We're doing it to ourselves on oil, says Pickens
By Glenn Hunter
Updated: 4:00 p.m. PT June 10, 2007
At age 79, Texas oil-industry icon T. Boone Pickens is making more money than ever. He's also giving a lot of it away.
In May, Pickens donated $50 million to Houston's The University of Texas M.D. Anderson Cancer Center and a matching amount to the UT Southwestern Medical Center at Dallas. The gifts came with a challenge: to grow them to $500 million each over 25 years.
It's a challenge that, to judge from his achievements, the founder and chairman of Dallas-based BP Capital Management LP wouldn't lose any sleep over if he had to accomplish it himself.
Pickens ranked No. 103 on the latest Forbes list of the wealthiest Americans, with an estimated net worth of $2.7 billion.
In this interview, the Oklahoma native talks about the energy markets, comparisons between the leveraged-buyout and private-equity eras in U.S. finance, and the secrets of his spectacular business success.
Q: Energy seems to be on everyone's mind these days, and you're an acknowledged expert. What do you see happening with oil and gasoline prices?
BOONE PICKENS: I think you'll see $80 oil before the end of the year. There's no question in my mind that oil has peaked. If you've already peaked, you'll start to decline. Can you replace it? Probably not. What happens then? The supply goes down, demand goes up, and price goes up. It will be a case of, how much does the consumer want to pay to get gasoline?
I don't know whether $4 chokes them. Three dollars didn't. But, you know, Europe has seen $5, $6 for gasoline. So I have the feeling that you're going to see the price go up in the U.S. I think cars will get smaller over time.
We have a tremendous demand in the United States. The United States uses 25 percent of the 85 million barrels used daily, and we have less than 5 percent of the population. So when you start to look around at who's doing it, we're doing it to ourselves. We are the ones that are using it, and we're the ones that are driving up the price.
Q: How do you recommend we move away from oil and gasoline to something else?
PICKENS: I say let the markets handle it. I don't think the government should try to manage it. If you can't stand the price, you're going to drive less; that's the way it starts. Also, I think that all the alternatives now are being given a chance, and that's good. Ethanol, for example, is not the solution, but it could be part of the solution. Biodiesel will also work, there's no question. But, we use so much oil and gasoline in the United States, there's not anything you're going to be able to pluck out of the air and say, "This is it, let's do it and we'll no longer be dependent on foreign oil."
Q: You don't think the government should tax gasoline to suppress demand, do you?
PICKENS: Oil is really a global commodity, so you can compare prices all over the world. But you can't do that with gasoline. Gasoline is taxed differently in different places. In Europe it's taxed much more than it is in the United States. But I have said, just go ahead and move up to where it's a global price or nearly a global price, as happens with oil, and then just tax gasoline up to that (global price point).
If you did tax gasoline, you could give the people that are most affected by it some trade-off. I'm not for taxing the poor, but go ahead and tax me with a big car.
Q: You believe we should buy oil from our friends, rather than from the hostile states?
PICKENS: Well, you know, there's not that much oil around. So you're kind of in a spot. The biggest exporter to the United States is Canada, and you'll have a growing situation there if you can continue to expand the oil sands in Northern Alberta. There's probably 250 billion barrels of oil there. The single biggest investment I have is in Sun Oil, (which is big in the oil sands). (Sun Oil's) production today is about 300,000 barrels a day, and it will be 500,000 barrels by 2010. And all of that should come to the United States.
Now, let me give you a quick comparison: The two largest oil-producing countries in the world are Saudi Arabia and Russia; for natural gas, the two largest are Russia and Iran. Who are the two biggest importers of oil? The United States and China. Look at the Saudis and Russians. They produce about 9 million barrels of oil a day, and then you look at the reserves in Northern Alberta up in the oil sands, and the reserves are big enough to also produce 9 million barrels a day. I don't think the production up there will probably be more than 5 million barrels a day maximum by 2020. Today it's producing about 1.1 million barrels a day, but it will work its way up to 3 million by 2015.
Q: Here in Texas we're struggling with our long-term power-plant needs, trying to pick among coal or nuclear or natural gas. I guess you'd pick nuclear to fuel the Texas plants?
PICKENS: Yes. You've got to get nuclear in because you don't have the other fuel to supply it, unless it's coal. You're not going to have enough natural gas. To use natural gas for power generation, is actually taking a better fuel and making something less out of it. So it's just not smart to use natural gas.
Q: Environmentalists say we can successfully meet our long-term power needs largely through conservation. Do you believe that?
PICKENS: Well, we all should conserve; conserving would be great. I don't think it would solve the problem with conservation, but if we could, that'd be wonderful.
Q: You made your name as an independent in the oil business, rising to prominence by trying to take over major oil companies in the 1980s. Where did you get the ideas or inspiration that led you to that revolutionary strategy?
PICKENS: Well, the first one came in 1981, and it was from a guy that knew very little about what he was doing: me. As the (head of Mesa Petroleum), I had been looking for oil and gas for a number of years by then. And the "finding" cost for oil and gas had progressively gone up, and I could see that it was only going to get worse. So I started wondering where I could find reserves cheaper than the way I'd been looking for them -- and I realized that somebody else owned them.
I was sitting there looking at a company called City Service, and it was selling for $30 on the New York Stock Exchange, and that was about 20 cents an MCF (Million Cubic Feet) for the gas. So I thought, "Well, if we can make a deal for one of those companies that has a very cheap reserve, then I'm doing a better job as steward of the money at Mesa, and it will be better if I invest it over there."
So City Service was the first deal, and then came Gulf Oil.
If you remember, Gulf had an offer from ARCO, and then they went on the block, and Chevron bought them, and Gulf was merged into Chevron, which was a windfall for us. By that time we were the largest owner of Gulf Oil. We owned 13 percent, which was 3 percent or 4 percent more than the Mellon family had at that point. The Mellon family was very happy about the deal, because the price of the stock went from $40 to $80. At $40, the company was valued at $6.5 billion, and when it went to $80, it was $13 billion.
Q: Now, of course, you've had the BP Capital hedge fund for several years, with billions of dollars invested in energy stocks and commodities. You've made almost $2 billion over the last couple of years?
PICKENS: Three.
Q: What's been the secret of your success with that -- just your years of experience in the energy business?
PICKENS: Yes, but to expand on it a little bit: People have often told me, "You know, I saw what you were doing, and I was a better geologist than you were," and that's true. Almost everybody was a better geologist than I was.
I had a good geologist who came to work at Mesa who was a better geologist than I was, so I let him do it. I got off in finance, and I went from one thing to another, and I did grow in the organization pretty well, which is hard for an entrepreneur who's a founder of the company to do. So I was running to keep up, but I did stay current.
I got into commodities in the 1970s in the cattle business. Mesa, I think, was the largest cattle-feeding company in the United States. I got in that in 1969 and got out in '74.
But I did have that introduction to commodities and I did, early on, see the advantage of hedging inventories from time to time. We actually hedged our production at Mesa in 1986. And from there, we not only hedged, we started to speculate in the oil markets. That was before natural gas was traded on the (international) Mercantile Exchange. And so I had that experience as well.
We put $2 million in a speculative position at Mesa in '86 and, by '96, when I left Mesa, that $2 million had made $151 million. So when I left Mesa I knew what I was going to do because, in all reality, I'd done better with the commodity than I had with the production. That's why I formed the first commodity fund in 1997 and, after 10 straight years of never having had a loss, in '97 I now was on my own and I lost in '97 -- and then I lost in '98. Then I went from '98 through 2006, and so it was 20 years with two years of losses.
So how did I get here? I think it's a combination. I was an OK geologist; I stayed current. I had the commodity experience; I stayed current again. I kept up with everything, and then they kind of just meshed together.
Q: As a major player in the 1980s and still today, at a time when private equity and hedge funds rule the roost -- how do you think the two eras compare?
PICKENS: Back in the '80s, you did a lot of things with debt that now, 20 years later, you do with equity. It's the same thing, though. You're trying to buy undervalued assets in a public marketplace.
Q: Do you see the private-equity boom continuing?
PICKENS: Sure, as long as they can find companies that are undervalued. It's a different approach now than it was then. Then it was hostile; today, it's somewhat friendly and, as I said earlier, managements stay in place now. It'll slow down as the juicier targets become harder and harder to find, and they'll bid up the price. In some instances they'll pay too much for a company, but who is it that prospers? The stockholders, and that's good. If anybody gets hurt it's going to be the private-equity guys, it's not going to be the stockholders.
T. Boone Pickens
Birthplace: Holdenville, Okla., 1928
Education: Oklahoma State University, 1951 graduate (geology)
Title: Founder and Chairman, BP Capital
Family: Wife Madeleine Ann Pickens, five children
Top business secret: "How did I get here? I think it's a combination. I was an OK geologist; I stayed current. I had the commodity experience; I stayed current again. I kept up with everything, and then they kind of just meshed together."
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