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T. BOONE PICKENS, JR.
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12 NOON - 1:30 PM
BRIEFING INFORMATION
THE INSTITUTE
THE TEXAS TECH UNIVERSITY CENTER FOR PROFESSIONAL DEVELOPMENT IS SPONSORING ITS THIRTIETH ANNUAL TAX INSTITUTE. THE TWO-DAY INSTITUTE FEATURES THE FOLLOWING TOPICS AND SPEAKERS:
OCTOBER 28
| CURRENT DEVELOPMENTS IN FEDERAL TAXATION | FRANK O'CONNELL MAIN HURDMAN |
| VIEW OF THE NEW TAX ACT OVER NEW ESTATE PLANNING | FRANK O'CONNELL PHIL MOREHEAD COOPERS & LYBRAND |
| THE OUTLOOK FOR THE OIL AND GAS INDUSTRY | T. BOONE PICKENS, JR. MESA PETROLEUM CO. |
| CURRENT DEVELOPMENTS IN OIL AND GAS TAXATION | JAMES G. CRUMP PRICE WATERHOUSE & CO. |
| WINDFALL PROFITS TAX | RAY POAGE MAIN HURDMAN |
OCTOBER 29
| INVESTING IN OIL AND GAS FUNDS | BEN F. DURHAM COOPERS & LYBRAND |
| PROPOSED CHANGES IN SUBCHAPTER TAXATION | RICHARD L. THOMAS ARTHUR ANDERSEN & CO. |
| AN OVERVIEW OF ACRS |
DIANE D. FULLER PEAT, MARWICK, MITCHELL & CO. |
| CURRENT DEVELOPMENTS IN REAL ESTATE TAXATION | DAVID REED ERNST & WHINNEY |
| SECTION 754 ELECTION | SALLY JONES UNIVERSITY OF TEXAS |
| FIDUCIARY ACCOUNTING | MARY BADGETT MASON, NICKELS & WARNER |
PRINCIPLE INDIVIDUALS WITH THE TAX INSTITUTE ARE:
| GARY E. WHITE, PHD., CPA | PRESIDENT |
| THOMAS A. RATCLIFF, PHD., CPA | PROGRAM CHAIRMAN |
| JOHN M. MALLOY, PHD., CPA | DIRECTOR |
| HASKELL G. TAYLOR, CPA | DIRECTOR EMERITUS |
AUDIENCE/ATTENDANCE
AN ATTENDANCE OF APPROXIMATELY 300 IS EXPECTED. PRIVATE AND PUBLIC TAX PRACTITIONERS WILL COMPRISE MOST OF THE AUDIENCE.
AGENDA/FORMAT
DEAN CARL STEM WILL MEET YOU AT TEXAS AIR CENTER AT 11:30 AM AND PROVIDE TRANSPORTATION TO THE LUBBOCK MEMORIAL CIVIC CENTER.
THE LUNCHEON BEGINS AT 12:00 NOON. THEY EXPECT YOUR COMMENTS TO BE 20-25 MINUTES FOLLOWED BY A BRIEF QUESTION AND ANSWER PERIOD. THE LUNCHEON IS TO CONCLUDE AT 1:30.
FOLLOWING THE LUNCHEON, DEAN STEM WILL TAKE YOU TO THE COLLEGE OF BUSINESS ADMINISTRATION TO HAVE AN INFORMAL DISCUSSION WITH FACULTY AND POSSIBLY SOME STUDENTS, INCLUDING MESA'S SCHOLARSHIP RECIPIENTS (SUSAN THRAMS—GRADUATE; BARRY COWAN— UNDERGRADUATE).
AT 2:00 PM THE SEMINAR ON THE "MESA-CS MUTUAL TAKEOVER ATTEMPT" WILL BEGIN. THEY EXPECT A "BLOW-BY-BLOW" DESCRIPTION. ATTENDANCE IS OPEN TO COMMUNITY BUSINESS LEADERS. THE SEMINAR SHOULD CONCLUDE BY 3:15 PM.
TAX INSTITUTE OUTLINE - HIGHLIGHTS
I. INTRODUCTION
A. WILL ADDRESS THE TOPIC—"OUTLOOK FOR THE OIL AND GAS INDUSTRY"—BY ASSESSING WHERE THE INDUSTRY IS TODAY AND PROJECTING WHAT MAY SPELL THE DIFFERENCE BETWEEN SUCCESS AND FAILURE FOR OIL AND GAS COMPANIES IN THE FUTURE.
II. CURRENT STATE OF THE INDUSTRY
A. 1982 MARKED THE END OF THE BOOM.
B. OPEC PRICE INCREASES.
C. EVERYONE RUSHED TO GET INTO THE BUSINESS.
D. WITH PROSPEROUS TIMES, MANAGEMENTS OVERLOOKED PROBLEMS OF HIGH FINDING COSTS, RISING INTEREST RATES AND TEMPORARY OVERSUPPLIES OF OIL AND GAS.
E. SEEING THESE PROBLEMS EMERGE NOW FOR MANY MANAGEMENTS.
F. DRILLING RIG COUNT HAS PLUNGED.
G. MANAGEMENTS ARE CUTTING BUDGETS AND EMPHASIZING EFFICIENCY AND PRODUCTIVITY.
H. HARD TO SELL A DEAL TODAY.
I. HASN'T BEEN ALL BAD—CONSUMERS HAVE BENEFITED AND INFLATION HAS BEEN BLUNTED.
J. BEING FORCED TO TAKE HARD LOOK AT THE INDUSTRY.
K. BUSINESS WILL BE STRENGTHENED—WILL SEE MANY CHANGES OCCUR.
L. WHO WILL SURVIVE AND BE THE MOST SUCCESSFUL?
III. THE ANSWER—MANAGEMENTS WHO CAN MAINTAIN OPTIMUM SIZE.
A. GOAL OF MANAGEMENT.
B. MANAGERS OF DEPLETABLE ASSETS.
C. INCUMBENT TO INCREASE RESERVES.
D. RESERVE ENHANCEMENT IS IMPORTANT MEASUREMENT IN DETERMINING OPTIMUM SIZE.
E. MANY COMPANIES ARE LIQUIDATING.
F. REPLACE BY EXPLORATION AND/OR ACQUISITION.
G. FINDING COSTS VS. PURCHASE PRICE.
H. CITIES SERVICE.
I. RESTRUCTURING WITH ROYALTY TRUST IS ANOTHER MEANS OF ACHIEVING OPTIMUM SIZE (MTR, MOST).
J. IRS RULINGS.
K REDUCING SIZE—NEW DISCOVERIES.
L. SUCCESS IS NOT BIGNESS.
M. IMPORTANCE OF MAKING ADJUSTMENTS QUICKLY.
IV. WE ARE EMBARKING UPON AN "AGE OF AWARENESS."
A. INVESTORS AWARE OF SIGNIFICANCE OF INCREASING RESERVES.
B. SHAREHOLDERS WILL SPEAK OUT.
C. ATTITUDES OF SOME CEO'S.
D. MEANINGFUL STOCK OPTIONS.
V. CONCLUSION
A. INDUSTRY IS IN TOUGH PERIOD—BUT MANY OPPORTUNITIES EXIST.
1. IMPORTANCE OF ADJUSTMENTS.
B. WILL SEE MORE RESTRUCTURING IN THE INDUSTRY.
C. SHAREHOLDERS WILL BECOME MORE VOCAL.
D. OPTIMISTIC ABOUT THE OUTLOOK.
VI. QUESTIONS AND ANSWERS.
"MESA-CS TAKEOVER ATTEMPT" SEMINAR
T. BOONE PICKENS, JR. REMARKS: TEXAS TECH TAX INSTITUTE
I. INTRODUCTION
A. THANK YOU FOR YOUR INTRODUCTION.
B. IT IS A PLEASURE FOR ME TO BE HERE TODAY TO PARTICIPATE ON THE PROGRAM OF THE THIRTIETH ANNUAL TEXAS TECH TAX INSTITUTE.
C. (PERSONAL COMMENTS)
1.
2.
3.
D. I HAVE BEEN ASKED TO PROVIDE AN OUTLOOK FOR THE OIL AND GAS INDUSTRY.
E. I WILL ADDRESS THIS TOPIC BY FIRST ASSESSING WHERE WE ARE TODAY IN THE INDUSTRY AND PROJECTING WHAT I BELIEVE WILL SPELL THE DIFFERENCE BETWEEN SUCCESS AND FAILURE FOR OIL AND GAS COMPANIES IN THE FUTURE.
II. NOW, LET'S TAKE A BRIEF LOOK AT THE CURRENT STATE OF THE INDUSTRY.
A. 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.
B. THE MAJOR FACTOR FOR THE PROSPEROUS EIGHT-YEAR PERIOD WAS THE ESCALATING PRICE OF CRUDE OIL...PRICES ORCHESTRATED BY OPEC.
C. 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.
D. 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.
E. THE POINT I WANT TO MAKE HERE IS THAT AS LONG AS RECORD REVENUES AND INCOME WERE BEING RECORDED IN THE INDUSTRY DUE PRIMARILY TO OPEC PRICE INCREASES, MOST MANAGEMENTS WERE NOT OVERLY CONCERNED WITH RISING FINDING COSTS, RISING INTEREST RATES, AND TEMPORARY OVER SUPPLIES OF GAS AND CRUDE OIL.
F. BUT WITH THE DROP AND EVENTUAL STABILIZATION OF PRICES, THESE SYMPTOMS SURFACED MAJOR PROBLEMS FOR MANY COMPANIES IN THE BUSINESS.
G. 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 2,380.
H. MANAGEMENTS HAVE RESPONDED TO THESE CONDITIONS BY SLASHING CAPITAL BUDGETS, TIGHTENING UP ON PERSONNEL AND POSTPONING PROJECTS DEALING WITH ALTERNATIVE ENERGY SOURCES.
I. MANAGEMENT THEMES HAVE BECOME "GREATER EFFICIENCY AND PRODUCTIVITY."
J. DRILLABLE PROSPECTS ARE BEING SCRUTINIZED MORE CAUTIOUSLY NOW AND MANAGEMENTS ARE REVERSING THE TREND TOWARD DIVERSIFICATION.
K. THE CONFIDENCE OF MANY, WITHIN THE INDUSTRY AND ON WALL STREET, IS FADING. IT'S DIFFICULT TO SELL A DEAL IN TODAY'S MARKET.
L. 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.
1. CONSUMERS HAVE BENEFITED AND INFLATION IN OUR COUNTRY HAS BEEN BLUNTED.
M. THIS TOUGH PERIOD THAT WE ARE IN HAS FORCED OUR INDUSTRY TO TAKE A GOOD, HARD LOOK AT ITSELF.
N. 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.
O. CHALLENGING TIMES ARE UPON US—SOME WILL MAKE IT AND SOME WILL NOT. WE ARE ALREADY SEEING SOME COMPANIES FALL BY THE WAYSIDE.
P. THIS RAISES THE QUESTION "WHO WILL BE THE MOST SUCCESSFUL IN THE NEW BUSINESS ENVIRONMENT?"
III. ONE ANSWER TO THIS QUESTION IS..."THE MANAGEMENTS THAT CAN DETERMINE AND MAINTAIN THE OPTIMUM SIZE OF THEIR COMPANIES."
A. THE OVERRIDING GOAL OF MANAGEMENT SHOULD BE TO PROTECT AND EXPAND THE ASSETS OF THE COMPANY AND THE VALUE OF THEIR SHAREHOLDERS' INTERESTS.
B. PERHAPS THE MOST IMPORTANT REMARK THAT I WILL MAKE TODAY IS...(PAUSE)...OIL AND GAS COMPANIES, BOTH LARGE AND SMALL, ARE MANAGERS OF DEPLETABLE ASSETS...THEIR RESERVES OF OIL AND GAS.
C. IT IS INCUMBENT UPON COMPANIES TO INCREASE RESERVES ANNUALLY TO ENSURE THE MAINTENANCE AND GROWTH OF THEIR SHAREHOLDERS' INVESTMENT.
D. THEREFORE, THE ENHANCEMENT OF RESERVES BECOMES AN IMPORTANT MEASUREMENT WHEN EVALUATING WHETHER OR NOT A COMPANY IS AT ITS OPTIMUM SIZE.
E. MANY COMPANIES IN OUR INDUSTRY, MISLED BY RISING OIL PRICES AND RECORD EARNINGS, HAVE BEEN LIQUIDATING FOR YEARS; THEY SIMPLY HAVE NOT BEEN INCREASING THEIR RESERVES ANNUALLY. AFTER PAYING CORPORATE AND WINDFALL PROFIT TAXES, THE DIVIDEND CHECK THAT THEY HAVE BEEN SENDING THEIR SHAREHOLDERS HAS BEEN MERELY A RETURN OF CAPITAL.
F. 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.
G. RECENTLY, THE FINDING COST AND PURCHASE PRICE CURVES HAVE BEEN TOO FAR APART...THEY MUST COME CLOSER TOGETHER TO SPUR NEW DRILLING ACTIVITY.
H. CURRENTLY, MERGER AND/OR ACQUISITION ARE VERY ATTRACTIVE WAYS OF INCREASING RESERVES.
I. 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 ABOUT $3 PER BARREL.
J. 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, WITH THE FORMATION OF MESA ROYALTY TRUST. WE HAVE ALSO ANNOUNCED OUR SECOND TRUST, THE PROPOSED MESA OFFSHORE TRUST, WHICH WILL BE CREATED BY THE END OF THE YEAR.
K. THE MESA ROYALTY TRUST AND MESA OFFSHORE TRUST WERE NOT CREATED TO SOLVE A RESERVE PROBLEM—FOR WE HAVE CONSISTENTLY INCREASED RESERVES FOR 18 YEARS.
L. RATHER, WE CREATED THE TRUSTS AS A MEANS OF ENSURING REALISTIC VALUE FOR THE COMPANY'S ASSETS.
M. OUR SHAREHOLDERS HAVE A DIRECT INCOME STREAM FROM THE PROPERTIES PLACED IN TRUST, AVOIDING TWO LEVELS OF TAXATION AT THE CORPORATE LEVEL.
N. INCIDENTALLY, THE IRS HAS RULED THAT THE MESA ROYALTY TRUST IS A GRANTOR TRUST AND MOST RECENTLY HAS CONCLUDED THAT ROYALTY INCOME ATTRIBUTABLE TO THE TRUST WILL NOT BE TAXABLE TO MESA.
O. BY REDUCING SIZE, NEW DISCOVERIES HAVE A GREATER IMPACT ON A COMPANY AND INCREASE THE VALUE OF THE SHAREHOLDERS' INVESTMENT.
P. SOME MANAGEMENTS EQUATE SUCCESS WITH BIGNESS—THEY SHOULD BE CONCERNED WITH KEEPING THEIR COMPANY'S SIZE AT A LEVEL THAT PROVIDES ITS SHAREHOLDERS THE BEST OPPORTUNITY TO MAKE A PROFIT.
Q. THE MANAGEMENTS THAT WILL BE THE MOST SUCCESSFUL IN ACHIEVING THIS GOAL WILL BE ONES THAT KNOW THEIR ASSETS WELL AND CAN MAKE THE NECESSARY ADJUSTMENTS QUICKLY.
R. LET'S QUICKLY REVIEW SOME OF THE ADJUSTMENTS OUR MANAGEMENT HAS MADE TO MAINTAIN OPTIMUM SIZE:
S. 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.
IV. 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?"
A. I BELIEVE THE ANSWER TO THIS QUESTION IS..."YES."
B. THE INVESTING PUBLIC IS BECOMING MORE AWARE THAT OIL AND GAS COMPANIES ARE MANAGERS OF DEPLETABLE ASSETS AND THAT RESERVES MUST BE INCREASED ANNUALLY TO PROTECT AND ENHANCE THEIR INVESTMENT.
C. I BELIEVE WE WILL SEE SHAREHOLDERS SPEAK OUT MORE...PARTICULARLY WHEN THE ASSETS OF THE COMPANY ARE BEING LIQUIDATED.
D. 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. THEY OFTEN EQUATE COMPANY WITH MANAGEMENT RATHER THAN EQUATING COMPANY WITH SHAREHOLDERS.
E. TO HELP "FORCE" MANAGEMENTS TO BEGIN THINKING AS INVESTORS—I BELIEVE SHAREHOLDERS WILL BEGIN TO INSIST THAT MANAGEMENT BE GIVEN MEANINGFUL STOCK OPTIONS.
F. THEY WILL THEN BE SOMEWHAT ASSURED THAT MANAGEMENT WILL MAKE DECISIONS WHICH ARE IN THE BEST INTEREST OF SHAREHOLDERS—NOT DECISIONS WHICH WILL MERELY PERPETUATE MANAGEMENTS' JOBS.
V. IN CONCLUSION...
A.OUR INDUSTRY IS EXPERIENCING A TOUGH PERIOD.
B. AS A RESULT OF PRICE STABILIZATION, MANAGEMENTS ARE BEING EXPOSED WHO HAVE NOT CONSISTENTLY INCREASED THEIR RESERVES.
1. 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.
C. SHAREHOLDERS WILL BECOME MORE AND MORE VOCAL IN THEIR CRITICISM OF MANAGEMENTS WHO DO NOT MAKE DECISIONS THAT ARE IN THE BEST INTEREST OF SHAREHOLDERS.
D. ALL IN ALL, I'M OPTIMISTIC ABOUT THE OUTLOOK FOR THE INDUSTRY.
2. VI. THANK YOU. I WILL NOW BE PLEASED TO ANSWER YOUR QUESTIONS.