Boone Pickens Homepage           Electronic Publishing Center
	REMARKS TO INSTITUTIONAL EQUITY “RESTRUCTURING IN THE PETROLEUM INDUSTRY: THE FREE ENTERPRISE SYSTEM AT WORK” DALLAS, TX APRIL 19, 1984 4:00 P.M.

(TIME: 15 MIN.)

I. THANK YOU.

A. (HOUSEKEEPING—INFORMATION PACKETS—FORTUNES)

[Handwritten addition: 100-100,000]

[Handwritten addition: proxie fight]

[Handwritten addition: Gulf people—tape recorder NY society (recorder)]

II. I RECALLED THIS MORNING THAT IT WAS SIX MONTHS AGO THIS WEEK WHEN WE ANNOUNCED THE PURCHASE OF GULF SHARES BY THE GULF INVESTORS GROUP.

A. JUST A FEW DAYS BEFORE THE ANNOUNCEMENT, I MADE SEVERAL SPEECHES WHICH SOME OF YOU MAY HAVE ATTENDED.

B. WE GOT A LOT OF QUESTIONS AT THOSE SPEECHES ON WHAT OUR NEXT MOVE WOULD BE. AND I REMEMBER SAYING THAT ALTHOUGH I COULDN’T DISCUSS IT, THERE WOULD BE NO DOUBT WITHIN A FEW DAYS.

C. I HOPE I DIDN’T DISAPPOINT ANYONE.

III. A LOT HAS HAPPENED IN THE LAST SIX MONTHS.

A. WE’VE SEEN SOME OF THE BIGGEST MERGERS IN THE HISTORY OF THE OIL INDUSTRY, NOT TO MENTION CORPORATE AMERICA.

B. THERE’S BEEN A GREAT DEAL OF DISCUSSION AMONG INDUSTRY PEOPLE AND CONGRESSIONAL LEADERS ON WHERE THE PETROLEUM INDUSTRY IS HEADED.

C. I’D LIKE TO COMMENT ON THE DIRECTION RESTRUCTURING IS TAKING FOR OUR INDUSTRY BECAUSE I FEEL IT IS A DIRECT EXAMPLE OF THE FREE ENTERPRISE SYSTEM AT WORK.

D. AND, I FEEL THAT IT IS GOING TO BE GOOD FOR THE INDUSTRY—FOR THE MAJORS AND INDEPENDENTS ALIKE.

E. OUR INDUSTRY HAS BEGUN AN ADJUSTMENT PERIOD LIKE NO OTHER IT HAS EVER EXPERIENCED.

F. AND WITHIN FIVE YEARS IT’S MY OPINION THAT THIS INDUSTRY WILL LOOK COMPLETELY DIFFERENT—MAYBE EVEN SOONER.

IV. MOST OF YOU ARE AWARE OF HOW THINGS HAVE CHANGED FOR US.

A. THE PRICE OF OIL HAS LEVELED OFF AT $29 A BARREL AFTER TOPPING OUT AT $40.

B. WE CONTINUE TO SEE SOME CURTAILMENTS IN THE GAS MARKET, ALTHOUGH I HOPE THE WORST IS BEHIND US AND THAT THE BUBBLE WILL BE OUT OF THE WAY IN THE WINTER OF ’84-’85.

           1. HOWEVER, I AM NOT OPTIMISTIC ABOUT GAS PRICES WITH $29 OIL.

C. DRILLING ACTIVITY HAS NOSEDIVED FROM THE RECORD HIGH OF 4,531 RIGS IN DECEMBER 1981 TO 2,107 THIS WEEK—LESS THAN HALF AS MANY RIGS.

D. THE TIP-OFF FOR ECONOMIC PROSPECTS IS THE RIG COUNT.

E. I’M AFRAID RECOVERY WILL BE SLOW BECAUSE FINDING COSTS ARE TOO HIGH.

F. FINDING COSTS ARE OUR REAL PROBLEM.

V. EVEN THOUGH MARKETS AND PRICES HAVE SIGNIFICANTLY CHANGED IN THE LAST FEW YEARS ONE FUNDAMENTAL PROBLEM HAS NOT CHANGED—THE PROBLEM OF ANNUALLY REPLACING RESERVES.

A. IN FACT IT’S BECOME A TOUGHER PROBLEM.

B. INDEPENDENTS AND MAJORS. ALIKE ARE HAVING AN INCREASINGLY DIFFICULT TIME REPLACING RESERVES ECONOMICALLY.

C. WE FOUND THE INEXPENSIVE OIL IN THE UNITED STATES YEARS AGO.

D. WE ARE A HIGH-COST PRODUCER IN A WORLD OF OVERSUPPLY.

E. IT’S THAT REASON THAT IS FORCING MANY COMPANIES TO REEXAMINE THEIR INVESTMENT PRIORITIES.

F. FOR EXAMPLE, IN 1981 SOCAL SAID THEY WOULD NOT ACQUIRE, YET THEY LOOKED AT GETTY AND THEN PURCHASED GULF.

          1. WHY?

          2. BECAUSE OF THE RESERVE REPLACEMENT PROBLEM PLUS FINDING COSTS, I’M SURE.

G. THE MUKLUK WELL IN THE ALASKAN FRONTIER MAY HAVE BEEN THE TURNING POINT FOR MANY OF THE MAJOR INTEGRATED COMPANIES.

H. MUKLUK WAS THE MOST EXPENSIVE DRY HOLE IN INDUSTRY HISTORY—$1.6 BILLION.

I. THAT KIND OF COSTLY FAILURE CANNOT BE OVERLOOKED.

J. WHETHER YOU WERE A PARTICIPANT OR NOT, MUKLUK WAS CONSIDERED TO BE THE BEST PROSPECT IN NORTH AMERICA.

           1. IT’S FAILURE IS VERY SAD FOR AMERICA AND SOBERING FOR THE INDUSTRY.

K. IT’S TRUE THAT THE BADLY NEEDED BIG OIL FINDS WILL PROBABLY BE MADE IN THE FRONTIER.

L. BUT MANAGEMENTS MUST ASK THEMSELVES IF THEY CAN JUSTIFY TAKING SUCH HIGH RISKS WITH THE STOCKHOLDERS’ MONEY UNDER CURRENT CONDITIONS.

M. REMEMBER, THE RESERVES AREN’T GOING ANYWHERE.

          1. THERE MAY BE A BETTER TIME TO DEVELOP THEM.

VI. WE RECENTLY CONDUCTED AN INTERNAL STUDY AT MESA THAT COMPARED THE WORLDWIDE CAPITAL EXPENDITURE OF 300 PUBLICLY-OWNED OIL AND GAS COMPANIES AND THE RESERVES FOUND.

A. THE TIME-FRAME FOR THIS STUDY WAS FROM 1980 TO 1982.

B. OVER THE THREE-YEAR PERIOD THESE 300 COMPANIES SPENT $166 BILLION FOR OIL AND GAS ACTIVITIES AND FOUND RESERVES WORTH $109 BILLION.

C. IN OTHER WORDS, THEY RECEIVED 66 CENTS IN VALUE FOR EACH DOLLAR SPENT.

D. THAT ILLUSTRATES THE PROBLEM OF LIMITED INVESTMENT OPPORTUNITY FOR EXPLORATION—AND WHY IT MAKES BETTER SENSE FOR SOME MANAGEMENTS TO ACQUIRE RESERVES.

VII. CHARLIE MAXWELL OF C.J. LAWRENCE MADE THE SAME POINT IN A RECENT ARTICLE ENTITLED, “WHO GAINS AND WHO LOSES FROM BIG OIL MERGERS.”

A. WHAT HE SAID WAS THIS: . . .QUOTE. . .“DIFFERENT COMPANIES HAVE DIFFERENT FINDING COSTS. WE ARE CONTENT TO LET THOSE MANAGEMENTS THAT CAN BRING NEW OIL SUPPLIES ONSTREAM AT THE LOW END OF THE RANGE OF COSTS DO THEIR SUPERIOR THING. FOR THOSE WHICH CANNOT, IT MAY BE IN THE PUBLIC INTEREST THAT THEY BUY RESERVES FROM THOSE WHO CAN, AND STOP WASTING THEIR SHAREHOLDERS’ AND THE PUBLIC’S MONEY ON A FRUITLESS, HIGH-COST PURSUIT.”

B. MAXWELL ALSO POINTS OUT THAT THIS LINE OF REASONING ISN’T ANYTHING NEW.

          1. IT COMES DIRECTLY FROM ADAM SMITH’S WEALTH OF NATIONS, PUBLISHED IN THE LATE 1700s.

C. I HAVE TO AGREE WITH MAXWELL.

D. WHY NOT LET THOSE COMPANIES WHICH DO A BETTER JOB OF FINDING RESERVES DO JUST THAT—FIND RESERVES.

E. OF COURSE WE’RE PRIMARILY TALKING ABOUT THE INDEPENDENT OIL PRODUCER BECAUSE INDEPENDENTS DRILL ABOUT 80% OF THE WELLS AND DO A MUCH BETTER JOB OF REPLACING THEIR RESERVES.

VIII. PUTTING THE SHAREHOLDERS’ MONEY TO THE BEST USE IS MORE THAN ECONOMIC THEORY AT MESA—IT’S OUR PRIMARY PURPOSE.

A. WE BELIEVE THAT THE SHAREHOLDER COMES FIRST, AND IT IS OUR JOB—AS EMPLOYEES OF THE COMPANY—TO SEE THAT THE SHAREHOLDERS’ INVESTMENT IS PROTECTED AND ENHANCED.

B. IT’S AS SIMPLE AND STRAIGHTFORWARD AS THAT.

C. IN THE CURRENT CLIMATE FOR THE INDUSTRY, MESA HAS MADE SEVERAL ADJUSTMENTS TO MEET THAT END.

D. WE HAVE REFOCUSED OUR EXPLORATION EMPHASIS ON OIL PROSPECTS.

E. AND THAT HAS PAID OFF IN SUBSTANTIALLY INCREASED OIL PRODUCTION IN EACH OF THE LAST FIVE QUARTERS.

F. WE HAVE ALSO MADE SIGNIFICANT ADJUSTMENTS IN OUR EXPLORATION AND PRODUCTION BUDGET.

G. OUR 1984 BUDGET IS CURRENTLY SET AT $109 MILLION, ALTHOUGH WE MAY INCREASE THAT FOR ADDITIONAL DEVELOPMENT DRILLING.

H. THAT IS A SIGNIFICANT REDUCTION FROM 1983’S BUDGET OF $223 MILLION AND OUR ALL-TIME HIGH OF $420 MILLION IN 1981.

I. HOWEVER, THE 1984 BUDGET WILL BE ABOUT 40% OF CASH FLOW, WHICH IS A LEVEL COMPARABLE TO THAT OF THE INDUSTRY AVERAGE.

J. WE HAVE ALSO MADE ONE MORE SIGNIFICANT ADJUSTMENT AT MESA AND THAT IS THE DEVELOPMENT OF A NEW DIMENSION TO OUR BUSINESS.

K. WE HAVE THE IN-HOUSE SKILL TO ASSESS UNDERVALUED ASSETS IN THE OIL INDUSTRY, AND WE ALSO KNOW THE CAPABILITIES OF THE MANAGEMENTS OF THESE COMPANIES, WHICH IS AN IMPORTANT FACTOR.

L. OUR INVESTMENT IN GULF CORPORATION WILL GIVE US A $500 MILLION PRE-TAX GAIN.

M. OVER THE LAST TWO YEARS SIMILAR INVESTMENTS HAVE MEANT $105.5 MILLION IN PRE-TAX GAINS TO THE COMPANY.

          1. I MIGHT ADD THAT THOSE INVESTMENTS BENEFITED THE SHAREHOLDERS OF THE COMPANIES INVOLVED TO THE TUNE OF $10 BILLION.

IX. TO SUM IT UP, OUR JOB IS TO MAKE MONEY FOR SHAREHOLDERS.

A. AND YOU CAN BE ASSURED THAT WE WILL DO IT.

B. WE ARE SUCCESSFUL IN OUR OPERATIONAL EFFORTS. . .AND WE’RE SUCCESSFUL IN OUR INVESTMENT EFFORTS.

C. AND WE’RE DEDICATED TO EXPLORING AND PURSUING NEW AND INNOVATIVE IDEAS FOR MAXIMIZING THE VALUE OF MESA SHAREHOLDERS’ INVESTMENTS.

D. THAT’S THE STANDARD BY WHICH WE OPERATE. . .AND I BELIEVE IT MUST BECOME THE INDUSTRY’S STANDARD, TOO, IF THE OIL AND GAS BUSINESS IS TO THRIVE IN THE FUTURE.