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In the Studio

HATTIE: Hi. I'm Hattie Bryant. If you want to understand how businesses are built and how they grow, stay with us for the next 30 minutes. You'll learn about business and the people who build them. These people are heroes because they are courageous, creative, self-reliant and strong.

On television, you see many celebrities, but don't confuse celebrity with heroism. In fact, most heroes will never be celebrities and most celebrities will never be heroes.

We'll show you what true heroism is.

It's going where others have never gone. It's overcoming obstacles. It's living with ambiguity. It's tapping into inner strength. It's believing you are capable of making good happen for yourself and others.

Steve Palko and Bob Simpson are new American heroes. Living on the edge of the West, they have grown up admiring the cowboy and the pioneer. They are like those who first settled here: independent and brave.

The history of oil is like the history of the frontier; it is written by pioneers who love open spaces, who value independence, and who are optimistic and willing to take risks. Like the roughnecks they employ, Steve Palko and Bob Simpson love the stuff of which the oil and gas business is made. In the tradition of the wildcatters, but with a unique strategy and discovery techniques not available in the early days of oil exploration, they are growing a business. The two formed Cross Timbers oil in 1986 with eight employees who believed in the future enough to work for almost nothing. They changed the company name to XTO Energy in 2001 and by 2003 they had over 900 employees.

XTO Energy, once Cross Timbers Oil Company, is beating the odds.

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STEVE PALKO: I've worked for a variety of major and independent oil companies.

HATTIE: (Voice over) Steve is the engineer; Bob, the CPA strategist.

(To Bob) Is there a romance to you about the oil and gas business?

BOB SIMPSON: Yeah, there is a romance.

You know, people ask me how I got in it, and rather than some elaborate answer, it's probably as simple this: When I was a little boy, my father was a cotton farmer in west Texas. He would drive up and down the road, and he would point at pump jacks. And he said, `Son, I almost bought that land, and if I had, we'd have been wealthy as royalty.' So, I ended up associating success and prosperity with oil, and I liked the smell of the gas tank when we were filling up.

HATTIE: Did you really?

BOB: I liked to smell the gas, yes.

My parents really taught me responsibility. I grew up in an agrarian atmosphere where I had my own chores. As a young man, I started my own businesses. You know, my mother laughs; I had an egg route when I was four.

HATTIE: Eggs when you were four!

BOB: When I was four, yes.

HATTIE: You would take your mother's eggs and...

BOB: I had my own hens (you know that it was totally subsidized -- I didn't know what the economics were), but I just marketed eggs door to door at twice their price. And I really thought it was my product. And people bought them. It was probably more because I was four years old.

But I was intuitively and instinctively an entrepreneur and interested in business. But my parents -- my mother's still alive, my father passed away -- they were very proud people, very hard-working people. Dad would say, `So it's a holiday? We're still working.' But that taught me self-responsibility.

I was an academic person. Grades were my deal. I went to Baylor on the full scholarships.

HATTIE: Math was your game.

BOB: Math, and I like liberal arts -- English -- as well.

HATTIE: So you could do both words and numbers! That's good.

BOB: It's an accident! But, I appreciate the arts; I was an academic person. I asked my mother one time, `You know, Mom, I don't remember you helping me with my homework.' And she says, `Well, you never asked.' I said, ` I was hoping it was more complicated than that. But apparently, it's my nature, `If it's my job, I'll do it.'

HATTIE: Independent.

BOB: Independent.

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STEVE: We've always been achievers. As Bob puts it, `It wasn't so much that I wanted to make A's. It was that I didn't want to make a B.'

I guess the era that I grew up in was the era of the big corporation, and there were a lot of opportunities in the industry. New companies were starting. Small companies were aggressively expanding and growing.

And then there was an opportunity to get out of the big company and the big-company routine and get to a smaller enterprise with more of an entrepreneurial attitude -- an opening was created for vice president of engineering or I guess at that time, it was manager of engineering. So I interviewed for the job and went to work at Southland, which was a major independent at that time.

HATTIE: You were young.

STEVE: I guess about 30.

HATTIE: Wow. OK. But then something happened. You're sitting there at your desk, just doing your business, trying to make the company grow, and you get an announcement from some law firm that you're going to be taken over or bought out. How did that work?

STEVE: Really, you get a call from the company that has a strategic number of your shares, and they announce their intentions, `Well, we need to talk because we have 9 1/2 percent of your shares.' The SEC requires that you be under 10 percent, or announce your intentions. So at that point, they had to talk to us. And they said, `Our intention is to purchase your company.'

HATTIE: Were you angry?

STEVE: Oh, yes. It's your life. It's something that you've put a lot of emotion and hard work into. You look forward to a future of continued growth and prosperity. All of a sudden, someone says, `It's over. We are going to buy your company. We have our own vice presidents and presidents, thank you very much.'

HATTIE: `We don't need you.'

STEVE: Right.

HATTIE: Is it like someone stealing your child?

STEVE: No, but it's more like someone breaking into your house and stealing all your furniture . . . maybe stealing your house probably is a more apt analogy. You feel violated. You feel disoriented. I mean, you're knocked off balance.

You've heard the sculpture story? That statue is a cowboy torn up, gun missing, riding off into the sunset with a fist raised.

HATTIE:When you saw it, you didn't have any money to buy it, but you still bought it.

STEVE: Absolutely. That was the spirit. `I'll Be Back!' is the name of the statue, and that's how we felt. First two years, maybe even three, we didn't have salaries. We used our own furniture for office furniture. You know, we brought things from the house to basically get things started. And so the early years were lean years.

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HATTIE: (Voiceover) Cross Timbers now owns this building in downtown Ft. Worth, part of the history of oil and a symbol for this company. It was built in 1911 by oil and cattle baron W.T. Waggoner and was the tallest building west of the Mississippi.

BOB: He (Waggoner) was a famous oil man, but he was first a rancher. His father came to Texas in the 1800s and staked out hundreds of thousands of acres and resisted oil and gas. They were kind of forced into the business by circumstance and, as it turned out, became very wealthy through oil and gas, but in a low-risk manner as royalty owners.

And so then he became more of a traditional wildcatter once he had the base.

This is a conservative strategy in those times; he was a risk-taker with a very conservative land holding and a base of royalty income, so in his day, that would have been the optimal position: `I'm not gonna go broke.'

BOB: You know, confidence was 90 percent of the equation of success. The last 10 percent's ability. So the romance of oil and gas is associated with this building. You know, oil and gas will always be popular, always draw investors because it's the search for gold. But you can go broke doing it.

If you spend all your money looking for gold and don't find any, you'll be broke. So what we like to do is offer that allure, like the Waggoners did off of a conservative base where you can't go broke and where we can only enhance ourselves if we do it appropriately.

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HATTIE: (Voiceover) Keith Hutton is a petroleum engineer and calculates risk.

KEITH HUTTON: (Voiceover) There's a finite amount of oil and gas, so that'll always decline. What you're really looking for is an area where it declines slowly, which probably means there's more in the ground in that particular area.

We look for a company selling properties that we think shouldn't be selling, that have a lot of upside but have been undermanaged for a while. Not to knock those particular companies, but to them, it's small potatoes. Then, we'll pay a pretty good-sized amount of money for that property, but the key is, if that property has the right attributes, we normally increase the return on it.

We usually find 60 percent more reserves than what were thought to be on the property.

One of the things that happened when we bought a property producing about 1,000 barrels a day-- by the end of this year, it's 2,900 barrels a day.

HATTIE: You've tripled it.

KEITH: ...triple production.

HATTIE: So you're pretty good at knowing where to drill.

KEITH: Yes, we are. Our success ratio has averaged about 97 percent every year, which means 97 percent of the wells that we drill find oil and gas.

HATTIE: Doesn't that sound astounding? I mean, isn't that just like -- how can that be? How can you get it so right?

KEITH: It's basically the type of drilling that we do. What we're doing is drilling wells where oil and gas already exists.

TECHNICIAN: There's been big advances that have occurred in the oil and gas business; it's really revolutionized exploration and development. The computer. Since about 1990, the big thing in geophysics has been the advent of 3-D seismic.

(Pointing to an illustration) This is a well right here that's been drilled. It's a dry hole, OK? I can pull up that line and take the well information and create a synthetic seismic section from the well information.

(With this new technology dry holes often become productive again by redrilling in a slightly different direction than the original hole. The soil samples from the old hole provide the key seismic data.)

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BOB: In any business, there are many roads. You know in our business, you can go to Mexico, Texas, offshore. There're just all kinds of variables that you can choose. And what we chose is what we knew and had learned in our prior career, that we want these basins -- Texas, Oklahoma and New Mexico -- really long-life properties.

HATTIE: And somebody else doesn't want them.

BOB: And somebody else thought it was all over. So what we do is take our talent and look for the missed nuggets. And we've been very successful at that. But what you get in our strategy is lesser risk than drilling a wildcat. And, as it turns out, there is virtually no risk in an otherwise -- depending on your strategy -- very risky business. I mean, you can be broke in a hurry in this business. So what we've done is take a strategy which, in our minds, is failure-proof and then make it better. And so we were able to pause in hard times because we had a strategy that would not put us out of business.

The most likely way you'll fail is if you're not properly capitalized . . . you have a good idea with no staying power. It's just like anything in life whether you're in the market or in commodities or in a business, capitalization is probably the killer issue.

HATTIE: Staying power -- where does that come from?

BOB: Staying power is both your will and again, your financial resources. You know, don't get out there too far if you can't afford to be there. If it's a 50/50 idea, don't just get one swing at the bat; you need two.

HATTIE: Why did you go public?

BOB: I would say we didn't have a choice. If you go back and look at our background, this particular one, our godfather's Bob Rubin, former Secretary of the Treasury. He raised the seed money in a couple hours, $35 million. And that group of people wants to liquefy or harvest.

HATTIE: They want to cash out.

BOB: In five years. We were in our sixth and then our seventh. So from our viewpoint, we could either sell the company and harvest or go public and let those people harvest. And so the initial decision was, `Which would you rather do?' And obviously we wanted to continue the company. This was a right answer for both parties.

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HATTIE: Louis Baldwin is chief financial officer and talks about going public.

LOUIS BALDWIN: We felt like that was the best way to maximize the value for our investors.

HATTIE: For the other investors, the private investors.

LOUIS: That's right. And we were a private investor, just like we're a public investor now. Oil and gas is not a growth business. Oil demand in the US goes up about 1 percent a year; gas, 2 percent or 2 1/2 percent a year.

HATTIE: Why did you start a business in an industry that isn't growing?

LOUIS: It's what we knew how to do. And I would say that most of the people that are starting businesses or are successful are doing what they know how to do. And if it's a growth industry, that's great. But you can be a successful start-up and growth firm in an industry that doesn't have a lot of underlying growth. If you can determine what niche of it you want to play and you've got a good plan, you can grow.

We started with eight employees of Cross Timbers. We went public in '93 with about 40 million barrels of oil reserves. With four years we're close to 200 million barrels. So somewhere in there, we were growing. And the real hard part is not only to grow but to grow profitably -- to make sure that you're making money for your investors, not just getting bigger by issuing more stock -- and we've done that.

HATTIE: Louis' daughter, Laura, wrote her undergraduate thesis at the University of Texas on what she saw her father living through, "The Decision To Go Public and the Initial Public Offering." In the introduction, she says, `There are only two reasons to go public: to raise capital and to provide liquidity to selling shareholders.' She also points out that the process is complicated and expensive and should only be undertaken when the company can demonstrate clear growth potential.

We suggest going public with your eyes wide open. It's not easy and changes entirely the way you do business.

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HATTIE: How do you motivate employees who work here to work harder to make money for other people? You just said the goal is to increase the shareholder value.

LOUIS: Most employees are owners of the company. They own the stock, either through outright purchases, through our stock-incentive plans, or through the 401(k) where they can buy stock or any other investment for that matter, and we match it. We give them dollar for dollar. So we encourage employees to do that, and it makes a real difference.

BOB: The worst problem you can have anywhere is people problems. Nobody likes to fire anybody. And so if you've got to fire somebody, your mind becomes preoccupied with it; you dread it. You spend the week doing that. So if you have people that are great in what they do -- no personnel problems -- you don't get distracted from the mission, you're running together, and you know the company hits the ground running.

RICK SEEDS: This is the best collection of people of any company I've ever seen.

HATTIE: A friend of Bob's for 25 years, Rick Seeds has just joined Cross Timbers.

RICK: I think at some organizations, they've been stifled so much. Their creativity is taken away from them . . . if you come up with an idea and no one wants to do it, why come up with another idea?

HATTIE: Is there a way for you to reward ideas?

RICK: I don't think there's a way to reward specific ideas. I think there's a way to reward general performance and accomplishment of corporate goals that everybody's working toward. And I think that's one thing that Bob and Steve have done a great job of, is making sure that everybody in this company knows exactly where we're all headed. And so you don't have people in the boat rowing in a different direction.

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The Lightbulb In the Studio

HATTIE: Do what you know with whom you know. Seems simple, but all great ideas are simple. When Bob and Steve were ousted from Southland Royalty by a hostile takeover, they took a breath and started over doing the same thing with many of the same people. They had built Southland Royalty and established themselves in the oil and gas business. They had longstanding relationships with people who trusted them and whom they could trust. When they were ready to start Cross Timbers, it only took a few hours to raise the start-up funds, and people lined up to follow them wherever they were going to go. On this program, you've learned if you have a good idea, the most important ingredient to success in business is people. Starting with nothing, working on borrowed furniture, Bob and Steve attracted people such as Louis Baldwin, who was willing to bet on the come. No one took salary in the early days because everyone had faith.

Bob and Steve had done it before, and they could do it again.

Do what you know with whom you know, and you'll build a better business faster.

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We went to far west Texas, Andrews County, to a Cross Timbers field to see a new chapter in their success story.

Unidentified Man #1: (Voiceover) We're drilling a hole at about 7,400 feet right now. They use well logs off the existing wells out here, ones that have already been drilled. They use seismic data. And all that is incorporated into picking a location to drill, where you have the best chance for success.

HATTIE: (Voiceover) I haven't asked anybody: "Why the name Cross Timbers?"

LOUIS: (Voiceover) Cross Timbers refers to the region that's a dividing area between west Texas and east Texas. It's an area of broken forest. In the 1800s, the Indians and Comanches primarily roamed the western Plains, and the piney woods were occupied by settlers and the Cross Timbers land was no man's land. If the settlers got over there, they were subject to being killed. And the Indians raided through the Cross Timbers. Actually there's not a lot of oil and gas in the Cross Timbers . . . we don't have any operations there. But it does symbolize the history of Ft. Worth and of Texas and the heritage of being a Texan and being in the oil business.

HATTIE: Tell me about this new cap you've got.

LOUIS: This is a cap that just shows XTO; that's our stock symbol. It is an interesting contrast between the hard hat, the real roots of the company, but we also need Wall Street and the investors as a way to value the company.

STEVE: A favorite expression in the oil field is, "If it ain't broke, don't fix it." We don't let people say that. We want them to say, "Even if it's not broke, can it be better? How good could it be?"

BOB: It's more important to me to have fun and to be with talented bright people, if you will, than to have more money.

HATTIE: Do you think that having big ideas makes people bigger people?

STEVE: Absolutely. Absolutely. And not being afraid to go down a brand-new road. We're not afraid of change. We're not afraid of a changing environment. And, we're not worried that whatever the circumstances are that we can't figure out a way to make the best of it.

BOB: You know one of the things that we do, in the adversity of the day and of the moment, is to know that it'll be better later, and believe that. You've got to believe that, because you're gonna defy the odds and you're gonna succeed. I don't care the odds are you won't, but you're gonna defy them and you know that even on your bad days. And so the way you think where you'll end is a lot about ending there.

STEVE: My hope is at the end of the time that people say it mattered that Steve Palko was here. That Bob Simpson or Louis Baldwin or the rest of that there was something that was better because they were here.

HATTIE: Remember, do what you know with whom you know, and you'll build a better business faster.

Join us next week.