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Oil & Gas Cost Reduction Projects With 50% IRR Go Undone

Even in today’s poor commodity climate – many cost savings projects with a 2-3 year payback (50% IRR) period go undone. If you don’t recall what the payback period or IRR is, please see my post:

“Who likes making money? Payback, RoI, IRR explained…” https://www.textor.ca/2016/03/who-likes-making-money-payback-roi-irr-explained/

There are two things to note about cost savings projects. They typically:

  • Reduce periodic General and Administrative (G&A) costs – so the savings that impact periodic payments do not “end” and could go on indefinitely.
  • Are beneficial in a good or bad commodity environment. There is no commodity price dependency!

Based on this, a company should always do periodic cost reduction projects – in a good or bad commodity environment since it increases the profit margin in good times and allows a company to survive longer than its competitors in bad times (and survivors always do the best in the long run).

I have been in Oil & Gas for over 17 years. And during that time I’ve been aware of more rural connectivity projects that have these characteristics than I could possibly handle… if only they would be approved and added to the queue. To add to the malaise, network costs are a top IT cost. See my article “Top Ongoing IT Costs – Data Centres and… Networks” https://www.linkedin.com/pulse/top-ongoing-costs-data-centres-networks-trevor-textor

Correct me if I’m wrong… but from what I recall from what Oil and Gas executives have told me, any Oil & Gas project with over a 30% IRR is always approved. However, it’s been entirely up-hill trying to convince Oil & Gas to approve these projects.

I’m going out on a limb here though…. Maybe the reason why is that they are connectivity (telecommunications) projects for rural areas? Connectivity usually falls within the IT department and from my interviews with CIOs, there is little focus on connectivity costs. That is, they feel that connectivity is not really an IT role but it gets lumped into IT so they suffer through it. I agree with them – IT is getting dumped on due to poor understanding of connectivity at the leadership levels. After over a decade doing rural connectivity, I believe that connectivity should be an engineering role and connectivity commissioning and operations should be in IT. This arrangement makes the basic procurement management build (engineering) vs rent (off the shelf) calculation possible. Let’s face it, IT is not engineering. IT is only going to rent. But most of the time, it is more effective to build in rural Oil & Gas locations.

The final nail in the coffin for this whole scenario is that connectivity is critical infrastructure (like water, electricity). This basically means you can’t do things that are expected of a company operating in the current economic environment without it. I have had to deliver the bad news to hundreds of promising Oil & Gas projects because the current network they have cannot support anything but the basics (e.g. kilobit per second SCADA – or what I call “tin can on a string” data). The cost of this one fact alone is colossal. I explain more about this in my presentation “Understanding the Remote Field Data Communications Challenge”

http://www.slideshare.net/TrevorTextor/understanding-the-remote-field-data-communications-challenge

Anyone care to chime in? Anybody have an Oil and Gas producer or midstream company (operates rurally with large footprint) who does not focus on connectivity and would love to save money?

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The digital divide (economic problem) is mainly due to broadband availability

Great to see jurisdictions taking action with the digital divide economic problem: this is clearly a data communications (broadband) delivery issue or we wouldn’t need a United Nations Broadband Commission to educate countries about this. Mexican government’s digital divide initiative is delivering 1500 base stations to service 64,000 sqr km (25,000 sqr miles) using Redline’s product. Redline won the bid by demonstrating that Redline’s product needed less total base stations and has better longevity. A total cost of ownership (TCO) calculation. Job well done! http://yourcommunicationnews.com/redline+communications+awarded+%241.7m+contract+for+major+wireless+network+in+mexico_129241.html

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Who likes making money? Payback, RoI, IRR explained…

What’s a payback period? How does it compare to Return on Investment and Internal Rate of Return?

A good question. A payback period is the time it takes for the benefit of a project (cost savings or increased revenue) to pay back the initial capital of the project. For example, you have a project that costs $2,000 and takes a year to complete. After it is completed it saves you $1,000 yearly (no end date in this example). That means the project will take 2 years to be paid back after the project’s completion ($2000/($1000/year) = 2).

So how does this compare to Return on Investment (RoI)? Simple ROI = (Gains or savings – investment costs) / Investment Costs. It does not take time into account. For instance, with the above example, after 3 years the RoI is ($3000-$2000)/$2000 = 50% but after 10 years the ROI is ($10,000-$2,000)/$2000 = 400% – so the RoI keeps escalating toward infinity over time… not very useful. Internal Rate of Return (IRR) however, is!

IRR is a compounding rate of return. I won’t go into the calculation but the above example has a ~50% IRR. Since it’s compounding we can use the “rule of 72” to figure out what this really means. The rule of 72 tells us how many years it takes to double the cumulative benefit. So 72/50= 1.44 years. So at 1.44 years the gain/savings is $1,440. At 2.88 years it is $2,880. At year 5.76 it is $5,760. And so on…

At left is the compounding “hockey stick” graph. This is the hockey stick graph for my “rewirement” strategy (9% compounded yearly) – coincidently this is the same strategy that I coach about. It’s the only buy and hold strategy that works in an up or down market, has over 150 years of market data behind it, is the laziest DIY strategy and that most anyone can do (assuming you understand addition, subtraction, multiplication and division).

A slow start initially and then ZOOM! upward. Compounding in action!

If you are interested in this strategy, I read about it in a book that is freely downloadable on the internet or you can get the book from a library or a used bookstore:

“The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller”
http://www.mhinvest.com/files/pdf/SBI_Single_Best_Investment_Miller.pdf

I liked reading it but many people tell me it’s boring… I guess I get excited enough about making money to read it through. What I coach in is the “how to” part; complementary to the book (or for people who don’t want to read it and want the summary). People are fully coached in approximately 2-4 hours depending on the person (2 hour basic course plus additional time as needed). However, I love to support “do it yourselfers”, and if you are one, you can probably figure out the “how to” part using Mr. Miller’s book with some invested time. However, if you want a jump start, please let me know! I discuss the strategy more here: https://www.textor.ca/single-best-investment-doomed-retirement-feeling/

I actually asked Mr. Miller if it was ok if I coached people using his book as the basis. He said “sure!”. You have to wonder… this strategy 100% works; always! Mr. Miller has published two versions of his book over the last decade+ before finally allowing people to read it for free on the internet. Clearly, people aren’t using it en masse. Every single person I have coached says “Why doesn’t everyone do this? It’s so easy!” and “I wish I had done this X years earlier.”  No one has ever told me “this is a waste of time”. Mr. Miller is a fund manager – which the book basically discourages using. And even after Mr. Miller tells his clients not to use him and how to do it themselves, they still want Mr. Miller to manage their money.  Such a strange world we live in!

Note: I owe recognizing the strength of this strategy as I read that book to my knowledge of IRR and payback periods. Good things to know!

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Many Protests Are NOT Evidence Based

This very articulate oil industry worker explains why anti-oil protests do not make sense in a surprisingly matter of fact and well delivered way.

https://youtu.be/qwCZB97E45M

Personally, I have trouble with being pure black and white / “anti-anything” these days; there is so much misinformation, especially from protest groups. In my youth I got keyed up by all the rhetoric like everyone else but then I learned that most of these people are so widely misinformed that it’s just dangerous to believe them. A film that highlighted this for me was the documentary “Pandora’s Promise”; in it, many key environmentalist figures question some environmental stances as non-evidence based.

https://en.wikipedia.org/wiki/Pandora%27s_Promise

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RioTel Celebrates 17 Years in Business

Karin Williams shares her founding story. Karin has been my primary and enduring mentor since starting my own business and her wisdom has rung true more times than I can count. Her brand of honest, respectful business conduct I truly cherish as I have found that it’s in less abundance than I had hoped. Congratulations Karin for navigating RioTel through 17 years. A true accomplishment!

https://www.linkedin.com/pulse/my-founder-story-circa-1999-karin-williams

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IEEE Southern Alberta Speaking Engagement – Calgary February 4, 2016

I’m delighted to be delivering two presentations again but for the first time, in tandem:

“Broadband Internet – The “Railroad” of Our Era”, a general view of broadband internet, followed by:

“Understanding the Remote Field Data Communications Challenge”, rural telecom for Oil & Gas “in a nutshell”.

Non-IEEE members are welcome. Registration opens at 5:15pm, presentations start at 6pm.

More about the presentation here:

https://meetings.vtools.ieee.org/m/36884

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Robocall Spam – Finally some movement in 2015

How come robocalls (telephone spam) is not being significantly curtailed?

The big telecom companies have been hiding behind excuses for years but those excuses are no longer holding water. With email systems doing it regularly, we know better; These excuses do not hold water anymore.

Consumers Union has taken a stand and is making progress. An update email from Consumers Union USA dated Dec 22, 2015:

“Last year at this time, hardly anyone believed robocalls could be stopped.

The Do Not Call list wasn’t working. Scammers quickly disappeared and reopened shop before the cops could find them. And your phone company just ignored you when you asked for help.

But together, with you, we changed all that.

After our campaign launched in February, the FCC and nearly every state Attorney General followed Consumers Union’s lead and told the phone companies to block these calls. Members of Congress introduced legislation. And presidential candidates even talk about this on the campaign trail.

Now, we are bringing Verizon, AT&T and Century Link to the negotiating table in the New Year. We will be representing your demands for free tools to block robocalls before they reach your phone – and we won’t back down!

…

When we started this campaign, everyone thought we were nuts. It was such a perplexing problem that regulators, who tried for years to stop robocalls, even held a contest looking for solutions. And the giant phone companies didn’t want to act, hiding behind the claim that they didn’t have the legal authority to block these calls.

But you told us robocalls were ruining your quality of life. And for others, your bank accounts. Some $350 million is stolen each year from consumers – mainly the elderly who take these calls and are quickly duped.

It’s been a long haul, but together we’ve made huge progress. Once thought an impossible problem, our research has found several solutions that will dramatically reduce robocalls. Now we’re headed to the major phone companies demanding they implement these solutions for you!

…
Thank you,
Tim Marvin, Consumers Union
Policy and Action from Consumer Reports”

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Automated Vehicles & Canada

What could automated vehicles do for Canadians and the economy? The Conference Board of Canada takes a look (infographic):
http://www.conferenceboard.ca/infographics/automated-vehicles.aspx

Access the full report here:
http://www.conferenceboard.ca/e-library/abstract.aspx?did=6744
Click the button at right labelled “access document”; it requires an account to be created.

Study shows that those who drive over 10 hours a week are 3 times more likely to cede control to autonomous vehicles and that confident, aggressive drivers are least likely to surrender control:

https://phys.org/news/2017-06-drivers-cautious-curious-automated-cars.html

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What does a TowerCo “look like”? (introduction to Real Estate for Telecom)

TowerCo

When I mention “TowerCo” (Tower Companies), real estate companies that are like an apartment building landlord… but for towers, I see the confusion in people’s eyes. Essentially, the tenants (renters) are antennas that get mounted to the tower (apartment building). What’s the best way to visualize what one looks like? Well, just look at their advertising – they have towers for rent! Here’s an advertisement from American Tower showing that they have acquired new towers in the following USA geographic locations.

American Tower Advertisement Nov 12, 2015

(click to enlarge)

The TowerCo industry itself comprises many companies across the globe. According to the industry’s journal TowerXchange, TowerCos already own 2/3rds of the world’s 3 Million towers. In the USA TowerCos own ~61% of the ~270K towers. In Canada, that figure is less than 5%.

TowerCo ownership, or companies that are exclusively real estate (do not sell telecom services), are a key indicator for broadband costs (e.g. cell phone data plans). This is because they offer a business model that promotes sharing and reduces costs. The reader may learn more about how the TowerCo business model reduces costs on my slideshare presentation entitled “Broadband Internet – The ‘Railroad of Our Era'”.

TowerCo Market

In the USA the top 3 tower companies listed on the New York Stock Exchange are:

  • SBA Communications
  • American Tower
  • Crown Castle

All three operate as “Real Estate Investment Trusts” (REITs), further confirming that they are real estate companies. Collectively they own, lease and manage 95,000 towers and are worth $69 Billion. One of these top 3 companies, SBA, has moved into Canada with a subsidiary called SBA Canada. (@ early 2014) The other major TowerCo in Canada is Turris Corp.

TowerCo Strategy

I’m including text from the podcast “Tower Talks with Inside Towers: #15 – TowerXchange CEO Kieron Osmotherly” (@9:17) which accurately summarizes the TowerCo strategy from the perspective of a mobile network operator (examples are Telus, Bell, AT&T, Verizon, etc) and provides some metrics on the performance of this business strategy.

We pickup in the podcast where Kieron is talking about the common fundamentals of the Tower market:  “… [A] telecom tower on a mobile network operator’s balance sheet is a depreciating asset built to serve the needs of one customer. You take that tower and you put it on a Tower company’s balance sheet and it becomes a potential source of long term recurring revenue from multiple credit worthy tenants.

We’re correcting a flaw in the original design of wireless communications which created this overlapping infrastructure. And we’re correcting that to a more efficient collocation driven model. The capital markets recognize that. It’s reflected in the valuation performance of tower companies. It aggregates up to a $330 Billion dollar global infrastructure asset class which is out-performing most relevant comparisons.

TowerCo Investment

As we mentioned before between them the tower companies now have 69% of the world’s invest-able assets which is a pretty good proportion. Most tower companies stick to that blueprint.

There is significant variation when you look at the difference between a pure play independent tower company like American Tower, SBA, Cellnex, HBS. These guys are fantastic at shareholder value creation and generating efficiencies. They typically trade at EBITA margins between 60-80% valued 15-25x.

And then we’ve got a relatively recent variant on the business model which we call the operator-led tower company [TowerCo]…. It’s at least 50.01% owned by the original parent mobile network operator(s). In comparison, to a pure play independent tower company [TowerCo] you often see slightly lower EBITA margins of perhaps 40-60%. And valuations of 10-15x are still significantly greater than the valuations of mobile network operators.

I think we’ve arrived at the day and age where pretty much everyone understands that a tower that’s trapped on a mobile network operator’s balance sheet is uh, it’s difficult to defend that position to shareholders these days. Whether you’re going to carve it out or sell it, it should be shared.”

About the Author

An avid writer, Trevor Textor has been quoted by Reader’s Digest, NBC News, Reviews.com and MarketWatch.com. As a freelancer Trevor has moved towers off of an Oil & Gas company’s balance sheet in a sale and leaseback deal to a TowerCo. Ask Trevor if he can help: https://www.textor.ca/contactme/