And We're Back...
With the Preliminary Specification producers overheads become variable based on production. Therefore they are able to shut-in any and all unprofitable production. And they will know what is unprofitable because their actual overhead costs are charged directly to the property, not the corporation. Therefore they can vary their production profile to any level, determined by profitable production, and remain profitable at all times. Any shut-in properties will incur a null operation, no profit but also no loss as a result of the Preliminary Specification making all of their costs variable. Ensuring that their profitable properties are no longer diluted by their unprofitable production.
Producers state they earn a return on their bloated balances of property, plant and equipment. I would argue they don’t. Capital, which consists of anything and everything in oil and gas, including the Post-it-Notes and phone service charges of the receptionist. Capital just accumulates in property, plant and equipment and therefore the real costs of exploration and production, in the capital intensive oil and gas industry, are never recognized. Therefore profits in oil and gas will always be highly overstated as a result. Making the return on those bloated assets balances also appear overstated than what they would be if they recognized the real cost of exploration and production. In the second quarter of 2017, reports of the 23 companies that we follow, their asset life increased from 8.94 years to 9.58 years. An increase of .64 years during the passing of .25 years. And reported second quarter earnings of $2.4 billion. This sleight of hand shows the industry deferred the recognition of $32 billion of losses, in my opinion, and is only one of the many methods used by producers to conceal the reality of the situation and never recognize their costs.
Being honest about your costs does not’ help the return argument nor the fact that investors have shunned the industry for the past number of years. Since June 30, 2017 these 23 producers have experienced a further drop of $27.3 billion in the value of their stock. Recording a market capitalization of $391.6 billion down from $523.8 billion only ten and one half months ago, a loss of $132.2 billion. Fully one quarter of the value of the producers is gone in just this single year’s mindless drift of “market rebalancing.” What it also shows is that no one is buying these financial statements anymore. The systemic capitalization of every conceivable cost is well known by the marketplace and what those policies implications are on the financial statements. Only the producers seem unaware that the cash shortfall that these policies create, which were funded by the annual investor fleecing, which are all but distant memories now.
Take a critical look at the state of affairs in the industry and you will see that there is no choice for the industry today. They must implement the Preliminary Specification in order to survive. These are hollowed out carcasses that have little residual value outside of the Post-it-Notes on the receptionists desk. These accounting shenanigans have hid the fact that the industry probably never once made any money in the past four decades. All of the money that was raised from investors went to subsidize consumers use of energy through lower prices. And that money is irretrievable. Tomorrow we’ll look at the prices producers need to “make” with the Preliminary Specification to resurrect themselves from their current walking dead status.
Or I could be wrong and there’s a fresh batch of investors waiting to put their money into these producers. To give them another chance and allow the bureaucrats to live the highlife just a little bit longer. Investing on the basis of a shareholding that is supported by those bloated balance sheets. Where these investors will end up paying a huge premium for each share their granted due to the wasteful spending that has occurred in the previous decades and represented in those “well defended balance sheets.” Wasteful spending due to the inability of any of these producers to stand on their own without systemic investor or banker cash infusions. The industry as a whole is unproductive and is a cash drain. The wool has been pulled over so many people’s eyes in the past four decades by the oil and gas industry, that the only ones that can’t see this new reality are the producers themselves. What I’m saying here on this blog is not rocket science, it’s basic business understanding. Basic it would seem to anyone outside the bureaucracy of the oil and gas producer. If we took a walk down the road to where we expired these obscene balances of property, plant and equipment what would happen? That’s right, the total asset balances of the producers would remain the same. The configuration of their assets however would be different. They would have very small balances of property, plant and equipment and vast amounts of cash and marketable securities. So why is it such a hard sell to convince these producers to do the right thing?
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.