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REMARKS FOR THE RAUSCHER PIERCE REFSNES, INC.
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Date and Setting:
(5-27-88) 9:15 a.m. RPR VP David Bradshaw introduces TBP for 20 minutes of remarks, followed by 25 minutes of Q&A.
Audience:
About 250 retail stock brokers and selected clients, both large and small. Most of them are MLP unitholders.
Topics:
Mesa and the future of the domestic energy industry.
Contact: David Bradshaw, RPR Inc., (214) 978-5589
Thank you, David (Bradshaw).
I’m told most of you are Mesa unitholders. . .show of hands.
How many of you made it to our annual meeting. . .Covering basically the same information.
Brief review of Mesa’s most significant 1987 accomplishments:
—Replaced 4% more reserves than we produced. . .at only $.36 per Mcf
—Increased cash flow from operations by 4%
—And we paid partners $310 million in tax-deferred distributions; highest distribution-to-equity ratio of top 20 oil & gas
producers
Industry outlook: I’m optimistic about the future of natural gas, not oil; most domestic oil has been found:
—Tom Brown story
The turnaround will come when gas supply and demand balance.
Gas supply is declining.
Peak drilling years 1980-85. . .average of more than 3,000 rigs operating. . .peaked at 4,500 in 1981.
Yet the industry barely replaced its gas production.
Once the number of rigs went below 2,000, gas reserves began a rapid decline.
So with fewer than 1,000 rigs operating in the United States today and no incentive to explore, the supply will continue its drop.
The problem that has plagued gas producers since 1980. . .what we call the gas “bubble.”
We expect the deliverability overhang to be worked off during 1990. . .a 10-year bubble; some said it would last only 6 months.
There’s a good possibility of localized gas shortages this coming winter, which we believe will push prices up.
Once supply and demand come into balance, the only thing restricting gas price increases will be the cost of alternate fuels such as oil and coal.
Smooth sledding to $2.50, then competition will slow the increase.
But because gas is a much cleaner fuel than oil or coal, we expect gas to sell at a premium on an energy equivalent basis by mid-1990s. . .Coalition of gas producers and environmentalists.
Mesa has been preparing itself for the turnaround. . .we’ve become the largest independent producer of domestic oil and gas in the United States.
Natural gas accounts for nearly 80% of our reserves. . .most of our gas is in the Hugoton field of southwest Kansas and the adjacent Panhandle field of Texas.
The Hugoton and Panhandle fields. . .long-lived, shallow gas reserves that will produce well beyond the year 2000.
Mesa’s reserve life index of 18.4 years is among the longest in the industry.
Mesa’s properties have the potential for significant price and production enhancement:
—Kansas Power & Light contract expiring in December 1989. . .virtually all production free for sale at market prices by 1990
—Hugoton infill. . .potential reserve and price increases. . .recently received $2.60/MCF for infill gas
In addition to about 350 infill locations, we’ve identified about 450 locations in other areas:
—When drilled, we expect these locations to add significant reserves
Future strategy:
—Add reserves in primary producing areas
—Market gas creatively
—Invest in undervalued situations, as we’ve done profitably in the past
—And reduce costs where we can. . .example; we cut 1987 annual report costs in half. . .a little plain, but much cheaper
The average cost of 1987 annual reports for America’s 11,000 publicly traded companies; $3 a copy, compared to Mesa’s $.39 a copy.
Our reports may be the best in the industry for reporting the facts clearly and concisely.
At Mesa, we know that management’s job is to maximize value for the owners. . .do the best we can with the capital and assets available to us.
That was the reason behind our recent decision to repurchase up to $100 million worth of the Partnership’s common units:
—So far. . .about 2.7 million units for $34 million
To summarize, Mesa is staying profitable even with today’s energy prices, we’re paying our partners the highest distribution-to-equity ratio of any of the country’s 20 largest oil and gas producers, and at the same time we’re building our reserve base in expectation of higher energy prices.
Mesa’s 574 employees are dedicated to maximizing value for our partners.
After all, about 95% of us are Mesa unitholders as well, so we know where our priorities lay.
—And remember, 95% of my net worth is invested in Mesa
Thank you. . .I look forward to your questions.