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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)

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.

A. WHAT'S MORE REVOLUTIONARY THAN OIL PRICE CHANGES DURING THE PAST FOUR MONTHS IS RIG COUNTS.

1. THE RIG COUNT IN THE U.S. BIT A HIGH WATER MARK DURING THE THIRD WEEK OF DECEMBER, 1981 WITH 4530.

2. SINCE THEN, THE RIG COUNT HAS DROPPED TO 3597 AS OF TODAY.

3. I DO NOT NECESSARILY VIEW THIS DROP AS BAD - IT COULD BE A HEALTHY SIGN.
A. DAY WORK CONTRACTS HAVE DRIVEN FINDING COSTS UP.
B. THIS COULD NOW CHANGE.

II. A PERIOD OF AWARENESS FOR OUR INDUSTRY IS APPROACHING AT A VERY RAPID PACE. LET ME EXPLAIN.

A. 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.

1. THE EARLY 80's COULD GO DOWN AS THE PERIOD OF AWARENESS IN THE OIL INDUSTRY—AWARENESS FOR BOTH STOCKHOLDERS AND MANAGEMENT. WHY?
A. COMPANIES ARE NOT REPLACING THEIR ASSETS AND
B. LIQUIDATION HAS BEEN GOING ON FOR YEARS DISGUISED BY INCREASED PRICES THROUGH THE 70'S

B. UNDER THE PRESENT STRUCTURE OF THE INDUSTRY.

1. THE RESERVE BASE IS TOO LARGE FOR MANY COMPANIES.

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

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

4. AND FINDING COST ARE TOO HIGH.

C. FOR SOME COMPANIES, THERE IS NO HOPE FOR REPLACING PRODUCTION. THESE COMPANIES 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 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
B. THERE IS A WIDE GAP BETWEEN FINDING COSTS ($15-$20 PER BARREL) AND PURCHASE PRICES ($10-$12 PER BARREL).
C. MIGHT BE BETTER TO JUST BUY YOUR OWN STOCK.

III. THERE MAY BE A SOLUTION TO SOME OF THESE CASES,—IT INVOLVES A RESTRUCTURING 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, (THE BREAKUP VALUE OF THE COMPANY WAS TWICE THIS AMOUNT), JUNE 1979 - ANNOUNCED TRUST - $44, NOVEMBER 1979 - SPUN OFF TRUST - COMBINED VALUE OF $65. APRIL 1982 - COMBINED VALUE OF $90 (2 SPLITS)

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

3. MESA HAS REPLACED RESERVES FOR 18 STRAIGHT YEARS.

4. IF YOU ARE A MESA STOCKHOLDER, I WILL PROMISE YOU THAT YOU WILL NOT GET 2 DOWN YEARS IN A ROW.

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 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.

3. MANAGEMENTS SHOULD NOT BE AFRAID OF THIS CONCEPT - IT MAY VERY WELL BE THEIR SALVATION—CONSIDER MARATHON AND CONOCO.

4. MANAGEMENTS SHOULD NOT BE CONCERNED WITH THEIR SIZE—THEY SHOULD ONLY BE CONCERNED WITH WHAT'S BEST FOR THE STOCKHOLDER.

5. 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 AND THIS WOULD BE MORE ATTRACTIVE TO THE INVESTMENT COMMUNITY.
B. REMEMBER, ON THE CREATION OF A TRUST, THE COMPANY MAINTAINS A 100% WORKING INTEREST. (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, SAN JUAN BASIN TRUST, HOUSTON OIL TRUST AND HOUSTN OIL ROYALTY TRUST. SABINE HAS ANNOUNCED THAT THEIR ROYALTY TRUST WILL BECOME EFFECTIVE BY-JANUARY 1, 1983.
E. OTHERS WILL BE ANNOUNCED SHORTLY.
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 ARE TREATED THE SAME.
G. I BELIEVE OUR MANAGEMENT HAS BEEN MORE SENSITIVE TO STOCKHOLDERS INTERESTS THAN MOST MANAGEMENTS—MAYBE BECAUSE 96% OF OUR EMPLOYEES ARE STOCKHOLDERS.
H. STOCKHOLDERS SHOULD DEMAND AND SEE THAT THEIR MANAGEMENTS HAVE MEANINGFUL STOCK OPTIONS SO THAT THEY WILL ALWAYS APPROACH QUESTIONS FROM A STOCKHOLDER'S VIEWPOINT -WHAT IS BEST FOR THE STOCKHOLDER.

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

1. THIS CAN RESULT IN 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. MOBILE WITH MARCOR AND EXXON WITH RELIANCE ELECTRIC)

2. 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

3. 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.

4. 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 WILL CAUSE MANAGEMENTS TO CONSIDER ROYALTY TRUST. I AM SURE THERE WILL BE MANY QUESTIONS ABOUT THEM AT ANNUAL MEETINGS. (1) THE TREASURY DEPARTMENT COULD ALSO ENCOURAGE TRUSTS BY CONSIDERING SUCH SPIN-OFFS 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 CASH FLOW ARE IN BALANCE, A ROYALTY TRUST PROBABLY SHOULD NOT BE CONSIDERED. (2) THE DEBT STRUCTURES OF SOME COMPANIES WILL NOT ALLOW FOR SPIN-OFFS
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.

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.) EXAMPLE: (1) OIL MAY NOT BE WORTH MORE THAN $3 A BARREL WITH SOME COMPANIES. (2) REMEMBER THE RESTRICTIONS OF GRANTOR TRUST - THE SHAREHOLDER WOULD NOT BE 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.

A. THIS WILL INCLUDE A COMPLETE RESTRUCTURING OF MANY COMPANIES WITH MAJOR PORTIONS OF ASSETS BEING DISTRIBUTED TO SHAREHOLDERS, (POINTS):
1) DO NOT LOSE CONTROL OF HYDROCARBONS AND
2) 100% OF WORKING INTEREST (SABINE MAY BE DIFFERENT)

1. THE RESULT WILL BE SMALLER (ONLY FROM.A RESERVE BASE STANDPOINT), 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 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 NATION'S MOST IMPORTANT ASSETS—AN AGGRESSIVE OIL AND GAS INDUSTRY.