Pickens Proves That Patience Is Indeed a Virtue
Most people think by now that the real business of T. Boone Pickens Jr. is doing takeover deals on Wall Street. And the man himself does little to dispel that notion, lecturing college students about the gluttony and sloth he has seen in corporate board rooms, filling his recently published autobiography with David and Goliath stories of his battles against big oil companies.
Which is too bad, really. Because all that takeover talk obscures the useful business lesson that Pickens’ career provides, which is: Find something of value, keep your eye on it, be patient--and maybe you’ll get rich.
The truth about Boone Pickens, the 58-year-old geologist from Oklahoma State University who founded Mesa Petroleum Co. 31 years ago as a drilling partnership, built it into a company with operations stretching from the Gulf of Mexico to the North Sea and converted it two years ago into a limited partnership that pays tax-sheltered income directly to investors, is that for almost 20 years he has been like a man with an inheritance promised to him.
Bright Prospects
His company, now called Mesa Limited Partnership, may need money in the meantime. But that Mesa and Pickens will be rich in the future is almost certain. And it won’t be Wall Street that provides their inheritance but a gas field in southwestern Kansas called the Hugoton field.
The Hugoton field is the largest producing gas field in the lower 48 states, and the site of roughly two-thirds of Mesa Limited Partnership’s reserves of natural gas. Two years ago DeGolyer & McNaughton, the petroleum engineering firm, estimated the present value of Mesa’s gas in Hugoton--which still will be producing past the year 2000--at roughly $650 million. That’s not chicken feed for a company with annual revenue of $300 million. But it’s the promise, not the present, that’s interesting.
Because as early as 1989 that stream of future revenue could be four or five times what it is now--yes, between $2 billion and $3 billion.
One reason is higher prices for Mesa’s gas in 1989, when a long-term contract that prices the gas at 26 cents per thousand cubic feet (mcf) finally expires and is renegotiated at prices closer to $1.50 per mcf. Another is the state of Kansas’ recent OK for new wells to be drilled in Hugoton, which is giving Mesa a way to add to its reserves and at the same time, through a change in gas regulation, gain higher prices.
Pickens didn’t discover Hugoton; he acquired it. In 1969, he saw the immense gas reserves held by a small company there and convinced its board of directors that he could add value, which he did by outwitting Kansas Power & Light, a gas customer, forcing it to pay a higher price for Mesa gas.
It was the making of his company.
He went from there to the North Sea and Canada, but in 1979 sold out those foreign operations--and used some of the proceeds to add to Mesa’s Hugoton holdings.
Clearer Insight
Next, he surprised Wall Street by transferring direct ownership of, and tax-sheltered income from, some of Hugoton’s reserves to Mesa shareholders in the Mesa Royalty Trust. Many on Wall Street saw the Royalty Trust as essentially a liquidating asset that never could increase in value, and so let its publicly traded price decline.
Pickens knew better. He said that his employees who had Royalty Trust in their retirement plans would be rich because the Hugoton gas would increase in price.
Pickens acted on that belief, too, later on.
After deciding that exploration in the Gulf of Mexico was too expensive for little Mesa, he went for acquisitions, trying at first to take over Cities Service--which by no coincidence held a lot of gas wells in the Hugoton field. Mesa was beaten out for Cities by Gulf Oil, but ultimately earned more than $500 million on Gulf stock in their subsequent takeover battle. And what did Pickens do with the $500 million? He used it to buy back Royalty Trust units at a premium. They now sell at a price above what he paid, thanks to new drilling in Hugoton.
By now you get the message--with almost every move he has made in the last decade, Boone Pickens has tended to that store of value in Hugoton. That includes his unsuccessful attempts to take over Phillips, Unocal and Diamond Shamrock, where his real purpose was to acquire fresh cash or oil and gas reserves to tide Mesa over until Hugoton prices rise.
At present, without the acquisitions, Mesa is a wasting asset, paying out more in cash distributions than it is taking in from oil and gas production. Which is why oil analysts Frederick Leuffer of Cyrus J. Lawrence Inc. and Alan Edgar of Prudential-Bache Securities’ Dallas office see Pickens making another takeover attempt soon.
Perhaps he will. But Mesa’s problem in any case is short term, and will be solved when higher prices in Hugoton bail it out. And that is when Boone Pickens, who has 80% of his net worth invested in Mesa Limited Partnership, will probably become a billionaire.
His image as an aggressive corporate raider notwithstanding, Pickens and his Mesa firm will make their biggest score from having bought and tended for two decades a single big asset in natural gas.
The moral of his college circuit lectures, when you think about it, should be that patience is the virtue that pays off big in business.
