The Tragic State of Affairs, Part I
Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. No one can stand aside with unconcern: the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.
-- Ludwig Von Mises
Professor Mises died in 1974 and should be excused for his sexism. Nonetheless this is what I consider my personal motivation in pursuing this task. Which allows me to ask what the bureaucrats motivation has been over these past decades other than personal financial gain. Their lack of professionalism has extended to all aspects of their positions. They were the ones that were responsible for the greater oil and gas economy. Oil and gas being a primary industry and therefore must take on a greater role in all aspects of the greater oil and gas economy. One where they understand how those revenues were earned and who exactly it is that’s responsible for making them happen. That begins with the drilling rig owner down to the clerk at the corner grocery store. What was it that we could have expected they could have done about the chronic boom and bust cycles that these bureaucrats literally sat through uncaringly mouthing the words “muddle through?” Lets not forget they had control of the revenues so they were fine. No one else had the authority to make the necessary changes, to look at the situation critically and evaluate why this was ever acceptable? It is not, and it certainly should never have been accepted in the 21st century. Yet here we are with the economic bust that defines them all. A full blown depression by anyone’s standards and one in which those in industry who were dependent on oil and gas, and in turn oil and gas can’t function without, really don’t care what it is the bureaucrats do from this point. We’ve all learned that they’re in it for themselves and are entrenched in those positions, spewing orders to everyone with the accusations of greed and laziness in everything they see and everywhere they look except in the one place it truly exists, the mirror.
Everyone is now laughing at the North American oil and gas bureaucrats. Everyone now understands how the destruction has been carried out and who the winners were and always will be in their system. They’re not laughing so loud that bureaucrats can hear it, but people are now snickering behind their back. Bureaucrats tried to take this recent oil rally as a guide to the next boom phase. “We’ve seen this before, now is the time to capture the future.” they’ve always said. Except there was no commensurate hopping on the wagon this time. I’m not saying no one believed them, but absolutely no one believed them and how dare they try that same stunt again! The script is old and doing the same things again and again, expecting different results… How many times have they tried this routine? Producers shares did rally quite handsomely, however not as well as GameStops have. When playing in the shallow end of the bottom, sometimes the feeders will take a quick gamble. That does not imply they’ll be lining up to fund the next rounds of trillion dollar spending binges or have the wherewithal to do so. What the real investors see is an exit strategy that they never thought previously possible. It’s just like Christmas, they can now leave with some value and wash their hands of the bunch. Those producers who think they can maybe raise some capital off this new found strength should consider they’ve just priced themselves out of that possibility. They’re now too expensive and have clearly defined how far the downside can be.
In contrast to my dire presentation there are the sycophantic media selling their share of the bureaucrats' story in this renewed “optimistic” environment. You have to be an optimist to be in oil and gas. There is never any doubt about that, but read this article in Forbes and ask yourself is this what’s really going on and is it possible? Are we just able to pick ourselves up, dust ourselves off and resume exactly where we were so many decades ago?
OPEC+ made their opinions known recently. Stating that they could increase the price of oil at will without a commensurate production increase from the North American shale producers. I’ll bet that stung a bit didn’t it. They didn’t laugh, they’re too solemn to engage in that sort of thing. What they know and understand is the extent of the damage that the North American oil and gas industry has sustained over the past number of decades is well past the remedial opportunities to deal with it. They know that to move forward with what exists today is not going to happen. The analogy of the car at the side of the road in the middle of nowhere, that has spewed oil from the crankcase for the past two miles isn’t going anywhere. And just as the bureaucrats continue to try, our car at the side of the road will soon have a dead battery too. The cupboards are bare, the service industry is unable to provide a compelling reason or valid business model to the investment community that will attract anything. Sound familiar? They’ll wait until the producers resurrect themselves, prove they can be consistently profitable and can pay for the work they want done. In cash, up front which will include the cost to build new capacities and capabilities. People only laugh after all the cash is gone, which occurs soon after the betrayal that’s been perpetrated on them. They lose trust, they don’t believe and they don’t need anymore promises or threats. They’ve been destroyed by them, it's time to pick up and move on with their lives and make what they can of what they have. Producers need to think in terms of generations, not immediate like just hitting the lights. And that's what OPEC+ knows that the producers are too thick to realize. The only resource the North American greater oil and gas economy has is a substantial, but diminishing, revenue stream of oil and gas sales to fund and rebuild the industry infrastructure that has been laid to waste.
With the Biden-Harris regime fully installed now, any substantial investments made in oil and gas will at best be dormant for the next four years. Therefore why bother, says John Q. Investor. With the aptitude for change by the bureaucrats and status quo regime there is probably more downside in the wind for any investment anywhere in the North American oil and gas industry. The Keystone XL decision shows the Biden-Harris regime may be the most unstable and unreliable anywhere in the world at this time. And if something should happen to change from the Biden-Harris regime in the next four years, things will only go down hill further and faster. A very risky proposition. Maybe they could have kept a good relationship with the Trump administration and looked forward to that continuing in 2024. I can assure you that will never happen. Leadership has failed within the bureaucracy, and leadership has failed the American political system. It's time for everyone to re-read the quote in the first paragraph of this blog post. Relying on leadership now will continue to fail as no one person can conduct all of these impossibilities. It's up to the people in society to become active to make the changes in their lives and stop taking things for granted. Stop allowing these bureaucrats and politicians to take what is not theirs and destroying what is ours. Or give up. People, Ideas & Objects is wholly reliant on the individuals who make up the user community and their service provider organizations to make the transition to a dynamic, innovative, accountable and profitable oil and gas industry and producer. There is no one individual that can lead the charge. Individuals making up the difference in their daily lives must be the reason that oil and gas is rebuilt and the American political system doesn’t continue down the road that it is on.
The overcapitalization issues are not difficult to comprehend. They’re covered in accounting 101 and make up what is considered basic business sense regarding accountings two key principles of timing and the accuracy of an organization's cost. The impact of shale is also inherently understood. The manifest failings of these two issues over the past had significant influence over the cultural development of the industry. A cultural division has grown over time where the accountants ability to assert the business issues doesn’t exist. The release of reserves value through further drilling is the business and the only business as far as the culture of the industry is concerned. The nuance of recording and reporting the accurate timing and recognition of capital costs of exploration and production are not a topic of discussion when “everyone” is following the SEC’s regulated requirements and are “building their balance sheets” faster than “we” are. This is how the goals and objectives became “putting cash in the ground,” “building balance sheets” and any number of other misguided adventures but never profitability, performance or productivity.
The perfect example of this cultural distortion is none other than the Anadarko acquisition by Occidental. It is here that Occidental paid an enterprise value of $68.3 billion for the assets of Anadarko. It is these assets' history that had performed on Anadarko’s financial statements to the tune of $695 million in lifetime earnings. We have to remember that over the prior four decades the method of accounting in oil and gas was to recognize as much cost as possible as a capital asset in property, plant and equipment. The limiting factor to what can be recorded in that account is the valuation of the petroleum and natural gas reserves. If they, subject to a handful of discounts, were higher than the account of property, plant and equipment then all was well. (In 2020 Occidental was recording significant impairments to their property, plant and equipment account. I guess the reserves didn’t hold up.) Therefore the race was on to reach that reserves value by cranking up the spending machine by each and every producer in each and every year they were in business. Throwing in overhead and interest is still done today. Royalties and operations didn’t fare as successfully and some producers are no longer with us as a result. The point of increasing the capital assets in this manner has the equal and exact amount of increased profitability reported. Therefore the $695 million in lifetime profits is more accurately stated as significant losses. If that were the case then the producers would be incurring significant cash drainage! Which highlights the importance and need of the annual shareholders issuance that became the cultural expectation that solved the accounting deficiencies described here. When the deception of false profits are attracting new investment then the world spins on the axis of those who issue such specious financial statements. It does not, however, say positive things about those who pay the full price for reserves that never performed, and by the looks of it, never will.
What are Anadarko’s “real” lifetime earnings? No one knows but I think Occidental is beginning to find out. How could such a large $70 billion transaction be undertaken on this basis? The full year 2020 Occidental has successfully drawn down their debt from $84.4 billion immediately upon the acquisition in the 3rd quarter of 2019 to $61.4 billion. Revenues were down $5 billion from 2019 and Occidental recorded revenues of $16.261 billion for 2020. Creating a loss of $15.675 billion. Sure it’s all covid, however I’ve noted everything was well within Occidentals hands and they did not need to run the oil price to negative $40 or continue to produce through March and April at under $20. Just out of curiosity, why would you? And who’s fault was it for the loss and selling of that production into that market? The one thing about the virus in 2020 is that it gave the bureaucrats a viable scapegoat that lasted almost the entire year and did solicit some sympathy in some quarters. Therefore an overall successful, viable scapegoat, but it's 2021 now. What it appears to me is that Occidental paid for the future revenues of Anadarko to make the acquisition. What else defines this lunacy? And what are the prospects of this once great company? But then again, pick up any oil and gas producers report over the past decade and you’ll see the same behavior, the same performance with the same results. It’s old school.
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, everywhere and always. 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. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.