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	T. BOONE PICKENS, JR. COMMENTS FOURTH ANNUAL IADC/PESA DRILLING/PRODUCTION MARKETING CONFERENCE LOEW'S ANATOLE HOTEL DALLAS, TEXAS AUGUST 18, 1982

12:00 NOON

HEADTABLE:

CHESTER B BENGE, JR., PRESIDENT, BIG "6" DRILLING CO. (1982 FIRST VICE PRESIDENT OF IADC) JACK R. HILDER, PRESIDENT, REED AMERICAN PRODUCTS J. W. GATES, MANAGER, FMC CORP., FLUID CONTROL DIVISION ED MCGHEE, EXECUTIVE VICE PRESIDENT, IADC BILL SALLANS, EXECUTIVE VICE PRESIDENT, PESA E. C. BROUN, JR., PRESIDENT, HUGHES TOOL CO. MARTIN GARBER, DIRECTOR OF POLITICAL AND ASSOCIATION AFFAIRS, PHILLIPS PETROLEUM CO. J. C. TEMPLETON, CHAIRMAN, TEMPLETON ENERGY INC. J. W. WARREN, CHAIRMAN, GOLDRUS DRILLING CO. (CHESTER BENGE WILL INTRODUCE T. BOONE PICKENS, JR.)

I. INTRODUCTION

A. THANK YOU, CHESTER, FOR YOUR KIND INTRODUCTION.

B. IT IS A PLEASURE FOR ME TO BE HERE TODAY TO PARTICIPATE AT THE FOURTH ANNUAL IADC/PESA - DRILLING/PRODUCTION MARKETING CONFERENCE.

C. I'M DELIGHTED AND SURPRISED TO SEE SO MANY PEOPLE IN ATTENDANCE—I GUESS THE NEWSPAPER STORIES ABOUT THE DRILLING AND EQUIPMENT SUPPLY BUSINESS ARE NOT TRUE! NOT EVERYONE IS OUT OF BUSINESS.

D. (PERSONAL COMMENTS)
2.
3.

E. YOUR CONFERENCE PROGRAM TODAY ADDRESSES TWO TOPICS:

1. "DRILLING ACTIVITY: WHAT DOES 1983 HOLD?", AND
2. "POLITICS AND ECONOMICS: NEAR TERM EFFECT ON DRILLING."

F. MY BRIEF COMMENTS WILL PROVIDE A PERSPECTIVE OF THESE TWO SUBJECTS FROM AN INDEPENDENT OIL AND GAS PRODUCER STANDPOINT...I WILL THEN BE PLEASED TO ENTERTAIN YOUR QUESTIONS.

II. LET'S FIRST TAKE A LOOK AT OUR INDUSTRY TODAY...AS PAINFUL AS THAT MAY BE.

A. I'VE BEEN IN THE EXPLORATION AND PRODUCTION BUSINESS FOR 31 YEARS...AND I CAN SUMMARIZE THIS EXPERIENCE IN FIVE WORDS: "IT HAS NEVER BEEN EASY."

B. FOR THE FIRST TWENTY YEARS OF THIS PERIOD, I SAW 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 ERUPTED AND AN EMBARGO WAS PLACED ON CRUDE OIL SUPPLIES TO THE U. S.

D. THE LATTER PART OF THE '70'S WERE GOOD YEARS AND 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 FROM TENNIS PROS TO DOCTORS, WAS GETTING INTO THE BUSINESS.

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

G. BUT THEN CAME 1982...

H. BECAUSE OF THE NEW HIGHS RECORDED IN THE INDUSTRY DURING '80 AND '81—CERTAIN CONDITIONS WERE OVERLOOKED BY MANY THAT WOULD 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. WE WERE ALL CAUGHT IN THE TRAP OF A BOOM TIME, WHERE PROSPECTS ARE DRILLED THAT SHOULD BE TURNED DOWN. MONEY WAS AVAILABLE...BOOM TIME PSYCHOLOGY WAS PREVALENT.
2. HIGH INTEREST RATES THAT WERE 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.

I. BOOM TIME IS OVER—AT LEAST FOR A WHILE—COMPANIES WILL RETURN TO THE HISTORICAL PATTERN OF RUNNING LEAN IN A CROWDED FIELD.

J. MANAGEMENTS ARE NOW BEGINNING TO TAKE ACTION TO OFFSET THE NEGATIVE CONDITIONS THAT EXIST

1. CAPITAL BUDGETS FOR EXPLORATION ARE BEING SLASHED.
2. DRILLING ACTIVITY IS DECLINING SHARPLY—WE HAVE SEEN A DROP IN RIG COUNT FROM A HIGH WATER MARK OF 4,530 IN DECEMBER 1981 TO THE CURRENT LEVEL OF 2,671. THE DROP THAT OCCURRED THIS JANUARY WAS THE FIRST TIME THE RIG COUNT FELL IN THE U.S. DURING THE PAST 33 MONTHS.
3. COMPANIES ARE TIGHTENING UP ON PERSONNEL INSTITUTING HIRING FREEZES, RELEASING EMPLOYEES AND ENCOURAGING EARLY RETIREMENT.
4. CUTBACKS AND POSTPONEMENTS OF PROJECTS DEALING WITH ALTERNATIVE ENERGY SOURCES ARE BECOMING COMMONPLACE.
5. MANAGEMENTS ARE BEING FORCED TO BE MORE FINANCIALLY INNOVATIVE DUE TO THE CURRENT DIFFICULTIES IN OBTAINING OUTSIDE FUNDING.
   a. BANK CREDIT IS TIGHTENING.
   b. THE "OILS" ARE ALL BEING TREATED ALIKE BY WALL STREET—"POORLY."
   c. DRILLING-PROGRAM SALES ARE DECLINING DUE TO TAX LAW CHANGES THAT HAVE MADE THESE SHELTERS LESS ATTRACTIVE TO INVESTORS.

K. THE INDUSTRY IS BEING FORCED TO TAKE A GOOD, HARD LOOK AT ITSELF...IN MY OPINION, THE NET RESULT OF ALL OF THIS WILL BE A STRENGTHENING OF THE INDUSTRY.

III. WELL, WHAT'S THE OUTLOOK FOR 1983?

A. EARLIER I SUMMARIZED MY 31 YEARS OF EXPERIENCE IN 5 WORDS...I CAN SUMMARIZE THE IMMEDIATE OUTLOOK FOR THE INDUSTRY IN 5 WORDS ALSO: "ABOUT THE SAME AS '82."

B. ACTIVITY AND GROWTH IN 1983 WILL REMAIN RELATIVELY FLAT...OR POSSIBLY DECLINE FURTHER. I DON'T THINK WE HAVE BOTTOMED OUT YET.

C. THE PREVAILING MANAGERIAL THEMES WILL BE GREATER EFFICIENCY AND PRODUCTIVITY.

D.THE DIVERSIFICATION WITHIN THE INDUSTRY OF THE PAST DECADE INTO FERTILIZERS, MINERALS, COAL, RETAIL CHAINS, ETC. WILL BE REVERSED.

E. I BELIEVE WE WILL SEE MORE COMPANIES SELLING OFF ASSETS OR SPINNING OFF ASSETS INTO TRUSTS SIMILAR TO THE ROYALTY TRUST THAT MESA PIONEERED IN 1979.

F. MANAGEMENTS WILL ALSO CONSIDER MORE SERIOUSLY THE ECONOMIC ADVANTAGES OF PURCHASING RESERVES.

G. I DON'T SEE TOO MANY REASONS FOR DRILLING ACTIVITY TO INCREASE DURING THE IMMEDIATE FUTURE.

H. THERE ARE, HOWEVER, SEVERAL SITUATIONS THAT WILL CAUSE DRILLING ACTIVITY TO INCREASE. THEY INCLUDE:

1. PROTECTING EXPIRING LEASES ON GOOD DRILLABLE PROSPECTS.
2. DEVELOPING OIL PROPERTIES THAT ARE TRULY WORTHY OF THE INVESTMENT.
3. PURSUING GAS PROSPECTS IN AREAS WHERE THERE ALREADY EXISTS A MARKET.

IV. ANOTHER FACTOR IN THE EQUATION TO OUR INDUSTRY'S RECOVERY IS OUR RELIANCE ON FOREIGN SOURCES OF ENERGY.

A. OF COURSE, I AM TALKING ABOUT OUR DEPENDENCE ON OPEC...THE SINGLE MOST IMPORTANT FACTOR IN OUR RECOVERY.

B. I BELIEVE WE COULD BE ASSURED OF RECOVERY AND A MORE VITAL DOMESTIC OIL AND GAS INDUSTRY IF ANOTHER INTERRUPTION IN SUPPLY OCCURS.

C. I FEEL CONFIDENT IN PREDICTING THAT THERE WILL BE AN INTERRUPTION—THE ONLY QUESTION IS WHEN.

D. BEING IN THE VICE GRIP OF OPEC IS NO WAY TO RUN A BUSINESS.

E. FOR SURE—THE LONG-TERM SOLUTION TO OUR PROBLEM IS FOR OUR NATION TO BECOME ENERGY INDEPENDENT.

F. MALCOLM FORBES RECENTLY SUMMARIZED THE SITUATION VERY WELL. I WOULD LIKE TO READ YOU HIS BRIEF COMMENTARY ON OPEC:

"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."

G. PERHAPS WE SHOULD TAKE HEED TO WHAT MR. FORBES IS SAYING WITH RESPECT TO NATIONAL EXPENDITURE TO PROTECT THE MIDDLE EAST...AND DUST OFF THE OLD "PLOW BACK" SYSTEM TO GET US TO WHERE WE NEED TO BE—ENERGY INDEPENDENT.

1. THE "PLOW BACK" PROGRAM WOULD PROVIDE A SUPPORT PRICE FOR A BARREL OF OIL.
2. TO GET THE SUPPORT PRICE, A COMPANY MUST "PLOW" THE DIFFERENCE BETWEEN THE MARKET PRICE AND SUPPORT PRICE BACK INTO DOMESTIC EXPLORATION.
3. RATHER THAN USING TAX DOLLARS TO BUILD UP OUR MILITARY FORCES IN THE MIDDLE EAST TO PROTECT SHIPMENTS OF CRUDE TO OUR COUNTRY, LET'S TAKE THAT MONEY AND PLOW IT INTO OUR NATIONAL ECONOMY.

H. THIS DISCUSSION OF A POSSIBLE "PLOW BACK" PROGRAM BRINGS US TO A SUBJECT THAT I BELIEVE IS A "MUST" FOR THE ENERGY FIELD...A NATIONAL ENERGY PLAN.

I. THERE HAS BEEN A LOT OF TALK IN WASHINGTON ABOUT AN ENERGY PLAN...BUT THERE HAS BEEN LITTLE OR NO ACTION.

J. GOVERNOR CLEMENTS TOOK THE INITIATIVE RECENTLY TO DRAFT A NATIONAL ENERGY POLICY AND PRESENTED IT TO THE SOUTHERN GOVERNOR'S CONFERENCE.

K. WHATEVER POLICY IS EVENTUALLY ACCEPTED IN WASHINGTON, IT SHOULD HAVE AT LEAST THREE PRIMARY OBJECTIVES.

1. TO HAVE SUFFICIENT ENERGY SUPPLIES, USED PRUDENTLY WITH PRACTICAL PROTECTION OF THE ENVIRONMENT.
2. TO MINIMIZE THE DISRUPTIVE EFFECTS OF OIL SHORTAGES FROM EMBARGOES, WAR OR POLITICAL UPHEAVELS IN MAJOR PRODUCING COUNTRIES; AND
3. TO MAKE THE TRANSITION TO A NEW ENERGY BASE AS EFFICIENTLY AS POSSIBLE.

L. THE POLICY SHOULD RECOGNIZE THAT THE FREE MARKET SHOULD PLAY THE PREEMINENT ROLE IN SOLVING THE ENERGY PROBLEM...NOT GOVERNMENT INTERVENTION.

M. I'M NOT SAYING EXCLUDE GOVERNMENT. THERE ARE AREAS IN WHICH THE GOVERNMENT IS BETTER EQUIPPED TO SOLVE PROBLEMS THAN THE FREE MARKET; FOR EXAMPLE, CONTACTS WITH OTHER GOVERNMENTS, DEVELOPMENT OF SYNTHETIC FUELS, NUCLEAR ENERGY DEVELOPMENT AND PROMULGATION OF ENVIRONMENTAL STANDARDS.

N. FROM THIS POLICY SHOULD COME SOME SPECIFIC PROGRAMS, SUCH AS

1. DEREGULATION OF THE PRICE OF NATURAL GAS;
2. REPEAL OF THE FUEL USE ACT;
3. INCREASED USE OF COAL;
4. A MORE CONSISTENT REGULATORY ENVIRONMENT FOR NUCLEAR ENERGY.

O. I AM OPTIMISTIC THAT THE REAGAN ADMINISTRATION WILL IN TIME ADDRESS THIS ISSUE IN A MEANINGFUL WAY.

V. IN CONCLUSION, I BELIEVE THAT OUR INDUSTRY IS ABOUT TO EXPERIENCE A REVOLUTION—THERE WILL BE MANY CHANGES IN THE WAY WE HAVE DONE BUSINESS IN THE PAST.

A. THE INDUSTRY IS DEFINITELY GOING THROUGH A SHAKEOUT PERIOD—ONLY THE FIT WILL SURVIVE.

B. SURVIVING MANAGEMENTS WILL BE THOSE:

1. WHO RECOGNIZE THAT THE DEFINITION OF A STRONG OIL AND GAS COMPANY WILL BE..."ONE THAT REPLACES ITS RESERVES ANNUALLY."
2. WHO RECOGNIZE WHEN IT IS BETTER TO ABANDON THE PURSUIT OF RESERVES AT UNECONOMIC EXPLORATION AND DEVELOPMENT COSTS AND PURSUE THE ACQUISITION OF SOMEONE ELSE'S RESERVES MORE CHEAPLY.
3. WHO UTILIZE THEIR PERSONNEL IN THE MOST EFFICIENT AND PRODUCTIVE MANNER.
4. WHO CAN DISPENSE WITH LOW-RETURN OPERATIONS.
5. WHO RECOGNIZE THAT THE OBJECTIVE OF MANAGEMENT IS NOT JOB PERPETUATION OR GROWTH FOR GROWTH'S SAKE.

C. OUR INDUSTRY IS AGAIN PLAYING HARDBALL. INVESTORS WILL BE LOOKING AT NUMBERS ALONE:

1. RETURN ON ASSETS
2. RETURN ON EQUITY
3. BALANCE SHEET STRENGTH
4. SHAREHOLDER BENEFITS FROM RISING EQUITY VALUES.

D. THESE THINGS CAN BE ACHIEVED THROUGH THE DISCIPLINE OF DOING A FEW THINGS REALLY WELL.

E. OUR GROWTH WILL NOT BE AS DRAMATIC AS IN RECENT YEARS, BUT I AM CONFIDENT THAT OUR INDUSTRY WILL REMAIN AMONG THE STRONGEST ECONOMIC ENTITIES IN THE UNITED STATES.

F. I WOULD LIKE TO CLOSE BY REVISING MY FIVE WORD OUTLOOK FOR THE INDUSTRY TO ONE WORD: "OPPORTUNITY"

G. WHETHER NEWS IS GOOD OR BAD, THE MANAGEMENTS THAT HAVE THE ABILITY TO ANALYZE ACCURATELY AND CAN ADJUST QUICKLY WILL BE ABLE TO CAPITALIZE ON ANY SITUATION.

H. I BELIEVE THIS IS THE CHALLENGE THAT FACES ALL OF US.

VI. THANK YOU. NOW, I WILL BE PLEASED TO ANSWER YOUR QUESTIONS.