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	“RESTRUCTURING IN THE PETROLEUM INDUSTRY: THE FREE ENTERPRISE SYSTEM AT WORK”

The following is a summary of the remarks made by T. Boone Pickens to Institutional Equity Corporation on April 19, 1984, in Dallas, Texas.

[Text stricken: Opening comments led to the subject of Gulf Oil. Mr. Pickens said that Mesa had announced the purchase of Gulf shares by [Handwritten addition: the] Gulf Investors Group six months ago this week. Having made several speeches during that time, Mr. Pickens was constantly asked what his next move was to be. Obviously, he had not discussed it, and hoped people were not disappointed after the announcement.]

Mr. Pickens noted that during the last six months, some of the biggest mergers in the oil industry had taken place, as well as in all of corporate America. In addition, the petroleum industry and congressional leaders have frequently discussed where the industry is headed. The restructuring of the oil industry, likely to be good for the industry (majors and independents alike), is a direct example of the free enterprise system at work. Within the next five years, or sooner, the industry will take [Handwritten addition: on] completely new look.

Changes have already taken place in the price of oil. The price per barrel has leveled off at $29 from the top price of $40. The worst of the curtailments of the gas market are [Handwritten addition: hopefully] behind us[Text stricken: .] and should be out of the way by the winter of 1984-1985. Mr. Pickens is not optimistic about gas prices with $29 oil prices.

With the rig count down to 2,107 rigs this week from 4,531 rigs in December, 1981, drilling activities have slowed. According to Pickens, economic prospects can be gauged on the rig count and recovery is expected to be slow, because of the cost of finding oil. This is the real problem.

Even though the markets and prices in the petroleum industry have significantly changed in the last few years, the problem of replacing reserves each year has not changed. Due to rising costs, independents and majors alike are having a difficult time replacing reserves economically. The inexpensive oil was found in the U.S. years ago. Pickens indicated that [Text stricken: they are] [Handwritten addition: the United States is] a high-cost producer in a world of oversupply. This is the reason [Text stricken: why] [Handwritten addition: that] many companies have been forced to re-examine their investment priorities. Mr. Pickens used the example of SOCAL, who said in 1981 they would not acquire. Yet, in 1983 they looked at Getty and then bought Gulf. The reason he sites, probably was that they had encountered the reserve replacement problem and high finding costs.

A $1.6 billion investment in the Mukluk Well in the Alaskan frontier turned in a dry hole. According to Pickens, this possibly was the turning point for many of the major integrated companies. Mukluk was considered the best prospect in North America and this kind of costly failure could not be overlooked. Pickens pointed out that under current conditions, managements must decide if they can risk stockholder money to explore for the badly needed oil in frontiers such as Alaska. Possibly there will be a better time to develop those reserves. Pickens noted that if the reserves are there now, they won’t be going anywhere.

Mesa recently conducted an internal study that compared the worldwide capital expenditure of 300 publicly-owned oil and gas companies and the reserves found. The time frame for the study was from 1980 to 1982. Over the three-year period, these 300 companies spent $166 billion for oil and gas activities and found reserves worth $109 billion. In other words, they received 66c in value for each dollar spent. Pickens pointed out that this is a perfect illustration of limited investment opportunities for exploration and why it makes sense for some managements to acquire reserves.

Charlie Maxwell of C. J. Lawrence made the same point in a recent article entitled, “Who Gains and Who Loses From Big Oil Mergers”:

“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.”

In this article, Mr. Maxwell also pointed out that this was not a new concept. It comes directly from Adam Smith’s Wealth of Nations published in the late 1700’s. Mr. Pickens agreed with Maxwell. Companies which do the best job finding reserves should do just that. . .find reserves. That should primarily be the independent oil producers who drill about 80% of the wells and do a much better job of replacing their reserves.

At Mesa, Mr. Pickens says their primary purpose is to put the shareholders’ money to the best use. Employees of Mesa have the job to see that the shareholders’ investment is protected and enhanced. They put the shareholders first. In the current climate for the industry, Mesa has made several adjustments to meet this requirement. They have refocused their exploration emphasis on oil prospects, increasing oil production in each of the last five quarters. They have also made significant adjustments in their exploration and production budget, which is currently set at $109 million for 1984. This budget [Text stricken: of]} which [Handwritten addition: constitutes] 40% [Text stricken: is] [Handwritten addition: of] cash flow, [Text stricken: a level comparable to that of the industry] can be adjusted for additional development drilling, if necessary. 1984’s budget is a significant reduction from 1983’s $223 million and an all-time high of $420 million in 1981.

Mesa has made another significant adjustment [Text stricken: which is] [Handwritten addition: by adding] a new dimension to their business. Their staff has the skill to assess undervalued assets in the oil industry and the capabilities of [Text stricken: the managements of these companies to benefit from those assets.] [Handwritten addition: these companies’ managements.] Mesa’s investment in Gulf will give a $500 million pre-tax gain. Similar investments during the last two years have meant $105.5 million in pre-tax gains to the company. In addition, those investments benefited the shareholders of the companies involved to the tune of $10 billion.

In summary, Pickens says that Mesa’s job is to make money for the shareholders. They have been successful in both operational efforts and in investment efforts. They are dedicated to exploring and pursuing new and innovative ideas for maximizing the value of Mesa shareholders’ investments. Pickens indicated that more of the industry will also have to follow these standards, if the oil and gas business is to thrive in the future.