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T. BOONE PICKENS, JR.
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11:30 A.M.
(TIME: 8 MIN.)
[Handwritten addition: I have had a lot of exp. with bankers—]
IT'S A PLEASURE TO BE HERE.
[Handwritten addition: Harold said—]
(FORTUNE PACKETS)
[Handwritten addition: Surgical [Unreadable text] Group—
Oles remark—]
[Handwritten addition: Jill here today—great record etc.
Austin—Laf. & Ama. bidding for Jack & Jean—great people We are not going to give up easy—]
MY TOPIC TODAY IS THE RESTRUCTURING OF THE U.S. PETROLEUM INDUSTRY.
WE'VE SEEN A LOT OF DRAMATIC CHANGES OCCUR WITHIN THE LAST 12 MONTHS, AND I THINK THAT HAS CONCERNED MANY PEOPLE.
BUT LIKE ALL BIG EVENTS THAT CHANGE THE COURSE OF THINGS, WE NEED TO LOOK BEHIND THEM TO SEE WHAT TRIGGERED SUCH ACTION.
THE ENTIRE RESTRUCTURING PROCESS IS OCCURRING BECAUSE OF ONE BASIC PROBLEM: RESERVE REPLACEMENT.
RESERVES OF OIL AND GAS REPRESENT A PETROLEUM COMPANY'S PRIMARY ASSET.
AND WHEN THOSE RESERVES ARE PRODUCED AND NOT REPLACED, THE ASSET BASE IS BEING ERODED.
THAT IS PRECISELY WHAT IS HAPPENING AMONG THE MAJOR U.S. OIL COMPANIES.
THEY HAVE HUGE RESERVE BASES TO REPLACE, AND THE CHANCES FOR REPLACING THROUGH EXPLORATION ARE SLIM.
THE UNITED STATES JUST DOES NOT HAVE THAT MANY POTENTIALLY LARGE PROSPECTS LEFT — NOT ON THE MAGNITUDE THAT THE MAJORS NEED.
THE ONLY PLACE THEY ARE LIKELY TO MAKE SUCH BIG FINDS IS IN THE FRONTIER AREAS.
YET, THOSE VENTURES HAVE PROVED TO BE DISAPPOINTING {Stricken text: IN A VERY EXPENSIVE WAY.}
TAKE THE MUKLUK PROSPECT, FOR EXAMPLE.
ELEVEN OIL COMPANIES PAID $1.6 BILLION FOR LEASES AND SPENT ANOTHER $140 MILLION TO DRILL THE WELL.
BUT THE WELL WAS DRY.
THAT WAS A SOBERING EXPERIENCE FOR THE PARTNERS INVOLVED AND MANY OF US WHO WERE NOT IN THE DEAL.
MUKLUK WAS THE MOST PROMISING GEOLOGICAL STRUCTURE IN NORTH AMERICA, AND ITS FAILURE HIT THE INDUSTRY HARD.
THE RESULT WAS THAT THE MAJORS BEGAN LOOKING FOR A MORE RELIABLE WAY OF REPLACING — ACQUISITION.
GEORGE KELLER, CEO OF CHEVRON, HAD SAID IN 1981 THAT HIS COMPANY WOULD NOT MAKE AN ACQUISITION.
BUT AFTER THE MUKLUK FAILURE, CHEVRON LOOKED AT GETTY AND EVENTUALLY BOUGHT GULF.
I THINK MANY OF THE OTHER MAJORS WENT THROUGH THE SAME THOUGHT PROCESS.
AND I SEE NOTHING WRONG WITH IT.
I AGREE THAT THE BIG FINDS WILL UNDOUBTEDLY BE MADE IN THE FRONTIER AREAS, AND I HAVE NO QUARREL WITH FRONTIER DRILLING — IF, AND I UNDERLINE IF, IT IS THE BEST INVESTMENT FOR THE SHAREHOLDERS' DOLLAR.
THAT'S WHAT IT ALL COMES DOWN TO — THE SHAREHOLDERS.
WHEN A COMPANY DOESN'T REPLACE, IT IS THE SHAREHOLDERS' ASSET BASE THAT IS BEING ERODED, THEIR INVESTMENT THAT IS LOSING VALUE.
GULF CORPORATION IS AN EXAMPLE OF A COMPANY THAT WAS GOING TO THE FRONTIER TO REPLACE RESERVES BUT REALLY HAD NO BUSINESS BEING THERE.
GULF'S SUCCESS RECORD IN THE FRONTIER WAS DISMAL.
YET, THEY CONTINUED TO CLING TO THE BELIEF THAT THE FRONTIER WAS THEIR ONLY HOPE — INSTEAD OF LOOKING FOR OTHER ALTERNATIVES TO REPLACE AND ENHANCE VALUES.
GULF'S RESERVE BASE HAD BEEN DECLINING FOR 12 STRAIGHT YEARS.
IN THE LAST 5 YEARS, THEY HAD ONLY REPLACED 43 PERCENT OF THEIR PRODUCTION.
THEY HAD LOST THE EQUIVALENT OF 634 MILLION BARRELS OF OIL FROM THEIR RESERVE BASE — OR, IN TERMS OF DOLLARS $6.3 BILLION.
THAT KIND OF STOCKHOLDER LOSS HAD TO BE HALTED.
SIMILAR SITUATIONS ARE OCCURRING THROUGHOUT THE PETROLEUM INDUSTRY.
THE STOCK MARKET RECOGNIZES THE RESERVE REPLACEMENT PROBLEM OF THESE COMPANIES AND AS A RESULT, PLACES A LOWER VALUE ON THEM.
HERE ARE SOME 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%
EXXON AND STANDARD OF INDIANA ARE TRADING AT 52% BECAUSE OF THEIR STOCK REPURCHASE PROGRAMS.
THE SHAREHOLDERS OF THESE COMPANIES ARE TRAPPED UNLESS THEY CAN CONVINCE MANAGEMENT TO TAKE ACTION TO ENHANCE VALUE.
AND THERE'S THE REAL PROBLEM — GETTING MANAGEMENT TO DO SOMETHING BEFORE IT'S TOO LATE.
MOST OF THE MANAGEMENTS AREN'T CONCERNED ABOUT THE URGENCY OF THE SITUATION BECAUSE THEY AREN'T SHAREHOLDERS, THEMSELVES.
AND GULF OIL IS A PRIME EXAMPLE OF THAT SAME ATTITUDE.
AS I SAID EARLIER, THEIR RESERVE BASE HAD BEEN DECLINING FOR 12 STRAIGHT YEARS.
YET, DIVIDENDS HAD BEEN INCREASING FOR 10 YEARS AND SALARIES HAD BEEN GOING UP FOR 8 YEARS.
IF NOTHING HAD BEEN DONE AT GULF OIL, THE COMPANY WOULD NOT HAVE BEEN ABLE TO PAY ITS $3 DIVIDEND IN 1989.
BUT DID ANYONE KNOW EXCEPT MANAGEMENT?
OF COURSE NOT.
AND WERE THEY CONCERNED?
[Handwritten addition: [Unreadable stricken text] Apparently not]
AND THE REASON IS THAT THEY WEREN'T SUBSTANTIAL SHAREHOLDERS.
(LEE — 21,000 SHARES
42 YEARS WITH COMPANY)
WHEN MANAGEMENT OWNS SIGNIFICANT STOCK IN THE COMPANY AND THEIR PERSONAL MONEY IS AT RISK, THEY BECOME MUCH MORE AWARE OF THE STOCKHOLDERS' INTERESTS.
GULF OIL {Strickent text: CORPORATION} IS JUST ONE EXAMPLE OF A SITUATION THAT IS WIDESPREAD IN CORPORATE AMERICA — MANAGEMENT HAS LOST SIGHT OF THE SHAREHOLDER.
BUT IT APPEARS THAT THE U.S. PETROLEUM INDUSTRY MAY BE TURNING THINGS AROUND.
WITHIN THIS ONE INDUSTRY, WE ARE SEEING A REBIRTH OF THE FREE ENTERPRISE SYSTEM'S BASIC PRINCIPLES.
SHAREHOLDERS ARE THE CORNERSTONE OF THE FREE ENTERPRISE SYSTEM.
WITHOUT THEIR INVESTED DOLLARS, BUSINESS WOULD NOT EXIST.
AND THAT'S WHY THE SHAREHOLDER ACTIVISM PRESENT IN THE OIL INDUSTRY IS SO IMPORTANT TO THE RESTRUCTURING PROCESS.
SHAREHOLDERS ARE BEGINNING TO CHALLENGE THESE MANAGEMENTS TO GIVE THEM BETTER VALUE.
ALL OF THE THREE MOST RECENT MERGERS — TEXACO-GETTY, CHEVRON-GULF AND MOBIL-SUPERIOR — HAD THAT ONE BASIC ELEMENT IN COMMON. [Handwritten addition: A large stockholder that was unhappy —]
I THINK IT'S A VERY HEALTHY SITUATION AND ONE WHICH COULD HAVE POTENTIALLY GREAT IMPACT ON CORPORATE AMERICA.
AND I {Stricken text: DON'T} BELIEVE IT WILL HAVE {Stricken text: ANY DETRIMENTAL} [Handwritten addition: a positive] EFFECT ON THE INDEPENDENTS.
IF THE MAJORS WANT TO LOAD UP WITH DEBT, THAT'S GREAT.
FOR ONCE, THEY'LL BE PLAYING FROM THE SAME FIELD POSITION WE'VE HAD FOR YEARS.
IN FACT, I THINK WE {Stricken text: MAY} [Handwritten addition: WILL] SEE INCREASED OPPORTUNITIES FOR INDEPENDENTS AS THE MAJORS MOVE TO THE OUTER CONTINENTAL SHELF AND THE INDEPENDENTS DOMINATE ONSHORE ACTIVITY.
THERE'S NO DOWN-SIDE {Stricken text: TO RESTRUCTURING} FOR THE INDEPENDENTS.
THIS IS THE FREE ENTERPRISE SYSTEM WORKING TO MAKE OIL COMPANIES MORE EFFICIENT AND ACCOUNTABLE TO THEIR OWNERS.
AND THE INDEPENDENTS KNOW VERY WELL WHAT FREE ENTERPRISE MEANS.
THERE ARE NO LOSERS UNDER RESTRUCTURING EXCEPT WEAK MANAGEMENTS.
THE INDUSTRY AND ITS SHAREHOLDERS WILL BE MADE STRONGER.
[Handwritten addition: In conclusion I will quote Bob Anderson with ARCO — "You can do anything to an independent oil man but eliminate them"]