It is no secret to anyone in this room that the oil and gas industry is a capital intensive one - the participants in which usually rely heavily on the financial markets to fund expansion plans. Unfortunately, as regards the capital markets, oil and gas companies have faced a kind of "double indemnity" in recent years - the volatility of the oil and gas business itself combined with the dramatic volatility of the financial markets over this same period. Needless to say, October 19, 1987, redefined the term volatility for all of us vis-a-vis the equity market, but the debt markets have exhibited their own version of volatility as evidenced by experience over 1988. For example, the ten-year Treasury bill has fluctuated from a low of 8.10% in February, 1988 to a year high in the 9-1/2% range - a roughly 150 basis point fluctuation that would have been unheard of only a few years ago in the course of a single year. As always, though, the flip side of challenge has been opportunity, and any number of small, medium-sized, and large oil and gas concerns have successfully tapped the markets during this period - not only insuring their survival in a volatile era but also positioning themselves well for the recovery. The secret to success for the energy companies which have financed successfully has usually been timing, product innovation, or often a combination of product innovation, or often a combination of both.
The depressed industry conditions of recent years have tended to accentuate the demarcation between what I call the "haves" and the "have nots" of the oil and gas industry. Companies, generally the larger ones, that were not highly leveraged were able to lower capital expenditures and ride out the storm; in fact, they have been able to take advantage of opportunities to buy assets in a lower-priced environment. Exxon, for example, has repurchased over $6 billion of its common stock and bought over $3 billion of reserves since 1984. Unfortunately, many smaller companies - especially the more highly levered ones - have been hard hit, facing at best little ability to take advantage of opportunities and at worst, failure to survive. As you are well aware, the "companies in the middle" - i.e., the viable mid-sized independents - have as often as not been the victims - willing or otherwise - of large oil and gas company acquirors during this period. Exhibit I dramatically illustrates the phenomenon of the disappearing independent. As you can see, in 1979 First Boston calculated the independent universe at 63 companies; as of 1988 that number has been reduced to only 20.
Putting aside this bit of history with which I am sure you are all too intimately familiar, the question becomes "For today's survivors, what opportunities do the capital markets presently hold?"