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	TBP SPEECH DYNAMIC CHANGES IN THE PETROLEUM INDUSTRY ANNUAL MEETING, DIVISION OF PRODUCTION ST. ANTHONY HOTEL SAN ANTONIO, TEXAS APRIL 5, 1982

MONDAY, 1:30 P.M.

(YOUR SPEECH WILL FOLLOW WELCOMING ADDRESS BY HENRY CISNEROS, MAYOR OF SAN ANTONIO)

[HANDWRITTEN ADDITION: ALL AGGIES? IS EVERYONE HERE AN AGGIE? ROB ADAMS- MAYOR 1) HISTORY OF S.A. 2) FIESTA WATCH STORY]

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. [HANDWRITTEN ADDITION: WHAT IS MORE REVOLUTIONARY THAT THE LAST 4 MOS. OIL PRICE CHANGE RIG COUNT FROM 4530 (3RD WK PEAK) TO 3596 RIGS TODAY, ATTITUDE ON WALL STREET ABOUT OUR INDUSTRY- A PERIOD OF AWARENESS IN APPROACHING AT A VERY RAPID PACE AND LET ME EXPLAIN.]

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. THE EARLY 80's COULD GO DOWN AS THE PERIOD OF AWARENESS IN THE OIL INDUSTRY—AWARENESS FOR BOTH STOCKHOLDERS AND MANAGEMENT. WHY? [HANDWRITTEN ADDITION: I SEE THIS AS LAST THEY DOWN 219 FROM THE WEEK BEFORE. 1850'S DAY WORK SERMIN. FINDING COST]

1. COMPANIES ARE NOT REPLACING THEIR ASSETS AND LIQUIDATION HAS BEEN GOING ON FOR YEARS DISGUISED BY INCREASED PRICES THROUGH THE '7Os. [UNREADABLE STRICKEN TEXT]

B. UNDER THE PRESENT STRUCTURE OF THE INDUSTRY-

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

2. CASH FLOWS ARF TOO LARGE FOR THE QUALITY PROSPECTS AVAILABLE.

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

4. [HANDWRITTEN TEXT: AND FIND COSTS ARE TOO HIGH.]

C. FOR SOME COMPANIES, THERE IS NO HOPE FOR REPLACING PRODUCTION. [HANDWRITTEN ADDITION: THESE CO'S WILL EVENTUALLY BE ONLY A DOWNSTREAM OPERATION.

1. SELLOUTS AND TAKEOVERS WILL BECOME COMMONPLACE.
A. TEXAS PACIFIC
B. DELHI
C. CONOCO
D. MARATHON
E. HOUSTON OIL & MINERALS
F. TRANS OCEAN [HANDWRITTEN ADDITION: AND THE LIST GOES ON.]

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

3. TAKEOVERS WILL OCCUR BECAUSE:

A. IT IS THE CHEAPEST WAY TO REPLACE RESERVES. [HANDWRITTEN ADDITION: WIDE GAP- TIMING COST $15-20 PER BBI PURCHASE. $10-12 PER BBI, BUY YOUR OWN STOCK.]

{STRICKEN TEXT: (1) BUT, NOT WITHOUT PROBLEMS}
{STRICKEN TEXT: A. HOSTILE OFFENSE}
{STRICKEN TEXT: B. RESERVE DECLINES}

III. THERE MAY BE A SOLUTION TO SOME OF THESE CASES, [UNREADABLE STRICKEN TEXT]—IT INVOLVES A RESTRUCTURING [UNREADABLE STRICKEN TEXT] 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?

1. IN FEBRUARY 1979, MSA WAS SELLING FOR $34. JUNE 1979 - ANNOUNCED TRUST - $44. NOVEMBER 1979 SPUN OFF TRUST COMBINED VALUE OF $65 {STRICKEN TEXT: DECEMBER 1981} [HANDWRITTEN ADDITION: APR. 1982]—COMBINED VALUE OF {STRICKEN TEXT: $115} [HANDWRITTEN ADDITION: $90] (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. [HANDWRITTEN ADDITION: MSA HAS REPLACED RES. FOR 18 STRAIGHT YEARS- IF YOU ARE A MSA STOCKHOLDER, I WILL PROMISE YOU WILL NOT GET 2 DOWN YEARS IN A ROW]

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 TRUST.

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. [HANDWRITTEN ADDITION: MANAGEMENT SHOULD NOT BE AFRAID- IT MAY VERY WELL BE THEIR SALVATION RE: 1) MRO 2) CONOCO MANAGEMENT SHOULD NOT BE CONCERNED WITH SIZE- ONLY WHAT IS BEST FOR THE STOCKHOLDER]

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) CONSEQUENTLY, THEY WOULD INCREASE THEIR P/E MULTIPLES, HANDWRITTEN ADDITION: MORE ATTRACTIVE TO INVESTMENT COMMUNITY.
B.REMEMBER, ON THE CREATION OF A TRUST, THE COMPANY MAINTAINS A 100% WI (1) TOTAL CONTROL OF RESERVES (2) NO REDUCTION IN PEOPLE
C. MTR WAS CLEARED IN MARCH [1982] BY THE IRS AND IS NOW A GRANTOR TRUST FOR TAX PURPOSES.
D. CURRENTLY, THE ROYALTY TRUSTS ARE: MTR, PERMIAN BASIN TRUST. [HANDWRITTEN ADDITION: SAN JUAN BASIN TRUST] HOUSTON OIL TRUST AND HOUSTON OIL ROYALTY TRUST.
E. OTHERS WILL BE ANNUNCED SHORTLY, (SABINE ROYALTY TRUST)
F. I AM CONTINUOUSLY AMUSED HOW SOME BUSINESS WRITERS SEE TRUSTS AS A "SCHEME FOR FOUNDERS TO MAKE LARGE GAINS." THESE WRITERS NEED TO REALIZE THAT ALL STOCKHOLDERS [UNREADABLE STRICKEN TEXT] ARE TREATED THE SAME.

[HANDWRITTEN ADDITION: I BELIEVE OUR MANAGEMENT HAS BEEN MORE SENSATIVE TO STOCKHOLDERS INTERESTS THAN MOST MANAGEMENT - MAYBE BECAUSE OUR 96% OF OUR EMPLOYEES ARE STOCKHOLDERS.]

[HANDWRITTEN ADDITION: STOCKHOLDERS SHOULD DEMAND AND SEE THAT THEIR MANAGEMENTS HAVE MEANINGFUL STOCK OPTIONS SO THEY WILL ALWAYS APPROACH QUESTIONS WITH WHAT'S BEST FOR THE STOCKHOLDERS]

C. TODAY, THERE ARE FEWER GOOD PROSPECTS AVAILABLE YET MORE COMPANIES WITH EXCESS CASH FLOW.

1. THIS CAN RESULT IN {STRICKEN TEXT: THESE} COMPANIES WITH EXCESS CASH FLOWS INVESTING OUTSIDE THE INDUSTRY.
A. THIS MAKES THE INDUSTRY VULNERABLE TO POLITICAL CRITICISM.
B. FURTHERMORE, INDUSTRY MANAGEMENTS HAVE DEMONSTRATED THAT THEY DO NOT HAVE THE EXPERTISE TO EFFECTIVELY MANAGE OTHER BUSINESS ENTERPRISES (I.E. MARCOR AND RELIANCE) [HANDWRITTEN ADDITION: MOBIL AND EXXON]
(1) POLITICAL ATTITUDES TOWARD THE INDUSTRY CAN CHANGE RAPIDLY, FOR EXAMPLE:
[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 GEOGRAPHICALLY-BASED POLITICAL SUPPORT FOR THE INDUSTRY.

2. THE TREASURY DEPARTMENT COULD ALSO BENEFIT FROM THE FORMATION OF ROYALTY TRUSTS WHICH WOULD GENERATE ADDITIONAL FEDERAL TAXES.
A. ACCORDING TO A PRELIMINARY 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 $10-$15 BILLION ON THE INITIAL DISTRIBUTION AND $2-$3 BILLION ON THE ANNUAL DISTRIBUTION.
B. THE GRANTOR TRUST STATUS RECEIVED LAST MONTH FROM THE IRS [UNREADABLE STRICKEN TEXT] [WILL] CAUSE MANGEMENTS TO CONSIDER [UNREADABLE STRICKEN TEXT] [A] ROYALTY TRUST. [UNREADABLE STRICKEN TEXT] I AM SURE THERE WILL BE MANY QUESTIONS ABOUT THEM AT ANNUAL MEETINGS.(1) THE TREASURY DEPARTMENT COULD ALSO ENCOURAGE TRUSTS BY CONSIDERING SUCH SPINOFFS AS LONG-TERM 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 {STRICKEN TEXT: MONEY} [HANDWRITTEN ADDITION: CASHFLOW] ARE IN BALANCE, A ROYALTY TRUST [PROBABLY] SHOULD NOT BE CONSIDERED. (2) THE DEBT STRUCTURES OF SOME COMPANIES WILL NOT ALLOW FOR SPINOFFS.
B. THE COMPANIES THAT MUST TAKE A SERIOUS LOOK AT ROYALTY TRUSTS ARE THOSE WITH DECLINING RESERVES AND LITTLE HOPE OF TURNING THIS TREND AROUND.

{STRICKEN TEXT: A. WITH A TRUST, P/E MULTIPLES WOULD MAKE A DRAMATIC CHANGE.}

5. RIDER 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.) EXAMPLE: (1) OIL MAY NOT BE WORTH MORE THAN $3 A BARREL WITH SOME COMPANIES. (2) REMEMBER THE RESTRICTIONS OF A GRANTOR TRUST - THE SHAREHOLDER WOULD NOT BF TAXED AT THE CORPORATE LEVEL.
B. COMPANIES CAN MORE EASILY IMPACT THEIR RESERVE BASE BY REDUCING THEIR SIZE.
C. GOVERNMENT CAN INCREASE ITS REVENUES.

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

1. THE RESULT WILL BE {UNREADABLE STRICKEN TEXT} SMALLER, [HANDWRITTEN ADDITION: ONLY FROM A RES BASE STAND POINT] 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 NATIONS SEARCH FOR INCREASED ENERGY INDEPENDENCE, THIS COULD BE SHORT-LIVED IF WE HAVE A CHANGE OF ADMINISTRATION IN 1984, THE INDUSTRY MUST START PLANNING FOR THAT POSSIBILITY NOW!

1. I BELIEVE WE COULD SEE DECONTROL OF NATURAL GAS SOMETIME NEXT YEAR; HOWEVER, IT WILL PROBABLY BE ACCOMPANIED BY A WINDFALL PROFITS TAX.
A. THE AVERAGE WELLHEAD PRICE FOR GAS, CURRENTLY APPROXIMATELY $2 PER MCF, SHOULD PROBABLY GO TO AN AVERAGE OF $5 OR $6 AFTER DECONTROL.
B. DECONTROL OF ALL GAS WOULD MEAN $28 BILLION IN ADDITIONAL REVENUES FOR THE FEDERAL GOVERNMENT, NOT INCLUDING A "WINDFALL PROFITS TAX.
C. THE CHANGES I HAVE SPOKEN OF TODAY ARE REVOLUTIONARY, BUT MORE IMPORTANT THEY ARE POSITIVE CHANGES WHICH WILL GIVE NEW LIFE AND VITALITY TO ONE OF THE NATIONS MOST IMPORTANT ASSETS—AN AGGRESSIVE OIL AND GAS INDUSTRY.

2. A REDUCTION IN RESERVES THROUGH THE ROYALTY TRUST CONCEPT WOULD BRING CASH FLOW MORE IN LINE WITH AVAILABLE PROSPECTS AND EMPLOYEES. [HANDWRITTEN ADDITION: SHOULD NOT BE SO CONCERNED WITH SIZE- PRIMARY CONCERN- WHAT IS BEST FOR THE STOCKHOLDERS.]

{STRICKEN TEXT: TO CONTINUALLY REPLACE PRODUCTION REQUIRES A QUALITY ACREAGE POSITION AND AGGRESSIVE EXPLORATION— BOTH REQUIRE SUBSTANTIAL CAPITAL BUDGETS.}

{STRICKEN TEXT: 1. MESA'S 1981 CAPITAL EXPENDITURES WERE $420 MILLION AND ARE ESTIMATED AT $350 FOR 1982.}

{STRICKEN TEXT: A. MESA HAS CONSISTANTLY REPLACED AND ADDED TO THE RESERVE BASE THROUGHOUT ITS TO YEAR EXISTANCE.}