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	DRAFT OF REMARKS TO DENVER SOCIETY OF PETROLEUM ENGINEERS “RESTRUCTURING IN THE PETROLEUM INDUSTRY THE FREE ENTERPRISE SYSTEM AT WORK” DENVER APRIL 18, 1984 12:00 P.M.

(TIME: 7 MIN.)

THANK YOU.

A. IT’S A PLEASURE TO BE HERE TODAY.

B. (HOUSEKEEPING CHORE — INFORMATION PACKETS — FORTUNE)

C.

D.

II. I’D LIKE TO TALK TODAY ABOUT THE RESTRUCTURING PROCESS NOW OCCURRING IN THE PETROLEUM INDUSTRY.

A. IN REVIEWING MY REMARKS, I BEGAN TO THINK ABOUT THE MANY WAYS IN WHICH THE FUNDAMENTAL PRINCIPLES OF THE FREE ENTERPRISE SYSTEM ARE AT WORK IN THIS PROCESS.

B. RESTRUCTURING IS HAPPENING BECAUSE OF THE WAY OUR ECONOMY AND MARKETS OPERATE.

C. AND MESA’S INVESTMENT IN GULF. . .AS WELL AS THE ACQUISITION OF SUPERIOR BY MOBIL. . .AND THE EARLIER ACQUISITION OF GETTY BY TEXACO. . .ARE ALL EXAMPLES OF OUR ECONOMIC SYSTEM AT WORK.

III. THESE ACTIONS HAVE OCCURRED FOR ONE OR MORE SPECIFIC REASONS.

A. IN SOME CASES, A LARGE STOCKHOLDER LOST CONFIDENCE IN MANAGEMENT AND SIMPLY CASHED OUT.

B. THE WEAKNESS OF MANAGEMENT BECAME APPARENT IN ANOTHER INSTANCE AND THE ASSETS FLOWED TO A STRONGER MANAGEMENT TEAM.

C. AND WE CANNOT DISCOUNT THE INFLUENCE OF THE MOST DISAPPOINTING AND EXPENSIVE DRY HOLE IN THE INDUSTRY’S HISTORY—THE MUKLUK WELL IN THE ALASKAN FRONTIER, WHICH COST $1.6 BILLION.

D. SUCH HIGH-COST EXPLORATORY FAILURES SHOULD CAUSE MANAGEMENTS TO REASSESS THEIR INVESTMENT DECISIONS.

IV. THERE HAS BEEN SOME OPPOSITION TO RESTRUCTURING BY A FEW MEMBERS OF CONGRESS.

A. HOWEVER, I BELIEVE IT STEMS FROM A BASIC MISUNDERSTANDING OF THE INDUSTRY AND THE REASONS FOR RESTRUCTURING.

B. THE PETROLEUM INDUSTRY FACES A UNIQUE SITUATION BECAUSE IT MANAGES DEPLETABLE ASSETS—RESERVES OF OIL AND GAS.

           1. THOSE RESERVES REPRESENT THE SHAREHOLDERS’ PRIMARY ASSETS.

          2. IF THEY ARE DEPLETED AND NOT REPLACED, THEN THE SHAREHOLDERS’ ASSETS ARE BEING DRAINED AWAY.

          3. SO IT IS IMPERATIVE THAT OIL COMPANIES REPLACE THE OIL AND GAS THEY PRODUCE EITHER BY EXPLORATION OR ACQUISITION.

C. THERE ARE PROBLEMS TO BE OVERCOME THROUGH EITHER APPROACH.

          1. WITH EXPLORATION, YOU’RE FACED WITH THE PROBLEM OF FINDING THOSE RESERVES AT AN ECONOMICAL COST.

          2. WITH ACQUISITION YOU’RE FACED WITH PROTECTING THOSE ADDED RESERVES FROM OTHERS WHO MAY WANT TO PURCHASE THEM.

D. I MIGHT ADD THAT REGARDLESS OF THE APPROACH THERE’S PLENTY OF MONEY IN THE INDUSTRY TODAY TO PURSUE EITHER ONE.

E. IT’S A MATTER OF WHICH ROUTE WILL BE OF GREATER BENEFIT TO STOCKHOLDERS.

F. THE OTHER UNIQUE FEATURE OF THE PETROLEUM INDUSTRY IS THAT WE HAVE A DOMESTIC RESERVE LIFE INDEX OF LESS THAN 10 YEARS.

          1. THAT MEANS IF WE STOPPED DRILLING AND CONTINUED PRODUCING OUR OIL AT THE CURRENT RATE OUR RESERVES WOULD BE GONE IN LESS THAN 10 YEARS.

V. THOSE TWO FEATURES PRESENT THE OIL INDUSTRY WITH A DIFFERENT SET OF PROBLEMS THAN OTHER INDUSTRIES FACE.

A. AND CURRENT CONDITIONS—STABLE OIL PRICES AND POOR NATURAL GAS MARKETS—PRESENT THE INDUSTRY WITH A DIFFICULT SET OF OPTIONS.

B. OIL PRICES DON’T JUSTIFY GOING AFTER THE MORE EXPENSIVE BIG OIL FINDS NEEDED TO STOP THE RESERVE DEPLETION TREND.

C. REMEMBER THE MONEY IS AVAILABLE FOR DRILLING, BUT THE INVESTMENT OPPORTUNITIES AREN’T THERE.

VI. WE RECENTLY CONDUCTED AN INTERNAL STUDY AT MESA THAT COMPARED THE WORLDWIDE EXPLORATION BUDGETS OF 300 PUBLICLY-OWNED OIL AND GAS COMPANIES AND THE RESERVES FOUND.

A. THE TIME-FRAME FOR THIS STUDY WAS FROM 1980 TO 1982.

B. WHAT WE FOUND WAS THAT OVER THE THREE-YEAR PERIOD THESE 300 COMPANIES SPENT $166 BILLION FOR OIL AND GAS ACTIVITIES AND FOUND RESERVES WORTH $109 BILLION.

C. IN OTHER WORDS THEY RECEIVED 66 CENTS IN VALUE FOR EACH DOLLAR THEY SPENT.

D. THAT ILLUSTRATES THE PROBLEM OF LIMITED INVESTMENT OPPORTUNITY FOR EXPLORATION—AND WHY IT MAKES BETTER SENSE FOR SOME MANAGEMENTS TO ACQUIRE RESERVES.

VII. CHARLIE MAXWELL OF C.J. LAWRENCE SPOKE TO THAT SUBJECT VERY WELL RECENTLY IN A PIECE ENTITLED “WHO GAINS AND WHO LOSES FROM BIG OIL MERGERS.”

A. WHAT HE SAID WAS THIS: . . .QUOTE. . .“DIFFERENT COMPANIES HAVE DIFFERENT FINDING COSTS. WE ARE CONTENT TO LET THOSE MANAGEMENTS THAT CAN BRING NEW OIL SUPPLIES ONSTREAM AT THE LOW END OF THE RANGE OF COSTS DO THEIR SUPERIOR THING, FOR THOSE WHICH CANNOT. IT MAY BE IN THE PUBLIC INTEREST THAT THEY BUY RESERVES FROM THOSE WHO CAN, AND STOP WASTING THEIR SHAREHOLDERS’ AND THE PUBLIC’S MONEY ON A FRUITLESS, HIGH-COST PURSUIT.”

B. MAXWELL ALSO POINTS OUT THAT THIS LINE OF REASONING ISN’T ANYTHING NEW.

          1. IT COMES DIRECTLY FROM ADAM SMITH’S WEALTH OF NATIONS, PUBLISHED IN THE LATE 1700s.

VIII. PUTTING THE SHAREHOLDERS’ MONEY TO THE BEST USE IS MORE THAN ECONOMIC THEORY AT MESA— IT’S OUR PRIMARY PURPOSE.

A. AND THAT’S WHY WE HAVE REFOCUSED OUR EXPLORATION EMPHASIS ON OIL PROSPECTS AND DEVELOPED A NEW DIMENSION TO OUR BUSINESS. . .WHICH HAS BEEN REFERRED TO AS A MERCHANT BANKING DEPARTMENT.

B. WE HAVE THE IN-HOUSE SKILL TO ASSESS UNDERVALUED ASSETS IN THE OIL INDUSTRY, AND WE ALSO KNOW THE MANAGEMENTS OF THESE COMPANIES, WHICH IS AN IMPORTANT FACTOR.

C. OUR PHILOSOPHY IS THAT THE SHAREHOLDER COMES FIRST, AND IT IS MANAGEMENT’S RESPONSIBILITY TO EXPLORE ALL POSSIBILITIES FOR ENHANCING THE SHAREHOLDERS’ INVESTMENT.

D. IT IS MY BELIEF THAT THIS SAME ATTITUDE MUST BECOME AN INDUSTRY STANDARD IF THE OIL AND GAS BUSINESS IS TO THRIVE IN THE FUTURE.

E. MANAGEMENTS MUST PUT THEIR SHAREHOLDERS’ INTERESTS FIRST.

F. AND THAT MAY MEAN UNDERTAKING SOME RADICAL ALTERNATIVES.

IX. THIS SEARCH FOR ALTERNATIVES IS THE BASIS OF THE RESTRUCTURING PROCESS.

A. IT IS THE FREE ENTERPRISE SYSTEM’S WAY OF IMPROVING EFFICIENCY IN THE PETROLEUM INDUSTRY.

B. IT’S MY OPINION THAT OUR INDUSTRY WILL LOOK COMPLETELY DIFFERENT 5 YEARS FROM NOW.

C. AND ITS NEW STRUCTURE WILL BE MORE ACCEPTABLE TO SHAREHOLDERS CONSUMERS AND THE GOVERNMENT.