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/

iStock_000013530407SmallThere 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).

pumpjackI 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?

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

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…

HockyStickGraph

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 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!

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:

http://www.ucalgary.ca/utoday/issue/2017-06-23/drivers-cautious-curious-over-automated-cars-first-canadian-study-shows

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

When I mention “TowerCos” (Tower Companies), real estate companies that are like an apartment building landlord… but for towers, I can 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 showing that they have acquired new towers in the following USA geographic locations.

American Tower Advertisement (click to enlarge)

The TowerCo industry itself comprises many companies across the globe. 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) since they offer a business model that promotes sharing and reduces costs. More about how the TowerCo business model reduces costs on my slideshare presentation entitled “Broadband Internet – The ‘Railroad of Our Era'”.

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.

Major data source for this post:

http://www.towerxchange.com/

The Anti-Store

Finally! The NPR Planet Money episode on Price Club / Costco. Why they purposely make shopping harder and why people love it. The quotes in this podcast are priceless; from the founder himself “I was adamant that we would not have signs telling people where things were because that would make it likely that they would wander through all the aisles and find other things to buy.”

http://www.npr.org/sections/money/2015/09/25/443519599/episode-653-the-anti-store

Here’s something I don’t understand about people shopping at Costco. Clearly Costco is not a “quick stop” experience. There are no express cashiers! So why do people still insist on going to Costco to buy a single item???

Image of Costco patron buying only two items (that’s my stuff on the left) on Oct 30, 2015 – bananas and bread?:

CostcoShopJustTwoItems

Planet Money Podcasts for the Canadian Federal Election (#elxn41)

Can politicians “create jobs”? How do they balance the interests of so many stakeholders in a trade deal? What could a “carbon tax” look like? What if politicians only did “what is right” instead of promising things to buy votes? (No-Brainer Economic platform)

Some podcasts from Planet Money that help educate voters and are appropriate for the Canadian federal election.

How Do You Create A Job?
http://www.npr.org/blogs/money/2011/04/05/135151990/the-tuesday-podcast-how-do-you-create-a-job

Trade Deal Confidential – Behind the scenes of the Trans-Pacific Partnership (TPP)
http://www.npr.org/sections/money/2015/06/26/417851577/episode-635-trade-deal-confidential

The One-Page Plan To Fix Global Warming
http://www.npr.org/blogs/money/2013/07/12/201502003/episode-472-the-one-page-plan-to-fix-global-warming

The No-Brainer Economic Platform
http://www.npr.org/blogs/money/2012/07/18/156928675/episode-387-the-no-brainer-economic-platform

The Fastest Growing, Least Popular Airline In America

NPR Planet Money explores our preferences, specifically the difference between what people say and what people do. Economists call this “stated preferences” (What they say they want) vs “revealed preferences” (what people actually choose). Bargain basement airlines are a perfect example as heard in this podcast.

http://www.npr.org/blogs/money/2014/02/14/276973956/episode-517-the-fastest-growing-least-popular-airline-in-america

Is Canada Moving to an Open Access Network?

By the CRTC mandating that telecom companies must share their passive broadband infrastructure might mean that Canada is moving toward an OAN. That means companies might actually need to show a return on investment for their passive infrastructure assets (fiber, conduit, towers) rather than using them to block competition. I’m all for the Telecom companies making a profit (I’m a shareholder of many of them) but I’d rather they do it on the service side in open, honest competition. We know from experience that competition drives companies to be innovative. I would like all the Telecom companies I own to be around for a long, long time and the “we’ve always done it this way” (no innovation) is going to kill them.

https://www.washingtonpost.com/news/the-switch/wp/2015/07/30/this-controversial-internet-policy-has-divided-americans-for-years-now-canadas-just-adopted-it/

http://news.gc.ca/web/article-en.do?mthd=tp&crtr.page=1&nid=1004669&crtr.tp1D=1

What Sensors & Big Data Can Lead To

This planet money follows a UPS truck where sensors & big data lead to small changes that make large bottom line impacts: 1 minute per driver per day over the course of a year adds up to $14.5M. One keystroke per driver costs $100K/year. 1 minute of idle per driver per day is worth $500K in additional fuel costs at the end of the year. Shaving all this time via efficiencies worked for the workers too. In the last decade, their wages & benefits have doubled.

http://www.npr.org/blogs/money/2014/05/02/308640135/episode-536-the-future-of-work-looks-like-a-ups-truck