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Notes for Remarks to Columbus Society of Investment Analysts
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A. IT’S A PLEASURE TO BE HERE TODAY.
[Handwritten addition: We are selling gas]
[Handwritten addition: 1. Roy Trst]
[Handwritten addition: 2. Socal-Gulf]
[Handwritten addition: 3. Corp-Merger prob]
B. (PERSONAL COMMENTS, HUMOR)
[Handwritten addition: The way things are going for me right now, I feel like the Human Cannonball.]
[Handwritten addition: (Story)]
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.
[Text stricken: C. THE OFFER AND THE PRORATION PERIOD WILL EXPIRE AT MIDNIGHT ON WEDNESDAY, MARCH 21, UNLESS EXTENDED.]
[Handwritten addition: C. On Monday, Socal signed an agreement to acquire Gulf at $80 a share ($13.4 billion).]
[Handwritten addition: There are really no losers in this acquisition.]
[Handwritten addition: In fact, the economy, the federal government and all Gulf stockholders are winners.]
[Handwritten addition: The 270,000 Gulf shareholders will receive approximately $13.4 billion for their stock.]
[Handwritten addition:
]
Explain:
270,000 shareholders
40 pt. Gain
165 mm shares
$13.4 billion
[Handwritten addition: The increase in the value of Gulf’s stock will have a positive impact on the nation’s economy.]
[Handwritten addition: The Government will also benefit from tax revenues which will be generated from the pending acquisition.]
[Handwritten addition: Unfortunately, there is now talk of panic legislation in Congress that would deprive Gulf shareholders from receiving the best offer.]
[Handwritten addition: 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.]
[Handwritten addition: What concerns me even more is that this type of thinking in congress shows that nobody is looking out for the stockholder in corporate America.]
[Handwritten addition: One out of every six Americans is a stockholder, according to a New York Stock Exchange survey done in mid-1983.]
[Handwritten addition: That’s 42 million people.]
[Handwritten addition: The politicians should beware that those 42 million stockholders probably have a spouse and at least one child at home of voting age.]
[Handwritten addition: That brings us up to every 3 out of 6 Americans being concerned about what happens to stockholders.]
[Handwritten addition: And when you get shareholders stirred up, they’ll be damn tough on anyone who is working against them.]
[Handwritten addition: Tell about the woman in L.A.—270,000 friends]
[Handwritten addition: And]
[Handwritten addition: Dave the cameraman at CBS. His mother a Gulf retiree and elevator operator.]
[Handwritten addition: Who is to say that the proposed legislation to stop mergers in the oil industry might not spill over into other industries?]
[Handwritten addition: Use house example:
Bought house for $45,000
Appraised value is $114,000
The offer is $80,000
But you’re not allowed to take the offer.]
[Handwritten addition: (Pause)]
[Handwritten addition: 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.
[Handwritten addition: B.] THE RESTRUCTURING COMES AS A RESULT OF SEVERAL PROBLEMS THAT PLAGUE THE INDUSTRY. . .PROBLEMS THAT HAVE DEVELOPED AND INTENSIFIED OVER THE LAST DECADE.
[Handwritten addition: C.] THE PROBLEMS HAVE COME ABOUT BECAUSE THE INDUSTRY’S “GREAT EXPECTATIONS” OF THE 1970s FELL FLAT.
[Handwritten addition: D.] AFTER THE ARAB OIL EMBARGO OF 1973, OIL AND PETROLEUM COMPANIES EXPECTED OIL PRICES TO CONTINUE TO RISE.
[Handwritten addition: E.] FINDING COSTS WERE ALSO EXPECTED TO RISE.
[Handwritten addition: F.] BUT MANY COMPANIES THOUGHT THAT EVER-INCREASING OIL PRICES WOULD COVER UP HIGHER FINDING COSTS.
[Handwritten addition: G.] THEY ALSO THOUGHT THAT IT WOULD COVER UP ANOTHER BIG PROBLEM—DEPLETING RESERVES.
[Handwritten addition: H.] SINCE 1970, OUR CRUDE OIL RESERVES HAVE BEEN STEADILY DECLINING.
[Handwritten addition: I.] EVEN WITH THE RECORD DRILLING ACTIVITY [Text stricken: OF THE EARLY 1980S,] [Handwritten addition: from 1973 to 1982,] THE INDUSTRY STILL DIDN’T REPLACE ITS RESERVES.
[Handwritten addition: J.] BUT AS LONG AS THE PRICE OF OIL INCREASED, RESERVE DEPLETION COULD BE HIDDEN.
[Handwritten addition: K.] OPEC PUT A HALT TO INCREASING PRICES, HOWEVER, AND THE INDUSTRY’S PROBLEMS BEGAN TO SURFACE.
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 [Text stricken: MUCH OF] A [Handwritten addition: strong] MARKET FOR GAS. [Handwritten addition: 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.
[Handwritten addition: 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 [Text stricken: FOR THE STOCKHOLDERS.]
I. WE’VE DEVELOPED WHAT YOU COULD CALL AN [Text stricken: INVESTMENT] [Handwritten addition: 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.
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 [Text stricken: OFTEN] THE FORGOTTEN PEOPLE IN CORPORATE AMERICA, [Handwritten addition: yet they are the cornerstone of the free enterprise system. 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. [Handwritten addition: Remember our industry has a res. life index of only 10 years (explain).]
G. MANY [Text stricken: MAJOR] OIL COMPANY SHAREHOLDERS SEE THAT THEIR ASSETS ARE BEING DEPLETED AND NOT REPLACED. . .EVEN WHEN MANAGEMENT HAS ABUNDANT CASH FLOW.
H. [Text stricken: AMONG] [Handwritten addition: 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 [Text stricken: ARE PROVING] [Handwritten addition: 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.
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. [Handwritten addition: I am talking about domestic res. & prod.]
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. [Handwritten addition: Directly or they are large stockholders.]
H. IT MAKES A DIFFERENCE.
I. THAT’S WHY, AT MESA, WE BELIEVE MANAGEMENT [Handwritten addition: And the board of directors] SHOULD HAVE [Text stricken: A] MEANINGFUL OWNERSHIP [Text stricken: POSITION] IN THE COMPANY.
[Text stricken: J. WE ALSO BELIEVE THAT EACH EMPLOYEE SHOULD BE GIVEN THE OPPORTUNITY TO BECOME A STOCKHOLDER.]
[Handwritten addition: You would be surprised at the number of directors on the boards of major U.S. corporations that are barely stockholders.]
[Handwritten addition: Many own little stock and some own none at all.]
[Handwritten addition: They are very beholden to management.]
[Handwritten addition: It seems reasonable that directors should put either a major portion or all of their director’s fees back into the company’s stock.]
[Handwritten addition: At Mesa, we also believe that each employee should be given the opportunity to become a stockholder.]
[Handwritten addition: And 95% of our employees are stockholders.]
K. [Text stricken: IN THAT WAY, EVERY PART OF] [Handwritten addition: With that ownership] OUR BUSINESS IS GEARED TOWARD ONE GOAL—MAXIMIZING THE VALUE OF THE SHAREHOLDERS’ INVESTMENT.
L. IT WORKS BECAUSE THE SHAREHOLDERS’ GAIN IS MANAGEMENT’S [Handwritten addition: the director’s] AND THE EMPLOYEE’S GAIN.
M. I GIVE NEW MESA EMPLOYEES A 1 ½ HOUR ORIENTATION ON THE COMPANY, AND THE THEME [Text stricken: —FROM BEGINNING TO END—] IS THAT THE SHAREHOLDER IS NO. 1 AT MESA.
N. UNFORTUNATELY, THAT IS AN ATTITUDE NOT SHARED BY MANY COMPANIES.
(PAUSE)
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 [Text stricken: JIMMIE] [Handwritten addition: Mr.] LEE [Handwritten addition: 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 [Handwritten addition: 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 [Text stricken: SPIN OFF] [Handwritten addition: Distribute] ROYALTY TRUSTS, 52% SAID YES.
(20% SHOULD NOT [Text stricken: SPIN OFF] [Handwritten addition: 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.
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.