensure that the oil and gas producers attain, and continue to always achieve the most profitable means of oil and gas operations. They have the means in which to make the changes to the software that is derivative of the Preliminary Specification and the services that are provided through their service provider organizations.

Another key difference between these two systems of organization of the oil and gas industry. Are that the current organizational model requires each and every oil and gas producer to build and maintain the administrative and accounting capabilities to function in the current business environment. What I mean by this is that the task of building and maintaining the requirements within each and every producer becomes an industry wide capability through the implementation of the user community and service providers. Today each producer is tasked with ensuring that they are meeting all of the requirements of every regulation and ensuring that the shareholders resources are managed appropriately. These tasks are not fundamentally different from the producer in the adjoining building or across the street. Today these resources and capabilities are not shared in any way because they are not shareable. With the structure introduced through implementation of the Preliminary Specification the service providers are managing one process and applying it to their customer base, which consists of the entire oil and gas industry. Therefore the shareable nature of the service providers process management is an inherent cost savings for the producer. This configuration, in addition to enabling the price maker strategy which therefore provides for the most profitable means of oil and gas operations, is a more cost efficient and effective manner in which to build the administrative and accounting capacities and capabilities to ensure compliance and governance is achieved within all areas of the industry and each producer.

The next 25 years in the oil and gas industry will be its most difficult. With the current disgruntled financial community, the financial demand to replace much of the infrastructure and the retirement of the brain trust of the industry. All pose difficult issues to the North American producers. The dynamic, innovative, accountable and profitable producer will need to adopt any and all necessary changes to their operations quickly. The era of muddle along and do nothing has seen its best days and has failed to provide any value for the industry. The user community and service providers, in addition to providing the administrative and accounting services to the producers, also provide continuous development of the business models. If there is a need for the adoption for a new business model, one that is not understood today, or would be incremental to those in the Preliminary Specification these organizations have the capabilities to dynamically make the changes to the software and services that make up the administrative, accounting and business models of the producers and industry.

How will the producers prove to their current and future investors that their future will be any different? How can they assure them they’ve acquired that old time religion of profits? I don’t think they even see the issue or its cause at this point. The producers behaviour has to be frightening the investors as they double down on their muddling and twiddling. Their credibility to provide any profitability or accountability in the current or future environments is null and void. When it comes to the next 25 years with the issues the industry is facing and the bureaucrats doing their Mr. Magoo impersonation I don’t see the investors changing their minds. The current industry trajectory is a continuous decline into oblivion. Allowing the continuation of creative destruction is contrary to the investors realizing the value that they have been short changed by these self interested bureaucrats. This value is represented in the $1.6 trillion sitting in the current producers property, plant and equipment account. This amount also represents the discount that has been provided to the consumers when the producers never recognized these capital costs of past production. To realize this value demands that the Preliminary Specifications decentralized production models price maker strategy be implemented with the user community and service providers. Either the investors can do that through their active participation in their producer organizations or the bureaucrats can wake up.

The President of the United States is suggesting he will be releasing 5 to 20 million barrels of oil from the strategic petroleum reserve to offset the Iran sanctions going into place in November 2018. It's almost like the President believes that oil prices are subject to price maker characteristics! Additional volumes of oil and gas supply have a material effect on the price. The producers should take this as the second source of evidence that the oil and gas commodities are subject to the economic characteristics of price makers and begin behaving in that manner. Implementing the Preliminary Specification might also give them some much needed credibility that they’re approaching the next 25 years with a different point of view and understanding. One in which they’ll focus on providing their investors with the most profitable means of oil and gas operations.

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 XX

When a new producer begins. When an acquisition by one producer of another occurs. When facilities or properties are bought and sold. When new facilities are brought on line. The need for systems integration of that data and information into the ERP system is a necessity. These will be carried out by the user community member through their service provider organizations. Integration of the process that they manage will therefore be a key offering, and seen as a distinct competitive advantage that the service provider provides the industry. The skills and capabilities in this area, when limited to just the process that is under management by the service provider organization, could become extremely efficient and valuable for both the producer and service provider.

There has been a strong orientation towards the Information Technologies in the user communities recent development and specifically their competitive advantages. Also with the recent expansion of the Preliminary Specification to twelve modules with the addition of the Blockchain module. The addition of these elements of Information Technology as part of the competitive advantages of the user community member and service provider are a substantial part of their skill set. We are developing the user community from the resources that are currently employed in the oil and gas industry. Primarily from the administrative and accounting fields. The orientation towards the Information Technologies are significant, and as with the leadership we noted the user community would be providing the industry, Information Technology is a fundamental part of the work that we are doing by developing software. The changes in everyone's work in the very near future. The sub-industry that we are creating with the user community and service providers that are filling the gap that has been created between the oil and gas producers and the technology providers. Where specialization and the division of labor has demanded that each of these industries focus on their capabilities and competitive advantages, and as a result are having difficulty communicating with one another. People, Ideas & Objects, our user community and service providers have to fill that gap with our own fundamental understanding of oil and gas and our special attributes or orientation towards Information Technology.

To quickly review where the user community and service providers competitive advantages stand we have the following list. We will provide a quality offering and let others compete on price. We will use specialization and the division of labor to generate further value for the oil and gas producers by doing more with less. Automation of the business processes will be a key feature of the service providers through their abilities and capabilities obtained through the user community vision. Specifically those include control over the Intellectual Property that makes up the Preliminary Specification and that People, Ideas & Objects software developers will only ever look to the user community for their input. The Preliminary Specification, People, Ideas & Objects, our user community and service providers are structured to provide the oil and gas producer and industry with the structure and capability for the oil and gas industry to expand its capabilities in terms of innovation. In that sense innovation on the administrative and accounting expertise will be a contributing factor to these producers innovations. We will focus on having the computers working for us as opposed to the situation today where I feel we are working for the computers. And therefore we will do what humans do best which includes the leadership, issue identification and resolution, decision making, creativity, collaboration, research, ideas, design, planning, thinking, negotiating, compromising, innovating and financing. And as we have been discussing we’ve added the application of Artificial Intelligence, Leadership, Integration and 5G / Internet of Things to the list of distinct competitive advantages of the user community and service providers.

We noted in the user communities vision, and elsewhere, that we need people who have a strong orientation towards the Information Technology capabilities. We are developing software and services based on that software, and understanding the strengths and weaknesses of the Information Technologies provides an understanding of the possibilities of what the software can do. We are the hybrid sub-industry between the oil and gas and Information Technology industries. These demands on the user community members are high, however these are the needs as defined by the marketplace. The service provider operations may be populated by specialists in either of the two industries in order to deal with the unique process that is under management at that service provider. If the user community participation role and opportunity appeals to you we have listed the level of Information Technology courses and understanding that would be helpful in the user community vision.

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 XIX

It was December 2013 when we published the final edited version of the Preliminary Specification. It was immediately after that we began with our focus and priority for these past five years. The same priority and focus that will always be what People, Ideas & Objects concern themselves with. Our user community. The development over these past five years has been slow and cumbersome however that is the problem with doing these kinds of things. You can’t short circuit the time commitment necessary to do it right. The biggest issue that I think People, Ideas & Objects have is that our awareness is constrained by the nature of the people who are interested in the user community. They’re not that free and willing to openly discuss this opportunity within the industry. There are many things that can be done quietly in the background, however it would be bad to discuss this in front of your employer, it is very bad to discuss in front of the bureaucrats, they just love to snuff out any interest and its bad to talk to other people who may not see the need in the industry and would see the support of People, Ideas & Objects as part of the loss of commitment to the oil and gas industry, a commitment that they would feel is needed at this dire time of need. This is the political environment that all major changes have to deal with and survive through. What people can determine from this is that People, Ideas & Objects are more committed than ever to see the changes brought about to ensure that we provide the oil and gas producers with the most profitable means of oil and gas operations. The only manner that this will be successfully done is through our user community, one in which has been endowed with a vision such as theirs.

My concern is that we’re cycling downward in terms of oil prices once again. It is what the bureaucrats do. It’s been over ten years in which the natural gas prices declined, and the cycling of those prices up and down, that led to the final loss of faith in the commodity price recovering to its traditional levels. Natural gas has traditionally traded at 6 to 1 of the oil price for the majority of its existence. Oil now trades at almost 26 times the price of natural gas. No one talks about the price of natural gas or the natural gas business. It is for all intents and purposes fundamentally destroyed by overproduction. Initially the low prices were constrained to the North America as a result of the continental nature of the marketplace. That has changed with global prices for natural gas now tracking closely to the North American prices. This has put substantial pressure on the viability and economic performance of LNG and the overproduction by the North American producers continues unconstrained. What constraints consist in the oil sector of the North American marketplace. OPEC has shown the way in terms of managing inventories, as all other business do, to ensure that the prices they ultimately realize would be profitable. Managing inventory is a necessary part of every business. Even Ford recently shut down production of the F-150. The most popular truck manufactured for something like 30 years straight. Why would they do that, because it's a business and they don’t want to overwhelm the market with overproduction.

Producers have expressed no desire to retrieve the monies that sit in property, plant and equipment on behalf of their shareholders! Interesting. I have been discussing the stored value sitting on these balance sheets for years. The only way in which to release this value is for the producers to implement the Preliminary Specifications decentralized production models price maker strategy. Producers would prefer to suffer through a cash induced starvation instead. It doesn’t make any sense and that’s the point. Oil and gas is not being run as a business. The bureaucrats are fine and satisfied with their compensation and see no reason or need to change the dynamics of their personal situation. How many times do bureaucrats think people will follow them when they just ride out the highs and lows of the oil and gas prices. They’ve lost the interest of their investors and bankers. Many have been displaced and those that do remain find that the increase in deliverability of production and the reduction in costs overall in the industry have nothing to do with what they’ve been suffering and sacrificing for, but with Artificial Intelligence! Well who ever was talking to the Wall Street Journal about AI just wasn’t thinking were they, therefore we can only conclude that it was a bureaucrat.

How does this play into the mindset of the user community and the developments we are undertaking. Only when strong leadership is present within the industry will there be a return to prosperity for those outside the bureaucracy. We see the user community being the leadership necessary to make the industry dynamic, innovative, accountable and profitable. The current bunch are not representative of that strong leadership as they are the ones that brought us to the point where this new leadership is demanded. Our user community members leadership will be the reason why our value proposition is realized by the 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.