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T. BOONE PICKENS, JR.
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11:15 A.M.
IT IS INDEED A PLEASURE FOR ME TO PARTICIPATE ON YOUR PROGRAM TODAY AND TO SHARE THE PODIUM WITH SUCH A FINE GROUP OF SPEAKERS THAT YOU HAVE ARRANGED FOR YOUR CONFERENCE. I HAVE BEEN ASKED TO COMMENT ON COMPANY RESTRUCTURING AND OIL AND GAS DEALS WITHIN THE CONTEXT OF YOUR CONFERENCE'S THEME "THE IMPACT OF STABLE OIL PRICES."
I WILL ADDRESS THIS TOPIC THIS MORNING BY: FIRST, BRIEFLY PROVIDING MY ASSESSMENT OF THE OIL AND GAS INDUSTRY TODAY; SECOND, ANSWERING THE QUESTION "WHAT IS THE OPTIMUM SIZE OF AN OIL AND GAS EXPLORATION COMPANY? AND THEN, CONCLUDE BY RAISING THE QUESTION "ARE WE EMBARKING UPON AN AGE OF AWARENESS IN THE OIL AND GAS BUSINESS?"
FOLLOWING MY REMARKS, I WILL BE PLEASED TO ANSWER YOUR QUESTIONS.
NOW, LET'S TAKE A BRIEF LOOK AT THE CURRENT STATE OF THE INDUSTRY...AS PAINFUL AS THAT MAY BE!
THE YEAR 1982 WILL BE REMEMBERED AS THE END OF A BOOM ERA IN THE INDUSTRY THAT BEGAN IN 1973, CULMINATING IN 1980-1981 WITH NEW HIGHS RECORDED IN THE INDUSTRY IN REVENUES AND PROFITS. THE MAJOR FACTOR FOR THE PROSPEROUS EIGHT-YEAR PERIOD WAS THE ESCALATING PRICE OF CRUDE OIL...PRICES CONTROLLED BY OPEC. DURING THIS PERIOD, A PERIOD IN WHICH THERE WAS A TWELVE-FOLD INCREASE IN THE PRICE OF CRUDE OIL, "BOOM TIME MENTALITY" BECAME COMMONPLACE; CASH WAS PLENTIFUL, DRILLING WAS SKYROCKETING, AND EVERYONE WAS RUSHING TO GET INTO THE BUSINESS...AND I MEAN EVERYONE FROM TENNIS PROS TO DOCTORS.
EVERYONE WAS CAUGHT UP IN THIS BOOM TIME, INCLUDING MESA WHICH HISTORICALLY HAS "ZIGGED" WHEN THE REST OF THE INDUSTRY "ZAGGED." WE HAD A CAPITAL BUDGET OF $470 MILLION IN 1981—MUCH TOO HIGH. EVEN THOUGH OUR MANAGEMENT BEGAN TO SEE THE SYMPTOMS OF A DECLINE AS EARLY AS OCTOBER OF 1981, IT WAS VERY DIFFICULT TO TURN THINGS 'AROUND QUICKLY...
THE POINT I WANT TO MAKE HERE IS THAT AS LONG AS RECORD HIGHS WERE BEING RECORDED IN THE INDUSTRY DUE PRIMARILY TO OPEC PRICING, MOST MANAGEMENTS WERE NOT OVERLY CONCERNED WITH RISING FINDING COSTS, RISING INTEREST RATES, AND TEMPORARY OVER SUPPLIES OF GAS AND CRUDE OIL. BUT WITH THE DROP AND STABILIZATION OF PRICES, THESE SYMPTOMS SURFACED MAJOR PROBLEMS FOR MANY COMPANIES IN THE BUSINESS.
WE HAVE SEEN THE DRILLING RIG COUNT CONTINUE TO DECLINE FROM ITS HIGH WATER MARK OF 4,530 IN DECEMBER 1981 TO THE CURRENT LEVEL OF 2,466; WITH STILL NO BOTTOM IN SIGHT.
MANAGEMENTS HAVE RESPONDED TO THESE CONDITIONS BY SLASHING CAPITAL BUDGETS, TIGHTENING UP ON PERSONNEL AND POSTPONING PROJECTS DEALING WITH ALTERNATIVE ENERGY SOURCES. MANAGEMENT THEMES HAVE BECOME "GREATER EFFICIENCY AND PRODUCTIVITY." DRILLABLE PROSPECTS ARE BEING SCRUTINIZED MORE CAUTIOUSLY NOW AND MANAGEMENTS ARE REVERSING THE TREND TOWARD DIVERSIFICATION.
THE CONFIDENCE OF MANY, WITHIN THE INDUSTRY AND ON WALL STREET, IS FADING. HOWEVER, I DO NOT BELIEVE THE UNCOMFORTABLE CONDITIONS THAT EXIST WITHIN THE INDUSTRY, BROUGHT ON IN LARGE PART BY THE DROP AND STABILIZATION OF PRICES, ARE NECESSARILY UNHEALTHY. CONSUMERS HAVE BENEFITED AND INFLATION IN OUR COUNTRY HAS BEEN BLUNTED. THIS TOUGH PERIOD THAT WE ARE IN HAS FORCED OUR INDUSTRY TO TAKE A GOOD, HARD LOOK AT ITSELF.
AS A RESULT, I BELIEVE WE WILL SEE REVOLUTIONARY CHANGES OCCUR WITHIN THE INDUSTRY DURING THE NEXT SEVERAL YEARS, RESULTING IN AN OVERALL STRENGTHENING OF THE OIL AND GAS BUSINESS. CHALLENGING TIMES ARE UPON US—SOME WILL MAKE IT AND SOME WILL NOT. THIS RAISES THE QUESTION "WHO WILL BE THE MOST SUCCESSFUL IN THE NEW BUSINESS ENVIRONMENT?"
ONE ANSWER TO THIS QUESTION IS..."THE MANAGEMENTS THAT CAN DETERMINE AND MAINTAIN THE OPTIMUM SIZE OF THEIR COMPANIES." THE OVERRIDING GOAL OF MANAGEMENT IN PUBLICLY HELD COMPANIES SHOULD BE TO PROTECT AND EXPAND THE ASSETS OF THE COMPANY AND THE VALUE OF THEIR SHAREHOLDERS' INTERESTS. PERHAPS THE MOST IMPORTANT REMARK THAT I WILL MAKE TODAY IS...OIL AND GAS COMPANIES, BOTH LARGE AND SMALL, ARE MANAGERS OF DEPLETABLE ASSETS...THEIR RESERVES OF OIL AND GAS. IT IS INCUMBENT UPON COMPANIES TO REPLACE PRODUCTION ANNUALLY TO ENSURE THE MAINTENANCE AND GROWTH OF THEIR SHAREHOLDERS' INVESTMENT.
THEREFORE, THE REPLACEMENT OF RESERVES BECOMES AN IMPORTANT MEASUREMENT WHEN EVALUATING WHETHER OR NOT A COMPANY IS AT ITS OPTIMUM SIZE.
MANY COMPANIES IN OUR INDUSTRY MISLED BY RISING OIL PRICES AND RECORD EARNINGS, HAVE BEEN LIQUIDATING FOR YEARS; THEY SIMPLY HAVE NOT BEEN REPLACING THEIR RESERVES. THE DIVIDEND CHECK THAT THEY HAVE BEEN SENDING THEIR SHAREHOLDERS HAS BEEN A RETURN OF CAPITAL.
THE BIGGEST JOB FACING EXPLORATION AND PRODUCTION COMPANIES IS TO PROTECT THEIR RESERVE BASE AND TO EXPAND IT AT A REASONABLE COST, EITHER THROUGH EXPLORATION OR ACQUISITION. RECENTLY, THE FINDING COST AND PURCHASE PRICE CURVES HAVE BEEN TOO FAR APART-THEY MUST COME CLOSER TOGETHER TO SPUR NEW DRILLING ACTIVITY. CURRENTLY, THE MERGER AND ACQUISITION OPTION IS VERY ATTRACTIVE BECAUSE IT IS THE CHEAPEST WAY TO REPLACE RESERVES.
SOME OF YOU MAY RECALL THAT WE RECENTLY MADE AN ACQUISITION ATTEMPT! IF A WHITE KNIGHT HAD NOT COME TO OUR TARGET'S RESCUE, WE WOULD HAVE PURCHASED OIL IN THE GROUND FOR $3 PER BARREL.
OTHER THAN UTILIZING EXPLORATION AND ACQUISITION MEASURES TO ENSURE OPTIMUM SIZE, MANAGEMENTS SHOULD ALSO CONSIDER THE BENEFITS OF RESTRUCTURING BASED UPON THE ROYALTY TRUST CONCEPT, PIONEERED BY MESA IN 1979. IN OUR PARTICULAR CASE WITH THE MESA ROYALTY TRUST, IT WAS NOT CREATED TO SOLVE A REPLACEMENT PROBLEM—FOR WE HAD CONSISTENTLY REPLACED RESERVES FOR 18 YEARS. RATHER, WE CREATED THE TRUST AS A MEANS OF ENSURING REALISTIC VALUE FOR THE COMPANY'S ASSETS. BY SPINNING OFF APPROXIMATELY ONE-HALF OF OUR RESERVES TO THE TRUST, WE IN EFFECT REDUCED OUR RESERVE BASE. OUR SHAREHOLDERS HAVE A MORE DIRECT INCOME STREAM FROM THE PROPERTIES PLACED IN TRUST, UNBURDENED BY INCOME TAXES AT THE CORPORATE LEVEL.
BY REDUCING SIZE, NEW DISCOVERIES HAVE A GREATER IMPACT ON A COMPANY AND INCREASE THE VALUE OF THE SHAREHOLDERS' INVESTMENT. MANAGEMENTS SHOULD NOT BE CONCERNED WITH GROWTH FOR GROWTH'S SAKE—THEY SHOULD BE CONCERNED WITH KEEPING THEIR COMPANY'S SIZE AT A LEVEL THAT PROVIDES ITS SHAREHOLDERS THE BEST RETURN.
THE MANAGEMENTS THAT WILL BE THE MOST SUCCESSFUL IN ACHIEVING THIS GOAL WILL BE ONES THAT KNOW THEIR ASSETS WELL AND CAN MAKE ADJUSTMENTS QUICKLY. OUR MANAGEMENT HAS EXPERIENCE AND A TRACK RECORD IN THIS REGARD OF WHICH I AM PLEASED. WHEN IT APPEARED THAT CANADIAN E&P OPERATIONS WOULD BE SEVERELY IMPACTED BY GOVERNMENT REGULATION—WE GOT OUT! WHEN OUR MANAGEMENT FORESAW THE IMPENDING TAXATION AND REGULATION OF NORTH SEA OPERATIONS BY THE UNITED KINGDOM—WE GOT OUT! WHEN OUR MANAGEMENT ADDRESSED THE QUESTION "WHY SELL AT BELOW ASSET VALUE IF YOU ARE REPLACING RESERVES?"—WE FORMED THE MESA ROYALTY TRUST AND OUR STOCKHOLDERS RECEIVED A DIRECT OWNERSHIP IN PRODUCING PROPERTIES.
EACH OF THESE STRATEGIC DECISIONS WAS MADE WITH ONE OVERRIDING OBJECTIVE—TO MAINTAIN THE OPTIMUM SIZE OF OUR COMPANY, THEREBY BENEFITING OUR SHAREHOLDERS IN THE MOST POSITIVE WAY POSSIBLE.
THIS BRINGS ME TO A QUESTION I WOULD LIKE TO POSE: "ARE WE EMBARKING UPON AN AGE OF AWARENESS IN THE OIL AND GAS BUSINESS?" OR MORE SPECIFICALLY, "ARE SHAREHOLDERS GOING TO SCRUTINIZE MANAGEMENTS MORE CAREFULLY AND HAVE A GREATER INFLUENCE ON CORPORATE DECISIONS?"
I BELIEVE THE ANSWER TO THIS QUESTION IS..."YES." THE INVESTING PUBLIC IS BECOMING MORE AWARE THAT OIL AND GAS COMPANIES ARE MANAGERS OF DEPLETABLE ASSETS AND THAT PRODUCTION MUST BE REPLACED ANNUALLY TO PROTECT AND ENHANCE THEIR INVESTMENT. I BELIEVE WE WILL SEE SHAREHOLDERS SPEAK OUT MORE...PARTICULARLY WHEN THE ASSETS OF THE COMPANY ARE BEING LIQUIDATED. I BELIEVE IT WILL BE THE INSTITUTIONAL INVESTORS WHO SPEAK THE LOUDEST AND WITH THE MOST INFLUENCE ON THESE ISSUES BECAUSE OF THEIR FIDUCIARY RESPONSIBILITY AND ORIENTATION TOWARD BOTTOM-LINE RESULTS. THEY WILL ALSO BE THE ONES WHO PLAY A MAJOR ROLE IN FUTURE MERGERS AND ACQUISITIONS...THIS SHOULD GET THE ATTENTION OF SOME MANAGEMENTS.
IT'S INCREDIBLE TO ME THE ATTITUDES SOME CEO'S HAVE TOWARD THEIR SHAREHOLDERS...THEY FORGET THAT WE ARE PAID TO GET THE BEST RETURN FOR THE STOCKHOLDER.
I BELIEVE SHAREHOLDERS WILL BEGIN TO INSIST THAT MANAGEMENT BE GIVEN SIGNIFICANT STOCK OPTIONS. STOCKHOLDERS WILL THEN BE SOMEWHAT ASSURED THAT MANAGEMENT WILL MAKE DECISIONS WHICH ARE IN THEIR BEST INTEREST—NOT DECISIONS WHICH WILL MERELY PERPETUATE MANAGEMENTS' JOBS.
IN CONCLUSION, OUR INDUSTRY IS EXPERIENCING A TOUGH PERIOD. BUT, I BELIEVE IT IS A PERIOD OF OPPORTUNITY. MANAGEMENTS THAT CAN ANALYZE AND MAKE ADJUSTMENTS QUICKLY WILL SEIZE UPON OPPORTUNITIES DURING THIS PERIOD.
AS A RESULT OF PRICE STABILIZATION, MANAGEMENTS ARE BEING EXPOSED WHO HAVE NOT REPLACED THEIR RESERVES. WE WILL SEE MORE RESTRUCTURING IN THE INDUSTRY THROUGH MERGERS, ACQUISITIONS, SPIN-OFFS AND THE SALE OF ASSETS TO ACHIEVE THE OPTIMUM SIZE OF A COMPANY—A SIZE THAT WILL BRING THE BEST VALUE TO ITS SHAREHOLDER.
SHAREHOLDERS WILL BECOME MORE AND MORE VOCAL IN THEIR CRITICISM OF MANAGEMENTS WHO DO NOT MAKE DECISIONS THAT ARE IN THE BEST INTEREST OF THEIR SHAREHOLDERS.
ALL IN ALL, I'M OPTIMISTIC ABOUT THE OUTLOOK FOR THE INDUSTRY. I BELIEVE THIS SHAKE-OUT PERIOD THAT WE ARE IN WILL STRENGTHEN THE INDUSTRY, AND THAT THE OIL AND GAS INDUSTRY WILL REMAIN AMONG THE STRONGEST OF ECONOMIC ENTITIES IN THE UNITED STATES.
THANK YOU. I WILL NOW BE PLEASED TO ANSWER YOUR QUESTIONS.