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REMARKS FOR THE MESA LIMITED PARTNERSHIP
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Welcome to Mesa Limited Partnership’s third annual meeting. . .(Mesa’s first was in 1965; 24 years)
I appreciate your attendance here today.
The collection and tabulation of proxies at today’s meeting will be conducted by the independent, certified public accounting firm of Peat Marwick Main & Co.
Management will not see results of the individual voting, but will be told the cumulative results of the election.
Mesa began using confidential voting procedures two years ago. Last year I told you that we were the only publicly traded entity in America to have totally confidential voting.
This year I can tell you that companies have confidential voting. (Expand)
The first part of this meeting will include introductions of Mesa’s advisory committee members and officers. Then we’ll hear comments from the floor.
While the election judges tally votes, I’ll comment on Mesa’s 1988 performance and outline our plans for the future. Then we’ll proceed with the formal business portion of the meeting.
After we adjourn, Mesa officers will remain in the Fitness Center to answer any of your questions.
If you have not already voted and don’t have a proxy, please raise your hand and a representative of Peat Marwick will get one to you.
Mesa’s advisory committee members are
—Jerry Walsh
—Wales Madden
—Bob Stillwell
Also I’d like to introduce
—Paul Cain, President
—Robert Thomas, Parliamentarian
—Leonard Hruzek, Secretary of the Meeting
Mesa officers that I want to recognize are
—Shell Boudreaux, vice president - Exploration & Acquisitions
—Dennis Fagerstone, vice president - Operations
—Claude Jenkins, vice president - Marketing
—Mark Womble, vice president & treasurer
Mesa bankers here today are
—Jim Nicholas, senior vice president at Texas Commerce Bank which heads Mesa’s revolving credit line.
—Tim Murray, vice president at Wells Fargo which is the agent on Mesa’s term loan.
From Arthur Andersen, Mesa’s independent auditors
—Tom Bauer
—Victor Burk
—Ken Theut
From Peat Marwick Main & Co.
—Ken Cochran
And, finally I’d like to introduce my wife, Bea.
We will use Roberts Rules of Order today. You have been provided with a copy of these parliamentary procedures. Robert Thomas will now explain the procedures that we’ll follow.
(Robert Thomas)
(Comments from the floor)
[Handwritten addition: Do we need to allow discussion of resolutions? Particularly E. Davis, before the vote—lets discuss.]
If we’ve heard from all those who wish to comment, I’ll ask those who have not turned in their proxies to pass them to the aisle. They will be collected by Peat Marwick.
While the votes are being counted, I’d like to review Mesa’s results for 1988.
Mesa is [Text stricken: becoming] very easy to understand. . .both the assets and philosophy have been in place for over 30 years.
At year-end 1988 Mesa had:
—100 million barrels of oil and liquids
—2.25 TCF natural gas
—2.85 TCF equivalent, 80% natural gas
[Handwritten addition: —or, 490 million bbls of oil equiv.]
—15th largest holder of domestic natural gas
80% of total reserves are associated with our two primary areas of interest:
—Hugoton - the largest gas field in U.S.
—Panhandle field located just north of Amarillo.
The key to Mesa is the concentration of high quality, long life, low cost gas production.
[Text stricken: High quality:
—Our core properties have been producing for over 30 years.
—We have a lot of history, no engineering risk.]
[Text stricken: They are quality reservoirs (excellent permeability in large contiguous reservoirs, with very good deliverability characteristics)]
[Text stricken: Long Life:
Reserve life index, which is calculated as total reserves divided by the current production rate, of over 14 years.
Industry average for natural gas is less than 10 years, so we are 40% longer.]
[Text stricken: We are a low cost producer.
—One reason is that our production is from shallow wells, concentrated in large fields.
—Mesa’s production cost company wide in 1988 was only $.50/Emcf, which includes $.11 of production taxes, one of the to lowest
in the industry.
—Only APC lower - they are virtually all gas, no liquids.
—Shallow production means minimal mechanical risk.
—You’re not dealing with fractured reservoirs two or three miles deep. Our major production is in large reservoirs, only half
a mile deep. We can replace a well in a week.]
In addition to our presently proved reserves of 2.8 Tcf, we have great opportunities to add to reserves by further development on our properties.
In total, Mesa has 900 development locations to which incremental reserves have not been assigned. We think that drilling these new wells can add about 25% to our reserve base.
[Text stricken: It is very important to understand what kind of wells we are talking about.] [Handwritten addition: Let me explain further about the 900 locations] We are not wildcatting, [Text stricken: here.] These are the same type of wells on which we have had better than a 95% success rate in each of the last three years.
Reserves for these [Text stricken: 900] wells are not yet booked; with the exception of the infill program, these locations will be drilled after [Handwritten addition: the] market turns.
1988 was another lean year for the industry. Oil averaged $14.50 per barrel. Mesa’s overall gas price was about $1.80.
The most significant achievement for Mesa in 1988 was the purchase of the Tenneco Mid-Continent division.
—The purchase closed in December 1988.
—We bought the properties for $700 million and promptly sold a portion for $110 million.
[Text stricken: —Intend to sell another $ of these properties in 1989.]
This was truly a unique purchase for Mesa.
—60% of the reserves in the Tenneco package were in the Hugoton field.
—These were properties that Mesa [Handwritten addition: had] operated [Text stricken: and] [Handwritten addition: since 1979 and we] already owned a ½ interest in. [Handwritten addition: them.]
[Text stricken: —Unlikely we will see anything like this again—“leave no more than 10% on the table.”]
—In addition to the presently proved reserves, we also picked up about 160 development locations in the deal.
One effect of the Tenneco purchase is that we incurred more debt and in the MLP structure we have tried to avoid high debt levels.
Top priority for 1989 is to reduce debt through asset sales of up to $[Handwritten addition: 300] million, (which would represent about 10% of our reserves).
—We will probably sell $100 million more of [Text stricken: Mid-Continent] [Handwritten addition: Tenneco] properties and up to $200 million of Mesa properties.
There’s a saying in the business that the good properties get better, marginal properties get worse.
—Throughout our history, we have bought and sold properties, constantly upgrading the quality of our core holdings.
We know our assets well, and work them very hard to get the most value out of them.
We operate with a lean, but very capable [Text stricken: and dedicated] group of employees.
[Handwritten addition: See p. 16 of old DBL speech]
We have the best management group at Mesa that we have ever had.
—Led by Paul Cain, who is the president and chief operating officer.
[Text stricken: —Paul has 28 years of oil industry experience and is the best operating and administrative executive I’ve ever had.]
[Handwritten addition: —Some of our other key people introduced earlier.]
—Management structure has only a couple of layers; we get more work done that way.
Now let me give you my current views on oil and gas prices and the future of our industry:
—We’ve had a very strong move on crude oil since last fall, from $12 to $20 per barrel.
—OPEC and non-OPEC are finally getting their acts together.
—We have had a weak winter on gas prices.
[Handwritten addition: “4 day winter”]
—But, the gas “bubble” is clearly diminishing. The drilling rig count is at 40-year lows; only [Handwritten addition: ?] rigs were drilling last week, compared to [Handwritten addition: ?] a year ago, and 4,500 rigs at the peak in 198[Text stricken: 0][Handwritten addition: 1]
—Only 40% of annual production is being replaced on an industry wide basis.
—Demand for natural gas has increased 6% in each of the last 2 years.
—As the gas market approaches equilibrium, prices become very sensitive to demand.
[Text stricken: —Any forecast that predicts a steady percentage increase in prices isn’t useful because gas is a commodity and commodity markets
just do not work that way.]
—In early February, during the arctic cold snap, we saw $3.50+/Mcf.
—So as the market balances, you’re going to see a strong move in prices.
—Gas will trade at parity with crude oil for the first time[Handwritten addition: .] [Text stricken: in my career.]
This concept of Parity between oil and gas deserves special attention.
—The economic value of a barrel of oil or of a thousand cubic feet of gas is the energy that it can generate. On a Btu basis,
it takes about 6 Mcf of gas to produce the same energy as one barrel of oil.
—So, given an even playing field, a thousand cubic feet of gas should sell for about 1/6 of what a barrel of oil sells for.
—But that’s not the case. Right now, with crude oil at $[Handwritten addition: 18] a barrel and [Text stricken: spot] gas at $[Handwritten addition: 1.40] an Mcf, you have a price ratio of [Handwritten addition: 13 tol], more than twice the energy equivalent ratio of [Handwritten addition: 6:1].
—This disparity will not last. [Text stricken: Natural gas and crude oil are going to trade at parity with each other.]
—[Text stricken: When this happens,] [Handwritten addition: If you go to energy parity,] $[Handwritten addition: 18] crude oil will mean $[Handwritten addition: 3] gas.
—And you can add 10-15% for gas being a premium fuel. It burns much cleaner than oil.
—There will be a sharp jump: In the winter of 1989, I think you have a 1 in 4 chance of a price jump; in 1990, your chances
are probably even money; in 1991, I believe you improve to a 4 to 1 chance.
[Text stricken: —We can afford to wait because we have the long life reserves.]
So [Text stricken: there] it [Text stricken: is] really[Text stricken: ,] [Handwritten addition: is] a simple story:
—15th largest holder of natural gas in the U.S.
—Our reserves are located in shallow, quality fields, which have a long production profile.
—We are a low cost producer, which is very important for a commodity business.
[Text stricken: We strongly believe that the value of natural gas will be upgraded.]
—Whether ,it’s 1989, 1990, or 1991.
[Handwritten addition: Have had 8 years of decline]
[Handwritten addition: Have to make adj. To maintain our flexibility so we can get to the pt. of higher prices]
[Handwritten addition: Div. cut beginning in 3rd Q]
[Handwritten addition: Saver $40mm per year:]
—We’ve been around for over 30 years and we’ll be there when the turn comes.
That concludes my remarks about Mesa. Now we’ll turn to completing the formal business of our meeting.
We are considering a proposed amendment that provides for [Handwritten addition: mis—fill in] We are also electing three members of the Advisory Committee, and we’re voting to ratify the appointment of Arthur Andersen & Co. as the Partnership’s independent public accountants for 1989.
According to our ownership list there were an aggregate of common and preference units held by limited partners and entitled to vote at the meeting.
Each unit is entitled to one vote.
A majority of the issued and outstanding units held by limited partners represents a quorum for all matters to be considered at this meeting.
Will the secretary please advise the meeting if a quorum is present [Text stricken: ?] [Handwritten addition: and, if so, report on the voting results.]
[Handwritten addition: Leonard Hruzek]: “Mr. Pickens, Peat Marwick reports there are present in person or represented by proxy units, or approximately % of the units entitled to vote as of the record date. Accordingly, a quorum is present.”
[Text stricken: Will the secretary please report on the voting results for the various proposals on the ballot?]
[Handwritten addition: Leonard Hruzek]: Reports on the results
If there is no further business, that concludes the [Text stricken: formal part of the] Partnership’s third annual meeting.
Thank you.
[Handwritten addition: Q&A?]