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

There still remains some equity values in some of the intermediate and larger producers. Therefore no need to panic yet. Not every producer everywhere has extinguished all of their shareholders equity. Bureaucrats should be able to resume their normal, non oil and gas related activities for at least this next quarter. I’m not suggesting that they’re not doing anything. It’s one thing to accuse the producers, as I did last Friday, of not doing anything by not proceeding with the Preliminary Specification. But they’ve done nothing. They never considered any alternatives or considered there was even an issue. They’ve just been quietly sitting, filling their pockets with the goods until the party was over. And as I said there’s more shareholders equity left in the industry. With oil prices having their most significant drop over the past few weeks. The competitive spirit will have been triggered in these bureaucrats to get their personal investments performing to the level they need too to sustain their posh life styles. They’ve used up all the excuses of praying for cold winters, rebalancing the markets, building their balance sheets and the other classics we’ve been subjected to over this past decade. Notice we’re not being offered any new reasons or explanations. It’s just dead quiet. Somebody might want to open the back gate for them, otherwise the herd might knock the fence down.

We now have nine quarters of financial reports from our sample of 23 producers. There is a trend that we can see that I find particularly interesting. One point that needs to be remembered is that this period of time July 1, 2016 to September 30, 2018 includes the period in which OPEC+ successfully implemented their production sharing agreement. In which prices increased from the 20’s to the mid 70’s. That agreement was cancelled recently and the third quarter of 2018 is the first quarter in which oil prices declined during the quarter. There is a trend that reflects the argument that People, Ideas & Objects have been asserting throughout this period regarding cash in the industry. When you don’t earn any real profit’s you have to be subsidized by capital infusions from bankers and investors. Remember those days? Investors and bankers became wise to the cash consumption of the industry and the scam that was being perpetrated against them and cancelled their participation. Creating this cash crisis I’ve repeatedly discussed here. I’ve had many people argue with me that yes, there is a cash crisis, yet the industry is paying significant dividends and reducing its debt. To which I agree and assert that that’s what businesses do. Nonetheless the reporting / scam continued without any changes over this period of time. This trend I’ve noticed is fascinating and can only be seen from an industry point of view over this length of time.

The trend is the working capital as a percentage of cash flow. It is difficult to relate table data on this blog however there are only a few data elements for each quarter so it shouldn’t get too contaminated in the process of publishing. All values represent only our sample of 23 producers, cash flow is annualized cash flow and all dollars are billions.

Quarter     Working Capital Cash Flow Percentage

3rd 2016     $20.4 $31.6 65%
4th 2016     $19.8 $36.2 55%
1st 2017      $22.2 $51.3 43%
2nd 2017     $19.2 $55.8 34%
3rd 2017     $21.7 $57.2 38%
4th 2017     $18.9 $61.3 31%
1st 2018      $14.6 $64.1 23%
2nd 2018     $7.6 $72.3 11%
3rd 2018     $12.3 $83.1 15%

As cash flow increased 263 percent over the past nine quarters, working capital has diminished by 40%. My recommendation would be to stop producing cash flow. For those that may not be too familiar with my sad sense of humor, welcome. The third quarter of 2018 also saw substantial numbers of property sales by these producers. Although we don’t track sales it would appear based on our calculations that there was in excess of $30 billion in property sales closed in the third quarter. We noted in the second quarter reports that 20 of the 23 producers had negative working capital. Only Conoco, Husky and Hess had positive working capital totalling in excess of $10 billion. As a result of these property sales there are a few more producers that have joined the positive working capital club for what might very well be the next season. Although no producer is overtly advertising properties for sale, the market demand has evaporated for some reason.

Earnings dates for the fourth quarter are set for mid February and later. I’ve been stating that producers won’t be able to make it through 2018. I think that’s valid. What will be done with this highly profitable industry in the remaining month and a half? The only source of cash was new production and the U.S. based production is at a record level of “highly profitable” 11.6 mmboe / day. Producers consume cash like no other business. Everything in the organization is capitalized for decades on the well built balance sheets. In order to complete that capitalization process they first have to use cash to pay the bills. Then those costs sit there in property, plant and equipment while the CEO struts about town showing how “big” his balance sheet is. Never realizing that the cash consumed for this sense of pride is gone for the better part of at least five to six years.

My mother always said don’t criticize unless you have a suggestion as to how to make it better. The Preliminary Specification deals with all of these issues. Except for the bureaucrats that is, they’re useless and therefore we just disintermediate them. We’ve been “suggesting” this solution for almost as long as most capital costs have been sitting on producers balance sheets. I count 27 years and this blog says I started writing these posts in December 2005. You would have thought with so much difficulty these producers would have done something by now. I think it's the end of the road unless they can pull another rabbit out of the hat. Our only suggestion is, if they adopted the Preliminary Specification by funding its budget. Then the investors and bankers would see that the producers have a plan for the future, a means to deal with their issues and a way to make money through producers everywhere in North America, always providing the most profitable means of oil and gas operations. Creating an opportunity for investors, to believe it or not, invest. Or we can all just sit here and wait to see what inevitably happens. Don’t you just love surprises.

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.

Remembrance Day

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

It hasn’t been a good quarter for the oil and gas producers. That’s well known throughout the industry but the third quarter reports make it that much more real. To earn profits in oil and gas you only have to wake up in the morning. There’s never been anything easier. The trouble today is that these past six months appear to have been the best that we’ll see for a while. No more production sharing agreement within OPEC+. In fact Russia and Saudi Arabia have both recorded record production volumes as has the U.S. Relief from Iranian sanctions are being made to certain countries. There is also a strong belief that economic growth outside of North America is beginning to slow. These are not the events that will support the price of oil at it’s four year highs, the price that was earned just recently. The financial performance of our sample of 23 producers was not what would have been deemed acceptable by investors. There was no significant progress by any of the companies in dealing with the issues of cash consumption despite the profitability they reported. If the cash is still an issue at $75 / barrel then what will the future hold at whatever prices will be provided then?

Hope was the intangible that everyone was hanging onto through the past few years. If the oil price continued to improve then there was a chance that things would continue to get better and we would begin moving forward again. What if the price of oil continues downwards into territory that does not allow producers to just hang on by their fingernails. Losing control of the political framework by telling everyone their profitable at $40 convinced the politicians that $74 was not necessary, which led President Trump to pressure the Saudi’s to dump their production sharing agreement. Now that it’s done the Saudis have put themselves in a real pickle where they are wholly beholden to the United States for support. The killing of the Washington Post reporter will need a few years to be forgotten about and until that time the Saudis need the U.S. more than ever, in my opinion. Is this the time in which the North American producers tell the President that they need higher oil prices? As bad as the situation is for the Saudis with the Washington Post reporter, it’s nothing like the difficulties that the producers would face if they told the administration that they were lying when they said they made money at $40 / barrel.

Operationally we’ve seen a decline in the capabilities of the North American industry over the past decade. This is not the industry that portrays a strong future as a dynamic, innovative, accountable and profitable world. If you doubt me then talk to your investors and bankers again, I’m sure they’ll set you straight. As bad as the operational capabilities and capacities have diminished in a generalized manner. We are beginning to see the big events that no one would have thought of, or could consider would happen. Random events that are material in the outcome of the performance of the producers. Take for example that we were unable to see any profitable property sale. What producers believed to be a source of cash turned out to be an area that is exposing the highly bloated nature of the balance sheets. When the market value of the property is barely half of what these companies have them recorded at, I think the CPA’s will be interested in this dynamic during their audits. Does the ceiling test override the GAAP requirement of recording assets at the lower of cost or market value? Other anomalies are of course Cenovus “onerous contract provisions” of over $750 million on real estate they leased for the staff they laid off. These kinds of situations don’t happen in a healthy, prosperous industry. One with a future and energy instilled within it to prosper in that future.

Either producers believed fundamentally what it was they were saying about their financial performance. And as a result have been caught in a situation that is not their doing. Or, they were winking and nodding that this was ok to do until their pockets were full. As I’ve said I’ve been arguing these points for thirteen years on this blog. This blog has been connected to the Internet and widely distributed. I’ll leave it up to my individual readers to determine if the producers are just willing dupes or were the culprits that are truly responsible for this situation. I think my tone and attitude toward the bureaucrats in the industry is a clear indication of where I stand. If they were innocent why did they attempt to steal our Intellectual Property five times? Why did they run me out of the industry? And why all of the abuse? At no time through our 27 year existence have we received $0.01 from any producer. The Preliminary Specification disintermediates the bureaucrats out of their franchise, just as it’s doing in every other industry. All of this destruction was deliberate, or in an uncaring manner, so that these bureaucrats would gain financially. The writing was on the wall in the record store, they therefore knew this was coming.

Each quarter the situation only gets worse and the remedial actions become fewer. Who will take the keys away from these irresponsible people? I don’t know. But what more do you expect from them. Have they not proven that they do not deserve the benefit of the doubt?. Sure I’m biased, I’m selling a solution, which provides me with a good living. That good living is based on the tangible and material value the Preliminary Specification brings to oil and gas. That’s how you make money in the world you build something that has value.

Whatever happened to managing the business? Planning the future and executing it. Dealing with the issues and opportunities the producers and industry face and using those to advance the organization successfully. The last ten years has seen the full on destruction and I suggest it’s been deliberate. How else would you line your pockets so effectively. If left to these same people we’ll be sitting in this same spot in ten years lamenting the loss and further destruction of this industry. Why?

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 XXVIII

Not one of the producers in our sample of 23 appear to be immune to the difficulties in the industry. It’s almost like there’s an issue plaguing the entire industry. One that isn’t attributable to any one specific producer, but is the responsibility of each and every producer. Any remedial efforts by any one producer to rectify their difficulties is incapable of making any impact on their outcome. It only seems to be getting worse. As Iranian sanctions are being imposed, the price of WTI has fallen around 20% in the past month. Buy on the rumor and sell on the news I guess. People, Ideas & Objects have established their credibility in terms of understanding this issue fully and completely by discussing the issue and our solution, the Preliminary Specification, throughout the past number of years. When everyone was continually saying that this was the end of the downturn, that there was no more pain to come. We’ve always said otherwise. $74 oil prices have not resolved any issues and that is clearly in evidence in the third quarter 2018 reports. We estimate that $150 is the actual cost of oil and gas exploration and production in North America. We have been stating the difficulties are not over for many, many years which should show that we fully comprehend the issue and its particular nuances. These are all captured in the over 2 million words of research that we’ve conducted and the 200,000 words that are contained within the Preliminary Specification. That these deal specifically with the issues that are prevalent in the market today. The issues that have resisted any and all producer remedies since the collapse of the natural gas market in late 2008.

What compelling reason is there for anyone, anywhere and at anytime to produce oil and gas unprofitably. There isn’t in my opinion. Yet the industry considers the issue moot, not what concerns them and that they don’t need any Preliminary Specification. We owe it to future generations to use the oil and gas resources, that are finite and extremely valuable to society, to be produced based on an accurate accounting of their profitability. To do otherwise is wasteful. Take a look around the oil and gas industry and see if you can spot any waste. All I see is a wasteland of oil and gas companies, service industry representatives and most importantly the most valuable resource in the industry, the people. We are laying waste to the future of the industry by destroying any good will that the industry had in attracting good talent for a profitable future. I’m sure that’s not an issue that concerns the producers either, the question on their minds is should they lay people off before or after Christmas. Can anyone answer me if this is the 21st century because it doesn’t feel like it.

Lately differentials in Canada are the most spectacular part of the business and therefore some producers are leaning toward the prescribed solution in the Preliminary Specification. WRONG. Let me stop both Cenovus and Canadian Natural right here and say that they’re going down the wrong rabbit hole. They’ve both announced production cuts in an effort to minimize the losses on their properties. Which undoubtedly they would, except their WRONG. Production cuts at facilities will not remedy the situation. Item number one that will make this a far greater financial disaster than what they’re currently experiencing is… Falling on their sword in an attempt to show the way by removing production in the market will be too limited and the impact will only be to their overall rapid downward profitability. Without a systemic change in the behaviour of the industry, where all production is produced profitably everywhere and always based on an actual detailed accounting there will be cheating. Remember we learned this from OPEC in the 1980’s when they tried to impose limits. Never worked until North American producers trashed the oil price to $29.

Secondly curtailing a facility by x production isn’t going to do it either. Properties have to be shut-in. If it’s unprofitable at 100% of it’s production profile, guess what it will be at 50% of its production profile. Massively unprofitable. If you shut-in the production of these facilities today they would even be more massively unprofitable. The reason that the Preliminary Specification promotes the shutting-in of production is that we do two things by implementing our technology throughout the industry. One is we convert all of the producers costs to variable costs. You can read about that here. Second we provide detailed accounting based on the Joint Operating Committee. Not the corporation. The overhead which is currently fixed and is charged in one lump sum to property, plant and equipment will be variable through our reorganization and charged directly to the Joint Operating Committee. No production, no costs. In the current environment if you have half or no production you still have all of your fixed costs. Which if you look at this seriously enough, is the reason your cash has rocket boosters to help break your grasp. Consider, by paying those involved in your overhead and then capitalizing those costs. The cash that was used to pay those overhead items will now sit in property, plant and equipment and will be released in tiny, tiny bits each year over the next dozen decades or so. If you expensed overhead, as we do in the Preliminary Specification at the Joint Operating Committee. And the assumption is that you’re producing only profitable production, then the cash incurred for those overhead items is returned to you the following month, all of the cash. By shutting in production now by half or all only hurts your one source of cash that is demanded by your organization in a chronic and systemic, somewhat ridiculous fashion.

In May 2019 I’ll have spent 28 years of my life more or less screaming about these points. At Christmas this year this blog will have involved thirteen years of that. There is nothing in this blog but the oil and gas accounting systems that are captured in the Preliminary Specification. I don’t know what makes me do these things. One of the key things for me was getting kicked out of the industry for these ideas in August of 2003. As a result this has been very liberating in terms of what and how I say what I say. Being able to say things like the following… What this involves, the implementation of the Preliminary Specification, is very basic business sense. What it also demonstrates is the lack of sense that the industry is applying today. Leading to a protracted suicide that we all have to experience due to the fact that these bureaucrats won’t listen and won’t act. There are two issues for this. “Accountants are scum that pay the bills, so shut up and pay the bills.” That is the engineering and geological attitude towards accountants. Secondly, what’s an accountant to do in a situation such as this? Well apparently the thing to do, and it's been done throughout the industry for the past four decades, is they established the accounting firm of Madoff, Madoff & Madoff. Do you think the types of creative accounting we documented in yesterday’s post about Cenovus would stand in any other industry? Never. Were these creative aspects developed overnight? Nope, and that’s what makes this the most creative accounting world around. The former CFO of Cenovus was a Fellow Chartered Accountant (FCA)! The accountants have to pay the bills and come up with new ways to represent the financial statements. Feigning that their too busy to consider what some blogger might have to say.

My argument has been made for a number of decades that the situation was untenable. And the individual who made that argument was run out of the industry and deemed crazy so that the party could continue in peace. It’s not that they didn’t know, their actions over the past number of decades have proven their knowledge of what I was doing. And now that everything has become a disaster they continue to pretend they’re naive and unknowing in the face of what is absolute common sense. It’s not that my argument is harsh against the people responsible in the industry. It's that the situation is harsh no matter how I relate it. It’s as surreal and ridiculous as it sounds.

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 XXVII

Dramatic activity is occuring in the stock prices of the oil and gas producers. As soon as they’ve reported their third quarter “performance” most of the activity is upward and substantial. Creating the sense that oil and gas is the place to be, or where the action is. These movements have been systemic and material in terms of changes in the price of the stock. I’m not going to speculate as to the cause of these, only to suggest that there are few periods in which insiders are freely able to purchase shares in the firms they represent. One of those times is when the financial situation has been fully disclosed to the market. The second point I would mention is that although these bumps in the stocks have lasted upwards of 24 hours in some instances. I would not suggest that the issues and opportunities, the plans and strategies of the producers and industry have changed.

Other than myself personally I don’t think anyone will be impressed by these financial reports. And I’m only impressed these producers are continuing on. Today’s trading bump isn’t going to attract any attention other than to maybe encourage an investor to take another look. If there is any attention paid by an investor they’ll soon be able to see that there’s no need to act. Let’s call this the bureaucratic dividend. If you never do anything, and continue to avoid the elephant in the room, others will follow your lead. These are the worst of times for these oil and gas bureaucrats. Looking for further investment, which is assumed what they’ve been doing for much of their time lately is a difficult thing to do when you’re in this kind of position. I too have been in this position and when you’ve knocked on the 1,000 door and received the same “not at this time” message you begin to realize, at least through your thick skin, but not your thick skull, that maybe “not at this time” is code for no.

There has been an uptick in the amount of cash that is held by a number of producers that we’ve reviewed to date. We’ll get into the numbers when all of our sample of 23 producers have reported. However the sales of some properties has allowed them to increase their cash, allowing them to hang on for another quarter or more. The problem that I see with this is that in each instance the divestiture has been made at a significant financial loss compared to the book value of the firm. It almost seems like the assets are recorded at too high of a value on these highly prized and well built balance sheets. Although these producers are reporting losses on the sales transaction itself, they’re also reporting large losses on discontinued operations. Indicating they’ve sold the properties that were dragging them down the most. Lastly the small number of actual property sales, and the financial losses on thoses sales may have proven to the industry that divestitures are not providing them with the cash that they expected when everyone announced properties for sale. It would appear that many of the properties that were listed for sale are no longer listed, but that doesn’t mean they’re no longer available.

Over the years I’ve had some fun with the creative accounting conducted by the prior CFO of Cenovus. We were entertained by such antics as negative depletion in the final quarter of 2016. A $2.5 billion increase in profits from the purchase of the $11+ billion Conoco property. A 27.79 year depletion schedule in the second quarter of 2017. This was due to the acquisition of the Conoco assets which they profitably recorded in the second quarter, and then only after six months did they adjust their depletion to finally account for that acquisition. These were just the highlights of their antics and I would only note there were many other such expansions of the concept of accounting. They have a new CFO who seems to better understand his role and is cleaning up the reporting. As a result I think we’re beginning to see some of the mess that was left behind for him. Cenovus sold a pipeline and related facilities for $625 million in desperately needed cash. Doubling their second quarters working capital. However they did record a $795 million loss on the sales transaction. What did I say about bloated balance sheets?

In another interesting Cenovus transaction, this was back in the days when balance sheet size truly ruled the world in oil and gas. Encana, the predecessor to Cenovus commissioned the building of the largest building in the City of Calgary. This building is called the Bow for its shape. Moving both Encana and Cenovus into the building after its completion. Cenovus has since had several rounds of layoffs and as a result have participated substantially to the 30% of idle downtown Calgary office space. In what can be seen in the standard issue bureaucratic manual, on page 505, cutting costs in a downturn is the right optic for the company to adopt. Times have changed though, and so has the real estate business, no one explained that the commissioning of the Bow had a “non-cancellable lease contract” contained in Cenovus’ lease. Sometimes you do have to read what you sign. To make a long story short Cenovus hasn’t, and doesn’t think it can sub-lease the space and therefore is stuck with the commitment. Claiming they are the victim that they most definitely are, Cenovus has recorded in the third quarter an “Onerous Contract Provision” of $726 million contributing to their $1.3 billion overall loss. Might I suggest that if Cenovus finds these consequences onerous they should pay attention to the contracts that they sign, manage their business effectively so that they don’t have to lay off thousands of people and leave hundreds of thousands of square feet empty. I would also suggest they could manage their business more effectively with the implementation of the Preliminary Specification. But I know, that solution is way too expensive, and I would suggest that it's too constructive as well.

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 XXVI

A swimming pool of drowning swimmers seems to have adopted the strategy of teaming up against the ill winds they face. Let’s hope they defy the odds. History would prove otherwise, but what’s history. Chesapeake has announced the acquisition of WildHorse Resource Development in a mostly stock deal. On a related note, lawsuits seemed to have been filed before the deal was even announced. What Chesapeake may be after is WildHorse bankers, who for whatever reason, extended their lines of credit by $250 million. That’s a lot of cash when you’ve only had at best $5 million of Chesapeake cash since the second quarter of 2017. I wonder, at times, but not often, what happened to that cash? This transaction also keeps the industry tradition of issuing large volumes of shares as if they were free money coming out of a printer. If you’re a shareholder of either of these companies you can now see the life history of these organizations are just a few minutes before the end.

Not to be undone Encana has announced the acquisition of Newfield Explorations in an all share deal. These companies have dipped below the water line a few times already, just as Chesapeake has. Therefore I don’t think this is going to extend or retard the progress of their demise. One thing these companies need to remember is that lawyers and bankers in corporate deals are a) very expensive and b) don’t work without retainers and payment. These producers may be forced to decide if payroll or lawyers are the right thing to pay in their very near future. This is the state of the oil and gas industry. The value, or scratch that, the amount that Encana is paying for Newfield is $7.7 billion with the assumption of their debt. About a month ago I mentioned the game that was played in terms of acquisitions and divestitures in oil and gas. Drawing the Pizza Restaurant analogy. How acquisitions price were based on the reserve values, or how many pizza boxes were in the restaurant, not on the performance of the assets based on their historical accounting. Which is a good thing for Newfield because their performance isn’t that stellar. Over the course of Newfields lifetime their performance, or scratch that, their “activities” have shown that they’ve incurred $1.4 billion in cumulative lifetime losses on shareholders investments of $3.3 billion. I think this tells me that Encana will enjoy the new company. Not Newfield being the new company, company as in misery loves company. For Encana to be paying $7.7 for these assets that have done nothing but lose $1.4 billion, which has forced Newfield into a shotgun marriage makes a lot of sense to me? If I were Newfield I’d probably think about taking myself out of the picture too. But then again, it’s just shares!

We also have a third candidate in this swimming pool. Please note that I’ve been screaming at all of these people in the pool that they can hang on to the edge of the pool by committing to the Preliminary Specification, but they just don’t listen. This third candidate is Denbury Resources who have chosen, at least I think it was a conscious act on both parties, to acquire Penn Virginia in a mostly stock deal. I think Denbury will be ok because they’ve deferred the recognition of their capital costs out past 20 years. This providing them with a loss of only $1.7 billion on shareholders investments of $2.7 billion. Penn Virginia is difficult to assess based on the fact that it emerged from bankruptcy in September 2016.

I have been critical of oil and gas producers for not having a strategy and plan to deal with their issues and opportunities. What we see here is the beginning of their plan to deal with their business. That plan and strategy, as I interpret it is clear, everyone buddy up and keep the value of your companies as freaking high as possible in the process. Pick a number, any number will do as long as it’s stratospheric, double it, and then announce the acquisition at three times what the doubled price was. This will support the values that are recorded in property, plant and equipment on the “well built balance sheets” throughout oil and gas. The immediate benefit of doing this is that you’ll also gain consensus of the acquisitions board, instantly, and there will be no bidding war by other producers offering anything else. From an industry point of view, this can’t be anything but positive when the industry is involved in so many multi-billion dollar deals.

If you’ve spent the life of your firm using and abusing the shareholders the culture becomes “that is what the investors are there for. What’s one more dilution? And what exactly have the shareholders done for us in the last three years? Nothing, so they should sit down and be quiet.” If you believed that producers should’ve had the overproduction issue resolved by now. If you believed that the starvation diet that the investors and bankers have imposed across the industry would invoke change in the producers and a cultural shift to one that’s dynamic, innovative, accountable and profitable, I can understand your disappointment. These issues are never going to be resolved if left to those that are in charge today. What are the consequences of me calling it as I’ve seen it over the past decade? If I had been nice to everyone what good would that have done? I would not have enjoyed myself and that would have been a tragedy.

This is the point in time that you would take the keys to the Ferrari away from your 18 year old son. What would you expect to happen other than a negative outcome from this point forward? As much as “discipline” has been the catchphrase in all of the third quarter conference calls. Discipline in what? Discipline in sending a message that the bureaucrats can’t, won’t and will not ever act in anyone’s interest other than their own. Discipline by itself is not that meaningful. It has to have been applied to something that needs attention. But if the producers said they were to display some discipline in terms of profitability or spending, that implies that they know their not profitable or spending is out of control and they can do something about it. They don’t want to do anything about that so they just say their “disciplined.” Then the usual behaviour and culture that has driven the industry into the deep end of the pool continues in somewhat of a disciplined way.

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 XXV

We have only a handful or so of our sample of 23 producers that have reported their third quarter results at the time of this writing. What we can determine in absolute terms is that the traditional accounting toolkit has been brought out and used throughout the industry once again. The most valuable trick in that toolkit happens to be the most effective and most used tool in the industry. It is of course the amount of depletion being reported by these producers. The general trend for the third quarter is to increase the amount of depletion that is reported by 3 - 4% over the second quarter amount. Which appears reasonable and in line with the business as it proceeds down its inevitable path to bankruptcy. What we can also determine is that this is not enough to deal with the vast spending that continues even though no one has any cash! The amount of capital expenditures of these producers divided by the amount of recorded depletion for the nine months ended equals 134% on average. This is the second principle of the ever expanding balance sheets that are being efficiently and effectively “built.”

In 2016 our sample of producers experienced $30.2 billion in losses on $75.6 billion of depletion. In 2017 our sample producers earned $15.6 billion in profits on $71.0 billion of depletion. Note that $9.6 billion of those profits were due to the Trump tax cuts. If producers recognized the same depletion as what they recorded in 2016, the 2017 earnings would have been $1.4 billion without the Trump tax cuts. In 2018 the amount of depletion recorded in the first half was $25.3 billion vs. $35.9 billion in the first half of 2017. Or $10.6 billion less than what was recorded in 2017. Therefore we can conclude on the basis of the small sample of 2018 third quarter reports that nothing material is going to change in determining the amounts of depletion for the remainder of the year. And therefore producers will increase profits to the tune of approximately $21.2 billion for the fiscal year 2018. All through the second principle of balance sheet building. Don’t recognize any depletion that you don’t have to.

What’s really going on here? How is it that depletion can be decreasing year over year? Producers are realizing that more reserves are coming on line as commercially viable with higher commodity prices and therefore the amount of depletion is less. A higher amount of property, plant and equipment is supported by more commercially viable P&NG reserves, therefore the need to deplete them is less urgent. The reserves in fact would now carry a much higher value in terms of the ceiling test due to both price and volume increases. Of course the opposite of this is the case during ceiling test write downs. The reserves are no longer able to carry the costs recorded in property, plant and equipment due to lower commodity prices or managements inability to find adequate volumes of reserves. This is the argument and the rationale for this activity of recognizing less depletion in the 2018 fiscal year. It is inconsistent with good bureaucratic ethics that they would ever desire to recapture those capital costs, recognize them by passing them through to the income statement and if they were charging the consumers enough for their oil and gas products, profitably produce that commodity and then be able to reuse that former capital investment which would then be sitting in cash.

Shifting back to the 2018 reporting period, the amount of earnings that were reported for the first half of 2018 were only $9.2 billion. People, Ideas & Objects claim that “these are not the earnings that were looking for” is coming into focus. It would appear that our sample of producers will end the year, holding all things constant for the second half, at a loss of $2.8 billion. But the commodity prices are so good and the depletion is so low! Please note in our previous posts that we have repeatedly stated that commodity prices need to be over $150 / boe in order to cover the costs of oil and gas exploration.

As one can see building a balance sheet is really quite simple. Spend money, admire the spectacle and compare it with your neighbors. No one yet has shown any sign of making any changes to this basic formula. And why would they, it’s worked so well for over four decades. Having to account for the past is not in anyone’s best interest and therefore not done. Those are sunk costs don’t you know. When you have the media and the analyst communities actively promoting Chesapeake as an investment there is no need to say or do anything. Chesapeake is a firm with almost $2 billion in negative working capital. $4 million in cash. Negative $39 million in shareholders equity. Capital expenditures that are 171% of depletion. And property, plant and equipment of $11.4 billion that is scheduled to be retired over the next 9.92 years and those assets alone are represented by 85% of the long term debt. $114 million in free cash flow. I could go on but what would be the point? For me to suggest that they need a plan and a strategy such as the Preliminary Specification seems laughable even to me.

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.

Third Friday

The Real Jurassic Park

With a future where natural gas volumes may triple to 50 bcf / day in the mid-term, times have never been better in Canada. The sense of excitement and wonder fills the streets. People’s enthusiasm is overflowing and they just can’t wait. Well that might have been the situation if the producers were in any kind of condition to contemplate any kind of future other than a courtroom. Looking at the working capital of the Canadian producers we follow in our sample of 23 producers reflects a probable different outlook. One that matches the lack of expectations that anything will happen to remedy the industries issues. And general sense that people are searching for opportunities elsewhere in other industries. The transition from difficult times for people to critical times appears to be well on its way. A decade has passed since the natural gas business collapsed. The industry has been on its heels since then and those affected have hung on as best they could. The issue for people now is it just doesn’t end. Taking a decade out of anyone's career is just a small price to pay. 30% of the office space in downtown Calgary is vacant. That has been the case for many years now. The consequences of inaction by the producers, although significant for the investors who have been betrayed by the accounting from the offices of Madoff, Madoff & Madoff, the overall economy in general that depends and is supported by the revenues of a primary industry, such as oil and gas, can’t be replaced.

We’ve recommended that the consumer should be chosen to pick up the tab for the future capital costs of the oil and gas industry. With our value proposition of $25.7 to 45.7 trillion over the next 25 years, that’s a hefty tab. I would expect all of this incremental value to come from the consumers. We need to ask ourselves if living off the scam that was perpetrated against the investors and banks was worth it when we run into situations where the economy takes a periodic nose dive. We’ve had nothing but downturns in oil and gas as a result of periodic phases of overproduction overwhelming the commodity markets. With the shale era we have an economic wasteland that only the bureaucrats can be satisfied with. It was inevitable, who has the greater volume of financial resources in order to power the industry through the next generation, the consumer or the investor. I would suggest the investor is a piker when compared to the resources of the consumers.

Business provides products and services to consumers for profit. I don’t want to sound demeaning to my readers, I know they know this. I’m writing to the oil and gas CEOs who are still strutting around town with their balance sheets comparing them to others to find out who has the biggest. I went back through my accounting textbooks and the textbooks that I have from business school and I’m unable to find any information about the concept of “building our balance sheet.” I still for the life of me can not understand what it is that the CEO’s are talking about when they utter such nonsense. There is no accounting policy or method to do so. There is no business strategy of “building a balance sheet.” I am just unable to find anything about this oil and gas phenomenon.

The fact of the matter is, if we had the consumer paying for the full cost of oil and gas exploration and production the economy that is dependent on the industry wouldn’t have these convulsions. It would be subject to the minor effects of recessions but those would be almost immaterial in comparison to the violent on again, off again throttle junkies we have running the show today. People would be able to plan their careers and families around their educations. Dedicate themselves to and build a worthwhile and valuable industry. Not be subject to layoffs in the same manner as the high school drop out that works in casual labor. Especially when they’re in their mid 30’s with a small family and a big mortgage. Or have invested the family fortune in a multi-generation service industry field operation, and been forced to scale down to 10% of their former capacity. This is the 21st century. Why are we still doing this? Not all of us have to work in the Jurassic period.

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.

You Can't Get There From Here

We noted a few weeks ago that Canadian producers were making application to the National Energy Board for LNG facilities across Canada. These facilities would increase the export capacity of Canada by 36.6 bcf / day. A substantial change to the industry considering the current production of natural gas is just under 16 bcf / day. It is reasonable to assume that the Gulf Coast is / will be going through a similar phase of development in terms of LNG exports. Based on the approved Shell project which has a capacity of 1.8 bcf / day and is projected to cost $40 billion CDN. The total cost of the 36.6 bcf / day capacity might range in the ballpark of $800 billion. These are estimates based on the remainder of the 12 out of 30 LNG projects also being approved. Nonetheless if the country were to maintain its current markets and expand its deliverability by these new exports the total deliverability of Canada would exceed 50 bcf / day. In terms of throughput capacity that is a different industry than the one that is in operation today.

The financial support to build these projects are a critical part of their definition. In Shells case, I assume that they, and their partners who are the end users of the gas, will be funding the capital program. Not everyone that will be participating in the development of these projects will have the wherewithal of Shell or the National Oil Companies represented in that ownership group. China, Japan, South Korea and Malaysia are each seeking to find and source long term sources of low cost natural gas. This investment provides them with that gas which is the objective, not necessarily that the project provides a financial return. Therefore we could assume that much of the LNG facilities that are being built will have some of this dynamic from this style of ownership group. I doubt that these four NOC’s would be satisfied with just the 1.8 bcf / day from the Shell project.

The remainder of these facilities do have to find the financing for these deliveries. What we see in today’s marketplace is when the producers leave the development of the takeaway capacity to the utilities, the needs of the producers aren't necessarily met. Differentials throughout the continent are wholly attributable to the lack of pipeline space. If they start drilling to fill this potential export market and leave the LNG facilities to others then we know what the result will be. Therefore the need to have the financing in place to build these facilities needs to be available fairly soon. I wonder where that money will come from? Has anyone seen an investor wanting to volunteer more money into the oil and gas incinerator lately? I haven’t either and I don’t think we’ll be able to find one in the current environment. As I write this the natural gas price at AECO/Spot is $0.26 for Canadian gas. The point is this natural gas differential now balances off the disparity that existed when the differential on oil was high, now they’re both very high, and therefore according to the oil and gas bureaucrat, “in balance.”

The established culture of the industry is one of accounting deception. Big balances of assets, huge cash flow and spectacular earnings everywhere and always. Just like Bernie Madoff. The assets are high because everything is capitalized, except for royalties, the SEC stopped that when they began their lawsuit of PennWest. Cash Flow From Operations is distorted upward when the Earnings number doesn’t consider any of these capitalized costs and instead defers their recognition under Capital Expenditures. The Net Income is essentially Revenue less electricity for the pump jack. And when it comes time to account for the performance for all of this spending? The story is told throughout the industry that those are sunk costs and are irrelevant to the situation today. The story that the investors now know and understand intuitively regarding oil and gas is producers don’t want to report about their activities truthfully, they don’t want to account for their past spending and don’t anyone ever mention the concept of performance. A trillion here, a trillion there, it makes no difference to the investors, that’s what they’re there for.

If this doesn’t scream disintermediation I don’t know what does. The approach to the industry is a failure. The future is a non starter as a result of the past history of the most recent four decades. And visions of sugarplums and LNG facilities everywhere are what will make people interested? The first thing they need to do is to start with a plan on how this will change. I suggest they implement the Preliminary Specification. The second thing they do is organize themselves in away that can approach this possible future. By using the Preliminary Specification. Then they would be running a profitable organization from stem to stern. Do that for a few years and they should be able to generate some cash that can allow them to take baby steps towards these lofty goals. There is ample enough capital sitting in property, plant and equipment that if they began recovering it by recognizing it as depletion on the Income Statement. And assuming they’re charging enough for their commodities to ensure profitable operations. This cash would be able to be cycled through the companies many times to generate many trillions of dollars in capital investment. People, Ideas & Objects always ask if property, plant and equipment is an asset or is it a cost. People, Ideas & Objects also ask if the future is financed by the investor or the consumer. I highly suggest the producer try the consumer for once by implementing the Preliminary Specification.

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.