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	T. BOONE PICKENS, JR. REMARKS UNDERWOOD, NEUHAUS & CO. SEMINAR THE HOUSTONIAN HOUSTON, TEXAS OCTOBER 21, 1982

8:30 A.M.-9:15 A.M.

BRIEFING INFORMATION

AUDIENCE

[HANDWRITTEN ADDITION: TBP-FYI, JRB]

UNDERWOOD, NEUHAUS & CO EXPECTS APPROXIMATELY 50 OF ITS INSTITUTIONAL CLIENTS TO ATTEND THE SEMINAR. MOST OF THE AUDIENCE SHOULD BE PORTFOLIO MANAGERS WITH A FEW ANALYSTS.

THE SEMINAR

THE TWO-DAY SEMINAR WILL FEATURE PROGRAMS DEALING WITH ENERGY, TECHNOLOGY AND REAL ESTATE. THE SCHEDULE IS AS FOLLOWS:

OCTOBER 20
8:30-9:00
OVERVIEW
DR. JAMES MCKIE
THE UNIVERSITY OF TEXAS

9:15-10:45
EXPLORATION OUTLOOK
H. ROBERT HIRSCH
CONQUEST EXPLORATION CO.

E. T. STORY, JR.
CONQUEST EXPLORATION CO.

CHARLES E. RAMSEY
MAY PETROLEUM, INC.

GEORGE P. MITCHELL
MITCHELL ENERGY & DEV. CORP.

11:00-12:30
NATURAL GAS OUTLOOK GALE L. GALLOWAY CELERON CORP.

JACK M. LAFIELD
LEAR PETROLEUM CORP.

BRIAN O'NEILL
TRANSCONTINENTAL GAS PIPELINE

PETER J. KING, JR.
COLORADO INTERSTATE GAS

2:00-3:30
REAL ESTATE OVERVIEW
BRUCE G. GARRISON UNDERWOOD, NEUHAUS

8:15
TEXAS BANKING
BEN LOVE
A CURRENT EVALUATION
TEXAS COMMERCE BANCSHARES

OCTOBER 21

8:30-9:15
CHANGING TRENDS IN
T. BOONE PICKENS, JR.
THE PETROLEUM INDUSTRY
MESA PETROLEUM CO.

9:30-10:30
PANDICK PRESS
EDWARD G. GREEN
BENJAMIN J. APICELLA

10:45-11:45
VERNITRON
BERNARD LEVINE

1:00-2:00
BDM-DEFENSE
EARLE C. WILLIAMS
ELECTRONICS

2:15-3:15
ELECTRONIC DATA SYSTEMS
MORTON MEYERSON
TOM WALTER

4:00-5:00
AYDIN AYHAM HAKIMOGLE
GERALDINE HENNESSEY

GREG STOERNER WILL SERVE AS MODERATOR FOR YOUR PORTION OF THE PROGRAM AND WILL INTRODUCE YOU.

BREAKFAST

GREG STOERNER AND PHIL DAVID HAVE INVITED YOU TO JOIN THEM FOR BREAKFAST AT THE HOUSTONIAN AT 7:45 AM IN THE OAK ROOM.

REMARKS OUTLINE—HIGHLIGHTS

I. INTRODUCTION

II. AN ASSESSMENT OF THE INDUSTRY—A REVIEW AND OUTLOOK

A. 1982 HAS BEEN AN "EYE OPENER."

1. END OF 9-YEAR BOOM
2. HIGHLIGHTED BY TWELVE-FOLD INCREASE IN PRICES ORCHESTRATED BY OPEC.

B. MOST NEWS THIS YEAR HAS BEEN NEGATIVE.

1. OVERSUPPLY OF OIL AND DROP IN PRICES
2. MARKET FOR NATURAL GAS HAS BEEN UNSETTLED
3. DRILLING ACTIVITY HAS PLUNGED
4. EARNINGS AND PROFITS DOWN (HIGH FINDING COSTS, HIGH INTEREST RATES AND OVER SUPPLIES OF OIL AND GAS).

C. END IS IN SIGHT FOR THE BAD NEWS FROM THE INDUSTRY.

D. TOUGH BUSINESS PERIOD—MOST OF 31 YEARS HAVE BEEN TOUGH.

E. SHAKEOUT WILL EVENTUALLY STRENGTHEN THE INDUSTRY.

F. OPTIMISTIC ABOUT THE FUTURE...BUT REALISTIC GROWTH WILL BE SLOW.

G. POSITIVE INDICATORS SIGNALLING RECOVERY.

1. INTEREST RATES DOWN
2. DRILLING COSTS DOWN
3. STOCK MARKET SIGNALLING RECOVERY
4. COLD WINTER FORECAST AND LOW INVENTORIES

H. RECOVERY WILL COME—BUT SLOW.

I. OPEC HAS CAUSED DRILLING ACTIVITY TO BE CUT IN HALF IN U.S....ONLY A MATTER OF TIME BEFORE DEMAND INCREASES.

J. GAS BUBBLE WILL CONTINUE THROUGH 1983 AND POSSIBLY THE FIRST HALF OF '84.

1. BUBBLE CAUSED BY GAS DELIVERABILITY EXCESS NOT EXCESS OF GAS RESERVES.
2. PROBLEM SHOULD BE SOLVED BY ECONOMIC RECOVERY, LESS GAS AVAILABLE DUE TO DRILLING DECLINE, AND PIPELINES DON'T HAVE RESERVES TO MEET NEEDS OF '84-'85.

K. ENERGY INDEPENDENCE

1. U.S. NEEDS AN ENERGY POLICY.
2. APPLAUD GOVERNOR CLEMENTS' EFFORT.
3. REAGAN ADMINISTRATION IS PREOCCUPIED NOW.
4. CAN'T CONTINUE TO IMPORT 35%.
5. SOME NATURAL GAS LEGISLATION MAY BE PASSED IN 1983.
6. WHATEVER LEGISLATION EMERGES, IT SHOULD LET THE MARKET SOLVE THE PROBLEM—NOT GOVERNMENT.

III. IMMINENT CHANGES IN THE INDUSTRY.

A. CHANGES AT A REVOLUTIONARY LEVEL DURING THE REMAINDER OF THE '80'S.

B. A CATALYST FOR CHANGE IS REALIZATION BY MANAGEMENTS AND INVESTORS THAT COMPANIES THAT HAVE THE BEST PERFORMANCE RECORDS ARE THOSE WHO CAN MAINTAIN AN OPTIMUM SIZE.

C. GOAL OF MANAGEMENT IS TO PROTECT AND EXPAND THE ASSETS OF THE COMPANY AND THE VALUE OF THEIR SHAREHOLDERS' INTERESTS.

D. MANAGERS OF DEPLETABLE ASSETS.

E. REPLACEMENT OF RESERVES.

F. REPLACE RESERVE BY EXPLORATION OR ACQUISITION.

G. ACQUISITION IS CURRENTLY ATTRACTIVE.

H. OTHER FORM OF RESTRUCTURING.

I. ROYALTY TRUST.

J. REDUCES RESERVE BASE—NEW DISCOVERIES HAVE GREATER IMPACT—INCREASES THE VALUE OF SHAREHOLDERS' INVESTMENT.

K. DIRECT INCOME STREAM UNBURDENED BY TAXES.

L. SUCCESS WILL MEAN KNOWLEDGE OF ASSETS, ANTICIPATION, ANALYSIS AND WILLINGNESS TO ADJUST.

M. MESA'S GAME PLAN REFLECTS THESE TRAITS.

N. HISTORY OF ADJUSTMENTS TO MAINTAIN OPTIMUM SIZE.

1. CANADA
2. NORTH SEA
3. MESA ROYALTY TRUST
4. MESA OFFSHORE TRUST

O. MOVES MADE MESA SMALLER.

P. MANAGEMENTS SHOULD NOT BE CONCERNED WITH GROWTH FOR GROWTH'S SAKE.

IV. ANOTHER CATALYST FOR CHANGE—SHAREHOLDERS

A. AGE OF AWARENESS.

B. IMPORTANCE OF OPTIMUM SIZE AND INCREASING RESERVES.

C. INSTITUTIONAL INVESTORS.

D. ATTITUDES OF SOME CEO'S.

E. STOCK OPTIONS FOR MANAGEMENT.

V. SUMMARY

A. TOUGH PERIOD—BUT INDICATORS ARE POINTING TOWARD RECOVERY.

B. RECOVERY WILL BE SLOW—SHAKEOUT WILL STRENGTHEN INDUSTRY.

C. CHANGES WILL COME IN THE INDUSTRY DUE TO REALIZATION OF IMPORTANCE OF OPTIMUM SIZE AND RESERVE REPLACEMENT.

D. INDUSTRY WILL REMAIN AMONG THE STRONGEST IN U.S.

VI. THANK YOU.

T. BOONE PICKENS, JR. REMARKS: UNDERWOOD, NEUHAUS SEMINAR

I. INTRODUCTION

A. THANK YOU, GREG.

B. (PERSONAL COMMENTS)
1.
2.
3.

C. GREG HAS GIVEN ME THE TOPIC "CHANGING TRENDS IN THE PETROLEUM INDUSTRY."

D. MY COMMENTS THIS MORNING WILL ASSESS WHERE THE PETROLEUM INDUSTRY IS TODAY, WHERE IT MAY BE HEADED, AND HIGHLIGHT TWO CATALYSTS THAT MAY LEAD TO CHANGES IN THE INDUSTRY.

II. FIRST, LET'S REVIEW 1982 AND ASSESS THE OUTLOOK FOR THE INDUSTRY.

A. 1982 WAS AN EYE OPENER FOR MANY—MANY MANAGEMENTS AND MANY INVESTORS.

1. IT MARKED THE END OF A BOOM ERA THAT STARTED IN 1973 WITH AN INTERRUPTION OF OIL SUPPLY FROM MIDEAST.
2. THIS BOOM PERIOD WAS SPURRED BY A TWELVE-FOLD INCREASE IN PRICES THAT WERE ORCHESTRATED BY OPEC, RESULTING IN RECORD EARNINGS AND PROFITS FOR THE INDUSTRY IN 1980 AND 1981.

B. THIS YEAR—MOST NEWS FROM THE INDUSTRY HAS BEEN BAD NEWS.

1. THERE HAS BEEN AN OVERSUPPLY OF CRUDE OIL AND THE SUBSEQUENT DROP AND STABILIZATION OF PRICES.
2. THE MARKET FOR NATURAL GAS HAS BEEN UNSETTLED.
3. DRILLING ACTIVITY, AFTER HITTING A HIGH WATER MARK OF 4,530 IN DECEMBER 1981, HAS PLUNGED TO _______.
4. BECAUSE OF HIGH FINDING COSTS, HIGH INTEREST RATES AND OVERSUPPLIES OF OIL AND GAS, EARNINGS AND PROFITS FOR MOST COMPANIES HAVE DECLINED SOME DECLINING DRASTICALLY.

C. BUT, I BELIEVE THERE IS AN END IN SIGHT FOR THE BAD NEWS.

D. TRUE, WE ARE EXPERIENCING A TOUGH, CHALLENGING PERIOD RIGHT NOW—NOT MANY OF MY 31 YEARS IN THE BUSINESS HAVE WE "KNOCKED 'EM DEAD."

E. AND, OUR INDUSTRY IS EXPERIENCING A SHAKEOUT PERIOD...BUT, I'M CONVINCED THAT THE SHAKEOUT WILL EVENTUALLY STRENGTHEN THE INDUSTRY—THOSE WHO SHOULD NEVER HAVE BEEN IN THE BUSINESS WILL FALL BY WAYSIDE—THOSE WHO HAVE OPERATED INEFFICIENTLY WILL ALSO FALL.

F. I'M OPTIMISTIC ABOUT THE FUTURE OF THE INDUSTRY, BUT I'M ALSO REALISTIC—THERE WILL BE GROWTH—BUT NOT AT THE RECORD PACE SET IN THE LATE '70'S AND EARLY '80'S.

G. YOU'VE GOT TO CONSIDER SOME POSITIVE INDICATORS THAT ARE NOW SURFACING, PROVIDING THE BASIS FOR THIS OPTIMISM:

1. INTEREST RATES ARE DECLINING.
2. COSTS OF DRILLING ARE FALLING—DRILLING CONTRACTORS ARE RETURNING TO FOOTAGE-RATE BIDDING FROM THE HIGHLY EXPENSIVE DAY-RATE CHARGES. SOME ESTIMATE THAT THE COST OF DRILLING AN EXPLORATORY WELL IN U.S. IS 20% TO 25% BELOW WHAT IT WAS A YEAR AGO.
3. THE STOCK MARKET IS BEGINNING TO SIGNAL THAT ECONOMIC RECOVERY IS ON ITS WAY. WITH THE RETURN OF ECONOMIC PROSPERITY FOR AMERICANS AND AMERICAN BUSINESS—WE WILL ALSO SEE AN INCREASE IN THE DEMAND FOR OUR PRODUCTS—OIL AND GAS.
4. THERE ARE TWO OTHER FACTORS THAT WILL HAVE A POSITIVE BEARING ON SUPPLY AND DEMAND—A PROJECTED COLD WINTER AND A DECLINING SURPLUS OF INVENTORY.

H. ANOTHER FACTOR THAT SHOULD BE CONSIDERED IN YOUR ANALYSIS IS THE FACT THAT OPEC HAS CAUSED THE DRILLING ACTIVITY IN THE U.S. TO DROP BY ALMOST 1/2.

1. DUE TO OUR DEPENDENCE ON FOREIGN CRUDE, IT'S ONLY A MATTER OF TIME BEFORE DEMAND INCREASES—AND WITH IT ANOTHER HIKE IN PRICES BY OPEC.

I. ON THE NATURAL GAS SIDE—WE SEE THE GAS BUBBLE CONTINUING THROUGH 1983 AND POSSIBLY INTO THE FIRST HALF OF '84.

I. ON THE NATURAL GAS SIDE—WE SEE THE GAS BUBBLE CONTINUING THROUGH 1983 AND POSSIBLY INTO THE FIRST HALF OF '84.

1. THE BUBBLE DOES NOT EXIST DUE TO AN EXCESS IN GAS RESERVES—BUT DUE TO A GAS DELIVERABILITY EXCESS CAUSED BY RECESSION, FUEL SWITCHING AND CONSERVATION.
2. WE SHOULD COME OUT OF THIS DELIVERABILITY PROBLEM IN '84 BECAUSE OF 3 FACTORS: (1) THE ECONOMY WILL HAVE RECOVERED; (2) THERE WILL BE LESS NEW GAS ON THE MARKET DUE TO THE CURRENT DECLINE IN DRILLING ACTIVITY; (3) PIPELINES DO NOT HAVE SUFFICIENT RESERVES TO FULFILL PROJECTED NEEDS OF '84-'85.

J. ONE CANNOT TALK ABOUT THE OUTLOOK FOR THE INDUSTRY WITHOUT ADDRESSING A MAJOR PROBLEM THAT, UNTIL SOLVED, WILL CONTINUE TO PLACE THE INDUSTRY IN A PRECARIOUS POSITION—ENERGY INDEPENDENCE.

1. THE U.S. NEEDS TO ADOPT AN ENERGY POLICY THAT OUTLINES A STRATEGY TO MAKE THIS COUNTRY ENERGY INDEPENDENT.
2. I APPLAUD GOVERNOR CLEMENTS FOR TAKING THE INITIATIVE TO SUBMIT AN ENERGY PLAN TO WASHINGTON.
3. I DON'T BELIEVE WE WILL GET PRESIDENT REAGAN'S ATTENTION ON THIS ISSUE UNTIL OUR ECONOMY IS CLEARLY ON THE ROAD TO RECOVERY OR UNTIL OUR COUNTRY IS HIT WITH ANOTHER ENERGY CRISIS BROUGHT ON BY AN INTERRUPTION IN SUPPLY.
4. WE CANNOT CONTINUE TO BUILD A STRONG AMERICA AND A STRONG ECONOMY WHEN WE ARE STILL DEPENDENT ON 35% OF OUR SUPPLY FROM OPEC.
5. WE DON'T EXPECT AN ENERGY POLICY TO BE ADOPTED BY THE ADMINISTRATION NEXT YEAR—BUT PERHAPS WE MAY GET SOME FORM OF LEGISLATION FROM CONGRESS THAT WILL EASE THE TRANSITION TO A DEREGULATED ENVIRONMENT FOR NATURAL GAS.
6. WHATEVER LEGISLATION DOES EMERGE FROM CONGRESS—IT SHOULD HAVE THE OBJECTIVE OF PROVIDING AN ADEQUATE SUPPLY OF OIL AND GAS AT THE LOWEST POSSIBLE COST. WE BELIEVE THE LEGISLATION SHOULD LET THE MARKET DO THIS, FOR WE HAVE YET TO SEE GOVERNMENT PERFORM AS WELL AS THE MARKET.

K. SO MUCH FOR A BRIEF ASSESSMENT OF OUR INDUSTRY AND ITS OUTLOOK.

III. NOW, I WOULD LIKE TO SPEND A FEW MINUTES DISCUSSING FACTORS THAT MAY LEAD TO SIGNIFICANT CHANGES WITHIN THE INDUSTRY.

A. CHANGES—WE HAVE SEEN CHANGES OCCUR WITHIN OUR INDUSTRY DURING THE PAST FEW YEARS...BUT WE WILL SEE CHANGES OCCURRING AT A REVOLUTIONARY PACE DURING THE REMAINDER OF THE DECADE.

B. ONE CATALYST FOR CHANGE IS THE GROWING REALIZATION BY MANAGEMENTS AND INVESTORS THAT THE COMPANIES WHICH HAVE THE BEST PERFORMANCE RECORDS ARE THOSE WHO CAN MAINTAIN AN OPTIMUM SIZE.

C. THE OVERRIDING GOAL OF MANAGEMENT SHOULD BE TO PROTECT AND EXPAND THE ASSETS OF THE COMPANY AND THE VALUE OF THEIR SHAREHOLDERS' INTERESTS.

D. OIL AND GAS COMPANIES ARE MANAGERS OF DEPLETABLE ASSETS—THEIR RESERVES OF OIL AND GAS.

E. THEREFORE, THE REPLACEMENT OF RESERVES IS A CRITICAL MEASUREMENT IN EVALUATING WHETHER OR NOT A COMPANY IS AT ITS OPTIMUM SIZE.

F. THE BIGGEST JOB FACING EXPLORATION AND PRODUCTION COMPANIES IS TO PROTECT THEIR RESERVE BASE AND TO EXPAND IT BY THE MOST ECONOMICAL MEANS POSSIBLE...EITHER THROUGH EXPLORATION OR ACQUISITION.

G. BECAUSE OF THE CURRENT WIDE GAP BETWEEN FINDING COSTS AND ACQUISITION COSTS, MERGERS AND ACQUISITIONS WILL REMAIN A VERY VIABLE OPTION FOR MANY MANAGEMENTS FACING THE RESERVE PROBLEM.

I. ONE FORM OF RESTRUCTURING THAT IS BECOMING MORE ATTRACTIVE TO MANAGEMENTS IS THE ROYALTY TRUST CONCEPT PIONEERED BY MESA IN 1979.

J. BY SPINNING OFF RESERVES TO A TRUST, A COMPANY REDUCES ITS RESERVE BASE...WHICH CAUSES FUTURE DISCOVERIES TO HAVE A GREATER IMPACT UPON THE COMPANY AND INCREASES THE VALUE OF THE SHAREHOLDERS' INVESTMENT.

K. SHAREHOLDERS GAIN A DIRECT INCOME STREAM FROM THE TRUST PROPERTIES, UNBURDENED BY TAXES AT THE CORPORATE OR TRUST LEVEL.

L. THE MANAGEMENTS THAT WILL BE SUCCESSFUL DURING THE REMAINDER OF THE '80'S WILL BE THOSE WHO ARE WELL VERSED ON THEIR ASSETS; WHO CAN ANTICIPATE CHANGES; WHO CAN ANALYZE ACCURATELY; AND WHO ARE WILLING TO MAKE ADJUSTMENTS.

M. MESA'S GAME PLAN HAS BEEN TO MAINTAIN OPTIMUM SIZE AND BE READY AND WILLING TO MAKE ADJUSTMENTS THAT WILL ENHANCE THE VALUE OF THE SHAREHOLDERS' ASSETS.

N. OUR HISTORY ILLUSTRATES THIS POINT VERY WELL:

1. WHEN IT APPEARED THAT CANADIAN E&P OPERATIONS WOULD BE SEVERELY IMPACTED BY GOVERNMENT REGULATION—WE SOLD OUT.
2. WHEN OUR MANAGEMENT FORESAW THE IMPENDING TAXATION AND REGULATION OF NORTH SEA OPERATIONS BY THE UNITED KINGDOM—WE SOLD OUT.
3. WHEN OUR MANAGEMENT ADDRESSED THE QUESTION, "WHY SELL AT BELOW ASSET VALUE IF YOU ARE CONSISTENTLY REPLACING RESERVES?" WE FORMED THE MESA ROYALTY TRUST.
4. AND RECENTLY WE ANNOUNCED OUR INTENT TO FORM THE MESA OFFSHORE TRUST—AGAIN TO MAXIMIZE BENEFITS TO OUR SHAREHOLDERS.

O. EACH OF THESE STRATEGIC DECISIONS MADE BY MESA, IN EFFECT, MADE US SMALLER—AND EACH WAS MADE TO OPTIMIZE OUR SIZE AND TO BENEFIT OUR SHAREHOLDERS IN THE MOST POSITIVE WAY POSSIBLE.

P. 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 OPPORTUNITY TO MAKE A PROFIT.

IV. I WANT TO MENTION ONE MORE CATALYST FOR CHANGE THAT WILL BECOME MORE PROMINENT DURING THE REMAINDER OF THE DECADE—THE SHAREHOLDER.

A. WE ARE EMBARKING UPON AN "AGE OF AWARENESS" IN THIS INDUSTRY.

B. AS INVESTORS BECOME MORE AWARE OF MANAGEMENTS WHO DISREGARD OPTIMUM SIZE AND ARE DEPLETING THE ASSETS OF THE COMPANY BY NOT INCREASING RESERVES—INVESTORS WILL BECOME VOCAL—BRINGING MORE AND MORE PRESSURE ON THESE MANAGEMENTS.

C. INSTITUTIONAL INVESTORS WILL LEAD THIS CHARGE BECAUSE OF THEIR FIDUCIARY RESPONSIBILITY AND ORIENTATION TOWARD BOTTOM-LINE RESULTS.

D. IT'S INCREDIBLE TO ME THE ATTITUDES THAT SOME CEO'S HAVE TOWARD THEIR SHAREHOLDERS...THEY EQUATE COMPANY WITH MANAGEMENT RATHER THAN EQUATING COMPANY WITH SHAREHOLDER.

E. THE WAY TO TURN THIS SITUATION AROUND IS QUITE SIMPLE—IF MANAGEMENT IS GIVEN SIGNIFICANT STOCK OPTIONS, THEIR DECISIONS SOON BEGIN TO REFLECT THE INTERESTS OF SHAREHOLDERS.

F. SO, YOU IN THE AUDIENCE HERE TODAY WILL PLAY AN IMPORTANT ROLE IN BRINGING CHANGE TO THE INDUSTRY.

V. IN SUMMARY,

A. THE INDUSTRY IS IN A TOUGH PERIOD RIGHT NOW—BUT MORE AND MORE KEY INDICATORS ARE POINTING TOWARD RECOVERY.

B. THE RECOVERY WILL BE SLOW—THE SHAKEOUT WITHIN THE INDUSTRY WILL CONTINUE—BUT THE NET RESULT WILL BE A STRENGTHENING OF THE INDUSTRY.

C. WE WILL WITNESS MANY CHANGES WITHIN THE INDUSTRY DURING THE REMAINDER OF THE DECADE—FORCING CHANGE WILL BE MANAGEMENTS WHO ARE WILLING TO MAKE ADJUSTMENTS TO MAINTAIN OPTIMUM SIZE; AND INVESTORS WHO WILL INSIST THAT MANAGEMENT NO LONGER DEPLETE THE ASSETS OF THEIR COMPANY.

D. I AM CONFIDENT THAT THE OUTLOOK FOR THE INDUSTRY IS GOOD AND THAT IT WILL REMAIN AMONG THE STRONGEST ECONOMIC ENTITIES IN THE UNITED STATES.

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