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	TBP SPEECH (30-45 MINUTES) DYNAMIC CHANGES IN THE PETROLEUM INDUSTRY AMERICAN ASSOCIATION OF PETROLEUM LANDMEN FIFTH ANNUAL MIDYEAR CONFERENCE HILTON HOTEL MIDLAND, TEXAS FEBRUARY 1, 1982

MONDAY, 12 NOON

LUNCHEON FOLLOWED BY KEYNOTE SPEECH

I. FOR THE AMERICAN PETROLEUM INDUSTRY, THE 1970's PRODUCED AN ENVIRONMENT OF CHANGE. IN THE 1980'S, CHANGE WILL OCCUR IN THE INDUSTRY AT A REVOLUTIONARY LEVEL.

II. OIL AND GAS COMPANIES, BOTH LARGE AND SMALL, ARE MANAGERS OF DEPLETABLE ASSETS (I.E. RESERVES), AND THE CONTINUED REPLACEMENT OF PRODUCTION IS ESSENTIAL TO THE MAINTENANCE AND GROWTH OF THE SHAREHOLDERS' INVESTMENT.

A. UNDER THE PRESENT STRUCTURE OF THE INDUSTRY—

1. THE RESERVE BASE IS TOO LARGE FOR MANY COMPANIES' EXPLORATION AND PRODUCTION BUDGETS.

2. CASH FLOWS ARE TOO LARGE FOR THE QUALITY PROSPECTS AVAILABLE (UNDEVELOPED ACREAGE).

3. CASH FLOWS ARE ALSO TOO LARGE FOR THE NUMBER OF PERSONNEL AVAILABLE.

B. FOR SOME COMPANIES, THERE IS NO HOPE FOR REPLACING PRODUCTION.

1. SELLOUTS AND TAKEOVERS WILL BECOME COMMONPLACE.
A. SOUTHLAND IS FOR SALE
B. DELHI
C. CONOCO
D. STEEL/MOBIL - MRO

2. SELLOUTS WILL OCCUR FOR SEVERAL REASONS:
A. AGE OF MANAGEMENT - SUCCESSION
B. LACK OF PROSPECTIVE ACREAGE
C. COST OF MONEY
D. TOO SMALL TO COMPETE

3. TAKEOVERS WILL OCCUR BECAUSE:
A. IT IS THE CHEAPEST WAY TO REPLACE RESERVES.
(1) BUT, NOT WITHOUT PROBLEMS
A. HOSTILE OFFERS
B. PESERVE DECLINES

III. THERE MAY BE A SOLUTION TO SOME OF THESE CASES, THOUGH SOMEWHAT DRASTIC—IT INVOLVES A RESTRUCTURING OF-THE INDUSTRY BASED ON THE ROYALTY TRUST CONCEPT. THIS IS A SOLUTION WHICH BENEFITS EVERYONE INCLUDING SHAREHOLDERS, MANAGEMENT AND THE GOVERNMENT.

A. IN 1979, MESA PIONEERED THE CONCEPT OF CREATING A ROYALTY TRUST AS A MEANS OF ENSURING MORE REALISTIC VALUE FOR THE COMPANY'S ASSETS, WHY SELL AT BELOW ASSET VALUE IF YOU ARE REPLACING RESERVES? [UNREADABLE HANDWRITTEN ADDITION]

1. IN FEBRUARY 1979, MSA WAS SELLING FOR $34. JUNE 1979 - ANNOUNCED TRUST - $44. NOVEMBER 1979 - SPUN OFF TRUST - COMBINED VALUE OF $65. DECEMBER 1981 - COMBINED VALUE OF $115. (2 SPLITS)

2. AT THE SAME TIME, THIS CONCEPT WILL REDUCE THE RESERVE BASE AND HELP SOLVE THE REPLACEMENT PROBLEM.

B. BASICALLY, THE ROYALTY TRUST GRANTS EACH STOCKHOLDER A DIRECT OWNERSHIP INTEREST IN PRODUCING PROPERTIES.

1. MESA SPUN OFF APPROXIMATELY HALF OF ITS RESERVES, 8 MILLION BARRELS OF OIL AND 800 BILLION CUBIC FEET OF GAS, TO THE MESA ROYALTY TRUSTS.

2. BY PROVIDING SHAREHOLDERS WITH A MORE DIRECT INCOME STREAM FROM THESE PROPERTIES, UNBURDENED BY INCOME TAXES AT THE CORPORATE LEVEL, THE STOCK MARKET IS MORE LIKELY TO RECOGNIZE THE VALUE OF THE ASSETS.

3. BY SPINNING OFF A TRUST, A COMPANY REDUCES ITS RESERVE BASE WHICH CAN THEN BE MORE MEANINGFULLY IMPACTED BY NEW DISCOVERIES.
A. THEREFORE, MORE COMPANIES WOULD BE ABLE TO REPLACE PRODUCTION ON A CONTINUING BASIS AND AVOID DEPLETION OF THE STOCKHOLDERS' INVESTMENT.
(1) CONSEOUENTLY, THEY WOULD INCREASE THEIR P/E MULTIPLES.
B. REMEMBER, ON THE CREATION OF A TRUST, THE COMPANY MAINTAINS A 100% WI
(1) TOTAL CONTROL OF RESERVES
(2) NO REDUCTION IN PEOPLE

[HANDWRITTEN ADDITION: WE HAVE COME A LONG WAY ON THIS CONCEPT. (1) 1979-NOT UNDERSTOOD (2) 1982-COMING AROUND: GERWIN SWERINGER, MCKINNEY, SOCAL, HYNES, AND HARTLEY]

C. TODAY, THERE APE FEWER GOOD PPOSPECTS AVAILABLE YET MORE COMPANIES WITH EXCESS CASH FLOW.

1. THIS CAN RESULT IN THOSE COMPANIES WITH EXCESS CASH FLOWS INVESTING OUTSIDE THE INDUSTRY.
A. THIS MAKES THE INDUSTRY VULNERABLE TO POLITICAL CRITICISM.

(1) POLITICAL ATTITUDES TOWARD THE INDUSTRY CAN CHANGE RAPIDLY. FOR EXAMPLE:

[HANDWRITTEN ADDITION: STOP MOBILE BILL]

[A] THATCHER GOVERNMENT - 1979
[B] TRUDEAU - 1979
[C] CLARK - 9 MONTHS
[D] TRUDEAU TODAY
[E] REAGAN COMPARISON

(2) IF NUMEROUS COMPANIES FORMED TRUSTS, IT WOULD CREATE THOUSANDS OF NEW ROYALTY OWNERS THROUGHOUT THE UNITED STATES, INCLUDING NONPRODUCING STATES, WHICH WOULD PROVIDE INCREASED AND BROADER GEOGRAPHICAL-BASED POLITICAL SUPPORT FOR THE INDUSTRY.

2. A REDUCTION IN RESERVES THROUGH THE ROYALTY TRUST CONCEPT WOULD BRING CASH FLOW MORE IN LINE WITH AVAILABLE PROSPECTS AND EMPLOYEES.

D. TO CONTINUALLY REPLACE PRODUCTION REQUIRES A QUALITY ACREAGE POSITION AND AGGRESSIVE EXPLORATION—BOTH REQUIRE SUBSTANTIAL CAPITAL BUDGETS.

1. MESA'S 1981 CAPITAL EXPENDITURES WILL RE APPROXIMATELY $470 MILLION.
A. MESA HAS CONSISTENTLY REPLACED AND ADDED TO THE RESERVE BASE THROUGHOUT ITS 18-YEAR EXISTENCE. (NOTE: DON'T BELIEVE WE SHOULD SAY THAT RESERVES HAVE BEEN UP EVERY YEAR—AS REPORTED IN THE 1975 ANNUAL, RESERVES FOR 1976 WERE DOWN FROM 1975)

2. THE TREASURY DEPARTMENT COULD ALSO BENEFIT FROM THE FORMATION OF ROYALTY TRUSTS WHICH WOULD GENERATE ADDITIONAL FEDERAL TAXES.
A. ACCORDING TO A PRELIMINAPY STUDY BY OUR PEOPLE, IF 100 OIL AND GAS COMPANIES FORMED TRUSTS COMPRISED OF 1/2 THEIR U.S. RESERVES, THEY WOULD GIVE SHAREHOLDERS DIRECT OWNERSHIP OF APPROXIMATELY $130 BILLION IN PRESENT VALUE UPON DISTRIBUTION PLUS APPROXIMATELY $15 BILLION IN ANNUAL DISTRIBUTIONS.
(1) THIS WOULD CREATE ADDITIONAL FEDERAL TAX REVENUES OF SOME $l0-$15 BILLION ON THE INITIAL DISTRIBUTION AND $2-$3 BILLION ON THE ANNUAL DISTRIBUTION.
B. THE TREASURY DEPARTMENT COULD ENHANCE THE NUMBER OF ROYALTY TRUSTS FORMED IN THE IMDUSTRY BY FORMALLY ANNOUNCING THAT ROYALTY TRUSTS WOULD HAVE GRANTOR TRUST STATUS.
(1) I EXPECT A RULING FROM THE IRS WITHIN THE NEXT FEW MONTHS, POSSIBLY WEEKS.
(2) THE TREASURY DEPARTMENT COULD ALSO ENCOURAGE TRUSTS BY CONSIDERING SUCH SPINOFFS AS LONGTERM CAPITAL GAINS TO SHAREHOLDERS.

4. THE ROYALTY TRUST CONCEPT. WILL NOT FIT ALL COMPANIES.
A. LET ME BE VERY CLEAR—
(1) IF THE DEALS AND MONEY ARE IN BALANCE, A ROYALTY TRUST SHOULD NOT BE CONSIDERED.
B. MANAGEMENTS OF THOSE WITH DECLINING RESERVES AND PRODUCTION OWE IT TO THEIR SHAREHOLDERS TO CONSIDER THE CONCEPT.
(1) WITH A TRUST. P/E MULTIPLES WOULD MAKE A DRAMATIC CHANGE.

5. UNDER THE ROYALTY TRUST CONCEPT, ALL PARTIES ARE WINNERS.
A. SHAREHOLDERS RECEIVE A GREATER AND MORE DIRECT RETURN ON THEIR INVESTMENT. (ASSETS WOULD NOT BE DEPLETED BY COMPANY.)
(1) OIL MAY NOT BE WORTH MORE THAN $3 A BARREL WITH SOME COMPANIES.
(2) SOME MANAGEMENTS GET THE IDEA THAT A TRUST WILL MESS UP THE COMPANY, BUT, THE COMPANY IS THE SHAREHOLDERS'.
B. COMPANIES CAN MORE EASILY IMPACT THEIR RESERVE BASE.
C. GOVERNMENT CAN INCREASE ITS REVENUES.

IV. TO SUMMARIZE, AMERICA'S PETROLEUM INDUSTRY IS FACING A PERIOD OF DRAMATIC CHANGE.

A. THIS WILL INCLUDE A COMPLETE RESTRUCTURING OF MANY COMPANIES WITH MAJOR PORTIONS OF ASSETS BEING DISTRIBUTED TO SHAREHOLDERS.

1. THE RESULT WILL BE MUCH SMALLER, MORE EXCITING COMPANIES WHICH CAN BE MORE EASILY IMPACTED WITH NEW RESERVES.

B. IN ADDITION, CHANGES IN THE NATION'S POLITICAL CLIMATE ARE HELPING END A LONG PERIOD OF LEGISLATIVE ROADBLOCKS AND CRITICISM FROM WASHINGTON WHICH HAVE NOT ONLY HAMPERED THE INDUSTRY BUT ALSO THE NATION'S SEARCH OF INCREASED ENERGY INDEPENDENCE.
A. THE AVERAGE WELLHEAD PRICE FOR GAS, CURRENTLY APPROXIMATELY $2 PEP MCF, WOULD PROBABLY GO TO $5 OR $6 AFTER DECONTROL.
B. DECONTROL OF ALL GAS-WOULD MEAN $28 BILLION IN ADDITIONAL REVENUES FOP THE FEDERAL GOVERNMENT, NOT INCLUDING A "WINDFALL PROFITS TAX.

C. THESE APE REVOLUTIONARY CHANGES, BUT MORE IMPORTANT THEY ARE POSITIVE CHANGES WHICH WILL GIVE NEW LIFE AND VITALITY TO ONE OF THE NATION'S MOST IMPORTANT ASSETS-AN AGGRESSIVE OIL AND GAS INDUSTRY.