10-Q 1 0001.txt 2ND QUARTER, 2000 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 June 30, 2000 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 June 30, 2000: 40,384,548 PART I. FINANCIAL INFORMATION POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- --------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (Expressed in thousands, except per share amounts) REVENUES: Oil and gas $108,530 $ 43,159 $211,007 $ 80,894 Pipeline sales and other 3,476 1,263 6,503 2,230 Gains (losses) on sales (9) 406 (14) 37,750 -------- -------- -------- -------- Total 111,997 44,828 217,496 120,874 -------- -------- -------- -------- OPERATING COSTS AND EXPENSES: Lease operating 24,215 12,952 46,006 28,517 Pipeline operating and natural gas purchases 3,156 1,336 6,546 2,198 General and administrative 7,539 6,746 17,962 13,629 Exploration 2,114 1,374 5,787 3,139 Dry hole and impairment 2,120 791 7,192 1,030 Depreciation, depletion and amortization 33,082 23,394 66,046 47,245 -------- -------- -------- -------- Total 72,226 46,593 149,539 95,758 -------- -------- -------- -------- OPERATING INCOME (LOSS) 39,771 (1,765) 67,957 25,116 -------- -------- -------- -------- INTEREST: Charges (8,210) (9,234) (16,956) (19,109) Income 186 238 479 310 Capitalized 4,604 5,017 9,614 8,767 MINORITY INTEREST - Dividends and costs associated with preferred securities of a subsidiary trust (2,559) (799) (5,117) (799) FOREIGN CURRENCY TRANSACTION GAIN (LOSS) (794) 460 (1,121) 409 -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES 32,998 (6,083) 54,856 14,694 INCOME TAX BENEFIT (EXPENSE) (14,689) 3,077 (24,591) (3,387) -------- -------- -------- -------- NET INCOME (LOSS) $ 18,309 $ (3,006) $ 30,265 $ 11,307 ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE Basic $ 0.45 $ (0.07) $ 0.75 $ 0.28 ======== ======== ======== ======== Diluted $ 0.42 $ (0.07) $ 0.71 $ 0.28 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $ 0.03 $ 0.03 $ 0.06 $ 0.06 ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND POTENTIAL COMMON SHARES OUTSTANDING: Basic 40,382 40,141 40,337 40,138 Diluted 50,052 40,141 47,263 40,315
See accompanying notes to consolidated financial statements. -1- POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Balance Sheets
June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) (Expressed in thousands except share amounts) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 42,145 $ 6,267 Accounts receivable 44,859 37,321 Other receivables 25,967 35,870 Inventory - Product 15,767 7,209 Inventories - Tubulars 9,645 10,352 Other 2,462 2,370 ----------- ----------- Total current assets 140,845 99,389 ----------- ----------- PROPERTY AND EQUIPMENT: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized 1,601,916 1,638,321 Unevaluated properties and properties under development, not being amortized 220,726 144,357 Pipelines, at cost 7,095 6,984 Other, at cost 13,567 13,103 ----------- ----------- 1,843,304 1,802,765 ----------- ----------- Accumulated depreciation, depletion and amortization Oil and gas (1,066,039) (1,006,542) Pipelines (1,656) (1,534) Other (7,986) (7,329) ----------- ----------- (1,075,681) (1,015,405) ----------- ----------- Property and equipment, net 767,623 787,360 ----------- ----------- OTHER ASSETS: Foreign tax net operating losses 5,299 16,237 Foreign value added taxes receivable 10,663 12,025 Debt issue expenses 11,679 12,686 Other 21,301 20,496 ----------- ----------- 48,942 61,444 ----------- ----------- $ 957,410 $ 948,193 =========== ===========
See accompanying notes to consolidated financial statements. -2- POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Balance Sheets
June 30, December 31, 2000 1999 --------- ----------- (Unaudited) (Expressed in thousands except share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - operating activities $ 21,218 $ 21,724 Accounts payable - investing activities 38,656 62,878 Accrued interest payable 7,327 7,457 Accrued dividends associated with preferred securities of a subsidiary trust 813 813 Accrued payroll and related benefits 3,208 2,149 Other 475 208 -------- -------- Total current liabilities 71,697 95,229 -------- -------- LONG-TERM DEBT 365,000 375,000 DEFERRED FEDERAL INCOME TAX 57,108 51,177 DEFERRED CREDITS 20,197 13,524 -------- -------- Total liabilities 514,002 534,930 -------- -------- MINORITY INTEREST: Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust, net of unamortized issue expenses 144,837 144,751 -------- -------- SHAREHOLDERS' EQUITY: Preferred stock, $1 par; 2,000,000 shares authorized - - Common stock, $1 par; 100,000,000 shares authorized, 40,400,123 and 40,279,661 shares issued, respectively 40,400 40,279 Additional capital 294,107 291,909 Retained earnings (deficit) (34,451) (62,291) Treasury stock (15,575 shares) and other, at cost (1,485) (1,385) -------- -------- Total shareholders' equity 298,571 268,512 -------- -------- $957,410 $948,193 ======== ========
See accompanying notes to consolidated financial statements. -3- POGO PRODUCING COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, ------------------------ 2000 1999 (Expressed in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $200,589 $ 80,740 Operating, exploration, and general and administrative expenses paid (76,807) (47,254) Interest paid (16,061) (12,242) Federal income taxes received 3,000 6,446 Federal income taxes paid (3,000) (8,000) Value added taxes received (paid) 1,362 (3,956) Other 301 597 -------- --------- Net cash provided by operating activities 109,384 16,331 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (57,665) (129,179) Proceeds from the sale of properties - 81,983 -------- --------- Net cash used in investing activities (57,665) (47,196) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of new debt - 150,000 Proceeds from issuance of new financing - 150,000 Borrowings under senior debt agreements 67,000 250,053 Payments under senior debt agreements (77,000) (470,000) Payments of cash dividends on common stock (2,425) (2,407) Payments of preferred dividends of a subsidiary trust (4,875) - Payment of financing issue expenses (22) (11,425) Proceeds from exercise of stock options and other 1,876 59 -------- --------- Net cash (used in) provided by financing activities (15,446) 66,280 -------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (395) (305) -------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 35,878 35,110 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 6,267 7,959 -------- --------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 42,145 $ 43,069 ======== ========= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 30,265 $ 11,307 Adjustments to reconcile net income to net cash provided by operating activities - Minority interest 5,117 799 Foreign currency transaction losses (gains) 1,121 (409) Losses (gains) from the sales of properties 14 (37,750) Depreciation, depletion and amortization 66,046 47,245 Dry hole and impairment 7,192 1,030 Interest capitalized (9,614) (8,767) Deferred federal income taxes 6,373 6,139 Change in operating assets and liabilities 2,870 (3,263) -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $109,384 $ 16,331 ======== =========
See accompanying notes to consolidated financial statements. -4- POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Unaudited)
Six Months Ended June 30, ------------------------------------------- 2000 1999 --------------------- -------------------- 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 40,279,661 $ 40,279 40,136,254 $ 40,136 Stock options exercised 120,462 121 8,250 8 Adjustment for fractional shares and other - - 13,132 13 ---------- -------- ---------- -------- Issued at end of period 40,400,123 40,400 40,157,636 40,157 ---------- -------- ---------- -------- ADDITIONAL CAPITAL: Balance at beginning of year 291,909 290,655 Stock options exercised 2,198 71 Adjustment for fractional shares and other - (13) -------- -------- 294,107 290,713 -------- -------- RETAINED EARNINGS (DEFICIT): Balance at beginning of year (62,291) (79,600) Net income 30,265 11,307 Dividends ($0.06 per common share) (2,425) (2,407) -------- -------- Balance at end of period (34,451) (70,700) -------- -------- TREASURY STOCK AND OTHER: Balance at beginning of year (15,575) (1,385) (15,575) (1,531) Activity during the period - (100) - 126 ---------- -------- ---------- -------- Balance at end of period (15,575) (1,485) (15,575) (1,405) ---------- -------- ---------- -------- COMMON STOCK OUTSTANDING, AT THE END OF THE PERIOD 40,384,548 40,142,061 ========== ========== TOTAL SHAREHOLDERS' EQUITY $298,571 $258,765 ======== ========
See accompanying notes to consolidated financial statements. -5- 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 and 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, 1999. (2) LONG-TERM DEBT - Long-term debt and the amount due within one year at June 30, 2000 and December 31, 1999, consist of the following:
June 30, December 31, 2000 1999 -------- ----------- (Expressed in thousands) Senior debt - Bank revolving credit agreement LIBO Rate based loans, borrowings at an average interest rate of 7.8% $ - $ 5,000 Uncommitted credit lines with banks, borrowings at an average interest rate of 5.9% - 5,000 -------- -------- Total senior debt - 10,000 -------- -------- 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") 150,000 150,000 5 1/2% Convertible subordinated notes due 2006 ("2006 Notes") 115,000 115,000 -------- -------- Total subordinated debt 365,000 365,000 -------- -------- Long-term debt, none due within one year $365,000 $375,000 ======== ========
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, 1999, for a further discussion of the Company's debt agreements. Effective May 3, 2000, the borrowing base under the Company's bank revolving credit agreement was increased to $200,000,000 and the restriction against new indebtedness was increased a corresponding amount to $565,000,000. As of June 30, 2000 $34,700,000 was available to the Company for common stock dividends under the most restrictive covenants included in the indentures governing the Company's various debt agreements. (3) IMPACT OF SFAS 133 - In June 1998, the FASB issued SFAS 133, Accounting for Derivative Investments and Hedging Activities. 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. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the FASB issued SFAS 137 which deferred the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. A company may implement SFAS 133 as of the beginning of any fiscal quarter after issuance, however, the statement cannot be applied retroactively. The Company does not plan to early adopt SFAS 133. The Company has not yet quantified the impact of the adoption of SFAS 133. -6- POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (4) BUSINESS SEGMENT INFORMATION - Financial information by operating segment is presented below:
Company Oil and Gas Pipelines Other -------- ----------- --------- -------- (Expressed in thousands) LONG-LIVED ASSETS: As of June 30, 2000: United States $423,372 $414,720 $5,439 $ 3,213 Kingdom of Thailand 337,187 335,123 - 2,064 Canada 7,064 6,760 - 304 -------- -------- ------ ------- Total $767,623 $756,603 $5,439 $ 5,581 ======== ======== ====== ======= As of December 31, 1999: United States $440,914 $432,034 $5,450 $ 3,430 Kingdom of Thailand 340,204 338,084 - 2,120 Canada 6,242 6,018 - 224 -------- -------- ------ ------- Total $787,360 $776,136 $5,450 $ 5,774 ======== ======== ====== ======= REVENUES: For the three months ended June 30, 2000 United States $ 67,977 $ 64,595 $3,210 $ 172 Kingdom of Thailand 42,975 42,890 - 85 Canada 1,045 1,045 - - -------- -------- ------ ------- Total $111,997 $108,530 $3,210 $ 257 ======== ======== ====== ======= For the three months ended June 30, 1999 United States $ 38,969 $ 37,218 $1,482 $ 269 Kingdom of Thailand 4,959 5,042 - (83) Canada 900 899 - 1 -------- -------- ------ ------- Total $ 44,828 $ 43,159 $1,482 $ 187 ======== ======== ====== ======= For the six months ended June 30, 2000 United States $134,400 $128,031 $6,592 $ (223) Kingdom of Thailand 81,194 81,108 - 86 Canada 1,902 1,868 - 34 -------- -------- ------ ------- Total $217,496 $211,007 $6,592 $ (103) ======== ======== ====== ======= For the six months ended June 30, 1999 United States $108,856 $ 68,789 $2,472 $37,595 Kingdom of Thailand 10,114 10,187 - (73) Canada 1,904 1,918 - (14) -------- -------- ------ ------- Total $120,874 $ 80,894 $2,472 $37,508 ======== ======== ====== ======= OPERATING INCOME (LOSS): For the three months ended June 30, 2000 United States $ 18,973 $ 18,919 $ (118) $ 172 Kingdom of Thailand 21,172 21,087 - 85 Canada (374) (374) - - -------- -------- ------ ------- Total $ 39,771 $ 39,632 $ (118) $ 257 ======== ======== ====== ======= For the three months ended June 30, 1999 United States $ 1,259 $ 1,157 $ (167) $ 269 Kingdom of Thailand (2,234) (2,151) - (83) Canada (790) (791) - 1 -------- -------- ------ ------- Total $ (1,765) $ (1,785) $ (167) $ 187 ======== ======== ====== ======= For the six months ended June 30, 2000 United States $ 31,989 $ 32,552 $ (340) $ (223) Kingdom of Thailand 36,535 36,449 - 86 Canada (567) (601) - 34 -------- -------- ------ ------- Total $ 67,957 $ 68,400 $ (340) $ (103) ======== ======== ====== ======= For the six months ended June 30, 1999 United States $ 33,125 $ (4,397) $ (73) $37,595 Kingdom of Thailand (6,391) (6,318) - (73) Canada (1,618) (1,604) - (14) -------- -------- ------ ------- Total $ 25,116 $(12,319) $ (73) $37,508 ======== ======== ====== =======
-7- POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (5) 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 Six Months Ended June 30, 2000 June 30, 2000 --------------------------------- ----------------------------------- Income Shares Per Share Income Shares Per Share --------- --------- ---------- -------- ---------- ---------- BASIC EARNINGS PER SHARE - $18,309 40,382 $ 0.45 $30,265 40,337 $ 0.75 ====== ====== Effect of dilutive securities: Options to purchase common shares - 628 - 610 2006 Notes 1,028 2,726 - - Trust Preferred Securities 1,584 6,316 3,169 6,316 ------- ------ ------- ------ DILUTED EARNINGS PER SHARE $20,921 50,052 $ 0.42 $33,434 47,263 $ 0.71 ======= ====== ====== ======= ====== ====== Antidilutive securities - Options to purchase common shares - 224 $34.82 - 226 $34.72 2006 Notes - - - 2,056 2,726 $ 0.75
Three Months Ended Six Months Ended June 30, 2000 June 30, 2000 --------------------------------- ----------------------------------- Income Shares Per Share Income Shares Per Share --------- --------- ---------- -------- ---------- ---------- BASIC EARNINGS PER SHARE - $(3,006) 40,141 $(0.07) $11,307 40,121 $ 0.28 ====== ====== Effect of dilutive securities: Options to purchase common shares - - - 17 ------- ------ ------- ------ DILUTED EARNINGS PER SHARE $(3,006) 40,141 $(0.07) $11,307 40,138 $ 0.28 ======= ====== ====== ======= ====== ====== Antidilutive securities - Options to purchase common shares - 2,521 $19.35 - 2,195 $21.14 2006 Notes 1,028 2,726 $ 0.38 2,056 2,726 $ 0.75 Trust Preferred Securities (a) 488 1,943 $ 0.25 490 977 $ 0.50
(a) The Trust Preferred Securities were issued on June 2, 1999. (6) COMPREHENSIVE INCOME - During 1998, the Company adopted the Financial Accounting Standards Board's (FASB) 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. -8- POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (7) PRICE HEDGE TRANSACTIONS - During the first six months of 2000, approximately 26% of the Company's equivalent production was subject to hedge positions. No significant amounts of hedge positions were held by the Company in the first six months of 1999 and approximately 7% of the Company's equivalent production was subject to hedge positions in all of 1999. As of June 30, 2000, the Company had entered into commodity price hedging contracts with respect to its natural gas production for 2000 as follows:
NYMEX Contract Price per MMBtu(a) ---------------------------------- Collars Fair Volume in ------------------- Market Period MMBtu(a) Swaps Floors Ceilings Value (b) ------ --------- ----- ------ -------- --------- Price Swap Contracts July 2000 -- August 2000 930 $ 2.87 - - $(1,520,000) July 2000 -- August 2000 1,240 $ 2.53 - - $(2,458,000) Collar Contract July 2000 -- September 2000 3,680 - $ 2.25 $ 2.80 $(6,204,000)
As of June 30, 2000, the Company had entered into commodity price hedging contracts with respect to its crude oil and condensate production for 2000 as follows:
NYMEX Contract Price per Bbl ------------------------------ Collars Fair Volume in ------------------- Market Period Bbls Swaps Floors Ceilings Value (b) ------ --------- ----- ------ -------- --------- Price Swap Contract July 2000 -- December 2000 368,000 $21.15 - - $(3,208,000) Collar Contracts July 2000 -- September 2000 92,000 - $21.00 25.00 $ (708,000) July 2000 -- December 2000 184,000 - $21.00 25.03 $ (890,000)
(a) MMBtu means million British Thermal Units (b) Fair market value is calculated using prices derived from NYMEX futures contract prices existing at June 30, 2000. -9- 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, 1999. 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, 1999, 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 second quarter of 2000 of $18,309,000 or $0.45 per share ($20,921,000 or $0.42 per share on a diluted basis), compared to a net loss for the second quarter of 1999 of $3,006,000 or $0.07 per share (on both a basic and a diluted basis). For the first six months of 2000, the Company reported net income of $30,265,000 or $0.75 per share ($33,434,000 or $0.71 per share on a diluted basis) compared to net income for the first six months of 1999 of $11,307,000 or $0.28 per share (on both a basic and a diluted basis). The increase in net income during the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, was primarily related to increased oil and gas revenues resulting from improved oil and gas production levels and prices. The net income reported in the first six months of 1999 was related to gains recognized by the Company from the sale of certain properties, most of which were recognized in the first quarter of 1999. Earnings per common share are based on the weighted average number of common shares outstanding for the respective periods. The increase in the weighted average number of common shares outstanding for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, resulted primarily from the issuance of common stock upon the exercise of stock options pursuant to the Company's incentive plans. The earnings per share computation on a diluted basis in the periods presented primarily reflects additional shares of common stock issuable upon the assumed conversion of the Company's 6 1/2% Cumulative Quarterly Income Convertible Preferred Securities due 2029 (the "Trust Preferred Securities") and, to a lesser extent, 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. In addition, the earnings per share computation on a diluted basis for the second quarter of 2000 reflects additional shares issuable upon the assumed conversion of the Company's 5 1/2% Convertible Subordinated Notes due 2006. Total Revenues The Company's total revenues for the second quarter of 2000 were $111,997,000, an increase of approximately 150% from total revenues of $44,828,000 for the second quarter of 1999. The Company's total revenues for the first six months of 2000 were $217,496,000, an increase of approximately 80% compared to total revenues of $120,874,000 for the first six months of 1999. The increase in the Company's total revenues for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, resulted primarily from a substantial increase in oil and gas revenues and, to a much lesser extent, pipeline sales that was only partially offset by a decrease in gain on 10 sales of certain Company properties. Oil and Gas Revenues The Company's oil and gas revenues for the second quarter of 2000 were $108,530,000, an increase of approximately 151% from oil and gas revenues of $43,159,000 for the second quarter of 1999. The Company's oil and gas revenues for the first six months of 2000 were $211,007,000, an increase of approximately 161% from oil and gas revenues of $80,894,000 for the first six months of 1999. The following table (expressed in thousands) reflects an analysis of variances in the Company's oil and gas revenues between 2000 and 1999: Increase (decrease) in oil and gas revenues resulting from variances in:
2nd QTR 2000 1st HALF 2000 COMPARED TO COMPARED TO 2nd QTR 1999 1st HALF 1999 -------------- --------------- NATURAL GAS -- Price $ 7,708 $ 17,095 Production 10,781 21,017 ------- -------- 18,489 38,112 ------- -------- CRUDE OIL AND CONDENSATE -- Price 14,964 34,172 Production 29,640 53,630 ------- -------- 44,604 87,802 ------- -------- NATURAL GAS LIQUIDS ("NGL") 2,278 4,199 ------- -------- Increase (decrease) in oil and gas revenues $65,371 $130,113 ------- --------
The increase in the Company's oil and gas revenues for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, is primarily related to increases in the Company's natural gas and oil, condensate and NGL ("liquid hydrocarbons") production volumes and, to a lesser extent, an increase in the price that it received for its liquid hydrocarbons and natural gas production volumes.
Comparison of Increases (Decreases) in: NATURAL GAS -- 2nd QUARTER 1st SIX MONTHS ------------------- % -------------------- % 2000 1999 CHANGE 2000 1999 CHANGE -------- ------- ------ ------- ------- ------ Average prices North America (a) $ 3.00 $ 2.18 38% $ 2.88 $ 1.96 47% Kingdom of Thailand (b) $ 2.20 $ 1.34 64% $ 2.08 $ 1.43 45% Company-wide average price $ 2.73 $ 2.02 35% $ 2.61 $ 1.86 40% Average daily production volumes (MMcf per day) North America (a)(c) 107.8 96.5 12% 112.7 101.7 11% Kingdom of Thailand 55.1 23.0 140% 56.8 24.2 135% -------- ------- ------ ------- ------- ------ Company-wide average daily production 162.9 119.5 36% 169.5 125.9 35% ======== ======= ====== ======= ======= ======
-------------------- (a) North American average prices and production reflect production from the United States and Canada. The average prices received for North American production reflect the effect of the Company's hedging transactions during the relevant period. See "Liquidity and Capital Resources - Other Matters; Current Hedging Activity." (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. (c) "MMcf" stands for million cubic feet. 11
Comparison of Increases (Decreases) in: CRUDE OIL AND CONDENSATE-- 2nd QUARTER 1st SIX MONTHS ------------------- % -------------------- % 2000 1999 CHANGE 2000 1999 CHANGE -------- ------- ------ ------- ------- ------ Average prices North America (a) $ 26.59 $ 15.99 66% $ 26.15 $ 13.71 91% Kingdom of Thailand $ 31.16 $ 18.45 69% $ 29.00 $ 16.38 77% Company-wide average price $ 28.68 $ 16.24 77% $ 27.46 $ 13.96 97% Average daily production volumes (Bbls per day) North America (a)(b) 13,348 11,893 12% 13,350 12,662 5% Kingdom of Thailand 11,234 1,331 744% 11,297 1,329 750% -------- ------- ------ ------- ------- ------ Company-wide average daily production 24,582 13,224 86% 24,647 13,991 76% ======== ======= ====== ======= ======= ====== TOTAL LIQUID HYDROCARBONS -- Company-wide average daily production (Bbls per day) 27,132 14,824 83% 26,887 15,875 83% ======== ======= ====== ======= ======= ======
------------------------- (a) North American average prices and production reflect production from the United States and Canada. The average prices received for North American production reflects the effect of the Company's hedging transactions during the relevant period. See "Liquidity and Capital Resources-Other Matters; Current Hedging Activity." (b) "BBLs" stands for barrels. 12 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. During the first six months of 1999, the Company and its joint venture partners did not meet the contractual minimum delivery requirements under the Gas Sales Agreement. This permitted PTT to reduce the price it paid on a portion of the natural gas which the Company sold to PTT during that period by 25% from the then current contract price. As a result of new production from new facilities installed in the Tantawan Field during the second quarter of 1999 and the commencement of production from the Benchamas Field during the third quarter of 1999, the Company has generally been able to meet its contractual minimum delivery obligations to PTT and is currently receiving the full contract price. Production. The increase in the Company's natural gas production during the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, was related in large measure to increased production from the Tantawan Field and production from the Benchamas Field which commenced during the third quarter of 1999 and, to a lesser extent, increased production from the Company's domestic properties, including its East Cameron Block 270 Field and certain of its Permian basin fields. Crude Oil and Condensate Thailand Prices. Since the inception of production, crude oil and condensate has been stored offshore 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 U.S. 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 crude oil and condensate production from the Gulf of Thailand during the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, resulted from production from the Benchamas Field during the third quarter of 1999 and, to a lesser extent, increased production from the Tantawan Field. The increase in the Company's North American crude oil and condensate production during the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, resulted from increased production from its Permian basin fields that was only partially offset by the anticipated natural decline in oil and condensate production from certain of the Company's offshore properties. 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 increase in NGL revenues for the second quarter of 2000, compared with the second quarter of 1999, related to increased NGL production volumes, primarily from its Permian basin properties and, to a lesser extent, an increase in the average price that the Company received for its NGL production. The increase in NGL revenues for the first six months of 2000, compared with the first six months of 1999, related to an increase in the average price that the Company received for its NGL production volumes and, to a lesser extent, an increase in NGL production volumes. Costs and Expenses
Comparison of Increases (Decreases) in: 2nd Quarter 1st Six Months --------------------------- % ---------------------------- % 2000 1999 Change 2000 1999 Change ------------- ----------- ------ ------------ ----------- ------ LEASE OPERATING EXPENSES North America $ 14,859,000 $11,488,000 29% $ 29,243,000 $22,944,000 27% Kingdom of Thailand $ 9,356,000 $ 1,464,000 539% $ 16,763,000 $ 5,573,000 201% Total Lease Operating Expenses $ 24,215,000 $12,952,000 87% $ 46,006,000 $28,517,000 61% PIPELINE OPERATING AND NATURAL
13 GAS PURCHASES $ 3,156,000 $ 1,336,000 136% $ 6,546,000 $ 2,198,000 198% GENERAL AND ADMINISTRATIVE EXPENSES $ 7,539,000 $ 6,746,000 12% $ 17,962,000 $13,629,000 32% EXPLORATION EXPENSES $ 2,114,000 $ 1,374,000 54% $ 5,787,000 $ 3,139,000 84% DRY HOLE AND IMPAIRMENT EXPENSES $ 2,120,000 $ 791,000 168% $ 7,192,000 $ 1,030,000 598% DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) EXPENSES $ 33,082,000 $23,394,000 41% $ 66,046,000 $47,245,000 40% DD&A rate $1.10 $1.20 (8%) $1.08 $1.11 (4%) Mcfe produced (a) 29,637,000 18,965,000 56% 60,205,000 40,033,000 50% ---------------------- (a) "Mcfe" stands for thousands of cubic feet equivalent.
Comparison of Increases (Decreases) in:
2nd Quarter 1st Six Months --------------------------- % ---------------------------- % 2000 1999 Change 2000 1999 Change ------------- ----------- ------ ------------ ----------- ------ INTEREST-- Charges $ 8,210,000 $ 9,234,000 (11%) $ 16,956,000 $19,109,000 (11%) Interest Income $ 186,000 $ 238,000 (22%) $ 479,000 $ 310,000 55% Capitalized Interest Expense $ 4,604,000 $ 5,017,000 (8%) $ 9,614,000 $ 8,767,000 10% MINORITY INTEREST - Dividends and costs Associated with Preferred Securities of a Subsidiary Trust $ (2,559,000) $ (799,000) 220% $ (5,117,000) $ (799,000) 540% FOREIGN CURRENCY TRANSACTION GAIN (LOSS) $ (794,000) $ 460,000 N/A $ (1,121,000) $ 409,000 N/A INCOME TAX BENEFIT (EXPENSE) $(14,689,000) $ 3,077,000 N/A $(24,591,000) $(3,387,000) 626%
Lease Operating Expenses. The increase in North American lease operating expenses for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, related in large measure to non-budgeted equipment repairs in the Gulf of Mexico, the acceleration of annual routine maintenance and repair on the Company's Western Division properties, increased severance taxes resulting from increased revenues from the Company's non-U.S. government owned properties and increased transportation and processing expenses resulting from increased production on certain of the Company's offshore Gulf of Mexico properties. The increase in lease operating expenses in the Kingdom of Thailand for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, primarily related to the fact that, prior to the commencement of production in the third quarter of 1999, no lease operating expenses were incurred by the Company in the Benchamas field. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relates to the lease payments made in connection with the bareboat charter of the FPSO for the Tantawan field and the FSO for the Benchamas field. Collectively, these lease payments accounted for $3,757,000, $7,513,000, $3,281,000 and $6,023,000 (net to the Company's interest) of the Company's Thailand lease operating expenses for the second quarter and first six months of 2000 and the second quarter and first six months of 1999, respectively. Pipeline Operating and Natural Gas Purchases Revenue from the sale of natural gas is reported as revenue under "Pipeline sales and other." Prior to the acquisition of the Pogo Onshore Pipeline interests, the Company did not separately report its pipeline operating expenses 14 or revenues, nor did it purchase any natural gas for resale to customers of its pipelines. The increase in pipeline operating expenses and natural gas purchase costs for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, primarily related to increased purchases of natural gas resulting from increased natural gas sales by the Company. General and Administrative Expenses The increase in general and administrative expenses for the second quarter and first six months of 2000, compared with the second quarter and first six months of 1999, related to, among other items, an increase in the size of the Company's work force and normal salary and concomitant benefit expense adjustments and, with respect to the six month comparative periods, increased expenses associated with the Company's Thailand operations related to the commencement of production from the Benchamas field. 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 increase in exploration expense for the second quarter of 2000, compared to the second quarter of 1999, resulted primarily from generally increased geophysical activity by the Company in: Canada, where a significant 3-D seismic survey was acquired; Hungary, where approximately 800 kilometers of proprietary 2-D seismic survey commenced; and in Thailand, where additional 3-D seismic data was acquired and existing 3-D seismic data was reprocessed. The increase in exploration expense for the first six months of 2000, compared to the first six months of 1999, resulted primarily from increased geophysical activity by the Company in the previously mentioned areas as well as expenses related to 3-D seismic surveys acquired in the offshore Gulf of Mexico and on the Company's exploration leases in the United Kingdom sector of the North Sea. 15 Depreciation, Depletion and Amortization Expenses The increase in the Company's depreciation, depletion and amortization ("DD&A") expense for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, resulted primarily from an increase in the Company's natural gas and liquid hydrocarbon production, that was only partially offset by a decrease in the Company's composite DD&A rate. The decrease in the composite DD&A rate for all of the Company's producing fields for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, 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 lower than the Company's recent historical composite rate (principally the Benchamas Field and certain Permian basin properties) and a corresponding decrease in the percentage of the Company's production coming from fields that have DD&A rates that are higher than the Company's recent historical composite DD&A rate. Interest Interest Charges. The decrease in the Company's interest charges for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, resulted primarily from a decrease in the average amount of the Company's outstanding debt, primarily due to the issuance of the Trust Preferred Securities in the second quarter of 1999, and, to a lesser extent, increased cash flow from operations that was not entirely offset by increased average interest rates on the debt outstanding. As of July 31, 2000, the Company was not a party to any interest rate swap agreements. Capitalized Interest. The decrease in capitalized interest for the second quarter of 2000, compared to the second quarter of 1999, resulted primarily from a decrease in the amount of capital expenditures subject to interest capitalization during the second quarter of 2000 ($225,405,000), compared to the second quarter of 1999 ($248,340,000), that was only partially offset by an increase in the interest rate discussed above that the Company uses to apply on such capital expenditures to arrive at the total amount of capitalized interest. The increase in capitalized interest for the first six months of 2000, compared to the first six months of 1999, resulted primarily from an increase in the amount of capital expenditures subject to interest capitalization during the first six months of 2000 ($229,920,000), compared to the first quarter of 1999 ($218,044,000) and, to a lesser extent, from an increase in the interest rate discussed above that the Company uses to apply on such capital 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. Minority Interest -- Dividends and Costs Associated with Preferred Securities of a Subsidiary Trust Pogo Trust I, a business trust in which the Company owns all of the issued common securities, issued $150,000,000 of Trust Preferred Securities on June 2, 1999. Therefore the amounts recorded for the second quarter and first six months of 1999 under Minority Interest -- Dividends and Costs Associated with Preferred Securities of a Subsidiary Trust principally reflected cumulative unpaid dividends and, to a lesser extent, the amortization of issuance expenses related to the offering and sale of the Trust Preferred Securities for a small portion of such periods. The amounts recorded for such expenses for second quarter and first six months of 2000 are indicative of future expenses that will be incurred during the term of the Trust Preferred Securities. Foreign Currency Transaction Losses The foreign currency transaction losses reported for the second quarter and first six months of 2000 and the foreign currency transaction gains reported for the second quarter and first six months of 1999 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 financial statements during the respective periods. In early July 1997, the government of 16 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 second quarter and first six months of 2000, 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 July 31, 2000, the Company was not a party to any financial instrument that was intended to constitute a foreign currency hedging arrangement. 17 Income Tax Expense The increase in the Company's income tax expense for the second quarter and first six months of 2000, compared to the second quarter and first six months of 1999, resulted primarily from increased pre-tax income and the increased contribution to pre-tax income from the Company's Kingdom of Thailand operations which are subjected to a tax rate in excess of the U.S. statutory tax rate. Management currently expects that its foreign taxes will constitute a substantial portion of its overall tax burden for the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES Cash Flows The Company's Condensed Consolidated Statement of Cash Flows for the first six months of 2000 reflects net cash provided by operating activities of $109,384,000. In addition to net cash provided by operating activities, the Company received $1,876,000, primarily from the exercise of stock options. During the first six months of 2000, the Company invested $57,665,000 of such cash flow in capital projects, repaid a net $10,000,000 under its senior debt agreements and paid $2,425,000 (two quarterly dividend payments of $0.03 per share) in cash dividends to holders of the Company's common stock and paid $4,875,000 in cash distributions to holders of its Trust Preferred Securities. As of June 30, 2000, the Company's cash and cash equivalents were $42,145,000 and its long-term debt stood at $365,000,000. Effective May 3, 2000, the borrowing base under the Company's revolving credit facility was increased to $200,000,000 and restriction against new indebtedness was increased a corresponding amount to $565,000,000. As of August 1, 2000, the Company had $200,000,000 of availability under its revolving credit facility and its unsecured credit line. Future Capital Requirements The Company's capital and exploration budget for 2000, which does not include any amounts that may be expended for the purchase of proved reserves, was established by the Company's Board of Directors at $200,000,000. The Company currently anticipates that its available cash and cash equivalents, cash provided by operating activities and funds available under its credit agreement, uncommitted credit line and banker's acceptance facility 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 2000, and future dividend and distribution payments at current levels (including a dividend payment of $0.03 per share to be paid on August 18, 2000 to shareholders of record on August 4, 2000). The declaration of future dividends on the Company's equity securities will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, its ability to pay dividends and distributions 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, 1999 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 was disclosed. Current Hedging Activity. From time to time, the Company has used and may continue to use hedging transactions with respect to a portion of its oil and gas production to achieve a more predictable cash flow, as well as to reduce its exposure to price fluctuations. While the use of these hedging arrangements limits the downside risk of adverse price movements, it may also limit future revenues from favorable price movements. The use of hedging transactions 18 also involves the risk that the counterparties will be unable to meet the financial terms of such transactions. All of the Company's recent historical hedging transactions have been carried out in the over-the-counter market with investment grade institutions. The Company accounts for these transactions as hedging activities and, accordingly, gains or losses are included in oil and gas revenues when the hedged production is delivered. Neither the hedging contract nor the unrealized gains and losses on these contracts are recognized in the financial statements. During the first six months of 2000, approximately 26% of the Company's equivalent oil and natural gas production was subject to hedge positions. No significant amounts of the Company's equivalent oil and natural gas production were subject to hedge positions during the first six months of 1999. 19 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders The registrant held its annual meeting of stockholders in Houston, Texas on April 25, 2000. The following sets forth the items that were put to a vote of the stockholders and the results thereof concerning: (A) election of three directors, each for a term of three years. The vote tabulation for each nominee was as follows:
For Withheld ----- -------- Robert H. Campbell 37,961,482 121,669 Gerrit W. Gong 37,962,269 120,882 Stephen A. Wells 37,962,070 121,081
(B) approval of the Company's 2000 Incentive Plan, including the reservation of 1,000,000 shares of the Company's common stock for issuance in connection therewith, with 26,416,240 shares of stock cast for approval, 11,580,931 shares against approval and 85,979 absentions. (C) ratification of the appointment of Arthur Andersen LLP, independent public accountants, to audit the financial statements of the registrant for the year 2000, with 38,040,648 shares of stock cast for the appointment, 16,007 against the appointment, and 26,496 abstentions and broker non-votes. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 4.1 -- Fourth Amendment dated May 3, 2000, to Amended and Restated Credit Agreement dated as of August 1, 1997 among Pogo Producing Company, certain commercial lending institutions, Bank of Montreal as the Agent and Banque Paribas as the Co-Agent. 27 -- Financial Data Schedule (B) Reports on Form 8-K None. 20 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 Chief Accounting Officer /s/ James P. Ulm, II ----------------------------- James P. Ulm, II Vice President and Chief Financial Officer Date: August 9, 2000 21