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. 

My Argument, Part XIV

Thank god the groundhog saw its shadow. Otherwise I think that natural gas prices might have dipped below $3. Producers don’t know what to do, the “market rebalancing” myth in natural gas seems to be coming into effect. This as a result of the industries bureaucrats planning and implementing the destruction of the industry since 2009. Their current thinking is that maybe during 2018 the decline in natural gas deliverability will be precipitous, and as a result, the long awaited natural gas price increase will arrive. Until then we have groundhog’s to drive the business decisions. My money will be on shale gas once again overwhelming the markets if the price begins to increase. Remember that shale gas went from 10 bcf / day in 2010 to 45 bcf / day in 2016 to provide 64% of U.S. supply. That’s an incremental 5.8 bcf / day each year in just the initial phase of shales development, what could be done now? We should ask Punxsutawney Phil.

On a lighter note, ask a producer, any producer for that matter, what the historical cost per barrel of a property is. Detailed between capital, operations, royalties and actual overhead incurred to manage the property. If you by chance found an honest producer they would say, “we can’t, we only deal in fudge here.” You need to ask detailed questions about the overhead that is recorded at the property you're reviewing and the overhead that you know those layers of people downtown are incurring. Therefore ask to see the properties accounting charge for the production accountants time. There isn’t one. Overhead or G&A costs in the industry range from 2% to 20% of the revenues of a producer and are part of the total overhead that is charged directly to the producer who is the operator. Note none of the non operators participate in paying the actual overhead costs of the operator. The operator in turn charges overhead allowances based on the Council of Petroleum Accountants Society guidelines for overhead to the properties. These overhead allowances are inadequate in capturing the real cost of administering a property.

And what do you do with all the costs of those people in head office administering these properties if they’re not charged to the properties. Oh, there allocated between overhead that will show up as G&A on the income statement and overhead capitalized to property, plant and equipment on the balance sheet. Of course those overhead costs that are capitalized to the balance sheet will eventually be “well defended” by the officers of the corporation. I still don’t know what “well defended balance sheet” means, or even if it’s supposed to mean anything. Anyway, if we assumed that a producer was allocating their overhead costs 50/50 then the range of overhead costs for the industry would be more like 4 to 40% of revenues. Which makes these numbers much more believable.

Ever see those big buildings in the big cities where oil and gas companies have their offices. That’s where all the people work. People cost money. Buildings cost money. And people spend money. When you stack them up 40 floors at a time they must come at a discount because these costs don’t seem to be showing up anywhere in the oil and gas firms. Most of these costs are capitalized, which is a big part of the deception of telling people you can produce profitably. Never recognizing the costs of exploration and production, or overhead, for decades, allows you to say whatever you like. And as much evidence as I have, and the decades that I have worked in oil and gas, it would be difficult for me to tell if their “actual” accounting or their “recycle costs” were more accurate. The Preliminary Specifications decentralized production model eliminates this slight of hand and begins to detail the actual, detailed costs of oil and gas exploration, development and production. Capital, operations, royalties and detailed actual overhead. Then a producer can say it's profitable or not. And not being lying about it.

If there was a clear, detailed, actual accounting of what is going on in this business then the bureaucrats would have been shown the door a long time ago. Running a scam is the best that they can do until such time as they’re shown the door. They have completely destroyed the industry and the service industry. Destroyed people’s careers. Ran an unprofitable operation that hasn’t paid its fair share of taxes to provide for society's benefits. Short changed the royalty holders by destroying the commodity markets through over production. We talk about the point in time when action is required. The “jarring gong.” That has passed, and there is an “unproductive” motive driving these producer firms. I think I’ve been clear as to what I think that motive is. These bureaucrats are just hanging on until someone pushes them out of the way. So let's do that.

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 XIII

Think of all of the investment capital that has been invested in oil and gas. And none of it produces a profit. What’s worse is that according to the financial statements being published now, oil and gas has never been produced profitably. We see this fact clearly when you consider that the bloated balance sheets of producers today, only hold the unrecognized costs of past spending binges of yesterday’s production. Yet at the same time retained earnings are rare, and in some cases shareholders equity is rare. All have been eliminated by the losses incurred by the bureaucrats. That is the extent of the damage to the industry. Yet these bureaucrats consider nothing is in need of attention. Its full, unconstrained promotion of the producer firms. You have a fundamental business change in the development of shale. The collapse of the commodity markets. Yet it’s no one’s fault because it can’t be OPEC’s anymore, now that they’ve implemented their agreement.

Commodity prices are showing weakness in the futures markets. Both oil and gas commodities are showing that current prices will be what’s available throughout the next eight years until 2025. Exciting isn’t it. The quarterly reports are all showing that each and every company is losing more than they were in 2015. The year that it was reputed to be the worst year in the industry. We can therefore conclude, with no change in commodity prices and the vast level of stored costs of past production sitting on producer's balance sheets, that no money will be made until at least 2025.

The escalation of drilling rigs since May of last year is indicative of the mindset of the producers. Like the junkie “more” is all that they can consider. It is claimed that these of course are being drilled “profitably” by each and every one of these producers. The costs of oil and gas exploration have decreased to the point where it’s profitable to produce at $30. Then why is everyone reporting losses at $53? With OPEC reducing output and North American producers rushing in to take up the slack, whom is it that’s responsible for the overproduction and oversupply?

We should revisit the producers friend the “recycle cost” that is the determinant of the $30 profitable oil. The last thing that the recycle cost is based on is historical accounting data. It is based on a wish list of optimistic possibles that might be the case. If the situation were to be those “best case” elements then maybe the cost of the operations would be as good as the recycle costs suggests. Historical accounting however shows that the actual costs are much different. Stating numbers that the producer would be profitable at, which do not have a historical cost basis, would be a scam being perpetrated by the officers of that corporation.

The producers will say, “the accountants would certainly have a different take on it. We don’t deal in sunk costs.” They never want to account for their spending. If they park all of their costs on to the balance sheet for decades why would you account for these costs in terms of the cost per barrel today? They don’t and the officers that parrot the “recycle costs” are knowingly deceiving their shareholders and the public. Their financial statements prove that. The determination of “recycle costs” are complex and sophisticated. The producer determines the current price of the commodity. States that there recycle costs are the price minus the profits they need, and the remainder would be the recycle cost. So today at $53 you would be profitable because your costs are $45. Presto! Some would call this lying, I chose to use the industry wide term of “recycle costs.”

As a result when a producer looks at their operation all they see are profitable properties. So when I suggest that the Preliminary Specifications decentralized production model would shut-in any unprofitable production they know, intuitively, that they will never have any shut-in production because all of their production is profitable at any price. Therefore there will never be any need for the likes of People, Ideas & Objects.

So there you have it, you’re stuck with what you have, producers who lose money faster than they can spend it, state falsehoods at any time about critical business facts, who will never accept their role in today’s and tomorrow’s problems and continue on in their own personal best interests with your money. They call it the oil and gas industry, I call em as I see em.

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 XII

The bureaucrats aren’t happy with me. Exposing their scam doesn’t sit well with their plans to keep their gravy train rolling. What other conclusion can you come to when you see that the business, as it currently stands, is not only unprofitable but also doesn’t offer a future. Where the accounting, which has been suspect for four decades, and like all accounting scandals, skewed the businesses development in negative ways. With the officers out pitching the next great thing, actively selling their producer firms as the strongest ever, with the best opportunities. Meanwhile the only reasonable critique of this scam, People, Ideas & Objects, is getting the baseball bat treatment out back by the producers dumpster. I could forgive this if I saw a plan, something that addressed the difficulties presented by the changes brought about by shale. Something that would make shale commercial, but it's just another day to these bureaucrats.

People, Ideas & Objects Preliminary Specification has a value proposition that is in the trillions of dollars over the next 25 years. Currently assessed in the $25.7 to $45.7 trillion range it provides this through two critical elements that are missing in the current producers business model. The first is our decentralized production model’s price maker strategy. We believe that oil and gas prices need to be at record levels in order to cover the costs of exploration and production, and the price maker strategy enables producers to only produce profitable production. Any unprofitable production is shut-in and as a result it incurs a null operation, no profit but also no loss. As a result the oversupply and overproduction is ended and the prices will seek the market equilibrium. The second element of our value proposition is that the capital that will be used to rebuild the industry during the next 25 years, and the capital that has been used in the past, will be returned to the shareholders.

Our value proposition is skewed towards the investors in the industry. A profitable oil and gas industry is also an overall benefit to society in general. There is however, nothing in our value proposition of material value for the bureaucrats. There compensation is fixed and they earn it whether the industry is doing well or it’s in the dumpster. Nothing can affect the value that they’re able to extract from their producer firms. There is also no upside in terms of the producer's output. If the producer is highly profitable and efficient, that only means the bureaucrats are working that much harder. And when we discuss the implementation of the Preliminary Specification, that empties the room over talk about the level of effort necessary to make it successful. Bureaucrats never want to work that hard. Why, they have a good thing going.

They’ve done nothing, yet had every opportunity to do something. When I pointed out several years ago that the current situation was where we were heading, they laughed stating profits were not important in oil and gas. Things were great then as far as they were concerned. Now that things are as bad as they are they think, as their experience with so many other bad times before, the good times will soon arrive. I’m not so certain of that. Shale has changed the business in fundamental ways. From scarcity to abundance.

Desperate times lead to desperate people. Cash has been the rarest commodity in the industry for the past year or more. The scam is getting to the end of its days in terms of its effectiveness in convincing investors. And we know that the principles in these producer firms are innocent of any wrongdoing. They were unaware and ill advised. Just like those in the prison system today that claim that 90% of all of the prisoners are innocent. Undertaking the fiduciary duties of an officer of an organization is done with the understanding that the responsibilities and obligations are hardly ever invoked, our friends the bureaucrats would say. Claiming innocence is the first step to ensure that is the case. The second is to tender your resignation. My message to these officers is that whatever you do, make sure you don’t say you didn’t understand. Ignorance of the law is no defence. If you say that they’ll come after you for sure.

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 XI

The trick for the current oil and gas producer will be to not read the prior two posts of this blog. There is nothing positive there for you, and I advise against reading them. And for that matter, if I were them, I’d probably skip reading this post as well. Don’t let anyone say I don’t play fair, I won’t have it.

The situation we detailed on Friday was that the business was untenable. BP’s Chief Economist noted that it would be in the best interest of the OPEC producers to produce what they have and provide the market at whatever price is offered for the next 32 years. With the abundance of supply on hand, stated as being double what is needed to 2050, those low cost producers would find that they would be profitable, but their margins would be slim. For high cost producers like those in North America, you’re out of business. That in essence was the message.

Monday we detailed the methodology behind accounting scandals, past and present. How the innocent were usually caught up in trying to do the right thing, being falsely accused and spending time in prison. Those that may have read the detailed histories of Worldcom and Enron may have seen how unfairly those companies were treated. That there are parallels to the oil and gas industry and People, Ideas & Objects hope that none of the bureaucrats in this industry are ever sent to prison. After all they were only doing what everyone else was doing. They were only competing within the industry and they didn’t know that it was wrong at the time. Give them a break.

Today, with those two posts in mind, we note the narrative in the industry is rainbows and unicorns. The times could not be better and the opportunities never so strong. If you as an investor bet your money, or is it invest your money, I can never remember anymore, you could win the biggest prize of all. Coming from Calgary I have to say that we’re probably better known for the scandals and scams then we are for any business success. We’ve seen them all. Back in the early 1990’s we had this Gold mining company named BreX. If you're interested you can catch Matthew McConaughey’s new movie Gold which is based on that story. What BreX did was find an unbelievable gold mine in Indonesia. It was only unbelievable because they were salting the samples that they sent to the lab to determine how much gold was held in reserve. The scam only fell apart when someone went back to the samples and found that the gold in the samples was placer gold. Which is gold that is only found in rivers, not mines.

Kind of feels like the 1990’s to me in ways. Looking behind the cheerleaders the producers are putting out in front of the investors is rather distracting. However, I have to admit effective. The show must go on. And it is. We spoke of the market capitalizations that my analysis over the holidays showed of the industry. That producers were very highly valued in comparison to their cash flow numbers. Those overvalued cash flow numbers, just like the overvalued earnings and assets. Those are financial performance over valuations. Here I’m talking about the price of the stock being overvalued on the order of three to four times. I suggested that this enabled positions to be liquidated and John Q. Public left holding the stock while it crashes and the company's officers skedaddle. With the earnings reports I’ve seen so far, I think this is highly probable.

Does anyone doubt that shale changed the business? What changes in the methods of operation have the producers undertaken to deal with shale? How have they made shale commercial? What plans do they have to rebuild the aging infrastructure? Deal with the big crew change? Or just move on in a manner that is viable? I haven’t seen anything. But when someone invites me into a dark room I generally run the other way. So they maybe talking amongst themselves about these things in that dark room and we’re just not aware of them. I’m sure that’s what’s going on.

The challenges and opportunities moving forward are the most significant in the industries history. Those were somewhat detailed in BP’s Chief Economists comments about double the supply of oil to 2050. Where’s the plan? What are we doing? I have proposed the Preliminary Specification and have been ostracized for it. Producers have done everything in their power to keep me quiet over the last decades. Why, am I screwing up the scam? Apparently so.

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 X

At the turn of this century we were blessed with a number of accounting scandals that made for interesting reading in the business papers. Two that captured the hearts and minds of everyone were companies by the name of Worldcom and Enron. Click on their names to be taken to the Wikipedia page of their rather checkered histories. These were public companies that were subject to annual audits by the likes of the first class accounting firms such as Pricewaterhousecoopers and Deloitte & Touche. At the time there was another premier audit firm by the name of Arthur Andersen who did the audit of Enron. When difficulties began with the company and questions began to be asked of the auditor, Arthur Andersen did what any prudent first class accounting firm would do. They shredded the Enron audit files. And that is why there is no Arthur Andersen in the marketplace today. There is however, one of the best advertisements ever.

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.

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 IX

I think I found the triggering mechanism that makes people realize that the oil and gas industry is in crisis. It was stated on Wednesday by BP’s Chief Economist Spencer Dale in World Oil. Here’s the quote.

The world has enough oil reserves that can be extracted with current technologies to be able to meet demand two times over until 2050, Dale told reporters in London. As demand growth tapers, holders of these resources could potentially decide to produce sooner rather than later, he said.

Abundant Reserves

“Over the long run, there seems to be increasing incentive for those producers that hold lots of low-cost oil” to rethink the strategy of rationing production, Dale said. “The view that a barrel not be produced today, but produced tomorrow,” may become less compelling, he said.

This is the logic that producers have adopted in the marketplace today. We have so much oil and gas in reserves, just get it onto the market. Is this the wise and prudent strategy in which to approach this abundance of resources? No, it becomes a race to the bottom where everyone loses forever. If you could also defer the recognition of the capital costs of the producer in this capital intensive industry you could convince your investors that you were making money for a while. This could keep the treadmill of new and progressively more naive shareholders available to the producer firm. Keep them lined up and sell them a story that never comes true.

If the Saudi’s et al are realizing that the North American producers have so destroyed the commodity marketplaces that it makes no sense to hold reserves for tomorrow. Then the North American producers should congratulate themselves on completely destroying the industry. No one is going to touch this industry again, that is until 2050. This has to stop. There has to be a better way. The more logical and valuable way is to recognize the value that is inherent in each and every molecule of energy. That it is irreplaceable and should be cherished to ensure that it is not wasted. We have a responsibility to our own future to ensure that all energy is produced profitably from this point forward. And conversely, the largest consumer of oil and gas will be the most economically productive in terms of its GDP. Energy provides mechanical leverage over labor. We should seek to use energy in every application possible. The consumers value proposition of a barrel of oil at $50 or $150 is undeniably irreplaceable and invaluable.

We therefore need to recognize the crisis that is the oil and gas industry. Production, as a result of what the BP economist is saying, consists of a race to the bottom. There is no understanding or appreciation of value of the commodity or the money that the investors provide. Everything for the past four decades has been a waste. As it will be until 2050. The tragedy is that there is nothing outside of People, Ideas & Objects that recognizes or appreciates these facts. The producer organizations are designed to enhance the bureaucrats lifestyle and accommodate their needs exclusively. The impact on society of the oil and gas industry is negative from the point of view of the people it discards as surplus from both industry and the service industry, the money it loses from investors and bankers and the opportunity costs lost in paying dividends, royalties and taxes. If this is not a crisis it certainly qualifies as a tragedy.

Now if we turn our attention to the prolific nature of shale reservoirs, the crisis deepens and the tragedy takes a much darker turn. This initial phase of shales impact has been felt and the business is in tatters. Remember the U.S. holds 17% of all shale reservoirs in the world. What’ll happen when the rest of the world learns the technologies that have so far destroyed the industry in the hands of those that do not care.

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 VIII

There is always a possibility that I am incorrect in my assessment of the oil and gas business. There could always be another commodity super cycle that would make the current producers business model valid for a while longer. Or investors and bankers could be using oil and gas for purposes other than profit. What those would be I'm not aware of or pretend to understand. What People, Ideas & Objects needs is that “jarring gong” of self preservation to hit the industry before any action will be taken to develop the Preliminary Specification. My argument is to provide the oil and gas industry with the most profitable means of oil and gas operations. We have the Preliminary Specification to provide the business model for when people do realize that the status quo is untenable. Which brings to mind the Milton Friedman quote.

Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.

I am pleased to say that with the Preliminary Specification we are prepared to deal with the future of the oil and gas industry. One that is profitable, innovative, dynamic and accountable. An industry that will have discarded its “muddle along” strategy and took proactive actions to bring about energy independence in North America. There is much talk about this possibility. Shale makes it real however with the financial performance of the producers we will never achieve that objective. The current business model is too dependent on investors to fuel all of the capital demands of the industry. The investors have subsidized the consumers of energy for the past four decades and I am at a loss to see how, with the state of affairs as they are, we are going to move forward from here on the financial base that we have, the operational base is incapable of being profitable, and yet we believe we can just wish energy independence into existence?

If as I suspect, Donald Trump will be the president for the next eight years, or as long as he desires. We have seen in the few months since he was elected a new business attitude begin to develop. Just this week, with the full power of the white house, more has happened than in the past eight years. Our long protracted progressive nightmare is over. As more and more success is attributed to the president's policies, the more garbage he will be able to wipe away. This progressive nightmare began in the 1960’s and has continued since then. We’re now getting back to business and it's about time. Hollywood and Madonna will be upset but they’ve had their run.

So what would happen if producers changed their minds regarding People, Ideas & Objects and the Preliminary Specification. That producers heard that “jarring gong” and realized that these alternatives to the existing policies were necessary. I’ll be the first to admit that there is no way in the world that the Preliminary Specification will ever be implemented in a normal environment. It is politically impossible for it to be adopted by healthy, profitable organizations. The crisis however is here. That is my perception but also the reality if you critically read the financial statements of the producers. There has been a rapid deterioration in the health of all of the producers over the past few years where many are carcasses strewn across the landscape.

Yet the producers behaviours haven’t changed. This week we heard of a sizeable gain of 67 new rigs being deployed in the United States. OPEC, I believe became tired of being the scapegoat for the oil price collapse. Certainly they changed their policies and created the downturn in the price of oil. However the downturn in the price of oil was inevitable. The U.S. producers had doubled their production of oil in only a few years. If OPEC didn’t act to hold market share, they would eventually lose that market share which would be difficult to reclaim. The story in the past year became it was OPEC’s fault. The U.S. producers had nothing to do with it. Now we see OPEC reducing production and the U.S. producers rushing in to fill the void being made by the cuts from OPEC’s agreement. I think we can now see clearly the behaviour of the U.S. producers is unchanged and the source of the issue of overproduction and oversupply unresolved. When we also see that producers depend on willing investors, I think, the continuation of that behaviour may be a bit much to ask. There is no discipline in the industry, overproduction will resume very shortly. Does anyone doubt that, and do we really have to go there?

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 VII

One of the areas that I have difficulty in accepting about the cash flow numbers of the oil and gas producers. Is what I believe to be an overstatement of those values as a result of the accounting that is done. If we look at the capital expenditures of the producer firm. And we look in hindsight at the production profile we see that not all of the capital expenditures were dedicated to increasing the firm's production profile. The reality of oil and gas is the ever present decline curve, particularly in shale. Should we look more critically at the capital expenditures of a producer and determine which dollars were spent in maintaining the production profile, and those dollars that were spent in expanding the production profile.

This goes to the heart of the issue of capitalizing everything under the sun. If capital expenditures are to maintain the production profile why would they not be considered operating costs. If they were they would reduce operating cash flows substantially and more accurately capture the activities and value that the firm is engaged in. This would immediately reevaluate the company's market capitalization and enterprise value in today’s environment. These reduced cash flows would more accurately relate to the state of the industry and producers would have to realize the three fold increase in revenues to record commodity price levels in order to better evaluate their firm. Having everything deemed to be a capital expenditure makes the cash flow overstated, in my opinion, just as capitalizing everything to the balance sheet will overvalue the firm's assets.

As we can see everything in oil and gas accounting is skewed to overvaluation. Assets, cash flow and earnings all are affected by the policies that are in place within the industry. This industry “norm” has enabled producers to believe that they are productive, contributing members of society when in fact they have been a financial disaster. It is only after four decades of this accounting treatment that the evidence of the issues in doing their accounting in this manner is becoming evident. Essentially the value that is contained within the entire industry's infrastructure, that is the entire producing infrastructure in North America, isn’t worth anything as it is a cash flow drain with catastrophic losses. The only measure in which to turn the industry around from this point is to triple the revenues to record commodity price levels of the producers for a sustained period. These revenues would be able to remediate the destruction that occurred these past four decades. Investors and bankers have invested in good faith, now own an industry that is a drain on their resources, and have indeed subsidized the consumer for their energy needs for these past four decades. The amount of the consumers subsidy accurately reflected as property, plant and equipment on the producers balance sheets.

Oil and gas is a capital intensive business. The way it is run today is the capital is raised, spent and sits for generations on the firm's balance sheet in their entirety. Turning around the capital to be used again and again is never done. It has always been believed that you just raise more money each and every year. Spend that, and then add it to the pile of never depleted assets on your well defended balance sheet. Whatever that means exactly, I don’t know. Producers have to begin to turn their financial resources over in a much quicker fashion. By doing the above, recognizing that most of their capital expenditures are to maintain their production profile, having those capital expenditures recorded as operations will return that capital back into cash within the current fiscal period. That is with the one big qualifier. If the firm is run like a profitable business and not an engineering exercise. It employs the price maker strategy of the Preliminary Specification and realizes the prices that make the producer a truly profitable operation.

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.