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	WASHINGTON SOCIETY OF INVESTMENT ANALYSTS: THE URGENCY TO RESTRUCTURE IN THE PETROLEUM INDUSTRY WASHINGTON, D.C. MARCH 7, 1984

1 P.M.

(TIME:___MIN.)

I. GOOD AFTERNOON
A. IT’S A PLEASURE TO BE HERE TODAY.
B. (PERSONAL COMMENTS, HUMOR)
C. THE WAY THINGS ARE GOING FOR ME RIGHT NOW, I FEEL LIKE THE HUMAN CANNONBALL.
D. (STORY)

II. THE PAST FIVE MONTHS HAVE BEEN VERY BUSY ONES AT MESA.
A. I’LL JUST GIVE YOU A LITTLE BACKGROUND ON WHERE THINGS CURRENTLY STAND.
B. ON FEBRUARY 23, MESA AND THE OTHER MEMBERS OF THE GULF INVESTORS GROUP COMMENCED A CASH TENDER OFFER AT $65 A SHARE FOR UP TO 13.5 MILLION SHARES OF GULF COMMON STOCK.
C. ON MONDAY, SOCAL SIGNED AN AGREEMENT TO ACQUIRE GULF AT $80 A SHARE ($13.4 BILLION).
D. THERE ARE REALLY NO LOSERS IN THIS ACQUISITION.
E. IN FACT, THE ECONOMY, THE FEDERAL GOVERNMENT AND ALL GULF STOCKHOLDERS ARE WINNERS.
F. THE 270,000 GULF SHAREHOLDERS WILL RECEIVE APPROXIMATELY $13.4 BILLION FOR THEIR STOCK.
1. (EXPLAIN: 270,000 STOCKHOLDERS, 40 POINT GAIN, 165 MM SHARES, $13.4 BILLION.)
G. THE INCREASE IN THE VALUE OF GULF’S STOCK WILL HAVE A POSITIVE IMPACT ON THE NATION’S ECONOMY.
H. THE GOVERNMENT WILL ALSO BENEFIT FROM TAX REVENUES WHICH WILL BE GENERATED FROM THE PENDING ACQUISITION.
I. UNFORTUNATELY, THERE IS NOW TALK OF PANIC LEGISLATION IN CONGRESS THAT WOULD DEPRIVE GULF SHAREHOLDERS FROM RECEIVING THE BEST OFFER.
J. IF CONGRESS WILL JUST RELAX AND LET THIS ACQUISITION—WHICH IS PART OF OVERALL INDUSTRY RESTRUCTURING—TAKE PLACE. . .THEY WILL SEE THAT IT WILL BE HEALTHY FOR SHAREHOLDERS CONSUMERS AND GOVERNMENT.
K. WHEN YOU STOP TO THINK. . .THOSE THREE GROUPS—SHAREHOLDERS, CONSUMERS AND GOVERNMENT—MAY OFTEN BE THE SAME PEOPLE.
L. SHAREHOLDERS ARE CONSUMERS, AND SOME CONSUMERS ARE SHAREHOLDERS.
M. AND GOVERNMENT IS ALL THE PEOPLE.
N. PASSING LEGISLATION TO HARM ONE GROUP WILL, IN TURN, HARM ANOTHER.

III. WE’VE SEEN A GREAT DEAL OF ACTIVITY IN THE OIL AND GAS INDUSTRY LATELY.
A. AND REGARDLESS OF WHAT SOME PEOPLE HAVE SAID, THE ACTIVITY IS TO THE INDUSTRY’S BENEFIT. . .BECAUSE IT IS PART OF A VITAL RESTRUCTURING PROCESS.
B. THE RESTRUCTURING COMES AS A RESULT OF SEVERAL PROBLEMS THAT PLAGUE THE INDUSTRY. . .PROBLEMS THAT HAVE DEVELOPED AND INTENSIFIED OVER THE LAST DECADE.
C. THE PROBLEMS HAVE COME ABOUT BECAUSE THE INDUSTRY’S “GREAT EXPECTATIONS” OF THE 1970s FELL FLAT.
D. AFTER THE ARAB OIL EMBARGO OF 1973, OIL AND PETROLEUM COMPANIES EXPECTED OIL PRICES TO CONTINUE TO RISE.
E. FINDING COSTS WERE ALSO EXPECTED TO RISE.
F. BUT MANY COMPANIES THOUGHT THAT EVER-INCREASING OIL PRICES WOULD COVER UP HIGHER FINDING COSTS.
G. THEY ALSO THOUGHT THAT IT WOULD COVER UP ANOTHER BIG PROBLEM—DEPLETING RESERVES.
H. SINCE 1970, OUR CRUDE OIL RESERVES HAVE BEEN STEADILY DECLINING.
I. EVEN WITH THE RECORD DRILLING ACTIVITY FROM 1973 TO 1982, THE INDUSTRY STILL DIDN’T REPLACE ITS RESERVES.
J. BUT AS LONG AS THE PRICE OF OIL INCREASED, RESERVE DEPLETION COULD BE HIDDEN.
K. OPEC PUT A HALT TO INCREASING PRICES, HOWEVER, AND THE INDUSTRY’S PROBLEMS BEGAN TO SURFACE.

IV. MOST COMPANIES HAVE HAD TO MAKE ADJUSTMENTS IN THEIR OPERATIONS OVER THE LAST TWO YEARS.
A. AT MESA, WE CHANGED GEARS QUICKLY.
B. WE FOCUSED OUR EMPHASIS ON OIL PROSPECTS.
C. THE REASONS FOR THIS MOVE ARE PRETTY OBVIOUS—THERE’S A MARKET FOR OIL TODAY BUT NOT A STRONG MARKET FOR GAS. BUT IT IS GETTING BETTER.
D. OUR EFFORTS HAVE PAID OFF IN FIVE CONSECUTIVE QUARTERS OF SUBSTANTIALLY INCREASED OIL PRODUCTION.
E. AND WE’VE BEEN ABLE TO ACHIEVE THIS EVEN THOUGH WE’VE REDUCED OUR CAPITAL BUDGETS A GREAT DEAL.
1. IN 1981, WE RAN A CAPITAL BUDGET OF $420 MILLION.
2. IN 1983, IT WAS $223 MILLION, BUT EVEN AT THAT LEVEL, MESA REPLACED 101% OF PRODUCTION ON A GAS EQUIVALENT BASIS.
F. OUR 1984 CAPITAL BUDGET HAS BEEN REDUCED BY 55% TO $100 MILLION.
G. AND THIS AMOUNT IS NOT EXPECTED TO BE SUFFICIENT TO REPLACE PRODUCTION THROUGH EXPLORATION AND DEVELOPMENT. HOWEVER, WE STILL HAVE 10 MONTHS TO WORK ON THIS PROBLEM.
H. SO WE’LL BE PLACING MORE EMPHASIS ON ANOTHER DIMENSION OF THE BUSINESS THAT WE’VE DEVELOPED OVER THE LAST FEW YEARS, ONE THAT MAKES BETTER USE OF OUR CAPITAL.
I. WE’VE DEVELOPED WHAT YOU COULD CALL AN MERCHANT BANKING DEPARTMENT.
J. WE HAVE THE IN-HOUSE EXPERTISE NEEDED TO MAKE GOOD INVESTMENT SELECTIONS AND GET RESULTS.
K. AND WE’LL CONTINUE TO PUT ADDED EMPHASIS ON THIS PORTION OF OUR BUSINESS UNTIL WE CAN SEE A CLEAR PICTURE OF INCREASED PRICES FOR OIL AND GAS.

V. WE HAVE A COMMITMENT AT MESA TO DO WHATEVER IS NECESSARY TO MAKE MONEY FOR OUR SHAREHOLDERS.
A. UNFORTUNATELY, THIS PHILOSOPHY ISN’T PREVALENT THROUGHOUT THE INDUSTRY.
B. AND THAT’S A LARGE PART OF THE REASON THAT WE’RE SEEING MORE PRESSURE FROM SHAREHOLDERS WHO ARE FORCING COMPANIES TO TAKE STEPS TO RESTRUCTURE AND MAXIMIZE VALUES.
C. SHAREHOLDERS ARE OFTEN THE FORGOTTEN PEOPLE IN CORPORATE AMERICA, YET THEY ARE THE CORNERSTONE OF THE FREE ENTERPRISE SYSTEM.
1. TOO OFTEN, THOUGH, THEIR INTERESTS ARE NOT CONSIDERED.
D. BUT, HOPEFULLY, THAT WON’T CONTINUE MUCH LONGER.
E. IN FACT, WE MAY HAVE HELPED THINGS ALONG A BIT.
F. IN THE OIL INDUSTRY, MANY SHAREHOLDERS ARE VOICING THE SAME CONCERNS THAT WE HAVE VOICED OVER THE DEPLETION OF RESERVES, WHICH REPRESENT THE SHAREHOLDERS’ ASSETS.
1. REMEMBER, OUR INDUSTRY HAS A RESERVE LIFE INDEX OF ONLY 10 YEARS (EXPLAIN).
G. MANY OIL COMPANY SHAREHOLDERS SEE THAT THEIR ASSETS ARE BEING DEPLETED AND NOT REPLACED. . .EVEN WHEN MANAGEMENT HAS ABUNDANT CASH FLOW.
H. FOR INSTANCE, AMONG THE MAJORS, THERE IS MORE CASH FLOW THAN ECONOMIC DRILLING PROSPECTS.
I. THAT’S THE CASE TODAY AND IT’S BEEN THE CASE FOR SEVERAL YEARS.
J. IN THE 70s, THE EXCESS CASH FLOW WAS CHANNELED TO DIVERSIFICATION VENTURES AND OTHER MARGINALLY PROFITABLE OPERATIONS.
K. THOSE INVESTMENTS PROVED TO BE VERY POOR.
L. THE SHAREHOLDERS SEE THIS, AND THEY ALSO SEE THAT MANAGEMENT CONTINUES TO TAKE EXCESS CASH FLOW AND USE IT IN WAYS THAT DO NOT BENEFIT SHAREHOLDERS.
M. SO YOU HAVE RESERVE DEPLETION, POOR INVESTMENTS. . .AND LITTLE, IF ANY, RESPONSE FROM MANAGEMENT TO MAKE CHANGES.
N. NO WONDER STOCKHOLDERS ARE GETTING FED UP.

VI. THERE’S ONE BASIC PROBLEM THAT UNDERLIES ALL THE OTHERS. . .AND IT’S SOMETHING THAT RARELY, IF EVER, COMES TO LIGHT.
A. YET, I BELIEVE IT’S AT THE VERY ROOT OF SHAREHOLDER DISCONTENT.
B. I’M TALKING ABOUT MANAGEMENT OWNERSHIP IN THE COMPANY. . .OR RATHER, LACK OF IT.
C. MANAGEMENTS WHO AREN’T SHAREHOLDERS, THEMSELVES, AREN’T GOING TO HAVE THE SHAREHOLDERS INTERESTS AT HEART.
D. THEY’RE NOT PUTTING THEIR OWN MONEY ON THE LINE, SO THEY DON’T BEAR THE BRUNT OF BAD INVESTMENTS AND RESERVE DEPLETION.
E. A POINT THAT ILLUSTRATES THAT IS THE COMPARISON BETWEEN THE INDEPENDENT OIL AND GAS COMPANIES’ REPLACEMENT PERCENTAGES AND THE MAJOR OIL COMPANIES’ REPLACEMENT.
F. IN 1982, THE MAJORS REPLACED 64 PERCENT OF THEIR COMBINED EQUIVALENT PRODUCTION—I AM TALKING ABOUT DOMESTIC RESERVES AND PRODUCTION.
G. INDEPENDENTS, ON THE OTHER HAND, REPLACED 125 PERCENT OF PRODUCTION. . .AND THE REASON IS THAT, IN MOST CASES, THE INDEPENDENTS HAVE THEIR OWN MONEY AT STAKE DIRECTLY OR THEY ARE LARGE STOCKHOLDERS.
H. IT MAKES A DIFFERENCE.
I. THAT’S WHY, AT MESA, WE BELIEVE MANAGEMENT AND THE BOARD OF DIRECTORS SHOULD HAVE MEANINGFUL OWNERSHIP IN THE COMPANY.
J. YOU WOULD BE SURPRISED AT THE NUMBER OF DIRECTORS ON THE BOARDS OF MAJOR U.S. CORPORATIONS THAT ARE BARELY STOCKHOLDERS.
1. MANY OWN LITTLE STOCK AND SOME OWN NONE AT ALL.
K. THEY ARE VERY BEHOLDEN TO MANAGEMENT.
L. IT SEEMS REASONABLE THAT DIRECTORS SHOULD PUT EITHER A MAJOR PORTION OR ALL OF THEIR DIRECTORS’ FEES BACK INTO THE COMPANY’S STOCK.
M. AT MESA, WE ALSO BELIEVE THAT EACH EMPLOYEE SHOULD BE GIVEN THE OPPORTUNITY TO BECOME A STOCKHOLDER.
1. AND 95% OF OUR EMPLOYEES ARE STOCKHOLDERS.
N. WITH THAT OWNERSHIP, OUR BUSINESS IS GEARED TOWARD ONE GOAL—MAXIMIZING THE VALUE OF THE SHAREHOLDERS’ INVESTMENT.
O. IT WORKS BECAUSE THE SHAREHOLDERS’ GAIN IS MANAGEMENT’S, THE DIRECTORS’ AND THE EMPLOYEES’ GAIN.
P. I GIVE NEW MESA EMPLOYEES A 1 1/2 -HOUR ORIENTATION ON THE COMPANY AND THE THEME IS THAT THE SHAREHOLDER IS NO. 1 AT MESA.
Q. UNFORTUNATELY, THAT IS AN ATTITUDE NOT SHARED BY MANY COMPANIES.

(PAUSE)

VII. IN FACT, THE IDEA OF MAKING CHANGES IN THE COMPANY’S OPERATIONS IS ALSO A PHILOSOPHY THAT MANY MANAGEMENTS DON’T SHARE.
A. THAT’S ESPECIALLY TRUE WHEN THE SUGGESTION FOR CHANGE COMES FROM SOMEONE OTHER THAN MANAGEMENT—LIKE SHAREHOLDERS, THE TRUE OWNERS OF THE COMPANY.
B. WE DISCOVERED THIS QUICKLY AT GULF.
C. NOT ONLY WERE THEY HESITANT TO MAKE CHANGES, BUT THEY ALSO DIDN’T WANT TO HEAR THE SUGGESTIONS.
D. GULF MANAGEMENT REFUSED OUR ROYALTY TRUST PROPOSAL, AND SINCE THEN MR. LEE, GULF’S CEO, HAS THROWN THE BOOK AT THE CONCEPT.
E. IT’S INTERESTING, HOWEVER, THAT WHILE LEE HAS TRIED TO LEAD PEOPLE TO BELIEVE THAT EVERYONE THINKS A ROYALTY TRUST IS A BAD IDEA, WE’VE ENCOUNTERED JUST THE OPPOSITE.
F. THE TORTORELLO CORPORATION CONDUCTED A SERIES OF SURVEYS PRIOR TO OUR INVESTMENT IN GULF IN WHICH THEY ASKED PETROLEUM INDUSTRY SHAREHOLDERS AND PETROLEUM ANALYSTS WHAT THEY THOUGHT OF THE ROYALTY TRUST CONCEPT.
G. SOME OF YOU MAY HAVE BEEN CONTACTED IN THE ANALYST’S SURVEY.
H. THE CONCLUSION IN THOSE SURVEYS WAS THAT BOTH ANALYSTS AND SHAREHOLDERS ARE RECEPTIVE TO THE IDEA AND FEEL THAT IT WOULD BE GOOD FOR SHAREHOLDERS AND THE INDUSTRY.
I. TODAY, I HAVE SOME NEW DATA TO REPORT.
J. TORTORELLO RECENTLY CONDUCTED AN ENERGY STUDY OF A CONGRESSIONAL SAMPLE OF 60. . .INCLUDING CONGRESSMEN AND THEIR ADMINISTRATIVE AND LEGISLATIVE AIDES.
K. WHEN THE CONGRESSIONAL GROUP WAS ASKED IF THE CREATION OF A ROYALTY TRUST WOULD BENEFIT SHAREHOLDERS, 80% SAID THAT IT WOULD.
(3% WOULD NOT BENEFIT; 17% DON’T KNOW, NOT SURE)
L. WHEN ASKED IF THE MAJOR OIL COMPANIES SHOULD DISTRIBUTE ROYALTY TRUSTS, 52% SAID YES.
(20% SHOULD NOT DISTRIBUTE; 28% NOT SURE)
M. FINALLY, WHEN ASKED IF THE OVERALL EFFECT ON THE INDUSTRY WOULD BE POSITIVE IF MOST OIL AND GAS COMPANIES DISTRIBUTED ROYALTY TRUSTS, 52% SAID YES. (18% NEGATIVE EFFECT; 12% NO EFFECT AT ALL; 18% NOT SURE)
(PAUSE)
N. THIS SURVEY, TOO, SHOWS THAT THERE IS SUPPORT FOR THE ROYALTY TRUST CONCEPT.
O. MORE IMPORTANTLY, IT SHOWS THAT CONGRESS IS OPEN TO MAKING CHANGES IN THE OIL INDUSTRY.
P. THAT’S A POINT THAT COMPANIES SHOULD TAKE HEED OF.

VIII. THERE IS AN URGENCY FOR THE INDUSTRY TO MAKE MAJOR CHANGES AND RESTRUCTURE ITSELF.
A. THOSE CHANGES SHOULD COME FROM WITHIN THE INDUSTRY. . .FROM THE PEOPLE WHO HAVE THE EXPERTISE NEEDED TO PUT THE INDUSTRY BACK ON ITS OWN FEET.
B. SHAREHOLDERS ARE BEGINNING TO ASK FOR SUCH CHANGES.
C. AND CONSUMERS MAY VERY WELL DEMAND IT, BECAUSE INEFFICIENT OPERATIONS ARE PAID FOR AT THE CONSUMER LEVEL.
D. MANAGEMENTS WHO CHOOSE TO IGNORE THESE SUGGESTIONS FOR CHANGE MAY FIND THEMSELVES CHALLENGED IN THE FUTURE. . .MAYBE SOONER THAN THEY THINK.