Boone Pickens Homepage           Electronic Publishing Center
	“THE U.S. PETROLEUM INDUSTRY: RESTRUCTURING FOR EFFICIENCY AND VALUE” HOUSTON JANUARY 16, 1985

(TIME: 8 MIN.)

[Handwritten addition: Stillwater]

[Handwritten addition: Bartlesville]

[Handwritten addition: Pitts]

[Handwritten addition: Ned said ok. . .I want you to make a speech.]

THANK YOU, NED (BROUN).

IT’S A PLEASURE TO BE HERE TODAY.

(PERSONAL COMMENTS; HUMOR)

[Handwritten addition: My wife is with me today for protection & I even brought my partner Cy Wagner & his wife Lissa also for protection.]

[Handwritten addition: Frank—ABC this I looked for Marvin Zindler]

THE TITLE OF MY TALK TODAY IS “THE U.S. PETROLEUM INDUSTRY: RESTRUCTURING FOR EFFICIENCY AND VALUE.”

AS YOU CAN IMAGINE, I HAVE SPENT A GREAT DEAL OF TIME OVER THE LAST COUPLE OF YEARS EXPLAINING WHY THE INDUSTRY IS UNDERGOING THIS VOLATILE PERIOD.

THE BASIC MISCONCEPTION IN THE PRESS, THE PUBLIC AND EVEN MEMBERS OF THE PETROLEUM INDUSTRY IS THAT THE ACTIVITY WE’RE SEEING IS A PROBLEM.

THIS ACTIVITY—WHETHER IT’S MERGERS, ACQUISITIONS, ROYALTY TRUST SPINOFFS OR RECAPITALIZATION PROGRAMS—IS NOT ITSELF A PROBLEM, BUT THE RESPONSE TO A PROBLEM.

THAT PROBLEM IS THE WORLD OIL PICTURE AND HOW THE U.S. PETROLEUM INDUSTRY FITS INTO IT.

I’D LIKE TO PUT THAT PICTURE IN PERSPECTIVE TODAY, AND THE DOMINANT FEATURE, OF COURSE, IS OIL PRICES.

WE HAVE AN INSTABILITY IN THE PRICING STRUCTURE THAT IS CAUSED BY A CONTINUING SURPLUS OF CRUDE IN THE MARKET.

THE GLUT IS STILL WITH US, AND ALONG WITH IT, A SURPLUS OF REFINING CAPACITY.

U.S. REFINERS HAVE SCALED BACK THEIR CAPACITY, CLOSING OVER 100 REFINERIES SINCE 1980.

BUT THE OPEC COUNTRIES, EGYPT AND MEXICO ARE INCREASING CAPACITY.

THEY PLAN TO ADD AT LEAST 1.2 MILLION BARRELS PER DAY OF REFINING CAPACITY BY 1988[Handwritten addition: .] [Text stricken: ACCORDING TO THE “OIL & GAS JOURNAL”.]

THIS EXCESS ABILITY TO PROCESS CRUDE, ALONG WITH THE SURPLUS OF CRUDE ON THE MARKET, WILL SIMPLY ADD TO PRICE INSTABILITY IN THE FUTURE.

AND UNTIL PRICES STABILIZE AND RISE, EXPLORATION WILL NOT BE AGGRESSIVE—REGARDLESS OF MERGER AND ACQUISITION ACTIVITY.

I AM [Text stricken: CONTINUALLY] AMUSED BY [Text stricken: MICHEL] [Handwritten addition: mike] HALBOUTY, WHO REPEATEDLY MAKES THE STATEMENT THAT WE SHOULD HAVE 4,500 RIGS OPERATING [Text stricken: TODAY.]

[Handwritten addition: We only have 2453 rigs working today along way from 4500 Mike]

[Handwritten addition: I can’t change rig activity only economics, plenty of money limited investment opportunity]

[Handwritten addition: I am not against exploration! I have said many times if it is economical feasible—then lets drill it—onshore offshore frontier or anywhere.]

[Text stricken: THE ECONOMICS SIMPLY DON’T JUSTIFY THE LEVEL OF ACTIVITY WE MAINTAINED IN THE EARLY 1980S—OR, BELIEVE ME, WE’D ALL BE OUT THERE DOING IT.]

THERE’S PLENTY OF MONEY IN THE INDUSTRY TO DRILL, [Text stricken: BUT THIS IS NOT A PROBLEM WE CAN BUY OUR WAY OUT OF.]

[Handwritten addition: but the economics are just not favorable & the uncertainties are freightning.]

ADMITTEDLY, DRILLING COSTS ARE LOWER NOW — ABOUT 36% LOWER ACCORDING TO THE JOINT ASSOCIATION SURVEY.

[Text stricken: HOWEVER, WE’RE LOOKING AT MORE EXPENSIVE PROSPECTS TODAY THAN WE WERE IN THE EARLY 1980s, SIMPLY BECAUSE WE’VE DRILLED THE INEXPENSIVE ONES.]

[Handwritten addition: But] REMEMBER THAT 80% OF THE WELLS DRILLED WORLDWIDE HAVE BEEN DRILLED IN THE LOWER 48 STATES.

OUR FINDING COSTS ARE HIGHER THAN ANY OTHER COUNTRY IN THE WORLD.

[Handwritten addition: And remember we do have an oversupply of oil. What could be worse for us?]

THE U.S. OIL INDUSTRY IS SIMPLY IN A DIFFERENT POSITION THAN THE REST OF THE WORLD’S PRODUCERS.

[Text stricken: IT’S MORE DIFFICULT FOR THE U.S. INDUSTRY TO MAKE ENDS MEET, AND IT’S EXTREMELY MORE DIFFICULT TO REPLACE RESERVES.]

[Handwritten addition: High finding cost poor replacement %.]

AND THE RESERVES FACTOR BECOMES THE FOCAL POINT, BECAUSE THOSE RESERVES REPRESENT THE SHAREHOLDERS’ PRIMARY ASSET. [Handwritten addition: explain private ownership]

WHEN THOSE RESERVES AREN’T REPLACED, THE ASSET BASE IS ERODING.

[Handwritten addition: For public cos.] THE MARKET RECOGNIZES THIS AND PLACES A LOWER VALUE ON THE COMPANY THAN THE TRUE VALUE OF THE [Text stricken: RESERVES DICTATES.] [Handwritten addition: assets.]

THE DIFFERENCE IN APPRAISED TO MARKET VALUE REPRESENTS BILLIONS OF DOLLARS OF LOST VALUE TO SHAREHOLDERS.

AND UNLESS THE MARKET SEES THAT MANAGEMENT IS WILLING TO MAKE SOME INNOVATIVE CHANGES TO RETRIEVE THAT VALUE, THE PRICE REMAINS DEPRESSED.

THERE’S NO QUICK FIX TO THIS.

INCREASING YOUR EXPLORATION BUDGET TO ATTEMPT REPLACEMENT IS [Handwritten addition: very likely] UNECONOMIC.

YOU HAVE TO APPLY CREATIVE MANAGEMENT—TO CHANGE THE STRUCTURE OF THE COMPANY [Text stricken: FOR THE LONG TERM] TO GET [Text stricken: THAT] VALUE TO SHAREHOLDERS.

AND THAT CAN BE ACCOMPLISHED IN [Text stricken: MANY] [Handwritten addition: several] WAYS: MERGERS, ROYALTY TRUSTS, ASSET SPIN-OFFS, STOCK REPURCHASE PROGRAMS OR A COMBINATION OF THESE[Handwritten addition: .] [Text stricken: TECHNIQUES.] [Handwritten addition: and some we haven’t come up with yet.]

THE COMPANIES THAT HAVE APPLIED THESE TECHNIQUES HAVE BROUGHT MORE VALUE TO THEIR SHAREHOLDERS.

[Handwritten addition: Jack Bowen—TRANSCO—understood—created Ltd. part.—and got results.]

ADMITTEDLY, THESE ARE BIG CHANGES, AND THEY HAVE REPERCUSSIONS AMONG EMPLOYEES, COMMUNITIES AND EVEN FOR THE CONSUMER.

THAT’S A BIG CONCERN TO THE HOUSTON AREA, I KNOW.

BUT KEEP IN MIND THAT WITH CREATIVE MANAGEMENT, THESE REPERCUSSIONS CAN BE POSITIVE AND DO NOT NECESSARILY LEAD TO JOB LOSS.

IT’S TRUE THAT WE HAVE SEEN SOME JOB LOSS.

BUT AT LEAST ONE STUDY SHOWS THAT THE CONTRACTION IN THE GULF COAST AREA WOULD HAVE OCCURRED REGARDLESS SIMPLY BECAUSE THE INDUSTRY IS MAKING A MAJOR ECONOMIC ADJUSTMENT.

AGAIN, ACTIONS THAT COMPANIES ARE TAKING ARE A RESPONSE TO THE WORLD OIL PICTURE.

JOHN REES OF SYRACUSE UNIVERSITY WAS COMMISSIONED BY THE JOHN GRAY INSTITUTE OF LAMAR UNIVERSITY TO STUDY THE PROBABLE IMPACT OF OIL MERGER ACTIVITY ON THE GULF COAST ECONOMY.

I’D LIKE TO SHARE HIS FINDINGS WITH YOU.

FIRST, REES SAYS THAT EMPLOYMENT DECREASES ARE A FUNCTION OF THE OVERCAPACITY PROBLEM IN THE OIL INDUSTRY RATHER THAN THE DIRECT RESULT OF CHANGES IN OWNERSHIP.

THE INDUSTRY IS RESPONDING TO AN UNPRECEDENTED PERIOD OF EXPANSION IN THE 1970s WITH A CONTRACTION PROCESS THAT IS A NATURAL FUNCTION OF THE MARKET.

SECOND, REES SAYS THAT THERE IS NO EVIDENCE TO SUPPORT THE POPULAR BELIEF THAT ACQUISITIONS LEADS DIRECTLY TO PLANT CLOSURES, ASSET STRIPPING OR JOB LOSS, EVEN UNDER CONDITIONS OF SLOW GROWTH.

REES’ BASIC CONCLUSION IS THAT THE INDUSTRY IS MATURING, THAT ITS GROWTH PERIOD EXTENDED AS FAR AS IT DID ONLY BECAUSE OF THE INFLUENCE OF OPEC IN INCREASING PRICES, AND THAT THE CONTRACTION WE’RE SEEING NOW IS A FUNCTION OF OVERALL ECONOMIC CONDITIONS, NOT SPECIFIC ACTIONS BY COMPANIES.

REES BELIEVES, AS I DO, THAT THIS CONSOLIDATION AND RESTRUCTURING OF THE INDUSTRY IS GOING TO HAPPEN REGARDLESS OF [Text stricken: WHAT WE TRY TO DO] [Handwritten addition: attempts] TO STOP IT.

TO ATTEMPT TO HALT IT WOULD BE USELESS BECAUSE IT IS BASED ON FORCES TOO POWERFUL TO CHANGE.

THIS WILL NOT BE A PAINLESS PROCESS, BUT THE LONG-TERM BENEFITS TO SHAREHOLDERS, EMPLOYEES, CONSUMERS AND THE NATION AS A WHOLE ARE FAR PREFERABLE TO THE NEGATIVE IMPACT THAT A REFUSAL TO RESTRUCTURE WOULD BRING.

IF WE STOP RESTRUCTURING NOW:
—CONSUMERS WILL CONTINUE TO PAY THE PRICE OF INEFFICIENCY IN OUR REFINING AND MARKETING OPERATIONS. . .
—EMPLOYEES WILL CONTINUE TO WORK FOR AN INDUSTRY ON A DOWNHILL TRACK. . .WHEN THEIR SECURITY IS ACTUALLY BEST INSURED BY A HEALTHY, EFFICIENT INDUSTRY—NOT A WEAK ONE THAT CAN’T EVEN RECOGNIZE ITS OWN PROBLEMS.
—AND SHAREHOLDERS, WHO I RELATE TO MOST OF ALL, WILL CONTINUE TO SEE THE VALUE OF THEIR INVESTMENT DECLINE. . .AND THAT HAS A TREMENDOUS RIPPLE EFFECT ON THEIR BUYING POWER, THEIR INVESTMENT ACTIVITIES IN THE FUTURE—ON OUR ENTIRE ECONOMY.

BUT WE MUST RECOGNIZE IT FIRST.

I SEE RESTRUCTURING AS THE INDUSTRY’S BEST HOPE FOR THE LONG TERM.

AND I’M CONFIDENT THAT MY INDUSTRY COLLEAGUES WILL COME TO THAT CONCLUSION, AS WELL.

THANK YOU.

(WAIT FOR APPLAUSE)

(TAKE QUESTIONS)