-----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, Elzp5yEi4eAJ3uqChcA6uKbHvqzM6qNUJMef3da+c2Nh4PSstLHHT4LUW8ZKBFum 0mcjW3W8Nk3EoaLkEK4qqw== 0000899243-99-000905.txt : 19990507 0000899243-99-000905.hdr.sgml : 19990507 ACCESSION NUMBER: 0000899243-99-000905 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990506 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: 99612711 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 FORM 10-Q 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 March 31, 1999 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 March 31, 1999: 40,141,061 PART I. FINANCIAL INFORMATION POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended March 31, -------------------- 1999 1998 ---------- --------- (Expressed in thousands, except per share amounts) REVENUES: Oil and gas $37,735 $60,432 Pipeline sales and other 967 229 Gains on sales 37,344 69 ------- ------- Total 76,046 60,730 ------- ------- OPERATING COSTS AND EXPENSES: Lease operating 15,342 16,446 Pipeline operating and natural gas purchases 862 63 General and administrative 7,106 5,485 Exploration 1,765 3,832 Dry hole and impairment 239 1,308 Depreciation, depletion and amortization 23,851 30,460 ------- ------- Total 49,165 57,594 ------- ------- OPERATING INCOME 26,881 3,136 INTEREST: Charges (9,875) (6,068) Income 72 148 Capitalized 3,750 1,845 FOREIGN CURRENCY TRANSACTION GAIN (LOSS) (51) 997 ------- ------- INCOME BEFORE INCOME TAXES 20,777 58 INCOME TAX (EXPENSE) BENEFIT (6,464) 126 ------- ------- NET INCOME $14,313 $ 184 ======= ======= EARNINGS PER COMMON SHARE Basic $0.36 $0.01 ======= ======= Diluted $0.36 $0.01 ======= ======= DIVIDENDS PER COMMON SHARE $0.03 $0.03 ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND POTENTIAL COMMON SHARES OUTSTANDING Basic 40,122 35,122 Diluted 40,252 35,565 See accompanying notes to consolidated financial statements. -1- POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Balance Sheets
March 31, December 31, 1999 1998 ------------ ---------- (Unaudited) (Expressed in thousands, except share amounts) ASSETS CURRENT ASSETS: Cash and cash investments $ 9,419 $ 7,959 Accounts receivable 23,511 24,054 Other receivables 59,244 38,977 Federal income taxes receivable 6,420 - Inventory - product 1,270 969 Inventories - tubulars 12,569 10,594 Other 2,848 2,814 ----------- ---------- Total current assets 115,281 85,367 ----------- ---------- PROPERTY AND EQUIPMENT: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized 1,431,056 1,485,125 Unevaluated properties and properties under development, not being amortized 254,037 215,244 Other, at cost 18,525 17,915 ----------- ---------- 1,703,618 1,718,284 Less--accumulated depreciation, depletion and amortization, including $7,400 and $6,862, respectively, applicable to other property 994,337 992,759 ----------- ---------- 709,281 725,525 ----------- ---------- FOREIGN TAXES RECEIVABLE 27,383 23,482 DEBT ISSUE EXPENSES 13,600 7,727 OTHER 19,671 20,295 ----------- ---------- $ 885,216 $ 862,396 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - operating activities $ 14,273 $ 12,197 Accounts payable - investing activities 76,361 90,102 Accrued interest payable 8,658 3,226 Accrued payroll and related benefits 2,216 1,952 Other 146 2 ----------- ---------- Total current liabilities 101,654 107,479 LONG-TERM DEBT 434,967 434,947 DEFERRED FEDERAL INCOME TAX 69,446 53,869 DEFERRED CREDITS 16,204 16,441 ----------- ---------- Total liabilities 622,271 612,736 ----------- ---------- SHAREHOLDERS' EQUITY: Preferred stock, $1 par; 2,000,000 shares authorized - - Common stock, $1 par; 100,000,000 shares authorized, 40,156,636 and 40,136,254 shares issued, respectively 40,156 40,136 Additional capital 290,697 290,655 Retained earnings (deficit) (66,491) (79,600) Treasury stock (15,575 shares) and other, at cost (1,417) (1,531) ----------- ---------- Total shareholders' equity 262,945 249,660 ----------- ---------- $ 885,216 $ 862,396 =========== ==========
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, -------------------------- 1999 1998 --------- -------- (Expressed in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 39,177 $ 68,538 Operating, exploration, and general and administrative expenses paid (22,999) (27,872) Interest paid (3,937) (3,645) Value added taxes paid (1,551) (2,870) Other 1,196 664 --------- -------- Net cash provided by operating activities 11,886 34,815 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (70,308) (53,880) Proceeds from the sale of properties 67,573 525 --------- -------- Net cash used in investing activities (2,735) (53,355) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the sale of new debt 150,000 -- Borrowings under senior debt agreements 110,020 91,000 Payments under senior debt agreements (260,000) (78,000) Debt issue expenses paid (6,379) - Payment of cash dividend on common stock (1,204) (1,072) Purchase of 2004 Notes - (99) Proceeds from exercise of stock options 42 970 --------- -------- Net cash provided by (used in) financing activities (7,521) 12,799 --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (170) 525 --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS 1,460 (5,216) CASH AND CASH INVESTMENTS AT THE BEGINNING OF THE YEAR 7,959 19,646 --------- -------- CASH AND CASH INVESTMENTS AT THE END OF THE PERIOD $ 9,419 $ 14,430 ========= ======== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 14,313 $ 184 Adjustments to reconcile net income to net cash provided by operating activities - Foreign currency transaction (gain) loss 51 (997) Gain from the sale of properties (37,344) (69) Depreciation, depletion and amortization 23,851 30,460 Dry hole and impairment 239 1,308 Interest capitalized (3,750) (1,845) Deferred federal income taxes 15,597 155 Change in operating assets and liabilities (1,071) 5,619 --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 11,886 $ 34,815 ========= ======== See accompanying notes to consolidated financial statements. -3- POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended March 31, ------------------------------------------------ 1999 1998 --------------------- ------------------------ 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 40,136,254 $ 40,136 33,552,702 $ 33,553 Shares issued upon conversion of the 2004 Notes - - 3,879,726 3,880 Adjustment for fractional shares and other 13,132 13 - - Stock options exercised 7,250 7 142,517 142 ---------- -------- ---------- ----------- Issued at end of period 40,156,636 40,156 37,574,945 37,575 ---------- -------- ---------- ----------- ADDITIONAL CAPITAL: Balance at beginning of year 290,655 144,848 Shares issued upon conversion of the 2004 Notes - 81,233 Adjustment for fractional shares and other (13) - Stock options exercised 55 1,712 -------- ----------- Balance at end of period 290,697 227,793 -------- ----------- RETAINED EARNINGS (DEFICIT): Balance at beginning of year (79,600) (31,971) Net income 14,313 184 Dividends ($0.03 per common share) (1,204) (1,072) -------- ----------- Balance at end of period (66,491) (32,859) -------- ----------- TREASURY STOCK AND OTHER: Balance at beginning of year (15,575) (1,531) (15,575) (324) Activity during the period - 114 - - ---------- -------- ---------- ----------- Balance at end of period (15,575) (1,417) (15,575) (324) ---------- -------- ---------- ----------- COMMON STOCK OUTSTANDING, AT THE END OF THE PERIOD 40,141,061 37,559,370 ========== ========== TOTAL SHAREHOLDERS' EQUITY $262,945 $ 232,185 ======== ===========
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, 1998. (2) LONG-TERM DEBT - Long-term debt and the amount due within one year at March 31, 1999 and December 31, 1998, consists of the following:
March 31, December 31, 1999 1998 -------- -------- (Expressed in thousands) Senior debt - Bank revolving credit agreement LIBO Rate based loans, borrowings at March 31, 1999 and December 31, 1998, at average interest rates of 6.6% and 7.4%, respectively $ 58,000 $205,000 Uncommitted credit lines with banks, borrowings at March 31, 1999 and December 31, 1998 at average interest rates of 5.8% and 6.1%, respectively 1,000 4,000 Banker's acceptance loans, borrowings at March 31, 1999 and December 31, 1998, at average interest rates of 6.2% and 5.9%, respectively 10,967 10,947 -------- -------- Total senior debt 69,967 219,947 -------- -------- Subordinated debt - 8 3/4% Senior subordinated notes due 2007 ("2007 Notes") 100,000 100,000 10 3/8% Senior subordinated notes due 2009 ("2009 Notes") 150,000 - 5 1/2% Convertible subordinated notes due 2006 ("2006 Notes") 115,000 115,000 -------- -------- Total subordinated debt 365,000 215,000 -------- -------- Long-term debt, none due within one year $434,967 $434,947 ======== ========
Refer to Note 3 of Notes to Consolidated Financial Statements included in the Company's annual report on Form 10-K for the year ended December 31, 1998 for a further discussion of the bank revolving credit agreement, the Company's uncommitted credit lines, the banker's acceptance loans, the 2007 Notes, and the 2006 Notes. On January 15, 1999, the Company issued $150,000,000 of 10 3/8% Senior Subordinated Notes, due 2009 (the "2009 Notes"). The proceeds from the issuance of the 2009 Notes were used to repay amounts outstanding under the Company's credit agreement. The 2009 Notes bear interest at a rate of 10 3/8%, payable semiannually in arrears on February 15 and August 15 of each year, commencing August 15, 1999. The 2009 Notes are general unsecured senior subordinated obligations of the Company, are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under the credit agreement, its unsecured credit lines, and bankers acceptances, are equal in right of payment to the 2007 Notes, but are senior in right of payment to its subordinated indebtedness, which currently includes the 2006 Notes. The Company, at its option, may redeem the 2009 Notes in whole or in part, at any time on or after February 15, 2004, at a redemption price of 105.188% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2009 Notes. The 2009 Notes are redeemable at the option of any holder, upon the occurrence of a change in control (as defined in the indenture governing the 2009 Notes), at 101% of their principal amount. The indenture governing the 2009 Notes also imposes certain covenants on the Company that are similar to the covenants contained in the indenture governing the 2007 Notes, 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. As of March 31, 1999, $8,819,000 was available to the Company for common stock dividends under the covenant that restricts certain types of payments and distributions by the Company. -5- POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (3) GEOGRAPHIC SEGMENT REPORTING - The Company's long-lived assets, revenues and operating income (loss) by segment and geographic area are as follows:
TOTAL OIL AND COMPANY GAS PIPELINES OTHER -------- -------- --------- ------- (Expressed in thousands) LONG-LIVED ASSETS: As of March 31, 1999: United States $484,157 $474,884 $5,321 $ 3,952 Kingdom of Thailand 219,915 218,171 - 1,744 Canada 5,209 5,081 - 128 -------- -------- ------ ------- Total $709,281 $698,136 $5,321 $ 5,824 ======== ======== ====== ======= As of December 31, 1998: United States $502,787 $493,633 $4,992 $ 4,162 Kingdom of Thailand 209,552 207,756 - 1,796 Canada 13,186 13,083 - 103 -------- -------- ------ ------- Total $725,525 $714,472 $4,992 $ 6,061 ======== ======== ====== ======= REVENUES: For the three months ended March 31, 1999 United States $ 69,887 $ 31,571 $ 990 $37,326 Kingdom of Thailand 5,155 5,145 - 10 Canada 1,004 1,019 - (15) -------- -------- ------ ------- Total $ 76,046 $ 37,735 $ 990 $37,321 ======== ======== ====== ======= For the three months ended March 31, 1998 United States $ 50,922 $ 50,624 $ - $ 298 Kingdom of Thailand 9,808 9,808 - - -------- -------- ------ ------- Total $ 60,730 $ 60,432 $ - $ 298 ======== ======== ====== ======= OPERATING INCOME (LOSS): For the three months ended March 31, 1999 United States $ 31,866 $ (5,554) $ 94 $37,326 Kingdom of Thailand (4,157) (4,167) - 10 Canada (828) (813) - (15) -------- -------- ------ ------- Total $ 26,881 $(10,534) $ 94 $37,321 ======== ======== ====== ======= For the three months ended March 31, 1998 United States $ 4,031 $ 3,733 $ - $ 298 Kingdom of Thailand (895) (895) - - -------- -------- ------ ------- Total $ 3,136 $ 2,838 $ - $ 298 ======== ======== ====== =======
-6- POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (4) COMPREHENSIVE INCOME - During 1998, the Company adopted the Financial Accounting Standards Board's (FASB'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. The Company did report a foreign currency translation gain of $114,000 in the three months ended March 31, 1999, which is reflected in shareholders' equity and represents less than one percent of the Company's reported pretax income for 1999. As such, total comprehensive income and net income are materially the same for the three months ended March 31, 1999 and 1998. (5) IMPACT OF SFAS 133 - In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities: ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair market value and that changes in the derivative's fair market value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for the Company in 2000 but early adoption is allowed. The Company has not yet quantified the impact of adopting SFAS 133 or determined the timing or method of adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income should the Company enter into transactions covered by the pronouncement. (6) EARNINGS PER SHARE - 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, 1999 -------------------------------- Income Shares Per Share -------- ------ --------- BASIC EARNINGS PER SHARE - $ 14,313 40,122 $ 0.36 Effect of dilutive securities: ========= Options to purchase common shares - 130 -------- ------ DILUTED EARNINGS PER SHARE $ 14,313 40,252 $ 0.36 ======== ====== ========= Antidilutive securities - Options to purchase common shares - 2,152 $ 21.19 2006 Notes 1,028 2,726 $ 0.38 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 -------- ------ DILUTED EARNINGS PER SHARE $ 184 35,565 $ 0.01 ======== ====== ========= Antidilutive securities - Options to purchase common shares - 876 $ 37.82 2004 Notes(a) 478 2,410 $ 0.20 2006 Notes 1,028 2,726 $ 0.38 (a) The 2004 Notes were converted to common stock or called in the first quarter of 1998. -7- 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, 1998. 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, 1998, 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 Net income The Company reported net income for the first quarter of 1999 of $14,313,000 or $0.36 per share (on both a basic and a diluted basis), compared to net income for the first quarter of 1998 of $184,000 or $0.01 per share (on both a basic and a diluted basis). The increase in net income during the first quarter of 1999, compared to the first quarter of 1998, was primarily related to a net gain recognized by the Company from the sale of certain properties, including the previously announced sale of the Lopeno Field in South Texas. These property sales were part of an effort by the Company to sell its non- strategic and/or underperforming properties to generate cash and maximize its focus on properties with greater exploration potential. If the gain of $37,344,000 related to the sale of such properties is excluded, the Company would have reported a net loss for the first quarter of 1999 of $9,961,000 or $0.25 per share (on both a basic and a diluted basis). Earnings per common share are based on the weighted average number of common shares outstanding for the first quarter of 1999 of 40,122,000 (40,252,000 on a diluted basis), compared to 35,122,000 (35,565,000 on a diluted basis) for the first quarter of 1998. The increase in the weighted average number of common shares outstanding for the first quarter of 1999, compared to the first quarter of 1998, resulted primarily from the issuance of approximately 3,900,000 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, the issuance as of August 17, 1998 of approximately 2,500,000 shares of common stock to former holders of Arch capital stock and convertible debt securities in connection with the Company's acquisition of Arch Petroleum Inc. ("Arch") and, to a lesser extent, the issuance of common stock upon the exercise of stock options pursuant to the Company's incentive plans. In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 128, the earnings per share computation on a diluted basis in the periods presented reflect additional shares of common stock issuable upon the assumed exercise of options to purchase common shares under the Company's incentive plans, less treasury shares that are assumed to have been purchased by the Company from the option proceeds. Total Revenues The Company's total revenues for the first quarter of 1999 were $76,046,000, an increase of approximately 25% from total revenues of $60,730,000 for the first quarter of 1998. The increase in the Company's total revenues for 1999, compared to 1998, resulted primarily from the gains on sales of properties previously discussed and, to a much lesser extent, an increase in pipeline sales related to the Saginaw pipeline, which was acquired as part of the Arch acquisition, that was only partially offset by a substantial decrease in oil and gas revenues. Oil and Gas Revenues The Company's oil and gas revenues for the first quarter of 1999 were $37,735,000, a decrease of approximately 38% from oil and gas revenues of $60,432,000 for the first quarter of 1998. The following table reflects an analysis of variances in the Company's oil and gas revenues (expressed in thousands) between 1999 and -8- POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations 1998: Increase (decrease) in oil and gas revenues 1st Qtr resulting from variances in: 1999 Compared to 1st Qtr 1998 ----------- Natural gas -- Price.............................................. $ (6,307) Production......................................... (8,538) -------- (14,845) -------- Crude oil and condensate -- Price.............................................. (3,410) Production......................................... (1,430) -------- (4,840) -------- Natural Gas Liquids................................... (3,012) -------- Increase (decrease) in oil and gas revenues........ $(22,697) ======== The decrease in the Company's oil and gas revenues in the first quarter of 1999, compared to the first quarter of 1998, is related to declines in the Company's natural gas production volumes, a decline in the average prices that it received for its natural gas and oil, condensate and NGL ("liquid hydrocarbons") production volumes and, to a lesser extent, declines in its liquid hydrocarbon production volumes.
Comparison of Increases (Decreases) in: 1st Qtr 1st Qtr % Change Natural Gas -- 1999 1998 1999 to 1998 ------------ ------------ ---------------- Average prices North America(a)............................................ $ 1.76 $ 2.19 (20%) Kingdom of Thailand(b)...................................... $ 1.51 $ 1.74 (13%) Company-wide average price............................. $ 1.71 $ 2.08 (18%) Average daily production volumes (MMcf per day) North America(a)............................................ 107.1 145.5 (26%) Kingdom of Thailand......................................... 25.4 42.4 (40%) ------- ------- Company-wide average daily production.................. 132.5 187.9 (29%) ======= ======= Crude Oil and Condensate -- Average prices North America(a)............................................ $ 11.67 $ 14.74 (21%) Kingdom of Thailand......................................... $ 14.28 $ 12.04 19% Company-wide average price............................. $ 11.90 $ 14.26 (17%) Average daily production volumes (Bbls per day) North America(a)............................................ 13,439 13,157 2% Kingdom of Thailand......................................... 1,328 2,944 (54%) ------- ------- Company-wide average daily production.................. 14,767 16,101 (8%) ======= ======= Total Liquid Hydrocarbons -- Company-wide average daily production (Bbls per day).......... 16,938 20,393 (17%) ======= =======
____________________________ -9- POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (a) North American average prices and production reflect production from the United States and Canada for the first quarter of 1999, but only production from the United States for the first quarter of 1998. The Company acquired its interests in Canada as part of the Arch acquisition which closed during the third quarter of 1998. "MMcf" and "Bbls" stand for million cubic feet and barrels, respectively. (b) The Company is paid for its natural gas production in the Kingdom of Thailand in Thai Baht. The average prices are presented in dollars based on the revenue recorded in the Company's financial records. The average price that the Company received for its natural gas production in the Kingdom of Thailand during the first quarter of 1999 reflects the impact of the penalty provisions of the Company's gas sales agreement with the Petroleum Authority of Thailand due to the Company's failure to meet its minimum contractual delivery obligations. Natural Gas Thailand Prices. The price that the Company receives under the Gas Sales Agreement with the Petroleum Authority of Thailand ("PTT") is subject to a penalty provision if the Company does not meet the minimum delivery requirements set forth in the agreement. Commencing on October 1, 1998, and continuing throughout the first quarter of 1999, the Company and its joint venture partners have not met the contractual minimum delivery requirements under the Gas Sales Agreement. This has permitted PTT to reduce the price it pays on a portion of the natural gas which the Company has sold to PTT by 25% from the then current contract price. If these penalty provisions had not been in effect, the average price that the Company would have received for its production in the Kingdom of Thailand for the first quarter of 1999 would have been approximately $1.73. The Company currently believes that it will be able to meet its contractual delivery obligations to PTT and will no longer suffer a penalty under the Gas Sales Agreement when production commences from new facilities, including the Benchamas Field, during the third quarter of 1999. Production. The decrease in the Company's natural gas production during the first quarter of 1999, compared to the first quarter of 1998, was related in large measure to decreased production from the Company's East Cameron Block 334 "E" platform, decreased production from the Tantawan Field in the Kingdom of Thailand that was partially attributable to extended periods during which platforms were shut-in during an in-fill drilling program and, to a lesser extent, the sale of the Lopeno Field and the anticipated natural decline in deliverability from certain of the Company's properties. The decline in the Company's natural gas production was partially offset by successful development of the Company's Main Pass Block 226 field, its continued successful offshore and onshore drilling and workover program, and production from properties that the Company acquired in its acquisition of Arch, including its Canadian properties. As of March 31, 1999, the Company was not a party to any future natural gas sales contracts. Crude Oil and Condensate Thailand Prices. Since the inception of production from the Tantawan Field, crude oil and condensate has been stored on the FPSO until an economic quantity was accumulated for offloading and sale. Prices that the Company receives for its crude oil and condensate production from Thailand are based on world benchmark prices, which are denominated in dollars. In addition, the Company is generally paid for its crude oil and condensate production from Thailand in U.S. dollars. Production. The increase in the Company's North American crude oil and condensate production during the first quarter of 1999, compared to the first quarter of 1998, resulted primarily from increased production from the Company's Permian basin properties due to an active workover and recompletion program commenced in late 1998 and additional production from properties acquired in the Arch acquisition, that was only partially offset by -10- POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations the anticipated natural decline in deliverability from certain of the Company's onshore and offshore properties. On a company-wide basis, the increase in North American crude oil and condensate production was not sufficient to offset the decline in production from the Tantawan Field in the Kingdom of Thailand. Crude oil and condensate production from the Tantawan Field declined, in part, due to disappointing reservoir performance and, in part, due to the need to shut-in production from platforms during the in-fill drilling program that commenced during the first quarter of 1999. As of March 31, 1999, the Company was not a party to any crude oil swaps or futures contracts. NGL Production. The Company's oil and gas revenues, and its total liquid hydrocarbon production, reflect the production and sale by the Company of NGL, which are liquid products extracted from natural gas production. The decrease in NGL revenues for the first quarter of 1999, compared with the first quarter of 1998, related, in almost equal measure, to a decrease in the average price that the Company received for its NGL and, to a lesser extent, a decrease in the Company's NGL production volumes. Costs and Expenses
1st Qtr 1st Qtr % Change Comparison of Increases (Decreases) in: 1999 1998 1999 to 1998 ----------------- ---------------- ----------------- Lease Operating Expenses North America.......................................... $11,233,000 $12,247,000 ( 8%) Kingdom of Thailand.................................... $ 4,109,000 $ 4,262,000 ( 4%) Total Lease Operating Expenses................... $15,342,000 $16,509,000 ( 7%) General and Administrative Expenses....................... $ 7,106,000 $ 5,485,000 30% Exploration Expenses...................................... $ 1,765,000 $ 3,832,000 (54%) Dry Hole and Impairment Expenses.......................... $ 239,000 $ 1,308,000 (817%) Depreciation, Depletion and Amortization (DD&A) Expenses.............................................. $23,851,000 $30,460,000 (22%) DD&A rate.............................................. $1.11 $1.08 3% Mcfe produced (a)...................................... 21,068,000 27,922,000 (25%) Interest-- Charges................................................ $ 9,875,000 $ 6,068,000 63% Capitalized Interest Expense.......................... $3, 750,000 $ 1,845,000 103% Foreign Currency Transaction Gain (Loss).................. $ (51,000) $ 997,000 N/A Income Tax Benefit (Expense).............................. $(6,464,000) $ 126,000 N/A
_____________________ (a) "Mcfe" stands for thousand of cubic feet equivalent. Lease Operating Expenses. The decrease in North American lease operating expenses for the first quarter of 1999, compared to the first quarter of 1998, was primarily related to a non-recurring maintenance project on the Company's East Cameron 334 "E" platform that occurred during the first quarter of 1998 for which no similar expenses were incurred during the first quarter of 1999 and, to a lesser extent, the results of a company-wide cost reduction program and decreased severance taxes. The decrease in lease operating expenses in the Kingdom of Thailand for -11- POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations the first quarter of 1999, compared to the first quarter of 1998, was primarily related to an ongoing cost reduction program. General and Administrative Expenses The increase in general and administrative expenses for the first quarter of 1999, compared with the first quarter of 1998, was primarily related to an increase in the size of the Company's work force due to the Arch acquisition, and to normal salary and concomitant benefit expense adjustments. Exploration Expenses Exploration expenses consist primarily of rental payments required under oil and gas leases to hold non-producing properties ("delay rentals") and exploratory geological and geophysical costs which are expensed as incurred. The decrease in exploration expense for the first quarter of 1999, compared to the first quarter of 1998, resulted primarily from decreased geophysical activity by the Company in most of its operational areas except Canada, where the Company participated in a significant 3-D survey during the first quarter of 1999, that was also partially offset by a small increase in delay rental payments. Depreciation, Depletion and Amortization Expenses The decrease in the Company's Depreciation, Depletion and Amortization ("DD&A") expense for the first quarter of 1999, compared to the first quarter of 1998, resulted primarily from a decrease in the Company's natural gas and liquid hydrocarbon production, that was only partially offset by an increase in the Company's composite DD&A rate. The increase in the composite DD&A rate for all of the Company's producing fields for the first quarter of 1999, compared to the first quarter of 1998, 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. Management currently anticipates that this trend will continue for the foreseeable future, resulting in generally increasing DD&A rates. Interest Interest Charges. The increase in the Company's interest charges for the first quarter of 1999, compared to the first quarter of 1998, resulted primarily from an increase in the average amount of the Company's outstanding debt and, to a lesser extent, increased average interest rates on the debt outstanding (resulting primarily from the issuance of the 10 3/8% Senior Subordinated Notes due 2009 (the "2009 Notes") on January 15, 1999). As of March 31,1999, the Company was not a party to any interest rate swap agreements. Management currently expects the average interest rate on its outstanding debt to continue to increase, primarily due to the issuance of the 2009 Notes. Capitalized Interest. The increase in capitalized interest for the first quarter of 1999, compared to the first quarter of 1998, resulted primarily from an increase in the amount of capital expenditures subject to interest capitalization during the first quarter of 1999 ($186,533,000), compared to the first quarter of 1998 ($104,439,000), and from an increase in the computed rate that the Company uses to apply on such capital -12- POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations expenditures to arrive at the total amount of capitalized interest. A substantial percentage of the Company's capitalized interest expense resulted from capitalization of interest related to capital expenditures for the development of the Benchamas Field in the Gulf of Thailand and, to a lesser extent, several development projects in the Gulf of Mexico. Foreign Currency Transaction Gain (Loss) The foreign currency transaction gain and loss each resulted primarily from the fluctuation 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 respective periods. 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 currencies under a "managed float" program arrangement. During the first quarter of 1998, the value of the Thai Baht generally strengthened against the U.S. dollar, resulting in a foreign currency transaction gain. However, in the first quarter of 1999, the value of the Thai Baht weakened against the U.S. dollar, resulting in a foreign currency transaction loss. The Company cannot predict what the Thai Baht to U. S. dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. As of March 31, 1999, the Company was not a party to any financial instrument that was intended to constitute a foreign currency hedging arrangement. Income Tax Benefit (Expense) The Company's income tax expense for the first quarter of 1999, compared to its income tax benefit for the first quarter of 1998, resulted primarily from a pre-tax gain on the sale of the Lopeno Field, that was only partially offset by substantially lower revenues 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 first quarter of 1999 reflects net cash provided by operating activities of $11,886,000. In addition to net cash provided by operating activities, the Company received $67,573,000 from the sale of certain non-strategic and/or underperforming properties, proceeds of $150,000,000 from the sale of its 2009 Notes and net proceeds of $42,000 from the exercise of stock options. During the first quarter of 1999, the Company invested $70,308,000 of such cash flow in capital projects, repaid a net $149,980,000 under its credit agreement, paid $6,379,000 in debt issuance expenses and paid $1,204,000 ($0.03 per share) in cash dividends to holders of the Company's common stock. As of March 31, 1999, the Company's cash and cash investments were $9,419,000 and its long-term debt stood at $434,967,000. Future Capital Requirements The Company's capital and exploration budget for 1999, 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 $170,000,000. The Company currently anticipates that its available cash and cash investments, cash provided by operating activities, funds available under its credit agreement, uncommitted credit lines and banker's acceptance facilities, and amounts that the Company currently believes that it can obtain from the issuance of new debt and convertible preferred securities, or -13- POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations asset sales, will be sufficient to fund the Company's ongoing operating, interest and general and administrative expenses, any currently anticipated costs associated with the Company's projects during 1999, and future dividend payments at current levels (including a dividend payment of $0.03 per share to be paid on May 28, 1999 to shareholders of record on May 14, 1999). Subject to favorable market conditions and other factors, the Company also currently intends to issue convertible preferred equity securities during the second quarter of 1999 to assist in funding its future capital and exploration plans. The declaration of future dividends on the Company's common stock will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, its ability to pay dividends under certain covenants contained in its debt instruments, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors. Other Matters Year 2000 Readiness Disclosure. Information regarding the Company's Year 2000 readiness is contained in the Company's annual report on Form 10-K for the year ended December 31, 1998 and reference is made to the information contained there. There has been no material change in the Company's Year 2000 readiness since that information disclosed. 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 Report filed on January 27, 1999, announcing the date of the Company's annual shareholder's meeting in 1999. -14- 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 6, 1999 -15- 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, 1999 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 MAR-31-1999 9,419 0 82,755 0 13,839 115,281 1,703,618 994,337 885,216 101,654 434,967 0 0 40,143 222,802 885,216 38,702 76,046 16,204 16,204 32,961 0 9,875 20,777 6,464 14,313 0 0 0 14,313 0.36 0.36 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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