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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 RY HENRY CISNEROS, MAYOR OF SAN ANTONIO)

FINAL

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: A. WHAT IS MORE REVOLUTIONARY THAN OIL PRICE CHANGE DURING THE PAST 4 MONTHS IS RIG COUNTS.]

[HANDWRITTEN ADDITION: 1. THE RIG COUNT IN THE US HIT A HIGH WATER MARK DURING THE 3RD WEEK OF DECEMBER, 1981 WITH 4530]

[HANDWRITTEN ADDITION: 2. SINCE THEN, THE RIG COUNT HAS DROPPED TO 3597 AS OF TODAY]

[HANDWRITTEN ADDITION: 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]

[HANDWRITTEN ADDITION: II. A PERIOD OF AWARENESS FOR OUT 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 LIQUIDATION HAS BEEN GOING ON FOR YEARS DISGUISED BY INCREASED PRICES THROUGH THE '7OS. {STRICKEN TEXT: AND FOREIGN EXPLORATION}

B. 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.

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

[HANDWRITTEN ADDITION: 4. AND FINDING COSTS ARE TOO HIGH-]

C. FOR SOME COMPANIES, THERE IS NO HOPE FOR REPLACING PRODUCTION. [HANDWRITTEN ADDITION: THERE 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 [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: 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, [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 I WHY SELL AT BELOW ASSET VALUE IF YOU ARE REPLACING RESERVES?

1. IN FEBRUARY 1979, MSA WAS SELLING FOR $34. [HANDWRITTEN ADDITION: THE BREAK UP VALUE OF THE COMPANY WAS TWICE THIS AMOUNT] JUNE 1979 - ANNOUNCED TRUST - $44. NOVEMBER 1979 - SPUN OFF TRUST - COMBINED VALUE OF $65 {STRICKEN TEXT: DECEMBER, 1981} [HANDWRITTEN ADDITION: APRIL, 1982] COMBINED VALUE OF {$115} [$90], (2 SPLITS)

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

[HANDWRITTEN ADDITION: 3. MESA HAS REPLACED RESERVES FOR 18 STRAIGHT YEARS.]

[HANDWRITTEN ADDITION: 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.

[HANDWRITTEN ADDITION: 3. MANAGEMENTS SHOULD NOT BE AFRAID OF THIS CONCEPT- IT MAY VERY WELL BE THEIR SALVATION-CONSIDER MARATHON AND CONOCO]

[HANDWRITTEN ADDITION: 4. MANAGEMENTS SHOULD NOT BE CONCERNED WITH THEIR SIZE- THEY SHOULD ONLY BE CONCERNED WITH WHAT IS 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 [HANDWRITTEN ADDITION: AND THIS WOULD BE MORE ATTRACTIVE TO INVESTMENT COMMUNITY]
B. REMEMBER, ON THE CREATION OF A TRUST, THE COMPANY MAINTAINS A 100% [HANDWRITTEN ADDITION: 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, [HANDWRITTEN ADDITION: SAN JUAN BASIN TRUST,] HOUSTON OIL TRUST AND HOUSTON OIL ROYALTY TRUST. [HANDWRITTEN ADDITION: SABINE HAS ANNOUNCED THAT THEIR ROYALTY TRUST WILL BE EFFECTIVE BY JANUARY 1, 1983.]
E. OTHERS WILL BE ANNOUNCED SHORTLY. {STRICKEN TEXT: 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: G. I BELIEVE OUR MANAGEMENT HAS BEEN MORE SENSATIVE TO STOCKHOLDERS INTEREST THAN MOST MANAGEMENTS - MAYBE BECAUSE 96% OF OUR EMPLOYEES ARE STOCKHOLDERS]
[HANDWRITTEN ADDITION: 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 {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

[HANDWRITTEN ADDITION: I.E. MOBIL WITH MARCOR AND EXXON WITH RELIANCE ELECTRIC]