These Are Not the Earnings We're Looking For, Part XII

One thing that the Preliminary Specification provides is a performance basis of evaluation of the producer firm. Since only profitable production will be enabled through our decentralized production models price maker strategy. Producers will seek to maximize profitability at all times by ensuring that their unprofitable properties are shut-in and aggressively worked over so they can be returned to profitable production. Our basis of profitability is based on a competitive investment environment that exists in the 21st century. Allowing assets to bloat on the balance sheet for decades provides no value for anyone other than for the CEO to brag amongst their friends. This accounting sleight of hand has been enabled for the past four decades by the SEC’s very odd accounting for oil and gas. Producers have over these decades taken the capitalization of every cost they incur to ridiculous levels to ensure that they report the highest “accounting” profits they possibly can. Accounting in oil and gas is about deceiving everyone that your profitable, integral and a good corporate citizen. Performance never enters into the mindset of anyone. If there was a performance mindset they would want to recognize the capital costs stored in property, plant and equipment to the income statement as quickly as possible.

I am not seeing any changes in the numbers or the attitudes of the producers regarding the time frame in which their depleting their capital assets. If they did change their time frame and adopted our recommendation that all of the property, plant and equipment currently on the balance sheet should be depleted within the next 2.5 years. Then the scam would be exposed for what it is. Producers have been selling oil and gas for decades at discounted prices to the consumer. This would become evident in an appropriate performance based accounting. Losses would be chronic, systemic and spectacular. These losses have been mitigated in the past decades by not recognizing the cost of capital in a capital intensive business. And having the shareholders fleeced annually for additional capital to make up for the cash shortfall the organizations incurred due to the low commodity prices they’re charging. To me this has been industry “common sense” since the time the SEC implemented their policies in the late 1970’s. It has become the culture of the industry to distort their performance in this way.

The attribute that keeps the doors open and the pumpjacks pumping is the fact that the industry is a capital intensive industry. The amount of capital that was taken from shareholders in the last number of decades. Annually and seemingly by every producer, is substantial. These investments now provide the cash flow that fuel the standard of living that our friends the bureaucrats enjoy. Whatever they spend and how they spend it in this area is never really known or understood. Overhead for our sample producers ranges from 1.5% to almost 20%. I would suggest the producer that is incurring the 20% is accurately reporting their overhead. The average for our sample of 23 producers is 6.21% which I think shows the extent of the capitalization of what others would call overhead costs. The game of who can capitalize the most costs came to somewhat of end a few years ago when individuals were charged by the SEC for capitalizing royalties. That as we know was PennWest, who now call themselves Obsidian so that people will forget that they tried that. The point is that this is evidence that these people can be embarrassed, and the fear of embarrassment will affect their behavior.

As good as that news is about the cash flow continuing and the bureaucrats keeping the show on the road. The overcapitalization of the industry is the dead weight, the albatross that they can never get out from under. What took decades to build up will not be resolved with accounting trickery in the next 15 minutes. As easy as it was to defer the recognition of your capital costs as a young, upstart producer with shiney profits. That deferral comes back to haunt you at some point. On an industry wide basis these balances have been bloating for the past four decades. Bureaucrats have been so enamoured with them that they use the property, plant and equipment account as evidence in the valuation of acquisitions and divestitures. Paying billions of dollars for big numbered assets is a fools game. Sure you can substantiate the validity of the value with the present value of the reserves. However if you critically evaluate the performance of the producer the assets have been sucking their shareholders down a big black hole. That big black hole, I’m suggesting, is only going to be getting bigger and its gravitational pull will be getting stronger.

In light of all of this. The one question that I have is why are we leaving this cash flow that is being used to support the bureaucracy in their hands? That is the only question I have based on my analysis of the sample of 23 producers that I reviewed. The only purpose to the existence of these organizations, other than drilling more wells that do nothing for the business, is unknown to me. Just drill more until the market collapses again. And maybe there is a performance and productivity here that I am unaware of. Nonetheless, why are we leaving the cash flow in the hands of these bureaucrats?

We’re going to shift back to our discussion of the user community and other topics next Monday. Today is the beginning of reporting season and annual general meetings. We’ll return to these topics and why they’re not the earnings we’re looking for after our sample of 23 companies have published their first quarter reports.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

These Are Not the Earnings We're Looking For, Part XI

Big numbers continue to be produced when it comes to anything associated with the Permian basin. The volume of associated gas production is stratospheric at approximately 10 bcf / day. The expectation is that this may exceed 16 bcf / day when all the screaming and hollering is done. That is more natural gas production than all of Canada. As it stands today Permian gas competes directly with Marcellus gas for the least expensive gas in the U.S. This being a result of the lack of take away capacity in the region. Almost 8 bcf in pipeline capacity will soon be coming on line to move the Permians associated gas to LNG facilities. Producers are sitting around waiting for these pipeline companies to build this new takeaway capacity at which time they will be able to release that trapped gas into the larger U.S. market. As I’ve stated before I think that’s what they’ll be doing, moving their trapped gas from low priced, depressed areas like the Permian and Marcellus to flood the market and depress the natural gas prices across the country. Unleashing the constrained gas in the Marcellus and Permian may have the unintended consequence of overwhelming the rest of the continent’s natural gas market with suppressed deliverability about to come online.

Recently Concho Resources announced a merger with RSP Permian Inc that is subject to both firms shareholders approval and is scheduled to be closed in the third quarter of 2018. Concho’s acquisition of Permian is valued at $8 billion. Concho has about $13 billion in total assets generating $2.5 billion in revenue per year. To give you an example of how far gone these oil and gas companies are, and how far I think they’ll need to travel in order to right themselves. It would be my opinion that Concho should have $2.5 billion in property, plant and equipment generating $13 billion in annual revenues. Since the merger deal includes the value of the debt, it would seem the premium paid for Permian is about $2 billion. Concho or the merged entity will have $21 billion in assets and approximately $3.5 billion in revenues. The only game in oil and gas is to have the biggest balance sheet, which will enable the CEO to strut like few before him.

Neither of these firms has ever truly been profitable. They collectively have reported almost $1 billion of those oil and gas type of earnings between them over the lives of their firms. Even over the long term considering an inflation induced business model. Under People, Ideas & Objects Preliminary Specifications decentralized production model the most effective use of a producer's time, energy and money would be to return their inventory of shut-in, unprofitable properties to profitable production. This would be done through the hard work and innovations of the producers earth science and engineering capabilities. Only when they have no inventory of shut-in properties would it be reasonable or justified for them to turn to the marketplace for more land, production or acquisitions. This rushing of everyone into the asset that grabs most of the press headlines has been part of their inflation induced business model and has been going on for 40 years. It’s almost like gaming the stock price is the objective. Today it’s the Permian, recently the Marcellus, prior to that any shale formation, heavy oil had its day and before that it was SAGD. On and on the spendaholics rush around with sirens ablaze that they’re in a panic to acquire the only thing of value. Chesapeake was the prior darling of the day. Acquisition of reserves at any price to boost the balance sheet is the name of the only game that is ever played in oil and gas. Reserves are useless if they can’t be produced profitably. What the acquisition of Permian by Concho shows is that this fact has not been learned and the status quo that has brought these very difficult times in this industry remain well entrenched.

What I think this merger looks like is two swimmers who are in jeopardy of drowning, then decide they have a better chance of survival by holding on to each other. Maybe these mergers will become the strategic flavor of the day! My suggestion would be for the industry to look northward to the pleasant business environment in Canada. I haven’t held out much hope for Canada these past few years. The business model here has been the same as in the U.S. Although the U.S. is much larger, they may be able to learn that continuation down this same old, same old road will present similar difficulties to the ones now being faced in Canada. More or less it’s get out of Canada as quick as you can. Shareholders are fleeing, Pipelines under development are being stopped and maybe the smart producers are moving to the states. There is nothing much for anyone here in Canada except for the bottom feeders. It is far easier to bail on the Canadians then it ever would be to bail on the American producers. Which doesn’t mean it can’t and won’t happen. I’ve been saying oil and gas is in serious jeopardy for a few years. It just doesn’t have to be this way.

What will the Canadian producers do to fix this? They like the rest of the industry have certainly done nothing so far. The problem still exists even after a decade of natural gas overproduction. Market rebalancing, discipline and every other excuse has been put forward and nothing has been done. Now it’s expected that we’ll just leave them alone and they’ll do their thing? What if these are the good times? What if the next 5 years present more difficulties than the past 5 years? Oil prices peaked at $145.29 and natural gas at $13.58 on July 3, 2008. Both collapsed as a result of the financial crisis to well below $45 for oil and $4 for gas. Neither has truly recovered since, but oil did have 2011 to 2014 in which the price averaged almost $100. We’re all aware of the sharp decline in prices since then and the efforts of OPEC to “rebalance” the market. If producers future is dependent on their stock price matching the changes in commodity prices. Is it reasonable to think the future is theirs? If just drilling more wells is their future, what could go wrong?

Natural gas as a business has been fundamentally destroyed by overproduction. Nothing is being done about that, or even discussed. Oil prices are up therefore drilling for oil is the “thing” to do. Around 1,000 rigs are operating now. Up from the days when oil collapsed. What is important to understand is that there’ve been innovations in the service industries. The speed and overall time to drill and complete a shale well has collapsed. Therefore on an annual basis those 1,000 rigs will drill and complete more wells. Oil prices are high today. Certainly not high enough to make the reserves profitable. But no one in the industry will be concerned about that until the commodity prices collapse again.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

These Are Not the Earnings We're Looking For, Part X

Bureaucrats have a point about the Preliminary Specification. It’s expensive. Which is also one of the few things that I agree with them about. What producers should be concerned about is the value proposition that the Preliminary Specification provides them. The $25.7 to $45.7 trillion in additional revenues they would earn in the next 25 years as a result of using the somewhat expensive, $6 billion Preliminary Specification. $20 to $40 trillion of those industry revenues cover the costs of what are believed to be the future capital costs that the industry needs to incur in order to meet the consumers energy demands. These capital cost estimates are from a variety of sources. Under the current business model the bureaucrats expect shareholders will fund these capital expenditures. Just as they’ve done for the past four decades. People, Ideas & Objects believe that these costs need to be incurred by the consumer. In doing so these capital costs will need to be recaptured by the producers through their revenues as a result of using the Preliminary Specifications price maker strategy. More or less it is this point that is the fundamental difference between the producers existing business model and the business models contained within the Preliminary Specification.

Having systems that are mission critical developed in the vision of the Preliminary Specification is difficult and risky. I would also agree with that statement if it were 1998, 2005 or even 2010. Today I believe the technical risks being incurred by the producers in developing the Preliminary Specification have been mitigated by the maturation of Information Technologies. Producers believe that their current systems, such as Qbyte, which was conceived of in the pre-Internet era of DOS, will continue indefinitely. At some point it is necessary to deal with these 30+ year old systems. When the business model of the producers and the industry has fundamentally failed, what better time to address this?

The industry and producers future demands will not be met by today’s software offerings. It is rumoured that iTunes, which is 15 years old, is in need of, and being rewritten, Qbyte which is 30+ years old is just beginning in its infancy in oil and gas. If a non-mission critical music application has had its best days and is being rewritten, why wouldn't a 30+ year old ERP application? In addition People, Ideas & Objects are providing the industry with a software development capability that is permanent and a key part of our business model. We are change based software developers. Changes in the Preliminary Specification are accommodated by the existence of the permanent user community and our permanent software development capability. If the Preliminary Specification needs to be replaced by a new business model People, Ideas & Objects, our user community and service providers will be the ones that make it happen.

Bureaucrats will no doubt look towards Artificial Intelligence and Machine Learning to solve their problems. Big data is the clue to the solution! Putting their house in order and getting organized profitably for the future is contrary to the health of the bureaucrats, which is why building the Preliminary Specification is more of a concern and priority for them to avoid than it is a wise strategy. It’s best that the bureaucrats remember that no one believes anything they say anymore. Their credibility is shot and if bureaucrats shop these Information Technology based ideas around then people will know their circus still has more dates on its calendar. “It’s the business, stupid,” Bill Clinton I believe once said.

If you were to build a bridge you wouldn’t expect the manager to initiate a corporate entity to raise capital and generate a business that will support the investment that needs to build the bridge. People, Ideas & Objects is a capital project where the vested interests, the producers, need to pay for our costs to enable their profitable future. This endeavor is not a commercial operation from the regular perspective of a corporation. It is very much a project with a business model to support the user community and software developments after initial commercial release. This is the manner in which the oil and gas industry has to be approached in terms of the development of ERP software. Building the Golden Gate Bridge on speculation wasn’t practical or necessary a century ago. Building ERP software for the oil and gas industry on speculation is not practical today. Only bureaucrats believe it to be necessary.

With our Preliminary Specification in place for 2018. We have calculated based on our sample of 23 producer firms 2017 fiscal years financial statements. That the prices necessary to be profitable were $135.67 / boe on average throughout the year. The industry generated actual industry-wide revenues of $430.8 billion, whereas if these same volumes were produced at our proposed prices, they would have generated $1.243 trillion. An overall differential of $812 billion. From this we would assume the following. 25% royalties of $203 billion on that differential. Gross taxes at 21% for $127 billion on that differential. Distribution to the Coin Holders that provide the funding to this project of $158 billion, or 33% of the net after taxes and royalties. Leaving the industry with an incremental $322 billion in net revenues. Industry wide capital costs of $215 billion would be fully funded. Leaving $107 billion in debt reductions and dividends. Of note 2017’s capital expenditures are down from about one half trillion only a few years ago. And the amount of industry wide property, plant and equipment is estimated to be $1.642 trillion. After all the bureaucrats and I are only arguing small differences on the margin. And they wonder why their having such difficulty in their business?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

These Are Not the Earnings We're Looking For, Part IX

During this annual report and general meeting season bureaucrats will focus on their diligent and ethical spending of shareholders money on their capital projects. This has been the case in oil and gas for many decades. Producers claim that capital discipline is one of their key attributes which makes them such a good investment. If only integral capital spending was the only attribute needed for a profitable operation. The thing they won’t, and don’t, talk about is the spending of the resources that are returned from those investments. The revenues that the oil and gas investments earn for all intents and purposes are for the bureaucrats to do with as they please. This being another reason why the annual shareholder fleecing, or offering, was such a mandatory part of the oil and gas producers operation. Nothing they did with these revenues have any impact on the profitability / loss of the operation as the costs of capital would rarely ever pass through the income statement during their tenure. And there were always new shareholders available for next years capital expenditure needs. We need to ask which is the higher cost, drilling, completion and equipping wells (capital) or the electricity for the pump jack (operations). Therefore these oil and gas revenues were to be done with as the bureaucrats pleased. Oh, did I say that out loud?

The first priority of the oil and gas bureaucrat and the first thing for them to utter anywhere is their efforts to reduce their costs. Cost reduction is the holy grail of accountability and responsibility. This in an industry whose costs fit conveniently and profitably under a 1970 oil price of $1.72. A period in which the general economy has experienced 640% inflation, yet the price of oil is 3250% higher. And remember it’s People, Ideas & Objects claim that the producers have also been taking these annual shareholder proceeds as compensation for the discount that they’ve continued to provide the energy consumer in the form of lower oil and gas prices. At 3250% the current oil prices are understated in our opinion. We’ve calculated they need to be $135.67 / barrel which would be 7887% inflation. It has been much easier to provide the consumers discount at shareholder expense than to run a truly profitable operation. In an environment where costs are escalating rapidly it is a necessity for the producer to recognize their capital costs quickly. It is on the basis of the failure of their cost control that these bureaucrats should be summarily fired for incompetence. There I got that out of my system, we can finish the rest of this post. My other point would be that any attempt to control costs in an industry where the costs of oil and gas exploration and production will be higher as a result of the never ending increase in effort necessary to bring the commodities to market, is futile is it not? In an increasing cost environment it should be a concern to these producers that these ever increasing costs are recovered quickly and profitably. Pushing the recognition of your costs out beyond a decade would be a deception in an environment of rapidly escalating costs. Bureaucrats would be looking to inflation to reflect their performance over time as opposed to earning real profits.

Today producers have lost the point. Concerned that they don’t get more expensive than solar or wind energy. Concerned that the public will get angry if they are perceived to be raising prices to cover the costs of oil and gas production and exploration. They are stricken with brief attention spans that fluctuate with the daily changes in direction of the price of oil and gas. Change is too difficult for them to undertake, its unwanted as it conflicts directly with the bureaucrats best interests and as far as their concerned, not needed now. The ability of the existing producers to execute the necessary changes has now proven to be impossible. Oil and gas producers are not competitive, they’re stale, chronically overproducing into the marketplace. We’ve noted that only 5 of the last 32 years have been “good years” for the oil and gas industry. Bureaucrats have enjoyed 32 “great years.” For everyone else it hasn’t been so prosperous during any of that time. Come to think of it things weren’t that much better before 1986 either. When will the industry begin to be managed as a viable going concern?

This reporting season will be the same as it has been for 32 years. “Prices are low, oh whoa is me and please send cash.” It could be different however. People, Ideas & Objects enables producers to capture their capital costs quickly and profitably. Providing them with the capital to fund their capital expenditures, reduce their debt and issue dividends to investors. By only producing profitable production and recognizing all of their costs within a reasonable time frame producers would maintain a mature, yet profitable industry for the long term. One that investors, service industry representatives and the people who have invested their careers in oil and gas would be able to prosper in everywhere and always. Where these people who work in oil and gas would not have to be subject to the same kind of seniority that a common laborer out of high school experiences. There will be losers however. The Preliminary Specification disintermediates the bureaucracy, eliminating them from the scene, which is why they’ve chosen to run the industry into the ground instead.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

These Are Not the Earnings We're Looking For, Part VIII

One of the concerns that we’ve expressed here at People, Ideas & Objects is the fact that North America holds 17% of all shale formations. What happens when the rest of the world begins to deploy the shale based capabilities that have been available somewhat exclusively to the North American market? The past number of years we’ve seen these technologies successfully deployed in Argentina, what happens when the rest of the world catches on? How will the industry be profitable when the abundance that we’ve seen in North American oil and gas commodity markets becomes the case elsewhere? It is this abundance in both oil and gas that have led to steep declines in the price of oil these past four years. And created a comprehensive market collapse in the natural gas market over the past decade, or should I say decayed.

Bahrain is a small country in the Middle East that has a population of 1.45 million people. Recently it held reserves of 125 million barrels of oil and 3.25 tcf of natural gas which provided for their consumption and Bahrain's primary export. To contrast, it’s neighbor Saudi Arabia has oil reserves that are in the region of 266 billion barrels. An order of magnitude difference. Bahrain recently contracted Schlumberger to drill a shallow offshore well in a tight formation that has been independently evaluated to hold 80 billion barrels of oil and 13.7 trillion cubic feet of natural gas. (Of note Halliburton will be drilling the next few wells.) How much of that oil could be produced is unknown and the completion of that well, particularly the fracing of the shale, offshore would be technically difficult. Although these technical and other issues will delay the development of these reserves, there are oil and gas shale reserves held in areas other than the North American marketplace. Not all of them will be as difficult to discover or produce as those in Bahrain, which is a small country. What we can be assured of, knowing the status quo’s muddle along strategy and do nothing operating procedure, in the decades to come, is that more than just North American producers will be exploring and producing expensive shale resources unprofitably.

Eventually, unquestionably and definitively there will be a need for a methodology of production allocation that is fair and equitable to all. People, Ideas & Objects have chosen the profitability of the property as that fair and equitable production allocation methodology. Only the decentralized production model of the Preliminary Specification can provide that. Producers need to implement our production allocation methodology within the North American marketplace as soon as possible and ensure that it is available to other regions as the high cost, tight formations around the world begin to be produced. Otherwise oil and gas will continue with this status quo for decades, which can best be described as a non-commercial operation where capital goes to die.

Conventional producers are happy with the price of oil today. Saudi Arabia’s cost to produce is well under $10 / barrel. They’re also happy to sit and wait while the North American producers prove to the rest of the world that their accounting has not only been suspect but deceptive and their earnings never existed, ever, we believe in the past 4 decades. OPEC for all intents and purposes will remain profitable in the conventional resource plays they produce. North American producers at some point will have to prove their claims of profitability and financial health. Something that they’re having difficulty doing even today at these commodity prices. It’s a slow bleed and the producers are the only ones that seem to be “allegedly” fooled by their accounting statements.

The claims of North American producers profitability in today’s marketplace have two deceptive elements to them. One is the shell game of stating that today’s “lower” drilling and completion costs apply to the historical cost that were incurred in prior fiscal years. Your costs are historically fixed, they don’t go down. Today’s costs may be lower but they can’t be retroactively adjusted to what was paid for in prior years. Secondly the fact is that their costs of capital per barrel this year are lower than last years. Which is a direct contradiction of what I just said. However that second point is not an accounting statement, nor is it an accounting statement being made by the people in industry when they say their costs are going down year over year. Reserves are booked on the basis of their commercial viability based on the current market price. The number of the reserves volumes are much higher when the price is $100 and much lower when the oil price is $29. That is to say that the reserves volumes change on the basis of the prices that are realized. As the price increases more reserves are able to be produced “commercially” and as a result the reserves value of the producer is increased by both volumes and prices. So when we look at the capital cost per volume of the reserves at $29 or at $100 we have a much different picture in terms of the capital cost per barrel of oil. This is not part of the accounting function and as I stated this is what is being quoted by the press when producers claim that their costs have come down in an environment of increasing oil prices from the high twenties to the low sixties.

Accounting is about measuring performance based on historical cost. Accountability by the engineers and geologists is based on their terms and understanding of reserves. Hence the two basis of discussing the oil and gas industries financial dynamics. It is People, Ideas & Objects opinion that the development of reserves is the appropriate approach for the industry to pursue, no question. However, development of the reserves within the business community it operates in is a necessity. Reserves are essentially useless if they remain terminally unprofitable. Ignoring the producers performance based on a reasonable accounting evaluation of what the owners of the firm invested and what was left after paying the bills is the only way in which to evaluate the commercial performance of the firm. It is on that basis that we state that these are not the earnings we’re looking for. Oil and gas needs to compete for the capital resources it requires as a capital intensive industry. Turning over its capital once every two decades is not adequate in the 21st century, nor is it going to be adequate in dealing with the low cost producers from OPEC or future global shale producers.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

Some Time Off

I will be taking some time off, returning April 9, 2018

These Are Not the Earnings We're Looking For, Part VII

As much as I think the message has been getting through regarding “bloated balance sheets” and not recognizing the capital costs of past production by the producers. A few producers have reduced their periods of depletion from many decades to within single digits in some cases. What we see in those producers is that the effect has been minimal in terms of retiring the balances of property, plant and equipment. These producers and the industries balances are still outsized. Even after the hit they took to earnings as a result, they’ll need to redouble their efforts from here. For example Hess has been aggressively moving in this direction at great cost to their profitability which has created conflict within their boardroom with some shareholders.

Now that we’re seeing the “harvesting” of the investment that was made in oil and gas being undertaken by the shareholders and bankers. For all of the screaming and yelling I’ve done about this issue, with respect to the existing producers, it’s probably a moot point now. What they do in recording their performance is irrelevant to the shareholders and bankers, and nothing is going to change their minds in terms of their strategy of “harvesting” their oil and gas investment. Once these types of decisions have been made they’re not revisited or reversed. Therefore it’s time to turn towards the future and start building the new oil and gas industry.

In terms of the establishment of the new oil and gas industry, based on the new producer firms there is much to do. In reading the Preliminary Specification we find that there are two business models in the way these new producers generate revenues and deal with their costs. We have discussed the decentralized production model here many times and will only note that this is the manner in which the dynamic, innovative, accountable and profitable oil and gas producers ensure that only profitable production is produced. The second business model deals with generating revenues from two of the four competitive advantages of an oil and gas producer, those being the earth science and engineering capabilities. The producers other competitive advantages are its land and asset base.

In terms of the earth science and engineering capabilities of the producer, these become revenue generating activities within this new industry we’re creating. First recall that overhead of the administrative and accounting resources won’t exist within the new producers because these resources have been reallocated to the service providers who are charging for their services directly to each individual Joint Operating Committee. Any overhead of this type will be as a result of profitable oil and gas production and charged to the Joint Operating Committee. The revenues from the earth science and engineering capabilities are generated as a result of the time of these resources being charged directly to the Joint Operating Committee as well. Whether that is a property that the producer has an ownership interest in, or is conducted on a consulting basis to other producers who are in need of the specific competitive offering of the producers earth science and engineering capabilities.

With the potential shortage of earth science and engineering resources in the future. The industry needs a method in which to deal with how they’ll be able to profitably expand the throughput of the industry. With the retirements and the lack of new graduates this may become a protracted issue for many decades. To expand the deliverability of the industry we can rely on an expanded division of labor and specialization both in terms of the professions and the activities of the producer firms. Expanding the division of labor and specialization of geology and engineering are never ending demands due to the complexity of the science basis of oil and gas. The difficulty here is that the ability and capability of each producer to cover off the full scope and scale of these professions diverse offerings will ensure the new oil and gas producers remain unprofitable attempting to support an ever expanding specialized resource. Therefore specialization within each producer firm will be necessary with a pooling of capabilities of the producers involved in the Joint Operating Committee becoming a necessity. Those Joint Operating Committees that are not fully represented by its ownership producers capabilities will need to invite other producers with the requisite specialization into the Joint Operating Committee on a consulting basis to ensure full coverage of what is required. Note that the concept of operatorship has never been a part of the Preliminary Specification.

It is the understanding and expectation that the charging of the geological and engineering resources of the producer firms directly to the Joint Operating Committees is the other business model of the producer. The charging to the Joint Operating Committee will be generating the revenues necessary to support the specialization and capability as if it were a stand alone enterprise. It is within the modules of the Preliminary Specification that this business model is included with the Work Order system capturing and invoicing the time of these resources to the Joint Operating Committee.

The ownership understanding and development of these producers specialization needs to be a deliberate act when these new producers are formed. We believe the specializations will be such that the building of the firm around specific capabilities in terms of facilities and resources will have to be done. Formation of these organizations are the beginnings of the new oil and gas industry.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part VI

If, as we discussed yesterday, industry is considered to be a sunk cost by the monied people, which I would propose is the decision that has been made, cash flow will take on an entire new meaning for those that administer the oil and gas industry. We saw the banks were able to poach the cash from the bank accounts of the producers in the fourth quarter, leaving them to increase accounts payable in order to deal with their loss of cash. Banks will have the same attitude for the next decade or so, that is until they feel their loans are paid in full for the money they’ve lent the producers. Shareholders will be of this mindset too. There was only one reason that Conoco was touting the return of 61% of cash flow to shareholders. It was outsized in terms of where the firm's cash went and he had no choice in the matter. What he didn't say was that the banks were also paid 111% of Conoco’s cash flow. These payments made possible through the sales of Canadian oil sands to Cenovus. The days where bureaucrats determined what was done in the industry are over. It's the monied people’s turn. They want their money back. And I’ll guarantee you they’ll get it. Somewhat of a different perspective, let’s say an outsider's perspective on bloated balance sheets in a capital intensive industry.

The monied people will be saying thank god for shale. It guarantees that the producers will be able to maintain their production profile with higher probability. Ensuring that cash will continue to flow into the producer firm. Then there will be sales of properties. We’ve seen how over the past two years that producers property sales have enabled them to keep the lights on, the doors open and the money flowing to the bank and shareholders through high levels of dividends and share buy backs. If this sounds like drudgery then you’re right. There were plenty of opportunities to fix the situation and nothing was done. Now it’s a sunk cost as far as those who have the real power are concerned and they’ll get their money out over time. It’s not that they think that producers can’t turn the situation around, its that they don’t believe what producers say. Nothing that has been stated in the past decade ended up being true.

Last year People, Ideas & Objects set out our Argument, Our Plan and what we believed to be the Best Business Opportunity, Ever. Conceptually none of these have changed other than Our Plan does not contemplate our software developments startup. We will wait to see the commitment from the ownership and the financial resources we need to hit our bank account before we implement any of our software development plans. Secondly, our current focus is on the development of the user community which provides us with the greatest leverage in terms of affecting our software release date. No user community, no developments.

The cash flow the monied people will receive from the existing producers can be used to recapitalize their new start up oil and gas organizations that will be the replacements to the existing producers. Much of these dollars can be used to purchase the premium properties being sold by the existing producers in order to establish a strong oil and gas producer for the future. We believe that these transactions can effectively transfer the title of the properties to the new owner complete with a management agreement executed between the existing and new producers. This management agreement providing the day to day management of the properties until such time as the new properties owner can establish themselves with the appropriate needs within their organization, i.e. the operational Preliminary Specification, our user community and service providers.

This will ensure that, eventually, all of the oil and gas production in North America is profitable, always. With the development of our software and the services of the service providers, these new oil and gas producers will not have to develop the administrative and accounting capabilities within their organizations. They will be using the existing producers to manage their properties under a management agreement, and when the time comes to switch over to the Preliminary Specification the service providers will be in place to ensure that their operation continues without any difficulty. This will see the cancellation of the management agreement as the point in time in which the new producer will go live on the Preliminary Specification. Providing time for the service providers to conduct the industries implementations on to the Preliminary Specification in a timely fashion.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part V

The business model that the oil and gas industry operates under is unprofitable. The lack of profitability is systemic, cultural, has been the operational model for at least four decades and has destroyed the value that was established in prior periods. Nothing will remediate these issues until such time as the business model that the industry operates under is revised to deal with the current issues. People, Ideas & Objects propose the Preliminary Specification with its two business models for the producer firms and industry operations. These are designed to deal with the chronic unprofitability and ensure that every drop of oil or gas is produced profitably from here onwards. With the value that is inherent in oil and gas commodities. We owe it to future generations to ensure that our consumption of these valuable resources are produced profitably.

This is the point that needs to be addressed by producers. Investors are not coming back until they see some material steps to cure what is causing the industry to decline. Talking around these issues and stating that they’re organizations are profitable when clearly their balance sheets and income statements don’t support those statements is not hurting their credibility, it’s also not earning it back. Time to act has past. Significant destruction has occurred throughout the oil and gas, and service industries. Now is not the time to continue to sell the story line that all is well. The future jeopardy of the producers and industries are much higher as a result of the depleted capacity to deal with issues, the lack of support of investors and bankers and the fading interest in the producers health by the general public due to this chronic decades long crisis. It is down to the industry itself to pull up its socks and make the changes needed to right the ship.

The fact of the matter is that throughout this self inflicted crisis the producers and industry have been lucky. The OPEC production cuts, Trump tax cuts, etc. etc. Will this continue? What steps have, or are being taken to deal with the potential downside of OPEC abandoning their production sharing agreement? Drilling more wells will not be the answer. Or is it that those in authority and responsibility will stick around until their luck runs out? Without any evidence either way what are people to assume?

All of this can not be fixed with the quick and easy remedies that were responsible for starting all of these problems. The size of the balances in property, plant and equipment can only be dealt with in one way. To recognize them and their bloated nature. Oil and gas has systematically over reported their profitability by not recognizing the largest cost in this capital intensive industry, the cost of capital. The balances of property, plant and equipment have distorted the amount of bank debt the producers were able to undertake, and the bankers now find they’re too heavily exposed to oil and gas. Investors were led to believe their annual investments were building growing organizations when in reality it was an accounting sham. For all the reporting of false profits in the industry our sample of 23 producers have still only managed to generate $80.8 billion in retained earnings as of December 31, 2017. That represents their lifetime of activity. They still hold over $478 billion in property, plant and equipment. If it has taken a lifetime to generate $81 billion it will take six more life times for industry to deal with these costs. If this doesn’t concern you then nothing will.

I fully understand and comprehend that many billions of dollars have been written off to the income statement in the process of establishing that $81 billion in retained earnings. Looking just at property, plant and equipment, it is disproportionate to the remainder of each account of the individual enterprises. The amount of debt that is carried in relation to the size of the revenues. The disproportionate weighting of short vs. long term assets. These support the fact that the number of years depletion that producers carry of their property, plant and equipment account reflects a mindset of others people’s money is cheap, easy and meaningless when it’s depleted over decades. Capital is a resource that should be turned over in an organization repeatedly and as quickly as possible. It should not hit the balance sheet and effectively die for decades. Capital is a resource that is costly in reality and is not an asset to be admired on ones balance sheet for years, it is a cost that is incurred by the organization. The dynamic, innovative, accountable and profitable oil and gas producer will reduce their capital demands by turning their capital over repeatedly. They will out compete other producers by having their balance sheets stuffed with liquid assets available to be deployed at the opportune time, not remain stagnant for decades on the belief that the CEO has the biggest balance sheet on the block. The time to stop considering these as assets and dealing with them as costs has past for the oil and gas industry. The problem is that these balances were built up over decades of spending. These balances won’t expire in the next 15 minutes, and is a legacy that will haunt these producer organizations for the next decades if they’re not addressed and dealt with. In other words if you like your oil and gas industry today, then do nothing.

The “controversial” manner in which the Preliminary Specification deals with these costs is that we recover them through increased oil and gas prices. These costs represent past investments that have been made in the oil and gas industry. They are the unrecognized capital costs of past production. If producers want to redeem themselves they can capture these costs and return that capital. The only way they’ll be able to do that is through higher commodity prices. This demands that the price maker strategy of the Preliminary Specifications decentralized production model be implemented. Instead of shrieking at the thought of making prices, producers need to deal with the issues at hand, these two working hand in hand, and recognize their costs through higher commodity prices. Or, be treated as a sunk cost by those that matter.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part IV

I realize the pressures on CEO’s are substantial and the difficulty of the oil and gas business does not necessarily fall within the four walls that are occupied by that CEO’s firm. Overproduction by the industry is the issue that can’t be solved by any individual producers action, other than by implementing the Preliminary Specification and enabling all producers to produce only profitable production. Nonetheless a little more candid conversation regarding these issues and the situation within their firm may lead to a more productive environment and relieve them of some of the difficulties they’re under. Producers, who say they can produce the Permian for $12 / barrel, are setting unreasonable expectations when the industry as a whole doesn’t earn that much money from North America. Everyone knows the situation in oil and gas is not positive. Telling the press and your shareholders that everything will be fine is what was stated five years ago and more or less ten years ago too. The people you told then still remember that and are waiting for the good times to happen, not for the same story to be recycled again and again.

The pressure is building on these firms with evidence almost everywhere you look in the fourth quarter of 2017. The banks contributed a net $10.6 billion of bank loans to two major heavy oil acquisitions. Outside of this participation there was no major bank participation that was noticeable in any of our 23 sample producers. There was however $12.6 billion in debt reductions in 2017, $7.3 billion of that just in the fourth quarter. In order to deal with these difficulties producers expanded short term liabilities by $7 billion during the fourth quarter. The cash crisis continues and the banks are getting out as quickly as they see any cash accumulating. Poaching it from the checking account without notice to the producer. This has also been known as a short leash. People, Ideas & Objects believe the high volumes of property, plant and equipment are offset with high volumes of bank debt, not equity. (ie. overcapitalized, ergo over indebted.) And therefore the lack of performance is reflected acutely when the bankers assess the performance of their oil and gas loans.

No one seems immune from the pressures being applied to these firms. Conoco is the largest independent. I used to think that independent meant that they were immune to certain pressures. Their CEO, Ryan Lance was quoted as saying that Conoco had a “very successful year.” Losing $2.6 billion prior to the Trump tax cuts is not what I consider successful. This is on top of losses in 2016 of $3.6 billion and $4.4 in 2015. A grand total of $10.6 billion in losses. Yet that’s not all, the sale of their heavy oil assets to Cenovus earned them a $2.177 billion gain on disposition which is included in 2017’s revenue, and without this their losses would have been $4.78 billion, higher than any of the past, much worse years. Conoco also claims they returned 61% of cash flow to shareholders through dividends and share buybacks. Selling the company to meet the demands of the shareholders and bankers is not a business. Performance in terms of profits would be a better method of generating a “very successful year.” Thanks to the sale of the heavy oil assets Conoco maintains healthy cash and working capital balances of $6.3 billion and $7.1 billion. Which should carry them for another three months of paying off the shareholders and bankers. The question is what will they do when that cash is gone. If selling properties to satisfy shareholders and bankers is the best that the largest independent can do to produce a “very successful year,” then I’ve been far too kind to the bureaucrats in this business.

Another producer that has had a “very successful year” is Cenovus. They were the purchaser of the Conoco heavy oil assets that were previously held 50 / 50 with themselves and Conoco. Their accountants were the most creative by far in the industry during 2017 when they took the purchase price of the Conoco assets, and the book value of their share of the heavy oil assets, and realized a $2.555 billion “revaluation gain” on their second quarter income statement. Only in oil and gas can the purchaser gain more of a profit than the seller can in a sales transaction! If we take the “revaluation gain” out of the remaining earnings that we calculated yesterday, we end up with just $2.9 billion in earnings for the sample of 23 producers.

None of these transactions that we’re adjusting our sample producers earnings for are getting to the heart of the matter. That being oil and gas is not, and has not been in the last four decades, recognizing the real costs of oil and gas exploration and production. The amount of depletion that has been deducted is a subjective number which is as good a guess as anyone else's, I guess. Few industries are provided with the luxury of capitalizing assets for decades and recognizing them when and if they feel like it. The only criteria that oil and gas is held to is the value of the assets remain below the current value of the firms reserves. A ridiculous number that each producer seems to approach every year. Though People, Ideas & Objects have been critical of this procedure, oil and gas producers have not changed their ways. What they had been doing for many decades is taking money from investors, spending it in order to produce oil and gas and hand that production over to consumers at discounted prices. Investors have learnt that lesson and suspended any further participation in the industry. For example revenues for our sample of producers were $161 billion in 2016 and $222 in 2017. Yet for some reason depletion was $75.6 billion in 2016 and $69.9 in 2017. If they were really interested in providing a clear picture of their operations they might have allocated the same amount of depletion for each dollar of revenue. Any subjective measure is good. If so, they would have recognized a total of $104 billion of depletion which would have brought our running balance of their profits in to losses of “only” $31 billion for all of 2017. More than the $30.2 billion in losses they recorded in 2016.

In terms of what People, Ideas & Objects recommend is that these bloated asset balances need to be eliminated as soon as possible. We recommend the next 30 months. This would bring the 2017 losses to $173 billion which is ridiculous of course. Just as ridiculous as the methodology of these producers listing and depleting their property, plant and equipment for the past four decades. The point here is that the legacy of this capitalization policy has to be dealt with. Ours is the most reasonable methodology from the point of view remediating the bloated balance sheet issue and having the industry move on. It also happens to be the most honest. The fact is the industry will have difficulty continuing with this albatross unaddressed and unrecognized. What we see here is that the bureaucrats haven’t learned anything. That’s because they don’t care, and by the way their fine.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part III

I’m curious as to where as an industry we go from here. Will OPEC implement a further cut in their production to offset the coming “explosion” of North American shale production? Or will the banks revisit their restrictive lending policies and resume the good old days of lending as much as is desired? The producers themselves will certainly continue to display their production “discipline” and “this time is different” ways. They may be able to find further room to deplete less of their capital costs per barrel. And claim once again that those “cost reductions” were innovative reductions in costs, as they were able to do in 2017. Or maybe, the investors will be satisfied that all is well and there’s no cause for concern in oil and gas, and resume their annual investment and dilution rituals? Prices of the commodities might go higher, as they did in 2017, which would make it all that much better. The fact of the matter is the producers have had a run of good luck in terms of dealing with this crisis. OPEC did the impossible and have shown the market two things. That oil and gas commodities are subject to the principles of price makers. And the problem lies with the North American shale producers who have no business sense or understanding. What will the lucky lottery prize be this time that gets the producers another year of “muddle along” and “doing nothing” as their strategy and operating procedure?

Earnings of our 23 producer firms stand at $15.25 billion for the year. An increase of $7.85 billion over the $7.4 billion that was earned up to the third quarter. Or have they? Oil prices were certainly the highest they’ve been for years and producers were claiming to be profitable at as little as $12 / barrel. Is this what was expected from an investment of $460 billion? If we take a more reasonable allocation of capital from property, plant and equipment, what would the earnings have been? People, Ideas & Objects suggest that the industry needs to retire these excessive balances of previously unrecognized capital costs from past production on a timely 30 month schedule. If producers were to do that then losses would be ridiculous and not representative of a commercial industry. Which has been what we’ve asserted on many occasions. As fast as the $460 billion in property, plant and equipment was depleted, and that is only for the 23 producers in our sample, additional capital would be spent that would replace at least $153 billion in the property, plant and equipment account. Would this balance be a more representative balance for our sample producers to reflect their property, plant and equipment assets? The point here is that no matter what producers do, these excessive balances that have been built up over the past decades will be their legacy.

Assuming, once again, that the industry was a viable going concern with commercial operations and the producers were generating adequate revenue to cover all of their costs. These incremental charges for depletion would be reflected in higher working capital of approximately the same amount of the increased depletion being recorded. If we look at the working capital of our sample producers at the end of 2017 it’s $648 million less than what it was at the end of 2016. The cash crisis continues as a result of the shareholders and bankers lack of participation in the continued farce that is the oil and gas industry.

I guess we can mark down the fact that the producers were able to generate some luck once again when it came to generating their financial statements. Although they report $15.25 billion in earnings, which is an improvement over the third quarter, it has been a disaster these past three months. The luck they seemed to have earned comes in the form of President Donald Trump’s tax cuts that generated $9.7 billion of those $15.25 billion in earnings. Therefore in the fourth quarter our sample producers actually lost $2.3 billion and for the 2017 year our sample producers only produced $5.5 billion in earnings. The bureaucrats would believe that this is a good performance that entitles them to continue for as long as they want. I don’t believe they have the time. And I think others have lost their patience too.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part II

What is clear as a result of the publication of the fourth quarter reports of the oil and gas producers. Is that it’s time to take the keys to the Ferrari back from these teenagers. I’ve been saying that none of the efforts up to this point where going to make any difference. Things would only get worse. And the scope and scale of the problems that I see are well beyond what can be healed in normal approaches to business issues. Disasters have been left to fester for years and in natural gas for over a decade. Leaving the situation as is when faced with this level of difficulty is dangerous. We are much worse off as a result of the fact that the bureaucrats can’t, won’t and will not do anything about this situation, ever. Where is this long term damage being represented?

The universities Geological and Engineering faculties have been hollowed out of students. Producers are claiming they can’t get enough frac crews into the Permian leaving too many wells drilled but not completed. The service industry has been fundamentally destroyed by the withdrawal of activity and the long payment periods of the producers. Jumping at the snap of the producers fingers isn’t generating any interest in the investment community when so many rigs lay idle and representative of the wholesale devastation in the service industry. We saw this in the software industry in the late 1990’s. There were dozens of ERP providers looking to provide oil and gas ERP solutions. The producers thought they could get the ERP providers to spend their own money to prove to them that they were committed to the oil and gas marketplace. Some did, and once they produced the software the producers knew that they could have the ERP vendor for a song. Anyone seen an oil and gas ERP software investor outside of the lunatic that’s writing this? The damaged reputation of the oil and gas producers with the service industries investors will be something that haunts the oil and gas industry for many decades. And lastly the people in oil and gas and the service industry. They are searching for ways out. Whether they still have a job in industry or not, they’ve had enough.

The financial condition of almost all of the producers is well beyond what can be remediated. Being a capital intensive industry, cash flow has always been strong. For the past four decades that was all that was required. Earnings were irrelevant. What cash flow represents is the investors money being returned to the business to be reinvested, pay down debt or returned to the shareholders. None of that happened in the past four decades. What did happen is the circus became ever bigger and more robust. The ability to fund current capital expenditures from new investors, with the associated dilution never being an issue to the bureaucrat, was all the rage. The cash flow was diverted from its proper role in the firm to support the overhead and interest with the new capital funding the capital expenditures and dividends. A little sleight of hand that carried on for many decades. Then natural gas prices fell, followed on by oil which exposed the game to the investment and banking community. Their strike continues and it doesn’t look to me like anyone is going to be jumping back in. Back when cash flow was being diverted, the industry was slowly being drained of any and all value. If not for the producers capitalization of every possible cost to hide the fact that these organizations were actively draining the value that the investors were pumping in each year, no one would have touched anything within the industry.

Today the industry is a wasteland representing no value. The service industry is a wasteland representing no value. There are trillions of dollars needed to maintain and expand the deliverability of North America. How and with what? If the sum total of everything is unable to generate any value. And indeed drains the ownership of further value each year. Who is going to make this industry function as it should? This is the sad result that these self interested, spending mad bureaucrats have created. Nothing, only it's far worse than that, it's nothing that takes billions each year just to keep it running. If these producer organizations bureaucrats were and are unwilling to fix these issues by implementing the Preliminary Specification why are they still around and what are they doing?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

These Are Not the Earnings We're Looking For, Part I

I’ve argued that oil and gas is in a state that is in permanent and terminal decline. The way in which I see things is reinforced by the fourth quarter reports of the 23 producers that we follow. I think now is the time to act by making the decision to build and implement the Preliminary Specification and therefore I will be making my case here in this series of blog posts. The first issue we’ll be discussing is the capitalization policies of the producers.

Until recently it was the size of the asset values of the producer firm that was the basis of success in the industry. CEO’s would brag about the growth of their assets and maintaining a “strong balance sheet” based on the large volumes of property, plant and equipment. Cash flow from these investments enabled them to pay the overhead and interest and there was an ever expanding pool of investors that were able to provide future capital to spend to maintain and grow the producers deliverability. Over time producers learned that what was included in property, plant and equipment were large percentages of those interest charges, overhead costs of the accounting and administration of the firm, including the receptionists time, phone service and Post-It-Notes. Few of the producers costs don’t end up in the property, plant and equipment account. Which has been the way of the industry for the past four decades. It is culturally ingrained with the leadership and management and that is the way it is done.

Oil and gas is a capital intensive industry. Therefore the largest cost incurred are the costs of drilling, completion and equipping. Our argument is that recognition of these costs in a timely fashion would be in the best interest of the dynamic, innovative, accountable and profitable oil and gas producer. They would seek to outperform their competitors by recognizing their capital costs as quickly as possible. Converting their property, plant and equipment investments back into cash via increased cash flow that would fund further investments, pay down debt and issue dividends to their shareholders. This assumes they were operating a commercial enterprise that was generating the revenues necessary to cover their costs. The current environment has their capitalization policies leading to high asset values and large profits. Over the past four decades these large profits have attracted overinvestment in the industry, increased the deliverability of the industry and collapsed the oil and gas commodity prices. In reality though, what was believed to be high asset values and large profits were just accounting magic that deceived the producers, industry and investors into believing that value was being generated. When in fact, as a result of these policies, the industry was using the capital generated from new investors each year to subsidize consumers for their consumption of energy. The amount of the subsidy accurately captured on the producers property, plant and equipment balance on their balance sheet. This activity has been able to continue for the past four decades due to the highly distorted policies of capitalization by the producers. This accounting game has now become obvious to the oil and gas investors who are unsatisfied with the performance and are actively withholding their participation in the industry.

The second element of this overcapitalization anomaly is the speed in which these assets are depleted. Currently producers allocate the costs of exploration and production across their known reserves. Therefore only a small percentage of the firm’s property, plant and equipment are recognized as costs in the current year. From an accounting basis this may make sense from a purely theoretical point of view. From a 21st century, high performing organization point of view it doesn't make any sense to be deferring the recognition of your capital costs to as much as 27.79 years as Cenovus has done in the second quarter of 2017. The demands for capital in the capital marketplace, and the performance of the firms that are successful in the 21st century are not provided with such luxuries. If the investors knew that they were being deceived by the accounting magic being discussed here, they would have withdrawn their investments far earlier.

When this overinvestment through chronic annual share distributions created overcapacity. The commodity prices were not going to be adequate to cover the real costs of oil and gas exploration and production. The deferral of the recognition of these costs into several decades therefore caused the producers to destroy value in the industry. The industry today has been hollowed out of its value and is incapable of providing, building or sustaining value. The subsidy to the consumers has quietly and effectively reduced the industry to the point where it demands a subsidy of several billion dollars each and every year to continue just to function. There is no residual value left anywhere. What the producers have done is they have listed on their balance sheets in the property, plant and equipment account the capital costs of past production. It has been easy to manage a firm on this basis. Now with bloated balances throughout the industry, the tough part begins. The recognition of the past productions capital will be difficult for producers to deal with and account for.

Bureaucrats will claim these are just accounting charges. They do not affect the cash flow of the producer. Ok, we’ve heard that before and they have the accounting mechanics correct. What they’re essentially saying is keep the spending machine going. Let them issue more stock and continue spending that to “build” the organization. What they never want to do at any point in time it seems, is account for that money that they keep spending and recording in property, plant and equipment. It’s a great game until the investors get wise to it. I truly don’t see where the producers go from here. Oil and gas has not been a commercial operation for the past four decades. This spending machine is becoming more obvious to more people every day. As that is what it is, a spending machine, nothing more.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

User Community Developments, Part VIII

Oracle has developed a term that I’ve recently come to appreciate. One that is consistent with the needs of People, Ideas & Objects, our user community and the service providers. That term is “rip and replace” when discussing transitioning between ERP systems. Our concern here is for the integration and implementation of the software, technologies, data and services that are necessary to make the oil and gas producer achieve the most profitable means of oil and gas operations. These will be the responsibilities of the service providers specifically and will have to be a key consideration of the user community members when they’re working with our developers. How will these changes be implemented within the producer firm and industry? The user communities objective of providing state of the art leadership and capabilities would include the change management leadership during the integration and implementation phase of installing the software within the oil and gas sector. It would also include their change management leadership during times when the software they’ve enhanced or improved requires their service provider organization and its producer clients to make the necessary changes.

The user community members development work with our software developers will involve the capture of the needs and understanding of what, how and why the software they’re designing will need to be developed. User community memberships are part-time positions with the bulk of the members earnings being generated as a result of the interest that they own in the service provider(s) they’ll create and operate. Working with the oil and gas producers during the initial software development phase will be necessary in order to determine what it is the producers are looking for in terms of the software that we’re building. This would fall under the part-time work that the user community member would be conducting. These part-time revenues are paid for out of the People, Ideas & Objects user community portion of our budget. Preparation and planning for the changes, training and the myriad different things that are going to have to be done in order that a “smooth” integration and implementation occurs when the software is complete and operational. These fall under the responsibility of the service providers and therefore ultimately the user community member.

These would be revenue generating activities and the bulk of the service providers revenues in terms of their pre-software operations. The allocation of costs and revenues of the user community member and service providers is pretty clear in my mind. As it will be in everyone else’s. It’ll just be that none of us agrees with one another. Another reason that we need to be moving forward soon. We have a diversity and scale of work that is well beyond anything that has been done in industry before. Is it impossible? It’s always impossible until it’s done. I do not see the continuation of the status quo oil and gas producer for much longer. Considering the work that we need to do I think it's reasonable to assume that we’ll soon be under pressure to get things done yesterday. Which is unfortunate but is the way that things get done.

Another area that both the user community member and service providers will be involved in is the fact that we have everything fully defined at this point. Which of course we don’t and never will. What unknown’s are unknown are probably kept that way, however we can be assured that they are growing in scope and scale each and every day. Where I see these fall under is the user communities responsibilities. People, Ideas & Objects have limited their specialization and division of labor in this effort to research, Intellectual Property and software development. For us to tackle anything more is lunacy. What and how the user community and service providers fill in the needed voids are their business models and opportunities. They’ll be entrepreneurs building their own businesses. What we’re all doing is creating a new sub-industry in the ever widening gap that has formed between oil and gas and the Information Technology industries. There is a relatively new area within management that deals with the specifics of these unknown unknowns. That is Program Evaluation, which is not research but its own discipline. Instead of researching to determine something new, Program Evaluation undertakes a study of which is the best option. That would be my summary of it. This has to fall under the area where the issues and opportunities have the means of being resolved by those who have the power and tools to resolve them, the user community.

We will be taking a short break from our series on user community developments to discuss the fourth quarter performance of the producers.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

User Community Developments, Part VII

The objective of the user community is to provide the oil and gas industry with state of the art leadership and capabilities in terms of oil and gas administration and accounting in North America. Focused on providing the oil and gas producer with the most profitable means of oil and gas operations. We have discussed many of the positive attributes of the user community and service providers in this series. Today we’ll discuss one of the downsides in undertaking these steps in providing these objectives, leadership, capabilities and profitability to the oil and gas industry. We are well past ten years in which natural gas prices have been depressed. I read the other day from an authoritative group who were suggesting that the possible natural gas reserves in the U.S. were now in the range of 4,500 tcf. An abundance of gas that is unfathomable. What we do know about this gas is that it is predominately shale and that shale is costly to produce. Much more expensive than what is being realized and reported on today’s producers financial statements.

Continuing to drill and develop these possible natural gas reserves, and for that matter the shale oil, in the way that it is done today will lead to the absolute and certain destruction of the industry. If we aren’t there yet. Taking these possible 4,500 tcf of gas, and maybe it’s much much more, and moving it on to the market as quickly as possible doesn’t seem to be working for anyone. Yet, if I suggest to the producers that they control their inventories like a business would, by only producing what is profitable. The screaming and hollering doesn’t seem to abate. This is truly a surreal situation where the industry is being operated with no logic or business sense whatsoever. The only hope for the industry in a world where shale reservoirs exist is the operation of producers based on our decentralized production model of the Preliminary Specification. Key to the ability of our model is the service providers providing the variable overhead costs of their services on an industry wide basis. Relieving the individual producers from their fixed overhead costs. Overhead costs that are currently unshared and unshareable, yet replicated in each and every producer. Any producer that considers their administrative and accounting expertise as a competitive advantage has already expired as a functioning organization. Without the change to our decentralized production model and the existence of the service provider sub-industry, the oil and gas industries administrative and accounting capabilities and costs will remain fixed. In that case the oil and gas industry is doomed.

The key therefore to our success within the oil and gas, and service industries, and to the larger extent our society that depends on oil and gas. Is the user community and service providers that we’re discussing here. Without them the software doesn’t get designed and developed in the appropriate manner. And therefore the industry will never changes from their current software offerings. ERP applications which will continue to define and support the oil and gas producer organizations that flood the commodity markets with excess oil and gas. The question should be asked how much unprofitable production needs to be taken off the market today? I think we can all understand that it wouldn’t take much. Maybe 10%. Even in the worst scenario of an economy in complete crisis I couldn’t see the demand for energy dropping below 85% of what it was before the economic disaster. Determining what is profitable or unprofitable in times like this, as in any time, will need to be an effective part of the accounting that the service providers and the Preliminary Specification provide the industry. This is also where the downside for the user community member and their service provider organizations comes in.

There will be a fundamental shift in the responsibility for cost control of the overhead costs in oil and gas production. It will no longer be the domain of the individual producers. If they produce 100,000 barrels they will incur 100,000 barrels of overhead costs. If they produce 50,000 barrels they will incur only that much in terms of overhead costs. Overhead costs as a result of the Preliminary Specification are variable. The burden for where these costs reside will be with the service providers. I believe this will be a positive development in the oil and gas industry. Not only do the producers obtain the feature of having variable overhead costs. The service providers will be able to exercise real cost control of these overhead costs on behalf of the oil and gas industry. Service providers will know that at any time they may lose up to 15% of their revenue as a result of some uncontrollable event. And therefore as a result they will be able to plan and budget themselves accordingly. Each service provider is in control of their domain which is the unique process that they manage for the industry. The cost they incur to provide their services are what they will control. It will be a manageable task in which to budget, plan and control those costs. The benefactor of this is the oil and gas industry who, as a result of the Preliminary Specification, our user community and service providers, obtain variable overhead costs and effective overhead cost control for the first time in the industries history.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.