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REMARKS TO DREXEL BURNHAM & LAMBERT FORUM
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(TIME: 12 MIN.)
[Handwritten addition: pays pretty good]
[Handwritten addition: Some oil Co’s in liquidation]
A. IT’S A PLEASURE TO BE HERE TODAY.
B. [Handwritten addition: Housekeeping]
C. [Handwritten addition: Gulf people have recorders]
D.
[Handwritten addition: Experts have disposed of M&A questions. Briefly on Gulf—all winners—Lee—zz—Cadillac—Bennett. I felt a little like the human cannonball on Gulf deal—had to try it. I can go back to being a geologist.]
A. I’LL START WITH A VERY BRIEF HISTORICAL OVERVIEW.
B. A PREDECESSOR COMPANY TO MESA WAS FORMED IN 1956 WITH $2,500 CASH AND A $100,000 LINE OF CREDIT.
1. IN 1959, AN AFFILIATED COMPANY WAS FORMED TO CONDUCT OPERATIONS IN CANADA.
2. THESE TWO COMPANIES WERE CONSOLIDATED IN 1964 TO FORM MESA.
C. WE HAVE OPERATED IN ALL THE MAJOR EXPLORATORY AREAS OF THE UNITED STATES, AS WELL AS IN CANADA, THE NORTH SEA AND AUSTRALIA.
D. TODAY, OUR OPERATIONS ARE CONDUCTED TOTALLY WITHIN THE U.S.
E. IN 1970, MESA BECAME ONE OF THE FIRST INDEPENDENT PETROLEUM COMPANIES TO MAKE MAJOR LEASE ACQUISITIONS IN THE GULF OF MEXICO.
1. TODAY, WE HAVE AN INTEREST IN 49 PLATFORMS ON PRODUCTION IN THE GULF.
F. WE ALSO OPERATED IN THE NORTH SEA, HAVING DISCOVERED THE BEATRICE FIELD IN 1976 OFF THE NORTHEAST COAST OF SCOTLAND.
1. WE SOLD OUR INTEREST IN THE NORTH SEA IN 1979 FOR $65 MILLION BECAUSE WE ANTICIPATED THAT INCREASING TAXATION AND OTHER GOVERNMENT INTERFERENCE WOULD YIELD A MARGINAL RETURN ON THE INVESTMENT.
G. IN ANTICIPATION OF THE SAME SITUATION DEVELOPING IN CANADA, WE SOLD OUR PROPERTIES THERE IN 1979 AFTER 20 YEARS OF SUCCESSFUL AND INTENSIVE EXPLORATION.
1. IN 1975, MESA DRILLED MORE WELLS IN CANADA THAN ANY OTHER COMPANY.
2. WE STARTED IN CANADA WITH $35,000 AND SOLD OUR INTERESTS FOR $600 MILLION.
H. WE ALSO HAD INTERNATIONAL OPERATIONS IN AUSTRALIA, AND AFTER WE DISCOVERED THREE OIL FIELDS THERE IN 1983, WE SOLD OUR INTERESTS FOR $42 MILLION.
A. WE HAVE ALSO ACTIVELY ACQUIRED RESERVES.
B. IN 1969, WE PURCHASED THE HUGOTON PRODUCTION COMPANY, WHICH INCREASED OUR NATURAL GAS RESERVES MORE THAN 15-FOLD.
C. WE ACQUIRED PUBCO PETROLEUM CORPORATION IN 1973, WHICH GAVE US ADDITIONAL ACREAGE IN THE ROCKY MOUNTAIN AND PERMIAN BASIN AREAS AND FORMED THE BASE FOR OUR PRESENT DIVISIONS THERE. [Handwritten addition: The only time we were a “white knight” and the term was unknown in 1973—just one luck.]
D. WE TEAMED UP WITH TENNECO IN 1979 TO PURCHASE THE MID-CONTINENT DIVISION OIL AND GAS PROPERTIES OF ASHLAND EXPLORATION, INC.
A. THIS REQUIRES THE WILLINGNESS AND ABILITY TO REACT QUICKLY TO OPPORTUNITY AND ADAPT TO CHANGE.
B. SOMETIMES THAT REQUIRES INNOVATIONS SUCH AS THE FORMATION OF THE MESA ROYALTY TRUST IN 1979, WHICH INVOLVED SPINNING OFF TO SHAREHOLDERS ABOUT 50% OF MESA’S RESERVES.
C. BECAUSE THE SHAREHOLDER COMES FIRST AT MESA, WE EXPLORE AND PURSUE ALL POSSIBILITIES FOR ENHANCING THEIR INVESTMENT.
1. THIS INCLUDES INVESTING IN MARKETABLE SECURITIES OF OTHER ENERGY COMPANIES.
D. IN MID-1982, WE SOLD OUR 4.1 MILLION SHARES OF CITIES SERVICE COMPANY STOCK FOR $55 A SHARE, WHICH GAVE US A $31.5 MILLION PRE-TAX GAIN.
1. [Text stricken: WHAT IS INTERESTING ABOUT THAT DEAL IS THAT] [Handwritten addition: And remember] CITIES ACTUALLY TENDERED FOR MESA FIRST.
2. THEN MESA MADE A COUNTER OFFER.
3. OUR BID WAS TOPPED BY GULF, WHICH EVENTUALLY BACKED OUT OF THE DEAL.
4. AND CITIES ENDED UP BEING ACQUIRED BY OCCIDENTAL.
E. IN LATE 1982, MESA MADE A TENDER OFFER FOR APPROXIMATELY 51% OF THE OUTSTANDING SHARES OF GENERAL AMERICAN OIL COMPANY.
1. GENERAL AMERICAN SUBSEQUENTLY RECEIVED A HIGHER OFFER FROM PHILLIPS PETROLEUM, AND WE WITHDREW OUR BID.
2. BUT THE RESULTING EXCHANGE OF MESA DEBENTURES FOR GAO STOCK ELIMINATED $76 MILLION OF THE COMPANY’S DEBT AND GAVE US A PRE-TAX GAIN OF $42.4 MILLION.
F. AND YOU’RE ALL AWARE OF OUR INVESTMENT IN GULF CORPORATION WHICH I’LL DISCUSS IN MORE DETAIL LATER ON.
A. AND BECAUSE OF THE CONTINUING POOR DEMAND FOR NATURAL GAS, WE ARE DIRECTING OUR EXPLORATION EFFORTS TOWARD OIL PROSPECTS.
1. THAT EMPHASIS HAS PAID OFF IN SUBSTANTIALLY INCREASED OIL PRODUCTION OVER THE LAST FIVE QUARTERS.
B. WE HAVE ALSO ADJUSTED OUR EXPLORATION AND PRODUCTION BUDGET TO REFLECT CURRENT CONDITIONS.
1. THE 1984 BUDGET IS PRESENTLY SET AT $100 MILLION, ALTHOUGH IT MAY BE INCREASED SOMEWHAT.
2. THIS IS DOWN SUBSTANTIALLY FROM LAST YEAR’S BUDGET OF $223 MILLION AND OUR ALL-TIME HIGH OF $420 MILLION IN 1981.
3. HOWEVER, WE [Text stricken: ARE SIMPLY SETTING OUR BUDGET MORE IN LINE WITH CASH FLOW.] [Handwritten addition: believe our budget is realistic for industry conditions—40% of C.F.]
4. HISTORICALLY, MESA HAS RUN A BUDGET SUBSTANTIALLY HIGHER THAN CASH FLOW. [Handwritten addition: (100% of CF 1983—first time ever)]
5. WE ARE NOW RETURNING TO A LEVEL WHICH IS MORE IN LINE WITH THE INDUSTRY AVERAGE.
C. I MIGHT ADD AN INTERESTING PIECE OF DATA AT THIS POINT.
1. WE RECENTLY MADE AN INTERNAL STUDY COMPARING OUR BUDGET WITH THOSE OF OTHERS IN THE INDUSTRY.
2. A PORTION OF THE STUDY COMPARED 300 PUBLIC OIL AND GAS COMPANIES’ DOMESTIC E&P BUDGETS TO THE RESERVES THEY FOUND.
3. FROM 1980 TO 1982, THESE 300 COMPANIES SPENT $166 BILLION ON OIL AND GAS ACTIVITIES.
4. THEY FOUND RESERVES VALUED AT $109 BILLION (SEC PV RESERVES).
5. IN OTHER WORDS, THEY RECEIVED 66 CENTS FOR EACH DOLLAR THEY SPENT.
D. THAT POINT ILLUSTRATES WHY COMPANIES ARE LOOKING AT ACQUIRING RESERVES.
1. AND THAT’S WHAT HAS SPAWNED RECENT MERGER AND ACQUISITION ACTIVITY.
2. COMPANIES HAVE BEGUN TO LOOK FOR BETTER WAYS TO INVEST THE SHAREHOLDERS’ MONEY.
[Handwritten addition: Very unusual situation—huge values in old res. found yrs ago—extreme difficult replacing res. as depleted.]
3. MESA IS NO EXCEPTION.
E. WE’VE FOCUSED ON ADDING A NEW DIMENSION TO OUR BUSINESS—WHAT YOU MIGHT CALL A MERCHANT BANKING DEPARTMENT.
1. WE HAVE THE SKILLS IN-HOUSE TO ASSESS UNDERVALUED ASSETS IN THE MARKETPLACE. [Handwritten addition: & we have the financing to pursue those situations.]
2. [Text stricken: AND WE’LL] [Handwritten addition: We may] CONTINUE TO UTILIZE THIS ABILITY AS A PROFIT CENTER UNTIL THERE IS A SUBSTANTIAL IMPROVEMENT IN INDUSTRY MARKET CONDITIONS.
F. NOW I’D LIKE TO TALK FOR A FEW MOMENTS ABOUT WHAT OUR INVESTMENT IN GULF CORP. WILL DO FOR MESA.
1. THE GULF INVESTORS GROUP HOLDS 21.7 MILLION GULF SHARES.
2. MESA’S PORTION, ALONE, IS APPROXIMATELY 14.5 MILLION SHARES AT A COST OF $650 MILLION.
3. WHEN THE SOCAL-GULF TRANSACTION IS COMPLETED, MESA WILL RECEIVE ABOUT $1.15 BILLION OR A PRE-TAX PROFIT OF APPROXIMATELY $500 MILLION.
[Handwritten addition: This deal will almost eliminate our debt—thus giving the ability to come up with $1.5 billion (leveraged) if we decide to go again—and by the way we have picked up a few more friends.]
[Text stricken: G. AS YOU KNOW, THE GULF INVESTORS GROUP HAS MADE A PARTIAL TENDER OFFER FOR GULF COMMON STOCK.]
[Text stricken: 1. IN CONNECTION WITH THE FINANCING OF ITS PORTION OF THE OFFER, MESA ISSUED] [Handwritten addition: This financing would include the] $300 MILLION OF PREFERRED STOCK, SUBORDINATED NOTES AND WARRANTS PURCHASED BY PENN CENTRAL.
[Text stricken: 2. THESE SECURITIES HAVE REGISTRATION RIGHTS.]
[Text stricken: 3. IF PENN CENTRAL ELECTS TO REGISTER THESE SECURITIES, THEY WILL BE AVAILABLE TO INVESTORS.]
A. THE ENTIRE OIL INDUSTRY MUST ALSO BE RECEPTIVE TO RESTRUCTURING. [Handwritten addition: in the best interest of the stockholders.]
1. CONDITIONS ARE SUCH THAT THE INDUSTRY CANNOT STAY ON THE COURSE IT HAS FOLLOWED FOR THE LAST DECADE.
[Handwritten addition: It is a new game,and unfortunately some managements have not realized or won’t accept what has taken place. But fortunately the stockholders are catching on.]
B. AT MESA WE WILL CONTINUE OUR PROGRAM OF FOCUSING ON OIL PROSPECTS AND PURSUING UNDERVALUED ASSETS IN THE MARKETPLACE UNTIL INDUSTRY CONDITIONS IMPROVE.
1. STABLE OIL PRICES, HIGH FINDING COSTS AND A POOR GAS MARKET HAVE PUT THE LID ON AGGRESSIVE DRILLING ACTIVITY.
2. IT’S HIGHLY UNLIKELY THAT WE’LL SEE ANY REAL INCREASE IN OIL AND GAS PRICES DURING THE 1980s.
3. WITHOUT INCREASED DEMAND [Handwritten addition: and price] FOR NATURAL GAS THERE JUST WON’T BE ANY INCENTIVE FOR LARGE SCALE DRILLING ACTIVITY.
C. SO WE’RE LIKELY TO SEE MORE MERGERS, SPIN-OFFS, DIVESTITURES AND OTHER RESTRUCTURING ACTIVITY AS THE INDUSTRY ADJUSTS TO THIS NEW SITUATION.
1. MY BELIEF IS THAT RESTRUCTURING IS THE FREE ENTERPRISE SYSTEM WORKING TO CORRECT INEFFICIENCIES IN THE INDUSTRY.
2. IT SHOULD RESULT IN A MORE PRUDENT COST-EFFICIENT INDUSTRY THAT WILL [Text stricken: BETTER] BE ABLE TO [Handwritten addition: better] HANDLE THE JOB OF ENSURING AMERICA’S ENERGY SUPPLIES.