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| Boone Pickens Homepage Electronic Publishing Center |
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T. BOONE PICKENS, JR.
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2:30 P.M.
(TIME: 9 MIN.)
THANK YOU, KARYN.
[Handwritten addition: I'm tougher on women—
you all are little late—
If I had only known you were at Betty's home, beautiful home—]
(HUMOR, FORTUNE PACKETS)
{Stricken unreadable text}
WE'RE GLAD TO HAVE YOU IN AMARILLO.
I'M PLEASED TO BE SPEAKING TO LEADERSHIP TEXAS AGAIN THIS YEAR.
I SPOKE TO LAST YEAR'S GROUP WHEN THEY CAME TO AMARILLO AND APPRECIATED THE QUESTIONS THAT WERE BROUGHT UP AFTER MY FORMAL REMARKS. [Handwritten addition: I look forward to questions today—]
IT WAS INTERESTING TO REVIEW LAST YEAR'S REMARKS IN PREPARATION FOR THIS TALK BECAUSE I HAD MADE SEVERAL PREDICTIONS.
ONE POINT IN PARTICULAR STANDS OUT IN MY MIND.
A YEAR AGO, I SAID THAT WE WERE GOING TO SEE SOME DRAMATIC CHANGES—VERY SOON—IN THE PETROLEUM INDUSTRY AND THAT SHAREHOLDERS WOULD BE THE CATALYST.
JUST A FEW MONTHS LATER, THAT PREDICTION CAME TRUE.
AND THAT'S WHAT I WANT TO VISIT WITH YOU ABOUT TODAY.
THE PETROLEUM INDUSTRY IS UNDERGOING A VITAL RESTRUCTURING PROCESS THAT IS ABSOLUTELY NECESSARY TO ITS FUTURE GROWTH.
BUT MORE THAN THAT, IT IS NECESSARY TO THE FREE ENTERPRISE SYSTEM.
AND THE PROCESS IS EXTREMELY IMPORTANT TO THE STATE OF TEXAS BECAUSE OF ITS CLOSE TIES TO THE INDUSTRY.
TEXAS IS THE LARGEST OIL AND GAS PRODUCER IN THE NATION, ACCOUNTING FOR ABOUT 30% OF U.S. OIL AND GAS PRODUCTION.
ABOUT 9,000 PETROLEUM COMPANIES ARE BASED IN OUR STATE.
THE INDUSTRY DIRECTLY EMPLOYS OVER 250,000 PEOPLE IN TEXAS AND PAID OVER $7.8 BILLION TO THEM IN WAGES LAST YEAR.
AND, VERY IMPORTANTLY, OIL AND GAS TAXES ACCOUNTED FOR 27% OF ALL 1983 STATE REVENUES—OR, IN OTHER WORDS, $2.3 BILLION.
SO TEXAS HAS A BIG STAKE IN THE PETROLEUM INDUSTRY, PARTICULARLY AS WE FACE THE NEED FOR INCREASED STATE REVENUES.
(PAUSE)
RESTRUCTURING ADDRESSES A BASIC PROBLEM FOR THE INDUSTRY: RESERVE REPLACEMENT.
THE INDUSTRY IS HAVING A VERY DIFFICULT TIME REPLENISHING THE OIL AND GAS RESERVES IT PRODUCES EACH YEAR.
SINCE 1970, THE UNITED STATES' RESERVES OF OIL AND GAS HAVE BEEN DECLINING.
IN TEXAS, IT'S WORSE.
TEXAS OIL RESERVES HAVE BEEN DECLINING SINCE 1955 AND ITS GAS RESERVES SINCE 1965.
THE INDUSTRY'S DOMESTIC RESERVE LIFE INDEX IS NOW LESS THAN 10 YEARS.
THAT MEANS THAT IF WE WERE TO STOP EXPLORING FOR OIL NOW AND CONTINUED TO PRODUCE AT OUR CURRENT RATE, WE WOULD RUN OUT OF OIL BY 1994.
SOME COMPANIES DO A BETTER JOB OF REPLACING RESERVES THAN OTHERS.
THE INDEPENDENT OIL COMPANIES FOR INSTANCE HAVE REPLACED 115 PERCENT OF THEIR DOMESTIC OIL AND GAS RESERVES OVER THE LAST THREE YEARS. . .ACCORDING TO A RECENT STUDY BY ARTHUR ANDERSEN.
THE MAJOR OIL COMPANIES, ON THE OTHER HAND, HAVE REPLACED ONLY 65 PERCENT.
WHY IS IT SO HARD TO REPLACE RESERVES?
IT ISN'T A PROBLEM OF MONEY ESPECIALLY FOR THE MAJOR OIL COMPANIES.
THE JULY ISSUE OF DUN'S BUSINESS MONTH LISTS 200 U.S. COMPANIES IN ORDER OF THE DOLLAR VALUE OF THEIR CASH FLOWS.
13 OF THE TOP 20 WERE MAJOR OIL COMPANIES.
AND THEIR CASH FLOWS IN 1983 RANGED FROM OVER $12 BILLION AT EXXON TO ABOUT $2 BILLION AT SUN.
SO CASH ISN'T THE PROBLEM.
FINDING WAYS TO INVEST IT IS THE PROBLEM.
UNFORTUNATELY, THERE ARE NOT MANY POTENTIALLY LARGE OIL AND GAS PROSPECTS LEFT IN THE UNITED STATES.
AND MANY OF THOSE THAT EXIST ARE NOT ECONOMICAL TO DRILL AT THE CURRENT OIL PRICE OF $29 A BARREL.
IT'S A CRITICAL SITUATION FOR THE SHAREHOLDERS OF THESE COMPANIES BECAUSE OIL AND GAS RESERVES REPRESENT THEIR PRIMARY ASSET.
IF RESERVES ARE PRODUCED AND NOT REPLACED, THEN THE ASSET BASE IS BEING ERODED.
AND THAT'S PRECISELY WHAT IS HAPPENING TO MOST OF THE MAJOR OIL COMPANY SHAREHOLDERS.
THE MAJORS HAVE HUGE RESERVE BASES BUT THE MARKET RECOGNIZES THAT THEY CAN'T REPLACE THEM AND, AS A RESULT, PLACES A LOWER VALUE ON THE STOCK.
HERE ARE JUST A FEW EXAMPLES:
EXXON IS TRADING AT 52% OF JOHN S. HEROLD'S APPRAISED VALUE.
MOBIL—30%.
TEXACO—31%.
SOCAL—35%.
UNOCAL—41%.
STANDARD OF INDIANA—52%.
ARCO—36%.
THE REASON THAT EXXON AND STANDARD OF INDIANA ARE TRADING AT 52% IS THAT THEY ARE BOTH MAKING MAJOR STOCK REPURCHASES.
THE MAJORS MUST FIND A WAY TO BOOST THEIR MARKET VALUE, AND IF THEY INTEND TO DO IT THROUGH EXPLORATION, THEN THEY HAVE TO MAKE BIG OIL FINDS.
THE MOST LIKELY PLACE TO DISCOVER THEM IS IN THE FRONTIER AREAS—ALASKA AND THE OUTER CONTINENTAL SHELF OF THE UNITED STATES.
BUT THE FRONTIER IS AN EXTREMELY EXPENSIVE AND RISKY PLACE TO LOOK FOR OIL.
AND THIS WINTER, THE MAJORS FOUND OUT JUST HOW HIGH THE PRICE IS.
IN 1982, ELEVEN MAJOR OIL COMPANIES SPENT $1.6 BILLION FOR LEASES IN THE MUKLUK AREA OF THE ALASKAN BEAUFORT SEA.
THIS WAS BELIEVED TO BE THE BEST GEOLOGICAL STRUCTURE IN NORTH AMERICA—THE MAJORS' BEST CHANCE OF MAKING A BIG DISCOVERY.
AND AFTER SPENDING $1.6 BILLION FOR THE LEASES, THIS WINTER THEY SUNK ANOTHER $140 MILLION INTO THE DRILLING OF THE WELL.
UNFORTUNATELY, IT WAS A DRY HOLE.
THIS WAS A SOBERING EXPERIENCE, NOT ONLY FOR THE PARTNERS INVOLVED BUT FOR THE UNITED STATES AND THE REST OF THE INDUSTRY.
IT PARTICULARLY AFFECTED THE MAJORS, HOWEVER, BECAUSE THEY BEGAN TO REALIZE THE CHANCES OF REPLACING THROUGH EXPLORATION WERE VERY SLIM.
AND THAT IS WHEN THEY SERIOUSLY BEGAN LOOKING AT ACQUIRING RESERVES.
THE MAJORS REALIZE THEY ARE TRAPPED AND THAT THEY MUST DO SOMETHING OR BE CHALLENGED BY SHAREHOLDERS.
SHAREHOLDERS ARE BECOMING MORE AWARE OF THE REPLACEMENT PROBLEM AND WHAT IT'S DOING TO THEIR INVESTMENT.
ALL OF THE MOST RECENT ACQUISITIONS—TEXACO-GETTY, SOCAL-GULF AND MOBIL-SUPERIOR—HAD ONE ELEMENT IN COMMON: A LARGE STOCKHOLDER WHO BECAME DISSATISFIED WITH MANAGEMENT'S PERFORMANCE AND TOOK ACTION TO MAKE SOMETHING HAPPEN.
LET ME USE GULF AS AN EXAMPLE.
GULF'S RESERVES HAD BEEN DECLINING FOR 12 STRAIGHT YEARS.
THEIR REPLACEMENT OVER THE LAST FIVE YEARS WAS ONLY 43%.
THAT REPRESENTED A LOSS FROM THE RESERVE BASE OF 630 MILLION BARRELS EQUIVALENT OF OIL. . .OR, IN OTHER WORDS, $6.3 BILLION.
AT THE RATE THEIR RESERVES WERE DECLINING, THEY WOULDN'T HAVE BEEN ABLE TO PAY THEIR $3 DIVIDEND IN 1989.
SOMETHING HAD TO BE DONE IN THIS SITUATION TO ENHANCE VALUES.
WE WERE GULF'S LARGEST SHAREHOLDER, BUT THEY WERE UNWILLING TO CONSIDER OUR IDEAS FOR ENHANCING VALUE.
WE EVENTUALLY MADE A TENDER OFFER FOR GULF AT $65 A SHARE, WHICH WAS A NICE PREMIUM TO THE ALL-TIME HIGH OF $53.
BUT WE WERE OUTBID BY SOCAL'S $80 OFFER.
THE ACQUISITION WAS THE ONLY SOLUTION FOR THE 400,000 GULF SHAREHOLDERS, BECAUSE THEY WERE ON A DEAD-END STREET.
THERE ARE SHAREHOLDERS AT OTHER COMPANIES IN SIMILAR SITUATIONS.
AND THAT IS WHY IT IS LIKELY THAT WE WILL SEE MORE MERGER AND ACQUISITION ACTIVITY IN THE FUTURE.
THE MANAGEMENTS OF THESE COMPANIES WILL HAVE TO TAKE STEPS TO INCREASE THEIR VALUE OR THEY WILL FIND THEMSELVES BEING CHALLENGED BY SHAREHOLDERS AND TAKEN OVER BY STRONGER COMPANIES.
IN EITHER CASE, THE IMPORTANT THING IS THAT THE SHAREHOLDER BE TAKEN CARE OF.
IT IS IMPERATIVE THAT THESE MANAGEMENTS LIVE UP TO THEIR FIDUCIARY RESPONSIBILITIES.
IF NOT, THEY CANNOT EXPECT PEOPLE TO INVEST IN THEIR BUSINESSES.
WE ARE SEEING A MOVE IN THE PETROLEUM INDUSTRY TO PLACE THE SHAREHOLDERS' ROLE IN PROPER PERSPECTIVE AGAIN.
AND I AM EXCITED ABOUT IT BECAUSE IT'S A REBIRTH OF THE FREE ENTERPRISE SYSTEM OCCURRING RIGHT BEFORE OUR EYES.
IT HAS THE POTENTIAL TO SPREAD BEYOND THE CONFINES OF THE INDUSTRY AND TRULY ADD VIGOR TO CORPORATE AMERICA.
THERE ARE 42 MILLION AMERICANS WHO HOLD STOCK IN PUBLIC-OWNED COMPANIES.
AND BY THE WAY, 51 PERCENT OF THEM ARE WOMEN.
THESE PEOPLE ARE THE CORNERSTONE OF OUR FREE ENTERPRISE SYSTEM.
WITHOUT THEIR INVESTED DOLLARS, AMERICAN BUSINESS WOULD NOT EXIST—THEY ARE THE GREASE FOR THE WHEEL.
(PAUSE)
I MADE PREDICTIONS FOR LAST YEAR'S GROUP AND I'LL MAKE ONE TO YOU, ALSO.
IN THE NEXT YEAR, WE'RE GOING TO SEE MORE SHAREHOLDER ACTIVISM AND MORE INTEREST IN CONGRESS ABOUT SHAREHOLDER RIGHTS.
AND IT WILL BE A REAL SHOT IN THE ARM FOR AMERICAN BUSINESS BECAUSE WHAT IS GOOD FOR SHAREHOLDERS IS GOOD FOR CONSUMERS AND THE AMERICAN ECONOMY.