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| Boone Pickens Homepage Electronic Publishing Center |
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T. BOONE PICKENS, JR.
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I. INTRODUCTION
A. THANK YOU FOR YOUR INTRODUCTION.
B. IT IS A PLEASURE FOR ME TO BE HERE TONIGHT TO PARTICIPATE ON THE PROGRAM OF HAPL'S ANNUAL MANAGEMENT NIGHT DINNER.
C. (PERSONAL COMMENTS)
1. [HANDWRITTEN ADDITION: MY DAD WAS A LANDMAN- WAS ALWAYS SUSPICIOUS OF MY BEING A GEOLOGIST.]
2. [HANDWRITTEN ADDITION: CONFIDENCE FACTOR-BOUGHT LEASES ACROSS FAULT ETC. DAD'S BD. TOMORROW, 84]
3.
D. I HAVE BEEN ASKED TO PROVIDE AN OUTLOOK FOR THE OIL AND GAS INDUSTRY. {STRICKEN TEXT: WITH SUCH A FINE REPRESENTATIVE OF THE INDUSTRY HERE TONIGHT, I FEEL LIKE I'LL BE PREACHING TO THE CHOIR.}
E. I WILL ADDRESS THIS TOPIC BY FIRST BRIEFLY ASSESSING WHERE WE ARE TODAY IN THE INDUSTRY AND PROJECTING WHAT I BELIEVE WILL BE THE DIFFERENCE BETWEEN SUCCESS AND FAILURE FOR OIL AND GAS COMPANIES IN THE FUTURE.
F. I WILL THEN BE PLEASED TO ANSWER YOUR QUESTIONS.
II. NOW, LET'S TAKE A BRIEF LOOK AT THE CURRENT STATE OF THE INDUSTRY.
A. MOST OF YOU HERE TONIGHT WILL PAINFULLY AGREE THAT THE YEAR 1982 WILL BE REMEMBERED AS THE END OF A BOOM [UNREADABLE STRICKEN TEXT] THAT BEGAN IN 1973.
B. DURING THIS NINE-YEAR PERIOD, A PERIOD IN WHICH THERE WAS A TWELVE-FOLD INCREASE IN THE PRICE OF CRUDE OIL, "BOOM TIME MENTALITY" BECAME COMMONPLACE—CASH WAS PLENTIFUL, DRILLING WAS SKYROCKETING, AND EVERYONE WAS RUSHING TO GET INTO THE BUSINESS...{STRICKEN TEXT: AND I MEAN EVERYONE FROM TENNIS PROS TO DOCTORS.}
C. AS LONG AS RECORD REVENUES AND INCOME WERE BEING RECORDED IN THE INDUSTRY {STRICKEN TEXT: IN 1980 AND 1981, DUE} PRIMARILY [HANDWRITTEN ADDITION: DUE] TO OPEC PRICE INCREASES, THE EMERGING PROBLEMS OF HIGH FINDING COSTS, {STRICKEN TEXT: RISING INTEREST RATES AND TEMPORARY OVERSUPPLIES OF GAS AND CRUDE OIL} [HANDWRITTEN ADDITION: & DECLINING RESERVES] WERE BEING MASKED.
D. BUT, WITH THE DROP AND EVENTUAL STABILIZATION OF PRICES, PROBLEMS BEGAN TO SURFACE FOR MOST COMPANIES IN THE INDUSTRY.
E. CONSEQUENTLY, MOST NEWS FROM THE INDUSTRY HAS BEEN NEGATIVE THIS YEAR—EARNINGS AND PROFITS HAVE SLOWED AND IN MANY CASES HAVE DECLINED.
F. BUT, THIS TOUGH PERIOD THAT WE ARE CHALLENGED BY IS NOTHING REALLY NEW TO THE INDUSTRY—OF THE 31 YEARS I'VE BEEN IN THE OIL AND GAS BUSINESS—THERE HAVE NOT BEEN TOO MANY YEARS, PERHAPS 5 OR 6, THAT WE "LINED 'UM UP AND RAN OVER 'UM."
G. OUR INDUSTRY WILL RECOVER—BUT THE RECOVERY WILL BE SLOW.
H. {STRICKEN TEXT: YOU'VE} [HANDWRITTEN ADDITION: WE'VE] GOT TO CONSIDER SOME OF THE POSITIVE FACTORS THAT ARE CURRENTLY AT WORK. {STRICKEN TEXT: IN THE MARKETPLACE.}
I. ANOTHER FACTOR THAT SHOULD BE CONSIDERED IN THE ANALYSIS IS THAT DRILLING HAS DROPPED BY ALMOST 2 THIS YEAR IN THE U.S.—IT'S ONLY A MATTER OF TIME BEFORE DEMAND INCREASES...AND WITH IT...ANOTHER PRICE HIKE BY OPEC.
J. AS OUR INDUSTRY STRUGGLES THROUGH THIS TOUGH PERIOD TOWARD RECOVERY, WE ARE FORCED TO TAKE A GOOD, HARD LOOK AT OURSELVES.
K. AS A RESULT OF THIS SELF-EXAMINATION, REVOLUTIONARY CHANGES WILL BEGIN TO OCCUR WITHIN THE INDUSTRY.
L. DURING THIS SHAKEOUT PERIOD, WHICH I BELIEVE WILL ULTIMATELY STRENGTHEN THE OIL AND GAS INDUSTRY, MANY COMPANIES MAY FALL BY THE WAYSIDE.
M. "WHICH MANAGEMENTS WILL BE THE MOST SUCCESSFUL IN THE CHANGING BUSINESS ENVIRONMENT?"
III. {STRICKEN TEXT: ONE ANSWER TO THIS QUESTION IS} [HANDWRITTEN ADDITION: I BELIEVE IT WILL BE]..."THE MANAGEMENTS THAT CAN DETERMINE AND MAINTAIN THE OPTIMUM SIZE OF THEIR COMPANIES."
A. HOW DOES MANAGEMENT ACHIEVE OPTIMUM SIZE? BY BALANCING [HANDWRITTEN ADDITION: THE] RESERVE BASE AND CASH FLOW WITH ITS PERSONNEL [HANDWRITTEN ADDITION: & PROSPECTS] TO ACHIEVE ECONOMIC INCREASES OF RESERVES OR THROUGH EXPLORATION AND [HANDWRITTEN ADDITION: OR] ACQUISITION.
B. AS {STRICKEN TEXT: YOU} [HANDWRITTEN ADDITION: WE] ALL KNOW, THE OVERRIDING GOAL OF MANAGEMENT IS TO PROTECT AND EXPAND THE ASSETS OF THE COMPANY AND THE VALUE OF SHAREHOLDERS' INTERESTS.
C. OIL AND GAS COMPANIES, WHETHER LARGE OR SMALL, ARE MANAGERS OF DEPLETABLE ASSETS...THEIR RESERVES OF OIL AND GAS.
D. TO ENSURE THE MAINTENANCE AND GROWTH OF THESE ASSETS, IT IS INCUMBENT UPON MANAGEMENTS TO INCREASE THEIR RESERVES {STRICKEN TEXT: ANNUALLY}
E. MANY COMPANIES IN OUR INDUSTRY, HOWEVER, {STRICKEN TEXT: MISLED BY RISING OIL PRICES AND RECORD EARNINGS} HAVE BEEN LIQUIDATING FOR YEARS; THEY SIMPLY HAVE NOT BEEN {STRICKEN TEXT: INCREASING} [HANDWRITTEN ADDITION: ABLE TO INCREASE] THEIR RESERVES. {STRICKEN ADDITION: ANNUALLY} AFTER PAYING CORPORATE AND WINDFALL PROFIT TAXES, THE DIVIDEND CHECK THAT THEY HAVE BEEN SENDING THEIR SHAREHOLDERS HAS [HANDWRITTEN ADDITION: ACTUALLY] BEEN {STRICKEN TEXT: MERELY} A RETURN OF CAPITAL.
F. OUR BUSINESS IS REALLY QUITE SIMPLE {STRICKEN TEXT: WE MAY INCREASE RESERVES BY} [HANDWRITTEN ADDITION: WE MUST PROTECT THE RESERVE BASE AND THEIR ARE ONLY 2 WAYS THAT WE CAN ACCOMPLISH THIS:] EITHER EXPLORATION SUCCESS OR BY ACQUISITION.
[HANDWRITTEN ADDITION: OK USE THIS] H. IN A SIMILAR STUDY OF 12 INDEPENDENT EXPLORATION COMPANIES MADE BY TOM HASSEN OF MORGAN STANLEY, 12 OF THE 18 COMPANIES HAD AN EXPLORATION/PRODUCTION RATIO OF 1.00 OR BETTER DURING THE 1978-81 PERIOD
I. FOR A COMPANY TO INCREASE RESERVES IS NOT, BY ITSELF, ENOUGH—THEY MUST DO SO PROFITABLY.
J. THE TENNECO STUDY REPORTED THAT THE AVERAGE FINDING COSTS FOR THE 20 COMPANIES WAS $11.25 FROM 1978-1981. THEIR AVERAGE FOR 1981 ALONE WAS $15.31, WITH COSTS RANGING FROM A LOW OF $8.64 TO A HIGH OF $41.34.
K. AS LONG AS FINDING COSTS AND ACQUISITION COSTS REMAIN SO FAR APART, MANAGEMENTS MUST CONSIDER ALTERNATIVES TO EXPLORATION. {STRICKEN TEXT: TO ACHIEVE OPTIMUM SIZE}
L. {STRICKEN TEXT: KNOWING} [HANDWRITTEN ADDITION: FOR MANAGEMENTS TO KNOW] ABOUT OPTIMUM SIZE AND {STRICKEN TEXT: DOING} [HANDWRITTEN ADDITION: THEN DO] SOMETHING ABOUT IT ARE TWO DIFFERENT THINGS. [HANDWRITTEN ADDITION: HOWEVER]
M. WHICH BRINGS ME TO ANOTHER INGREDIENT FOR SUCCESS—THE WILLINGNESS AND ABILITY TO MAKE ADJUSTMENTS.
N. MANAGEMENTS WHO KNOW THEIR ASSETS WELL, WHO CAN ANALYZE ACCURATELY AND WHO ARE "DECISION-MAKERS," WILL BE THOSE WHO CAN MAKE THE NECESSARY ADJUSTMENTS TO ACHIEVE OPTIMUM SIZE.
O. BELIEVE ME, MAKING THE DECISION TO SHRINK SIZE TO ACHIEVE OPTIMUM SIZE IS A REAL CHALLENGE AND TEST FOR MANAGEMENTS.
P. TO HELP ILLUSTRATE THE TYPES OF ADJUSTMENTS THAT MAY BE NECESSARY TO MAINTAIN OPTIMUM SIZE—I WILL USE MESA'S EXPERIENCE AS AN EXAMPLE:
Q. WHAT HAVE THESE ADJUSTMENTS DONE FOR OUR STOCKHOLDERS? LET'S CONSIDER A HYPOTHETICAL INVESTMENT OF $10,000 IN 1964 TO PURCHASE 1,000 SHARES OF MESA COMMON STOCK.
R. ALL IN ALL, THESE ADJUSTMENTS IN OUR SIZE HAVE INDEED BEEN TO THE BENEFIT OF OUR SHAREHOLDERS.
IV. THE DISCUSSION OF SHAREHOLDERS BRINGS ME TO ANOTHER CHANGE THAT I FORESEE FOR THE INDUSTRY.
A. WE ARE EMBARKING UPON [UNREADABLE STRICKEN TEXT] [HANDWRITTEN ADDITION: A PERIOD] OF AWARENESS" ON THE PART OF STOCKHOLDERS.
B. THE INVESTING PUBLIC IS BECOMING MORE AWARE THAT OIL AND GAS COMPANIES ARE MANAGERS OF DEPLETABLE ASSETS AND THAT RESERVES MUST BE INCREASED ANNUALLY TO PROTECT AND ENHANCE THEIR INVESTMENT.
C. I BELIEVE WE WILL SEE SHAREHOLDERS BEGIN TO SPEAK OUT MORE...PARTICULARLY WHEN THE ASSETS OF THE COMPANY ARE BEING LIQUIDATED.
D. IT'S INCREDIBLE TO ME THE ATTITUDES SOME CEO'S HAVE TOWARD THEIR SHAREHOLDERS...THEY FORGET THAT WE ARE PAID TO GET THE BEST RETURN FOR THE STOCKHOLDER. THEY OFTEN EQUATE COMPANY WITH MANAGEMENT RATHER THAN EQUATING COMPANY WITH SHAREHOLDERS.
E. AS A RESULT OF THIS {STRICKEN TEXT: TYPE OF} ATTITUDE, I BELIEVE SHAREHOLDERS WILL BEGIN TO INSIST THAT MANAGEMENT BE GIVEN MEANINGFUL STOCK OPTIONS.
F. THIS WILL INCREASE THE INCENTIVE OF MANAGEMENTS TO MAKE DECISIONS WHICH ARE IN THE BEST INTEREST OF SHAREHOLDERS—NOT DECISIONS WHICH WILL MERELY PERPETUATE MANAGEMENTS' JOBS.
F. THIS WILL INCREASE THE INCENTIVE OF MANAGEMENTS TO MAKE DECISIONS WHICH ARE IN THE BEST INTEREST OF SHAREHOLDERS—NOT DECISIONS WHICH WILL MERELY PERPETUATE MANAGEMENTS' JOBS.
V. IN CONCLUSION...
A. OUR INDUSTRY IS EXPERIENCING A TOUGH PERIOD.
B. WE WILL SEE MORE RESTRUCTURING IN THE INDUSTRY THROUGH MERGERS, ACQUISITIONS, SPIN-OFFS AND THE SALE OF ASSETS TO ACHIEVE THE OPTIMUM SIZE OF A COMPANY - A SIZE THAT WILL BRING THE BEST VALUE TO ITS SHAREHOLDERS.
C. SUCCESS OF OIL AND GAS COMPANIES WILL NO LONGER BE EQUATED WITH LARGENESS. RATHER, SUCCESS WILL MEAN ACHIEVING OPTIMUM SIZE.
D. MANAGEMENTS WHO DO NOT ACHIEVE OPTIMUM SIZE WILL BEGIN TO BE CRITICIZED STRONGLY BY SHAREHOLDERS WHO ARE MORE AWARE OF THE SIGNIFICANCE OF RESERVE ENHANCEMENT.
E. ALL IN ALL, I'M OPTIMISTIC ABOUT THE OUTLOOK FOR THE INDUSTRY.
VI. THANK YOU. I WILL NOW BE PLEASED TO ANSWER YOUR QUESTIONS.