Both large and small exploration and production companies shoulduse the same philosophy to create value for their shareholders:manage the present to enable the future, advised Conoco Inc.Executive Vice President Robert McKee III at Arthur Andersen’sEnergy Symposium in Houston yesterday.

“To be a premier company 10 years down the road, you have tocontinually plant the seeds,” said McKee. He shared a panel onvalue creation in the E&P industry with EOG Resources CEO MarkG. Papa and Occidental Oil & Gas CEO Dr. Dale L. Laurance.

All three offered similar strategies detailing how theircompanies had achieved success in the past few years, although theyadmittedly have taken slightly different roads to do it. However,one theme emerged — to capture new opportunities, challenge thestatus quo.

“Conoco’s E&P approach to growth is a continual reinventionof our company,” said McKee. By maintaining its focus as an E&Pcompany “for the foreseeable future,” McKee said that the companywould put more emphasis in the near term on natural gas,particularly in the growing North American market.

Until a few years ago, Conoco made most of its profits in twocore areas, North America and northwestern Europe. However, McKeesaid the company realized it could not fuel its growth from thoseareas alone, so it moved more into North America and then intoSouth America, its third core area. It now has a foothold inSoutheast Asia.

Why the changes? As recently as 1992, Conoco ranked “dead last”in Prudential’s E&P annual survey. The company took some”difficult steps” to create a healthy E&P business and in July,the company had moved into first place in Prudential’s study, whichranked E&P growth between 1995 and 1999.

“It’s difficult to add value without a successful explorationprogram,” he said. Since 1998, Conoco has had 21 worldwidediscoveries, with a success rate of about 40%. McKee said Conocoalso is keeping its “cupboard stocked” to lay the groundwork forfuture successes, with new acreage in Canada, Indonesia, Norway,Nigeria and the Caspian Sea. “We don’t rely on what we have, wehave to rely on new markets to create opportunities.”

Echoing McKee’s advice to “be good in traditional businesses tosustain value,” Occidental CEO Laurance said his company’s strategyhad been basically unchanged for three years.

“Our strategy is simple,” Laurance said. “We have been shiftingour assets to focus on a smaller number of assets to give us a morestable number and more cash flow. We’ve shifted our corporateassets to large, long-lived oil and gas assets with growthpotential.”

Focused in the United States, Latin America and the Middle East,Occidental’s big egg is its production in California. Occidental isthe largest producer in the state, and California is the “best gasmarket in the United States,” he said.

“Today, the U.S. accounts for 70% or our growth,” he said.Despite its move to deplete assets by swapping and selling marginalassets, Laurance said that production had grown by 18% since 1997.Occidental also has had an annual growth rate of 6% since 1998. Thegrowth has come despite the fact that Occidental moved fromoperating in 14 states in 1998 to only five today. Globally, it nowoperates in 10 countries; in 1997, it operated in 24.

“We are focused on fewer areas than before, but are focused nowon legacy assets and on maximizing those assets,” said Laurance.”Value creation has set up a whole new platform and allowed us todo those things into the future.”

For EOG’s Papa, the company’s growth will continue to comethrough the drill bit. Saying EOG was in a different “peer group”than Conoco or Occidental, attracting a different type of investor,Papa still summed up his company’s success in similar ways. EOG’speers were more driven by getting cash flow than income in thepast, which led to “a lot of uneconomic investments,” he said. Theconsequence: significant value reduction.

Creating value, said Papa, is “pretty simple. All independentcompanies have large amounts of cash flow coming through the door.The good E&P companies invest the cash flow wisely and havehigh rates of return.” He said EOG focused on a “very strongreinvestment rate of return on cash flow” to create shareholdervalue. “This is a cyclical business, so we try and focus on being alow-cost producer to generate above average net income through thecommodity cycle.”

Investors, said Papa, want both volume growth and net income,which had become “very apparent in the last year” with moreconsolidations and acquisitions. Now, institutional and securityinvestors are focusing more on net income. “Earnings are moreimportant.”

Despite the fact that EOG operates almost solely in NorthAmerica, a “zero growth area,” Papa said the company focuses onearnings and reinvestment. The company bases its bonus pay toexecutives on the rate of return. “We believe the simplest way tofocus on earnings is to focus on the rate of return. At EOG,everybody’s pocketbook is affected by it.”

In the coming year, EOG expects to have an 8% growth rate inNorth America through the drillbit, primarily. Its share growth,which now stands at about 22%, also is expected to stay on thatcourse. “Clearly, we are the leader in being able to grow volume,”said Papa. “Free cash flow provides flexibility. With high gasprices, everyone is getting a lot of money coming in the door.” Buthe cautioned that EOG, despite its high earnings, did not haveenough projects to “intelligently” spend all of its excess cash.Instead, it is paying down debt and retiring shares.

Papa also isn’t too keen on consolidation or acquisitions. EOGstock has outperformed nine out of nine of the peer groupconsolidations since 1998, he said. “I’m not convinced that’s thebest way to grow shareholder value. Clearly, bigger is notnecessarily better.”

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