My Argument, Part XXXI

What the oil and gas industry, and its producers need is a methodology of production allocation. In the world of shale, where production has shown itself to continually overwhelm the marketplace and destroy the oil and gas commodity prices. The old business model of controlling capital expenditures is incapable, inefficient and failing outright. The only reasonable, fair and equitable means in which to allocate production is to do so on the basis of profitability. If a property can show, with detailed financial statements that include the royalties, operating and actual overhead costs can the determination of profitability be made. Once a property achieves profitability it is assessed monthly based on its revenues and costs. If it ceases to be profitable it will be moved to the producers shut-in inventory. Where they can innovatively work the property to enhance its reserves, revenues or reduce its costs. This is how People, Ideas & Objects Preliminary Specifications decentralized production model operates.

Today we see shale producers adopting a more “disciplined” approach to the business. At least that is what they tell us. They understand that they need to be disciplined in order to ensure they don’t flood the market with shale production, again. Yet two months into the OPEC production sharing agreement and the U.S. is already over the 9 million barrel per day threshold. Although I haven’t a clue where the investment capital will be coming from to fund the announced 2017 budgets of the producers. They are ramping up as we speak to spend like drunken sailors once again. As we indicated yesterday that is their business model. There’s a new name for this in the industry, it’s now being called a manufacturing process. That’s what’s being used to attract the new investment I guess.

So everyone drills and everyone produces and everyone dumps the product on the market. Oil or gas it doesn’t matter, these reserves are worth sixteen trillion dollars, the startup producer claims. The party bus just pulled up. It’s a little worn since the last time I saw it, but it’ll do. Oil and gas is back! On the basis of the fourth quarter reports that I reviewed this may be the shortest boom in business history. Spending money like a drunken sailor, when you have none, is a recipe for people getting hurt. Further leveraging balance sheets that have been destroyed by systemic losses, have outsized balances of property, plant and equipment that are really just unrealized costs of past production, and shareholder equity that shows that the firm's lifetime activities amount to nothing but a losing cause are one thing. The lack of cash, working capital and generation of cash flow being the other “current crisis” in the industry. So yeah lets all get on the bus.

So instead of constructively looking at the business and fixing the industries issues we see the mad dash once more. I think we all could certainly be doing more productive things like developing software. But I’m biased because I want to build value. What is the purpose of drilling more wells and increasing the deliverability of the industry if its in excess of what the market can handle. Does anyone doubt that the commodity prices will go down?

The industry is filled with bureaucrats who are concerned with the environmental impact of energy production, the communities they operate in and their activities that they’re involved in and any other sort of distraction that pulls them away from their primary purpose of building value. If they build value in the form of real profits, not the fake type they’ve been reporting for decades, then society will profit as well. The people who are currently able to profit from producers concerns about the environment will be able to take care of those things. It’s not the producers, or should I say bureaucrats job. Theirs is to profitably produce oil and gas. Not on a scorched earth basis, but profitably and as a benefit to society. What benefit to society is the industry providing today? Losses in the industry, losses in the service industry, losses in investment, losses in tax revenue, losses in royalty income and losses most particularly to those that are employed in the industry. Has any producer thought how they’ll get the universities to reestablish their curriculum in petroleum engineering and geology?

Round and round and round and round we go. That’s how the tub drains. It would seem to me to be the way in which value is leaving oil and gas. Just enough damage that no one does anything, then the turnaround arrives. One step forward two steps back, and repeat.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XXX

Producers love to declare the value that they hold in oil and gas reserves. These numbers are what cause everyone to lose their minds, put their money down and watch it glow for decades on the balance sheet. Recently we saw Exxon having to take the value of their heavy oil investments off their reserves estimates. The cumulative $20 billion investment has added nothing of value to the firm and will be removed. To counter that disappointment we have two announcements from Exxon to mitigate the impact in the market. The first is the switch in their focus towards shale.

CHICAGO (Bloomberg) -- Exxon Mobil Corp. is trading in long-term projects that pump oil over decades for U.S. shale drilling that can be switched on or off as crude prices change.

To augment this new focus Exxon went out and purchased a shale producer that provides them with greater shale exposure. It has been described as the following.

When the transaction closes, Exxon’s Permian asset base will hold the equivalent of 6 Bbbl of crude, an asset that’s worth $324 billion at current oil prices. Wells drilled in the acquired area will generate “attractive returns” even if crude drops back down to $40/bbl, Exxon said when the deal was announced on Jan. 17.

Here we have evidence of the fact that producers hold out the ridiculous value proposition of determining barrels of reserves times the current price. Some might suggest that this is no different than People, Ideas & Objects publication of its value proposition of $25.7 to $45.7 trillion. I would assert that our value proposition is incremental value and is realized on top of the current cost structure of the industry. The statement of $324 billion assumes no costs and therefore is a distortion of the facts. A distortion due to the fact that the producer is unable to produce any oil and gas profitably at this time. Therefore this $324 billion will simply slip through Exxon’s fingers with no value being realized by the shareholders, etc. Note however, the bureaucrats will be fine.

It is the last part of the first Exxon quotation in this blog post that I also want to address. Their comment that “shale drilling that can be switched on or off as crude prices change.” Is there a belief in the marketplace that the producers will move to drill dynamically based on the prices realized? This has been the business model that has been in place for decades. It is a blunt and ineffective instrument. Scaling up capital expenditures in the good times, and scaling them down in troubled times. The difficulty with the current business model is that we only ever seem to be in difficult times. And that in no way is good enough.

Last week we saw the producers participate in the annual CERA conference. In contrast to last years mood producers were boasting their recovery and asserting that the Saudi’s and OPEC were in retreat from the shale producers. Based on the fourth quarter reports I certainly don’t see any recovery in the producers, the oil price might be marginally higher but still unable to cover the costs of production. And no one anywhere is profitable. Shale’s dynamics are pushing U.S. deliverability over 9 million barrels with the inevitable flood of oil on the horizon. North American producers believe they can compete with Saudi costs that include the societal costs of the Kingdom. I see that as an unfair comparison. Saudi production costs are negligible in comparison to shale. If the producers want to assert the costs of the Kingdom then they should adopt the cost of the U.S. debt and deficit as part of their cost structure to make it directly comparable.

I see a lot of deception in the marketplace. Producers are convincing themselves that they can compete and that they are financially capable. Neither are the case. Overproduction is increasing at a time when inventories are at record volumes. Positions in the futures market for further increases in the price of oil are also at records. These are all pointing to another steep decline in the price of oil as a result of the North American shale producers overproduction. This is not a tragic event, the bureaucrats will continue to get paid and that’s all that really matters. I’ve lost count of the number of times we’ve been through this cycle but it does seem to have a good rhythm.

Producers should be careful not to fall into the trap that has been laid for them by the Saudi’s. If they are seen as destroying the oil market in just a few months after a production sharing agreement is implemented. People won’t have difficulty in seeing who’s truly responsible for the poor oil and gas prices.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

Short Break

No posting today or tomorrow, returning Monday.

My Argument, Part XXIX

Through the Preliminary Specification we fundamentally transform the way in which oil and gas is operated. Shifting to identify and support the Joint Operating Committee as the key organizational construct we introduce new dynamics into the industry. The compliance and governance frameworks of the hierarchy are moved from what we call the existing corporate model to align with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. This alignment achieves a speed, innovativeness, accountability and profitability in the oil and gas producers that use the People, Ideas & Objects Preliminary Specification.

Moving away from the corporate model will allow the producer to focus on the business of the property. Today the corporate model is constrained by the compliance and governance of regulatory, tax and accounting requirements as opposed to the business of the business. Drilling wells for the sake of drilling wells is the old business model. Each property must be evaluated each month to ensure that it is profitable in the current commodity price environment and cost structure. If it is not, then the property needs to be shut-in and looked at from the point of view of how its profitability can be enhanced by increasing its throughput, lowering its costs or expanding its reserves and returning it to profitable production. It will be through these individual decisions being made independently at each property based on actual accounting information, each month that will remove the overproduction and oversupply from the commodity markets. And allow the commodity prices to find their marginal cost.

In People, Ideas & Objects system the producers are reorganized to focus on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base. The producers C class executives, the earth science and engineering resources, some land and legal, and support staff remain at the producer on a full time basis. The remainder of the accounting and administrative resources are reorganized into service providers who focus on one process or subprocess and apply it across their client base which consists of all the producers in the industry. It is in this way that they can specialize and divide the labor within the industry in order to expand the capacities and capabilities of the administrative and accounting of the industry.

The industry itself takes on unique organizational changes as a result of implementing the Preliminary Specification. These changes begin with the software development capabilities of People, Ideas & Objects. Software is a critical competitive enabler in all industries. By using software, organizations seal their structures in cement. Disabling them from making any change to accommodate any inevitable business change. Therefore, a permanent software development capability is a key competitive advantage that the oil and gas industry will inherit from People, Ideas & Objects by using the Preliminary Specification. Software today also needs to be user driven in order to ensure that it addresses the needs of the people using the software. The Preliminary Specification is user community based software developments. Our approach to this element of software quality is reflected in our user community vision. A vision that spells out that our users have the power and capabilities to drive the changes that are necessary in the industry.

The service providers mentioned before are a critical aspect of enabling the producers to achieve the most profitable means of oil and gas operations. If a property is shut-in due to it being uneconomic, no data is generated that month and therefore no triggering event will occur in our task and transfer network of the Preliminary Specification. And none of the service providers will therefore have any work to do with that property for the month that it’s shut-in. As a result the producer records a null event. No profit, but also no loss. There will be no revenue, royalties, operations or any overhead costs for that month. No production accounting people, no office space, or printer paper, etc. And therefore the producers profitable properties will no longer be diluted by unprofitable operations. The overhead burden of the oil and gas industry will have shifted from the industry itself to the service providers. Who understand that at anytime they may be subject to a 15% decline in their revenues. Assuming a 15% decline in the industries production profile. Something that they can budget for on an annual basis.

In a world where overproduction and oversupply in North America are the key issues in oil and gas. And the abundance brought about by shale will continue these trends for the long term. This thinking of People, Ideas & Objects is considered by producers to be unreasonable and crazy. You don’t have to be crazy to do my job, but I’ve found it to be a strategic competitive advantage. The damage that has been done in oil and gas is complete. I can’t see how the industry can continue without the changes that have been mentioned here. There is a challenging and opportune future ahead of us and the first thing we need to do is to organize ourselves to ensure that the value to society is realized by all concerned. The producers, investors, governments, royalty holders, employees and service industry representatives. These groups capture the scope of those stakeholders in society. They’ve gone on long enough without benefiting from oil and gas. Its time the bureaucrats stopped gorging only themselves at the trough and let the value flow to these stakeholders.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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.

My Argument, Part XXVIII

There has been a dramatic deterioration in the cash flow of each of the producers during this past year. That would seem to be the natural case with the very low commodity prices at the early part of 2016. However the fourth quarter did not seem to remedy the situation at any of the producers I reviewed. $4 natural gas and $53 oil were some of the healthiest prices that were realized in the past number of years. I think our proposed solution to the industries ailes is the correct remedy. A three fold revenue increase is the only thing that will solve the financial difficulties of any of the producers that I’ve seen. The only way in which to do that is to implement People, Ideas & Objects Preliminary Specifications decentralized production model and price maker strategy. Then producers will only produce profitable oil and gas and generate the cash flow to fund their operations.

We see continued resistance to this position in the industry. Bureaucrats do not believe that they have any impact on the prices of the commodities that they produce. Their actions are not part of the problem and therefore can’t be part of the solution. This is just a capitulation of responsibility and avoidance of the difficult task of implementing the Preliminary Specification. Bureaucrats know that they can’t fight the situation forever and they have no plans to do so. They’re involved in a limited engagement with People, Ideas & Objects to ensure that they maximize their personal revenues from the industry before they begin their mass migration out.

So whether it is the “jarring gong of self preservation” that everyone hears that precipitates the necessary actions to fix the industry. The bureaucrats migrate out. Or the investors express their frustration with their investments poor performance by acting to correct these issues. It will be one of these three scenarios that will be the manner in which the necessary changes are made in the industry. Oil and gas has carried on for far too long with its “muddle along” strategy. Things have changed fundamentally with the development of shale. The business model of the current producers is incapable of dealing with the abundance of the resources that are available through shale reservoirs. The commodity markets are overwhelmed by the volumes of reserves of oil and natural gas. They are overwhelmed by the volumes in inventory and the production that is presented each and every day. Producers don’t discuss these points, they just continue to overproduce and drill for more.

There is now mention in the markets that the Saudi’s will be changing their production strategy once they’ve completed the IPO of Saudi Aramco. Moving back to full production for the long term. This flooding of the markets is consistent with the thinking of BP’s Chief economist who said that only mid-east producers would be profitable in the abundant, oversupplied oil markets. And this would be the case until 2050. If North American producers were smart they would circumvent the Saudi’s motivation to do this while they still have the ability to materially impact prices in both oil and natural gas. If mid-east producers just flood the market until 2050, will there be any opportunity to implement the price maker strategy? Producers should ask their investors if they want to take that path with them. There will come a time when all solutions fail to solve this problem for the North American producer.

The bureaucrats will have moved on by then so you should be careful who you ask. Is it wise to have North America unprofitably produce oil and gas for the next generation? I don’t think so and that is why I think it’s very important that we implement the Preliminary Specification in the industry as soon as possible. The past generation produced oil and gas unprofitably and look at the disaster that is.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XXVII

If it is that we are to hobble along paying one screaming, nasty creditor after another. Spend our time on the phone trying to convince people to give us another chance, to support the firm in its hour of need. Ask employees to do a bit more each week. Camping out at the bank. Selling the next in an never ending parade of crown jewel properties to keep afloat. Then oil and gas is doing all that we could ever have expected of it. When the operational problems arise or the pipelines leak, then those unfortunate producers can show the world those skills and capabilities that’ve been so well honed over the past years and troubleshoot the problem with a package of Band Aid brand bandages. We all know they’re that good. But lets look at the bigger picture.

The opportunities and issues that we face in the next 25 years will be the greatest this industry has ever faced. Hobbling along with our muddle along strategy is the vision that the industry has put forward to meet these challenges. That’s not good enough. The investors and bankers who have seen their investments in the producers themselves perform very poorly will no doubt reconsider their investments. This reconsideration is different than looking up the price of the stock on the exchange. That is not how you evaluate the investment in the producer. In most cases the book value of the producers interest is nothing. Their investments have been eroded away by the chronic losses and the apathy of the bureaucrats. Bank and bond holders have taken the hit in terms of settling at less than face value on their investments.

Expecting these people to then step up and fund the next round of $20 to $40 trillion in investment over the next 25 years will be laughed at. The industry doesn’t have the performance necessary, or the integrity to ask for that. Besides the expectation that that volume of money would be available is ridiculous on its face. What the industry needs to do is to change its business model to the Preliminary Specification and begin the self funding that most businesses do. A business model that also recognizes that shale has changed the industry from one based on scarcity of the resource to one in which there is an abundance of the resource. The reliance on investment capital to provide consumers with a subsidy on their energy consumption is over. The producers are broke. Bureaucrats have fundamentally run the business into the ground. This being the beginning of what should be the industry's golden years.

As with every industry the forces of creative destruction are at work. Eventually all industries fail to produce any value from the business model that they employ. During the downturn in 2008 GM was clearly failing in the marketplace. Something that it had been doing since the Japanese began introducing vehicles in the 1970’s. Until the investors saw the whole in their portfolios did anyone do anything about it. And I’m not holding GM out as an example of productive creative destruction, clearly the firm needs more work. However the signalling event then, as it was with the banking crisis, was when the banks and investors were feeling the pain from their investments. Pain that was in excess of what their financial statements could handle.

As much as the oil and gas bureaucrats like to point to the reserves in the ground as the intrinsic value of the firm. They are worthless to anyone if they can’t be produced profitably. Currently the book value of the industry, based on all the financial statements of the producers is $0.00. The industry chronically loses money and demands cash in large quantities just to produce. This is in sharp contrast to the values represented on the exchanges for each individual producer. This variance will be corrected in the short term. And when the investors are presented with the fact that these bureaucrats have destroyed the industry, have no plans to undertake these golden years of opportunity and are demanding more money just to produce, then we may see the final act of the industry as it stands today.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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 Off

No posting today.

My Argument, Part XXVI

Over the past few decades it would be a fair question to ask, who’s been winning and who’s lost in the oil and gas industry. It’s difficult to see how anyone outside of the bureaucrats that run the producers can categorize their time, money and efforts over these past few decades as a success. Society in general has to realize the costs of the unemployed in oil and gas and the service industry. The loss in tax revenues from profitable operations and the royalties that would be paid if the products received fair value. The investors and bankers have seen the investment that they’ve made in the producers produce little to nothing in terms of value. No producer has performed in terms of their accounting. Their stocks may be high at present, but those have nothing to do with the value that is being generated by the producer. They are for all intents and purposes a different market. One which could collapse itself. And certainly the people who work in the industry have either been laid off or are having to make up for those that are no longer there. They wouldn’t count themselves on the winning side I’m sure.

The brokerage houses must have inventories of producers stocks that they’re trying to offload onto unsuspecting victims. I read an article yesterday stating how good a job Chesapeake had done and the glowing commentary had little to do with the facts of the firm. These comments coming the day before the producer would be publishing their fourth quarter results. Why would they comment the day before? Wouldn’t they be best served by waiting for the facts and provide their clients with those? Or were they thinking that the stock was going to be hit as a result of the inevitable poor quarter’s performance. Chesapeake has no money, no working capital, no cash flow, debts everywhere, and have lost $19 billion in 2015 and $3.9 so far in 2016. That’s a $3.9 billion loss on $5.8 billion in revenues. Results will be out soon after the posting of this blog post. Maybe the key factor when evaluating Chesapeake is that it’s 70% institutionally owned and some of those institutional investors are nervous.

As bad as the situation is in the United States you haven’t seen anything until you focus on the producers north of the border. Canada has much less “rigorous’ accounting requirements for producers. What you see in the U.S. is a reasonable, factual tale being presented based on the SEC requirements of Full Cost or Successful Efforts. The difficulty that I have is that producers have been reaching the limit of the ceiling test almost each and every fiscal year. The capitalization of any and all costs being the issue. In Canada you have to believe in unicorns in order to interpret the accounting. Cenovus, as an example, reported a profit for the fourth quarter. This as a result of negative depletion. Now I understand that this is possible, however, the company has outsized assets that will take 8.79 years to fully deplete at that rate. This is unreasonable. The CEO was also claiming in the text that cash flow was so strong that it funded capital expenditures and the dividends. This Cenovus categorically did not do.

Acceptance of this level of destruction throughout the industry is difficult. Acceptance of this level of misrepresentation is disheartening. What is going on in the industry? Lipstick on a pig? We were all led to believe that the difficulties in natural gas were about to expire and the industry would rebound. This “market rebalancing” being what has been expected since at least 2010. Natural gas prices were at almost $4 and have lately collapsed, once again, into the $2.60 range and are certainly headed lower at the speed and trajectory their taking. Oil inventories continue to build despite OPEC’s production cuts. North American producers have been increasing field activity and it may not be too long before we see declines in the oil markets. All as a result of overproduction and oversupply. Were we not just at this point six months ago?

The industry continues to swirl around the drain. 2016 is much worse than 2015. Prospects look very dim to me unless we obtain the three fold revenue increase these producers need. There is no discussion of the difficulties in the industry. Producers have their blinders on and only see their tiny part of the world and are unable to grasp the larger picture. Saying things are great isn’t going to make it so. This Ostrich like act is only leading to additional problems down the road as those who were in the industry are seeing less and less opportunity in the future, and are more motivated to get out of the industry permanently. We are not being productive but destructive. The forces of creative destruction are in operation throughout the industry. This is not a changing environment as much as the bureaucrats make it out to be. We will continue to cycle downwards until such time as we take control of the situation and that requires that the industry adopt the Preliminary Specification.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XXV

If we have no hope of ever producing oil or gas profitably, what are we doing? Producers believe that all of their value is represented in the reserves of oil and gas that they hold. At current prices they’re worth billions of dollars. What isn’t discussed anywhere in the industry, other than at People, Ideas & Objects, is that those reserves are not produced profitably. Never have been and never will be. Not under the current business model. It is flawed and only serves the bureaucrats who operate the industry on the basis that they know people will believe the value they create is in the ground. Unseen and unrealized. This is not a business. A business generates value. Oil and gas has destroyed the investments that have been made in the producers through faulty accounting and bureaucratic mischief. If the value that was represented in the reserves existed as is represented, then the industry would not be subject to these downturns or to the financial disaster that it’s in. Where is the value when the producer always has their hands out for more investment capital and is subject to the ups and downs of the commodity prices?

Cost estimates for the rebuilding and refurbishing of the industry and infrastructure are estimated in the $20 to $40 trillion range over the next 25 years. Are investors expected to line up, invest their money and marvel at it in the ground? The only manner in which the reserves in the ground have any value is on the basis that they can be produced profitably. If they can’t be produced profitably then they’re a drain on the cash of the owner of those reserves or more specifically its investors. Who wants to own that? And if the industry needs that much capital on a go forward basis, I believe, it needs to fund those capital expenditures from the value of those reserves sitting in the ground. And that means they have to be profitable to generate the cash to fuel that investment. Otherwise we are running a scam and kidding ourselves thinking that the money can come from somewhere else. Fools trying to scam innocent shareholders into a failed business model that has proven itself an abject failure.

There I go again. One would think I would be more successful in securing our budget if I didn’t call out the people who are responsible in this industry. You’re probably correct. The damage I see however is complete. And maybe I’m wrong, but I don’t think so. The people who are responsible for this level of damage don’t deserve the respect of anyone. They have deceived and misrepresented the situation and are actively doing it again. They have no plans or discussion about what to do or where to do it. It’s shake the furniture cushions once more and spend the money. It’s not a business, it’s a scam whose purpose is to enrich the bureaucrats and I’ve detailed how they account for their spending. When we see critical comments and news from opposite corners of the industry. Where BP’s Chief Economist says no one can make any money until 2050, where Exxon is concerned they will never earn any money in the oil sands and Lexin Resources operational capabilities have degraded due to financial difficulties to the point where regulators have to take them over, we know the pain is being felt everywhere and by everyone. Pain as a result of the overproduction from overinvestment as a result of over reported profits from faulty accounting. It's time for a new business model such as the Preliminary Specification.

If Exxon was really concerned about the profitability of the oil sands they would do something about it. They don't, they just announce that it won’t be profitable, ever, and that’s that. No one cares in this business. If they did I would have been funded a long time ago. Instead the only treatment I’ve received is repeated visits out back by the dumpster for another round with the baseball bats. They’ve done everything they could to try and silence me and will continue to do so. It’s not that I am unknown in this business, it’s that I am a nuisance. As I’ve stated before, the situation is untenable from the bureaucrats perspective. They're just milking the last few nickels and quarters out of the firms before they parachute out into oblivion and anonymity. Leaving the mess for others to clean up. Or, the lofty prices of the stocks of these producers will fall when the oil price declines. Which would then trigger the bureaucrats migration. Either way we have serious issue on hand.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XXIV

Late last week we had a number of announcements that fall outside of what a healthy industry would be involved in. On Thursday an Alberta regulator suspended licenses of Lexin Resources Ltd citing “Lexin has failed to comply with multiple orders, lacks sufficient staff to manage its 1600 sites…” Noting the company was in default on its obligations for site reclamation and other requirements. Reading some of the information about Lexin, the regulators were getting calls from residents in the area that equipment was disappearing. Upon questioning Lexin, they noted the equipment was sold. Lexin were also unable to source any resources from the service industry without first receiving payment. The service industry has been abused by the producers so badly in this downturn. I’m sure the service industry can only dream of the days when the producers just called them lazy and greedy, but at least paid the bills. Our Resource Marketplace module deals with the issues here. Producers should be ashamed of themselves in how they’ve treated the service industry throughout the 21st century. Bureaucrats at Lexin can now congratulate themselves on a job well done and most definitely know now that they withdrew all of the value out of the company. The second interesting piece of news was speculation of an upcoming Exxon announcement that…

In a signal that the threat is growing more serious, Exxon Mobil Corp. (XOM) is expected in the coming week to disclose that as much as 3.6 billion barrels of oil that it planned to produce in Canada in the next few decades is no longer profitable to extract.

The acknowledgment by Exxon, after the company spent about $20 billion to put the oil sands at the center of its growth plans, highlights how dramatically expectations have changed about the future prospects of the region.

I guess the point would be then to just walk away. Again the bureaucrats have done what they could to extract all the value they could for themselves and now have no plans or use for the properties. I think that they should find a new business model, one that’s based on the Joint Operating Committee and defined as the Preliminary Specification which would put the properties back in the black. A business model that provides the oil and gas producers with the most profitable means of oil and gas operations. The capitulation of a $20 billion investment is not unlike what I see throughout the industry. There is no accountability or desire to do anything. Who cares? It’s at best an engineering exercise to build the biggest and best plants that you can imagine, better than your neighbours, run it until the bureaucrats can’t make themselves anymore money and wait for the regulators to take it over. That’s the oil and gas business.

Drilling rig increases continue on their upward trajectory in North America. Activity is the name of the game here. You must be doing something in order for the investors to believe in the scam. Another 10 rigs this week, but this time it’s different, this time the producers say they have “discipline” and won’t destroy the commodity market prices. I see the price of oil falling as a result of the upward trajectory in rigs. It won’t take to much more to convince the market that the real issue is the North American producers and their bad business behaviour causing all the commodity price difficulties. Who will the producers blame then? OPEC have shifted the focus to where the issue lies and people will see that.

Going back to what BP’s Chief Economist stated a few weeks ago about none of the production outside of the middle east being profitable until 2050. The question that I would have is, if more drilling is being done, but none of it is expected to be commercially viable until 2050, why? The answer is because this has never been an economic exercise. This is a scam so that the bureaucrats can live the good life. Some like Exxon were not so involved, at least they’re being honest about it. Others like Lexin’s bureaucrats are now unknown and unknowable.

Who’s that idiot that’s been jumping up and down for the past decade or so. Screaming about profits in the oil and gas industry. Everyone sure had a good laugh about him haven’t they. I seek to please my audience at all times and I’m glad you’ve enjoyed the show. The seriousness of the issue maybe coming into focus for some. The next six months will not be positive in my estimation as I’ve heard that “jarring gong” of self preservation in late 2016. As more and more people hear it, I hope they’ll find the opportunity that exists for those that feel that they can make a difference. There is more opportunity here at People, Ideas & Objects, working to correct this mess, and to build a better industry.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

Alberta Family and President's Day

No posting today.

My Argument, Part XXIII

These commodity prices just refuse to listen to the producers demands that they stay where they are. The prices only seem to respond to the overproduction of the North American producers. Oil inventories are at record highs. Should have seen that one coming. Natural gas is under $3, which is also somewhat predictable. 2016 was a good year for crude oil prices. Nymex prices were up 49% year over year to $53.26 from $35.42. It has been suggested that I cut the producers a break in my criticism of the industry. That 2016 prices were terrible at the beginning of the year and were much better in the second half. Which is the case of course. My argument is one of degree. A 49% increase in oil prices isn’t adequate to deal with the industry's issues. What is necessary is a tripling of prices from today’s values.

Capital expenditure budgets are being settled and to no one's surprise the North American producers are looking to increase their spending by 50 to 100%. Should have seen that one coming. As the volume of these announcements begin to accelerate over the next month, we should watch the price of oil and natural gas fall back into the abyss that they seem to feel most comfortable in. Producers have no idea what’s going on. I only question where they think the money will be coming from to fuel these capital expenditures. It’s one thing to announce a budget in this stressful time, another thing to have it funded. I should know, I am wholly unsuccessful in having my budget funded. It would be my suggestion that the producers think for two minutes about the business they’re in and instead of increasing their production profile, enhance their business capabilities by funding the Preliminary Specification. Doing so would provide them with the most profitable means of oil and gas operations.

If producers did invest in People, Ideas & Objects and were able to make their businesses viable, they believe that the higher prices of the commodities would introduce alternative forms of energy production into the equation. This myth has perpetuated itself over the decades and is one of the reasons that nothing is ever done. If man can create energy sources that can compete with oil or gas then they should be developed. What we need to do is run the business. There are reputed to be 23,200 man hours in a barrel of oil. That’s a little under 15 man years of physical effort for $53 U.S. Deal of the century to me, and it would continue to be so if the price was $159.

As I mentioned I've heard that “jarring gong” of self preservation and it’s getting awfully loud. I don’t know if it will be the bureaucrats that’ll be the first ones to leave their post at the producers, or the investors who abandon the free falling stock prices of the producers. If one goes, the other is sure to follow. I’ve fought these bureaucrats on all these issues for more than the past decade. They’ve had every opportunity to remedy this. And that, in addition to what I said yesterday regarding storing costs of past production as property, plant and equipment, these two points are what makes this a scam. None of these losses were necessary and the issue, now, is as plain as the nose on their faces. The big problem for the producers is there is not much choice in terms of what to do. The choice consists of waiting for the end, or implementing People, Ideas & Objects Preliminary Specification.

Bouncing around from topic to topic today I note that Devon Energy has achieved a milestone in their fourth quarter report. They have now lost $42.07 / share in the past two fiscal years. What is particularly disconcerting to the shareholders is that the stock is trading at $44.23. Which is 13.6 times cash flow. I do have to give them full credit for catching the religion that I have been spewing here about storing costs of past production as property, plant and equipment. They’ve moved their number of years that they were depleting their assets from 1.93 years down to 1.79 years since just the third quarter. This is the appropriate footing for a capital intensive industry. Turn that capital over repeatedly so that it can generate cash and be used to fuel future capital expenditures, pay dividends and reduce debt. Investments should be made on the basis that they provide returns, not sinkholes. But I'm preaching. The only thing that Devon now needs to learn is that they have to sell their products for enough cash to cover the costs of the property, plant and equipment that they’re recognizing in their annual depletion. That’ll take the decentralized production model of the Preliminary Specification to be in place, and who knows maybe budgets do get funded.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XXII

Keeping our focus on the left coast we have one of the major integrated oil producers located in the balmy state of California. Chevron hasn’t avoided the difficulties in oil and gas. However first, I find the inability of producers to publish full financial statements on a quarterly basis dumbfounding. They seem to understand exactly the level of data that needs to be published to not provide any real information. We know they prepare financial statements. We know that they’re required to publish financial statements. What’s the difficulty in just publishing the financial statements instead of providing about one sixth of the data that shareholders need. There seems to be a trend in terms of the quality of disinformation coming out of these producers.

I’ve commented before that Chevron is the most aggressive that I’ve seen in terms of storing the cost of past production as property, plant and equipment. Their total stands today at one quarter of a trillion dollars. At current rates of depletion that will take 13 years to realize all of these costs, assuming that no more is spent on capital expenditures. That’s a lot of money and Chevron doesn’t produce a lot of money. Their cash flow for 2016 was $13.4 billion. That’s 5% cash generation from a quarter trillion investment. Another difficult to accept number is that 59.04% of that cash flow is dedicated to maintaining their dividend. Free cash flow is negative $9.032 billion. These last three points support People, Ideas & Objects conclusion that oil and gas production needs a tripling of oil and gas commodity prices in order to avoid further financial disaster and industry degradation. The only means in which to achieve this is through the Preliminary Specifications decentralized production models price maker strategy.

If we flip over to the other coast we find another household name in Hess Corporation. Here we have the biggest disaster of the fourth quarter reporting season, so far. We’ve only seen the beginning of the ongoing catastrophe, there are about 60% of the firms yet to report. To Hess’s credit, as I am seeing in a number of producers, they’re reducing the number of years in which they are depleting property, plant and equipment. Moving from 6.83 years to 5.04 years in just the three months since the third quarter. This is the kind of progress that I am seeing at a handful of producers. It is time to rectify this issue and Hess are moving in the right direction on this issue. Still at that, $24 billion in assets generating $795 million, or 3%, in cash flow. These are poorly performing assets. You could buy bonds and be further ahead, particularly when you see that Hess lost $6.173 billion in 2016.

Most of the Hess loss is attributable to taxes payable. Oil and gas companies are expert at deferring their tax liabilities. You can pay your taxes at the time you earn the money, or defer them, and have them come due at the most inopportune time. All this and Hess gets an overall reduction in their production profile of 15% from 368,000 bopd to 311,000 bopd. Their dividend is keeping their valuation in the marketplace around four times what a normal valuation based on cash flow would be. They too are currently trading at 22.6 times cash flow.

If you’re not concerned about the financial health and survivability of these producers and the industry then you haven’t been listening. Here are three household “blue chip” names that have been run into the ground as a result of the overproduction and oversupply of oil and gas. The decline in oil and gas prices have eaten away at the core of these producers and there is nothing left. If we assume that 75% of property plant and equipment are costs that are attributable to past production. Which is what I feel is a reasonable and representative assessment. Then the writing down of those assets would eliminate all of the share equity of each of these producers. I think that is a reasonable way to look at the situation. The assets are not productive in any sense, they should flow to the income statement as a result. What you have left are heavily indebted producers. If they were able to dedicate all of their cash flow towards paying down their debts, it would take each of them four to six years to accomplish that. A lifetime to pay off their debts in their current configuration.

The sum total of all of this is it doesn’t matter if you’re Chevron, Hess, Occidental or Bob’s Oil and Gas. You don’t receive enough for the products that you produce. Through accounting trickery over the past four decades and overproduction these producers have convinced themselves that they were doing something productive. Now it is clearly evident that they’re not and haven’t been for a long time. Storing costs on the balance sheet is a scam that needs to stop. What it represents is the subsidy that the energy consumers have received from the investors of the oil and gas producers.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XXI

I am shocked at the state of affairs at all of these producer firms. The financial performance of these producers in 2016 was tragic and unsustainable. Looking at Occidental Petroleum, with a history of being a first class operation, they have as little as six months to get their ship in order. As with all producers the only way in which to right the ship is to triple the revenues of their existing oil and gas production by tripling the price of the commodities. Occidental has cash flow of $2.519 billion. Negative free cash flow of $247 million. And dividend payments that are $2.309 billion for a cash drain of $2.556 billion. Everything they’re doing is to support the dividend payment. If they should cease to do so, their lofty $53 billion market cap may crash to six times cash flow or $15 billion. They consume a billion dollars in working capital each quarter and have two billion remaining in both cash and working capital. Six months, then what?

Asset sales in the first quarter of 2016 were very successful in offloading some of the poorest performers. They received $300 million for properties that were losing $428 million per year. What is clearly evident from their report is that the market for assets has dried up. Nothing was initiated in 2016. Although Occidental did purchase about $2 billion in assets in the fourth quarter. The generosity of the banks in lending almost $3 billion during the year might be questionable to continue for 2017. Occidental are recording reasonable levels of depletion in the current period. Total depletion, impairments, etc were 80.8% of oil and gas revenues. Even at that pace of depletion the company's assets are being depleted over 6.27 years. The company has retained earnings of $22.9 billion, down from $35.3 billion in the first quarter of 2015. Thirteen billion dollars has been lost in the last two years, fully one third of the value of the company.

Overall the deterioration has been everywhere within the firm. If we assume the People, Ideas & Objects point of view that most of the assets recorded in property, plant and equipment are costs associated with past production. That producers have recorded everything they can as an asset to bloat their balance sheet and over represent their value. Then we have the walking dead. The $32 billion in assets are therefore overstated. The loss of $574 million is understated and the cash flow reported for each of the past number of years and the 2016 $2.5 billion are all overstated. The real numbers are unknown but $32 billion in assets generating $6.3 billion in annual revenues, or 19.6% of assets, 80.8% of which the oil and gas revenues are being recognized as depletion, or 3.76% of assets are net revenues, this money is not performing.

The conclusion that I came to in my analysis late last year was the industry needed a threefold increase in revenues. It was the only solution to get these producers out of these difficulties. That demands that the industry adopt the Preliminary Specification with its decentralized production model and price maker strategy as that solution. Otherwise selling assets requires the answer to two critical questions. How many assets need to be sold and to whom? Simply all the assets need to be sold, and to companies that are not currently in the oil and gas industry. Because those in the industry don’t have any money. Or, having the bank's continue to hang on and keep the firm's cash balance up would end up with the banks owning the industry. Look at the encumbrances that the banks already have. They already own the industry and may soon be managing it. Investors don’t have that much money to give to producers to fritter and waste on overhead, interest and being scammed. All of these solutions, except the Preliminary Specification, put a Bandaid on the critical patient.

The dichotomy is that the producers market valuations are obscenely overvalued. As indicated above Occidental is currently 3.5 times the traditional 6 times cash flow valuation. They are trading at 21 times overstated cash flow. Someone is expecting miracles to arise from the oil and gas industry and that is the difficulty that producers have to deal with. No one is going to provide them with any additional investment dollars on the basis of pricing an offering at 21 times overstated cash flows. So once again we are presented with a chicken and egg situation. Who is the first to bail out of this situation. The investors or the bureaucrats? I’m putting my money on the bureaucrats being the first to bail. Ironically they have the most to lose as they have their personal situation in jeopardy by staying. Investors may have already lost all that they’re going to lose. Whom ever is last, please turn out the lights, and don’t let the door hit you on the way out.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XX

The net result of all these corrupt accounting practices is overstated earnings, assets and cash flow. But no one cares about accounting, the bureaucrats would allege. But the issue is much more than that. Overproduction from overinvestment is the result. If an investor sees the result of investment in a producer increased the assets, earnings and cash flow of the producer then that investor, and other investors, believe that oil and gas is a good investment. It’s not, and it hasn’t been for decades. It’s the place where investments and costs go to retire on balance sheets for decades, while overhead eats up any of the proceeds from revenue. Without a steady flow of investors over the past decades the oil and gas industry wouldn’t exist.

For identifying this slight of hand, developing an alternative business model and focusing on making operations profitable, and a methodology of increasing the value of the industry. This is considered wrong and I’m taken out to the woodshed. If not for the commodity price increases the bureaucrats stock price would never rise. They build no value outside of the changes in the commodities prices. The industry should be building value in good times and bad. Instead we are conditioned to accept that if we achieve one good year per decade then we should be happy with the performance of the management. Some will say, it’s a long term game where the assets of the firm are worth so much more and that makes up for all of the bad times. Unless the producer firm is in the business of selling assets then this is a foolish argument. Besides the market for assets sales is a market, and we’re talking about the performance of the management based on accounting. If you’re only holding out for the big payday decades down the road, while each year you consume ever greater amounts of cash, then you’re being foolish. You should expect both, the big payday and the consistent earnings performance.

I think the current situation, based on the understanding that all is well according to the bureaucrats, is a disaster. The cash and working capital issues in the industry are critical. Losses continue to escalate. The devastation that has been realized by all of the producers has been tragic and epic. I can’t think of an industry that has had this level of damage realized and not had a wholesale level of bankruptcies and defunct companies. There is no discussion of any remedial action, there is no remedial action taken. It is all carry-on as if nothing has happened. What is obvious to me is that the bureaucrats have rode the industry into the ground and are just waiting for the signal to abandon ship. If everyone goes at once then no individual will be noticed or held responsible. The question therefore is who’s going to be the first one to leave? What is happening in the industry is anything but normal. Why is it being presented as normal?

The other day they had a Bloomberg analyst from Detroit on Bloomberg talking about the automotive industry. He said that his discussions with the big three were all about inventory management. How to cut back on production to stop the swelling of inventories around the country. With the increase in inventory the big three were experiencing price weakness and as a result needed to shut-in some plants until the inventory was drawn down. If this is common practice in other industries why is it such a myth that the producers in North America can not use the People, Ideas & Objects Preliminary Specifications price maker strategy. I’ll give you my reason why. It would cause the bureaucrats to do some work in building the Preliminary Specification and then for them to self select. We make bureaucrats redundant in the mid-term. They’d rather ride the industry into the dust first and then walk away to make sure that they’ve squeezed every penny out that they could for themselves.

We are being set up by this scam and are going to be left with the industry in shambles and no one able to run it in the very short term. Then what? I need two things, first our budget and then I will need a reasonable amount of time to build the Preliminary Specification. Cutting off any alternative to the bureaucrats has been effectively done by the bureaucrats. The situation as it stands today is either I’m right in describing this nightmare scenario, or I’m a raving loon. Based on the 26 years of work that I’ve completed to get us this far, and the need for the Preliminary Specification so obvious in the marketplace today, I’ll leave the determination up to you.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XIX

When oil and gas producers are evaluated by the stock market on the basis of six times cash flow. If a producer were to scam an investor this would be the most effective area in which to do so. It would be the ideal opportunity to overstate the value of the producer firm in the eyes of the investors. To state that the oil and gas industries cash flow numbers are overstated would require proof. Which is the purpose of this post here today. In order to make this assessment it is necessary to evaluate what it is that the producer is doing on an annual basis with its capital expenditures. And ask critically what exactly is it that they’ve done?

One factor that we do know that is present in all oil and gas is the decline curve. If no action is taken to work the reserves on a consistent basis the decline in productivity of the wells and the field will become material. Efforts to mitigate the effect of the decline curve include recompletions, drilling laterally, infill drilling and the like. There is a distinct characteristic to these actions in that they’re taken to offset the natural decline in production. My question would therefore be, would these be considered capital expenditures in most businesses or maintenance?

In a world where everything is capitalized, such as oil and gas. Including the receptionists staples and sticky notes. The interest on debt and head office rent. The allocation of overhead is as much as 80% of all of these overhead costs of the producer to property, plant and equipment. This is extreme, what are the exceptions? There are none. I think one of the exceptions that must be considered in terms of whether a cost should be capitalized or not. Is if it was incurred to expand the production profile of the producer, or, if it was incurred to maintain the production profile of the producer. Those two actions are distinctly different in terms of evaluating the performance of the producers management.

The cash crisis at Pengrowth was so severe last year that they did not spend anything on capital expenditures. As a result their production profile decreased by 30%. Maintenance of the asset would have maintained the production profile. Note that those costs would have also been incurred in the current period, just as an operating cost would be. They would have had no residual value as an asset would have had. In essence those costs will have to be incurred again and again in each of the subsequent years in order to avoid a 30% / year erosion in the production profile. A recurring cost just as operating costs are.

We are to believe that capital expenditures involve every aspect of an oil and gas producer. When an investor is promoted into buying an oil and gas producers stock it is on the basis of the next great drilling opportunity. What ends up with their money, however, is that it is expended on overhead and maintaining the production profile that was in existence. Where is the upside? Year after year the producer goes to the market to raise more and more money only to fund their overhead and maintenance? I guess the real attraction is with each subsequent share offering the previous shareholders are diluted once more. That in oil and gas must be what’s called the kicker!

Therefore, I believe that a certain percentage of capital expenditures should be reallocated to operating expenses as a result of being maintenance of the production profile. As a result cash flow from operations would be down significantly in this low commodity price environment. And capital expenditures would be down as well. This would be a more accurate accounting of the performance of the management and consistent with a going concern. One that would be more interested in sustaining itself then annually scamming its shareholders and investors.

We all know the purpose of Generally Accepted Accounting Principles. Things have digressed to this deceptive accounting practice over the past four decades. Allocating overhead was the first “trick” to boost earning and boost the asset value of a company. It also has the effect of increasing the cash flow numbers by recording G&A as capital expenditures as opposed to part of operations. Then interest was added to the list when the 1980’s interest rates hit such high values.The scam has gotten ever more sophisticated over that time frame. From there creative accounting became the only game in town and the basis of how the producers were able to consistently generate investor interest year after year with little to show for the money that was invested. These “attributes” became what are known as Generally Accepted Accounting Principles. Corrupt as they are. When everyone’s robbing the bank then bank robbers won’t be criminals will they.

The Preliminary Specification will establish new accounting discipline and methodologies to report more effectively what it is that the producers are doing. It's time for a clear accounting of what is going on in oil and gas. An accounting that shows the difference between producers. Enabling investors to see who are the real oil men and who are the pretenders. If I was handed the financial statements from an anonymous oil and gas company today I could not tell you if it was commercially successful or not. This has gone on too long as it is. It’s time to fix it.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XVIII

Taken in its entirety the industry isn’t worth a nickle. It drains cash and loses money on a wholesale scale. Its producer organizations are immune to action to correct the issue due to the fact that its bureaucrats are well fed and adequately housed. The past has shown these people expect little of themselves and muddle through. If they score a winning year every decade or two that would be considered superior performance. The reality of the situation is that shale has fundamentally changed the business from scarcity to abundance. Overproduction and oversupply are now permanent fixtures of the existing organizations outcome. What we see today we should expect to see from now on. Waiting for something better to happen is believing in Santa Claus.

Those investors who in good faith provided the funds to the producers so the bureaucrats could spend them and watch those costs glow on the producer balance sheets for decades. Were soon joined by the bankers who were lined up behind the investors and loaned money based on the outsized balance sheets. Leaving the producer with outsized assets and unreasonable levels of leverage. Essentially outsized levels of debt in comparison to the performance of the firm. In a low interest rate environment high levels of debt may be acceptable for a short period of time. However, a plan to deal with that high debt when interest rates do rise would be appropriate for a firm that is so heavily indebted. I’m sure that debt plan is sitting on someone's shelf, along with all the other plans the producer has regarding the other issues they ignore.

The costs of past production remains unrecognized in the property, plant and equipment account on the balance sheets of the producers. For decades they have capitalized every cost they could possibly conceive of and bloated their balance sheets to the level where the ceiling test was invoked. The ceiling test essentially says the asset value of the firm will be below all the future net revenues of the firm. Which is ridiculous. That means that most of those assets will never be produced profitably by the firm. Specifically the future actual overhead and interest costs that the firm will subsequently incur are not accounted for. In addition a producer firm subject to a ceiling test write down is an abject failure. Its spending is not covered by the value that is being generated.

This of course is all accounting speak and no one listens to accountants. That is what you’ll hear on the street regarding the situation in oil and gas. Accountants are retained in order to pay the bills, when they’re told. That is their purpose in the industry. Just as would be the case in any scam. Not recognizing the capital cost in a timely manner makes you look profitable in the short run. Capital assets or property, plant and equipment therefore represents unrecognized costs of past production. With the industry only generating a nickle in value overall, why is anyone carrying any value in property, plant and equipment?

The conclusion that I came to as a result of my recent analysis of the industry is that it needs a tripling of revenues. If so the industry may be able to remediate the damage that has been done and begin to build for the future. Otherwise we are headed directly at the brick wall. Which I think is happening currently. Our nervous system just hasn’t caught up yet. A tripling of revenue would enable producers to retire their remaining balances of property, plant and equipment, recapitalize themselves, retire debts to reasonable levels and be profitable for the long term. This of course assumes that all production is profitable at all times as a result of the implementation of the Preliminary Specification.

Once again I’ve set the bureaucrats hair on fire as a result of stating that we need a tripling of commodity prices. First those prices would be close to their all time highs. Second if it did establish a foundation in which alternative energy sources could be developed then let them develop them. Who cares! Is it worth the destruction of the industry, the service industry, people’s careers, investors and bankers capital, society's costs and the royalty holders diminished income to ensure that alternative energy sources don’t develop? No, besides I really look forward to pocket fusion reactors. The industry needs to quit being driven by myths that are destructive to their well being.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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.

My Argument, Part XVII

Watching this endless cycle of bubbly elation of the producers as the commodity prices show some slightly positive upward momentum. Only to find the elation vanish once the reality that shale producers will fill the void of any diminished overproduction. And the latest quarterly reports show that things are worse than even last quarter, and the worst year on record. Then the industry wide depression sets in and we all find the whole process maddening. Meanwhile the bureaucrats do nothing, plan nothing and just watch the weather for signs of severe cold.

Occasionally we hear one of the producers mention that they too are committed to energy independence in the North American marketplace. It is these attributes of the producers that make me know for certain that they are scamming their investors and the general public. To achieve energy independence, from where we are in the industry today, with every company in the worst financial position that they’ve been in decades. With a continued deterioration in the cash and working capital of all producers. With the investors and bankers looking to the industry with concerned expressions on their faces. Now is the time they chose to discuss the expansion of the industry to meet all of the continent's energy needs? This is not just a scam, this is the boldest scam that has ever been perpetrated on anyone in the history of commerce.

Astute readers will note that People, Ideas & Objects are promoting energy independence. The difference is we have a plan to achieve it. First we build the Preliminary Specification in order to establish profitability over the entire production profile of the continent at all times. Then we deal with the throughput of the industry. To increase our capabilities and capacities we are not going to get to where we want to go from the base that we have today. The people necessary to run the industry will have to be organized. The “big crew change” and other issues will have to be addressed. Such as the way the Preliminary Specification does in the Resource Marketplace module. Then we can approach the issues related to enhancing the throughput of the industry. This also needs to address the aging infrastructure that exists and the need to replace and refurbish much of that in the next generation.

Therefore talking about energy independence without a plan and a means to make the industry profitable. A plan that would seek to return the capital that is currently tied up in the industry, that which is “well defended” by the bureaucrats on those producers balance sheets. A plan that will provide for the return of any additional capital that is subsequently invested. Without these elements within the plan then the plan I would have to say is a scam. The bureaucrats at the producers know what they’re doing. It's a simple manner of holding out the prize to the prospective victims of this scam, without any details of the issues or the resolution of those points. You only have to capture people’s imagination for the scam to work!

We are at a critical point in this process. The scam isn’t really working anymore. As we have documented here many times the “jarring gong” of self preservation, as Winston Churchill called it, has rung. I think that happened in late 2017. The fact that nothing is being done about the situation is evidence of the scam and why I am writing about it today. The producers know that the situation is not sustainable on a go forward basis. They have been devastated by losses and the cash situation in the industry is hyper critical. Action is demanded however we don’t see a thing.

What we will see is the bailing of the bureaucrats from these producers in rapid fashion. Sticking around as the hero that saved the ship isn’t a) possible or b) consistent with the work ethic of the bureaucrat. Insurance companies will advise those directors who they cover for fiduciary duty purposes to bail as opposed to stick around. Once it becomes obvious that the directors are jumping ship, that will be the time when the receptionists and mail clerks step into action. Also known as, its over.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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. 

My Argument, Part XVI

Everyone want’s to own stuff. The more you have when you die, there is supposed to be some benefit. That is the motivation behind the bureaucrats loading up their well defended balance sheets with assets. Companies with decades worth of capital expenditures sit in outsized fashion to every other aspect of the operation. This is what makes you the most efficient and effective oil and gas producer in the industry. If you can spend money, then you’re golden. Accounting seeks to balance the recognition of capital assets in a timely manner. Currently producers deplete their assets based on their production over their reserve base. This is why there is such a small amount of capital that is recognized on the income statement as depletion. Oil and gas reserves are constantly under evaluation and being developed further through additional work and effort. Rarely is a field shut-in and terminated. Therefore the property accumulates spending and releases it slowly over long periods of time. This may theoretically be the ideal that accounting is seeking to achieve, in reality decades of unrecognized costs is a subsidy to the consumers of the products being produced. Particularly when the prices paid by those consumers don’t cover the cost of the operation and additional investment capital is needed to help “build the business.”

Those that have been reading this blog know that I have a particular dislike to this methodology. Leaving assets for 12 to 15 years on the balance sheet disable the company from turning its capital over in an efficient way. That capital investment is just sitting their for 12 to 15 years before the money is ever returned. I believe, that none of the money in oil and gas has ever been returned as each year more is needed from the annual share issuance and the assets only grow in size and the period of time in which they are recognized. If producers were recognizing these costs in a more timely manner, I suggest a three year term, then the capital that was employed in developing those assets would be returned to them in that time frame. This of course assumes that they’re running a profitable operation which imputes that the prices are able to cover the costs of the operation and provide for that profit. This is where the bureaucrats fail to achieve any sense of a commercial operation. They spend and when it comes time to spend some more they go to the markets and raise some more capital. That’s not a commercial business operation. That’s what Pravda would call the five year plan. Or maybe what I’ve been talking about here lately, a scam.

What People, Ideas & Objects propose is that we recognize the cost of capital in the three year time frame mentioned. Returning the capital from the operation to be distributed to further capital expenditures, dividends and paying down debt. Literally a self funding operation, or business. In order to do that the industry has to stop the chronic overproduction and oversupply. In order to do that we have to recognize that the commodities of oil and gas are subject to the economic characteristics of price makers. That small changes in the volumes of oil and gas have large impacts on the prices. We do this by each and every property being evaluated monthly on the basis of whether it is profitable or not. Considering all of the costs of capital, operating, royalties, and detailed overhead. If it can’t be produced profitably then it should be shut-in where it will incur a null operation, no profit, but also no loss.

We would be able to incur these null operations as a result of the manner that the People, Ideas & Objects Preliminary Specification reconfigures the industry and what we call the service providers. The producer is a stripped down version consisting of the C class executives, earth science and engineering resources, some land and legal, and support staff. The remaining accounting and administrative resources are reallocated to service providers who focus on one process and service the entire industry as their client base. So that when the property that is not profitable is shut-in. None of the service providers are conducting any of the accounting or administrative work for that property during that month and the property records no capital, operation, royalty or overhead costs. A null operation. Overhead costs of any shut-in production will have been shifted from the industry itself to the service providers. Who, understanding at any time may see their revenues decrease by as much as 15%, or the amount of industries shut-in production, and are able to budget annually for this contingency. Oil and gas will therefore have a dynamic output of their product. Based on the demand level determined at the cost of the product. There will be no further subsidy of the consumer by the oil and gas investor. This is a business, or it should be. Let's start operating it as one.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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.

My Argument, Part XV

Accounting is the tool that is used to conceal the scam being perpetrated on its victims. In oil and gas accounting has achieved levels of creativity and obscurity that have pushed the envelope to new heights never believed achievable. We are seeing an exceptional performance from these bureaucrats, if only they would apply themselves productively. The lack of clarity has become somewhat of a competitive playground where the level of obscurity has become artistic and sophisticated. Here is a statement that was provided by one of the senior intermediates entitled “Reconciliation of adjusted corporate segment net expense.” Beautiful isn’t it. Who needs balance sheets, income statements and statements of changes when we can have as their replacement a reconciliation of something or other.

Accounting has been standardized and normalized across the continent. This is to make it comparable between companies. Companies in the same industry and companies in different lines of business. Understanding the standard way in which accounting has been prepared enables you to impute how the company producing those financial statements have performed. Accounting is about performance. Mostly about the performance of the money that has been invested by its shareholders and bankers. Was the management prudent and provide value? Or did they mismanage the resources they were entrusted with. With accounting being standardized the reader knows that certain things are done in a certain way. Accountants prepare financial statements based on prescribed policies and the audit firms audit to those policies. Standards.

So let's apply some standards to the “Reconciliation of adjusted corporate segment net expense” of this senior intermediate across the industry. We have no idea what these numbers mean and what they represent. No one else in the industry, or any other industry, is preparing a statement such as this. Therefore we are unable to determine any performance related information or meaning from this treasured statement. What is it and what does it do? I have no idea but it must be important because it replaced the balance sheet for that producer. I am seeing this slight of hand amongst the producers more and more during the 3rd and fourth quarter of 2016. I felt that it was out of control then but now it is epic. We have to remember that the cash situation in the industry is at a crisis level. Working capital is a term used in accounting, but not in existence in oil and gas. Debt is at disproportionate levels in terms of what the real assets values are. Debt covenants are in many cases coming into play. So yeah, why would you publish a balance sheet and announce to the world that you're in financial trouble?

You can’t send out a glowing press release stating that the company is doing so well and the future never looked brighter. That you’re literally walking two feet off of the ground. And then publish a balance sheet that shows you are in default on your debt with no working capital and your revenues are collapsing from production declines. So change the financial statements to reconciliations of something or other and put those out with that glowing press release. That is how you do it in oil and gas.

During the financial crisis Bernie Madoff continued to produce statements to his victims that showed he continued to perform as he had throughout his history. The world had seen a 50% decreases in the value of their holdings yet he was able to avoid everything and still earn what he had consistently earned. The parallel in oil and gas is that if you want consistent and comparable statements between periods of time and between producers don’t look to the financial statements, look to the press releases.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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.