T. Boone Pickens Transformed the U.S. Oil Industry

By Loren Steffy

The U.S. oil and gas industry lost a towering figure in September with the passing of T. Boone Pickens. Pickens spent more than 60 years in the business as an independent producer and was once the highest paid executive in America — not just in oil and gas but in any industry.  

As one of the first “corporate raiders” of the 1980s, Pickens redefined how capital was distributed in the energy industry. His company, Mesa Petroleum, like many independents, had been battling a wave of cheap imports from the major oil companies. Those imports kept prices low, which made it difficult for the independents to expand. For domestic producers, the cheapest oil had already been found, and replacing their reserves was becoming more expensive.  

Pickens did an analysis and found that Mesa would need to invest $1 billion over a decade just to maintain its reserve base. But he soon found more fertile fields where huge reserves of oil and gas were vastly undervalued — the listings of the New York Stock Exchange.  

He recognised that the stocks of most major oil companies were selling for a fraction of their asset values. Pickens developed a strategy to “seek out the most vulnerable, undervalued, poorly managed companies, then target one and make a major investment in that company.” He’d acquire an equity position and try to force the managers to increase returns. If they refused, Mesa would launch a takeover.  

His first target was Cities Services Co. of Tulsa, Oklahoma, a company six times Mesa’s size. Cities’ refineries and chemical plants were losing money, and Cities had been depleting its oil and gas reserves for a decade. Pickens wanted to get control of those reserves, but Cities was too big for Mesa to buy. He lined up partners to make a hostile takeover offer. At the time, the idea that a smaller company would buy a larger one seemed outlandish, and it quickly became controversial.  

Rather than submit to Mesa, Cities sold itself to Gulf Oil Co., generating a $30 million profit for Mesa. (Gulf later withdrew its offer, and Occidental Petroleum Corporation eventually acquired Cities.)

The deal whets Pickens’ appetite for hostile takeovers, and he spent much of the 1980s pursuing other majors, including Gulf, Phillips Petroleum and Unocal. “I was seen as the financial barbarian with little regard for shareholders, employees or consumers,” Pickens wrote in his autobiography, Boone, published in 1987.

In 1985, his run at Gulf landed him on the cover of Time magazine, which wrote: “To his victims, mostly entrenched corporate executives, he is a dangerous upstart, a sneaky poker player, a veritable rattlesnake in the woodpile. To his fans, he is a modern David, a champion of the little guy who can take on the Goliaths of Big Oil and more often than not gives them a costly whupping.”

It wasn’t just corporate titans who were his victims, however. To fend off his raids, companies slashed expenses, and usually jobs. To this day, many former employees get angry at the mention of Pickens’ name.  

But his strategy worked, at least as far as investors were concerned. In his 1983 bid for Gulf, for example, success again eluded him, as his target fled into the arms of what’s now Chevron. But  Gulf shareholders made $6.5 billion on the deal — money that would have gone unrealised if Pickens hadn’t come on the scene. Mesa's portion of that profit was $760 million. Gulf shares almost doubled in value, to $80 after the deal from $41 before Pickens began his run. Pickens profited personally, too. That year, he was the highest-paid corporate executive in America with more than $20 million in salary and deferred compensation.  

Pickens saw himself as a champion of shareholders, but in some ways, his fight was more personal. Many independents saw his takeover threats as getting even with Big Oil for promoting cheap imports over domestic crude. “On one level, his campaign, for that’s what it was, represented the revenge of the independent oilman on the hated majors,” oil historian Daniel Yergin wrote in The Prize: The Epic Quest for Oil, Money and Power. Indeed, for the rest of his life, Pickens would push politicians — especially the Republicans he supported — for energy policies to reduce dependence on foreign oil.

By the 1990s, the majors had either merged to flee Pickens’ takeover threats or had shored up their balance sheets. The undervalued assets were mostly gone. As the takeover game wound down, Pickens decided to focus Mesa on natural gas. During the 1980s, the U.S. government had adopted a series of laws to deregulate how natural gas was sold, traded and transported. Demand for gas was rising, and many in the industry, including Pickens, believed that it would become the fuel of the future, perhaps even unseating oil.  

But as the markets opened up, and more gas became available, prices fell in the late 1980s and early 1990s. Pickens, meanwhile, had transformed Mesa into a partnership, promising huge dividends that, given weak prices, he couldn’t afford. The company borrowed heavily to make the payouts, and by the mid-1990s, it was stumbling under more than $1 billion in debt as it's market value plunged.  

A few years later, Pickens became the target of a takeover threat himself, and many of his old Big Oil adversaries reveled in his comeuppance. He was forced out by investor Richard Rainwater, who took control of Mesa and renamed it Pioneer Natural Resources. Ironically, Pickens’ predictions about natural gas eventually proved true. Surging gas prices in the early 2000s catapulted Pioneer into a major player in the Permian Basin of West Texas, the world’s hottest oil and gas play.

Pickens was done with takeovers and public companies. A few months after being ousted from Mesa, he lined up investments from wealthy friends and set up an energy trading partnership in Dallas, BP Capital. Unlike Mesa, the company was private and out of the limelight. The partnership struggled in its first few years. By 1999, it had burned through all but $2.5 million of the $37 million Pickens had raised.  

In 2000, though, he spotted early signs that natural gas prices would rise, and he positioned the company to profit from the increase. The strategy worked. Gas quadrupled that year, and his trading shop, BP Capital, ended the year with a balance of $237 million.

Natural gas topped $13 per thousand cubic feet in 2003 and by 2006, Pickens became a billionaire at age seventy-six. He continued to go into the office every day, even at age 91, and after a lifetime of making and losing money, he decided to give away his fortune. The biggest benefactor was his alma mater, Oklahoma State University, but he also gave generously to hospitals and other charities, as well as to Republican politicians.  

Pickens died at his home in Dallas on Sept. 11. At his funeral, Jerry Jones, the owner of the Dallas Cowboys football team and a long-time friend, marvelled at Pickens’ tenacity. He’d made and lost fortunes, at an age when most people would have retired, Pickens started over again, becoming more successful than ever.  

Pickens, he said, was the "best fourth-quarter player that I’d ever seen." And the owner of the Dallas Cowboys, with three Super Bowl championships under his belt, had seen quite a few.

“There was never a moment, down and tired, uniform dirty, nose bloodied...that Boone didn't rise to the occasion, showing his mettle,” Jones said.