J'accuse
November 16, 2012
Imagine if Mercedes announced gains in units sold, without reference to which particular units accounted for the gains. Are those units from the SL series, priced at over $100,000 or are they Smart cars, at under $20,000? Flat numbers, blending across entirely unrelated lines, are worthless. There's no other way to describe it.
The Oil & Gas sector is problematic enough in restricting material news flow to quarterly reports (see my rant on that here). My beef today is on usage of a measure called BOE/day. Short for barrels-of-oil-equivalent-per-day, this term collapses oil and gas together in one count for the sake of simplicity.
From Albert Einstein, "Everything should be made as simple as possible, but not simpler."
Here's where BOE/day goes too far in the name of simplicity. BOE incorporates a 6:1 ratio of gas (mcf – thousand cubic feet) to oil (barrel). This ratio is a function of the BTUs (British thermal unit) produced by each fuel. To wit, it takes approximately 6 mcf of natural gas to generate the same amount of energy as produced by one barrel of oil. Ceteris paribus, prices would mirror this ratio. Ceteris paribus, of course, is dreamland. Long ago and far away, the price of a barrel of oil may also have been 6x that of one mcf of gas. Soooo… blending the two for an equivalent, adjusted by this ratio would have been fair game. Well… the price of oil today stands at $86.31. Recent quarterly reports in Western Canada have the price of natural gas in the range of $2.27. That's certainly not 6x, is it? More like 38x. Moreover, the prices of these commodities vary widely by type or region. Brent Crude goes for $108.57. Gas in New Zealand is recently reported at $4.38. On top of all this, there's no cost quotient built in to the differential. In short, what we've got here is a dog's breakfast, with no rational foundation.
The only consideration that should be of interest to investors would be cash flow, or at most, cash flow per unit. My own preference would be to show absolutely no mixing of the two commodities in company reports, other than in consolidated financial statements, with no reference to volumes. Volumes need to be maintained and reported separately. Mixing of the two does no more than muddy the true picture of what's going on.
No one seems inclined to remedy this mess. Moreover, company after company issues releases including headlines or boldfaced bullet points declaring current or projected BOEs. Analysts play along with this charade, adding only parenthetic or footnoted references to the mix of oil and gas. The numbers are all there, mind you. Make no mistake of it, the numbers are there. The challenge is that, for no supportable reason, you'll need to pull out your calculator and dig through small print footnotes to get to the truth of the matter.
My family and I watched a 2002 episode of West Wing last night. In it, Sam Seaborn, played by Rob Lowe, says to the President, "I don't think it's such a good idea to be casual about the truth." I agree and the notion fits here perfectly.
Yesterday, I read a release reflecting BOE/day up from the previous quarter by 11%. Well… it seems from the same release that revenues were down from the previous quarter by 19% (a number you'd have to interpolate from what was provided, of course, because it didn't actually say this), leading me to read more closely. Further scrutiny revealed that gas volumes were up by 150%. Unfortunately, oil volumes were down by 33%, quarter over quarter. Both of these quarterly comparisons needed to be calculated, I should say, as comparisons offered were to six month reports and previous year performance. Adjusted for price information provided in the release, 'true' BOEs were calculated as down by 20%, almost a perfect match to the revenue drop.
Later in the day, I fell upon an analyst's summary of this news, reporting that BOE/d was higher than he'd forecasted. He also reported BOE/d at a figure 11.8 per cent higher than was named in the actual news release. What's up with that, I ask?
On the company side of this issue, I understand that nobody wants to be the first out of the trenches (think of WWI), as their transparent reporting would be missed by most who are not careful readers (to use the generous description). Transparent apples would be compared to opaque oranges, leaving full and frank reporting penalized by an unknowing marketplace.
On the analyst side, why on Earth would a purportedly independent person perpetuate the myth that BOE/day offers any value whatsoever? For those who understand that this measure holds nothing, such behaviour can only be seen as irresponsible. For those who do not understand… well, I know, ignorance is no excuse. This said, don't take me for a ride and then tell me that I should have known that you were taking me for a ride. Not the best way to build trust… if trust is something to be valued, that is.
Same old… same old.
Gotta run… I'm off to test drive a new Mercedes.
With respect,
Kevin Graham