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	T. BOONE PICKENS, JR. COMMENTS FOURTH ANNUAL IADC/PESA DRILLING/PRODUCTION MARKETING CONFERENCE LOEWS 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. 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.

B. PLEASURE PARTICIPATING AT THE FOURTH ANNUAL [UNREADABLE STRICKEN TEXT] DRILLING/PRODUCTION MARKETING CONFERENCE.

C. SURPRISED TO SEE SO MANY PEOPLE IN ATTENDANCE. NOT EVERYONE IS OUT-OF BUSINESS.

D. (PERSONAL COMMENTS) [HANDWRITTEN ADDITION: I WISH THIS HAD BEEN 2 YRS AGO.]

E. CONFERENCE PROGRAM TODAY ADDRESSES TWO TOPICS.

1. "DRILLING ACTIVITY: WHAT- DOES 1983 HOLD?", AND
2. "POLITICS AND ECONOMICS: NEAR TERM EFFECT ON DRILLING." [HANDWRITTEN ADDITION: TODAY I WILL GIVE YOU]

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

II. OUR INDUSTRY TODAY...AS PAINFUL AS THAT MAY BE.

A. 31 YEARS [HANDWRITTEN ADDITION: SUMMARIZE THESE YEARS IN] FIVE WORDS: "IT HAS NEVER BEEN EASY."

B. FIRST TWENTY YEARS...DECLINE IN THE NUMBER OF DOMESTIC WELLS DRILLED.

C. [HANDWRITTEN ADDITION: THE] TREND WAS REVERSED IN 1973. [HANDWRITTEN ADDITION: ARAB EMBARGO]

D. A BOOM IN THE INDUSTRY.

E. DRILLING ACTIVITY WAS SKYROCKETING—EVERYONE WAS GETTING INTO THE BUSINESS.

F. REVENUES AND PROFITS REACHEf NEW HIGHS IN 1980—AND 1981.

G. BUT THEN CAME 1982...

H. CERTAIN CONDITIONS LEAD TO TROUBLE:

1. HIGH FINDING COSTS.
2. HIGH INTEREST RATES.
3. OVERSUPPLY OF NATURAL GAS AND CRUDE OIL.
4. A DECLINE IN WORLD CRUDE OIL PRICES.

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

J. MANAGEMENT [HANDWRITTEN ADDITION: STARTED TAKING] ACTIONS:

1. CAPITAL BUDGETS SLASHED.
2. DRILLING ACTIVITY {STRICKEN TEXT: IS DECLINING} [HANDWRITTEN ADDITION: ALONG WITH THOSE MOVES- DELINED]
3. PERSONNEL [HANDWRITTEN ADDITION: WAS AFFECTED]
4. ALTERNATIVE ENERGY SOURCES [HANDWRITTEN ADDITION: WERE DROPPED] [HANDWRITTEN ADDITION: OTHER PROBLEMS DEVELOPED]
5. {STRICKEN TEXT: FINANCIALLY INNOVATIVE}
   a. BANK CREDIT [HANDWRITTEN ADDITION: TIGHTENED]
   b. WALL STREET. [HANDWRITTEN ADDITION: DROPPED THE INDUSTRY]
   c. DRILLING PROGRAM SALES. [HANDWRITTEN ADDITION: DECLINED DRAMATICALLY]

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

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

A. [HANDWRITTEN ADDITION: I CAN] SUMMARIZE THE IMMEDIATE OUTLOOK IN [HANDWRITTEN ADDITION: ONLY] 5 WORDS: "ABOUT THE SAME AS '82."

B. ACTIVITY AND GROWTH IN 1983 WILL REMAIN FLAT.

C. MANAGERIAL THEMES WILL BE GREATER EFFICIENCY AND PRODUCTIVITY.

D. DIVERSIFICATION WILL BE REVERSED.

E. MORE COMPANIES WILL SELL OFF ASSETS OR SPIN OFF ASSETS INTO TRUSTS.

F. CONSIDER THE ECONOMIC ADVANTAGES OF PURCHASING RESERVES.

G. NOT MANY REASONS FOR DRILLING ACTIVITY TO INCREASE.

[HANDWRITTEN ADDITION: H. BASICALLY WHAT WE ARE LOOKING AT FOR ACTIVITY IS:] {STRICKEN TEXT: SEVERAL SITUATIONS THAT WILL CAUSE DRILLING ACTIVITIES TO INCREASE}

1. EXPIRING LEASES.
2. OIL PROPERTIES WORTHY OF THE INVESTMENT.
3. GAS PROSPECTS 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 QUOTE:

"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. DUST OFF THE "PLOW BACK" SYSTEM.

1. SUPPORT PRICE FOR A BARREL OF OIL.
2. A COMPANY MUST "PLOW" THE DIFFERENCE BACK INTO DOMESTIC EXPLORATION.
3. LET'S TAKE TAX DOLLARS AND PLOW THEM INTO OUR NATIONAL ECONOMY RATHER THAN PROTECTING THE MIDDLE EAST.

H. NATIONAL ENERGY PLAN.

I. A LOT OF TALK IN WASHINGTON [HANDWRITTEN ADDITION: NO ACTION TAKEN -TO DATE]

J. GOVERNOR CLEMENTS.

{STRICKEN TEXT: K. POLICY SHOULD HAVE AT LEAST THREE PRIMARY OBJECTIVES:}

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

{STRICKEN TEXT: L. FREE MARKET ROLE}

{STRICKEN TEXT: M. GOVERNEMENT ROLE.} [HANDWRITTEN ADDITION: FREE MARKET YES- GOVT' YES- BUT THE SPECIFIC ROLLS TO FILL]

N. SPECIFIC PROGRAMS:

1. DEREGULATION OF THE PRICE OF NATURAL GAS;
2. REPEAL OF THE FUEL USE ACT;
3. INCREASED USE OF COAL; [HANDWRITTEN ADDITION: & NUCLEAR ENERGY]
4. {STRICKEN TEXT: CONSISTANT REGULATORY ENVIRONMENT FOR NUCLEAR ENERGY.}

O. THE REAGAN ADMINISTRATION. [HANDWRITTEN ADDITION: WILL SUPPORT WHEN THEY SORT OUT OTHER PROBLEMS]

V. IN CONCLUSION, I BELIEVE THAT OUR INDUSTRY IS {STRICKEN TEXT: ABOUT TO EXPERIENCE} [HANDWRITTEN ADDITION:IN] A REVOLUTION—THERE WILL BE MANY CHANGES. {STRICKEN TEXT: IN THE WAY WE HAVE DONE BUSINESS IN THE PAST.}

A. SHAKEOUT PERIOD.

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 [HANDWRITTEN ADDITION: TRAIL] {STRICKEN TEXT: 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. [HANDWRITTEN ADDITION: BUT THE BEST RETURN FOR THE STOCKHOLDER- THAT'S WHAT WE ARE PAID TO DO.]

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

1. {STRICKEN TEXT: RETURN ON ASSETS}
2. {STRICKEN TEXT: RETURN OF EQUITY}
3. {STRICKEN TEXT: BALANCE SHEET STRENGTH}
4. {STRICKEN TEXT: SHAREHOLDER BENEFITS FROM RISING EQUITY VALUES}

D. THE DISCIPLINE OF DOING A FEW THINGS REALLY WELL. [HANDWRITTEN ADDITION: BOOM TIMES MAKE US FEEL VERY SMART- BE CAREFUL]

E. GROWTH WILL NOT BE AS DRAMATIC BUT 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. GOOD OR BAD NEWS...THE MANAGEMENTS THAT HAVE THE ABILITY TO ANALYZE ACCURATELY AND CAN ADJUST QUICKLY WILL BE ABLE TO CAPITALIZE ON ANY [HANDWRITTEN ADDITION: GIVEN] SITUATION.

{STRICKEN TEXT: H. THE CHALLENGE THAT FACES ALL OF US.}

VI. THANK YOU.