Mesa’s Style Is Lean and Unorthodox : Despite Takeovers, Boone Pickens’ Firm Keeps Its Eye on Oil

T. Boone Pickens Jr. was shaving one morning when he was struck with a realization as plain as the Amarillo landscape: “The cattle game was over.”

That was February, 1974. Mesa Petroleum Co. was losing $2 million on its cattle business at that point, and the company’s cattle specialists were distraught when Pickens told them that day that he wanted to sell out when the business was still in the red. He left the matter open.

Four months later, the industry was in such trouble that Mesa couldn’t give away the business. It took a $20-million loss.

“It was my fault,” Pickens said in a recent interview. “We stayed with it too long.”

The story is instructive about the way the 21-year-old oil and gas exploration and production company is run:

It has made mistakes but adjusts quickly when it does. It has gained respect in its own industry for running ahead of the pack in spotting problems and trends but sometimes it hesitates too long before taking action. Pickens calls the shots but encourages differing opinions and seriously considers them.

Mesa, with $4 billion in assets, is much in the news these days for its seemingly insatiable appetite for much bigger oil and gas companies and for its chairman’s view that energy companies are generally uncreative and poorly managed. “This is an industry with a lot of money and a limited number of ideas,” he likes to say.

Ever since Mesa’s first foray into the takeover arena--the 1982 turnabout play for its would-be acquirer Cities Service--Pickens has been portrayed by his many critics as a corporate predator out to make a fast buck and as a glib deal maker who can’t run his own company, much less the mighty corporations that are his prey--Cities Service, Gulf, Phillips and now Unocal.

“It’s clear they are distracted by all their battles,” said a longtime energy analyst who, like many of Pickens’ critics, asked not to be identified. “They’re running a caretaker operation.”

Constant Flurry of Activity

Certainly, Pickens and his circle of closest advisers do devote an inordinate amount of time to stalking prey, sniffing out oil and gas on Wall Street, wooing friends in high-finance circles and keeping on top of gambits in the ever-changing, sophisticated takeover game.

In the bank of executive offices on the Mesa headquarters building’s fifth floor last week, there was a constant flurry of activity--virtually all of it related to the bid for Unocal: calls from big-time financiers, major Unocal shareholders and big-city reporters; visits from Unocal supporters seeking to change Pickens’ mind about a takeover; meetings to plot takeover strategy; sessions with Unocal shareholders; constant monitoring of news of the fight and Wall Street’s reaction.

But Mesa executives say there is strict attention to the oil and gas business, too. Pickens, who recently took over the responsibility for Mesa’s exploration operations, checks in with his operations staff at least once a day, even when he is out of town or embroiled in a takeover fight.

Mesa, it could be said, was born in the back seat of a station wagon. That office on wheels and a few hundred dollars were all Pickens had in 1955 after he quit his job as a geologist at Phillips Petroleum and struck out on his own.

He made his first wildcatting deal in just 10 days, pocketing $2,500. With that cash and a $100,000 line of credit, he and a partner formed Mesa’s predecessor, Petroleum Exploration, the following year. A second company, Altair Oil & Gas, was hatched to explore and drill for oil and gas in western Canada.

During those early years, Pickens says, “I was probably broke three times but I was too dumb to realize it.”

The consolidation of the two companies in 1964 created Mesa. Back then, it employed 18 and had 234 stockholders, $1.5 million in revenue, $435,300 in net income and assets of $4.1 million. Two decades later, Mesa employs 649, had about 16,900 stockholders as of the end of 1984 and reported 1984 revenue of $413 million, assets of $4 billion and net income of $270 million.

Mesa’s oil and gas operations have shown steady sales gains for the past 16 years--although the rate of growth has declined sharply since 1982, reflecting the company’s philosophy that domestic drilling currently is too expensive to justify escalation. Likewise, it continues to report an operating profit, although the income has been flat for three years.

With the exception of 1976, Mesa has finished every year with at least as many oil and gas reserves as it began the year--either through prospecting or acquisition--a record few companies match. This is called reserve replacement and is among the most important measures of performance for oil and gas producers.

“A company that is not able to replace reserves is in serious trouble,” says Charles Andrew of John S. Herold Co., an oil and gas appraiser. He said statistics compiled by Herold show that Mesa over the past decade has been “an above-average exploration company,” in terms of reserves, production and profitability.

‘We Won’t Be Around’

Says Pickens: “If we ever have back-to-back down years, we won’t be around for the third. We would not continue to deplete the primary asset of the shareholders.”

At the same time, it is no slouch on the production side. John S. Herold figures show that there, too, Mesa has outperformed the pack for several years running. (Comparisons are an imperfect exercise because Mesa is much smaller than oil companies the size of Unocal or Exxon and is larger than most independents.)

Last year, it produced 21% more natural gas and 10% more oil than in the previous year. And in the first quarter of 1985, it produced more domestic oil and gas on a daily basis than at any time in its 21-year history.

Analysts and industry appraisers say Mesa’s reserve base and its production stand to grow dramatically over the next few years because of an impending change at the Hugoton natural gas field in Kansas, where Mesa is a big driller. Kansas regulatory officials are expected to approve later this year a doubling of the drilling currently allowed there.

That’s why Mesa paid a premium for a royalty trust that provided shareholders income directly from the cash flow of the oil fields. “It was another in a long line of astute moves,” says Alan Edgar, an energy analyst with the firm Schneider, Bernet & Hickman in Dallas and a specialist in royalty trusts.

The Mesa Royalty Trust, spun off to shareholders in 1979 and reacquired by Mesa last year for a premium over market value, comprised royalties on its producing properties in the Hugoton oil field, among others.

Mesa’s record does have a few blemishes.

Heavily Loaded With Debt

It lost about $500,000 on a mining acquisition in the mid-1960s. Its exploration costs have far exceeded the industry average for several years. And it has been heavily loaded with debt since the early 1980s.

But last year, aided by the repurchase of cheap reserves (the equivalent of $5.59 per barrel) from the Mesa Royalty Trust, Mesa reduced its finding costs from the equivalent of $18.54 a barrel in 1983 to $9.35, the lowest level since 1978. The industry average was closer to $14.

Mesa’s long-term debt has risen sharply since 1981, exceeding its net worth in each of the last three years. But with the help of a $404-million pretax profit from its Gulf stock and a $75-million pretax profit from its Phillips stock, Mesa has enough cash on hand that it could reduce its debt to one-tenth of its 1983 level and be virtually debt free by the end of 1985.

Even the soured cattle deal, the most spectacular flop in the company’s history, had a silver lining: It provided the cash flow with which Mesa acquired five offshore properties (there were commercial discoveries found on four of the five) and taught Mesa to stick to the business it knows best--oil and gas.

Mesa reflects its chairman--lean and unorthodox. Lean: Even for the capital-intensive petroleum industry, Mesa runs its business with very few employees--ranking first in terms of net income per employee, a measure of productivity, on Forbes magazine’s list of the nation’s top 500 companies.

Unorthodox: It’s hard to say which of them would dislike the comparison more, but in that regard, Pickens and his current opponent, Fred L. Hartley, are a lot alike. Hartley once told a reporter that “you should never do what everybody else is doing; that’s where you make your mistakes.”

So, too, Pickens and Mesa have thrived because they zig where others zag.

In 1969, after other companies had passed on buying Hugoton Production Co., Mesa acquired it, increasing its gas reserves more than 15 times and buying into what is now known to be the nation’s largest gas field within the continental United States, in terms of reserves.

In 1979, when the oil industry was agog over Canadian and North Sea oil and gas prospects, Mesa was already pulling out, foreseeing the changing political and economic climates that would later inspire other industry pullouts.

In 1983, when Australian oil and gas properties were still hot prospects, Mesa sold out its operations in that country for a $26.5-million pretax gain, the timing of which has since been lauded as astute.

And in the halcyon days of 1981, when the phenomenal increases in capital expenditures by oil companies was matched only by their skyrocketing profits and prices for energy, Mesa began a furious backpedaling.

As with the cattle incident, Pickens says he foresaw the underlying problems that have since forced serious changes in the petroleum industry well before he ordered a restructuring of his own company.

“We stayed with the play too long, way too long,” he said. “I couldn’t convince our people of the seriousness of it.”

“Like the rest of the industry, we all thought it was headed forever up,” said Sidney Tassin, assistant to Mesa’s financial vice president, David Batchelder. “So we drilled some expensive deep wells and bought some expensive acreage, and our capital budget got out of hand.”

Cutback in Spending

From $197 million in 1978, Mesa’s capital spending had risen to $420 million by 1981. The next year it was cut back to $332 million and is running at an annual rate of $85 million this year.

“But when Boone came to us in late 1981 and said, ‘Guys, we can’t operate the way we have in the past,’ there were a lot of us who didn’t want to listen,” Tassin continued. “Particularly on the operating end, oil people tend to be optimists. The next well is always going to be the good one.”

Pickens’ marching orders: Put the brakes on high-priced acreage and expensive deep-well drilling, re-examine the riskier offshore operations and bring exploration costs in line with economic reality. Lastly, change the company’s vision.

“Pickens said it wasn’t enough to just hunker down like a bunch of groundhogs; get rid of a little fat; accept a little less cash flow, lower reserves and less net income, and next winter come out of the hole,” said Tassin. “He wasn’t willing to accept that as a working philosophy. He said it was time to take a fresh look at our business.”

The new Mesa strategy began to emerge. Company officials began studying the possibility of selling off some high-cost properties, farming out some of its business, making other kinds of investments and acquiring reserves. Until then, Mesa had built its reserves almost entirely by drilling.

About the same time, Tassin and his boss, Batchelder, were coming into their own. Then 24 and 31, respectively, the two young accountants were taking over additional responsibilities from the cadre of older vice presidents who had helped Pickens build Mesa from a small producer to what was then a $2-billion company by aggressive drilling. Pickens turned to them.

‘Lean, Young and Hungry’

“I relate very well to young people,” the 56-year-old Pickens says. “I want people in my organization that are lean, young and hungry.”

His closest takeover advisers are all under 35, and the average age of Mesa’s 649 employees is 36.

His preference for young employees also is at the heart of early retirement over the past 15 months of four longtime Mesa executives--a fifth retired at age 65--and the reduction in Mesa’s number of vice presidents to three from 10.

“I went to these guys and said, ‘Look, you’ve made quite a bit of money here, and I get the feeling you’ve lost a little enthusiasm for the job,’ and they agreed.” (Three contacted by The Times gave the same account.)

Since the formulation of its new strategy, Mesa has gone on two major cost-cutting sprees. It has cut its work force almost 300 from its December, 1982, peak of 914; sold off its overseas operations (it kept its residual interest in its Canadian properties at no cost to Mesa, however, in case the political and economic climate for drilling improves there); streamlined the company by moving several divisions back to company headquarters; stopped issuing company cars, and issued strict orders that exploration costs be held to the equivalent of $10 a barrel or less.

“It’s a very lean ship,” says Michael Brown, West Coast mergers and acquisitions chief for Drexel Burnham Lambert, the investment banker that has raised $3 billion on Mesa’s behalf for the Unocal fight.

Mesa keeps a surprisingly low profile in Amarillo, the slow-paced Texas Panhandle town of 180,000 where Pickens attended high school. It employs only 349 people there, and most of its operations--which are 70% natural gas--are outside of Amarillo, in places like Ulysses, Kan., and Dunn County, N.D.

Residents say they know little more about the company than that Pickens is on the TV news a lot and that important-looking people in pin-striped suits are always coming and going at the local airport.

Mesa’s modern offices are tastefully appointed--with paintings depicting Western scenes on the walls and thick rugs in the subdued beige and blue corporate colors on the floors--but unspectacular. Conservative suits and ties and wing-tip shoes are favored.

In fact, the entire company is image-conscious. Every morning, a Mesa employee searches a database for any mention of Mesa or Pickens in the news, copies the stories, makes comments on their content and circulates the whole package to key executives. A copy of the package also goes to the Mesa employee fitness center for employee viewing.

Mesa employees, while reminded repeatedly that they are secondary to shareholders, are among the best paid in the industry and have an array of benefits that Hewitt Associates, a large Chicago benefits-consulting company, says is among the most attractive in American industry. They seem truly fond of Pickens, and he of them.

‘Boone Looks Out for Us’

In exchange for hard work, “Boone looks out for us,” says the company’s personnel director, Sid Bayless. “Even with something as insignificant as insurance, he’s always suggesting new ways to do things that will improve morale and efficiency at the same time.”

To encourage exercise and good eating habits among employees, the fitness-conscious Pickens, an avid racquetball player and jogger, had Mesa build a multimillion-dollar fitness center six years ago on the third floor of the company’s parking garage. There, employees and their families can work out, play racquetball or volleyball, take nutrition courses and eat healthy food--all free of charge. Those who work outside of Amarillo are reimbursed if they join a health club.

Mesa was one of the first to offer a wellness plan--offering cash incentives to employees who exercise at least three times a week and refrain from smoking, a habit that Pickens detests. And it is one of the few U.S. companies to offer an in-house health insurance plan.

The company also has gained respect for innovation on the operating side. To get some expensive properties off its books and at the same time put some of the company’s value into shareholders’ hands, it spun off some of its assets into two royalty trusts traded separately on the New York Stock Exchange. Other companies followed suit.

In 1976, it devised an unusual way to finance its exploration and development activities overseas--borrowing money at no interest from pipeline companies, who in exchange were guaranteed gas production from the tracts on which they lent the money. Again, others followed suit.

Running wells by wind chargers and reducing obsolete inventory by bartering with other companies are further innovations with which Mesa is credited.

Many of the innovations are the doing of Pickens. “Boone is well-versed in operations,” says Jesse P. Johnson, who joined Mesa as vice president for operations in 1982 after 33 years with Arco. “When I need a decision on completing a well, I can always get to him within an hour, and he understands because he’s been out on wells. I don’t have to spend any time explaining things to him. Decisions get made very quickly.”

Pickens’ well-publicized philosophy that the U.S. energy industry is in its sunset years, and that to keep drilling for oil and gas when the cost far exceeds the going market price is wasteful and economically unsound, has triggered criticism that he has abandoned the energy ship and is staying afloat only through takeover maneuvers.

“I’m not so certain that Mesa today is in the oil and gas business. They’re in the takeover business,” said an executive with another oil company who also is familiar with Mesa.

It is true that Mesa has sharply scaled back its operations. It also is true that Mesa earned more on its takeover business last year than from its oil and gas operations. But it would have reported a profit last year even without its takeover activities.

Mesa decided to scale back exploration activities sharply because of the current high cost of finding oil and gas. Johnson said the company has stopped drilling deep gas wells entirely because the cost is as much as quadruple the break-even point, and it isn’t buying any offshore properties.

‘Shareholders’ Company’

In 1983 and 1984, Mesa cut back so sharply on its exploration that it was able to replenish its reserves only through acquisitions--principally with the repurchase of Mesa Royalty Trust.

It only found enough oil and gas to replace 80% of its domestic production in 1983 and 65% in 1984, contrasted with 145%, 154% and 117% replacements the previous three years. (The average domestic reserve replacement for the industry for the last five years was roughly 80%, 87%, 70%, 81% and 64%.) Acquisitions covered the remaining 20% in 1983 and permitted a near-50% reserve increase in 1984.

Pickens’ credo that shareholders are king in publicly held companies is captured in its logo that contains the message, “The Shareholders’ Company.” But Pickens has been criticized for paying himself too richly while not rewarding other shareholders enough.

“To me, the real measure of a company’s abilities is the stock price, and in that regard, Pickens needs to practice what he preaches,” said David Ullom, an energy analyst with Bateman Eichler, Hill Richards in Los Angeles.

Batchelder points to Standard & Poor’s indexes showing that Mesa’s stock price rose 36% in 1984, contrasted with 13% for the domestic oil industry and 1% for all U.S. companies. And to critics who note that the current $18 stock price is little more than half its early 1981 high, Batchelder counters that the same could be said for the oil industry as a whole. Analysts generally agree.

In addition, shareholders who agreed to sell their Mesa Royalty Trust shares to Mesa--89% sold out--received $35 a share. And the Offshore Royalty Trust, which was spun off to shareholders in 1984, is trading at between $2 and $3 a share.

To the charge that he lines his own pockets at the expense of shareholders, Pickens replies that the $3-million bonus he received last year wasn’t his idea--it was suggested by director Cyril Wagner Jr. (Wagner, however, is both a business partner and a good friend.) He also points out that many of his oil-executive acquaintences, like George Mitchell of Mitchell Energy & Development, are worth several hundred million dollars because they have equity equivalent to as much as 50% of their companies’ net worth. Pickens doesn’t.

“All I have is 2.5% of Mesa,” he said. His Mesa stock at current prices is worth about $30 million.

MESA PETROLEUM AT A GLANCE

In millions of dollars 1984 1983 1982 1981 1980 Oil and gas revenues 413 391 376 367 332 Operating income 154 158 152 171 143 Net income 270 126 130 115 95 Capital spending 105 223 332 420 397