OMG!!!
The source of the issue is the results of inappropriate accounting dictated by the SEC for the past four decades. Specifically Full Cost and Successful Efforts. This accounting has created the appearance of a profitable, well capitalized industry when in reality it never was. This accounting fuelled over investment that has lead to the overproduction that we now have. The industry operated on other people's money and was never sustainable on its own. After four decades it is culturally ingrained within the industry, and these issues were therefore unseen by most. Now that the investors and bankers have ceased their investment activities, and due to the inevitable poor performance, this crisis is now clearly evident.
Cash is truly king. General field operations, in all instances that I saw, consumed cash. In some cases producers relied heavily on the service industry to fund this cash shortfall. Negative working capital has always been the status quo in oil and gas. It therefore wasn't long for it to degrade to disaster proportions when the regular capital injections ended. Another contributing factor to this problem was the diminished role that hedging played in helping the producer through these times. Those hedges at handsome prices have all but expired and now producers are fully exposed to the commodity price declines. In many of the company's, revenues can only be described as evaporating. Losing up to 50% from the first quarter of 2016!
The market for acquisitions and divestitures was very quiet through the quarter. With the lack of cash and available investment that might be understood. It could also be a pricing issue with a purchaser unwilling to pay high prices for an asset that subsequently consumes cash.
Generally field operations were cash neutral at best across the industry. When everything was considered, reported losses were in excess of those reported for the same period in 2015. Which was unquestionably the worst year ever in the industry. Layoff notices, which started with Conoco, may hit fever pitch once there are enough announcements that a producer can hide their announcement in a crowd of layoff notices.
There has been a lot of discussion regarding “protecting” or “strengthening” the balance sheet. These discussions are disingenuous and push the envelope of what is acceptable. My argument, as I stated above, is that accounting for capital assets has caused this problem. Capitalizing every penny you spend and keeping it on the balance sheet for decades is only permitted by the SEC in oil and gas. In other industries the inverse situation, of the firm rarely being able to capitalize any of its costs, is the SEC’s prescribed methodology.
I therefore look at the producer from the point of view that the assets have been bloated over time and are stratospherically overstated. I would also argue that with none of the field operations generating any cash, with all of the producers losing money and with no plans to deal with the situation. We should correct for these by writing off the remaining net balance of property, plant and equipment. Doing so puts the producer in the right context to the situation that the industry is in. This is an accurate reflection of the difficulties that we are faced with, and is acceptable in my opinion. The entire North American continents asset base appears to be unsustainable. Therefore what value other than $0.00 can you assign to it.
“Market rebalancing” has failed as the commodity prices begin to fade from systemic overproduction once again. If producers don't address these issues immediately they will seriously damage their organization. Acting as if all is well is putting lipstick on a pig. Investors and bankers can see what's going on and would be unwilling to front any money to a delusional industry with no plan to solve its real problems. People, Ideas & Objects our user community and the service providers have a plan that deals with these difficulties. Producers need to call me in order that they can subscribe.
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.