Permian Basin Royalty Trust

Transcription

>> You know the topic of hot topics, I really don't feel like a hot topic, but when you are playing the Batman, you'll take it if they'll give it to you, so I'll be a hot topic today. My career has been mainly in the public market, 90% of it within a public company. I went to work for Southland Royalty Company and I had a buddy that was a fraternity brother whose father was chairman. And so he mentioned to me that I might be able to get a job there. I was working to be an actuary in Philadelphia and that was giving me a headache. I knew that I didn't really want to be an Actuary. So, I looked at this company, Southland Royalty Company and it had a $100 million market cap. It is a public company in American Stock Exchange, had no debt, 60% gross profit and a horrible business plan. I mean, they pissed off their entire cash flow every year and didn't add any value with it at all. They drilled, whack out wells, [inaudible] and so, my buddy and I and we were analyzing this and so, that's a case, you know, if you can't make that baby sing, if you can't get in a position of responsibility you ought to really be ashamed of yourself. And so, I decided I would go, give this a trial interview with Mr. Weaver and I went down and talked to him and this was in over several months and he finally said, well, do you want this job. And I said, well, yes sir, I do. He said, well how much money do you make now. I said, well like $15,000 a year and he said, okay, I will give 13. And I was-- my brain was going and I said, well Mr. Weaver, will you pay my way to move to Fort Worth from Philadelphia and I had a family and you know, you would say to him as much as you could and I borrowed money to go to school. He said, no, you have to get yourself down here. So, I took that job, paid my way down there and for his benefit, I guess about six months later, he raised me $2,000 to the 15,000 that I had given up. But you know, if you look back at the time and some of you are in the oil business out here, but you know, back then, all those $3 a barrel and it didn't had been $3 a barrel for twenty years. I mean, it was just flat and every year, Exxon and Shell would get together with the Saudis and they would-- the Saudis would always want a little bit more and they wouldn't give it to them. They just said no, $3. And about 1971, the United States' oil production fee and we didn't talk much about it, but the Saudis noticed it. And so, in '73, the Saudis said, you know, we think we want $5 a barrel and Exxon and Shell said, no, we will give you 3.70. And so, what happens then is everybody went home to their governments to discuss whether or not they were going give 5 or take 3.70 or whatever. And in the same year, Egypt decided they wanted these territories back that Israel had taken in this six-day war and so, you know, whose side are you going to be on that because obviously, they always have all the energy. You would be rush your head decided to back Egypt and you know, we couldn't let them get a real foothold in the Middle East and so, we backed Israel. And the Saudis had told us something bad would happen if you did and you know, we won the war. I mean, we backed Israel and that is why they won the war really, but the Saudis said, you know, you are going to read about what is going to you in the newspaper. It turned out, an embargo happened. They cut off the oil supplies for everybody that had backed Israel. OPEC really got strong and from that time on, oil was never $3 a barrel again. I mean, oil has gone up and down. It's just been in short supply. Oil had been you know, for some short period of time there would be an oversupply, but it has trended up and Philip Southland, you know he said, look and by the way, the job that I took was administrative assistant and I was administrative assistant to no one. I wouldn't in administration and I wouldn't an assistant to anybody, so people here that worked with me back there at Southland are nodding their head and it was a really interesting company to go to work for, but we decided that we are going to look at acquisitions and instead of be a walk out company and it just set the fact that all or I believe that all gas were going to trend upward. And so, I can remember the first acquisition that we worked on was one that in West Texas and it was pre-computer. And so, computers had come into existence and bought a national cash register computer and that computer was all these course. And you didn't have programs like you have now. I mean, it was all machine language and you had to learn how to program that thing from basic language. So, I learned how to do that and we were working with this acquisition, a $6 million acquisition and I guess I didn't trust the computer, I didn't trust the answer, stayed up all night long manually doing that acquisition to check to see if the computer was right. Now, you would think that you had more confidence in yourself than you did in the computer but sure enough it happened to come out with the same answer, $6 million for that deal. And we started making larger and larger acquisitions, but still we hadn't gone to the point where we really had it going and Boone Pickens noticed this and so, he decided to tender for Southland, now still administrative assistant when he tendered. And I wouldn't going to tell this part of the story, but two days ago on the Wall Journal, a guy named Joe Flom died and had a big obituary and had this picture on, I think it is on the C section of The Wall Street Journal. Well, Mr. Weaver came in and he said, yeah, you don't, we didn't have a CFO. He said you are the only one that looks like a CFO here, go to New York and get a team together. And so, I went to New York and hired Bob Rubin at government. He was my age then and we were really young and Joe Flom. And so, Pickens didn't know that I existed. He didn't know we had hired a team-- Joe Flom was just 45 then. He was the greatest M and A guy and he made Skadden Ores. And so, put together this team that was really formidable team and we kicked his butt. I mean to tell you, it was absolutely wonderful. Then, he did a tender offer for us and we kicked his butt again. I mean, it was the most thrilling thing for a guy like 31, 32 years old and so then, I was made executive vice president and Pickens offered me a job. And so, I went to Mr. Weaver and said, you know, here's a really a good job, I'm going to be executive vice president of a-- my son, I am going to get stock options and he has got a really, I want to making a whole lot more than $15,000 a year by then. So Mr. Weaver said, oh no, you can't do that. So, he bid a little better than Mike Pickens offers. So, I said Boone made me, you know, he made my career, but then shortly thereafter I was made president of Southland and it's at that time we came up with our first business plan and this is what I really want to talk to you today is really about business plans. And it is fun to talk to somebody about business plans especially when you are looking backwards. I mean, you know because they get a whole lot better when you are looking backwards than when you are going through it at that time. But, our business plan was to acquire oil and gas reserves that had really quality reserves, long life quality reserves. We were going to use bank debt. We acquire each property, we use 50% bank debt and we were going to create love for the investors and that was pretty easy to do when you are chairman, has started his family, had 30% of the value of this company. I had 30% of the stock and they hadn't done well. And so, you know, Mr. Weaver was really eager for his family to make some money out of this thing that they deserved. The company was founded in 1925, so you know, but that is how we started thinking about Royalty Trust and when Jim talked about-- had in public company's New York Stock Exchange, we took Southland from the American to the New York Stock Exchange. And then, we decided we would create two royalty trusts and we created the Permian Basin Royalty Trust and the San Juan Basin Royalty Trust. And a royalty trust is a grantor trust and it can't make business decisions. It can't hedge, it can't do wills, it can't borrow money. The only purpose of this is to distribute revenue and so, we created the Permian Basin out of old Southland manuals which are great properties and then we created the San Juan Basin Royalty Trust out of properties that we required and had tender for us to take oil and gas company. Now, Boone started to tender. He did the hostile. We couldn't do the hostile with our board, but he started that and he did the hostile tender, but we had already studied it and so, in this time, Joe Flom was on his side. But we came in and bid him in that tender offer. There were several companies that had tendered, but it was a fabulous acquisition in the San Juan Basin and it was $167 million for a trillion cubic feet in natural gas, so it was pre-developed reserve for 16 cents an Mcf which is just absolutely unbelievable because they had so much in-field drilling today, and I know some of you are not in the oil or most of you are not in the natural gas business, but these were lenticular sands and based referred sands and there were lenticular like lens pods or you can look at it kind of a pancake. And if you could imagine a big wash tub full of pancakes when you drill a new well, you it some pancakes that have not been hit before and every time you did that, you got virgin pressure and you are almost into a new reservoir. So, we were getting tremendous wells as we down space that and we have created immense wealth with these in-filed program. And so, as we went ahead to develop that and we decided that we would give those two trusts to the investors as opposed to sell them to the public. Southland never went to the public market at all. The only thing close to doing that we did was when went to the bond market a couple of times, but we didn't sold them the equity. And so, we gave this to the investor. It caused them a tax problem because we didn't give them any cash to pay their taxes so they had to sell some of the-- you know some of them were quite angry. But they shouldn't have been because if you look, if you reinvest those dividends back into other or the unit revenue back into the trust itself, I've always done that as we have issued these things, I've always kept mine and reinvested it. And now, even though, you know you build the cost up over time because you are reinvesting it, but that pays me 16% a year now and it is 6% a year if you would to buy it brand new. It's paid out 20 times and it pays out every other year on the original investment that we paying for it. So, it's just been a fabulous wealth creator and if you ever look at these things together and combine the three that we did and we have outperformed Exxon and just about everybody and it is this royalty trust are really unique pick. I don't know why more people haven't done it, but it was a great part of our business plan to build wealth. But the one problem with it was is that once we was issued that value, we maintained the debt of Southland and the only way that a public company to pay down debt especially if you have got too much is you to sell equity which we didn't want to do or you pay down debt with cash flow. And once you start paying down debt with cash flow, your growth pretty much stops for that period of time and your stock drops. And back in these days in the 80's when your stock drops somebody came in and tendered for you. I mean, that is the way things work back then. And so, I was hoping that we could escape being tendered for and get through this program by paying down debt with cash. We didn't like in 1985, Burlington Northern tendered for us and this is the railroad and they got in their tender about 45% of the stock. So, we actually beat them, but we were smart enough to know that you are not going to fight a railroad over 5% because I wanted that 5% they were going to get it and so, we capitulate. We talked to 64 other companies. We put our self up for sale that was the highest has to offer what we have got. An interesting thing about that, when they tendered in October, all those $27 a barrel, we capitulated, gave in to them. When it closed in December it was $10 a barrel and so, you talked about lucky. I mean, we would have been stuck with all that debt trying to pay that by our cash flow would have been gone down by at least a half. I mean, it was Bob Simpson always said, you know, God was sitting on our shoulder with that quarter, but that's what happened and then Bob Simpson, he was our CFO, and Steve Palko and I was charge of acquisition started Cross Timbers Oil and Gas Company and the symbol for Cross Timbers was XTO. And so, that little name was later crossed-- nobody understood what Cross Timbers mean. It is a region in our area and we thought it was pretty cool, but nobody in New York understood that. So, they changed the name to XTO. I was at XTO for ten years. We changed the business plan a little bit at XTO and what we did was we said, okay, instead of buying just long life production, we would qualify that a little bit, that the long life production that we bought you had to be able to replace production. The production declined with half a cash flow. And so, if you decline 5% you had to be able to invest that money back into those properties where they would be flat again and then you could use the other half of cash flow to pay down debt or to grow the company. And so, that became, you know, something that we created through models and it worked. And Bob Simpson and I to this day believe that is really one of the keys reasons for our-- the success of our career that we also, we are trying to build wealth here and obviously, we were and we have created yet another royalty trust, the Cross Timbers Royalty Trust. And so, we sold half and kept half in the company. We got a little smaller and we have [inaudible], but the biggest plan has been enormously successful. And you know, I have been out of XTO for 16 years and so, I really can't take any credit for it, but you know, they sold that company, you know this past year for about what Exxon paid for Mobil. And you just think of that as really been one of the great stories in American capitalism. The same gas were there. And you know, after I had been there about ten years-- I was acting as board and be the best way to say that, everything was going so smooth and the business plan was working and everybody had this, you know, great job and I just wasn't, you know I don't want to sound kind of funny, but actually Becky and I were talking about it one night. And she said, you know, when have you really been happiest. I said, well, I really was happiest when I was trying to turn Southland around and work on the business plan and get something going or when we started XTO. I mean, that's when the real struggle happens and that is when it's really difficult and she said, well, dig in. So, I decided, well, heck, I'll do it again. So, I found my son Johnny. He was working in Houston and I felt well, he just jump all over this. I said Johnny, let's start a company. Well, I don't know Dad, I'm been pretty good down here in Houston. I got a good job and I don't know if I want to do that, and so I just thought, wow, that is crazy. And so it had taken about a week to talk him into it, finally talked him into it and so, then I would have to go tell Bob and Steve. So, I went one morning, we three of us sat down and they were really shocked and upset and it didn't go well and I said, well I just feel like I need to do this. And so, I didn't want to leave it like, well, think about it overnight because I had made up my mind. So, we came back the next morning and they had gotten over whatever was bothering them and they were ready to help me pack my boxes the next day. I mean, they were think they had gotten so excited overnight and talked all night long about what they would do, and so it absolutely worked out best for both of us. We put out an announcement that I was leaving. I was chairman of the board and had half of the general partnership that we started this thing with. And so, you know we had some damage control to do and all that, but all that went really well. And once the announcement came out, Richard Rainwater phoned and said, look, I put all these money into Mesa and you are doing anything, you know, why don't you come and help me with my problems and I said, no way man, you have got a problem and I am not coming over there. Mesa was-- well, had it, in spite of him putting all that money it still had a negative value. And I did not want to do that. I must have turned him down four or five times. I said, you know, Johnny and I are going to go together, he said, Johnny can go to work for me, you know while you are doing this. I said, no way I don't want Johnny to work for you. I mean, we have got a plan and Boone phoned and [inaudible] come to say and he came over and he said, John, you have got to do this. He said, yeah, you know, Richard and I don't like each other. I don't like anybody Richard likes. Richard doesn't like anybody I like and you're the only guy I know of that we both like and I said, it hit Richard between the eyes what is going to be a big hard offer. So, I said, well, that is about right. You know, you are negotiating with Richard when he really wants something is like negotiating with Jerry Jones if you're really fast. I mean, you know, so they-- I have negotiated a deal for Johnny and Johnny got 20% of the deal. I was chairman CEO, Johnny was on the executive committee. Johnny was really young and we went into Mesa. We had to perform a merger within one year to get our you know all these the bonuses and all that stuff we were going to get and one year was really short when you are taken over a company with a negative value. And so, I probably wouldn't do that again because that was stressful and it was extremely horrible, but we tweaked the business plan as soon as we got in. Mesa had a really, has a Hobbiton [phonetic] reserves which are long life great properties, but they were declining and there wouldn't much you could do to turn that declining around. They have some off real properties were pretty good and they had absolutely wonderful people. They had a wonderful staff. And so, I went to the chief operating officer and told him, I said, you have got to flatten Hobbiton for me, some way. You have to figure out how you can do it. And he said, well, it is a bit expensive, but I can add compression in that I can get that down and I said, well, let's do that. So, we kind of had that handle, but the you know, how do you do the rest of it and I'd always developed good banking relationships because I'd use the banks and so I went to Chase and I said, you know, you have got loan us the money for an acquisition and they did. They had done some bonds for Mesa and we bought a company with a real high cash flow and so, the new twist in the business plan was that instead of each property having to replace production with cash flow we used the all the model, all the properties. And so, what we wanted to do was make our whole profile where we could replace production with half gas especially went out and bought this large short life flush property that we could stick on top of this rest of this company. And it was a shallow water off shore property and then Johnny came up with the idea because now oil was kind of invoked and so, he said, you know, Dad, I think we can throw derivatives, switch this gas to oil that we were buying and we did that and the street loved it. I mean, when we could talk about been able to replace production with half a cash flow where we had to we have added all the money was really gas. The stock went up and we have managed to do a merger with Parker and Parsley, a company without much debt and an oil company, primary Spraberry Properties in West Texas and we got our merger done with three days to spare and so, that was really something though and we formed Pioneer. You know, Pioneer has been a great company. They have a different business plan. They are primarily a drilling company with biodiesels and drill, but they have done great, but they have also created a royalty trust and so, that was pretty cool to see them do that. And then finally Johnny and I started Encore Acquisition Company. You know, one thing I left out but when we started Cross Timbers, it was a private equity through Goldman [assumed spelling] and we raised $16 million and Goldman-- the fellow that raised the money was Bob Rubin again and he raised it all in one afternoon. And $16 million doesn't sound like a lot of money and it wasn't a lot of money then, but the important part of it is that even without a lot of money, the important thing is you got to make money with that money. And if you could take $16 million and make money with that money, then six months later or a year later, you can raise $50 million. If you can raise that money, you can go a $100 million and go to 300 million, but you always have to make money and that is what I've tried to talk to these young people about that want to go into these types of businesses. It doesn't matter how small you start, the important thing is that you have a business plan that's successful. And when we raised that money, Bob and Steve and I put up 2% and we got 12% of every property that we acquired that was just assigned to us and there was no hurdle rate. We were on the same basis and so we made that work for a couple of times and then Rubin came by. He said, you know we think now that 12% is too much and I said, Rubin, that kind of what we were all thinking. And he said, well, we think you shouldn't have with an 8%. Well, I said, well, okay. Maybe we shouldn't have to put up two and he said, well that is about right. I said, what if we just put up one, and he said that would be okay. And I said, I'll do that they all lied on, you know I get one for eight is a little two for twelve I said you know let's do some more business. I mean, that sound like a great-- to no hurdle right and so, that is how Cross Timbers was created. Well, now when Johnny and I go to start this Encore, the private equity guys were not so simple, it's not so easy you know. And we put up 3%, we have three other partners, we put up 3% for 23% of the upside or the profit with about 6% hurdle rate. But this time, the private equity people wanted us and we did. Say, if we didn't make the 6% hurdle, we lost our 3%. And so, for me it wouldn't so hard because I had created well, but for some of these young guys, that was really death going. It is really a stressed amount and the 6% hurdle is really what they-- and so, some of them had to cut back. I have always wanted to hire a lot younger guys and have them learn the secret to my success is hiring good partners. I mean, I've really done a good job of that and I like young guy, but we did put them under a lot of stress. Our business plan will give you a 15% rate return and I really believe that that is true and that is a big rate of return, but we have always managed to do that. In any event, we did it and we would let our business plan, we just didn't change it much. Johnny came up with a new hedge idea for hedging and he had learned a lot working with the Mesa guys because they were really good at commodities and hedging and what we did was we said, okay, we'll take a third of the production and we'll buy pooch and floors and that's very expensive rate to go, but two or three years out, you will pay a lot of money for that. We'll take a third of the production and do swaps which don't cost you anything. And they won't take a third of the production and leave it open. We won't hate you. Now what that let us do is we are always two thirds protected to the downside. And if oil and gas prices go down we are two thirds protected. Whereas, if you are like diamonds you are bullish when gas prices going up and that is not so hard and then you are two thirds open to the upside and so, your two thirds is all it goes up to $10 a barrel, you dip two thirds of that. If it goes down to $10 a barrel you are protected on two thirds of that. So, other than buying expensive and it is expensive, it was a good plan and we followed it. We raised $300 million. It took over a year, about a year and half to make our first acquisition and if you are trying to buy quality, you know, you don't want to just get started and for much of that year, that overhead was coming out of my pocket. Never mind in Becky's pocket, but be careful with what I say. And finally, we got that taken care off with our backers, but they were getting a little nervous because they have put up $300 million. This was about 1998 and none of it was being used. And then we found that Shell might sell the Cedar Creek Anticline. The Cedar Creek Anticline is a great legacy property of Shell. It is in Montana, in eastern Montana. It is an anticline 60 miles long, 4 miles wide, you know, hundreds of well. If you could picture that Wilson Bison [assumed spelling] and you are coming up out of side of the Wilson Bison, you know you have an anticline and you had a big [inaudible] that run 60 miles and there is all these traps against that fall. If field had been so good that when Shell wanted to do water flood and drill water injection wells, every time they drill an injection well, they would produce a 1,000 to 2,000 barrels a day or so, they couldn't make themselves convert. I mean, you know they would not covert that into an injection. Well, they just kept producing it or by the time we come along and buy it you know 50 years later, those wells are down to 50 barrels a day which still you know a lot on the average and but they have got no patterns. You know, like anything else and seem like it works engineering wise, you just have to have patterns and so, you know, you have to reengineers those figures and it cost a lot of money. We reengineered the figure-- we did our patterns by what you call land drive and we drilled a series of horizontal wells that we injected water into and that water then pushed the oil to the next you know that you drill these two line drives and these were producing wells in between and you do these up and down and so as the water pushes into the middle and so we produce the oil out of that. And that carried us at least five years where we could replace production with half a cash flow. It was just a tremendous fill, still a tremendous fill. It would be a great CO2 fill. You know when we borrowed it, these are all new borrowed and never work with this board a private equity board and I told them I said, look these legacy field just don't come along but four or five times in your 40-year career and you have to buy this. And oil prices were $12 a barrel and you know, I said in order to make sure you buy-- nobody is going to out engineer us. We have covered that base. I said, you know if somebody has a higher price tag then you have to believe that oil is going to go up $12 barrels. So, I convinced them that within three years all would be $20 a barrels. Well, that is a 20% compound increase a year. And these New York guys looked at me like I have to be craziness. So, it may not be there. I don't know it is going to be there, but if you are going to make sure you buy these and have this kind of, this is what you have to do. Well, they finally went along and you know, the oil was $20 a barrel when we closed. From the time we did purchase and settled thing it was 12 to the time that the deal closed the oil was $20 a barrels. I really looked smart. I think you know when we made our bid it might offer the whole industry thought we were crazy. We didn't look more smart until it closed and certainly we weren't that smart, we were just lucky on that deal going that way as we were on the Burlington deal going the other way, but you have got to be lucky in this business. I mean, in most businesses you have got to have a lot of pointers and a lot of luck really help you. When we sold Encore last March, the private equity investors got 20 times on their money. We have been public for eight years and the IPO investors got six times on their money. And so it was really a great investment, you know equal to those investments as Southland and XTO, but not as well known, but certainly created a lot of wealth for a lot of people. And I really credit the business plan, you know, with my career. And I love business plans and I love to help people work on their business plans, and no matter what business they're in, I have, I'd do this a lot and I enjoyed doing it. And I was fishing with a guy named George Passela who had been on our board and he works for a company called Momentum and we were talking about their business plan and I said, George I just got to meet your chairman and his name was Bill Pritchard and he lives in Houston. And look, I kind of really want to invest in you know with Pritchard and so, we would go as a private company and George introduced me. We were talking about the business plan and I was about to bring up that I wanted to invest and he looks at me and he said, do you remember a speech you gave to the IPA about ten years ago or 12 years ago and I said, I kind of remember it. And he said, well you know you were talking about how to-- it's OK to start small. You were talking about business plans and he said, I was sitting out in the audience and I worked for GE Capital and I said to myself, you know I can do it. And [inaudible] and he said that I can do that and I was just floored. I thought, wow, you know, you really kind of helped somebody and he goes start, forms Momentum. That is a young guy and like all his money and so or creates all these wealth for all these people. And so, you know, it's really made me feel good about doing talks like this because you know, you never know if somebody is going to be out there. You know, whether it is a Bill Pritchard or a Johnny Brumley or Bob Simpson, I don't know [inaudible]. It's fun for me to do and it is fun for me to talk to people about business plans and to encourage them to go and be an entrepreneur because it's fun and I've certainly enjoyed it. So, thank you. I appreciate it. [ Applause ]