You Can't Buy Time, Part V

I’ve stumbled upon a graph that I’d never seen before. It was sourced from Lev Borodovsky who publishes the DailyShotWSJ.com, and can be reached on Twitter @SoberLook. As far as I can tell it has most of its input from the bureaucrats who operate today’s oil and gas producers. I can state this due to its representation of their view of the world. A world view that is skewed culturally as a result of four decades of specious accounting that People, Ideas & Objects document in our white paper “Profitable, Energy Independence in North America -- Through the Commercialization of Shale.” When I first saw this chart it confused me until I could figure out that it was representing the status quo perception of costs and how to handle the management of them in oil and gas.

Looking at this from the perception of the producer bureaucrats. Their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $18 to $23 in capital costs are based on an allocation of all of the capital costs across the entire reserves of the property. In our white paper we’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their cash over several decades or more. As an alternative, People, Ideas & Objects recommend in our Preliminary Specification that the producer retire all of their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. Providing them with the means to meet the demands of their future capital costs, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the costs of operations and capital.

Note this graph reflects that Well Break Even and Shut-in prices denote that at any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money and will continue to produce. What they’re stating is acceptable is they may not be breaking even, but they’re generating cash flow.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

People in other industries operate with the appropriate level of production discipline. Producing only above the breakeven point. They are considered businesses and do not have the luxury of new investors at the ready. They don’t immediately shut-in what is unprofitable when the conditions in the next month or two are going to change positively. That is unnecessary. All industries will wait a month or two to see if conditions change before they’re forced to shut-in production. If conditions don’t turn around then it’s time to make the changes to ensure that losses don’t pile up and, in this case, the commodity markets are permanently damaged (from 6 to 1 to 20 to 1) such as natural gas has been and oil is well on its way to becoming. The same situation would occur with an upswing in conditions, a producer would wait to ensure that the revised situation held before moving too quickly to return to production.

One of the consequences of using break even analysis such as we’ve done here reflects the Keystone Cops mentality that is on constant display in the industry. Today the entire industry is focused on shale as the only aspect of interest anywhere. Conventional just doesn’t excite anyone. Before it was heavy oil sands projects, Steam Assisted Gravity Drainage, before that there were half a dozen trends which saw the producer bureaucrats scurrying in an animated fashion to reconfigure themselves for that new “future of the industry.” Remember oil and gas is not a business. Using break even analysis today would reflect that the most profitable place to be would be in conventional oil and gas properties where the capital costs have been captured and returned, the breakeven costs are therefore very low and hence continue to be profitable at these prices. Returning even more cash to the producer. Yet the Keystone Cops have done everything to divest, cannibalize and let these “assets” atrophy in order to position themselves by investing all of their cash flow in shale. Ghawar in Saudi Arabia being discovered in 1948 and therefore conventional, North American producers behavior would have abandoned it because it's not shale.

What we do know is that no producer at any time in the past four decades has shut-in any oil or gas due to its lack of economic performance. Here is the very difficult aspect of the behavior which is conducted in oil and gas today. Not only do they continue to produce systemically, everywhere and always below the breakeven point. They’ve attempted to deceive everyone by allocating their capital costs to each and every molecule of oil and gas held in reserve no matter how long it will take for that molecule to be produced. Will it be this year, this decade or this century in the case of shale reserves of natural gas? Therefore deceiving everyone with the misguided belief that their breakeven costs are $50 when they’re really $150. Causing the erosion of value and wealth to accelerate even faster.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Buy Time, Part IV

The trend is your friend they say, except in oil and gas. I’m seeing a definitive downward trend that began in the first and second week of April 2019. Look at any oil and gas stock and you’ll see a wholesale decline since then. Something must have happened at that time. Something that I’ve missed, or the Camel’s back finally broke and no one noticed. The last shred of credibility must have escaped the industry and they’re now left to find their own way home. Action is not the North American producers forte. We heard on Wednesday from Harold Hamm at Continental that they would apply capital discipline, which as he says, they’re known for. It’s this deep, critical analysis that has led the industry through these dark times since natural gas collapsed in 2010, oil in 2014 and the producers investors flocked to safer locales. Our white paper captures my frustration in attempting to deal with these people since these threats began eating away at the value in their organizations. It is difficult for me to see how they continue.

Since the April 2019 trend began producers have been able to achieve what I would call a modern miracle. With all the destruction that has occurred over the past decade, or as I prefer to say at times, decayed. Halving their market cap in the course of one quarter should be considered an achievement. With late July and August 2019 seeing an even greater acceleration in this overall decline, I think we may be able to welcome many more producers into this club’s membership which has no rewards. As I note in the white paper, it is necessary to evaluate North American based producers with the following pro-forma accounting adjustment. To adjust for the unrecognized capital costs of prior production over the past decades, by taking at least 65% of property, plant and equipment and moving it to depletion. As we’ve noted this adjustment exposes these producers to the real value that they’ve created and that which is reflected in shareholders equity. The nature of this revised capitalization captures the issue regarding the leverage of their debt, reflecting the remaining assets are solely the property of their banks. Maybe that’s the trend being played out in the market, providing a lesson on how we learn that leverage can work against you.

The path forward being touted by many is the method that had been used so many times before. Consolidation was the beginning of creative destruction and would make the industry look fundamentally different a decade from now. Just as the industry is different from what it was ten and twenty years ago, etc. I’m putting this conversation in the category of excuses that are used to ensure that no producer bureaucrat needs to get off the couch. This being one more of their lies that are told and no one believes. The news as of yesterday is that consolidation is dead in oil and gas. Shareholders in the Occidental / Anadarko acquisition approved their deal and as a result it will proceed. What may not proceed as it was specifically voted down in a non-binding vote is the bonus compensation awarded to Anadarko bureaucrats. The amount was $300 million to be paid to five of the top people who were exiting, with the CEO taking $98 million. Whether they get the money or not, I think the reason that anyone attempts to sell their firm “on behalf of their shareholders” was to capture the golden parachute. If that has been voted down in a premier deal such as Occidental / Anadarko it may be the canary in the coal mine that dictates future transactions. So much for consolidation.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Buy Time, Part III

On page 29 of our white paper, Profitable, Energy Independence in North America -- Through the Commercialization of Shale, we detail the reason cash is escaping from the producer firms and the greater oil and gas industry. Through the capitalization policies that have developed over the past four decades, the culture of the industry is to capitalize almost everything other than operating costs. Royalties are no longer capitalized as PennWest was busted by the SEC for that reason and some of their people are still in the SEC’s crosshairs. As a result of these industry wide capitalization policies, and the allocation of these capitalized costs across the entire reserves base. Where only the capital cost of the reserves associated with that years production volumes are recognized as depletion. (By the way, did anyone hear that the U.S. has in excess of a 100 year supply of natural gas reserves?) The cash used to pay for these capital costs are sunk into those accounts of property, plant and equipment for decades and left to rot on the big, bold, beautiful balance sheets. The purpose of the producer bureaucrat is to build these big, beautiful balance sheets so the CEO can strut about with the largest of all balance sheets. These producer firms consumption of cash is voracious and this demands that investors and bankers step up if they want to have the biggest, best and most beautiful balance sheets! Otherwise the cash consumption will eat the producer alive. The account of property, plant and equipment, as the Preliminary Specification and our white paper state is the source of the producers cash resources to fund their future capital requirements, investor dividends and debt payments. By charging the consumer the appropriate amount of capital and operating costs of the oil and gas commodities the producers will then have these otherwise hibernating capital costs returned as cash to the producer. That is if the producers use the Preliminary Specification with its decentralized production models price maker strategy and by doing so only produce profitable production. We have argued this point for as long as we’ve been ostracized from the industry. The “muddle through” and “do nothing” strategy and operating procedure is in full operation within the industry. The persistence of the bureaucracy will be its demise. If you don’t recognize the capital costs, in a capital intensive industry, and pass these on to your customers you will go out of business. And that is where we’re at in the second quarter of 2019.

The persistence of the bureaucrats have now created a permanent divide between their investors and bankers. But they’ll now “fight to the death,” the problem is their dead. The meltdown in their stock prices is truly epic from an industry point of view. From a few years ago named companies are trading at single digit percentages of their highs. Chesapeake 2.1%, Encana 4.3%, Crescent Point 5.6%, and PennWest or Obsidian 0.36374%. I added all of the digits to give them the full value and benefit of their efforts, if I rounded it would be 0.0%! In theory you could rally any investor with a viable, workable plan to quadruple the value of a company's stock. The problem in oil and gas is that no one who has been along for the ride from the highs is going to be motivated to see them recapture 15% in the case of Crescent Point or 1.09% of their investment in the case of Obsidian. But then I could be wrong.

The financial statements produced in the second quarter are a wonder of the world. “Stellar” companies such as Canadian Natural believe they can run a $79 billion company on negative $3.5 billion working capital. That the infection of the culture, let’s call it a culture of destruction, is systemic, prolific and everywhere. It also shows the nature of the business from an operational point of view. Producer bureaucrats manage their risk through the contracts they issue. Shifting the responsibility for failure onto the other side of the contract, that way they can blame them when things go bad. What producers need to do is to continue to identify the risks but also identify the elements of success. Effectively communicate these to those concerned, but also participate actively in mitigating the risks and ensuring the success is achieved. And to do so not by handing off the responsibility onto someone that can be held accountable but by actively participating in making the initiative a success. The responsibility for the damage that the bureaucrats have done is not a point of discussion anywhere or within any conscious thought that I saw. What I did, do and have seen throughout the process of bringing the Preliminary Specification to oil and gas is remarkable. An industry focused on saving as much time and money on each and every transaction incurred. The equivalent of moving deck chairs around on the Titanic. What People, Ideas & Objects have traditionally called the cottage industry approach. A lot of chatter about what the right thing to do is, none of it consistent or acted upon, just as there has been over the past four decades. Small minded talking heads that occupy themselves with chatter while the ship goes down.

Pointing out the producers responsibility is the fifth element of this series of “You Can’t Buy Time.” The others being cash which the industry continues to flush, time in terms of making the effective changes and having them realized, choices since People, Ideas & Objects have realized that we’re unable to be successful for producers in their current degraded and disintegrating situation, and a future which requires a vision, plan and means to get there. Responsibility as far as the bureaucrats have been concerned is to undertake none, do nothing and ensure that no one thinks that they’re responsible by forcefully developing scapegoats everywhere and always. The producer bureaucrats role in society was to collect the checks from oil and gas sales and the investors and make sure everyone knew it was they who had the check book. Much like a bird feeds its hungry chicks these bureaucrats revelled in the role of sole provider. They were absolute ruler of the land and what they said was all that was heard. Or, you were blacklisted, kicked out and never allowed to return. Such as I was in August 2003. It is this process that taught the bureaucrat that everything flowed one way. Down from them. These payments were burdens that had to be made to be a good corporate citizen. Never realizing the role that anyone other then themselves took in the generation of the revenues in which the bureaucrats enjoyed exclusively and without question. Now the people that have been employed at the producer firm are excess and costly baggage, the service industry and overall general economy as well. They all had better start realizing that the oil and gas “producers themselves are not going to tolerate any insubordination or negative chatter. It’s time for those that have benefited at the expense of the producers to put in the effort to make it right and to do so on a volunteer basis. After all it’s their fault.”

This hypothetical rant is not far from the truth. Lets just look at the well known example of the manner in which investors have been treated these past few decades. Investments made last year are now sunk costs and we don’t consider them in what it costs to be profitable. New investment is required to continue to develop x and y property and we’re diluting the shareholders that we do have in order to do so. That’s what’s required in order to ensure that we treat this years investment as next years sunk cost, subject to dilution, rinse and repeat. Different rules and processes applied to different groups of people but the same outcome was always the case. The bureaucrats won. In the U.S. most of the cities that oil and gas operates have other industries in which to diminish the impact of the downturn in oil and gas. In Calgary oil and gas is all that there is. We are feeling the full brunt of this downturn. And it is an unmitigated disaster. Most people do not see a future that they want to be a part of. Whether that is a supervisory person in an oil and gas producer themselves or the gas station attendant. The consequences of the management of oil and gas are prevalent everywhere. Yet we see no admission, accountability or responsibility being taken by these bureaucrats for their primary, exclusive and absolute fault.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Buy Time, Part II

In reviewing these producers second quarter 2019 reports it’s clear that they’re out of time as much as they’re out of cash. These were two of the necessary elements that producers were missing which we documented in our blog post last week. Two other elements that are considered necessities are the primary topic of today’s post. These elements are, a diversity of good quality choices that address their issues and get them out of the situation they’re in. This also leads to the difficulty in defining and expressing a future that extends beyond next month. Cash, time, choices and a future are the elements that are required in order for an industry to resolve the existential threats that loom, not around the corner, but overhead. These are not on the producer bureaucrats side, they are being subject to the consequences of not having these aspects of their organizations under their control and as a result they’re passengers on a run-away train.

Back when the bureaucrats were running the show life was easy. Raise money, spend money. That was the sole purpose of the organization and it worked for many decades, generations and even careers of bureaucrats in the industry. Now producers have to attend to the demands of the “business” of the oil and gas business and its here where things have become complicated for them. Banks, investors, the service industry representatives demanding payment, people leaving the producer for other employers in other industries and having to feed the capital expenditures and overhead of the organization in order to maintain the production volumes. This is not what the bureaucrats signed up for. The choices that producers have in dealing with these demands is cash, which is non-existent according to their big, bold, beautiful balance sheets. Therefore having to think of creative ways to develop alternative means to deal with these issues does get tiring as does communicating those specific instructions repeatedly. It is a bucket-brigade style of management that demands the full attention be focused on the days efforts. Choices in terms of resolving anything for the long term is out of the question as there is no time and no money to consider anything such as the Preliminary Specification. The time to cultivate choices and lay out a vision of what could have been, has now passed. Maybe a decade ago, but that’s just me selling my book.

Volatility in the price of producers shares came about this past week. It should not be confused with any opportunities for these producers, and I think it may not be their friend. Volatility is a precursor to substantial changes in the underlying value of whatever it is that’s trading. Volatility precedes both downward and upward swings. It’s difficult for me to objectively state what will happen, what do you think is the future? Some companies lost large percentages one day followed up with large increases the next and then down again the next day. Swings as low as -40% and up 10% were not uncommon in all sizes and configurations of producers. I have to say that all of this volatility appeared to occur during the release and distribution of their quarters report. I suspect that if it wasn’t for share buyback schemes, there would have been further deterioration.

I’m noticing a different tone developing here in Calgary. People are not happy. They see that the situation in the economy is not going to be resolved in the short, or possibly even the mid-term. Serious damage has occured throughout Alberta, also known as the one industry province. We’ve been through the litany of excuses provided to us from the oil and gas producers and it always seems to be others fault. However, the common man / woman is able to understand that the revenues of the producers from oil and gas production is the absolute top of the food chain. And those revenues are not realized exclusively as a result of the efforts of the oil and gas producers. It takes the entire province to not only benefit from those sales but also support those sales through the various economic support that is provided to the oil and gas producers in order to cash those checks. Therefore what has the pipeline got to do with it, or the government for that matter? There is a change in the thinking that is beginning in Calgary. People have been able to focus on the main culprit of their economic difficulties after three or so years of obfuscation by the producer bureaucrats. Much of this seems to have been triggered from the fact that people were unable to impact the decision making process of City Hall. Frustrated that they were given a week in which to decide if the Calgary Flame owners would be granted the $275 million of tax dollars that the owners needed for a new arena. Why not defer the decision until the economy turns around, and why is the decision being railroaded through a process of one week of community input?

Which brings up the larger point of discussion. Where is the responsibility that the producers should recognize. They’re the ones that receive and control the oil and gas revenues. Yet they don’t earn those revenues on their own. They are the result of all of the efforts from the service, secondary, tertiary industries and overall economy. These industries are facing issues which are greater than what the producers are facing. They are seriously questioning their future where they’re so dependent on an industry that doesn’t have the desire, capacity or sense to manage their economic environment to eliminate the booms and busts. It may be considered a feature of the bureaucratic management but it is a bug as far as anyone else is concerned. There are many that are now thinking that the long term prospects in Canada are no longer in existence. Leaving for better economic opportunities is beginning to be considered by many people. They don’t see a future as laid out by these producers. It doesn’t take anyone too much difficulty to understand that the fish stinks from the head down. But then again the cheery and happy thoughts being published in the quarterly reports might convince them otherwise? It’s always good to remember that oil and gas has been built on the hope of an optimist outcome!

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Buy Time, Part I

I’ve changed the name of the series in which we evaluate the earnings of the oil and gas producers from “These Are Not the Earnings We’re Looking For” to this new name. Cash is one element of life that an organization is unable to live without. Time is another that is just as critical. They’re just like the water and air that sustain us. Now that cash is no longer an issue in oil and gas. That is, there is none and there also appears to be no capacity to generate any, the future of these organizations comes into question. The timing of their demise begins to tick away as they think of ways they could have, should have or would have done this or that. Unfortunately, based on the behaviors that I’ve seen over the past number of years analyzing the producers, quietly passing through the night while these reports are issued is the modus operandi in the industry once again. They are however issuing stellar Greenhouse Gas emission target reductions that impress those that are impressed with those things. Leadership has been nonexistent in the past forty years as we’ve documented in our White Paper. Why would you need leaders when all you had to do is spend money, raise money, repeat. It’s as simple as washing your hair each morning. Oil and gas degraded into a culture of severely addicted spendaholics with no business sense some time in the 1980’s and the generations since have only learned the wise ways of their forefathers. Without any leadership to steer the ship, the ability to use the time they had to head in the appropriate direction to avoid the mess their in was not done. No one was able to identify the issues or use the time they had to their advantage. The trouble today is that you have no money to remedy anything and they don’t have the time needed to implement them, maybe even think about them.

To the cheerier side of life in oil and gas, only three producers of our sample of 23 have issued their second quarter reports. What I’ve always been surprised about is that as bad as I make it out to be in the industry they’ve always seemed to shock me during these reporting periods. All I can say is that it may be a good idea to seek shelter, this is going to get ugly. The producer bureaucrats however are oblivious and uncaring of the situation that has and is going on around them. “We’ve seen it all before, that’s the way the business is, boom or bust and you learn to live with it.” I found a particularly disappointing article being posted on Forbes that showed this attitude clearly. The author who had over 20 years of experience in oil and gas justified inaction and summarized his commentary in tweets that note “None of this is unprecedented or is unusual. This is how the industry evolves.” Which shows the acceptance level that is common throughout oil and gas. “Muddle through” is the religion, and its DNA. 5 of the last 34 years were “good years,” for the bureaucrats who run the producer firms. For everyone else it was moderately successful. Those 29 bad years were never acceptable to anyone as far as I could tell. How could anyone justify losing money, destroying capacity, capabilities and people’s lives. People, Ideas & Objects White Paper seeks to establish an additional standard that we have no right to take from our future generations these oil and gas resources by using them in wasteful ways. The only rightful way in which we can do so is to ensure that we’ve produced them profitably everywhere and always based on a reasonable accounting of the costs. The exercise, the activity, the function of the industry over the past four decades has been about what?

The three producers that we’ve analyzed for the second quarter of 2019 produce over 1.8 million boe / day. Have capital assets listed in property, plant and equipment of $134.4 billion of their balance sheets $170.8 billion in assets. Debt totals $96.3 billion leaving $72.9 billion in equity. Note Anadarko has now achieved the much sought after negative retained earnings the industry seeks and cherishes. Recording $528 million of lifetime losses. If we apply our pro-forma adjustment, which we discuss in the White Paper, to the property, plant and equipment account. An adjustment to reflect that the amounts in property, plant and equipment, are better classified as 35% assets in the traditional sense and 65% as the unrecognized capital costs of past production. Then their assets are reduced from $170.8 billion to $83 billion, $13 billion short of the total debts and $14.5 in negative shareholders equity which is a bonus when you’re just trying to eliminate positive retained earnings.

Arguments continue with producers claiming these are assets and everyone outside of the industry noting the extensive and chronic destruction of value that has occurred over the past 20 years. We have always claimed that financial statements should reflect their intended purpose, that being the organization's performance and not its market value. And that is what we are asserting here. And in support of our argument and in our defence, it is also always necessary to write down the assets value to the lower of cost or market value. Therefore as reflected in our pro-forma adjustment, these producers aren’t worth anything from a performance point of view. The key takeaway from this discussion is that these three producers generate 1.8 mmboe / day, not mom and pop organizations.

Now to the point about time and the inability to purchase it. Cash is king they say and no more so than in oil and gas. My projections are that collectively the sample of 23 producers will have extinguished their working capital. Currently the three producers with these “assets” and production profile have working capital as a percentage of annualized cash flow of 0.775% or about three quarters of one percent. This contrasts to the working capital in the “bad” year that 2016’s Year End realized of 54.854% of cash flow. Everyone likes to run around and say that the producers have a lot of cash. Which in some cases could be considered a true statement. However working capital is a much more reasonable number in determining what the status and health of the organization is. If you liquidate all of your short term investments, inventories and accounts receivable and add those to cash, then deduct all of the short term liability of the producer you’ll determine the working capital. What you’ll find is that organizations can’t liquidate their short term assets outside of cash and short term investments. And the amounts listed in short term liabilities are for debts that have been incurred this quarter for the things the producers have already purchased. Therefore they may have money, just as their credit card still has the same line of credit that it had when it was first issued, its just that it’s all been spent.

In a display of the rational mind of a producer bureaucrat and the business logic that they employ. People in Calgary are being subjected to the full brilliance that has been on display, in my opinion, for the past four decades in oil and gas and the primary reason we are in this mess. First these producers began with the layoffs. Next they were able to offload the office space that they used to house these former employees. Calgary has an office vacancy rate that has exceeded 30% for at least the past three years. This caused the City of Calgary to lose a substantial portion of their tax base and therefore they’ve had to shift that base out to the small businesses that populate the rest of the city. In some cases taxes have been raised 400% on these small businesses. Which isn’t an issue because no one visits those businesses because the people were laid off. Here is where the brilliance comes in. Calgary has what’s known as the SaddleDome which was built for the 1988 Olympics, seats 19,289 people, fifth largest in the NHL and is in good shape, albeit a public facility. The oil and gas based Flames owners want a new one, an arena of their own, sort of speak. And they want the city to pay for it. Just as other cities have paid for other arenas excetera. Therefore the city is being held hostage for $275 million for the building of a new arena next to the SaddleDome that will seat almost 19,000 people. Is this tone deaf or just the irrational actions of a group of oil and gas producers who are going through spending addiction withdrawals? I think it’s reflective of both but also the oblivious nature of how they’ve done business these past four decades.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

Noting Our Transition

Our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale” has been well received in the market. I am naturally very pleased with the results, but also pleased with the position we find ourselves in. Which is the opportunity to resolve the issues in oil and gas over the long term. What I’m displeased with is that we’ve had to take it to the level that we’re at. We are at the very beginning stages of this decline in oil and gas and there will be much more pain realized before the Preliminary Specification is operational within whatever industry configuration that exists at that time. Producers are currently experiencing significant financial stress from the Exxon’s down to the one or two startups that still exist. No one is immune from the disaster that is being played out across the industry.

Contrasting the situation in the industry to another story that many people would be familiar with is that of IBM. Since the early 1990’s when they found that they missed the importance of the PC market and its impact on their business they have struggled. For almost thirty years now they’ve realized the damage that they’ve incurred and have worked to restructure and refocus their organization. And that is the point that I wanted to make. No one was unaware of the difficulties that IBM was going through or the hard work that was going on to try to fix those issues. In contrast, after at least a decade since the collapse of natural gas prices it’s all sunshine and rainbows as far as the oil and gas bureaucrats are concerned. They’ve spent no time reviewing their business or working on the issues. The other aspect that IBM shows us is that after the 30 years of remedial effort, the culture of the organization remains incapable of making the changes that are necessary to deal with the issues. What needs to happen to IBM is the exercise of creative destruction and disintermediation just as we’re applying to oil and gas.

The share prices of these producers appear to me to be in a preliminary stage of meltdown, not that their values were representative of anything close to their history. As we noted in the White Paper the performance of the industry has been an absolute disaster. Over the past decade when the S&P has been up over 300% the energy industry has declined by 10%. This past quarter has seen oil prices rise almost 30% yet the producers have declined on average another 10%. Imagine what these producers performance would have been like if they didn’t all have share buyback approvals.

Faith that something will be done has all but evaporated from the industry. Our exit from providing a solution to the existing producers may have made us the last one to leave. Our rebuilding of the industry through disintermediation and creative destruction starts today and that begins with the notice that my daily writing habit will become a sporadic writing habit. Focusing on the rebuilding of the industry and funding the Preliminary Specification with our IEO will become our second priority for the next few years, our first priority is always our user community. With the publication of our White Paper I’ve been able to put our solution into the context that considers all aspects of what the situation reflects. Therefore I feel there is little for me to write about. I certainly don’t have that harping and nagging feeling that I have to express this or I didn’t get that point out clearly. The white paper has enabled me to point to what we’re doing and why without having to contribute something in writing each and every day. As I do stumble across things I’ll return to make those points. What I foresee in the immediate future is our traditional analysis of our sample of 23 producers for the second quarter of 2019. This will be around the 5th of August. Possibly until then, have a good read of our White Paper.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

It's July!

I'll be taking the next two weeks off. In the meantime have a look at our white paper "Profitable, North America Energy Independence -- Through the Commercialization of Shale." In .pdf or Wiki.

Our Oil and Gas White Paper, Part XXXIX

Our White Paper has been published. "Profitable, North American Energy Independence -- Through the Commercialization of Shale" is available in .pdf and wiki form. 

Capitalization

The difference between what People, Ideas & Objects believe should be done and what is common practice in the industry is as follows. Oil and gas is a capital intensive operation. Leaving the capital costs on the balance sheets for decades provides no one with any value anywhere outside of mainstreet where CEO’s strut the size of their balance sheets. Retrieving the capital from the prior investment should be the first order of business for the producer. It had become far too easy to sit back and let a few more investors pass through the locked gate to access the cash needed to continue with spending like drunken sailors and no one looking at the business critically. The point in industry is to emulate the value of the company, not to record the performance of the management of those assets. No one was, or is even today, asking if those are assets or are they costs. Producers just continue to harp that they’re building their balance sheet in isolation to any and all other industries on the planet.

Incinerating Cash

I believe it’s clear to see that with everything that is spent on drilling, completion, equipping, overhead and interest expense as property, plant and equipment the cash demands in the industry have been horrendous. Realizing such small amounts of the depletion that should have been realized does not allow much of the cash to be returned from these investments. The assets only build at remarkable rates. The other side of the coin is that these operations are generating revenues that are inadequate to carry what would be the normal or accelerated volume of depletion necessary to correct these difficulties. They would be significantly unprofitable if they did. That’s not the key issue however. These producers are constantly on the lookout for additional financial resources to reload the months spending on the items in the overhead accounts. When these are capitalized as they are they’re not accounted for in the price of the oil and gas commodities, and therefore passed on to the consumer, where the cash would be returned immediately to the producer to be spent in the following month. The next months costs have to be sourced from new money each month as the operation is not truly profitable and the cash is not being returned. Why would an organization do this? Why would an industry do this? Why would they do this for four decades?

Accuracy vs. Fudge

Critical analysis of the financial statements of any and all producers in North America show the same attributes. Size being the only differential. Balance sheets heavily dominated by property, plant and equipment, little to no working capital, materially damaged shareholders equity through extensive and successive losses, and what appears on the surface to be a reasonable amount of debt. Our one concern about the debt is the excessive level of unrecognized capital costs of past production are overstating property, plant and equipment and therefore the leverage the producer is actually carrying is far greater than what is represented. The generic financial statements of the industry all fall within these classifications. For the life of me I can never tell who is performing well and who is incinerating money at a faster rate. They’re indistinguishable.

These financial statements are seeking to emulate the value that the producer has achieved. Instead of reporting on the performance of the producer, what we’ve ended up with is best described as indistinguishable fudge. What producers have done is explored the level of capitalization of costs until someone stood up and said enough. That was the SEC when they saw PennWest and their accounting staff capitalizing royalties. PennWest doesn’t exist anymore, their called Obsidian, and their former accounting people are still being pursued in court by the SEC. Obsidian trades at one third of one percent of those heady PennWest days. The point I would assert is that PennWest was the warning shot across the industries bow. The SEC’s message was heard throughout the industry and the capitalization of royalties has been adjusted for and I’m certain has ended.

The desire to never recognize the costs of oil and gas exploration and production are easily understood. If producers can report profits, based on SEC guidelines, producers have a built in mechanism where profitability will always be achieved and there will never be any call for change. Party city can go indefinitely and the work that you don’t do won’t be interrupted. The problem is that someone has upset the apple cart and starting selling their Preliminary Specification. Unfortunately for the producer bureaucrats, the Internet makes it hard to get rid of people like this.

Profitability, Assets and Cash Flow

What we’ve obtained in the financial statements of the producers is highly overstated profitability, assets and cash flow. We have detailed extensively how the overstatement of profits and assets occurs, the difficulty in understanding how cash flow is overstated is a little more complex. If a producer recognizes their capital costs on an accelerated basis to what they would have historically done the cash flow of that producers would be the same. The capital asset depletion would still not affect the cash that was generated from operations. However, if we were to begin to reclassify many of the field operations, particularly in the shale era, where extensive workovers of existing wells was reported as part of operations then these current operations costs would affect cash flow directly. These costs would be recognized 100% in the current period and reduce cash flow by the amount of the costs. Why would we do this?

It is necessary for the industry to begin thinking about how they’ll recover their capital and operating costs, all of their overhead and interest costs in rapid fashion. Turning these costs back into cash for purposes of reuse is the only method that I see, and is People, Ideas & Objects plan of how they’re ever going to be able to approach their difficult and challenging future. Our bold and audacious recommendation is that they begin running their companies as businesses. Expecting that either investors, bankers or Santa will help fund them continuously is wishful thinking and is never going to happen. Producers have earned a well deserved reputation where they can’t be trusted with others money. If they're to keep the organizations that they currently manage they’ll need to stand up and make the changes necessary to begin to defend their organization. That means implementing the Preliminary Specification. Recent history shows this is never going to happen so we’ll just let them rest on the couch for the remainder of the time their organizations have left. Cash drainage as a result of the overhead, interest and all of these other costs being capitalized for the next few generations has traditionally caused these costs to be funded from outside investors. I’m glad to be the one to tell them, those days have passed.

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 American 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.

Independence Day

I am pleased to publish our white paper which is entitled

Profitable, North American Energy Independence -- Through the Commercialization of Shale Reserves

What better day than Independence Day to start us on this important goal of energy independence.

Copies of the .pdf are available here.

Access to the wiki is available here. 

Our Oil and Gas White Paper, Part XXXVIII

A quick note to say that our white paper "Profitable, North American Energy Independence -- Through the Commercialization of Shale Reserves" will be published on Independence Day. 

The Methods of Oil and Gas Accounting

Overhead

It is important to understand why things are happening as they are. The first issue is overhead. In oil and gas there are various Petroleum Accountants Societies for each region on the continent. They are governed by the Council of Petroleum Accountants Societies or COPAS. Their role is to define the accounting procedure that is adopted by each and every Joint Operating Committees agreement for the property. This has been the case since 1961. Within the accounting procedure the amounts of overhead that can be charged to a Joint Operating Committee are regulated and agreed to by each and every producer that operates on the continent. These overhead allowances capture fees for the overhead that the operator would incur as a result of the increased burden they, as operator, need to have in terms of their accounting and administrative capabilities. Therefore the operator would be generating a “revenue” from its working interest partners for their shares of the overhead fees charged to the Joint Operating Committee. These “revenues,” for lack of a better word, offset the actual overhead that the producer incurs. These amounts of overhead allowances are woefully inadequate to capture the true cost of accounting and administration in oil and gas. They are necessary to avoid the cost that would be incurred if each overhead item had to be costed to each Joint Operating Committee. A task that would be impossible in the manual systems of 1961 and their derivative ERP systems of today. A task that the Preliminary Specifications decentralized production model undertakes with the service providers.

The negligible amount of offset provided by the COPAS overhead allowances to any operator are reflected in the remaining G&A balances of each producer. It is key to remember that the actual overhead items are charged to the various corporate accounts within the system during the year, and at the end of the year a large percentage of their total are capitalized to property, plant and equipment. No one knows for sure what the overhead costs are in oil and gas. I believe the amounts that are capitalized average 85% across the industry. That’s just based on experience, nothing I can point to. The variance reported by producers of their overhead costs range from 1% to over 16% of revenues in the industry. The best estimate of what the actual overhead and accounting costs are is to get pictures of the downtown core of Calgary, Houston, Dallas and Oklahoma City and assume that most of those building and the people in it are involved to some degree.

Due to the fact that overhead at the property level is severely underreported due to the amount of the COPAS overhead allowances. Then we know that the properties will be reporting profitability, if it was able to be determined, that is overstated. In addition corporate profitability is overstated due to the high percentage of overhead that is capitalized to property, plant and equipment to help “build those big, beautiful balance sheets.” The amounts of these overstatements is unknown and unknowable. Please review the section entitled “Service Providers” under “Our Solution” for further information on how People, Ideas & Objects will be recording actual overhead incurred at the Joint Operating Committee.

Performance vs. Needs Work

As a result of this methodology of overhead cost accounting what are property a,b, and c doing in terms of performance? Producers present Statements of Expenditures and Statements of Operations which when combined will tell the reader what the performance of the property is in the current month as long as they calculate a reasonable amount for depletion. As we see with the dynamics of these calculations, just for overhead purposes, the profitability of the property could be overstated by as much as 10 - 15% or more just from the recording of overhead allowances vs. actual overhead. Am I overstating the situation or is it worse? No one knows.

The Preliminary Specification will be recording the actual overhead that is attributable for the accounting and administration of each property to that Joint Operating Committee. This will be done through the service providers as they receive their information from the task and transfer network in the Preliminary Specification. If there is propane production, and propane inventories then all of those service providers associated with the follow on processes of production accounting, revenue and royalty accounting and product allocation down to the point of sale will be invoked and manage the process for that property that month. The cost incurred for that month will be what the service provider has deemed as necessary for the capture of the costs and a share of profit of their organization. This cost may be fractions of one cent for some processes. However the service provider may have millions in revenue from the annual processing of all of the industries data for that process. The costs to the Joint Operating Committee for overhead and accounting as a result of the service provider is going to be as accurate as is possible under any possible scenario considering there may be up to one hundred thousand Joint Operating Committees in some producers.

It will be on this basis, and the other changes that we make through the implementation of the Preliminary Specification that the producer will know with a high level of precision where they're earning their profits and not. Where they can apply their innovation and how to optimize their organizations. This is opposed to today where the bureaucrats assume that overproduction of commodities is irrelevant to the “market rebalancing” of the markets!?

Tangible vs. Intangible

People, Ideas & Objects assert that there is a fundamental error in the manner in which capital assets are recorded from the point of view of tangible vs intangible, and capital vs. operations. Currently everything that is done in the industry goes into the one overall objective of “building the balance sheet” by recording it in property, plant and equipment. With drilling involving high cost rigs, steel pipe and cement, coil tubing and fracing operations we feel a breakdown between property, plant and equipment and intangibles in necessary. This goes for equipping costs as well. Although there are many items with serial numbers, items such as casing bowls, these are not retrievable. The effect of this would be to better clarify the vast majority of the costs of the producer as intangible vs. the tangible nature of property, plant and equipment implies.

Secondly, the clarification between what is rightfully in property, plant and equipment, and intangibles vs. ongoing operations. Drilling new wells and conducting the completion and equipping of those are assets for the purposes of this conversation. However, in the shale era these wells require extensive work to maintain their deliverability. Additional laterals may be drilled, fracing further down the original lateral and reworking the prior fracs are all extensive operations to maintain the deliverability. What are these assets or operations? If we’re only lumping more costs on to the existing reserves, to be depleted over the next 20 years then we’ve completed the deception that is the oil and gas industry. However, I believe that this implies that the initial drilling costs should have been depleted in the initial flush production if we’re just adding the additional costs to the reserves. Alternatively, we can stick to the 30 month program that People, Ideas & Objects suggests in which we deplete the original cost of capital, and handle these incremental workover type costs as operations in the month that their incurred.

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 American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Exchange Offering (IEO) that will fund these user defined software developments. It is through the process of issuing our IEO 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.