To hear T. Boone Pickens Jr. tell it, some of the nation's major oil companies have become dinosaurs, as unwieldy, inefficient and obsolete as the beasts whose extinction and deterioration into fossil fuel made the oil business possible.
Pickens has lost a lot of friends in the oil patch with that attitude, but he's made just as many on Wall Street. The colorful founder and chairman of Mesa Petroleum Co. has acted on his dinosaur philosophy to become the oil industry's master deal-maker.
Pickens has been the architect of a series of raids on the stock of big oil companies, making a lot of money for the people who bet on the results of such takeover bids and for Mesa itself--even though it usually hasn't gained control of the companies it has bid for. Last year, for instance, Mesa's short-lived offer for Cities Service Co. triggered a bidding war for that company that resulted in a reported $45 million profit for Mesa.
Now Pickens, 55, is gunning for his biggest target yet--Gulf Oil Co., the nation's fifth-largest oil concern, a company 75 times larger than Mesa.
Mesa and a group of partners have spent $791 million to buy a 10.8 percent stake in Gulf, a holding that has set off all sorts of speculation on Wall Street about Pickens' objectives and motives--and made Gulf decidedly nervous. The company has been very critical of Pickens' position and has taken steps to block him from gaining control of the company.
"They obviously appear to be very hostile," Pickens said in an interview at his attorney's office here. "My attitude wouldn't be that way toward a large stockholder in Mesa."
There are those who might suggest, however, that Pickens would feel differently about that if the large stockholder was somebody like T. Boone Pickens Jr.
In just a couple of years, Pickens has gained the kind of reputation around corporate boardrooms previously reserved for well-known corporate raiders such as Victor Posner and Carl Icahn. The merest whisper that Pickens is interested in a company's stock is often enough to convince it to call in the investment bankers and circle the lawyers.
Gulf, for instance, filed plans to reincorporate itself to make a corporate raid more difficult even before it knew for sure that Pickens was accumulating its stock. And Cities Service hastily made a pre-emptive takeover bid for Mesa before Pickens could announce his offer for Cities Service.
"He just kind of puts the stick into the hornet's nest and sees what will happen," says Alvin Silber, an oil-industry analyst at Dean Witter Reynolds who thinks highly of Pickens. "It would be a lot duller Wall Street for oil stocks without Pickens around."
Pickens insists that he's not some reckless gunslinger from Amarillo, where Mesa is based. He says each of his well-publicized investments in other companies--and there have been at least a half a dozen in the past few years, three this year alone--has been part of a well-planned strategy.
In part, Pickens focuses his investments on stocks that appear to be undervalued and ripe for appreciation. But he also isn't shy about suggesting how a company can make its stock appreciate.
Sometimes, the stock rises simply on market speculation about what Pickens might be up to. In other cases, like Cities Service, the price rises because another company comes in and makes a bid for the stock to prevent Pickens from taking over. Or the threatened company buys its stock back from Mesa at a few dollars per share more than Mesa paid for it, just to get rid of Pickens. No matter the outcome, though, Mesa, and any other investor who gets in at the same time, makes money on the stock.
But Pickens believes that many companies can become more valuable to their shareholders if they are simply managed more efficiently. "I'm not going to be presumptuous enough to think that all these people are not running these companies in good operating fashion," he says. "I have to presume that they are. But I think there are financial innovations that should be considered."
It is this philosophy that he's applying to Gulf, just as he did last year with Cities Service--that the sum of the company is worth less than the parts. He argues that, while Gulf stock is selling for about $46 a share, the company's appraised value--the value of its assets--is generally accepted to be more than twice that amount. "Why is it that we can't get market value up to appraised value?" he asks. "There's something wrong with the structure, obviously, when you have that kind of value that's unrealized by the stockholders."
So Pickens wants to restructure Gulf, to do what the trustbusters would love to do, to take the capital letters, if not the capital, out of Big Oil. He wants Gulf to consider selling off unprofitable operations--which the company says it is already doing--and to place a large chunk of its oil and gas operations into a little-understood device called a royalty trust that would pay income directly to the shareholders.
Basically, a royalty trust separates oil and gas reserves from the rest of the company and puts them under direct ownership of shareholders, while the company retains control of the property. But Gulf and many analysts say the royalty trust plan is unworkable for a large international oil company such as Gulf and could be a major tax burden to shareholders. Pickens, who has put many of Mesa's oil and gas reserves into royalty trusts, says it's the best thing the company could consider to make itself more efficient and increase the value of Gulf's stock.
But the royalty trust plan is a key to Pickens' campaign against the oil industry's "dinosaurs." The problem with the industry, as he sees it, is that large companies are pumping oil and gas out of the ground far faster than they can find it. So a big oil company's assets--its reserves of oil and gas--are constantly being reduced. The problem is less serious with smaller companies, which have fewer reserves to replace every year--Mesa, in fact, has increased its reserves or at least kept them even for 18 straight years, one of the reasons the company wins generally high marks from industry analysts.
What Pickens would do at a company such as Gulf would be to retain just as many reserves as the company can afford to replace every year, and put the rest into a royalty trust for stockholders. "I'm not talking about dismembering anything," he says. "I'm just talking about making everything more efficient than it is."
The plan would not affect exploration for new oil and gas because that would continue as is, he says. But the oil and gas production that pays for the exploration would be tailored to the company's needs to replace its petroleum reserves.
"I've had people say, 'Pickens, what you propose is to wipe out the domestic petroleum industry,' " he says. "That's not so. All I'm saying is, get it more efficient.
"There isn't any gimmicky stuff here," he adds. "You're talking about just divvying up with the stockholders. They're the owners anyway. There isn't anything peculiar about dividing things up with the owners."
Some analysts, though, say the tax consequences to shareholders could wipe out most or all of the benefits of a royalty trust. And Gulf says it has examined the royalty trust concept and found it unsuitable to the company.
"They quickly brushed it off as, oh no, this doesn't make sense for an international oil company. Well, that's misleading," Pickens says. "It isn't more taxes. . . . It's a very realistic, efficient way to deplete these oil and gas reserves."
The criticism obviously bothers him. "I know this business, you know--I've been in it for 33 years," he says, an edge to his voice. "So it's not something somebody's told me about--hell, I've been there. It's a tough business getting tougher."
"Pickens is one of the smartest guys around, and he certainly knows this game," says Dean Witter's Silber.
Just how Pickens can force Gulf to adopt his beliefs is a matter of considerable debate. "We're their biggest shareholder," he says. "They're going to eventually have to talk with us." He appears to hope to use his shares to gain representation on Gulf's board, but Gulf has called a special shareholders meeting for Dec. 2 to reincorporate the company and change its charter so that such a move would be all but impossible. There are some doubts on Wall Street, however, that Gulf can muster enough votes to pass the reincorporation.
Even so, many analysts believe that the Mesa-Gulf battle will play itself out some other way, perhaps duplicating past Mesa operations. One popular scenario has another company or group of companies joining Mesa to take over Gulf; another has Gulf paying Mesa a premium for its stock to get Pickens off its back. Pickens won't comment on either possibility, other than to say that he's had no contact with Gulf officials. And he seems bemused by press and market speculation about what he's up to. "I've read a lot of these examples of what we might do," he says. "Some of them are pretty far-fetched."
But there is a another possible scenario--that Gulf can try to beat Pickens at his own game by making a takeover offer for Mesa, similar to what Cities Service tried last year before it evaded Mesa by agreeing to be taken over by Gulf. (Pickens avers that it is just coincidence, in the wake of Gulf's interference in that battle, that Gulf is his target now, and, in any case, the Gulf-Cities deal fell through and Cities was finally bought out by Occidental Petroleum Corp.)
Pickens says Mesa would not fight a fair takeover bid. "If we have an offer . . . that's a legitimate offer, and not one that is a defensive tactic, we're going to get serious about it right quick," he says. "If we can't beat it someplace else, we'll sell out for the offer on the table."
That would leave T. Boone Pickens Jr. a very rich man, but it also would make him a maverick oilman without an oil company. That's okay with him--although he believes he'll always be close to the oil industry in some capacity, he also says, "If they knock me out, I may enjoy a stint with an investment banking firm."
Then he could devote full time to his dealmaking, something he obviously wouldn't mind a bit.
"I do enjoy the deals. I like for them to be designed to make a lot of sense and all," he says. "The making-the-money part, that's the report card. Sure, you want to make money, but I hope that, in going back and analyzing the deals that we've been involved in, that it's not a case of trying to outsmart somebody--it's a straightforward saleable proposition and would be good for all involved."
"We're not trying to outslick somebody in a deal like this. I can't ever recall when I outtraded anybody. I've always paid more than something's worth--on that particular day."!30:Picture, T. Boone Pickens Jr.: Now running for Gulf, 75 times larger than his Mesa Petroleum. AP