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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

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

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)
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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.

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 {STRICKEN TEXT: TRULY} 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 OUR INDUSTRY IS 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. {STRICKEN TEXT: OUR INDUSTRY IS CYCLICAL—WE HAVE OUR HIGHS AND LOWS—OUR UPS AND DOWNS}

B. I'VE BEEN IN THE [HANDWRITTEN ADDITION: EXP. & PROD] BUSINESS FOR 31 YEARS AND I CAN {STRICKEN TEXT: TRUTHFULLY SAY, "IT'S NEVER BEEN EASY".} [HANDWRITTEN ADDITION: SAY MOST OF THOSE YEARS HAVE BEEN TOUGH GOING, A FEW EASY, BUT IT IS A BUSINESS WHERE YOU HAVE TO GET RESULTS FAIRLY OFTEN TO SURVIVE]

C. FOR MOST OF THIS PERIOD, WE HAVE SEEN A STEADY DECLINE IN THE NUMBER OF DOMESTIC OIL WELLS DRILLED, DUE PRIMARILY TO FLAT OIL PRICES WHICH WERE CONTROLLED IN LARGE PART BY GOVERNMENT REGULATIONS.

D. THIS DOWNWARD TREND WAS REVERSED, HOWEVER, {STRICKEN TEXT: ON OCTOBER 6,} [HANDWRITTEN ADDITION: IN] 1973, WHEN WAR BETWEEN ISRAEL AND ARAB NATIONS BROKE OUT AND AN EMBARGO WAS PLACED ON CRUDE OIL SUPPLIES TO THE U.S.

E. AS THE DECADE OF THE '80's WAS USHERED IN, WE WERE EXPERIENCING A BOOM {STRICKEN TEXT: TIME} IN THE INDUSTRY.

F. DRILLING ACTIVITY WAS SKYROCKETING—EVERYONE, AND I MEAN EVERYONE (INCLUDING DOCTORS AND TENNIS PROS) WERE GETTING INTO THE BUSINESS.

G. REAGAN, [HANDWRITTEN ADDITION: IN 1980] PROMPTLY AFTER TAKING OFFICE, ELIMINATED PRICE CONTROLS ON DOMESTICALLY PRODUCED CRUDE OIL NINE MONTHS AHEAD OF SCHEDULE.

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

I. WELL...WE ALL KNOW ABOUT 1982.

J. 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 {STRICKEN TEXT: BY POOR QUALITY OF} [HANDWRITTEN ADDITION:HEAVY PRESSURE ON] EQUIPMENT AND INEXPERIENCED PERSONNEL. [HANDWRITTEN ADDITION: AND WE WERE ALL CAUGHT IN THE TRAP OF BOOM TIME, WHERE PROSPECTS ARE DUDS THAT SHOULD HAVE BEEN TURNED DOWN- TOO MUCH MONEY. EVERYBODY WAS GETTING INTO THE BUSINESS-AND IT ISN'T AN EVERBODY BUSINESS, HIGHLY TECHNICAL AND VERY EXPENSIVE- 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.

K. REALIZING THAT THE BOOM IS OVER, MANAGEMENTS ARE [HANDWRITTEN ADDITION: NOW] BEGINNING TO TAKE ACTION TO OFFSET THESE NEGATIVE CONDITIONS.

1. CAPITAL BUDGETS FOR EXPLORATION ARE BEING {STRICKEN TEXT: REDUCED} [HANDWRITTEN ADDITION: SLASHED BY] {STRICKEN TEXT: MOST} MAJORS AND INDEPENDENTS.
2. DRILLING ACTIVITY IS DECLINING SHARPLY—WE HAVE SEEN A DROP IN RIG COUNTS IN THE U.S. FROM THE HIGH WATER MARK OF 4, 321 DURING THE THIRD WEEK OF DECEMBER 1981 TO THE CURRENT LEVEL OF {STRICKEN TEXT: 2,924} [HANDWRITTEN ADDITION: 2,406] 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. [HANDWRITTEN ADDITION: GET PAGE 27 IN THIS WEEKS FORBES- OPEC]

L. WHAT IS ESPECIALLY UNUSUAL ABOUT THE CURRENT CONDITION OF THE OIL AND GAS INDUSTRY—AND WHAT MAKES IT SO PAINFUL—IS THAT FOR THE FIRST TIME IN MORE THAN A DECADE, A DOWNTURN IN THE OIL AND GAS BUSINESS HAS COINCIDED WITH A RECESSION IN THE U.S. ECONOMY.

M. {STRICKEN TEXT: I BELIEVE THAT MOST PEOPLE IN OUR COUNTRY ARE AWARE BY NOW THAT OUR INDUSTRY IS GOING THROUGH A SHAKEOUT PERIOD.}

N. 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. [HANDWRITTEN ADDITION: THE BUSINESS GOT RIDICULOUS-EVERYBODY WAS DRILLING WELLS & MONEY WAS COMING IN FROM EVERYWHERE (TELL BARFIELD STORY)]

O. OUR GROWTH {STRICKEN TEXT: CURVES} WILL NOT BE AS DRAMATIC AS {STRICKEN TEXT: THEY HAVE} [HANDWRITTEN ADDITION: IT HAS] BEEN IN RECENT YEARS, BUT OUR INDUSTRY WILL REMAIN AMONG THE STRONGEST ECONOMIC ENTITIES IN THE UNITED STATES. [HANDWRITTEN ADDITION: MENTION ABC DOCUMENTARY- LEAD IN TO PETRO US- IN 1984- IF 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 [HANDWRITTEN ADDITION: EMPLOYEE PARTICIPATION (PROF. WORK ETHIC)]
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, {STRICKEN TEXT: AND ANY PUBLICALLY HELD COMPANY,} IS TO PROTECT AND INCREASE THE VALUE OF THEIR SHAREHOLDER'S INVESTMENT. [HANDWRITTEN ADDITION: THIS IS THE RESERVE BASE FOR OUR CO.]

B. TOO OFTEN, THE STOCKHOLDER PUTS UP HIS MONEY AND TAKES HIS CHANCES...AND IS {STRICKEN TEXT: SOON FORGOTTEN} [HANDWRITTEN ADDITION: NEVER CONSIDERED] BY MANAGEMENT.

C. IT IS {STRICKEN TEXT: VERY} 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. [HANDWRITTEN ADDITION: 1 MILLLION SHARES FNR OVER $300 M]
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. [HANDWRITTEN ADDITION: I SOUND LIKE I AM TALKING ABOUT THE CS DEAL.]
2. OUR WEEKLY OPERATING MEETINGS ARE ALWAYS WELL ATTENDED AND GENERATE MANY INNOVATIVE IDEAS BECAUSE OF OUR MANAGEMENTS' ORIENTATION AS STOCKHOLDERS. [HANDWRITTEN ADDITION: OPTIONS FOR OTHER MANAGEMENTS- CUT THE PERKS- MAKE THEM GAMBLE JUST LIKE THE STOCKHOLDER GET EVERYBODY DRINKING OUT OF THE SAME CUP.]

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. [HANDWRITTEN ADDITION: STOCKHOLDERS ARE CATCHIN ON- LED BY THE ANALYST & INDUSTRY. HOLDERS IF IS A NEW [UNREADABLE TEXT] COMING UP- STARTED WITH DOWE 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 {STRICKEN TEXT: MAY} [HANDWRITTEN ADDITION; WILL] RESULT.

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.

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. [HANDWRITTEN ADDITION: BRING YOUR YOUNG PEOPLE ALONG- CS DEAL]

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 OIL COMPANIES 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, COMPANIES 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 THEIR JOBS. [HANDWRITTEN ADDITION: PAYING A DIVIDEND-OUT OF LIQUIDATION-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.