-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GEOMYvUDi3W4bDrItu/glRhKl5h8Qg6b/FvdImVwwmG6QaT0g4AigOyMXpMqD5NG qM0JqJHCvGNaELC/QdFXkQ== 0000230463-97-000012.txt : 19971113 0000230463-97-000012.hdr.sgml : 19971113 ACCESSION NUMBER: 0000230463-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POGO PRODUCING CO CENTRAL INDEX KEY: 0000230463 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741659398 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07792 FILM NUMBER: 97715687 BUSINESS ADDRESS: STREET 1: 5 GREENWAY PLAZA STE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 BUSINESS PHONE: 7132975017 MAIL ADDRESS: STREET 1: 5 GREENWAY PLAZA SUITE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL OFFSHORE GAS OPERATORS INC /TX/ DATE OF NAME CHANGE: 19600201 10-Q 1 3RD QUARTER 1997 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ( X ) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1997 OR ( ) Transition report pursuant to section 13 or 15[d] of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-7792 Pogo Producing Company (Exact name of registrant as specified in its charter) Delaware 74-1659398 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 Greenway Plaza, Suite 2700 Houston, Texas 77046-0504 (Address of principal executive offices) (Zip Code) (713) 297-5000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days: Yes X No Registrant's number of common shares outstanding as of September 30, 1997: 33,527,854 Part I. Financial Information Pogo Producing Company and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- ------------------------------- 1997 1996 1997 1996 ------------- --------------- ----------- -------------- (Expressed in thousands, except per share amounts) Revenues: Oil and gas $ 77,318 $ 48,233 $ 213,913 $ 147,993 Gains (losses) on sales (141) -- 1,318 (165) ------------- --------------- ----------- -------------- Total 77,177 48,233 215,231 147,828 ------------- --------------- ----------- -------------- Operating Costs and Expenses: Lease operating 16,628 9,676 45,116 27,756 General and administrative 4,789 3,930 15,746 13,734 Exploration 1,870 4,257 7,823 12,133 Dry hole and impairment 1,919 2,043 6,926 7,161 Depreciation, depletion and amortization 29,112 15,412 75,989 46,918 ------------- --------------- ----------- -------------- Total 54,318 35,318 151,600 107,702 ------------- --------------- ----------- -------------- Operating Income 22,859 12,915 63,631 40,126 ------------- --------------- ----------- -------------- Interest: Charges (5,940) (3,307) (15,771) (9,491) Income 142 60 271 199 Capitalized 833 1,069 3,463 2,899 Foreign Currency Transaction Loss (6,522) -- (6,522) -- ------------- --------------- ----------- -------------- Income Before Income Taxes 11,372 10,737 45,072 33,733 Income Tax Expense (3,986) (3,766) (15,694) (11,560) ------------- --------------- ----------- -------------- Income Before Extraordinary Loss 7,386 6,971 29,378 22,173 Extraordinary Loss on Early Extinguishment of Debt (net of taxes) -- -- -- (821) ------------- --------------- ----------- -------------- Net Income $ 7,386 $ 6,971 $ 29,378 $ 21,352 ============= =============== =========== ============== Primary Earnings Per Share: Income before extraordinary loss $ 0.22 $ 0.21 $ 0.86 $ 0.65 Extraordinary loss -- -- -- (0.02) ------------- --------------- ----------- -------------- Net Income $ 0.22 $ 0.21 $ 0.86 $ 0.63 ============= =============== =========== ============== Fully Diluted Earnings Per Share: Income before extraordinary loss $ 0.21 $ 0.20 $ 0.83 $ 0.65 Extraordinary loss -- -- -- (0.02) ------------- --------------- ----------- -------------- Net Income $ 0.21 $ 0.20 $ 0.83 $ 0.63 ============= =============== =========== ============== Dividends Per Common Share $ 0.03 $ 0.03 $ 0.09 $ 0.09 ============= =============== =========== ==============
See accompanying notes to consolidated financial statements. - 1 - Pogo Producing Company and Subsidiaries Consolidated Balance Sheets
September 30, December 31, 1997 1996 -------------- ------------- (Unaudited) (Expressed in thousands, except share amounts) Assets Current Assets: Cash and cash investments $ 12,444 $ 3,054 Accounts receivable 38,547 30,031 Other receivables 52,668 35,027 Inventory - Product 5,009 -- Inventories - Tubulars 8,997 6,165 Other 1,050 641 ------------- ------------- Total current assets 118,715 74,918 ------------- ------------- Property and Equipment: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized 1,253,619 1,079,523 Unevaluated properties and properties under development, not being amortized 87,064 111,192 Other, at cost 11,885 8,773 -------------- ------------- 1,352,568 1,199,488 Less--accumulated depreciation, depletion and amortization, including $5,680 and $4,822, respectively, applicable to other property 889,752 814,623 -------------- ------------- 462,816 384,865 -------------- ------------- Other 26,557 19,459 -------------- ------------- $ 608,088 $ 479,242 ============== ============= Liabilities and Shareholders' Equity Current Liabilities: Accounts payable - operating activities $ 11,812 $ 7,676 Accounts payable - investing activities 41,799 56,961 Accrued interest payable 5,419 1,957 Accrued payroll and related benefits 2,148 1,490 Other 32 163 -------------- ------------- Total current liabilities 61,210 68,247 Long-Term Debt 340,199 246,230 Deferred Federal Income Tax 54,298 46,321 Deferred Credits 13,175 11,162 -------------- ------------- Total liabilities 468,882 371,960 -------------- ------------- Shareholders' Equity: Preferred stock, $1 par; 2,000,000 shares authorized -- -- Common stock, $1 par; 100,000,000 shares authorized, 33,543,429 and 33,321,381 shares issued, respectively 33,544 33,321 Additional capital 144,687 139,337 Retained earnings (deficit) (38,701) (65,075) Treasury stock and other, at cost (324) (301) -------------- ------------- Total shareholders' equity 139,206 107,282 -------------- ------------- $ 608,088 $ 479,242 ============== =============
See accompanying notes to consolidated financial statements. - 2 - Pogo Producing Company and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ----------------------------------- 1997 1996 -------------- -------------- (Expressed in thousands) Cash Flows from Operating Activities: Cash received from customers $ 197,367 $ 148,789 Operating, exploration, and general and administrative expenses paid (64,549) (56,394) Interest paid (12,309) (9,039) Federal income taxes received 7,037 -- Federal income taxes paid (13,500) (12,500) Other (1,064) (1,790) -------------- -------------- Net cash provided by operating activities 112,982 69,066 -------------- -------------- Cash Flows from Investing Activities: Capital expenditures (163,203) (106,395) Purchase of proved reserves (28,617) -- Proceeds from the sale of properties 100 100 -------------- -------------- Net cash used in investing activities (191,720) (106,295) -------------- -------------- Cash Flows from Financing Activities: Proceeds from issuance of new debt 100,000 115,000 Borrowings under senior debt agreements 408,000 105,000 Payments under senior debt agreements (414,000) (138,000) Payments of cash dividends on common stock (3,004) (2,981) Purchase of 8% debentures due 2005 -- (40,699) Payment of debt issue expenses (3,144) (3,060) Proceeds from exercise of stock options 3,800 2,965 -------------- -------------- Net cash provide by financing activities 91,652 38,225 -------------- -------------- Effect of Exchange Rate Changes (3,524) 35 -------------- -------------- Net Increase in Cash and Cash Investments 9,390 1,031 Cash and Cash Investments at the Beginning of the Year 3,054 4,481 -------------- -------------- Cash and Cash Investments at the End of the Period $ 12,444 $ 5,512 ============== ============== Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net income $ 29,378 $ 21,352 Adjustments to reconcile net income to net cash provided by operating activities - Extraordinary loss on early extinguishment of debt (net of taxes) -- 821 Foreign currency transaction loss 6,522 -- (Gains) losses from the sale of properties (1,318) 165 Depreciation, depletion and amortization 75,989 46,918 Dry hole and impairment 6,926 7,161 Interest capitalized (3,463) (2,899) Deferred federal income taxes 9,719 (246) Change in operating assets and liabilities (10,771) (4,206) -------------- -------------- Net Cash Provided by Operating Activities $ 112,982 $ 69,066 ============== ==============
See accompanying notes to consolidated financial statements. - 3 - Pogo Producing Company and Subsidiaries Consolidated Statements of Shareholders' Equity (Unaudited)
Nine Months Ended September 30, -------------------------------------------------------------- 1997 1996 -------------------------- ----------------------------- Shares Amount Shares Amount ---------- ------------ ---------- ------------- (Expressed in thousands, except share amounts) Common Stock: $1.00 par - 100,000,000 shares authorized Balance at beginning of year 33,321,381 $ 33,321 33,006,972 $ 33,007 Conversion of 2004 Notes 1,396 1 901 1 Conversion of 8% Debentures -- -- 32,898 33 Stock options exercised 220,652 222 235,132 235 ---------- ------------ ---------- ------------- Issued at end of period 33,543,429 33,544 33,275,903 33,276 ---------- ------------ ---------- ------------- Additional Capital: Balance at beginning of year 139,337 132,881 Conversion of 2004 Notes 30 19 Conversion of 8% Debentures -- 1,267 Stock options exercised 5,320 4,155 -------------- ------------- Balance at end of period 144,687 138,322 -------------- ------------- Retained Earnings (Deficit): Balance at beginning of year (65,075) (93,856) Net income 29,378 21,352 Dividends ($0.09 per common share) (3,004) (2,981) ------------ ------------- Balance at end of period (38,701) (75,485) ------------ ------------- Treasury Stock and Other: Balance at beginning of year (15,575) (301) (15,575) (324) Activity during the period -- (23) -- 35 ---------- ------------ ---------- ------------- Balance at end of period (15,575) (324) (15,575) (289) ---------- ------------ ---------- ------------- Common Stock Outstanding, at the End of the Period 33,527,854 33,260,328 ========== ========== Total Shareholders' Equity $ 139,206 $ 95,824 ============ =============
See accompanying notes to consolidated financial statements. - 4 - Pogo Producing Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (1) General Information - The consolidated financial statements included herein have been prepared by Pogo Producing Company (the "Company") without audit and include all adjustments (of a normal and recurring nature) which are, in the opinion of management, necessary for the fair presentation of interim results which are not necessarily indicative of results for the entire year. Certain reclassifications have been made to prior period presentations to conform to the presentation in the current period. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report. (2) Long-Term Debt - Long-term debt and the amount due within one year at September 30, 1997 and December 31, 1996, consists of the following:
September 30, December 31, 1997 1996 -------------- ------------- (Expressed in thousands) Senior debt -- Bank revolving credit agreement Prime rate based loans, borrowings at interest rates of 8.5% and 8.25%, respectively $ 4,000 $ 13,000 LIBO Rate based loans, borrowings at average interest rates of 6.32% and 6.59%, respectively 25,000 22,000 Uncommitted credit lines with banks, borrowings at average interest rates of 6.61% and 7.0%, respectively 10,000 10,000 -------------- ------------- Total senior debt 39,000 45,000 -------------- ------------- Subordinated debt -- 8 3/4% Senior subordinated notes due 2007 100,000 -- 5 1/2% Convertible subordinated notes due 2004 86,199 86,230 5 1/2% Convertible subordinated notes due 2006 115,000 115,000 -------------- ------------- Total subordinated debt 301,199 201,230 -------------- ------------- Long-term debt $ 340,199 $ 246,230 ============== =============
Effective August 1, 1997, the Company entered into an amended and restated credit agreement (the "Credit Agreement"). The Credit Agreement provides for an unsecured $250,000,000 revolving/term credit facility which will be fully revolving until July 1, 2000, after which the balance will be due in eight quarterly term loan installments, commencing October 31, 2000. The amount that may be borrowed under the Credit Agreement may not exceed a borrowing base which is composed of both domestic and Thai properties less, in certain circumstances, the present value of interest payments on a portion of certain subordinated indebtedness, including the 2007 Notes. The domestic borrowing base is determined semi-annually by the lenders in accordance with the Credit Agreement, based primarily on the discounted present value of future net revenues from the Company's domestic oil and gas reserves. The portion of the borrowing base which is composed of properties located in the Kingdom of Thailand is also determined semi-annually, but may, at the lenders' discretion, be redetermined once more during each semi-annual period. The value of this portion of the borrowing base is determined by the lenders applying their usual and customary criteria for oil and gas evaluation. As of October 1, 1997, the Company's total borrowing base, including both domestic and Thai properties, exceeded $250,000,000. The Credit Agreement is governed by various financial and other covenants, including requirements to maintain positive working capital (excluding current maturities - 5 - Pogo Producing Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (2) Long-Term Debt (Continued) of debt) and a fixed charge coverage ratio, and limitations on indebtedness, creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Credit Agreement currently bear interest at a base (prime) rate or LIBOR plus 5/8%, at the Company's option. A commitment fee on the unborrowed amount under the Credit Agreement is also charged. The commitment fee is currently 0.25% per annum on the unborrowed amount under the Credit Agreement that is designated as "active" and 0.10% per annum on the unborrowed amount under the Credit Agreement that is designated as "inactive." Of the $250,000,000 that is currently available under the Credit Agreement (subject to borrowing base limitations), $125,000,000 is designated as "active" and $125,000,000 is designated as "inactive." On May 22, 1997, the Company issued $100,000,000 of 8 3/4% Senior Subordinated Notes due 2007 (the "2007 Notes"). The proceeds from the issuance of the 2007 Notes were used to repay amounts outstanding under the Company's bank revolving credit agreement, and to purchase short-term cash investments. The 2007 Notes bear interest at a rate of 8 3/4%, payable semi-annually in arrears on May 15 and November 15 of each year, commencing November 15, 1997. The 2007 Notes are general unsecured senior subordinated obligations of the Company and are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under its bank revolving credit agreement and its unsecured credit lines, but are senior in right of payment to its subordinated indebtedness, which currently includes the 2006 Notes and the 2004 Notes. The Company, at its option, may redeem the 2007 Notes in whole or in part, at any time on or after May 15, 2002, at a redemption price of 104.375% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2007 Notes. The 2007 Notes are redeemable at the option of any holder, upon the occurrence of a change of control (as defined in the indenture governing the 2007 Notes), at 101% of their principal amount. The indenture governing the 2007 Notes also imposes certain covenants on the Company (as more fully described therein) that are customary for senior subordinated indebtedness generally, including covenants limiting: incurrence of indebtedness, including senior indebtedness; restricted payments; the issuance and sales of restricted subsidiary capital stock; transactions with affiliates; liens; disposition of proceeds of asset sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and mergers, consolidations and the sale of assets. Refer to Note 3 of the Notes to Consolidated Financial Statements included in the Company's latest annual report for a further discussion of the 5 1/2% Convertible Subordinated Notes due 2004 (the "2004 Notes") and the 5 1/2% Convertible Subordinated Notes due 2006 (the "2006 Notes"). - 6 - Pogo Producing Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (3) Earnings per Share - Earnings per share (in thousands, except per share amounts) are based on the following:
Three Months Ended Nine Months Ended September 30, 1997 September 30, 1997 ------------------------------- --------------------------- Income Shares Per Share Income Shares Per Share ---------- ---------- --------- -------- -------- --------- Earnings and shares outstanding $ 7,386 33,403 $ 29,378 33,374 Effect of dilutive securities -- Options at average price -- 803 -- 805 _________ _________ ________ _______ Primary earnings per share $ 7,386 34,206 $ 0.22 $ 29,378 34,179 $ 0.86 ======= ======= Options at closing price -- 50 -- 22 2004 Notes 770 3,885 2,311 3,885 --------- --------- -------- ------- Fully diluted earnings per share $ 8,156 38,141 $ 0.21 $ 31,689 38,086 $ 0.83 ========= ========= ======= ======== ======= ======= Antidilutive securities -- Options at average price -- 20 $ 44.54 -- 468 $ 40.83 2006 Notes $ 1,028 2,726 $ 0.38 $ 3,083 2,726 $ 1.13
Three Months Ended Nine Months Ended September 30, 1996 September 30, 1996 ------------------------------- --------------------------- Income Shares Per Share Income(a) Shares Per Share ---------- ---------- --------- -------- -------- --------- Earnings and shares outstanding $ 6,971 33,243 $ 22,173 33,180 Effect of dilutive securities -- Options at average price -- 780 -- 517 --------- --------- -------- ------ Primary earnings per share $ 6,971 34,023 $ 0.21 $ 22,173 33,697 $ 0.65 ======= ======= Options at closing price -- 8 -- 10 2004 Notes 771 3,886 2,312 3,886 --------- --------- -------- ------- Fully diluted earnings per share $ 7,742 37,917 $ 0.20 $ 24,485 37,593 $ 0.65 ========= ========= ======= ======== ======= ======= Antidilutive securities -- Options at average price -- 64 $ 36.15 -- 64 $ 36.15 8% Debentures -- -- -- $ 1,081 702 $ 1.54 2006 Notes $ 1,028 2,726 $ 0.38 $ 1,172 1,036 $ 1.13
- ---------------- (a) Income before extraordinary loss The 8% Convertible Subordinated Debentures due 2005 (the "8% Debentures"), retired on June 28, 1996, were common stock equivalents. The 2004 Notes and the 2006 Notes (issued on June 18, 1996) are not common stock equivalents. - 7 - Pogo Producing Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (3) EARNINGS PER SHARE (Continued) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). It is effective for periods ending after December 15, 1997, and early adoption is not permitted. The following is the pro forma effect (in thousands, except per share amounts) of applying the provisions of SFAS 128 to the periods indicated:
Three Months Ended Nine Months Ended September 30, 1997 September 30, 1997 ------------------------------- --------------------------- (Pro Forma) (Pro Forma) ------------------------------- --------------------------- Income Shares Per Share Income Shares Per Share ---------- ---------- --------- -------- -------- --------- Basic earnings per share $ 7,386 33,405 $ 0.22 $ 29,378 33,374 $ 0.88 ======= ======= Effect of dilutive securities -- Options at average price -- 803 -- 805 2004 Notes 770 3,885 2,311 3,885 --------- --------- -------- ------- Diluted earnings per share $ 8,156 38,091 $ 0.21 $ 31,689 38,064 $ 0.83 ========= ========= ======= ======== ======= =======
Three Months Ended Nine Months Ended September 30, 1996 September 30, 1996 ------------------------------- --------------------------- (Pro Forma) (Pro Forma) ------------------------------- --------------------------- Income Shares Per Share Income(a) Shares Per Share ---------- ---------- --------- -------- -------- --------- Basic earnings per share $ 6,971 33,243 $ 0.21 $ 22,173 33,180 $ 0.67 ======= ======= Effect of dilutive securities -- Options at average price -- 780 -- 517 2004 Notes 771 3,886 2,312 3,886 --------- --------- -------- ------- Diluted earnings per share $ 7,742 37,909 $ 0.20 $ 24,485 37,583 $ 0.65 ========= ========= ======= ======== ======= =======
- ---------------- (a) Income before extraordinary loss - 8 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's annual report on Form 10-K for the year ended December 31, 1996. Certain statements contained herein are "Forward Looking Statements" and are thus prospective. As further discussed in the Company's annual report on Form 10-K for the year ended December 31, 1996, such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. RESULTS OF OPERATIONS -- INCOME AND REVENUE DATA NET INCOME The Company reported net income for the third quarter of 1997 of $7,386,000 or $0.22 per share ($0.21 on a fully diluted basis) compared to net income for the third quarter of 1996 of $6,971,000 or $0.21 per share ($0.20 on a fully diluted basis). For the first nine months of 1997, the Company reported net income of $29,378,000 or $0.86 per share ($0.83 on a fully diluted basis) compared to net income for the first nine months of 1996 of $21,352,000 or $0.63 per share (on both a primary and a fully diluted basis). The Company recorded an extraordinary loss during the second quarter of 1996 of $821,000, or $0.02 per share related to the early retirement of the Company's 8% Debentures with the proceeds from the Company's issuance of its 2006 Notes on June 18, 1996. Earnings per share are based on the weighted average number of common and common equivalent shares outstanding for the third quarter and first nine months of 1997 of 34,206,000 and 34,179,000, respectively, compared to 34,023,000 and 33,697,000, respectively, for the third quarter and first nine months of 1996. The increases in the weighted average number of common and common equivalent shares outstanding for the 1997 periods, compared to the 1996 periods, resulted primarily from the issuance of shares of common stock upon the exercise of stock options pursuant to the Company's stock option plans. Earnings per share computations on a fully diluted basis in the 1997 periods primarily reflect additional shares of common stock issuable upon the assumed conversion of the Company's 2004 Notes (the only convertible securities of the Company that were dilutive during any of the periods presented) and the elimination of related interest requirements, as adjusted for applicable federal income taxes. The weighted average number of shares of common and common equivalent shares outstanding on a fully diluted basis for the third quarter and first nine months of 1997 were 38,141,000 and 38,085,000, respectively, compared to 37,917,000 and 37,593,000 respectively, for the third quarter and first nine months of 1996. Earnings applicable to common stock, assuming full dilution and, with respect to the 1996 periods, after giving effect to an extraordinary loss of $821,000, for the first nine months of 1997 were $8,156,000 and $31,689,000, respectively, compared to $7,742,000 and $23,664,000, respectively, for the third quarter and first nine months of 1996. - 9 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations REVENUES TOTAL REVENUES The Company's total revenues for the third quarter of 1997 were $77,177,000, an increase of approximately 60% compared to total revenues of $48,233,000 for the third quarter of 1996. The Company's total revenues for the first nine months of 1997 were $215,231,000, an increase of approximately 46% compared to total revenues of $147,828,000 for the first nine months of 1996. The increase in the Company's total revenues for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from increases in the the Company's natural gas and liquid hydrocarbon (including crude oil, condensate and natural gas liquid ("NGL")) production volumes, that were only partially offset by decreases in the average price that the Company received for its liquid hydrocarbon production. In addition, the total revenues for the third quarter were reduced by $141,000 due to an accounting adjustment in connection with the gain recorded in the second quarter for the sale of certain excess equipment. Total revenues for the first nine months of 1997 reflect a net gain on sales of $1,318,000, primarily related to the gain on the sale of excess equipment discussed previously, while the Company's total revenues for the first nine months of of 1996 were adversely affected by a $165,000 loss resulting from the sale of a non-strategic property. OIL AND GAS REVENUES. The following table reflects an analysis of differences in the Company's oil and gas revenues (expressed in thousands of dollars) between the third quarter and first nine months of 1997 and the same periods in the preceding year.
3rd Qtr '97 9 mos. '97 Compared to Compared to 3rd Qtr '96 9 mos. '96 ----------- ---------- Increase (decrease) in oil and gas revenues resulting from differences in : Natural gas -- Price . . . . . . . . . . . . . . . . $ 945 $ 267 Production . . . . . . . . . . . . . . 20,538 47,755 --------- --------- 21,483 48,022 --------- --------- Crude oil and condensate -- Price . . . . . . . . . . . . . . . . (3,814) (6,453) Production . . . . . . . . . . . . . . 9,332 20,229 --------- --------- 5,518 13,776 --------- --------- NGL and other, net . . . . . . . . . . . 2,084 4,122 --------- --------- Increase in oil and gas revenues . . . . $ 29,085 $ 65,920 ========= =========
- 10 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations NATURAL GAS PRICES. Prices per thousand cubic feet ("Mcf") that the Company received for its natural gas production during the third quarter of 1997 averaged $2.25 per Mcf, an increase of approximately 4% from an average price of $2.16 per Mcf that the Company received for its production during the third quarter of 1996. Prices that the Company received for its natural gas production during the first nine months of 1997 averaged $2.31 per Mcf, a slight increase from an average price of $2.30 per Mcf that the Company received for its domestic natural gas production during the first nine months of 1996. DOMESTIC PRICES. Prices that the Company received for its domestic natural gas production during the third quarter of 1997 averaged $2.31 per Mcf, an increase of approximately 7% from an average price of $2.16 per Mcf that the Company received for its domestic natural gas production during the third quarter of 1996. Prices that the Company received for its domestic natural gas production during the first nine months of 1997 averaged $2.37 per Mcf, an increase of approximately 3% from an average price of $2.30 per Mcf that the Company received for its domestic natural gas production during the first nine months of 1996. THAILAND PRICES. The Company's Tantawan Field located in the Kingdom of Thailand commenced production of natural gas and liquid hydrocarbons in February 1997. During the third quarter of 1997, the price that the Company received under its long term gas sales contract for natural gas production from the Tantawan Field averaged approximately 60.5 Thai Baht per Mcf. NATURAL GAS PRODUCTION. The Company's natural gas production during the third quarter of 1997 averaged 206.1 million cubic feet ("MMcf") per day, an increase of approximately 93% from an average of 106.9 MMcf per day that the Company produced during the third quarter of 1996. The Company's natural gas production during the first nine months of 1997 averaged 184.5 MMcf per day, an increase of approximately 70% from an average of 108.3 MMcf per day that the Company produced during the first nine months of 1996. DOMESTIC PRODUCTION. The Company's domestic natural gas production during the third quarter of 1997 averaged 166.7 MMcf per day, an increase of approximately 56% from an average of 107.0 MMcf per day that the Company produced during the third quarter of 1996. The Company's domestic natural gas production during the first nine months of 1997 averaged 152.4 MMcf per day, an increase of approximately 41% from an average of 108.3 MMcf per day that the Company produced during the first nine months of 1996. The increase in the Company's natural gas production during the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, was related in large measure to production from the Company's East Cameron Block 334 "E" platform, which commenced production in April 1997, and, to a lesser extent, the results of successful drilling in the Company's Lopeno Field in South Texas and its Eugene Island Block 261 field, that was only partially offset by the anticipated decline from certain of the Company's properties. As of October 1, 1997, the Company was not a party to any future natural gas sales contracts. - 11 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations THAILAND PRODUCTION. The Company commenced production from its Tantawan Field early in February 1997. Following a field startup phase which ended on March 15, 1997, production from the Tantawan Field stabilized. During the third quarter of 1997, the Company's share of natural gas production from the Tantawan Field averaged approximately 39.3 MMcf per day. Commencing in October 1997, in accordance with the long term gas sales contract with the Petroleum Authority of Thailand for the Tantawan Field, natural gas production from the field is anticipated to increase to approximately 47 MMcf per day (net to the Company's working interest). CRUDE OIL AND CONDENSATE PRICES. Prices received by the Company for its crude oil and condensate production during the third quarter of 1997 averaged $18.62 per barrel, a decrease of approximately 16% from the average price of $22.15 per barrel that the Company received during the third quarter of 1996. Prices that the Company received for its crude oil and condensate production during the first nine months of 1997 averaged $19.58 per barrel, a decrease of approximately 9% from an average price of $21.47 per barrel that the Company received during the first nine months of 1996. DOMESTIC PRICES. Prices received by the Company for its domestic crude oil and condensate production during the third quarter of 1997 averaged $18.42 per barrel, a decrease of approximately 17% from the average price of $22.15 per barrel that the Company received during the third quarter of 1996. Prices that the Company received for its domestic crude oil and condensate production during the first nine months of 1997 averaged $19.69 per barrel, a decrease of approximately 8% from an average price of $21.47 per barrel that the Company received during the first nine months of 1996. THAILAND PRICES. Since the inception of production from the Tantawan Field, crude oil and condensate has been stored in a Floating Production, Storage and Offloading System (the "FPSO") until an economic quantity was accumulated for offloading and sale. The first such sale of crude oil and condensate from the Tantawan Field occurred in July 1997. Prices that the Company recorded for its crude oil and condensate production stored on the FPSO for the third quarter and first nine months of 1997, were $19.83 and $18.84, respectively. Prices that the Company receives for such production are based on world benchmark prices, which are denominated in U.S. dollars, and are currently expected on future crude oil sales to be paid in U.S. dollars. CRUDE OIL AND CONDENSATE PRODUCTION. The Company's crude oil and condensate production during the third quarter of 1997 averaged 17,171 barrels per day, an increase of approximately 46% from an average of 11,723 barrels per day during the third quarter of 1996. The Company's crude oil and condensate production during the first nine months of 1997 averaged 15,856 barrels per day, an increase of approximately 31% from an average of 12,071 barrels per day during the first nine months of 1996. DOMESTIC PRODUCTION. The Company's domestic crude oil and condensate production during the third quarter of 1997 averaged 14,869 barrels per day, an increase of approximately 27% from an average of 11,723 barrels per day during the third quarter of 1996. The Company's domestic crude oil and condensate production during the first nine months of 1997 averaged 13,927 barrels - 12 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations per day, an increase of approximately 15% from an average of 12,071 barrels per day during the first nine months of 1996. The increase in the Company's domestic crude oil and condensate production during the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from increased condensate production from wells located in the Gulf of Mexico, that was only partially offset by the anticipated decline from certain of the Company's properties. THAILAND PRODUCTION. The Company commenced production from its Tantawan Field early in February 1997. Following a field startup phase which ended on March 15, 1997, production from the Tantawan Field stabilized. During the third quarter and first nine months of 1997, the Company's share of crude oil and condensate production production from the Tantawan Field averaged approximately 2,304 barrels and 1,930 barrels per day, respectively. NGL PRODUCTION AND "OTHER" NET REVENUE ITEMS. The Company's oil and gas revenues, and its total liquid hydrocarbon production volumes, reflect the production and sale of NGL by the Company. In addition, the Company's oil and gas revenues for the third quarter and first nine months of 1997 and 1996 also reflect adjustments for various miscellaneous items. The Company's NGL and "other" net revenues for the third quarter and first nine months of 1997 increased $2,084,000 and $4,122,000, from the third quarter and first nine months of 1996, respectively. The increase in the Company's NGL and "other" net revenues for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, was primarily related to an increase in the Company's NGL production from the Company's East Cameron 334 "E" platform, and, to a lesser extent, by an increase in net revenues from miscellaneous other items, that was only partially offset by a decrease in the average price that the Company received for its NGL production. TOTAL LIQUID HYDROCARBON PRODUCTION. The Company's average liquid hydrocarbon (including crude oil, condensate and NGL) production during the third quarter of 1997 was 21,557 barrels per day, an increase of approximately 54% from an average liquid hydrocarbon production of 13,995 barrels per day during the third quarter of 1996. The Company's average liquid hydrocarbon production during the first nine months of 1997 was 19,280 barrels per day, an increase of approximately 35% from an average liquid hydrocarbon production of 14,314 barrels per day during the first nine months of 1996. OPERATING COSTS AND EXPENSES LEASE OPERATING EXPENSES Lease operating expenses for the third quarter of 1997 were $16,628,000, an increase of approximately 72% from lease operating expenses of $9,676,000 for the third quarter of 1996. Lease operating expenses for the first nine months of 1997 were $45,116,000, an increase of approximately 63% from lease operating expenses of $27,756,000 for the first nine months of 1996. The increases in lease operating expenses for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from expenses related to the leasing of equipment (principally expenses of $4,324,456 for the third quarter and $10,881,594 for the first nine months of 1997 in connection with the FPSO); increased operating activity by the - 13 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Company and its industry partners; and increased costs to the Company (and the entire offshore oil industry) due to a shortage of qualified offshore service contractors and equipment, which has permitted such contractors to increase the costs of their services. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the third quarter of 1997 were $4,789,000, an increase of approximately 22% from general and administrative expenses of $3,930,000 for the third quarter of 1996. General and administrative expenses for the first nine months of 1997 were $15,746,000, an increase of approximately 15% from general and administrative expenses of $13,734,000 for the first nine months of 1996. The increases in general and administrative expenses for the third quarter and first nine months of 1997, compared with the third quarter and first nine months of 1996, were primarily related to salary and benefit expenses incurred in connection with the increase in the Company's work force in Bangkok, Thailand as a result of the Company's increased operating activities there. EXPLORATION EXPENSES Exploration expenses consist primarily of delay rentals and geological and geophysical costs which are expensed as incurred. Exploration expenses for the third quarter of 1997 were $1,870,000, a decrease of approximately 56% from exploration expenses of $4,257,000 for the third quarter of 1996. Exploration expenses for the first nine months of 1997 were $7,823,000, a decrease of approximately 36% from exploration expenses of $12,133,000 for the first nine months of 1996. The decrease in exploration expenses for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from costs associated with conducting several 3-D seismic surveys by the Company on its leases in South Louisiana and East Texas in the third quarter and first nine months of 1996 for which no similar costs were incurred during the 1997 comparative periods. DRY HOLE AND IMPAIRMENT EXPENSES Dry hole and impairment expenses relate to costs of unsuccessful wells drilled, along with impairments due to decreases in expected reserves from producing wells. The Company's dry hole and impairment expenses for the third quarter of 1997 were $1,919,000, a decrease of approximately 6% from dry hole and impairment expenses of $2,043,000 for the third quarter of 1996. The Company's dry hole and impairment expenses for the first nine months of 1997 were $6,926,000, a decrease of approximately 3% from dry hole and impairment expenses of $7,161,000 for the first nine months of 1996. DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES The Company accounts for its oil and gas activities using the successful efforts method of accounting. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Unproved properties are reviewed whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Unproved properties are - 14 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations reviewed quarterly, with any such impairment charged to expense in the period. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for depreciation, depletion and amortization ("DD&A") is based on the capitalized costs, as determined in the preceding paragraph, plus future costs to abandon offshore wells and platforms, and is determined on a cost center by cost center (generally, a field by field) basis using the units of production method. The Company's DD&A expense for the third quarter of 1997 was $29,112,000, an increase of approximately 89% from DD&A expense of $15,412,000 for the third quarter of 1996. The Company's DD&A expense for the first nine months of 1997 was $75,989,000, an increase of approximately 62% from DD&A expense of $46,918,000 for the first nine months of 1996. The increases in DD&A expense for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from increased production of oil and gas from the Company's properties and, to a much lesser extent, an increase in the Company's composite DD&A rate. The composite DD&A rate for all of the Company's producing fields for the third quarter of 1997 was $0.92 per equivalent Mcf ($5.53 per equivalent barrel), an increase of approximately 6% from a composite DD&A rate of $0.87 per equivalent Mcf ($5.19 per equivalent barrel) for the third quarter of 1996. The composite DD&A rate for all of the Company's producing fields for the first nine months of 1997 was $0.91 per equivalent Mcf ($5.45 per equivalent barrel), an increase of approximately 5% from a composite DD&A rate of $0.87 per equivalent Mcf ($5.23 per equivalent barrel) for the first nine months of 1996. The increase in the composite DD&A rate for all of the Company's producing fields for the third quarter and the first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from an increased percentage of the Company's production coming from certain of the Company's fields that have DD&A rates that are higher than the Company's recent historical composite rate and a corresponding decrease in the percentage of the Company's production coming from fields that have DD&A rates that are lower than the Company's recent historical composite DD&A rate. The Company produced 30,857,000 equivalent Mcf (5,143,000 equivalent barrels) during the third quarter of 1997, an increase of approximately 76% from the 17,568,000 equivalent Mcf (2,928,000 equivalent barrels) produced by the Company during the third quarter of 1996. The Company produced 82,036,000 equivalent Mcf (13,673,000 equivalent barrels) during the first nine months of 1997, an increase of approximately 54% from the 53,176,000 equivalent Mcf (8,863,000 equivalent barrels) produced by the Company during the first nine months of 1996. INTEREST INTEREST CHARGES The Company incurred interest charges for the third quarter of 1997 of $5,940,000, an increase of approximately 80% from interest charges of $3,307,000 for the third quarter of 1996. The increases in interest charges for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from an increase in the average amount of the Company's outstanding debt and, to a lesser extent, increased average interest rates - 15 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations on the debt outstanding (resulting primarily from the issuance of the 2007 Notes on May 22, 1997, which bear interest at a 8-3/4% annual interest rate) and increased expenses related to amortization of debt issuance expenses resulting from the issuance of the 2006 Notes. Interest charges incurred by the Company for the first nine months of 1997 were $15,771,000, an increase of approximately 66% from interest charges of $9,491,000 for the first nine months of 1996. The increases in interest charges for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from an increase in the average amount of the Company's outstanding debt and, to a lesser extent, increased amortization of debt issuance expenses resulting from the issuance of the 2006 Notes. As of October 1, 1997, the Company was a party to an interest rate swap agreement. The swap agreement, which terminates on March 10, 1998, effectively changes the interest rate that the Company would pay on $5,000,000 of debt from a market based variable rate to a fixed rate of 7.2%. CAPITALIZED INTEREST EXPENSE Capitalized interest expense for the third quarter of 1997 was $833,000, a decrease of approximately 22% from capitalized interest expense of $1,069,000 for the first quarter of 1996. The decrease in capitalized interest expense for the third quarter of 1997, compared to the third quarter of 1996, resulted primarily from the cessation of the requirement to capitalize interest expense attributable to capital expenditures on properties once production commences from such properties. A substantial percentage of the Company's capitalized interest expense during 1996 and most of the first quarter of 1997 resulted from capitalization of interest related to capital expenditures for the development of the Tantawan Field (which commenced production in early February 1997) and the East Cameron Block 334 "E" platform field (which commenced production in early April 1997). Capitalized interest expense for the first nine months of 1997 was $3,463,000, an increase of approximately 19% from capitalized interest expense of $2,899,000 for the first nine months of 1996. For the reasons enumerated above, the increase in capitalized interest expense for the first nine months of 1997, compared to the first nine months of 1996, resulted primarily from the requirement to capitalize interest expense attributable to capital expenditures on non-producing properties, principally capital expenditures related to the Company's development of the Tantawan Field and the East Cameron Block 334 "E" platform during the first quarter of 1997, which substantially exceeded the Company's capital expenditures on non-producing properties (principally the Tantawan Field) during the first nine months of 1996. The Company expects its capitalized interest costs to increase in the future as a result of the requirement to capitalize interest expense attributable to capital expenditures incurred in connection with its development of the Benchamas Field in the Gulf Thailand. FOREIGN CURRENCY TRANSACTION LOSS The Company incurred a foreign currency transaction loss of $6,522,000 during the third quarter of 1997. No comparable losses were incurred in any of the comparative 1996 periods. The foreign currency transaction loss resulted from the depreciation against the dollar of cash and other monetary assets and liabilities denominated in Baht that were on the Company's subsidiary's financial statements during the third quarter of 1997. In early July 1997, the government of the Kingdom of Thailand announced that the value of the Baht would be set against the dollar and other - 16 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations currencies under a "managed float" program arrangement. Since that time the value of the Baht has generally declined. The Company cannot predict what the Baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. INCOME TAX EXPENSE Income tax expense for the third quarter of 1997 was $3,986,000, an increase of approximately 6% from income tax expense of $3,766,000 for the third quarter of 1996. Income tax expense for the first nine months of 1997 was $15,694,000, an increase of approximately 36% from income tax expense of $11,560,000 for the first nine months of 1996. The increase in income tax expense for the third quarter and first nine months of 1997, compared to the third quarter and first nine months of 1996, resulted primarily from increased taxable income. LIQUIDITY AND CAPITAL RESOURCES -- CASH FLOWS The Company's Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 1997, reflects net cash provided by operating activities of $112,982,000. In addition to net cash provided by operating activities, the Company received net proceeds of $96,856,000 from the issuance of the 2007 Notes on May 22, 1997, $3,800,000 from the exercise of stock options and $100,000 from the sale of certain non-strategic properties. During the first nine months of 1997, the Company invested $163,203,000 of such cash flow in capital projects, purchased proved reserves for $28,617,000, repaid a net $6,000,000 under its revolving credit facility, incurred a foreign currency transaction loss related to cash balances of $3,524,000 and paid $3,144,000 ($0.03 per share for each of the first three quarters of 1997) in cash dividends to holders of the Company's common stock. Of the $163,203,000 invested in capital projects, $56,961,000 was applicable to 1996 capital projects and $106,242,000 was applicable to 1997 capital projects. As of September 30, 1997, the Company's cash and cash investments were $12,444,000 and its long-term debt stood at $340,199,000. FUTURE CAPITAL REQUIREMENTS The Company's capital and exploration budget for 1997, which does not include any amounts that may be expended for the purchase of proved reserves or any interest which may be capitalized resulting from projects in progress, was established by the Company's Board of Directors at $210,000,000. In addition to anticipated capital and exploration expenses, other material 1997 cash requirements that the Company currently anticipates include ongoing operating, general and administrative, income tax, interest expense and the payment of dividends on its common stock, including a $.03 per share dividend on its common stock to be paid on November 21, 1997 to stockholders of record as of November 7, 1997. The Company currently anticipates that its available cash and cash investments, cash provided by operating activities and funds available under its - 17 - Pogo Producing Company and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations revolving credit facility and uncommitted lines of credit with banks will be sufficient to fund the Company's ongoing expenses, its 1997 capital and exploration budget, any currently anticipated costs associated with the Company's Thailand projects during 1997 and anticipated future dividend payments. The declaration of future dividends will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors. - 18 - Pogo Producing Company and Subsidiaries Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 27 -- Financial Data Schedule (B) Reports on Form 8-K None - 19 - Pogo Producing Company and Subsidiaries Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pogo Producing Company Registrant /s/ THOMAS E. HART Thomas E. Hart Vice President and Controller /s/ JOHN W. ELSENHANS John W. Elsenhans Vice President - Finance and Treasurer Date: November 13, 1997 - 20 - EX-27 2 FINANCIAL DATA SCHEDULE
5 This Financial Data Schedule contains summary financial information extracted from the Consolidated Financial Statements (Unaudited) of Pogo Producing Company, including the Consolidated Balance Sheets as of September 30, 1997 and the Consolidated Statements of Income for the three months ended September 30, 1997, and is qualified in its entirety by reference to such Consolidated Financial Statements. 1,000 9-MOS DEC-31-1996 SEP-30-1997 12,444 0 91,215 0 14,006 118,715 1,352,568 889,752 608,088 61,210 340,199 33,544 0 0 105,662 608,088 213,913 215,231 45,116 45,116 106,484 0 15,771 45,072 15,694 29,378 0 0 0 29,378 .86 .83 This amount is not disclosed on the face of the Consolidated Financial Statements due to lack of materiality, but is included as a contra-asset in Accounts Receivable. Does not include Gains (or Losses) on Property Sales. Includes Lease Operating Expense, but excludes General and Administrative, Exploration, Dry Hole and Impairment and Depreciation, Depletion and Amortization Expenses. Includes General and Administrative, Exploration, Dry Hole and Impairment and Depreciation, Depletion and Amortization Expenses. This amount is not disclosed on the face of the Consolidated Financial Statements due to lack of materiality, but is included in Oil and Gas Revenues.
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