Mesa Petroleum, the vehicle for Texas oilman T. Boone Pickens Jr.'s corporate takeover forays, will be dissolved as a corporation--and thus, as an aggressor in future hostile takeover attempts--in a radical reorganization approved Monday by its board.
As proposed, Mesa will transform itself into a limited partnership, with Pickens, Mesa's chief executive, as the general partner. That means that Pickens will continue to run the operation but that cash generated by Mesa's oil and gas properties will be distributed directly to Mesa owners, without first being taxed.
The result, according to analysts and other energy companies that have used this increasingly popular limited partnership concept--albeit on a smaller scale--is a better return for investors.
'Good Deal' for Holders
Wall Street seemed to share that view. On news of the planned reorganization, Mesa stock closed Monday at $17.125 a share, up $1.625, in trading on the New York Stock Exchange.
"This is a very good deal for the (Mesa) shareholders," given the current slump in the oil industry, said Alan Edgar, an analyst who follows Mesa for the Dallas securities firm Schneider, Bernet & Hickman Inc. "And it will be good for Pickens, too."
Mesa is the second-largest independent oil and gas exploration and production company in the United States. It had revenue last year of $413.5 million and profits of $270.2 million, including non-operating gains of $214 million.
Pickens has come under attack for his unsuccessful but profitable runs on such energy giants as Unocal, Gulf and Philips Petroleum, and for his compensation, which last year was one of the highest in corporate America. In 1984, Pickens was paid a salary of $4.2 million and received another $18.6 million in deferred bonuses.
New Source of Cash
The partnership arrangement would permit him to continue to run Mesa but also to expedite the exercising of his stock options and to have a new source of cash with which to finance future deals--on his own or with partners, rather than through Mesa. Edgar estimates Pickens' annual income from his partnership unit holdings at $18 million a year and the total value of his holdings--with his stock options, he owns about 6.5 million Mesa shares--at $150 million under the partnership arrangement.
"I think Boone is admitting with this proposal that he can't get (a takeover deal) done under the existing structure," Edgar said.
"This will give him an opportunity to do some deals on his own, maybe as a private merchant banker."
Pickens, in an interview, noted that 90% of his personal net worth is--and will continue to be--tied up in Mesa. "It will continue to have my attention," he said, adding that "I don't have any intention of leaving."
He cited "the current operating environment for oil and gas companies" as his motivation for the reorganization. "Transfer of assets to the limited partnership will provide Mesa shareholders a more direct economic interest in the company's primary asset--its oil and gas reserves," he said. Once it becomes a partnership, Mesa will no longer pay income taxes; instead, that responsibility is passed to its partners, who presumably can reduce the burden by taking tax deductions. Because Mesa will pay no tax, it will have more money to distribute to partners than it now has to pay dividends.
Edgar and other analysts estimate the initial price of each limited partnership unit at between $20 and $25. By comparison, Mesa's stock has been languishing around $15 a share for several months. Similarly, they estimate annual distributions to unit owners at around $2.75 per unit, compared to the 20-cent annual stock dividend that Mesa shareholders currently receive. Mesa officials have said the dividend has remained low because the company's stock price hasn't justified a higher level.
These analysts also cite the value of a limited partnership in allowing a company to demonstrate the true market value of its assets. Edgar estimates that Mesa's stock currently sells for just 60% to 65% of the value of its assets.
Moreover, income from limited partnership units can be partially tax sheltered, because certain expenses incurred in the operation of the oil and gas business are tax deductible. And those expenses, just like the cash from the operations, flow directly to the unit owners. That is not the case with stock dividends, which are taxed first at the corporate level and then to stockholders.
Pickens said he could not specify how much more Mesa shareholders would stand to receive as limited partners until documents are filed with the Securities and Exchange Commission late this week. But it will be "substantially more," he said.
Even in an industry that has undergone a dramatic restructuring--both voluntarily and at the behest of such corporate takeover artists as Pickens--this is a novel reorganization approach.