That's a Cost, Not an Asset

Everything that's been done by the producers in these past ten years, which is nothing, has amounted to nothing. More and more people are catching on to the parlour tricks involved in oil and gas. Drill wells, build balance sheets and report profits that always have a rapidly decreasing cash and working capital balance associated with them. Producers will say “look at all the value we’ve released” and investors state “show me the money.” I’m reading more and more about the failure that is the shale oil and gas revolution. Shale is an exaggeration of the difficulties experienced everywhere in the industry. Capital costs are incurred to drill, complete and equip the well. A well that costs substantially more than anything experienced before. Producers then put these “assets” on their well built balance sheets for at least a decade or more, with a depletion schedule allocating these costs across each molecule of P&NG rights they’ve revealed. Therefore as the well produces in its first year, the results of all of these costs are realized when these molecules are produced, and are contrast to the inevitable, natural decline curve that kicks in. Spending is how the producer builds the balance sheet, depletion over decades as most reserves will last that long, only accelerates the producers balance sheet building.

The natural decline curve is a bit of a red herring to those that are not fully familiar to the oil and gas industry. It exists and oil and gas everywhere is subject to it. It is also forward looking, not historical. Engineers are employed at the producers and what they understand is that the natural decline curve doesn’t have to be natural. They’ll keep the production volumes up through their constant innovations and enginuity. I don’t know what the average pay is for a shale formation, however with the aerial extent of the shale formations spanning states in many cases the opportunity to work these formations and maintain deliverability is easily achieved. They can extend the laterals, increase the number of fracs in each lateral, they can run multi-laterals around the wellbore. They can also conduct completions lower within the pay zone to stimulate further production. There are many things that have been learned over the past decades and although the ones that I’ve mentioned here are considered radical surgery, they also show that these formations have many decades of productive life left in them.

The problem is this additional work has incremental capital involved. Nothing is ever free is it. The costs of these additional fracs is the difficulty with the costs associated with shale. The drilling costs are otherwise the same. Drilling laterally for miles, completing at upwards of 70 intervals on each lateral easily costs at least 70 times as much in terms of completion costs of a what a conventional vertical well would cost to complete. Doing these major operations multiple times during the life of the well will add substantial costs to the reserves of the property. Almost as much as the initial drilling, completion and equipping did. What happens is that these operations also expose more reserves to be produced. These newly exposed reserves are added to the reserves base and the incremental costs are allocated equally across the total reserves. This is the ponzi scheme that is being mentioned repeatedly as criticism of the way in which oil and gas is accounted for. We here at People, Ideas & Objects have used the ponzi scheme allegation as a means to describe the methods used in oil and gas. We however have adopted a more civil and sophisticated argument to describe this situation. Suggesting these results come from the accounting firm of Madoff, Madoff, & Madoff.

As long as money is spent the balance sheet continues to grow bigger and more beautiful each quarter. This worked for many decades. Until the question was asked when was oil and gas going to be classified as a mature industry. One that doesn’t need to be “built” continuously from outside investment. That threw the cat amongst the pigeons and the investors began to see the nature of Madoff, Madoff, & Madoff’s accounting wizardry. Positive cash flow was only achieved as result of drawdowns of bank debt or further investment by investors. Capital budgets never stopped growing. Money goes in and nothing ever comes out. Sure dividends are paid, usually out of the bank debts that had been incurred. Just as the ponzi scheme has to keep those who might get wise to the game quiet, producers have had to make some dividend distributions to keep their machinery operating.

The SEC guidelines enable a producer to conduct themselves in this manner until such time as the commodity prices decline sharply, or the fact that the people at the producer are not that smart or that good at oil and gas. The issue comes about as result of the SEC’s ceiling test where the “assets” as the producers call these costs, are subject to the comparison of the valuation of the total reserves times their commodity prices. If the reserves are valued more than the “assets” then the producer can slide for at least one more year before any critical situation arises. Otherwise they need to go to their shareholders and explain to them how their “assets” suddenly became costs. Which is dangerous and unhealthy for the producer.

Now what we propose in the Preliminary Specification is to rectify this situation by accounting for the costs of oil and gas at the Joint Operating Committee. The capital, royalty, operating, and overhead costs need to be accurate in order to determine the profitability of the property in the current environment. If the property is unprofitable then it will be shut-in until such time as it can reduce its costs, increase its throughput or reserves. While it is unprofitable it will incur a null operation, no profit but also no loss. The Preliminary Specification turns all of the producers costs into variable costs based on production. No production no costs. Therefore if the property is shut-in the producer maximizes their profitability by not diluting it with unprofitable operations. The commodity markets find the marginal costs by removing the marginal production from the market. The reserves are held for a time in which they can be produced profitably and they don’t have to realize the additional monthly losses that otherwise would have been incurred if the property continued to produce unprofitably.

A means in which to allocate the capital costs to what is referred to as flush production needs to be determined by our user community. The allocation of capital to all of the reserves is unreasonable and distorts the costs of the initial phase of production, and for that matter, all subsequent phases. Leaving the property with eventually few reserves and large balances of unrecognized capital costs of past production, as we call them. Madoff, Madoff & Madoff don’t see an issue with this. However it is highly inappropriate and needs to change in the shale era. Where the capital costs of each phase of development need to be captured by the production that arises from that effort. The deferral of these capital costs, in a capital intensive industry, that supports the activity of “building balance sheets” is most inappropriate and will cease with the implementation of 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.

Third Friday

American Thanksgiving

I'll Trade You 5,000 Economists For One Barrel of Oil

Assigning responsibility for the greater economy that’s involved in the exploration and production of oil and gas seems unfair to the bureaucrat. They’re just doing their job after all. The Preliminary Specification looks beyond the edge of the desk of these bureaucrats and takes a broader look at the situation at hand. Society in general is the net benefactor of the oil and gas commodities that are produced. Consumers in particular benefit at the convenience of these commodities to provide power, heat and mechanical leverage. Without these we would be back in the dark ages in terms of our capabilities. On a heat value basis it is understood that each barrel of oil is the equivalent of 23,200 man hours of labor. At today’s global liquids production of approximately 100 million barrels / day that benefits mankind in the order of 1.189 Billion man years each and every day. That’s billion man years every day. Therefore we know that the economy that consumes the most energy is also going to be the most productive. This is the role of the North American oil and gas industry to profitably provide North America with the most productive economy. And to do that in a dynamic, innovative, accountable, and profitably manner through the implementation of the Preliminary Specification.

What we are learning from the Trump economy is that trade is an important part of any nations benefit. Economists call this comparative advantage. Essentially specialization and the division of labor on a national scale. What we are now learning is that true fair trade is subject to others taking advantage of their trading partners. The hollowing out of the United States has been at the encouragement of the economists who suggest we look to all of the very low cost “stuff” we get in return. What the President is doing is not listening to the economists anymore when it has become so obvious to everyone but the economists that it’s good to have low cost goods, but it's better to have jobs for people. What we need to do is to stop listening to economists in general. Since 2008 when only Nouriel Roubini had predicted the financial crisis and the other economists believed everything was smooth sailing. That fact, in my mind, disqualifies all of the other economists and their profession from any further discussion. They are too busy looking at the dials on their dashboards to see what’s occurring in front of them. Their numbers may be better for them one way than the other, that doesn’t mean it's the right way to go. The same principle applies here in oil and gas. Everyone complains about the cost of oil and gas. Well maybe consumers should go without! That would be what the economists would suggest. Or they could pay the piper for the real cost of oil and gas exploration and production, and have a job to pay for their energy. A job in either the oil and gas industry, or the most productive economy. Energy being a small component of the individual’s budget and will continue to be so even after the Preliminary Specification is implemented.

What we see today is the producer searching for the nearest and easiest forms of cash. No investors remain, the bank is not lending, the service industry can’t extend their receivables any further. Producers can’t even attract the bottom feeders. The only cash available to them for the past year is new flush production. It is incremental cash over last months and can be used in discretionary ways, such as their paychecks. Therefore as we see in Canada, this is the ultimate end of the road for the industry. The search for cash has now estinguished the last viable source when the differentials are greater than 50% everywhere and always. We’ve discussed the differentials before, prices on natural gas have been as low as $0.19.  We should thank the Canadians for showing us the future in such stark terms. They’ve done a good job in educating us what the net effect of decades of their cultural madness brings. The next step is the inevitable exit of those that are primarily responsible for this mess. Which I think we’ll see as soon as the number of paychecks that are fully processed through the bank diminish each pay period. I do not see how we get through the remainder of 2018.

Without profitable production everywhere and always the North American producers have no future. The investors are unhappy with the treatment they’ve received over the past four decades. The consumers are uneducated about the value they’re provided with each and every day. Our economies are suffering as a result of the protracted and unnecessary downturn in oil and gas since 2008. And it seems the oil and gas bureaucrats want to extend their destructive reach beyond oil and gas to the greater economy. Enough time has passed that we’ve witnessed enough of this destruction and need to get on with the job of building for the future. How this is resolved is through the implementation of the Preliminary Specification. The level of destruction that is ongoing to me is remarkable. The rational, logical conclusion is that this has to be resolved before much more damage is done. Yet I’m not sure that will happen. If producers chose to implement the Preliminary Specification they would then have a plan to deal with this situation. I believe investors would see the industry opportunities and want to position themselves for the future through new investments in the industry. I naturally believe that’s the industries only hope.

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.

Ouch! That's a Big Boo Boo

Since September 30, 2018 the market capitalization of the 23 producers that we follow has declined by 18.5% from $551.3 billion to $449.6 billion. Just over $101 billion lost in the course of 45 days. $2 billion / day in financial losses sounds so much more impressive than 100,000 boe / day doesn’t it. Keep up the good work! More gold stars for this excellent participation are on their way. In fact the market cap of these producers at the end of the third quarter of 2016 was $523.8 billion. Just doesn’t seem to have much performance in this sector of the economy, not that that’s an issue or anything. Take into consideration the loss of $100 billion per year that Canadian producers are now realizing on their oil production due to differentials. Add that to the differentials that have been preeminent in the Marcellus for years and in the Permian for the recent short term. All these losses being incurred makes you wonder who’s running the show? Especially since I’ve been screaming for so long about these points, highlighting our value proposition which is $25.7 and $45.7 trillion over the next 25 years, being laughed at for that, and all that producers need to do is fund our budget to resolve these issues, become profitable in the real sense of the word and as a result would have a plan on how to deal with the future.

But that’s the point isn’t. Funding People, Ideas & Objects budget is the equivalent of bureaucratic suicide. We have no room, tolerance or understanding for bureaucrats in the environment we’re creating with the Preliminary Specification. If you look at the losses detailed above those are just the current losses being incurred by the producers. If we look at the societal costs over the past decade of this downturn we see the people who have either lost their employment in oil and gas. Have had their careers stalled in a mind numbing nothingness decayed (or decade) that only bureaucrats have thrived in. Governments have forgone their taxes on all these losses and royalty holders are having to share their meals with the dog. Or is it the other way around? But worst of all is the service industry who’ve had their activity levels slashed, producers knowing that the situation they created was particularly dire for the service industry began to pressure these vendors for large discounts. And then, if they were ever granted any work, would have to sit on the accounts receivable for upto 18 months before the bureaucrat decided to pay them. I’m just trying to remember the times when, and if, the love and support of the bureaucrats was sent to those noted above when they were suffering. Can’t remember at the moment, maybe it didn’t happen that way. Bureaucrats haven’t been known to give a damn about anyone else. Don’t get me wrong we all love and support the oil and gas bureaucrats. We just don’t understand the reason why the chronic, systemic and cultural overproduction has to continue when the People, Ideas & Objects Preliminary Specification resolves all of the issues that we’ve noted here. To put a positive spin on it, we also provide a permanent tropical vacation for the bureaucrats! Maybe that will express the love and support that they feel is missing.

We’ve had many reasons and excuses from the producers this past decade. Prayers for a cold winter, waiting for markets to rebalance, building strong balance sheets or is that bigger, but how many remember those days when innovation was all the rampage in the industry. Where costs were collapsing at tremendous speeds due to the “producers” innovations. Yes we had a good laugh then too. Producers don’t innovate, its the service industry. The cost reductions were a result of beating up the service industry on price, and the accounting wizardry of Madoff, Madoff & Madoff. Extending the depletion from ten years to fifteen years has the effect of miraculous cost reductions in a capital intensive industry, as one could understand. Maybe the best tale told by the producers is that their profitable. Unfortunately the investors learned that profitable doesn’t mean profits in the traditional sense. Then the banks learned the new classification of that term. That didn’t stop the producers though, they told everyone that $40 was all they needed for “profitable” operations. Heck even the President of the United States believed them. I’m not suggesting that all these excuses or stories that’ve been told over the past decade aren’t true. It’s just that no one believes these bureaucrats about anything anymore. So crying that they have no love or support is probably the last humiliating act they’ll have to face before they exit out the back door in shame. And I say that with all the love and support I can muster.

Now not only are governments taking over sectors of the oil and gas industry as Canada’s Federal government is buying the TransMountain pipeline expansion. They are actively being asked to take the responsibility for the big boo boo that bureaucrats made in terms of overproduction. Don’t worry kids the government fixes everything. Investors are thinking to themselves “thank god we didn’t put anymore money in the industry for the past three years. Too bad we still hold stock!” Seems to be a bit of a run on Canadian oil and gas producers since the government was asked to clean up the boo boo. The motto for Canadian oil and gas is “invest in oil and gas we need your love and support.” I’ve been consistently critical of the manner in which the industry has been operated for the past decade. Filling one’s pockets at the expense of others is not how you run an industry. My sarcasm is mostly a result of the best I can do in terms of restraining my disrespect for these bureaucrats. My frustration is conflicted with what can only be the heydays of all heydays and the last few minutes of these bureaucrats administration. They’ve now proven incapable of seeing the issues and acting in the interests of their business. There’s no one left to cry too about their boo boo's. Move along.

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.

Rip and Replace

Late last week we learned of the unfortunate news that Canadian producers were feeling a lack of support and a general feeling of being unloved from the country. Not to worry, I have authority and authorization from the government for this blog post today, and a special note from Premier Rachel Notley that she does appreciate and love everyone in the business. She’s asked her staff to distribute extra gold stars to all of the producers CEO’s just to let them know she’s thinking of them. These gold stars can found in the CEO’s morning pouches from the government starting on Tuesday, they’ll find their stars stapled to their instructions for the day. Absolutely pathetic.

No one is getting this issue fixed are they, certainly not this bunch. The first step to resolving any issue is to realize that there’s a problem. I don’t think there has ever been any doubt that the bureaucrats fully understood and appreciated the problems that they’ve created, or are blessed with. They know they’re responsible and they’re the ones that can solve it with the implementation of the Preliminary Specification. It’s just that to do so requires them to eliminate themselves from the scene permanently. While they continue to extract at least some value from the industry for themselves, they’ll be satisfied with the status quo. Disintermediation is the term that is used to reflect the elimination of the bureaucrats from an industry and to reestablish the manner in which it is operated on a sane basis. For more information about disintermediation you should speak to a record store manager.

Conflicted and compromised bureaucrats are only standing by their oath to do so. Maybe the real issue is that we’re blaming bureaucrats for being bureaucrats. We have a job to do and it’s not getting done due to the fact that we have none of the financial resources necessary. That’s not an excuse, that’s reality. Producers would love to see someone hand deliver the perfect software solution to their door, just-in-time and for free. You get what you pay for. And today they can buy any of our competitors who will willingly support the status quo disaster that is the oil and gas industry. If they had the solution I wouldn’t be writing this.

What this rambling dissertation reflects is that the role of disintermediation, the value that it provides society, is very high. Without it we would be trying to drive our cars with square stones. In order for the industry to progress and begin to deal with this otherwise unresolvable issue is that we need to dispatch what we’re doing today to the history books. Evolution vs revolution is the question that needs to be asked here. I think the question is more along the lines of how much more time do you have left? Without the radical surgery of the Preliminary Specification none of the steps towards clearing these problems have been made and therefore they’ve only become more protracted. Instead of being just North American in nature, as gas was only initially depressed there, it grew to be global in scope and now there are regional issues developing with differentials creating even greater difficulties. “The problem with normal is it always gets worse.”

How do we change this? First, fund our budget in its entirety. We are breaking away from the bureaucracy and its influence on the future direction of the industry. We can not be “blind, sleepwalking agents of whomever will feed us” Professor Jurgen Habermas. We’ll end up only recreating the status quo. Secondly the need for the people who will be committing to the development of this initiative need to know that they’ll be able to finish and become a viable sub-industry on its own, with it’s own revenue base. That bureaucrats won’t be distracted one day with a $2 rise in the price of oil and cancel the project in its entirety. We could never restart this initiative a second time. People will have seen the results of the first try and would never join in again. As much as producers want to see the initiative be carried through with the passions and commitment of these people. I can only say that we’ve been down that road before in software developments. That’s the opening bid in their challenge to have software written for free and that’s not how this gets done. Producers are the benefactors of our value proposition. If producers can’t see their way to funding this, who will volunteer on their behalf? Their position is a ridiculous notion that supports their inaction and nothing more.

The only two things that investors see in oil and gas is the disaster that currently exists and the future that is substantially greater in terms of deliverability. North America as a net exporter of energy could be a reality for the remainder of the 21st century. North America will also be the world’s largest consumer of hydrocarbons which reflects that they are the most powerful and productive economy. The investor can’t reconcile these two things when the bureaucrats go on about how profitable they are and suggest things are “just great, look how big our balance sheets are.” Without a solid foundation of profitability being established across the industry, as the first priority, there will be no future for anyone. Real profits that will generate the cash necessary to fund the financial resources necessary to build this future is the only way in which this future will be enabled. The investors are tapped out and sitting on the sidelines. There is no future as it stands today in oil and gas.

By committing to the Preliminary Specification the industry will begin the reorganization of the resources of the producers and industry that are necessary for that profitability. It will provide the producers with the ability to produce only profitable production everywhere and always. Why would anyone produce oil or gas unprofitably? How could we justify such actions to future generations? We can’t. Therefore the discipline necessary to produce only profitable production is the benefit of implementing the Preliminary Specification. Cheating by producing unprofitable production only reduces the profitability of the producer by diluting their profits with unprofitable operations. No doubt this will occur, and no doubt investors will notice. It’ll be a different world.

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.

Intangible vs. Intangible and Tangible

I just received certification, authorization and approval from the government to publish this blog post. Here in Canada we've handed the management and control of all things oil and gas over to the government for management. That way we don't have to think anymore or be responsible. It really is a better way.

In a competitive environment for investment dollars. Why would one industry be provided with the luxury of paying the investor back over several decades, as is the case in oil and gas. Or pay the money back in the current period in other industries such as technology. One being a traditionally good place to put your money in terms of upside, the other industry being a chronic abuser of the number of shares outstanding, that being oil and gas. In terms of the treatment of how capitalization occurs in oil and gas, producers have an exceptional allowance from the accounting standards boards and the SEC to record anything and everything as an asset and hold it there for the next few decades. Including the Post-it-Notes of the receptionist. And in other industries the recording of assets is not permitted, where otherwise capital costs are recognized in the current period. Costs such as software companies product development are realized immediately in the current period.

I can criticize the recording of Post-it-Notes, the receptionists time and the phone service charges to property, plant and equipment and gain a general consensus that these don’t belong there. The Preliminary Specification takes the position that producers would be better off if they were to realize their capital on a much more timely basis. Secondly the accuracy of the earnings and cash flow are further distorted when the intangibles of the producer are also recorded as property, plant and equipment. If your objective were to “build a balance sheet” these would be productive policies to adopt. The more you spend, the more successful you are in achieving your objective in terms of value, profits and cash flow. People, Ideas & Objects suggest that we take the intangibles that are incurred in the industry and capture them as intangibles on the income statement in the current period. That would involve the drilling day work rates, the casing, cementing of the casing, fracing, perforating and other costs. Anything with a serial number would be able to be recorded as property, plant and equipment. None of the intangible items I mentioned can be recaptured and sold in the marketplace, they are irretrievably lost. Why not recognize that instead of letting them exist for decades on any “well built” balance sheet.

This all assumes that these costs of oil and gas exploration and production that are captured in the current period are maintained by profitable oil and gas producers. They would need to have the commodity prices necessary to offset the costs of royalties, capital, operations and overhead of oil and gas exploration and production. This would therefore put somewhat of a constraint on the producers drilling activities. Instead of “building balance sheets” with the implied spendaholic mania, the objective would be to maintain profitability which would require a discipline inherent in the business world. Moving accounting from the measurement of value that is imputed in the “build the balance sheet” objective, and returning it to the measurement of performance of what it is intended and designed to be. Always.

We have suggested that the overstatement of assets, earnings and cash flow were the net result of the accounting methodology in use throughout industry. The overstatement of assets and earnings are straight forward, the cash flow is a little more subtle. The intangible costs being shifted to the current period has the effect of reducing earnings, which will affect the calculation of cash flow from operations. Or in other words we are shifting a large portion of the capital expenditures incurred from investing activities to operating activities on the statement of changes. Diminishing cash flow and hence the valuation of the firm based on a multiple of cash flow. Which, based on my understanding, did not reflect the value of the firm only the depth of accounting wizardry. Some may argue this to be a timing difference in the parlance of accounting terminology. Which is true, the issue however is the bloated nature of producers balances of property, plant and equipment. They are a severe distortion that only grows more severe each year. It’s therefore time this timing issue be recognized and resolved.

Speaking to the timing nature of the issue of how People, Ideas & Objects will rectify the issues of oil and gas overcapitalization. Retirement of the current balances of property, plant and equipment is over a period of time of 2.5 years. The balance of property, plant and equipment would rebuild, somewhat, based on the capital expenditures that are incurred during the time we were retiring these bloated balance sheets. This rebuilding would be at the lower velocity of only tangible capital costs.

The net effect of this 2.5 years is that the cash that is held on the balance sheet in the property, plant and equipment account will be released back into the organization. Assuming that the Preliminary Specifications decentralized production model’s price maker strategy is defining the commodity prices and therefore all production everywhere is profitable. This cash which will be sourced from the consumers and is a repayment back to the investors for the $1.7 trillion "temporary" energy discount that the investors have had to provide consumers through the decades of accounting shenanigans by the producers. Or what we could call the other side of the timing issue. During the time in which the property, plant and equipment account balances are blown down they are replenished with only tangible assets making the account a small fraction of what it is now and more in line with what is appropriate for today’s demands of industries to compete for investment and source the capital they need to approach their future. One that producers have costed at $20 to 40 trillion in expenditures in the next 25 years. Producers need a plan on how they’ll come up with that financing. Suggesting that investors will fill their traditional role in oil and gas is unreasonable, especially when they sit on vast volumes of usable cash to solve their capital needs.

What should be evident to everyone in the industry is that the ability, the capability and the capacity to make the changes to deal with overproduction in oil and gas is currently non-existent. The over profitability reported as a result of these accounting “anomalies” has created overinvestment leading to overproduction. Bureaucrats can’t, won’t and will not ever change. Any change would also require them to do some hard work. With shale we’ll continue on these violent cycles of up and down in terms of commodity price changes. The overall trend however is steeply downward. And the cycle times are progressively shorter in each iteration. Such that the consideration of a return to “normalcy” is never even dreamed of. With such stability in the industry, with such capacity for change, I don’t know, maybe the need for the radical changes in the Preliminary Specification are not required!

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.

The Utility Business Culture

There are two types of industry models that operate within the sphere of oil and gas. The first of course is the commercial operation in which the oil and gas producers should belong to. The second is the utility model that includes most of the larger midstream operations and pipeline companies. In terms of operations there are fundamental and distinct differences between these two industry models. I believe the assumption has been made by the producers that they fall within the domain of a utility style of industrial business model. This, in my opinion, is a symptom of the larger cultural issues that are in play in oil and gas and is more or less derivative of the engineering mindset around the performance of the assets they develop. Evidence of this is that the utilities profitability is directly associated with the assets of the firm. The larger the asset base of the utility, the larger the profitability of the utility. Hence we have the oil and gas CEOs strutting their balance sheets about town in an attempt to reflect their asset size as some tangible form of meaning, other than its a reflection that they’re a chronic spendaholic and a deceptively profitable producer, their assets reflecting nothing more than decades of unrealized capital costs of past production.

The utility is a quasi governmental organization that is heavily regulated as to its fees and operations. They occupy an area of business that usually spans a large scope and scale, where the business risk is too steep for any business to undertake in the classic commercial operation. Therefore the regulatory environment guarantees the utility with a fee structure that will provide a cost plus profitable operation everywhere and always. This is why utilities are second only to bonds in terms of their dividend payout reliability. Managing a business such as a utility is not far distant from the type of administration done within a government agency. Although they account to outside shareholders as well, the fact that the revenue and profitability of the utility instills a sense of security that attracts a certain type of individual, and these people for lack of a better description, are not the entrepreneurial, innovative and profit driven people that you would need in a commercial operation. Nor do they have to or would they fit in to the utility culture where these attributes are not required. Nonetheless, the technical aspects of the utilities, particularly from an engineering point of view are quite substantial. These are not assets that can be placed in anything but a safe environment where lives are at stake. This I believe is the crossover point to the oil and gas producer. The interaction between the engineers in both of these industry models is strong and the assumption that the business is the same has become part of the oil and gas culture. A cost plus business culture.

The commercial operation is a wholly different industry model and one that I’ve not seen in oil and gas since the late 1970’s. Commercial operations live / die by their success as expressed in true profitability. If you can’t be profitable, then the writing is on the wall and you will not last. Until recently in oil and gas if you were faced with this situation you would simply prepare a new offering for next years capital budget. Keeping the walking dead alive and believing that they’re prosperous for many decades. $74 oil did not provide the kind of environment where the industry can sustain itself. How did it get to this level? Simple, the specious accounting of reporting everything as a capital cost has over reported assets, cash flow and earnings for decades. What we see now is that none of these firms were truly performing in the commercial sense of an industry model. And were not performing in the sense of a utility either. Consuming large quantities of capital is not a business. The overreporting of profitability created a rush of investors that has led to a situation where overinvestment of that capital has occurred. Creating the situation where overproduction is the systemic, cultural and endemic problem that can’t be solved or even identified by the producers. However, I did read an article the other day that stated the Canadian producers were losing $100 billion per year due to differentials. Welcome to my inflated numbers world! As an aside the amount of flac that I’ve taken for reflecting our value proposition at $25.7 to $45.7 trillion over the next 25 years has been substantial. Now that producers are actually losing these amounts of money they’re beginning to believe in People, Ideas & Objects value proposition.

No one could comprehend my frustration at seeing this situation arise when the Preliminary Specification is designed to and has resolved these issues. To now see the oil price, as I’ve noted here many times before, mimic the fundamental collapse that we saw in the price of natural gas. No one should be surprised if OPEC+ has as their target an average price of $40, the price in which North American producers said they were profitable. That’s where I think we’re headed and if anyone thinks that a little tuning here and some cost cutting there will fix it haven’t been listening or captured the scope of the catastrophe the industry is operating under. I’ve stated that producers couldn’t survive 2018. That’s the reality. The delusion is that many will keep going thinking that it will all turn around soon. Trillions of dollars have been flushed by an uncaring bureaucracy since the collapse of natural gas prices. Trillions more have also been irretrievably flushed in oil in the last five years. I don’t think any money has been made anywhere in the industry since the 1970’s. Cenovus feels the government should allocate production to the producers, which proves to me that no one in the industry is driving the bus. The Preliminary Specification needs to be built so that the keys can be taken away from the non-thinking people in industry, as expressed by Cenovus, and returned to a dynamic, innovative, accountable and profitable oil and gas industry. This bunch isn’t going to do it.

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 XXXI

I’ve never been an advocate of share buybacks. The producers have recently discovered this method of “putting money back in shareholder hands.” I’m just at a loss as to how that’s done. If producers buy out the shareholder they’re no longer their investors. Giving them back their money I guess qualifies as putting money in their hands. The stated purpose is to then have the remaining shareholders hold a larger portion of the company. Has anyone taken the time to analyze the pro-forma results of a share buyback. The destruction of both working capital and of shareholders equity is not a positive attribute for the company to pursue. Maybe the bureaucrats should be clearer as to their intent to destroy value. If shareholders need money then they could sell their interest. If companies don’t want them to sell their shares then outperform the market. Make it difficult for the investor to choose to sell and give up on the opportunities that the company is consistently delivering. If companies can’t perform then I guess they’re relegated to buying back shares. IBM is the best example of a company that has refused to perform and has consistently bought back their shares. This occurring over the past number of decades. There is also the occasion where the company has consistently outperformed and as a result has a surplus of cash that is deemed unnecessary. It would be my recommendation that the company issue a special dividend in these instances as opposed to share buybacks. The company would keep their shareholders and reward them at the same time. With bureaucrats owning a portion of the firm their interest is enhanced with each share buyback. Making it an incentive for them to perform poorly and enhance their position by using the firm’s cash to participate in share buybacks over the long term. That’s the only benefit that I see.

Let’s be clear that the oil and gas producers didn’t have a surplus of cash or provide their shareholders with any performance for their investments in the third quarter of 2018. No matter what these producers do, the albatross of bloated balance sheets continue to plague them. Asset sales don’t work. Cash flow at these levels don’t work. Nothing works to bring down these overly obscene balances of unrecognized capital costs of past production into the range of reasonableness. The only thing that will work is higher revenues to begin to recognize the actual costs of oil and gas exploration and production. Then through the use of the Preliminary Specifications advanced depletion schedule these bloated balances of unrecognized capital costs of past production would be blown down to a more reasonable amount within 2.5 years. That would be as a result of these costs being recognized at properties where balances exist and the fact that the Preliminary Specification ensures that all production in North America is produced profitably and always. Creating a cash hoard that would enable the producer firms to compensate their shareholders for their earlier participation in the industry. This cash hoard needs to be distributed by way of special dividends and not by share buybacks. With the amount sitting in property, plant and equipment today, an amount we estimate to be $1.7 trillion for just the North American producers, that enhanced cash flow would enable the bureaucrats to purchase much of the shares of their producer firms in share buyback shenanigans.

What we can say about the third quarter of 2018 is that the bureaucrats have passed into a period of further recklessness and irresponsibility. The volume of property sales that were below the recorded costs of their big beautiful balance sheets was surprising to me. Why would anyone sell a property for a quarter of what they paid for it? Or even half? The simple answer is for the cash, so that the bureaucrats can cruise for a short while longer. As we detailed yesterday, the higher commodity prices of the past few years did contribute to higher cash flows at the producers. Yet these higher cash flows, which increased 263% over the period that we’ve been keeping detailed records, did not contribute to the overall liquidity of the producers with working capital deteriorating by 40%. Recall too that the working capital for the third quarter of 2018 was shored up by substantial property sales being closed. The general health of these companies continued to deteriorate at a rapid rate considering this cash flow increase. Supporting our assertion that if we consider the actual costs of exploration and production on a reasonable accounting of depletion, the real costs to produce are in the range of $145 to $150 / boe.

What this reflects is an unaccountable and uncaring management of the industry. I’ve argued for a different manner in which the industry needs to operate. That which is captured in the Preliminary Specification. It seems to me that their argument that our budget is too expensive for producers to consider is laughable when compared to the performance that they continue to report as a result of their antics. My favorite part of this quarter was Cenovus recognition of three quarters of a billion dollars for office space they can’t use after so many layoffs. Their description read like they were the victim of a “non-cancellable” agreement. Either they didn’t read what they signed or they were too full of themselves when they did. If they can spend that kind of money on items that provide no benefit then doing something positive for their firm should be easy to consider. That’s why we think the Preliminary Specification would be good value, it provides the industry with the ability to produce only profitable production everywhere and all the time.

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 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.