-----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, HSgk61zu84Ex2EsM8QlTzupEtUAK2H4H4+9O0Lsf/0tqkqLonJEDWS6zsCDSL1b4 Eqbg9HbGCcAQQ3BWwT/sfw== 0000230463-98-000004.txt : 19980505 0000230463-98-000004.hdr.sgml : 19980505 ACCESSION NUMBER: 0000230463-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980504 SROS: NYSE SROS: PCX 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: 98609334 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 1ST QUARTER 1998 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERION 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 March 31, 1998: 37,559,370 Part I. Financial Information Item 1. Financial Statements Pogo Producing Company and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1998 1997 --------------- --------------- (Expressed in thousands, except per share amounts) Revenues: Oil and gas $ 60,661 $ 61,314 Gain on sale 69 -- _____________ _______________ Total 60,730 61,314 ------------- --------------- Operating Costs and Expenses: Lease operating 16,509 12,297 General and administrative 5,485 5,836 Exploration 3,832 1,900 Dry hole and impairment 1,308 921 Depreciation, depletion and amortization 30,460 18,420 ------------- --------------- Total 57,594 39,374 ------------- --------------- Operating Income 3,136 21,940 Interest: Charges (6,068) (4,295) Income 148 56 Capitalized 1,845 1,870 Foreign Currency Transaction Gain 997 -- ------------- --------------- Income Before Income Taxes 58 19,571 Income Tax Benefit (Expense) 126 (6,753) ------------- --------------- Net Income $ 184 $ 12,818 ============= =============== Earnings Per Common Share (restated for 1997 period) Basic $ 0.01 $ 0.38 ============= =============== Diluted $ 0.01 $ 0.36 ============= =============== Dividends Per Common Share $ 0.03 $ 0.03 ============= =============== Weighted Average Number of Common Stock and Potential Common Shares Outstanding Basic 35,122 33,348 Diluted 35,565 40,789
See accompanying notes to consolidated financial statements. - 1 - Pogo Producing Company and Subsidiaries Consolidated Balance Sheets
March 31, December 31, 1998 1997 ------------- ------------- (Unaudited) (Expressed in thousands, except share amounts) Assets Current Assets: Cash and cash investments $ 14,430 $ 19,646 Accounts receivable 30,166 39,540 Other receivables 41,738 46,951 Inventories - Product 2,682 713 Inventories - Tubulars 6,528 8,334 Other 4,376 4,087 ------------- ------------- Total current assets 99,920 119,271 ------------- _____________ Property and Equipment: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized 1,335,531 1,321,817 Unevaluated properties and properties under development, not being amortized 116,965 110,231 Other, at cost 13,027 12,619 -------------- ------------- 1,465,523 1,444,667 Less--accumulated depreciation, depletion and amortization, including $6,323 and $6,004, respectively, applicable to other property 936,469 917,363 -------------- ------------- 529,054 527,304 -------------- ------------- Other 32,193 30,042 -------------- ------------- $ 661,167 $ 676,617 ============== ============= Liabilities and Shareholders' Equity Current Liabilities: Accounts payable - operating activities $ 11,593 $ 13,639 Accounts payable - investing activities 62,063 90,833 Accrued interest payable 5,553 3,130 Accrued payroll and related benefits 2,065 1,938 Other -- 632 -------------- ------------- Total current liabilities 81,274 110,172 Long-Term Debt 275,000 348,179 Deferred Federal Income Tax 56,250 57,502 Deferred Credits 16,458 14,658 -------------- ------------- Total liabilities 428,982 530,511 -------------- ------------- Shareholders' Equity: Preferred stock, $1 par; 2,000,000 shares authorized - - Common stock, $1 par; 100,000,000 shares authorized, 37,574,945 and 33,552,702 shares issued, respectively 37,575 33,553 Additional capital 227,793 144,848 Retained earnings (deficit) (32,859) (31,971) Treasury stock, at cost (324) (324) -------------- ------------- Total shareholders' equity 232,185 146,106 -------------- ------------- $ 661,167 $ 676,617 ============== =============
See accompanying notes to consolidated financial statements. - 2 - Pogo Producing Company and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, ------------------------------------ 1998 1997 ------------- -------------- (Expressed in thousands) Cash Flows from Operating Activities: Cash received from customers $ 68,538 $ 59,834 Operating, exploration, and general and administrative expenses paid (27,872) (16,740) Interest paid (3,645) (3,690) Federal income taxes received -- 7,037 Other (2,206) (542) ------------- -------------- Net cash provided by operating activities 34,815 45,899 ------------- -------------- Cash Flows from Investing Activities: Capital expenditures (53,880) (70,388) Purchase of proved reserves -- (28,617) Proceeds from the sale of properties 525 -- ------------- -------------- Net cash used in investing activities (53,355) (99,005) ------------- -------------- Cash Flows from Financing Activities: Borrowings under senior debt agreements 91,000 162,000 Payuments under senior debt agreements (78,000) (102,000) Payment of cash dividend on common stock (1,072) (1,001) Purchase of 2004 Notes (99) -- Proceeds from exercise of stock options 970 717 ------------- -------------- Net cash provided by financing activities 12,799 59,716 ------------- -------------- Effect of exchange rate changes on cash 525 (78) ------------- -------------- Net Increase (Decrease) in Cash and Cash Investments (5,216) 6,532 Cash and Cash Investments at the Beginning of the Year 19,646 3,054 ------------- -------------- Cash and Cash Investments at the End of the Period $ 14,430 $ 9,586 ============= ============== Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net income $ 184 $ 12,818 Adjustments to reconcile net income to net cash provided by operating activities - Foreign currency transaction gain (997) -- Gain from the sale of properties (69) -- Depreciation, depletion and amortization 30,460 18,420 Dry hole and impairment 1,308 921 Interest capitalized (1,845) (1,870) Deferred federal income taxes 155 14,052 Change in operating assets and liabilities 5,619 1,558 ------------- -------------- Net Cash Provided by Operating Activities $ 34,815 $ 45,899 ============= ==============
See accompanying notes to consolidated financial statements. - 3 - Pogo Producing Company and Subsidiaries Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended March 31, -------------------------------------------------------------- 1998 1997 -------------------------- ----------------------------- 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 33,552,702 $ 33,553 33,321,381 $ 33,321 Shares issued upon conversion of the 2004 Notes 3,879,726 3,880 -- -- Stock options exercised 142,517 142 57,283 58 ---------- ------------ ---------- ------------- Issued at end of period 37,574,945 37,575 33,378,664 33,379 ---------- ------------ ---------- ------------- Additional Capital: Balance at beginning of year 144,848 139,337 Shares issued upon conversion of the 2004 Notes 81,233 -- Stock options exercised 1,712 1,159 ------------ ------------- Balance at end of period 227,793 140,496 ------------ ------------- Retained Earnings (Deficit): Balance at beginning of year (31,971) (65,075) Net income 184 12,818 Dividends ($0.03 per common share) (1,072) (1,001) ------------ ------------- Balance at end of period (32,859) (53,258) ------------ ------------- Treasury Stock and Other: Balance at beginning of year (15,575) (324) (15,575) (301) Activity during the period -- -- -- (78) ---------- ------------ ---------- ------------- Balance at end of period (15,575) (324) (15,575) (379) ---------- ------------ ---------- ------------- Common Stock Outstanding, at the End of the Period 37,559,370 33,363,089 ========== ========== Total Shareholders' Equity $ 232,185 $ 120,238 ============ =============
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 prior year amounts have been reclassified to conform with current year presentation. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. (2) Long-Term Debt - Long-term debt and the amount due within one year at March 31, 1998 and December 31, 1997, consists of the following:
March 31, December 31, 1998 1997 -------------- ------------- (Expressed in thousands) Senior debt -- Bank revolving credit agreement LIBO Rate based loans, borrowings at March 31, 1998 and December 31, 1997 at average interest rates of 6.29% and 6.52%, respectively $ 60,000 $ 47,000 Uncommitted credit lines with banks -- -- -------------- ------------- Total senior debt 60,000 47,000 -------------- ------------- Subordinated debt -- 8 3/4% Senior subordinated notes due 2007 ("2007 Notes") 100,000 100,000 5 1/2% Convertible subordinated notes due 2006 ("2006 Notes") 115,000 115,000 5 1/2% Convertible subordinated notes due 2004 ("2004 Notes") -- 86,179 -------------- ------------- Total subordinated debt 215,000 301,179 -------------- ------------- Total debt 275,000 348,179 Amount due within one year -- -- -------------- ------------- Long-term debt $ 275,000 $ 348,179 ============== =============
Refer to Note 3 of the Notes to Consolidated Financial Statements included in the Company's annual report on Form 10-K for the year ended December 31, 1997, for a further discussion of the bank revolving credit agreement, the Company's uncommitted credit lines, the 2007 Notes and the 2006 Notes. On February 12, 1998, the Company announced its intent to redeem the 2004 Notes on March 16, 1998 at 103.3% of thier principal amount plus accrued interest. Holders of $86,084,000 principal amount of the 2004 Notes elected to convert their notes into 3,879,726 common shares at $22.188 per share plus $640 in cash for fractional shares. The value of the shares issued was credited to common stock and additional capital less the unamortized debt issue expenses applicable to the 2004 Notes. The remaining $95,000 principal amount of the 2004 Notes were redeemed for $98,135, representing 103.3% of the principal amount of such 2004 Notes. (4) Geographic Segment Reporting - The Company's long-lived assets and revenues by geographic area are as follows:
Long-Lived Assets Revenues -------------- ------------- (Expressed in thousands) As of and for the Three Months Ended March 31, 1998 United States $ 361,373 $ 50,922 Kingdom of Thailand 167,681 9,808 ______________ _____________ $ 529,054 $ 60,730 ============== ============= As of December 31, and for the Three Months Ended March 31, 1997 United States $ 366,638 $ 56,239 Kingdom of Thailand 160,666 5,075 ______________ _____________ $ 527,304 $ 61,314 ============== =============
- 5 - Pogo Producing Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (3) Earnings per Share - In 1997, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Prior periods have been restated in conformity with the provisions of SFAS 128. Earnings per common share (basic earnings per share) are based on the weighted average number of shares of common stock outstanding during the periods. Earnings per share and potential common share (diluted earnings per share) consider the effect of dilutive securities as set out below in thousands, except per share amounts:
Three Months Ended March 31, 1998 -------------------------------------------- Income Shares Per Share -------------- ------------- ----------- Basic earnings per share -- $ 184 35,122 $ 0.01 Effect of dilutive securities: ========== Options to purchase common shares -- 443 2004 Notes -- -- 2006 Notes -- -- _____________ ____________ Diluted earnings per share $ 184 35,565 $ 0.01 ============= ============ ========== Antidilutive securities -- Options to purchase common shares -- 876 $ 37.82 2004 Notes 478 2,410 $ 0.20 2006 Notes 1,028 2,726 $ 0.38
Three Months Ended March 31, 1997 (Restated) -------------------------------------------- Income Shares Per Share -------------- ------------- ----------- Basic earnings per share -- $ 12,818 33,348 $ 0.38 Effect of dilutive securities: ========== Options to purchase common shares -- 828 2004 Notes 771 3,887 2006 Notes 1,028 2,726 _____________ ____________ Diluted earnings per share $ 14,617 40,789 $ 0.36 ============= ============ ========== Antidilutive securities -- Options to purchase common shares -- 11 $ 44.27
(5) Comprehensive Income -- During 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). Currently there are no significant amounts to be included in the computation of comprehensive income of the Company, as defined, that are required to be disclosed under the provisions of SFAS 130. As such, total comprehensive income and net income are the same for the three months ended March 31, 1998 and 1997, respectively. - 6 - 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, 1997. 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, 1997, 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 first quarter of 1998 of $184,000 or $0.01 per share (on both a basic and a diluted basis) compared to net income for the first quarter of 1997 of $12,818,000 or $0.38 per share ($14,617,000 or $0.36 per share on a diluted basis). Earnings per common share are based on the weighted average number of common shares outstanding for the first quarter of 1998 of 35,122,000 (35,565,000 on a diluted basis), compared to 33,348,000 (40,789,000 on a diluted basis) for the first quarter of 1997. The increase in the weighted average number of common shares outstanding for the first quarter of 1998, compared to the first quarter of 1997, resulted primarily from the issuance of 3,882,023 shares of its common stock upon the conversion of the Company's 5-1/2% Convertible Subordinated Notes due 2004 (the "2004 Notes") prior to their being redeemed on March 16, 1998 and, to a lesser extent, the exercise of stock options pursuant to the Company's stock option plans. Earnings per common share computations on a diluted basis for the first quarter of 1997 primarily reflect additional common shares issuable upon the assumed conversion of the Company's 2004 Notes and its 5-1/2% Convertible Subordinated Notes, due 2006 (the "2006 Notes") and the elimination of related interest requirements, as adjusted for applicable federal income taxes. The 2006 Notes were antidilutive during the first quarter of 1998. In addition, the number of common shares outstanding in the diluted computation for both quarters is also adjusted to include dilutive shares that are assumed to have been issued by the Company in connection with options exercised during the year, less treasury shares that are assumed to have been purchased by the Company from the option proceeds. During 1997, the Company also adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128, Earnings per Share, resulting in a restatement of the earnings per share calculations for the first quarter of 1997. - 7 - 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 first quarter of 1998 were $60,730,000, a decrease of approximately 1% compared to total revenues of $61,314,000 for the first quarter of 1997. The decrease in the Company's total revenues for the first quarter of 1998, compared to the first quarter of 1997, resulted primarily from decreases in the average price that the Company received for its liquid hydrocarbon (including crude oil, condensate and natural gas liquid ("NGL")) and natural gas production volumes, that were only partially offset by increases in its natural gas and liquid hydrocarbon production volumes. 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 first quarter of 1998 and the same periods in the preceding year. 1st Qtr '98 Compared to 1st Qtr '97 ----------- Increase (decrease) in oil and gas revenues resulting from differences in: Natural gas -- Price . . . . . . . . . . . . . . . $ (6,828) Production. . . . . . . . . . . . . 10,916 -------- 4,088 -------- Crude oil and condensate Price . . . . . . . . . . . . . . . (10,049) Production. . . . . . . . . . . . . 2,821 -------- ( 7,228) -------- NGL and other, net. . . . . . . . . . 2,487 -------- Decrease in oil and gas revenues. . . $ (653) ======== Natural Gas Prices. Prices per thousand cubic feet ("Mcf") that the Company received for its natural gas production during the first quarter of 1998 averaged $2.08 per Mcf, a decrease of approximately 22% from an average price of $2.67 per Mcf that the Company received for its production during the first quarter of 1997. - 8 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Domestic Prices. Prices that the Company received for its domestic natural gas production during the first quarter of 1998 averaged $2.19 per Mcf, a decrease of approximately 22% from an average price of $2.82 per Mcf that the Company received for its domestic natural gas production during the first quarter of 1997. Thailand Prices. The Company's Tantawan Field located in the Kingdom of Thailand commenced production of natural gas and liquid hydrocarbons in February 1997. All of the Company's gas production from the Tantawan Field is sold under a long-term gas sales agreement with the Petroleum Authority of Thailand ("PTT"). The gas sales agreement provided that PTT paid a discounted price during field startup, which continued throughout the majority of the first quarter of 1997. Consequently, the Company does not consider a comparison of prices that the Company received for its natural gas production in the Kingdom of Thailand for first quarter 1998, compared to the first quarter of 1997 to be meaningful. During the first quarter of 1998, the price that the Company received under its long term gas sales contract for natural gas production from the Tantawan Field averaged approximately 83 Thai Baht per Mcf. Based on the Thai Baht to U.S. dollar exchange rates in effect at the time that such production was recorded on the Company's financial statements, the Company recorded an average price of $1.74 per Mcf for its natural gas production from the Kingdom of Thailand during the first quarter of 1998. The price that the Company receives under the gas sales agreement normally adjusts on a semi-annual basis. However, the gas sales agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. Due to the volatility of the Thai Baht and the current economic difficulties in the Kingdom of Thailand and throughout Southeast Asia, the price that the Company received under the gas sales agreement was adjusted on a monthly basis during the first quarter of 1998. However, the adjustments that the Company has received in the Thai Baht price for its natural gas production from the Tantawan Field have not been sufficient to completely ameliorate, in U.S. dollar terms, the decline of the Thai Baht against the U.S. dollar since July 1997. Natural Gas Production. The Company's total natural gas production during the first quarter of 1998 averaged 187.9 million cubic feet ("MMcf") per day, an increase of approximately 45% from an average of 129.7 MMcf per day that the Company produced during the first quarter of 1997. Domestic Production. The Company's domestic natural gas production during the first quarter of 1998 averaged 145.5 MMcf per day, an increase of approximately 30% from an average of 112.1 MMcf per day that the Company produced during the first quarter of 1997. The increase in the Company's natural gas production during the first quarter of 1998, compared to the first quarter of 1997, 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, that was only partially offset by the anticipated decline from certain of the Company's properties. As of May 1, 1998, the Company was not a party to any future natural gas sales contracts. Thailand Production. During the first quarter of 1998, the Company's share of natural gas production from the Tantawan Field averaged approximately 42.4 MMcf per day, an increase of - 9 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations approximately 141% from an average of approximately 17.6 MMcf per day for the first quarter of 1997. 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. Consequently, the Company believes that the increase in natural gas production between the first quarter of 1998 and the first quarter of 1997, although useful for comparative purposes, should not be construed as indicative of future production trends in the Tantawan Field. Crude Oil And Condensate Prices. Prices received by the Company for its crude oil and condensate production during the first quarter of 1998 averaged $14.26 per barrel, a decrease of approximately 36% from the average price of $22.29 per barrel that the Company received during the first quarter of 1997. Domestic Prices. Prices received by the Company for its domestic crude oil and condensate production during the first quarter of 1998 averaged $14.74 per barrel, a decrease of approximately 34% from the average price of $22.48 per barrel that the Company received during the first quarter of 1997. 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. The average price that the Company recorded for its crude oil and condensate production stored on the FPSO for the first quarter of 1998 was $12.04, a decrease of approximately 40% from the average price of $20.06 that the Company recorded for the first quarter of 1997. 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 total crude oil and condensate production during the first quarter of 1998 averaged 16,101 barrels per day, an increase of approximately 16% from an average of 13,903 barrels per day during the first quarter of 1997. Domestic Production. The Company's domestic crude oil and condensate production during the first quarter of 1998 averaged 13,167 barrels per day, an increase of approximately 3% from an average of 12,811 barrels per day during the first quarter of 1997. The increase in the Company's domestic crude oil and condensate production during the first quarter of 1998, compared to the first quarter of 1997, resulted primarily from increased condensate production from wells located in the Gulf of Mexico and, to a lesser extent, increased condensate production from its onshore properties, that was only partially offset by the anticipated decline from certain of the Company's more mature properties. As of May 1, 1998, the Company was not a party to any crude oil swap agreements. Thailand Production. During the first quarter of 1998, the Company's share of crude oil and condensate production from the Tantawan Field averaged approximately 2,944 barrels per day, an increase of approximately 170% from an average of approximately 1,089 barrels per day for the first quarter of 1997. The Company commenced production from its Tantawan Field early in February - 10 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations 1997. Following a field startup phase which ended on March 15, 1997, production from the Tantawan Field stabilized. Consequently, the Company believes that the increase in crude oil and condensate production between the first quarter of 1998 and the first quarter of 1997, although useful for comparative purposes, should not be construed as indicative of future production trends in the Tantawan Field. 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 first quarter of 1998 and 1997 also reflect adjustments for various miscellaneous items. The Company's NGL and "other" net revenues for the first quarter of 1998 increased $2,487,000 from the first quarter of 1997. The increase in the Company's NGL and "other" net revenues for the first quarter of 1998, compared to the first quarter of 1997, was primarily related to an increase in the Company's NGL production from the Company's East Cameron 334 "E" platform, 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 total average liquid hydrocarbon production during the first quarter of 1998 was 20,393 barrels per day, an increase of approximately 34% from an average liquid hydrocarbon production of 15,215 barrels per day during the first quarter of 1997. Operating Costs and Expenses Lease Operating Expenses Company-wide lease operating expenses for the first quarter of 1998 were $16,509,000, an increase of approximately 34% from lease operating expenses of $12,297,000 for the first quarter of 1997. Domestic Lease Operating Expenses. The Company's domestic lease operating expenses for the first quarter of 1998 were $12,247,000, an increase of approximately 18% from domestic lease operating expenses of $10,402,000 for the first quarter of 1997. The increase in domestic lease operating expenses for first quarter of 1998, compared to the first quarter of 1997, resulted primarily from a non-recurring maintenance project on the Company's East Cameron 334 "E" platform and increased costs to the Company (and the entire offshore oil industry) because of an increasing shortage of qualified offshore service contractors, which has permitted such contractors to increase the costs of their services significantly in the last year, and increased expenses related to the leasing of certain equipment in the Gulf of Mexico. Thailand Lease Operating Expenses. The Company's lease operating expenses in the Kingdom of Thailand for the first quarter of 1998 were $4,262,000, an increase of approximately 125% from lease operating expenses of $1,895,000 for the first quarter of 1997. Prior to the commencement of production in the Tantawan Field on February 1, 1997, there were no lease operating expenses incurred by the Company in Thailand as defined by generally accepted - 11 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations accounting principles. Consequently, the Company does not believe that a comparison of lease operating expenses in the Kingdom of Thailand between the first quarter of 1998 and the first quarter of 1997 are meaningful. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relate to lease payments made by a subsidiary of the Company in connection with its bareboat charter of the FPSO, which amounted to $2,742,000 during the first quarter of 1998. General and Administrative Expenses General and administrative expenses for the first quarter of 1998 were $5,485,000, a decrease of approximately 6% from general and administrative expenses of $5,836,000 for the first quarter of 1997. The decrease in general and administrative expenses for the first quarter of 1998, compared with the first quarter of 1997, was primarily related to decreased insurance expense and the delay of certain expenses which were incurred in the first quarter during 1997, but which were not incurred until the second quarter during 1998. Exploration Expenses Exploration expenses consist primarily of delay rentals and geological and geophysical costs which are expensed as incurred. Exploration expenses for the first quarter of 1998 were $3,832,000, an increase of approximately 102% from exploration expenses of $1,900,000 for the first quarter of 1997. The increase in exploration expenses for the first quarter of 1998, compared to the first quarter of 1997, resulted primarily from costs of purchasing licenses for 3-D seismic surveys in the Gulf of Mexico together with the costs associated with conducting a 3-D seismic survey by the Company on its leases in South Louisiana and East Texas in the first quarter of 1998, 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 first quarter of 1998 were $1,308,000, an increase of approximately 42% from dry hole and impairment expenses of $921,000 for the first quarter of 1997. 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. Proved properties are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, 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. - 12 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations 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 basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its oil and gas activities onshore in the United States. The Company's DD&A expense for the first quarter of 1998 was $30,460,000, an increase of approximately 65% from DD&A expense of $18,420,000 for the first quarter of 1997. The increases in DD&A expense for the first quarter of 1998, compared to the first quarter of 1997, 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 first quarter of 1998 was $1.08 per equivalent Mcf ($6.47 per equivalent barrel), an increase of approximately 19% from a composite DD&A rate of $0.91 per equivalent Mcf ($5.47 per equivalent barrel) for the first quarter of 1997. The increase in the composite DD&A rate for all of the Company's producing fields for the first quarter of 1998, compared to the first quarter of 1997, 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 27,922,000 equivalent Mcf (4,654,000 equivalent barrels) during the first quarter of 1998, an increase of approximately 40% from the 19,888,000 equivalent Mcf (3,315,000 equivalent barrels) produced by the Company during the first quarter of 1997. Interest Interest Charges The Company incurred interest charges for the first quarter of 1998 of $6,068,000, an increase of approximately 41% from interest charges of $4,295,000 for the first quarter of 1997. The increases in interest charges for the first quarter of 1998, compared to the first quarter of 1997, were primarily attributable to an increase in the average interest rate on the debt outstanding (resulting primarily from the issuance of the 2007 Notes on May 22, 1997, which bear interest at an 8-3/4% annual interest rate) and an increase in the average amount of the Company's outstanding debt. As of May 1, 1998, the Company was not a party to any interest rate swap agreement. Capitalized Interest Capitalized interest for the first quarter of 1998 was $1,845,000, a decrease of approximately 1% from capitalized interest of $1,870,000 for the first quarter of 1997. The decrease in capitalized interest for the first quarter of 1998, compared to the first quarter of 1997, resulted primarily from a decrease in the amount of capital expenditures subject to interestcapitalization during the first quarter of 1998 ($104,439,000), compared to the first quarter of 1997 ($128,761,000), which was largely offset by an increase in the computed rate that the Company uses to apply on such capital expenditures - 13 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations to arrive at the total amount of capitalized interest. A substantial percentage of the Company's capitalized interest during 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). A substantial percentage of the Company's capitalized interest during the first quarter of 1998 results from capitalization of interest related to capital expenditures for the development of the Benchamas Field in the Kingdom of Thailand. The Company expects its capitalized interest costs to increase in the future as a result of the requirement to capitalize interest attributable to additional capital expenditures incurred in connection with its development of the Benchamas Field in the Gulf of Thailand and several projects in Gulf in Mexico. Foreign Currency Transaction Gain The Company incurred a foreign currency transaction gain of $997,000 during the first quarter of 1998. No comparable gain, or loss, was incurred in the first quarter of 1997. The foreign currency transaction gain resulted from the appreciation against the U.S. dollar of cash and other monetary assets and liabilities denominated in Thai Baht that were on the Company's subsidiary's financial statements during the first quarter of 1998. Although in recent weeks the value of the Thai Baht has shown some signs of stabilizing against the U.S. dollar, the Company cannot predict what the Thai Baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. Income Tax Benefit (Expense) The Company received an income tax benefit of $126,000 for the first quarter of 1998, as opposed to an income tax expense of $6,753,000 for the first quarter of 1997. The income tax benefit for the first quarter of 1998, compared to the income tax expense recorded in the first quarter of 1997, resulted primarily from substantially lower taxable income in the United States and the tax benefit of accrued foreign losses from the Company's operations in the Kingdom of Thailand. LIQUIDITY AND CAPITAL RESOURCES -- Cash Flows The Company's Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 1998, reflects net cash provided by operating activities of $34,815,000. In addition to net cash provided by operating activities, the Company received net proceeds of $970,000 from the exercise of stock options and $525,000 from the sale of certain non-strategic properties and had net borrowings of $13,000,000 under its revolving credit agreement and uncommitted money market credit lines with certain banks. - 14 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations During the first three months of 1998, the Company invested $53,880,000 of such cash flow in capital projects, paid $1,072,000 ($0.03 per share) in cash dividends to holders of the Company's common stock and expended $99,000 in connection with the redemption of its 2004 Notes on March 16, 1998. All of the $53,880,000 invested in capital projects was attributable to projects that were committed to in 1997 and therefore constituted a portion of the 1997 capital budget. As of March 31, 1998, the Company's cash and cash investments were $14,430,000 and its long-term debt stood at $275,000,000. Future Capital Requirements The Company's capital and exploration budget for 1998, 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 $230,000,000. In addition to anticipated capital and exploration expenses, other material 1998 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 May 29, 1998 to stockholders of record as of May 15, 1998. The Company currently anticipates that its available cash and cash investments, cash provided by operating activities and funds available under its revolving credit facility and uncommitted lines of credit with banks will be sufficient to fund the Company's ongoing expenses, its 1998 capital and exploration budget, any currently anticipated costs associated with the Company's Thailand projects during 1998 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. - 15 - Pogo Producing Company and Subsidiaries Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 27 - Financial Data Schedule (B) Reports on Form 8-K A report on Form 8-K was filed on January 28, 1998 setting forth under Item 5 thereof, certain information regarding the time and location of the registrant's annual meeting of stockholders. - 16 - 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 and Chief Financial Officer Date: May 4, 1998 - 17 - 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 March 31, 1998 and the Consolidated Statements of Income for the three months ended March 31, 1998, and is qualified in its entirety by reference to such Consolidated Financial Statements. 1,000 3-MOS DEC-31-1997 MAR-31-1998 14,430 0 71,904 0 9,210 99,920 1,465,523 936,469 661,167 81,274 275,000 37,575 0 0 194,610 661,167 60,661 60,730 16,509 16,509 41,085 0 6,068 58 (126) 184 0 0 0 184 .01 .01 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 (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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