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	T. BOONE PICKENS, JR. COMMENTS SEMINAR FOR SENIOR EXECUTIVES IN THE OIL AND GAS INDUSTRY SPONSORED BY THE MAGUIRE OIL AND GAS INSTITUTE EDWIN L. COX SCHOOL OF BUSINESS SOUTHERN METHODIST UNIVERSITY KIANDRA LODGE VAIL, COLORADO June 25, 1982

4:15 p.m.

(APPEARING AT THE INVITATION OF M. EDGAR BARRETT, PROFESSOR AND DIRECTOR)

[HANDWRITTEN ADDITION: 4:15-5:45]

I. INTRODUCTION

A. DOCTOR BARRETT AND COLLEAGUES IN THE OIL AND GAS INDUSTRY - IT IS CERTAINLY A PLEASURE FOR ME TO BE HERE TODAY TO PARTICIPATE IN THIS FOURTH ANNUAL PROGRAM SPONSORED BY THE MAGUIRE OIL AND GAS INSTITUTE OF THE COX SCHOOL OF BUSINESS AT SMU.

B. IT IS ALSO VERY REFRESHING TO BE HERE IN VAIL—IT'S A FAR CRY FROM WHERE I WAS LAST FRIDAY AT THIS TIME!

C. (PERSONAL COMMENTS)
1. [HANDWRITTEN ADDITION: CATTLE BUSINESS-TIMING-OFFSHORE ETC.]
2.
3.

D. DOCTOR BARRETT HAS GIVEN ME SPECIFIC INSTRUCTIONS FOR MY COMMENTS THIS AFTERNOON—"THE TOPIC SHOULD BE RELATED TO MANAGERIAL OR POLICY ISSUES WITHIN, OR RELATED TO, THE OIL AND GAS INDUSTRY."

E. I'M SURE GLAD HE GAVE ME THESE GUIDELINES, BECAUSE THIS IS MY FAVORITE TOPIC OF CONVERSATION ANYWAY.

F. I HAVE A FEW PREPARED COMMENTS FOR YOU TODAY, BUT I WOULD LIKE MOST OF OUR TIME TOGETHER TO BE SPENT IN A QUESTION AND ANSWER PERIOD—DISCUSSING SPECIFIC POINTS YOU MAY WANT ME TO ADDRESS. [HANDWRITTEN ADDITION: THIS INCLUDES MERGERS- FRIENDLY & UNFRIENDLY-IT'S HARD FOR ME TO GIVE A "NO COMMENT."]

G. DOCTOR BARRETT ASKED FOR A TITLE OF MY COMMENTS—I TOLD HIM "THE 1980's—A DECADE OF AWARENESS IN THE OIL AND GAS INDUSTRY."

H. I BELIEVE WE WILL SEE REVOLUTIONARY CHANGES IN OUR BUSINESS DURING THIS DECADE.

I. THIS AFTERNOON, I WOULD LIKE TO GIVE YOU MY ASSESSMENT OF WHERE {HANDWRITTE ADDITION: I SEE] OUR INDUSTRY TODAY AND CONCLUDE BY REVIEWING SOME OF THE MANAGERIAL PHILOSOPHIES AND PRACTICES WE HAVE IMPLEMENTED AT MESA PETROLEUM CO....I WILL THEN BE PLEASED TO ANSWER YOUR QUESTIONS.

II. THE CONDITION OF OUR INDUSTRY TODAY

A. I'VE BEEN IN THE EXPLORATION AND PRODUCTION BUSINESS FOR 31 YEARS AND I CAN SAY THAT MOST OF THESE YEARS HAVE BEEN TOUGH GOING...A FEW EASY...BUT IT IS A BUSINESS IN WHICH YOU MUST PRODUCE RESULTS FAIRLY OFTEN IN ORDER TO SURVIVE.

B. FOR {STRICKEN TEXT: MOST} [HANDWRITTEN ADDITION: THE FIRST 20 YEARS] OF THIS PERIOD, [UNREADABLE STRICKEN TEXT] [I] HAVE SEEN A STEADY DECLINE IN THE NUMBER OF DOMESTIC WELLS DRILLED, DUE PRIMARILY TO FLAT OIL PRICES WHICH WERE CONTROLLED IN LARGE PART BY GOVERNMENT REGULATIONS.

C. THIS DOWNWARD TREND WAS REVERSED, HOWEVER, IN 1973, WHEN WAR BETWEEN ISRAEL AND ARAB NATIONS BROKE OUT AND AN EMBARGO WAS PLACED ON CRUDE OIL SUPPLIES TO THE U.S.

D. AS THE DECADE OF THE '80's WAS USHERED IN, WE WERE EXPERIENCING A BOOM IN THE INDUSTRY.

E. DRILLING ACTIVITY WAS SKYROCKETING—EVERYONE, AND I MEAN EVERYONE (INCLUDING DOCTORS AND TENNIS PROS) WERE GETTING INTO THE BUSINESS. [HANDWRITTEN ADDITION: DOCTORS IN THE CATTLE BUSINESS]

F. REAGAN, IN 1980, PROMPTLY AFTER TAKING OFFICE, ELIMINATED PRICE CONTROLS ON DOMESTICALLY PRODUCED CRUDE OIL NINE MONTHS AHEAD OF SCHEDULE.

G. REVENUES AND PROFITS FOR OIL AND GAS COMPANIES REACHED NEW HIGHS IN 1980 AND 1981 ... EVERYTHING LOOKED GREAT.

H. WELL...WE ALL KNOW ABOUT 1982.

I. BECAUSE OF THE NEW HIGHS RECORDED IN THE INDUSTRY DURING '80 AND '81, CERTAIN CONDITIONS WERE OVERLOOKED BY MANY THAT WOULD SOON LEAD TO TROUBLE FOR THE INDUSTRY. FOR EXAMPLE

1. UNREASONABLY HIGH FINDING COSTS CAUSED IN LARGE PART BY HEAVY PRESSURE ON EQUIPMENT AND INEXPERIENCED PERSONNEL, AND WE WERE ALL CAUGHT IN THE TRAP OF A BOOM TIME, WHERE PROSPECTS {STRICKEN TEXT: WERE} [HANDWRITTEN ADDITION: ARE] DRILLED THAT SHOULD {STRICKEN TEXT: HAVE BEEN} TURNED DOWN. MONEY WAS AVAILABLE, AND EVERYONE WAS GETTING INTO THE BUSINESS. BUT IT'S NOT AN "EVERYBODY BUSINESS." IT'S A TECHNICAL AND VERY EXPENSIVE BUSINESS. (CERF RANCH, W. OKLAHOMA, BIG HUM).
2. HIGH INTEREST RATES CAUSED PRIMARILY BY HUGE GOVERNMENT DEFICITS.
3. A TEMPORARY OVERSUPPLY OF NATURAL GAS AND CRUDE OIL.
4. A DECLINE IN WORLD CRUDE OIL PRICES FROM A HIGH OF $40 PER BARREL IN EARLY 1981 TO THE CURRENT PRICE OF $33-$34. [HANDWRITTEN ADDITION: WHAT NOW?]

J. REALIZING THAT THE BOOM IS OVER, MANAGEMENTS ARE NOW BEGINNING TO TAKE ACTION TO OFFSET THESE NEGATIVE CONDITIONS.

1. CAPITAL BUDGETS FOR EXPLORATION ARE BEING SLASHED BY MAJORS AND INDEPENDENTS.
2. DRILLING ACTIVITY IS DECLINING SHARPLY—WE HAVE SEEN 4530 A DROP IN RIG COUNTS IN THE U.S. FROM THE HIGH WATER MARK OF 4,530 DURING THE THIRD WEEK OF DECEMBER 1981 TO THE CURRENT LEVEL OF 2,906. THE DROP THAT OCCURRED THIS JANUARY WAS THE FIRST TIME THE RIG COUNT FELL IN THE U. S. DURING THE PREVIOUS 33 MONTHS.
3. COMPANIES ARE TIGHTENING UP ON PERSONNEL—INSTITUTING HIRING FREEZES, RELEASING EMPLOYEES AND ENCOURAGING EARLY RETIREMENT.
4. {STRICKEN TEXT: MOST INTEGRATED COMPANIES HAVE CUT BACK ON THEIR DOWNSTREAM OPERATIONS—REFINING AND MARKETING.}
5. CUTBACKS AND POSTPONEMENTS OF PROJECTS DEALING WITH ALTERNATIVE ENERGY SOURCES ARE BECOMING COMMONPLACE.

K. THIS IS WHAT MALCOLM ORBES HAD TO SAY ABOUT THE SITUATION THIS WEEK:

"THAT SURPLUS WAS THE BEST THING THAT'S HAPPENED TO OPEC EXCEPT—AND SINCE—ITS INCEPTION. A FEW MONTHS OF 'GLUT.' A MODERATE DROP IN SPOT PRICES, AND MEANINGFUL ALTERNATIVE ENERGY DEVELOPMENTS IN THE U.S. HAVE BEEN KNOCKED DEAD. FROM RECORD HIGHS, INTENSIVE U.S. WELL DRILLING OFFSHORE AND EVERYWHERE HAS PLUMMETED AT A RATE AT WHICH DRILLERS WOULD LOVE TO SEE THEIR SHAFTS SINK. WE HAD WITHIN OUR SIGHTS ENERGY INDEPENDENCE. SURE, THE COSTS ARE HIGH. BUT THOSE COSTS ARE LITERALLY NEGLIGIBLE COMPARED WITH WHAT IT'S COSTING US NOW IN MILITARY PREPARATIONS TO DEFEND THE MIDDLE EAST OIL THAT PRESENTLY CONSTITUTES A JUGULAR VEIN FOR US. THE SAME DEPENDENCE MAKES US A VERITABLE HOSTAGE IN THE ONGOING ISRAELI-ARAB CONFRONTATION. AND, OF COURSE, THE COST OF OUR BEING INVOLVED IN ACTUAL MILITARY ACTION IN THE MIDDLE EAST IS BEYOND CALCULATION. INSTEAD OF BEING IN A NEAR-PANIC ABOUT THE THREAT OF A SURPLUS TO THEIR PRICING UNITY, OPEC KNOWS NOW THAT ALL THEY NEED TO DO TO DROWN OUR EFFORTS AT ENERGY INDEPENDENCE IS TO OPEN THEIR TAPS WIDE ONCE IN A WHILE."

L. WE ARE BEING FORCED TO TAKE A GOOD, HARD LOOK AT OURSELVES...IN MY OPINION, HOWEVER, THE NET RESULT OF ALL OF THIS WILL BE A STRENGTHENING OF THE INDUSTRY. THE BUSINESS GOT RIDICULOUS... EVERYBODY WAS DRILLING WELLS AND MONEY WAS COMING IN FROM EVERYWHERE (BARFIELD STORY).

M. OUR GROWTH WILL NOT BE AS DRAMATIC AS IT HAS BEEN IN RECENT YEARS, BUT OUR INDUSTRY WILL REMAIN AMONG THE STRONGEST ECONOMIC ENTITIES IN THE UNITED STATES.

1. ABC DOCUMENTARY
2. LEADING TO PETRO USA IN 1984 IF {STRICKEN TEXT: HAVE} [HANDWRITTEN ADDITION: THERE IS A] CHANGE IN ADMINISTRATIONS.

III. I WOULD NOW LIKE TO BRIEFLY REVIEW THREE MANAGEMENT PRINCIPLES THAT ARE FUNDAMENTAL TO MESA'S SUCCESS:

A. OUR ATTITUDE TOWARD SHAREHOLDERS
B. OUR COMMITMENT TO PROTECTING AND ENHANCING OUR ASSETS
C. OUR APPROACH TO DECISION MAKING

IV. IT'S APPROPRIATE THAT I BEGIN THIS DISCUSSION WITH OUR ATTITUDE TOWARD SHAREHOLDERS, BECAUSE OUR MANAGEMENT AND EMPLOYEES ARE DEDICATED TO MAKING THE SHAREHOLDER NO. 1.

A. THE OVERRIDING GOAL OF MANAGEMENT AT MESA IS TO PROTECT AND INCREASE THE VALUE OF THEIR SHAREHOLDER'S INVESTMENT. THIS IS THE RESERVE BASE FOR OUR COMPANY.

B. TOO OFTEN, THE STOCKHOLDER PUTS UP HIS MONEY AND TAKES HIS CHANCES...AND IS NEVER CONSIDERED BY MANAGEMENT.

C. IT IS CLEAR TO ALL MESA PEOPLE THAT IT'S THE STOCKHOLDER WHO IS THE BACKBONE OF OUR FREE ENTERPRISE SYSTEM. HE OWNS THE STORE...AND WE OPERATE IT.

D. MESA'S ORIENTATION TO ITS SHAREHOLDERS STARTS WITH ITS PEOPLE—WHO ARE A DEDICATED GROUP, MOTIVATED BY BASIC ENTREPRENEURIAL CONCEPTS.

E. AN EFFECTIVE MOTIVATIONAL TOOL USED BY MESA IS TO GIVE ALL EMPLOYEES A "CUT OF THE PIE." WE DO THIS IN SEVERAL WAYS.

F. WE HAVE A STOCK PURCHASE PLAN THAT MATCHES DOLLAR FOR DOLLAR THE EMPLOYEE'S CONTRIBUTION ... WHICH CAN EQUAL 6% OF HIS SALARY.

1. OVER 95% OF MESA'S EMPLOYEES ARE ALSO STOCKHOLDERS.
2. PERHAPS THIS IS A KEY REASON WHY THE PRODUCTIVITY IS SO HIGH AMONG OUR 887 EMPLOYEES, WHO ARE RESPONSIBLE FOR ASSETS IN EXCESS OF $2 BILLION.

G. EACH EMPLOYEE ALSO PARTICIPATES IN A NONCONTRIBUTORY PROFIT-SHARING PLAN.

1. THIS PLAN HAS BEEN INVESTED HEAVILY IN MESA COMMON STOCK AND IS CURRENTLY INVESTED PRIMARILY IN MESA ROYALTY TRUST. (FUTURE NET REVENUE ON THE 1 MILLION SHARES CURRENTLY OWNED BY THE PLAN WILL BE OVER $300 MILLION).
2. SINCE ITS INCEPTION THROUGH DECEMBER 31, 1981, THE PLAN AVERAGED 23% ANNUAL GAIN ON INVESTMENT.
3. FROM 1964 THROUGH 1981, MESA CONTRIBUTED $10 MILLION TO THE PLAN...AND EMPLOYEES MADE $6 MILLION.
4. IN 1980, 26% OF OUR EMPLOYEES MADE MORE FROM THEIR PROFIT-SHARING TRUST THAN THEY DID ON SALARY.

H. OUR KEY PERSONNEL ARE ALSO HOLDERS OF STOCK OPTIONS.

1. YOU WILL FIND THAT MESA'S MANAGEMENT LOOKS AT SITUATIONS VERY MUCH LIKE STOCKHOLDERS DO...AND NOT LIKE PROFESSIONAL MANAGERS PERPETUATING THEIR JOBS. I SOUND LIKE I'M TALKING ABOUT THE CITIES SERVICE DEAL.
2. OUR WEEKLY OPERATING MEETINGS ARE ALWAYS WELL ATTENDED AND GENERATE MANY INNOVATIVE IDEAS BECAUSE OF OUR MANAGEMENTS' ORIENTATION AS STOCKHOLDERS. [HANDWRITTEN ADDITION: SOLUTIONS TO HIRING RESPONSIVE MANAGEMENT.]

a. OPTIONS FOR OTHER MANAGEMENTS.
b. CUT THE PERKS.
c. MAKE THEM GAMBLE JUST LIKE THE STOCKHOLDER.
d. GET EVERYBODY DRINKING OUT OF THE SAME CUP. [HANDWRITTEN ADDITION: I CAN ASSURE YOU THE CS EMPLOYEES WOULD HAVE BEEN MILES AHEAD WITH MSA OVER GULF]

V. A SECOND FUNDAMENTAL MANAGEMENT PRINCIPLE PRACTICED BY MESA IS TO PROTECT AND EXPAND THE ASSETS OF THE COMPANY.

A. OIL AND GAS COMPANIES, BOTH LARGE AND SMALL, ARE MANAGERS OF DEPLETABLE ASSETS—THEIR RESERVES OF OIL AND GAS.

B. THEREFORE, IT IS INCUMBENT UPON MESA AND ALL OIL AND GAS COMPANIES TO REPLACE PRODUCTION ANNUALLY.

C. MESA HAS REPLACED RESERVES FOR EIGHTEEN CONSECUTIVE YEARS...I HAVE OFTEN SAID THAT MESA WILL NEVER REPORT TWO DOWN YEARS IN A ROW. WE WILL LIQUIDATE BEFORE THIS HAPPENS.

D. MANY OIL AND GAS COMPANIES, HOWEVER, MISLED BY RISING PRICES AND RECORD EARNINGS, HAVE BEEN LIQUIDATING FOR YEARS...THEY SIMPLY ARE NOT REPLACING THEIR RESERVES.

E. THE BIGGEST JOB FACING EXPLORATION AND PRODUCTION COMPANIES IS TO PROTECT THEIR RESERVE BASE AND TO FIND OIL AND GAS AT A REASONABLE COST...EITHER THROUGH EXPLORATION OR ACQUISITION.

F. MANAGEMENTS MUST DECIDE UPON THE MOST ADVANTAGEOUS WAY TO REPLACE RESERVES...AND PROCEED WITH THIS GOAL IN MIND.

G. ONE MANAGEMENT TOOL TO CONSIDER IN ADDRESSING THE RESERVE BASE ISSUE IS TO RESTRUCTURE BASED UPON THE ROYALTY TRUST CONCEPT—PIONEERED BY MESA IN 1979.

1. STOCKHOLDERS ARE BEGINNING TO CATCH ON, LED BY THE ANALYSTS AND INSTITUTIONAL HOLDERS.
2. IT'S A NEW GAME COMING UP - STARTED WITH DOME/CONOCO.

H. I WILL SPARE YOU MY ROYALTY TRUST SPEECH TODAY...BUT I DO WANT TO MAKE THE FOLLOWING POINTS:

1. THE ROYALTY TRUST GRANTS EACH STOCKHOLDER A DIRECT OWNERSHIP INTEREST IN PRODUCING PROPERTIES...PROVIDING HIM A DIRECT INCOME STREAM UNBURDENED BY INCOME TAXES AT THE CORPORATE LEVEL.
2. BY SPINNING OFF PROPERTIES TO A TRUST, THE COMPANY'S RESERVE BASE BECOMES SMALLER—THUS NEW DISCOVERIES HAVE A GREATER IMPACT ON THE COMPANY.
3. COMPANIES ARE BETTER ABLE TO REPLACE PRODUCTION ON A CONTINUING BASIS AND AVOID THE DEPLETION OF THE STOCKHOLDERS' INVESTMENT.
4. THE INVESTMENT COMMUNITY WILL RECOGNIZE THESE COMPANIES AND HIGHER P/E MULTIPLES WILL RESULT.
5. COMMENT FROM "SLOW" MANAGEMENT.

a. TAXABLE
b. DEPLETING
{STRICKEN TEXT: WEAK WEAK ARGUMENTS}

VI. A THIRD MANAGEMENT PRACTICE THAT MESA EMPHASIZES IS DECISION MAKING.

A. I ALLUDED EARLIER TO THE FACT THAT ENTREPRENEURIAL INSTINCTS ARE ENCOURAGED AMONG OUR PEOPLE.

B. WE GIVE PEOPLE THE RESPONSIBILITY AND AUTHORITY TO MAKE DECISIONS. THIS IS IMPORTANT IN BRINGING YOUR YOUNG PEOPLE ALONG (CS DEAL).

C. THEY ARE WILLING TO TAKE RISKS. THEY ASSESS RISKS WELL AND CAN MAKE DECISIONS QUICKLY.

D. I BELIEVE THIS IS A VERY IMPORTANT FACTOR IN OUR SUCCESS.

E. BY DEVELOPING MANAGERS WHO CAN ANALYZE SITUATIONS QUICKLY, COMPLETELY AND CAN MAKE DECISIONS, WE DEVELOP THE ABILITY TO MAKE ADJUSTMENTS.

F. I BELIEVE THE MANAGEMENTS IN THE OIL AND GAS BUSINESS THAT CAN ADJUST QUICKLY AND ACCURATELY WILL BE THE ONES THAT SURVIVE.

G. THE MANAGEMENTS THAT CAN ADJUST QUICKLY—ON THE FIELD OF ACTION WITHOUT HAVING TO REVIEW THE GAME FILMS—WILL BE THE ONES WHO DO THE BEST JOB FOR THEIR SHAREHOLDERS.

VII. IN CONCLUSION,

A. THERE WILL BE A SHAKEOUT OF OUR INDUSTRY IN THE 1980'S—MANY COMPANIES WILL NOT SURVIVE. ONE OIL ANALYST IN HOUSTON PROJECTS THAT AS MANY AS 300 COMPANIES IN THE INDUSTRY COULD BE FORCED OUT OF BUSINESS BY THE END OF THIS YEAR ALONE.

B. DESPITE THE TOUGH PERIOD THAT OUR INDUSTRY IS CURRENTLY EXPERIENCING, I BELIEVE THERE ARE EXCELLENT OPPORTUNITIES AVAILABLE FOR COMPANIES THAT HAVE PROPERLY ANALYZED AND PREPARED FOR THE CURRENT BUSINESS CLIMATE.

C. DURING THIS DECADE, {STRICKEN TEXT: COMPANIES} [HANDWRITTEN ADDITION: MANAGEMENTS] AND INVESTORS WILL TAKE THE REPLACEMENT OF RESERVES MORE SERIOUSLY.

1. MORE COMPANIES WILL RESTRUCTURE—USING APPROACHES SUCH AS THE ROYALTY TRUST CONCEPT.
2. MANAGEMENT WILL BE EVALUATED BY INVESTORS ON THEIR PHILOSOPHY AND PERFORMANCE IN RESPECT TO THE REPLACEMENT OF RESERVES. IN THIS REGARD, I BELIEVE THAT SHAREHOLDERS WILL BE MORE VOCAL THAN EVER BEFORE IN THEIR CRITICISM OF THOSE MANAGEMENTS WHO ARE ONLY CONCERNED WITH THE PERPETUATION OF THEIRJOBS. A LOT OF PEOPLE WILL REALIZE THAT MANY COMPANIES ARE PAYING A DIVIDEND OUT OF LIQUIDATION - THIS IS DISHONEST.

D. THE '80'S WILL BE AN INTERESTING AND CHALLENGING PERIOD FOR ALL OF US...AND WILL INDEED BE A "PERIOD OF AWARENESS."

VIII. NOW, I WILL BE PLEASED TO ANSWER YOUR QUESTIONS.