My Argument, Part X
To draw a parallel to our current troubles in oil and gas to those accounting scandals at the beginning of the century might be what people think I’m imputing. Let me be clear. There are strong parallels between the Worldcom and Enron accounting scandals and the systemic way that accounting has been done in oil and gas. The other day I detailed how the assets, earnings and cash flow of the producers are all overstated. Materially and for the past four decades. Using the SEC’s requirement that the value of the assets recorded on the balance sheet of the producer will not exceed the independently evaluated oil and gas reserves, times the current commodity price, at any time. This has led to all manner of recording of every conceivable cost as an asset on the balance sheet. Costs such as interest expense and overhead are systemically charged to property, plant and equipment. Once there, these costs never leave and will only move to the income statement after decades in some, and in most instances.
Although the SEC states that this is the accounting requirement. It does not provide license for each and every producer to reach that level, known as the ceiling test, each and every fiscal year. The value reached by recording the assets at just below the threshold of proven reserves times current prices. Is essentially saying that the assets are just slightly less than the entire future revenues of the producer. This being useless information, ridiculous and anyone with a brain in oil and gas knows that. Who has benefited as a result of the ability of these producers to overstate asset values, earnings, and cash flow? And where are Arthur Andersen’s competitors in applying some level of reasonableness to the process? Do they not have a stake in the credibility and integrity of the accounting information that is put out by an industry such as oil and gas? Or did Arthur Andersen establish the new standard?
I think we all heard that distinct sound of a paper shredder starting up. No worry we still have the .pdf’s. Earnings season has begun once again. If you compare Chesapeake to the history of Worldcom you’ll find that Chesapeake’s history is eerily similar, but far more advanced. Where Worldcom was forced into bankruptcy, Chesapeake was only beginning. Their current CEO states that they’ve never been in better financial position. Which is a statement that can’t be supported by any fact and I would advise him to be careful!
There is a mechanical methodology to accounting. That although you can massage the numbers in the short term for your benefit, there will be some commensurate pain that has to be realized in the future. Producers have avoided recognizing their costs for so long that they now have them being recognized at the wrong time and at the wrong velocity. What I have seen so far on the earnings front is making 2016 look like the worst year in oil and gas, not 2015. But still no one is acting responsibly. People, Ideas & Objects have given them every opportunity to correct their ways by implementing the Preliminary Specification, why haven’t they? Telling isn’t it. In the movie the Big Short the quote “Tell me the difference between stupid and criminal and I’ll have my brother in law arrested” is appropriate here. Producers will say that they had to compete. That everyone was doing it. Or they didn’t know. Bernie Ebbers the CEO of Worldcom and Jeffrey Skilling the CEO of Enron are spending the rest of their lives in prison for this kind of stupidity.
So here’s the big problem. That over reporting of earnings has created a rush of investment into the industry. That over investment has created overproduction, which on a real basis does not perform as economically as it is reported to be. This has been on the sustained basis of the past four decades. Now the industry must deal with these three major issues. No performance on their invested capital, overproduction, and the accounting scandal that has been perpetrated against the investors by the producers. Investors even have a name for this, they call it the roach motel, money goes in, nothing comes out. But let's be honest, the bureaucrats are happy.
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