-----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, VvQKG9UqsatsEI9SmnaRYHs/NGKT20oh/Z0udaWZE/nHly4tnTKrTJKn6v1kF7RT Nl8RwZkRifIpcIoUhqMVzA== 0000950129-00-001252.txt : 20000320 0000950129-00-001252.hdr.sgml : 20000320 ACCESSION NUMBER: 0000950129-00-001252 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000317 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-K405 SEC ACT: SEC FILE NUMBER: 001-07792 FILM NUMBER: 572727 BUSINESS ADDRESS: STREET 1: 5 GREENWAY PLAZA STE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77252-0504 BUSINESS PHONE: 7132975000 MAIL ADDRESS: STREET 1: 5 GREENWAY PLAZA SUITE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77252 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL OFFSHORE GAS OPERATORS INC /TX/ DATE OF NAME CHANGE: 19600201 10-K405 1 POGO PRODUCING COMPANY - 12/31/1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 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, P.O. BOX 2504 HOUSTON, TEXAS 77252-2504 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS: ON WHICH REGISTERED: -------------------- --------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE PACIFIC EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE PACIFIC EXCHANGE POGO TRUST I 6 1/2% CUMULATIVE QUARTERLY NEW YORK STOCK EXCHANGE INCOME CONVERTIBLE PREFERRED SECURITIES, SERIES A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE JUNE 15, 2006 ------------------------ 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 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 requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant (treating all executive officers and directors of the registrant, for this purpose, as if they may be affiliates of the registrant) was approximately $690,675,734 as of March 16, 2000 (based on $25.875 per share, the last sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape on such date). 40,348,775 shares of the registrant's Common Stock were outstanding as of March 16, 2000. DOCUMENT INCORPORATED BY REFERENCE Portions of the Company's definitive Proxy Statement respecting the annual meeting of shareholders to be held on April 25, 2000 (to be filed not later than 120 days after December 31, 1999) are incorporated by reference in Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORWARD LOOKING STATEMENTS The statements included or incorporated by reference in this Report on Form 10-K for the year ended December 31, 1999 (this "Annual Report") include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included herein or therein other than statements of historical fact are forward-looking statements. When used herein or therein, the words "anticipate," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, without limitation, the statements herein and therein regarding the timing of future events regarding the operations of Pogo Producing Company (the "Company") and its subsidiaries, and the statements set forth herein under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" regarding the Company's anticipated future financial position and cash requirements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Annual Report and in other filings by the Company with the Securities and Exchange Commission (the "Commission"). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and other factors set forth in or incorporated by reference in this Annual Report. These factors include: - the cyclical nature of the oil and natural gas industries - uncertainties associated with the United States and worldwide economies - current and potential governmental regulatory actions in countries where the Company owns an interest - substantial competitor production increases resulting in oversupply and declining prices - the Company's ability to implement cost reductions - operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, transportation interruptions, and spills and releases and other environmental risks) - fluctuations in foreign currency exchange rates in areas of the world where the Company owns an interest, particularly Southeast Asia - covenant restrictions in the Company's indebtedness Many of those factors are beyond the Company's ability to control or predict. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All subsequent written and oral forward-looking statements attributable to the Company and persons acting on the Company's behalf are qualified in their entirety by the Cautionary Statements contained in this section and elsewhere in this Annual Report. 1 3 CERTAIN DEFINITIONS As used in this Annual Report, "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls" means thousand barrels and "MMBbls" means million barrels. "BOE" means barrel of oil equivalent, "Mcfe" means thousand cubic feet of natural gas equivalent, "MMcfe" means million cubic feet of natural gas equivalent and "Bcfe" means billion cubic feet of natural gas equivalent. Natural gas equivalents and crude oil equivalents are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids ("NGL"). References to "$" and "dollars" refer to United States dollars. All estimates of reserves contained in this Annual Report, unless otherwise noted, are reported on a "net" basis. Information regarding production, acreage and numbers of wells are set forth on a gross basis, unless otherwise noted. PART I ITEM 1. BUSINESS. The Company was incorporated in 1970 and is engaged in oil and gas exploration, development, acquisition and production activities on its properties located offshore in the Gulf of Mexico, onshore in selected areas in New Mexico, Texas and Louisiana, and internationally, primarily in the Gulf of Thailand and in Canada. As of December 31, 1999, the Company had interests in 102 lease blocks offshore Louisiana and Texas, approximately 340,047 gross acres onshore in the United States and Canada, approximately 734,140 gross acres offshore in the Kingdom of Thailand, approximately 193,631 gross acres in the Danish and U.K. sectors of the North Sea and approximately 778,136 gross acres in Hungary. The Company organizes its exploration and production activities principally into four operating divisions and a new ventures group. The operating divisions are its Offshore Division, which is responsible for the Company's operations offshore Texas and Louisiana in the Gulf of Mexico, its Western Division, which is active in the Permian Basin area in New Mexico and West Texas, its Onshore Division, which includes the Company's onshore operations principally in South Texas, East Texas, Louisiana and Western Canada (principally in the provinces of Alberta and British Columbia) and the International Division, which has responsibility for the Company's operations on its Block B8/32 Concession in the Kingdom of Thailand (the "Thailand Concession"), as well as the Company's exploration licenses in the North Sea. The Company's new ventures group is currently responsible for the Company's exploration activities in Hungary. DOMESTIC OFFSHORE OPERATIONS Historically, the Company's interests have been concentrated in the Gulf of Mexico, where approximately 27% of the Company's proved reserves were located as of December 31, 1999. During 1999, approximately 51% of the Company's natural gas production and approximately 42% of its oil and condensate production was from its domestic offshore properties, contributing approximately 45% of the Company's consolidated oil and gas revenues. Although the Company's operations were historically focused in shallower waters of the Outer Continental Shelf, the Company has recently expanded its exploration efforts further offshore into deeper waters where the Company currently believes the opportunities for discovering substantial quantities of oil and gas exist. As of December 31, 1999, the Company has interests in 18 lease blocks in water depths that range from 600 feet to approximately 4,900 feet. Exploration and Development The scope of exploration and development programs relating to the Company's offshore interests is affected by prices for oil and gas, and by federal, state and local legislation, regulations and ordinances applicable to the petroleum industry. The Company's domestic offshore capital and exploration expenditures for 1999 were approximately $56,900,000 (excluding approximately $1,500,000 of net property acquisitions), or 16% lower than the Company's domestic offshore capital and exploration expenditures of approximately $68,000,000 for 1998 (excluding approximately $5,000,000 of net property acquisitions) and 34% lower than the Company's domestic offshore capital and exploration expenditures of approximately $86,300,000 (exclud- 2 4 ing approximately $900,000 of net property acquisitions) for 1997. The decrease in the Company's domestic offshore capital and exploration expenditures for 1999, compared with 1998 and 1997, resulted primarily from the Company's decision to decrease its exploration drilling and workover and recompletion activity in light of poor oil and gas prices in the first half of the year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company maintains a significant presence in the Gulf of Mexico where it participated in drilling 15 successful wells during 1999, bringing the total number of producing oil and gas wells in the Gulf of Mexico that the Company held an interest to 211 at December 31, 1999. Leases acquired by the Company and other participants in its bidding groups are customarily committed, on a block-by-block basis, to separate operating agreements under which the appointed operator supervises exploration and development operations for the account and at the expense of the group. These agreements usually contain terms and conditions which have become relatively standardized in the industry. Major decisions regarding development and operations typically require the consent of at least a majority (in working interest) of the participants. Because the Company generally has a meaningful working interest position, the Company believes it can significantly influence (but not always control) decisions regarding development and operations on most of the leases in which it has a working interest even though it may not be the operator of a particular lease. The Company is the operator on all or a portion of 32 of the 102 offshore leases in which it had an interest on December 31, 1999. Platforms and related facilities are installed on an offshore lease block when, in the judgment of the lease interest owners, the necessary capital expenditures are justified. A decision to install a platform generally is made after the drilling of one or more exploratory wells with contracted drilling equipment. Platform costs vary depending on, among other factors, the number of slots, water depth, currents, and sea floor conditions. Over the five years ended December 31, 1999, the gross construction and installation cost of production platforms and related facilities located in shallower waters in which the Company shared a portion of the construction costs based on its ownership interest in the development ranged from approximately $3,000,000 to approximately $16,500,000. Wells, platforms and related facilities are typically much more expensive in the deeper waters of the Gulf of Mexico. The Company has participated in the construction of one platform and related facilities on its deep water block at Viosca Knoll Block 823 at a total capital commitment of approximately $142,500,000 ($15,390,000 net to the Company's working interest). Occasionally, deep water developments can be performed by means of "subsea completion" technology, with the production then piped back to an existing platform. The Company participated in one subsea completion development during 1999 at Garden Banks Block 367, at a gross cost of approximately $26,000,000 ($6,500,000 net to the Company's working interest). The Company is currently planning to commence construction of at least one additional subsea development during 2000. The Company believes that future development projects in the deep water areas of the Gulf of Mexico may require similar capital commitments, each of which must be justified in the then current and anticipated future product price environment. In order to better manage the risks of large projects in the deep water Gulf of Mexico, the Company generally seeks to have a smaller ownership interest in these lease blocks than it averages in shallower waters. Lease Acquisitions The Company has participated, either on its own or with other companies, in bidding on and acquiring interests in federal and state leases offshore in the Gulf of Mexico since December 1970. As a result of such purchases and subsequent activities, as of December 31, 1999, the Company owned interests in 96 federal leases and 6 state leases offshore Louisiana and Texas. Federal leases generally have primary terms of five, eight or ten years, depending on water depth, and state leases generally have terms of three or five years, depending on location, in each case subject to extension by development and production operations. As part of its strategy, the Company intends to continue an active lease evaluation program in the Gulf of Mexico in order to identify exploration and exploitation opportunities. During 1999, the Company was successful in acquiring interests in three lease blocks through federal Outer Continental Shelf oil and gas lease sales and two lease blocks by assignment from a third party. As in the case of prior sales, the extent to which the Company participates in future bidding on federal or state offshore lease sales will depend on the availability of funds and its estimates of hydrocarbon deposits, operating expenses and future revenues which 3 5 reasonably may be expected from available lease blocks. Such estimates typically take into account, among other things, estimates of future hydrocarbon prices, federal regulations and taxation policies applicable to the petroleum industry. It is also the Company's objective to acquire certain producing leasehold properties in areas where additional low-risk drilling or improved production methods by the Company can provide attractive rates of return. ONSHORE OPERATIONS The Company's Onshore Division has staffs in Houston, Texas and Calgary, Alberta, Canada. The Company's Western Division has an office in Midland, Texas. The Company conducts its onshore operations in the United States directly and through its wholly-owned subsidiary, Arch Petroleum Inc. ("Arch"). The Company conducts its operations in Canada through its wholly-owned subsidiary, Pogo Canada Ltd. The Company's onshore operations constitute a growing area of the Company's reserves and production. Onshore reserves as of December 31, 1999, accounted for approximately 29% of the Company's total proved reserves. During 1999, approximately 22% of the Company's natural gas production and 36% of its oil and condensate production was from its onshore properties, contributing approximately 27% of the Company's consolidated oil and gas revenues. Exploration and Development A major drilling objective of the Company in the Permian Basin is the Brushy Canyon (Delaware) formation which generally produces oil from depths of 6,000 to 9,000 feet. Since the Company began exploring in the Brushy Canyon (Delaware) formation in October 1989, it has participated in drilling 409 wells in the Permian Basin and West Texas areas through December 31, 1999, including 20 wells in 1999. The Company believes that during the past seven years it has been one of the most active companies drilling for oil and natural gas in the southeastern New Mexico (Lea and Eddy Counties) portion of the Permian Basin where the Company has interests in over 113,000 gross acres. Fields in the Brushy Canyon (Delaware) formation in the southeastern New Mexico portion of the Permian Basin are generally characterized by multiple producing zones in most wells. The Company has achieved rapid cost recovery with respect to its New Mexico wells drilled to date because of relatively low capital costs and high initial rates of production. In Southwest Louisiana, the Company participated in drilling 23 wells since 1996, including three wells in 1999, to test various prospects, primarily in the Hackberry and Yegua formations, almost all of which were identified on proprietary 3-D seismic surveys that the Company and its industry partners have acquired since 1995. The Company is currently participating in a 3-D seismic survey covering approximately 39,000 acres in Southwest Louisiana that should be completed late in the second quarter of 2000. The Company generally conducts its onshore activities through joint ventures and other interest-sharing arrangements with major and independent oil companies. The Company operates many of its own onshore properties using independent contractors. The Company's onshore capital and exploration expenditures were approximately $25,700,000 (excluding approximately $25,100,000 of net property acquisitions) for 1999, or 47% lower than the Company's onshore capital and exploration expenditures of approximately $48,800,000 (excluding approximately $133,100,000 of net property acquisitions, including approximately $131,500,000 related to the acquisition of Arch Petroleum Inc. ("Arch")) for 1998 and 57% lower than the Company's onshore capital and exploration expenditures of approximately $60,000,000 (excluding approximately $1,700,000 of net property acquisitions) for 1997. The decrease in the Company's onshore capital and exploration expenditures for 1999, compared to 1998 and 1997, resulted primarily from the Company's decision to curtail non-essential drilling in light of poor oil and gas prices and to focus on workover and recompletion work, that was not entirely offset by increased capital and exploration expenditures in Canada where the Company acquired its interest in Pogo Canada Ltd. in August 1998. 4 6 Lease Acquisitions As it has in recent years, in 1999 the Company also successfully participated in various onshore federal, state and provincial lease sales and acquired interests in prospective acreage from private individuals. As of December 31, 1999, the Company held interests in approximately 340,000 gross (186,000 net) acres onshore in the United States and Canada. INTERNATIONAL OPERATIONS The Company has conducted international exploration activities since the late 1970's in numerous oil and gas areas throughout the world. Currently, the Company maintains an office in Bangkok, Thailand from which it oversees its operations on the Thailand Concession through its wholly-owned subsidiary Thaipo Limited ("Thaipo"). Thaipo currently owns, directly or indirectly, a 46.34% working interest in the entire Thailand Concession. The remainder of the working interest is owned, directly or indirectly by Chevron Offshore (Thailand) Limited ("Chevron") (46.34%), a subsidiary of Chevron Corporation, and Palang Sophon Limited ("Palang") (7.32%). Through its majority ownership of Palang, Chevron owns or controls, directly or indirectly, 53.66% of the working interests in the Thailand Concession. Effective October 1, 1999, Thaipo turned over operatorship of the Thailand Concession to Chevron. Through voting procedures in the joint operating agreement governing the Thailand Concession, and the close working relationship between Chevron's and Thaipo's exploration staffs, Thaipo continues to exert substantial influence over the development of the Thailand Concession. As of December 31, 1999, the Company's proved reserves located in the Kingdom of Thailand accounted for approximately 44% of the Company's total proved reserves. During 1999, approximately 28% of the Company's natural gas production and 22% of its oil and condensate production came from its operations on the Thailand Concession, contributing approximately 24% of the Company's consolidated oil and gas revenues. Exploration and Development The Company's international capital and exploration expenditures were approximately $111,500,000 for 1999, or 4% higher than the Company's international capital and exploration expenditures of approximately $107,400,000 for 1998 and 26% higher than the Company's international capital and exploration expenditures of approximately $88,300,000 (excluding approximately $28,600,000 of net property acquisitions) for 1997. The increase in the Company's international capital and exploration expenditures for 1999, compared to 1998, resulted primarily from increased exploration expenditures and development drilling in the Tantawan and Benchamas Fields that was not entirely offset by a decrease in exploration drilling expenditures and in spending related to platform and facilities construction for the Benchamas Field. The increase in the Company's international capital and exploration expenditures for 1999, compared to 1997, resulted primarily from increased platform and facilities construction costs related to development of the Benchamas Field and, to a lesser extent, increased drilling activity in the Tantawan and Benchamas Fields in 1999, as compared to 1997. Substantially all of the Company's international capital and exploration expenditures for 1999 were related to the Company's license in the Kingdom of Thailand. Thailand Concession Benchamas Field. In July 1997, the government of Thailand designated another portion of the Thailand Concession comprising approximately 102,000 acres as the Benchamas and Pakakrong production area or the "Benchamas Field." Production from the Benchamas Field commenced production in July 1999 from three production platforms, with natural gas and oil from these platforms delivered by undersea pipeline to a central processing and compression platform where the oil, condensate and natural gas is processed and separated. The natural gas is sold to The Petroleum Authority of Thailand ("PTT") and delivered into export pipelines for transportation to shore, while the oil and condensate produced from the field is stored on board a Floating Storage and Offloading system ("FSO"), known as the "Benchamas Explorer," for sale and ultimate transfer to shore by oil tanker. The FSO is moored in the Benchamas Field. Its capacity is approximately 1,400,000 Bbls of crude and condensate. The Company currently expects to complete drilling the first phase of the Benchamas Field development during the first quarter of 2000. The phase I field development plans provide 5 7 for 55 wells in the field, including 38 producing wells (14 of which will be horizontal wells) and 17 water injection wells. Current Benchamas Field development plans also call for the commencement of design and fabrication work on three more platforms for the field, with installation of the first platform currently expected to commence in the fourth quarter of 2001. Tantawan Field. In August 1995, at the request of Thaipo and its joint venture partners, the government of Thailand designated a portion of the Thailand Concession comprising approximately 68,000 acres as the Tantawan production area or the "Tantawan Field." Initial production from the Tantawan Field commenced on February 1, 1997. A fifth platform was installed and commenced production in 1999. Currently, there are 37 wells producing from five platforms. Oil and gas production from the Tantawan Field is gathered through pipelines from the platforms into a Floating Production Storage and Offloading system (an "FPSO") named the "Tantawan Explorer." The FPSO is a converted oil tanker with a capacity of slightly less than 1,000,000 Bbls, that is moored in the Tantawan Field, on which hydrocarbon processing, separation, dehydration, compression, metering and other production-related equipment is installed. Following processing on board the FPSO, natural gas produced from the field is delivered to PTT through an export pipeline. Oil and condensate produced from the field is stored on board the FPSO and transferred to shore by oil tanker. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." Other Portions of the Thailand Concession. In September 1997, the government of Thailand designated an additional 91,000 acres of the Thailand Concession as the Maliwan production area. Development plans for this concession area are currently under way. One additional well was drilled in this area during 1999 and additional wells are planned for 2000. In addition, Thaipo and its joint venture partners have identified other potentially promising areas on the Thailand Concession. In February 2000, the Company and its joint venture partners submitted an application to have up to approximately 120,000 additional acres of the concession, known as the North Jarmjuree area, designated as a production area. Through February 1, 2000, Thaipo and its joint venture partners have drilled ten wells on areas of the Thailand Concession that are not currently designated as production areas. Interpretation of the data provided by these wells and 3-D seismic data covering these areas is ongoing. Thaipo and its joint venture partners also currently plan to drill additional exploration wells in these areas during 2000. Platforms are installed on the Thailand Concession in fields where, in the judgment of Thaipo and its joint venture partners, the necessary capital expenditures are justified. A decision to install a platform generally is made after the drilling of one or more exploratory wells with contracted drilling equipment and the area where the platform would be located has been designated a production area by the government of the Kingdom of Thailand. See "-- Contractual Terms Governing the Thailand Concession and Related Production." Platforms are used to accommodate both development drilling and additional exploratory drilling. Over the four years ended December 31, 1999, the gross cost of the first five production platforms and related facilities in the Tantawan Field and the first three production platforms in the Benchamas Field have averaged approximately $20,000,000 per platform. The Company and its joint venture partners have been working to employ advanced platform facility design and advanced drilling and completion techniques, including slimhole, batch and horizontal drilling, to reduce the cost of developing the Thailand Concession. The Company believes that future satellite platforms and related facilities may be installed for as little as approximately $15,000,000 per platform in the future. Platform costs vary and more (or less) expensive platforms could be required in the future depending on, among other factors, the number of slots, water depth, currents and sea floor conditions. Other Areas of the World On December 1, 1998, the Company together with two joint venture partners, were successful in obtaining a license from the United Kingdom governing approximately 113,000 acres in the British sector of the North Sea. Terms of the license provided for a minimum work commitment that will involve the acquisition, processing and interpretation of 3-D seismic data over the block. The initial exploratory term of this license expires on December 1, 2004, unless otherwise extended or a production license is granted. 6 8 On August 5, 1999, the Danish government approved the assignment of a 40% working interest in License 13/98 covering approximately 81,000 acres in the Danish sector of the North Sea. The initial term of the license goes through June 14, 2004, unless otherwise extended or a production license is granted. However, a "drill or drop" election must be made by the concessionaires prior to December 31, 2000. On April 20, 1999, the Company's subsidiary Pogo Hungary Kft.("Pogo Hungary") was awarded a license to explore for oil and gas on approximately 778,000 acres in the Szolnok and Tompa areas of central and south central Hungary. The exploration term of the license is four years, with areas where commercial accumulation of hydrocarbons being held through the economic productive life of such reserves. The Company has signed a contract and currently expects to commence acquiring over 850 kilometers of modern 2-D seismic data in the Szolnok area early in the second quarter. In addition, the Company continues to evaluate other international opportunities that are consistent with the Company's international exploration strategy and expertise. Contractual Terms Governing the Thailand Concession and Related Production The Thailand Concession was granted in August 1991. The exploratory term for those portions of the Thailand Concession that have not yet been designated a production area (comprising approximately 354,000 acres exclusive of the North Jarmjuree area over which a production license has been requested) expires July 31, 2000. Thaipo and its joint venture partners will be obligated to relinquish 50% of this acreage but will be permitted to, and currently intend to, apply for an extension of the exploration term on the remaining acreage. Such an extension, if granted, would extend the exploration term on the remaining acreage through July 1, 2001. Similar one-year extensions could also be applied for and granted through July 1, 2005. For those portions of the Thailand Concession that have been designated as production areas, the initial production period term is 20 years, which is also subject to extension, generally for a term of ten years. See also "-- Miscellaneous; Sales." To date, the Benchamas Field, Tantawan Field and the Maliwan area have been designated as production areas. Subject to governmental approval, other portions of the Thailand Concession may be designated production areas in the future. Production resulting from the Thailand Concession is subject to a royalty ranging from 5% to 15% of oil and gas sales, plus certain fixed U.S. dollar amounts payable at specified cumulative production levels. Revenue from production in Thailand is also subject to local income taxes and other similar governmental charges including a Special Remuneratory Benefit tax ("SRB"). Thaipo and its joint venture partners have entered into a thirty-year Gas Sales Agreement with PTT (the "Gas Sales Agreement"), governing gas production from the Tantawan Field and anticipated gas production from the Benchamas Field. The terms of the Gas Sales Agreement currently include a minimum daily contract quantity ("DCQ") of 125 MMcf per day, subject to certain exceptions and will in the future be based on a percentage of the remaining proved reserves, but in any event, will not be less than 125 MMcf per day. The DCQ is the minimum daily volume that PTT has agreed to take, or pay for if not taken, under the agreement. Thaipo and its joint venture partners are subject to certain penalties if they are unable to meet the DCQ, principal among which is a decrease in sales price of up to 25% of the then current sales price. During a period extending from October 1, 1998 through early August 1999, as a result of declining production from existing wells in the Tantawan Field, the need to shut-in existing wells while drilling additional wells from the same platform, and the decision to emphasize oil and condensate production from the Tantawan Field, the Company and its joint venture partners delivered less natural gas than was nominated by PTT under the Gas Sales Agreement. This resulted in the Company receiving only 75% of the current contract price on a portion of its natural gas sales to PTT during that time. Although the Company is currently meeting the minimum DCQ requirements, there can be no assurance that the Company will be able to continue to meet them in the future, in which case the penalty provisions of the Gas Sales Agreement would again reduce the price received by the Company for its gas sold to PTT from the Tantawan and Benchamas Fields. The sales price under the Gas Sales Agreement is subject to automatic semi-annual adjustments based upon a formula which takes into account changes in: Singapore fuel oil prices; the U.S. Bureau of Labor Statistics Oilfield Machinery and Tool Index; the Thai wholesale producer price index; and the U.S./Thai 7 9 currency exchange rate. However, the Gas Sales Agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. As of December 31, 1999, the Company was receiving a price of approximately $1.99 per Mcf. Under the Gas Sales Agreement See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations; Foreign Currency Transaction Gain (Loss)" and "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." MISCELLANEOUS Other Assets The Company and a subsidiary, Pogo Offshore Pipeline Co., own interests in eight pipelines (excluding field gathering pipelines) through which offshore hydrocarbon production is transported. Through a wholly-owned subsidiary, Pogo Onshore Pipeline Company, the Company owns and operates the Saginaw pipeline, a six inches in diameter pipeline that runs from just outside of Fort Worth, Texas to Wichita Falls, Texas. Industrial Natural Gas, L.C., a subsidiary of the Company, markets the sale and transmission of natural gas through the Saginaw pipeline. In addition, the Company owns an approximately 19% interest in a cryogenic gas processing plant near Erath, Louisiana, which entitles it to process up to 186 MMcf of natural gas and 5,478 Bbls of natural gas liquids per day. The plant is not currently operating at full capacity. Sales The marketing of offshore oil and gas production is subject to the availability of pipelines and other transportation, processing and refining facilities, as well as the existence of adequate markets. As a result, even if hydrocarbons are discovered in commercial quantities, a substantial period of time may elapse before commercial production commences. If pipeline facilities in an area are insufficient, the Company may have to await the construction or expansion of pipeline capacity before production from that area can be marketed. The Company's domestic offshore properties are generally located in areas where a pipeline infrastructure is well developed and there is adequate availability in such pipelines to transport the Company's current and projected future production. The Company's Thailand Concession is traversed by two major (34 inches and 36 inches in diameter, respectively) natural gas pipelines that are owned and operated by PTT and which come within approximately 25 miles of the Tantawan Field (and are slightly closer to the Benchamas Field). Thaipo and its joint venture partners in the Tantawan Field signed a long-term gas sales contract with PTT in November 1995, which has since been amended to include production from the Benchamas Field. All oil and condensate production from the Tantawan Field is initially stored aboard the FPSO and is then sold to various third parties, including PTT, on a tanker load by tanker load basis at prices based on then current world oil prices, typically with reference to the Malaysian Tapis crude oil benchmark price. The buyer is responsible for sending a tanker to off load the oil and condensate it has purchased. Crude oil and condensate production from the Benchamas Field is initially stored aboard the FSO and such production is currently also sold on a tanker load by tanker load basis, similar to the way Tantawan Field crude is currently marketed. See "-- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." The marketing of onshore oil and gas production is also subject to the availability of pipelines, crude oil hauling and other transportation, processing and refining facilities as well as the existence of adequate markets. Generally, the Company's onshore oil and gas production is located in areas where commercial production of economic discoveries can be rapidly effectuated. Most of the Company's North American natural gas sales (exclusive of forward gas sales contracts) are currently made in the "spot market" for no more than one month at a time at then currently available prices. Prices on the spot market fluctuate with demand. Crude oil and condensate production is also generally sold one month at a time at the price that is then currently available. Other than any oil and natural gas futures contracts which may exist from time to time, and which are referred to in "-- Miscellaneous; Competition and 8 10 Market Conditions," and the Gas Sales Agreement with PTT for production from the Tantawan and Benchamas Fields (see "-- International Operations; Contractual Terms Governing the Thailand Concession and Related Production"), the Company has no existing contracts that require the delivery of fixed quantities of oil or natural gas other than on a best efforts basis. The Company had no customers in 1999 to whom total sales constituted more than 10% of the Company's consolidated revenues. Risks Associated with Acquisitions From time to time the Company acquires, and may acquire in the future, additional interests in oil and gas properties, either through acquisition of the properties themselves or indirectly through the purchase of an equity interest in the entity owning such properties. The successful acquisition of such properties requires an assessment of several factors, including recoverable reserves, projected future cash flows, which are in part based upon future oil and gas prices, current and projected operating, general and administrative and other costs, contingent liabilities associated with the properties or entities acquired, including potential environmental and other liabilities. The accuracy of the Company's assessment of these factors is inherently uncertain. To the extent reasonably practicable and possible under the specific circumstances of each acquisition, the Company performs a review of the properties or entities prior to their acquisition. The Company believes that its review procedures are generally consistent with current industry practices. The Company's review and assessment process will not reveal all existing or potential problems nor will it permit the Company to become sufficiently familiar with the properties or entities to fully assess their deficiencies and capabilities. Even when problems are identified, the other party may be unwilling or unable to provide effective contractual protection against all or apart of the problems. The Company is generally not entitled to contractual indemnification for many liabilities, acquiring the properties on an "as is, where is" basis. Competition and Market Conditions The Company experiences competition from other oil and gas companies in all phases of its operations, as well as competition from other energy related industries. The Company's profitability and cash flow are highly dependent upon the prices of oil and natural gas, which historically have been seasonal, cyclical and volatile. In general, prices of oil and gas are dependent upon numerous factors beyond the control of the Company, including various weather, economic, political and regulatory conditions. In addition, the decisions of the Organization of Petroleum Exporting Countries relating to export quotas also affect the price of crude oil. In the past, when natural gas prices in the United States were low, the Company at times elected to curtail a portion of its production. In the future, the Company may again elect to curtail certain quantities of its natural gas production. Because it is impossible to predict future oil and gas price movements with any certainty, the Company from time to time enters into contracts on a portion of its production to hedge against the volatility in oil and gas prices. Such hedging transactions, historically, have never exceeded 50% of the Company's total oil and gas production on an energy equivalent basis for any given period. While intended to limit the negative effect of price declines, such transactions could effectively limit the Company's participation in price increases for the covered period, which increases could be significant. As of December 31, 1999, the Company was a party to natural gas futures contracts and crude oil swap arrangements as described in "Quantitative and Qualitative Disclosure About Market Risk." When the Company does engage in such hedging activities, it may satisfy its obligations with its own production or by the purchase (or sale) of third party production. The Company may also cancel all delivery obligations by offsetting such obligations with equivalent agreements, thereby effecting a purely cash transaction. Operating and Uninsured Risks The Company's operations are subject to risks inherent in the exploration for and production of oil and natural gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, pollution and other environmental risks. Offshore oil and gas operations are subject to the additional hazards 9 11 of marine and helicopter operations, such as capsizing, collision and adverse weather and sea conditions. These hazards could result in substantial losses to the Company due to injury or loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. The Company carries insurance which it believes is in accordance with customary industry practices, but is not fully insured against all risks incident to its business. Drilling activities are subject to numerous risks, including the risk that no commercially productive hydrocarbon reserves will be encountered. The cost of drilling, completing and operating wells and of installing production facilities and pipelines is often uncertain. The Company's drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery or availability of material, equipment and fabrication yards. The availability of a ready market for the Company's natural gas production depends on a number of factors, including the demand for and supply of natural gas, the proximity of natural gas reserves to pipelines, the capacity of such pipelines and government regulations. In periods during which the industry experiences a substantial decline in oil and gas prices, many of the Company's partners, particularly the smaller ones, can experience liquidity and cash flow problems. These problems may lead to their attempting to delay or slow down the pace of drilling or project development in order to conserve cash, to a point that the Company believes is detrimental to the project. In most cases, the Company has the ability to influence the pace of development through joint operating agreements. Some partners may be unwilling or unable to pay their share of the costs of projects as they become due. At worst, a partner may declare bankruptcy and refuse or be unable to pay its share of the costs of a project. The Company would then be required to pay this partner's share of the project costs. In most instances, the Company believes that it is contractually protected from such an event through its ability to take over the non-paying partner's share of the project and by applicable oil and gas lien laws and bankruptcy laws. The Company believes that it would ultimately recover any sums that it is owed by non-paying partners that do not meet their share of the costs of a project in a timely fashion. Risks of Foreign Operations Ownership of property interests and production operations in Thailand and in any other areas outside the United States in which the Company may choose to do business, are subject to the various risks inherent in foreign operations. These risks may include, among other things, currency restrictions and exchange rate fluctuations, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection and other political risks, risks of increases in taxes and governmental royalties, renegotiation of contracts with governmental entities, changes in laws and policies governing operations of foreign-based companies and other uncertainties arising out of foreign government sovereignty over the Company's international operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations; Foreign Currency Transaction Gain (Loss)," and "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." The Company's international operations may also be adversely affected by laws and policies of the United States affecting foreign trade, taxation and investment. In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States. The Company seeks to manage these risks by concentrating its international exploration efforts in areas where the Company believes that the existing government is stable and favorably disposed towards United States exploration and production companies. EXPLORATION AND PRODUCTION DATA In the following data, "gross" refers to the total acres or wells in which the Company has an interest and "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company. 10 12 Acreage The Company owns interests in developed and undeveloped oil and gas acreage in various parts of the world. These ownership interests generally take the form of "working interests" in oil and gas leases which have varying terms. The following table shows the Company's interest in developed and undeveloped oil and gas acreage under lease as of December 31, 1999:
DEVELOPED UNDEVELOPED ACREAGE(A) ACREAGE(B) ------------------ ---------------------- GROSS NET GROSS NET ------- ------- --------- --------- Domestic Offshore Louisiana (State)...................... 4,516 2,182 1,169 584 Louisiana (Federal).................... 166,500 45,529 160,304 64,013 Texas (Federal)........................ 40,320 10,855 74,185 20,994 ------- ------- --------- --------- Total Domestic Offshore................ 211,336 58,566 235,658 85,591 ------- ------- --------- --------- Onshore Louisiana.............................. 3,583 926 10,178 4,402 New Mexico............................. 37,912 22,536 75,396 56,641 Texas.................................. 20,500 8,568 77,308 43,156 Canada................................. 24,407 3,817 90,085 45,803 Other.................................. 3,200 333 198 35 ------- ------- --------- --------- Total Onshore.................. 89,602 36,180 253,165 150,037 ------- ------- --------- --------- Total North America............ 300,938 94,746 488,823 235,628 ------- ------- --------- --------- International Gulf of Thailand....................... 260,407 120,682 473,733 219,530 North Sea.............................. -- -- 112,729 45,092 Hungary................................ -- -- 778,136 778,136 Denmark................................ -- -- 80,902 32,361 ------- ------- --------- --------- Total International............ 260,407 120,682 1,445,500 1,075,119 ------- ------- --------- --------- Total Company.................. 561,345 215,428 1,934,323 1,310,747 ======= ======= ========= =========
- --------------- (a) "Developed acreage" consists of lease acres spaced or assignable to production (including acreage held by production) on which wells have been drilled or completed to a point that would permit production of commercial quantities of oil or natural gas. "Developed acreage" in Thailand includes all acreage designated as a production area by the Thai government, which currently includes the Benchamas Field, Tantawan Field and the Maliwan production area. (b) Approximately 22% of the Company's total domestic offshore net undeveloped acreage and approximately 17% of the Company's total onshore net undeveloped acreage are under leases that have terms expiring in 2000 (unless otherwise extended). Approximately 20% of total domestic offshore net undeveloped acreage and approximately 16% of total onshore net undeveloped acreage are under leases that terms expiring in 2001 (unless otherwise extended). All of the Company's undeveloped acreage in the Kingdom of Thailand must be relinquished to the Thai government on July 31, 2000, unless designated as a production area or unless the exploration term is extended. See "-- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." In addition, the Company holds certain other types of mineral interests, including fee interests (which never expire) and royalty interests (which generally terminate when the underlying mineral lease expires). The Company owns varying fee and royalty interests in 10,800 gross acres in Texas and a royalty interest in 5,000 gross acres (1,250 net acres) offshore Louisiana. 11 13 Productive Wells and Drilling Activity The following table shows the Company's interest in productive oil and natural gas wells as of December 31, 1999. For purposes of this table "productive wells" are defined as wells producing hydrocarbons and wells "capable of production" (e.g., natural gas wells waiting for pipeline connections or necessary governmental certification to commence deliveries and oil wells waiting to be connected to currently installed production facilities). This table does not include exploratory or developmental wells which have located commercial quantities of oil or natural gas but which are not capable of commercial production without the installation of material production facilities or which, for a variety of reasons, the Company does not currently believe will be placed on production.
NATURAL GAS OIL WELLS(A) WELLS(A) -------------- ------------- GROSS NET GROSS NET ----- ----- ----- ---- Offshore United States...................................... 130 28.9 81 25.2 Onshore (U.S. and Canada)................................... 756 469.6 112 45.3 Kingdom of Thailand......................................... 10 4.6 53 24.6 --- ----- --- ---- Total 896 503.1 246 95.1 === ===== === ====
- --------------- (a) One or more completions in the same bore hole are counted as one well. The data in the above table includes 5 gross (1.3 net) oil wells and 5 gross (1.6 net) natural gas wells with multiple completions. The following table shows the number of successful gross and net exploratory and development wells in which the Company has participated and the number of gross and net wells abandoned as dry holes during the periods indicated. An onshore well is considered successful upon the installation of permanent equipment for the production of hydrocarbons or when electric logs run to evaluate such wells indicate the presence of commercially producible hydrocarbons and the Company currently intends to complete such wells. Successful offshore wells consist of exploratory or development wells that have been completed or are "suspended" pending completion (which has been determined to be feasible and economic) and exploratory test wells that 12 14 were not intended to be completed and that encountered commercially producible hydrocarbons. A well is considered a dry hole upon reporting of permanent abandonment to the appropriate agency.
1999 1998 1997 ------------------ ------------------ ------------------- PRODUCTIVE DRY PRODUCTIVE DRY PRODUCTIVE DRY ---------- ---- ---------- ---- ---------- ----- Gross Wells: Offshore United States Exploratory................................ 4.0 -- 5.0 1.0 4.0 1.0 Development................................ 11.0 -- 2.0 -- 12.0 3.0 Onshore United States and Canada Exploratory................................ 3.0 3.0 9.0 4.0 18.0 12.0 Development................................ 23.0 1.0 32.0 1.0 50.0 3.0 Offshore Kingdom of Thailand Exploratory................................ 4.0 -- 12.0 -- 18.0 1.0 Development................................ 42.0 -- 12.0 -- 16.0 -- ----- ---- ----- ---- ----- ----- Total................................. 87.0 4.0 72.0 6.0 118.0 20.0 ===== ==== ===== ==== ===== ===== Net Wells: Offshore United States Exploratory................................ 1.32 -- 1.07 .25 1.21 .25 Development................................ 3.37 -- .80 -- 4.15 1.05 Onshore United States and Canada Exploratory................................ 1.63 1.65 5.08 2.19 11.27 7.40 Development................................ 13.89 .80 22.61 .34 30.18 1.41 Offshore Kingdom of Thailand Exploratory................................ 1.85 -- 5.56 -- 8.34 .46 Development................................ 19.46 -- 5.56 -- 5.11 -- ----- ---- ----- ---- ----- ----- Total................................. 41.52 2.45 40.68 2.78 60.26 10.57 ===== ==== ===== ==== ===== =====
Average Production (Lifting) Costs The following table shows the average production (lifting) costs per unit of production during the periods indicated. For a discussion of the Company's average daily production and the average sales prices received by the Company for such production see "Selected Financial Data -- Production (Sales) Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations; Oil and Gas Revenues."
1999 1998 1997 ---- ----- ----- Average Production (lifting) Costs(a): Located in the United States and Canada Natural Gas, Crude Oil, Condensate and Natural Gas Liquids (per Mcfe).................................... $.69 $ .61 $ .49 Located in the Kingdom of Thailand Natural Gas, Crude Oil and Condensate (per Mcfe)(b).... $.99 $1.10 $1.12
- --------------- (a) Production costs were converted to common units of measure on the basis of relative energy content. Such production costs exclude all depletion and amortization associated with property and equipment. (b) The major contributing factor to lifting costs are lease operating expenses. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relate to lease payments made by a subsidiary of the Company in connection with its bareboat charter of the FPSO and the FSO, which collectively amounted to $17,588,000 net to the Company during 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources; Future Capital Requirements; Other Material Long -- Term Commitments." 13 15 Reserves The following table sets forth information as to the Company's net proved and proved developed reserves as of December 31, 1999, 1998 and 1997, and the present value as of such dates (based on an annual discount rate of 10%) of the estimated future net revenues from the production and sale of those reserves, as estimated by Ryder Scott Petroleum Engineers ("Ryder Scott"), the Company's independent petroleum engineers, in accordance with criteria prescribed by the Commission.
AS OF DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- -------- -------- Total Proved Reserves: Oil, condensate, and natural gas liquids (MBbls) Located in the United States and Canada.............. 42,120 33,699 29,382 Located in the Kingdom of Thailand................... 36,656 33,811 28,783 ---------- -------- -------- Total Company................................... 78,776 67,510 58,165 ========== ======== ======== Natural Gas (MMcf) Located in the United States and Canada.............. 221,110 271,780 216,720 Located in the Kingdom of Thailand................... 153,588 168,389 184,768 ---------- -------- -------- Total Company................................... 374,698 440,169 401,488 ========== ======== ======== Present value of estimated future net revenues, before income taxes (in thousands)(a) Located in the United States and Canada.............. $ 585,052 $294,629 $406,161 Located in the Kingdom of Thailand................... 569,594 200,597 56,620 ---------- -------- -------- Total Company................................... $1,154,646 $495,226 $462,781 ========== ======== ======== Total Proved Developed Reserves: Oil, condensate, and natural gas liquids (MBbls) Located in the United States and Canada.............. 35,487 29,070 26,168 Located in the Kingdom of Thailand................... 18,408 4,298 6,982 ---------- -------- -------- Total Company................................... 53,895 33,368 33,150 ========== ======== ======== Natural Gas (MMcf) Located in the United States and Canada.............. 157,216 184,630 179,972 Located in the Kingdom of Thailand................... 88,041 40,424 59,760 ---------- -------- -------- Total Company................................... 245,257 225,054 239,732 ========== ======== ======== Present value of estimated future net revenues, before income taxes (in thousands)(a) Located in the United States and Canada.............. $ 472,856 $242,574 $377,530 Located in the Kingdom of Thailand................... 304,275 28,244 36,692 ---------- -------- -------- Total Company................................... $ 777,131 $270,818 $414,222 ========== ======== ========
- --------------- (a) The Company believes, for the reasons set forth in succeeding paragraphs, that the present value of estimated future net revenues set forth in the Annual Report and calculated in accordance with Commission guidelines are not necessarily indicative of the true present value of the Company's reserves and, due to the fact that essentially all of the Company's domestic natural gas production is currently sold on the spot market, whereas all of the Company's Thai natural gas production is sold pursuant to a long-term gas sales contract, such estimates of future net revenues from the Company's domestic and Thai reserves are, accordingly, not useful for comparative purposes. See the discussion on the following pages for the prices used in making these calculations. 14 16 Natural gas liquids comprised approximately 7% of the Company's total proved liquids reserves and approximately 10% of the Company's proved developed liquids reserves as of December 31, 1999. All hydrocarbon liquid reserves are expressed in standard 42 gallon Bbls. All gas volumes and gas sales are expressed in MMcf at the pressure and temperature bases of the area where the gas reserves are located. In computing future revenues from gas reserves attributable to the Company's domestic interests, prices in effect at December 31, 1999 were used, including current market prices, contract prices and fixed and determinable price escalations where applicable. In accordance with Commission guidelines, the gas prices that were used make no allowances for seasonal variations in gas prices which are likely to cause future yearly average gas prices to be somewhat lower than December gas prices. For domestic gas sold under contract, the contract gas price including fixed and determinable escalations, exclusive of inflation adjustments, was used until the contract expires and then was adjusted to the current market price for the area and held at this adjusted price to depletion of the reserves. In computing future revenues from liquids attributable to the Company's domestic interests, prices in effect at December 31, 1999 were used and these prices were held constant to depletion of the properties. The future revenues are adjusted to reflect the Company's net revenue interest in these reserves as well as any ad valorem and other severance taxes but do not include, unless otherwise noted, any provisions for corporate income taxes. In computing future revenues from the Company's gas reserves attributable to the Company's interests in the Kingdom of Thailand, the current contract price under the Gas Sales Agreement was used, without giving effect to any of the adjustments provided for in the Gas Sales Agreement, due to their indeterminate nature as of December 31, 1999, in accordance with Commission guidelines. In computing future revenues from liquids attributable to the Company's interests in the Kingdom of Thailand, a price was used which the Company believes approximates the price that the Company would have received for its production from the Thailand Concession based upon the world market price for Tapis benchmark crude on December 31, 1999, and this price was held constant until depletion of the Company's reserves in the Kingdom of Thailand. The future revenues are adjusted to reflect the Company's net revenue interest in these reserves and the Company's obligations under the Thailand Concession, including the payment of SRB and applicable production bonuses, but does not include any provisions for U.S. or Thai corporate income or other taxes. In accordance with Commission guidelines, the prices used by the Company to calculate the present value of estimated future revenues are determined on a well or field by field basis, as applicable, as described above and were held constant over the productive life of the reserves. The initial weighted average prices used by Ryder Scott were as follows:
AS OF DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ Initial Weighted Average Price (in U.S. dollars): Oil, condensate, and natural gas liquids (per Bbl) Located in the United States and Canada............. $25.55 $10.45 $16.60 Located in the Kingdom of Thailand.................. $25.08 $12.68 $16.00 Natural Gas (per Mcf) Located in the United States and Canada............. $ 2.14 $ 2.01 $ 2.30 Located in the Kingdom of Thailand.................. $ 1.99 $ 1.81 $ 1.83
The estimates of future net revenue from the Company's domestic and Thailand properties are based on existing law where the properties are located and are calculated in accordance with Commission guidelines. Operating costs for the leases and wells include only those costs directly applicable to the leases or wells. When applicable, the operating costs include a portion of general and administrative costs allocated directly to the leases and wells under terms of operating agreements. Development costs are based on authorization for expenditure for the proposed work or actual costs for similar projects. The current operating and development costs were held constant throughout the life of the properties. For properties located onshore, the estimates of future net revenues and the present value thereof do not consider the salvage value of the lease equipment or the abandonment cost of the lease since both are relatively insignificant and tend to offset each other. The 15 17 estimated net cost of abandonment after salvage was considered for offshore properties where such costs net of salvage are significant. No deduction was made for indirect costs such as general and administrative and overhead expenses, loan repayments, interest expenses and exploration and development prepayments. Accumulated gas production imbalances, if any, have been taken into account. Production data used to arrive at the estimates set forth above includes estimated production for the last few months of 1999. The future production rates from reservoirs now on production may be more or less than estimated because of, among other reasons, mechanical breakdowns and changes in market demand or allowables set by regulatory bodies. Properties which are not currently producing may start producing earlier or later than anticipated in the estimates of future production rates. The future prices received by the Company for the sales of its production may be higher or lower than the prices used in calculating the estimates of future net revenues and the present value thereof as set forth herein, and the operating costs and other costs relating to such production may also increase or decrease from existing levels; however, such possible changes in prices and costs were, in accordance with rules adopted by the Commission, omitted from consideration in arriving at such estimates. There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those of Ryder Scott, the Company's reserve engineers. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate, which revisions may be material. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. The Company is periodically required to file estimates of its oil and gas reserve data with various U.S. governmental regulatory authorities and agencies, including the Federal Energy Regulatory Commission ("FERC") and the Federal Trade Commission; with respect to reserves located in Canada, with the Alberta Energy Utilities Board and, with respect to reserves located in Thailand, the Kingdom of Thailand's Department of Mineral Resources and PTT, which the Company considers a quasi-governmental authority. In addition, estimates are from time to time furnished to governmental agencies in connection with specific matters pending before such agencies. The basis for reporting reserves to these agencies, in some cases, is not comparable to that furnished by Ryder Scott in accordance with Commission guidelines because of the nature of the various reports required. The major differences generally include differences in the time as of which such estimates are made, differences in the definition of reserves, requirements to report in some instances on a gross, net or total operator basis and requirements to report in terms of smaller geographical units. During 1999, no estimates by the Company of its total proved net oil and gas reserves were filed with or included in reports to any governmental authority or agency other than the Commission; and, with respect to reserves relating to the Company's properties located in Thailand, the Kingdom of Thailand's Department of Mineral Resources and PTT. GOVERNMENT REGULATION The Company's operations are affected from time to time in varying degrees by political developments and governmental laws and regulations. Rates of production of oil and gas have for many years been subject to governmental conservation laws and regulations, and the petroleum industry has been subject to federal and state tax laws dealing specifically with it. Federal Income Tax The Company's operations are significantly affected by certain provisions of the federal income tax laws applicable to the petroleum industry. The principal provisions affecting the Company are those that permit the 16 18 Company, subject to certain limitations, to deduct as incurred, rather than to capitalize and amortize, its domestic "intangible drilling and development costs" and to claim depletion on a portion of its domestic oil and gas properties based on 15% of its oil and gas gross income from such properties (up to an aggregate of 1,000 Bbls per day of domestic crude oil and/or equivalent units of domestic natural gas) even though the Company has little or no basis in such properties. Under certain circumstances, however, a portion of such intangible drilling and development costs and the percentage depletion allowed in excess of basis will be tax preference items that will be taken into account in computing the Company's alternative minimum tax. Environmental Matters Domestic oil and gas operations are subject to extensive federal regulation and, with respect to federal leases, to interruption or termination by governmental authorities on account of environmental and other considerations including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") also known as the "Superfund Law." The recent trend towards stricter standards in environmental legislation and regulation may continue, and this could increase costs to the Company and others in the industry. Oil and gas lessees are subject to liability for the costs of clean-up of pollution resulting from a lessee's operations, and may also be subject to liability for pollution damages. The Company maintains insurance against costs of clean-up operations, but is not fully insured against all such risks. A serious incident of pollution may, as it has in the past, also result in the Department of the Interior requiring lessees under federal leases to suspend or cease operation in the affected area. The operators of the Company's properties have numerous applications pending before the Environmental Protection Agency (the "EPA") for National Pollution Discharge Elimination System water discharge permits with respect to offshore drilling and production operations. The issue generally involved is whether effluent discharges from each facility or installation comply with the applicable federal regulations. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulations. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by the OPA. The OPA also imposes ongoing requirements on responsible parties, including proof of financial responsibility to cover at least some costs in a potential spill. For tank vessels, including mobile offshore drilling rigs, the OPA imposes on owners, operators and charterers of the vessels, an obligation to maintain evidence of financial responsibility of up to $10,000,000 depending on gross tonnage. With respect to offshore facilities, proof of greater levels of financial responsibility may be applicable. For offshore facilities that have a worst case oil spill potential of more than 1,000 Bbls (which includes many of the Company's offshore producing facilities), certain amendments to the OPA that were enacted in 1996 provide that the amount of financial responsibility that must be demonstrated for most facilities ranges from $10,000,000 to $35,000,000, depending upon location, with higher amounts, up to $150,000,000 in certain limited circumstances. The Company believes that it currently has established adequate proof of financial responsibility for its offshore facilities at no significant increase in expense over recent prior years. However, the Company cannot predict whether these financial responsibility requirements under the OPA amendments will result in the imposition of substantial additional annual costs to the Company in the future or otherwise materially adversely affect the Company. The impact, however, should not be any more adverse to the Company than it will be to other similarly situated or less capitalized owners or operators in the Gulf of Mexico. The Company's onshore operations are subject to numerous United States and Canadian federal, state, provincial and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment including CERCLA. Such laws and regulations, 17 19 among other things, impose absolute liability on the lessee under a lease for the cost of clean-up of pollution resulting from a lessee's operations, subject the lessee to liability for pollution damages, may require suspension or cessation of operations in affected areas, and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater. Such laws could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. Federal, state, provincial and local initiatives to further regulate the disposal of oil and gas wastes are also pending in certain states and Canadian provinces, and these initiatives could have a similar impact on the Company. The Company is asked to comment on the costs it incurred during the prior year on capital expenditures for environmental control facilities and the amount it anticipates incurring during the coming year. The Company believes that, in the course of conducting its oil and gas operations, many of the costs attributable to environmental control facilities would have been incurred absent environmental regulations as prudent, safe oilfield practice. During 1999, the Company incurred capital expenditures of approximately $929,000 for environmental control facilities, primarily relating to pit liner and routine site restoration costs, the installation of certain environmental control facilities on two platforms installed in the Gulf of Thailand and at three locations in New Mexico, and the drilling of two salt water disposal wells. The Company budgeted approximately $4,090,000 for expenditures involving environmental control facilities during 2000, including, among other things, environmental control equipment. Other Laws and Regulations Various laws and regulations often require permits for drilling wells and also cover spacing of wells, the prevention of waste of oil and gas including maintenance of certain gas/oil ratios, rates of production and other matters. The effect of these laws and regulations, as well as other regulations that could be promulgated by the jurisdictions in which the Company has production, could be to limit the number of wells that could be drilled on the Company's properties and to limit the allowable production from the successful wells completed on the Company's properties, thereby limiting the Company's revenues. The Minerals Management Service of the Department of the Interior (the "MMS") administers the oil and gas leases held by the Company on federal onshore lands and offshore tracts in the Outer Continental Shelf. The MMS holds a royalty interest in these federal leases on behalf of the federal government. While the royalty interest percentage is fixed at the time that the lease is entered into, from time to time the MMS changes or reinterprets the applicable regulations governing its royalty interests, and such action can indirectly affect the actual royalty obligation that the Company is required to pay. In a letter dated May 3, 1993, the MMS announced a reinterpretation of its right to collect royalty payments from producers on certain settlements in which such producers and pipeline companies were involved a number of years ago. The MMS reinterpretation has been challenged in court by various producers and trade groups representing them. On August 27, 1996, in Independent Petroleum Association of America, et al. v. Babbit et al., Nos. 95-5210 etc., the United States Court of Appeals for the District of Columbia Circuit held that the May 3, 1993, reinterpretation was invalid and unenforceable. Unless and until this or other similar cases are resolved in favor of the MMS' reinterpretation of its regulations, it is unlikely that the Company or other producers will be legally required to pay royalties on such settlement agreements. The Company was involved in several settlement agreements with pipelines that could be subject to the MMS' new reinterpretation. The MMS has reviewed the Company's and other producers' settlement agreements, to determine whether it believes any additional royalty payments may be due and has asserted that additional royalties may be due in connection with two of the Company's settlement agreements. Based upon existing case law, the Company has asserted through the administrative appeals process, and continues to believe, that it does not owe any additional royalties beyond what it has previously paid. However, in the event that the MMS is able to successfully assert that additional royalty is due from the Company in connection with settlement agreements to which the Company is a party, the Company does not currently believe that such additional assessment will have a material adverse impact on the financial position or results of operations of the Company. The MMS is currently engaged in developing new oil and gas valuation regulations for royalty purposes. The gas rule was published in final form on December 16, 1997. Industry trade associations have challenged portions of the rule in American Petroleum Institute, et al. v. Babbitt, Civil Nos. 98-631, et al. (D.D.C. 1998). 18 20 The latest version of the oil valuation rules proposed by the MMS was published on December 30, 1999. A final rule is expected. We are not in a position to predict the outcome of the litigation, but the Company believes that the impact of the final rules that emerge from the court review will not impact the Company to any greater extent than other similarly situated producers. Recently, the MMS and various state and municipal authorities have attempted to collect alleged underpayment of royalties from various integrated oil companies in connection with sale transactions between exploration and production affiliates and pipeline affiliates of the same company. The Company has not been named in any of these collection efforts, a fact that the Company believes is primarily due to its never having sold any oil or gas production from one of its affiliates to another. The Company does not believe that it has any material liability for underpayment of royalty in connection with affiliate transactions, including those described above. The FERC has recently embarked on wide-ranging regulatory initiatives relating to gas transportation rates and services, including the availability of market-based and other alternative rate mechanisms to pipelines for transmission and storage services. In addition, the FERC has announced and implemented a policy allowing pipelines and transportation customers to negotiate rates above the otherwise applicable maximum lawful cost-based rates on the condition that the pipelines alternatively offer so-called recourse rates equal to the maximum lawful cost-based rates. With respect to gathering services, the FERC has issued orders declaring that certain facilities owned by interstate pipelines primarily perform a gathering function, and may be transferred to affiliated and non-affiliated entities that are not subject to the FERC's rate jurisdiction. The Company cannot predict the ultimate outcome of these developments, nor the effect of these developments on transportation rates. Inasmuch as the rates for these pipeline services can affect the gas prices received by the Company for the sale of its production, the FERC's actions may have an impact on the Company. However, the impact should not be substantially different on the Company than it will on other similarly situated gas producers and sellers. EMPLOYEES As of December 31, 1999, the Company and its subsidiaries had 165 full-time employees, including three in its Bangkok, Thailand office and seven in its Calgary, Canada office. None of the Company's employees are presently represented by a union for collective bargaining purposes. The Company considers its relations with its employees to be excellent. ITEM 2. PROPERTIES. The information appearing in Item 1 of this Annual Report is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to various other legal proceedings consisting of routine litigation incidental to its businesses, but believes that any potential liabilities resulting from these proceedings are adequately covered by insurance or are otherwise immaterial at this time. See "Business-Government Regulation; Other Laws and Regulations." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not Applicable. 19 21 ITEM S-K 401(b). EXECUTIVE OFFICERS OF REGISTRANT. Executive officers of the Company are appointed annually to serve for the ensuing year or until their successors have been elected or appointed. The executive officers of the Company, their age as of March 10, 2000 and the year each was elected to his present position are as follows:
EXECUTIVE OFFICER EXECUTIVE OFFICE AGE YEAR ELECTED - ----------------- ------------------------------------ --- ------------ Paul G. Van Wagenen...... Chairman of the Board, President and 54 1991 Chief Executive Officer Stuart P. Burbach........ Executive Vice President-Exploration 47 1998 Kenneth R. Good.......... Executive Vice President 62 1998 Jerry A. Cooper.......... Senior Vice President and Western 51 1998 Division Manager R. Phillip Laney......... Senior Vice President and Manager of 59 1998 Worldwide New Ventures John O. McCoy, Jr. ...... Senior Vice President and Chief 48 1998 Administrative Officer J. D. McGregor........... Senior Vice President-Sales 55 1998 Barry W. Acomb........... Vice President and Offshore Division 47 1999 Manager Bruce E. Archinal........ Vice President and Onshore Division 47 1997 Manager David R. Beathard........ Vice President-Engineering 41 1997 Stephen R. Brunner....... Vice President-Operations 41 1997 Frank Davis III.......... Vice President-Land 53 1997 Thomas E. Hart........... Vice President and Chief Accounting 57 1999 Officer Gerald A. Morton......... Vice President-Law and Corporate 41 1997 Secretary S. Clay Robinson, Jr. ... Vice President and International 45 1999 Division Manager James P. Ulm, II......... Vice President and Chief Financial 37 1999 Officer
Prior to assuming their present positions with the Company, the business experience of each executive officer for more than the last five years was as follows: Mr. Van Wagenen, who joined the Company in 1979, served as President and Chief Operating Officer of the Company since 1990; Mr. Burbach served as Vice President and Offshore Division Manager since rejoining the Company in 1991; Mr. Good, who joined the Company in 1977, served as Corporate Senior Vice President of the Company since 1996 and prior thereto served as the Company's Senior Vice President-Land and Budgets since 1991; Mr. Cooper, who joined the Company in 1979, served as Vice President and Western Division Manager for the Company since 1990; Mr. Laney, who joined the Company in 1977, served as Vice President and International Exploration Manager for the Company since 1991; Mr. McCoy, who joined the Company in 1978, served as Vice President and Chief Administrative Officer of the Company since 1989; Mr. McGregor, who joined the Company in 1981, served as Vice President-Sales since 1988; Mr. Acomb served as Offshore Division Exploration Manager since joining the Company in 1994; Mr. Archinal, who joined the Company in 1982, served as the Company's Onshore Division Manager since 1994; Mr. Beathard, who joined the Company in 1982, served as Manager of Petroleum Engineering for the Company since 1991; Mr. Brunner served as Resident Manager of the Company's Thailand operations since 1995, prior to which he was an Operations Manager for the Company since 1994; Mr. Davis, who joined the Company in 1978, served as Land Manager for the Company since 1991; Mr. Hart was Vice President and Controller since 1988 and prior thereto was Controller since joining the Company in 1977; Mr. Morton was Associate General Counsel for the Company since 1993; Mr. Robinson, since joining the Company in 1996, served as International Division Exploration Manager; and 20 22 Mr. Ulm served as Treasurer of Newfield Exploration Company from 1995 until joining the Company as its Vice President and Chief Financial Officer in August of 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS. The following table shows the range of low and high sales prices of the Company's Common Stock (the "Common Stock") on the New York Stock Exchange composite tape where the Common Stock trades under the symbol PPP. The Common Stock is also listed on the Pacific Exchange.
LOW HIGH ---- ---- 1998 1st Quarter................................................. 26 1/2 34 2nd Quarter................................................. 21 1/2 34 11/16 3rd Quarter................................................. 11 5/8 25 7/8 4th Quarter................................................. 9 13/16 17 1/8 1999 1st Quarter................................................. 8 15/16 14 1/2 2nd Quarter................................................. 11 15/16 21 3/8 3rd Quarter................................................. 18 1/8 23 7/16 4th Quarter................................................. 15 5/8 21
As of March 3, 2000, there were 3,064 holders of record of the Company's Common Stock. In each of 1998 and 1999, the Company paid four quarterly dividends of $0.03 per share on its Common Stock. However, the declaration and payment of future dividends will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors. Pursuant to the Company's revolving credit facility with its banks under which the Company has borrowed funds, and the Indentures relating to the Company's 8 3/4% Senior Subordinated Notes due 2007 (the "2007 Notes") and 10 3/8% Senior Subordinated Notes due 2009 (the "2009 Notes"), the Company may not, subject to certain exceptions, pay any dividends on its capital stock or make any other distributions on shares of its capital stock (other than dividends or distributions payable solely in shares of such capital stock) or apply any funds, property or assets to the purchase, redemption, sinking fund or other retirement of its capital stock, if the aggregate amount of all such dividends, purchases, and redemptions would exceed an amount determined based on the consolidated income of the Company and its consolidated subsidiaries plus the proceeds of the issuance of capital stock from and after a specified date set forth in each respective agreement or, in the case of the revolving credit facility, if the net worth of the Company is negative. As of December 31, 1999, $16,516,000 was available for dividends under this limitation in the Indenture relating to the 2009 Notes, the agreement currently having the most restrictive covenants. In addition, the 6 1/2% Cumulative Quarterly Income Convertible Preferred Securities, Series A (the "Trust Preferred Securities") issued by the Company's subsidiary, Pogo Trust I, prohibit the Company from paying dividends on the Company's Common Stock if dividends have not been paid on the Trust Preferred Securities. 21 23 ITEM 6. SELECTED FINANCIAL DATA.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AND PRODUCTION DATA) FINANCIAL DATA Revenues: Crude oil and condensate............... $109,803 $ 74,703 $112,603 $ 96,908 $ 76,557 Natural gas............................ 111,152 116,148 158,500 94,589 72,032 Natural gas liquids.................... 9,544 9,303 13,748 11,867 8,097 -------- -------- -------- -------- -------- Oil and gas revenues................... 230,499 200,154 284,851 203,364 156,686 Pipeline sales and other............... 7,159 2,741 349 778 773 Gains (losses) on sales................ 37,458 (92) 1,100 (165) 100 -------- -------- -------- -------- -------- Total........................... $275,116 $202,803 $286,300 $203,977 $157,559 ======== ======== ======== ======== ======== Income (loss) before extraordinary item................................... $ 22,134 $(43,098) $ 37,116 $ 33,581 $ 9,230 Extraordinary losses..................... -- -- -- (821) -- -------- -------- -------- -------- -------- Net income (loss)........................ $ 22,134 $(43,098) $ 37,116 $ 32,760 $ 9,230 ======== ======== ======== ======== ======== Per share data: Income (loss) before extraordinary item -- Basic................................ $ 0.55 $ (1.14) $ 1.11 $ 1.01 $ 0.28 Diluted.............................. $ 0.55 $ (1.14) $ 1.06 $ 0.97 $ 0.28 Cash dividends on Common Stock......... $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 Price range of Common Stock: High................................. $ 23.44 $ 34.69 $ 49.88 $ 48.38 $ 29.00 Low.................................. $ 8.94 $ 9.81 $ 27.00 $ 24.38 $ 16.00 Weighted average number of common shares outstanding............................ 40,178 37,902 33,421 33,203 32,893 Long-term debt........................... $375,000 $434,947 $348,179 $246,230 $163,249 Trust Preferred Securities, net.......... $144,751 -- -- -- -- Shareholders' equity..................... $268,512 $249,660 $146,106 $107,282 $ 71,708 Total assets............................. $948,193 $862,396 $676,617 $479,242 $338,177 PRODUCTION (SALES) DATA Net daily average and weighted average price: Natural gas (Mcf per day).............. 141,600 159,000 181,700 107,700 121,000 Price (per Mcf)...................... $ 2.15 $ 2.00 $ 2.39 $ 2.40 $ 1.63 Crude oil-condensate (Bbl per day)..... 16,036 15,775 15,927 11,968 11,786 Price (per Bbl)...................... $ 18.76 $ 12.97 $ 19.37 $ 22.12 $ 17.80 Natural gas liquids (Bbl per day)...... 2,077 2,422 2,923 2,173 1,998 Price (per Bbl)...................... $ 12.59 $ 10.52 $ 12.89 $ 14.92 $ 11.10 CAPITAL EXPENDITURES Oil and gas: Domestic Offshore -- Exploration.......................... $ 12,600 $ 20,200 $ 18,700 $ 16,800 $ 13,300 Development.......................... 43,200 42,500 59,800 73,900 17,800 Purchase of reserves................. -- 5,000 900 - -- Onshore North America -- Exploration.......................... 9,800 16,500 18,100 10,400 8,800 Development.......................... 19,800 28,100 38,400 27,800 22,400 Purchase of reserves................. 19,500 133,100 1,700 -- 7,900 Kingdom of Thailand -- Exploration.......................... 3,500 11,600 21,700 8,500 5,500 Development.......................... 106,300 95,500 62,500 54,700 24,400 Purchase of reserves................. -- -- 29,300 -- 4,200 -------- -------- -------- -------- -------- Total oil and gas...................... 214,700 352,500 251,100 192,100 104,300 Other.................................... 2,200 6,300 4,000 1,600 500 -------- -------- -------- -------- -------- Total........................... $216,900 $358,800 $255,100 $193,700 $104,800 ======== ======== ======== ======== ========
22 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On August 17, 1998, a wholly owned subsidiary of the Company merged with and into Arch in a stock-for-stock tax-free merger accounted for as a purchase. In connection with the merger, the Company paid off $51,749,000 of Arch's existing bank debt and production payment obligations. The Company also exchanged $5,000,000 of Arch's existing convertible subordinated notes, 727,273 shares of Arch preferred stock (having a liquidation preference of $20,000,000) and 17,321,804 shares of Arch common stock for approximately 2,500,000 shares of Common Stock. RESULTS OF OPERATIONS Net Income (Loss) The Company reported net income for 1999 of $22,134,000 or $0.55 per share, compared to a net loss for 1998 of $43,098,000 or $1.14 per share (on both a basic and a diluted basis) and net income for 1997 of $37,116,000 or $1.11 per share ($40,198,000 or $1.06 per share on a diluted basis). Among other items affecting the net income for 1999 were $37,458,000 in net gains related to the sale by the Company of certain properties during the first quarter of the year as part of its asset maximization plan. Net income for 1998 was affected by non-recurring expenses totaling approximately $2,285,000 ($1,485,000 or $0.04 per share on an after-tax basis) related to the Company's acquisition of Arch and impairments to its oil and gas properties of $30,813,000, primarily resulting from poor reservoir performance and persistent low oil and gas prices. Earnings per common share are based on the weighted average number of common shares outstanding for 1999 of 40,178,000 (40,390,000 on a diluted basis), compared to 37,902,000 (on both a basic and a diluted basis) for 1998 and 33,421,000 (38,064,000 on a diluted basis) for 1997. The increase in the weighted average number of common shares outstanding for 1999, compared to 1998 and 1997, resulted primarily from the issuance of 3,882,023 shares of its common stock upon the conversion of the Company's 5 1/2% Convertible Subordinated Notes due 2004 (the "2004 Notes") prior to their being redeemed on March 16, 1998, 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 and, to a lesser extent, the issuance of common stock upon the exercise of stock options pursuant to the Company's stock option plans. The earnings per share computation on a diluted basis in 1998 is identical to the basic earnings per share computation because there were no securities of the Company that were dilutive during the period. The earnings per share computation on a diluted basis in 1997 primarily reflects additional shares of common stock issuable upon the assumed conversion of the 2004 Notes and the elimination of related interest requirements, as adjusted for applicable federal income taxes and, to a lesser extent, the assumed exercise of options to purchase common shares. In addition, the number of common shares outstanding in the diluted computation is adjusted, in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 128, to include dilutive shares that are assumed to have been issued by the Company in connection with options exercised during the year, less treasury shares that are assumed to have been purchased by the Company from the option proceeds. SFAS No. 128 was adopted by the Company in 1997, resulting in a restatement of the earnings per share calculations for 1997 and all preceding years. Total Revenues The Company's total revenues for 1999 were $275,116,000, an increase of approximately 36% from total revenues of $202,803,000 for 1998, and a decline of approximately 4% of total revenues of $286,300,000 for 1997. The increase in the Company's total revenues for 1999, compared to 1998, resulted primarily from the gains on sales of properties discussed earlier, increases in oil and gas revenues and an increase in pipeline sales, principally related to the Saginaw pipeline, which was acquired as part of the Arch acquisition in the third quarter of 1998. The decrease in the Company's total revenues for 1999, compared to 1997, resulted primarily from a decrease in oil and gas revenues, that was only partially offset by the revenues generated by the Company's pipeline sales. 23 25 Oil and Gas Revenues The Company's oil and gas revenues for 1999 were $230,499,000, a increase of approximately 15% from oil and gas revenues of $200,154,000 for 1998, and a decrease of approximately 19% from oil and gas revenues of $284,851,000 for 1997. The following table reflects an analysis of variances in the Company's oil and gas revenues (expressed in thousands) between 1999 and the previous two years:
1999 COMPARED TO -------------------- 1998 1997 -------- -------- Increase (decrease) in oil and gas revenues resulting from variances in: Natural gas -- Price................................................... $ 8,706 $(15,853) Production.............................................. (13,702) (31,495) -------- -------- $ (4,996) $(47,348) -------- -------- Crude oil and condensate- Price................................................... $ 33,310 $ (3,546) Production.............................................. 1,790 746 -------- -------- $ 35,100 $ (2,800) -------- -------- Natural Gas Liquids....................................... $ 241 $ (4,204) -------- -------- Increase (decrease) in oil and gas revenues............. $ 30,345 $(54,352) ======== ========
The increase in the Company's oil and gas revenues in 1999, compared to 1998, is related to increases in the average price that the Company received for its natural gas and oil, condensate and NGL ("liquid hydrocarbons") production volumes and, to a lesser extent, increases in crude oil and condensate production, that was partially offset by declines in natural gas and NGL production volumes. The decrease in the Company's oil and gas revenues in 1999, compared to 1997, is related to declines in the natural gas and NGL production volumes and, to a lesser extent the average price that the Company received for its natural gas and liquid hydrocarbon production volumes, that more than offset increases in crude oil and condensate production volumes. 24 26
% CHANGE % CHANGE 1999 1999 TO TO 1999 1998 1998 1997 1997 ------- ------- -------- ------- -------- Comparison of Increases (Decreases) in: NATURAL GAS -- Average prices North America................................ $ 2.31 $ 2.09 11% $ 2.50 (8)% Kingdom of Thailand (ThaiBaht)(a)............ 61 70 (13)% 60 2% Company-wide average price................. $ 2.15 $ 2.00 8% $ 2.39 (10)% Average daily production volumes (MMcf per day) North America................................ 102.6 122.2 (16)% 147.2 (30)% Kingdom of Thailand (a)...................... 39.0 36.8 6% 34.5 13% ------- ------- ------- Company-wide average daily production...... 141.6 159.0 (11)% 181.7 (22)% ======= ======= ======= CRUDE OIL AND CONDENSATE -- Average prices North America................................ $ 17.43 $ 12.94 35% $ 19.49 (11)% Kingdom of Thailand(a)....................... $ 23.49 $ 13.17 78% $ 18.60 26% Company-wide average price................. $ 18.76 $ 12.97 45% $ 19.37 (3)% Average daily production volumes (Bbls per day) North America................................ 12,517 13,214 (5)% 13,711 (9)% Kingdom of Thailand (a)...................... 3,519 2,561 37% 2,216 59% ------- ------- ------- Company-wide average daily production...... 16,036 15,775 2% 15,927 1% ======= ======= ======= TOTAL LIQUID HYDROCARBONS -- Company-wide average daily production (Bbls per day)......................................... 18,112 18,197 -- 18,851 (4)% ======= ======= =======
- --------------- (a) Production from the Tantawan Field commenced in February 1997, with a start-up phase which extended through March 15, 1997. Production from the Benchamas Field commenced in July 1999. Prices received for its gas production during the start-up phase of the Tantawan Field and during the period from October 1998 through August 1999 when the Company did not meet the contractual DCQ were negatively affected by the contractual provisions of the Gas Sales Agreement. See "Business and Properties -- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." Natural Gas Thailand Prices. The price that the Company receives under the Gas Sales Agreement for its natural gas production from the Thailand Concession normally adjusts on a semi-annual basis. However, the Gas Sales Agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. In addition, prices received by the Company for its natural gas production during the period from October 1, 1998 through August 1999 were adversely affected by certain penalty provisions in the Gas Sales Agreement. See "Business -- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." Due to the volatility of the Thai Baht and the economic difficulties that prevailed in the Kingdom of Thailand and throughout Southeast Asia during 1997 and parts of 1998, the price that the Company received under the Gas Sales Agreement adjusted several times during 1998, and almost monthly in the latter half of 1997. The Company cannot predict what the Baht to dollar exchange rate may be in the future. Although it has been relatively stable throughout much of 1999, the exchange rate could again become volatile in the future. See "-- Foreign Currency Transaction Gain (Loss)," and "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." 25 27 Production. The decrease in the Company's natural gas production during 1999, compared to 1998, was related in large measure to the sale of the Lopeno Field and other lesser properties in the first quarter of 1999, decreased production from the Company's East Cameron Block 334 "E" platform and natural production declines from other Company properties, which were partially offset by increased production from the Company's Thailand Concession resulting from a successful infill drilling program in the Tantawan Field and commencement of production from the Benchamas Field and production from the Company's Garden Banks Block 367 project. The decrease in the Company's natural gas production during 1999, compared to 1997, was related in large measure to decreased production from the Company's East Cameron Block 334 "E" platform, the sale of the Lopeno Field and other lesser properties in the first quarter of 1999, and natural production declines from other Company properties, which were partially offset by production from properties that the Company acquired in its acquisition of Arch, increased production from the Company's Thailand Concession and production from the Company's Garden Banks Block 367 project. Commencing on October 1, 1998 and continuing through August 1999, the Company and its joint venture partners in the Thailand Concession delivered less natural gas than was nominated by PTT under the Gas Sales Agreement. This resulted in the Company receiving only 75% of the then current contract price on a portion of its natural gas sales to PTT. These penalties are reflected in the average price that the Company received for its natural gas production described elsewhere in this Annual Report. 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. The first such sale of crude oil and condensate from the Tantawan Field occurred in July 1997. Commencing in July 1999 when production began from the Benchamas Field, crude oil and condensate from that field has been stored on the FSO and sold as economic quantities were accumulated. Prices that the Company receives for its crude oil and condensate production from Thailand are based on world benchmark prices, typically as a differential to Malaysian TAPIS crude and 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 crude oil and condensate production during 1999, compared to 1998 and 1997, resulted primarily from increased production from the Company's Thailand Concession due to commencement of production from the Benchamas Field, and increased production from the Company's Western Division properties (including those acquired in its acquisition of Arch), which was partially offset by a decline in production from certain of the Company's other domestic properties, principally in the offshore Gulf of Mexico. 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 that are extracted from natural gas production. The increase in NGL revenues for 1999, compared with 1998, primarily related to an increase in the average price that the Company received for its NGL, that was only partially offset by a decrease in the Company's NGL production volumes. The decrease in NGL revenues in 1999, compared with 1997, primarily related to a decrease in the Company's NGL production and, to a much lesser extent, a decline in the price that the Company received for its NGL production. 26 28 Costs and Expenses
% CHANGE % CHANGE 1999 1998 1999 TO 1998 1997 1999 TO 1997 ------------ ------------ ------------ ------------ ------------ Comparison of Increases (Decreases) in: LEASE OPERATING EXPENSES North America.............. $ 48,121,000 $ 48,158,000 -- $ 43,934,000 10% ------------ ------------ ------------ Kingdom of Thailand(a)..... 21,815,000 20,913,000 4% 19,567,000 11% ============ ============ ============ Total Lease Operating Expenses............ $ 69,936,000 $ 69,071,000 1% $ 63,501,000 10% PIPELINE OPERATING AND NATURAL GAS PURCHASES.............. $ 6,481,000 $ 2,142,000 203% -- N/A GENERAL AND ADMINISTRATIVE EXPENSES................... $ 29,865,000 $ 26,356,000 13% $ 21,412,000 39% EXPLORATION EXPENSES.......... $ 5,982,000 $ 9,802,000 (39)% $ 10,530,000 (43)% DRY HOLE AND IMPAIRMENT EXPENSES................... $ 4,594,000 $ 41,736,000 (89)% $ 9,631,000 (52)% DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) EXPENSES................... $104,266,000 $110,916,000 (6)% $103,157,000 1% DD&A rate.................. $ 1.12 $ 1.12 -- $ 0.95 18% Mcfe produced.............. 91,351,000 97,894,000 (7)% 107,605,000 (15)% INTEREST-- Charges.................... $ 35,874,000 $ 24,682,000 45% $ 21,886,000 64% Capitalized Interest Expense.................. $ 17,733,000 $ 9,381,000 89% $ 6,175,000 187% MINORITY INTEREST -- Dividends and costs associated with preferred securities of a subsidiary trust........... $ 5,914,000 -- N/A -- N/A FOREIGN CURRENCY TRANSACTION GAINS (LOSS)............... $ 572,000 $ 953,000 (40)% $ (7,604,000) N/A INCOME TAX BENEFIT (EXPENSE).................. $ (9,583,000) $ 27,751,000 N/A $(18,091,000) (47)%
- --------------- (a) Production from the Tantawan Field commenced in February 1997, with a start-up phase which extended through March 15, 1997. No lease operating expenses were incurred in Thailand prior to commencement of production. Lease Operating Expenses. The increase in North American lease operating expenses for 1999, compared to 1998, were affected by operating expenses related to the Pogo onshore pipeline system and other Arch properties for which no corresponding expenses were recorded during 1998. In addition, lease operating expenses for 1998 were reduced by $1,793,000 in refunds in connection with the Company's audit of a joint venture partner and settlement of a dispute with a vendor. The increase in lease operating expenses in the Kingdom of Thailand for 1999, compared to 1997, was primarily related to the fact that prior to the commencement of production in the Tantawan Field on February 1, 1997, no lease operating expenses were incurred by the Company in Thailand. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relate to 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 $13,619,000, $11,122,000 and $10,200,000 (net to the Company's interest) of the Company's Thailand lease operating expenses for 1999, 1998 and 1997, respectively. See "-- Liquidity and Capital Resources; Capital Requirements; Other Material Long-Term Commitments." 27 29 Pipeline Operating and Natural Gas Purchases The Company acquired primarily all of its pipeline interests as part of its acquisition of Arch on August 17, 1998. The Company purchases natural gas for transportation through the Pogo Onshore Pipeline, which runs from Wichita Falls, Texas to just outside of Fort Worth, Texas. This gas is then resold under firm contracts to its customers. The expense of purchasing the natural gas is reported on the Company's income statement under pipeline operating and natural gas purchases. Revenue from the sale of the 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 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 1999, compared to 1998, was primarily related to the fact that expenses for the pipeline were recorded for all of 1999, whereas expenses for 1998 did not commence until the pipeline was acquired as part of the Arch acquisition on August 17, 1998. General and Administrative Expenses The increase in general and administrative expenses for 1999, compared with 1998, was related to increased expenses associated with the Company's Thailand operations due to commencement of production from the Benchamas Field, as well as an increase in the size of the Company's work force and normal salary and concomitant benefit expense adjustments. The increase in general and administrative expenses for 1999, compared with 1997, was related to increased expenses associated with the Company's Thailand operations due to commencement of production from the Benchamas Field, a number of non-recurring expenses arising in connection with the Company's acquisition of Arch totaling approximately $2,285,000, that included severance payments to former officers and employees of Arch, as well as an increase in the size of the Company's work force and 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 geological and geophysical costs which are expensed as incurred. The decrease in exploration expenses for 1999, compared to 1998, resulted primarily from decreased geophysical activity by the Company in most of its operational areas except Thailand, where the Company participated in a significant 3-D survey of the remainder of the Thailand Concession and a reprocessing of all of the seismic data covering the Thailand Concession during 1999, and a decrease in delay rental payments. The decrease in exploration expenses for 1999, compared to 1997, resulted primarily from decreased geophysical activity by the Company in all of its operational areas except Canada, which the Company added as a result of the Arch acquisition in 1998, and a decrease in delay rental payments. Dry Hole and Impairment Expenses Dry hole and impairment expenses relate to costs of unsuccessful wells drilled, along with impairments resulting from the application of SFAS No. 121 due to decreases in expected reserves from producing wells. The decrease in dry hole and impairment expenses for 1999, compared with 1998, was principally related to expenses charged in 1998 for the dry hole cost of the Company's Mustang Island Block A-51 well, and impairment expenses related to a decline in reserves at the Company's East Cameron Block 334/335 Field and its Keystone Field located in Winkler County, Texas (which the Company sold at year-end 1998) and disappointing reservoir performance at the Company's South Pass Block 78 Field, for which no expenses of comparable magnitude were recorded in 1999. Depreciation, Depletion and Amortization Expenses The Company accounts for its oil and gas activities using the successful efforts method of accounting. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved properties are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if 28 30 there has been impairment of the carrying value, with any such impairment charged to expense in the period. Proved oil and gas properties are reviewed when circumstances suggest the need for such a review and, if required, the proved properties are written down to their estimated fair value. Estimated fair value includes the estimated present value of all reasonably expected future production, prices and costs. As a result of poor reservoir performance and persistent low oil and gas prices, the Company performed such a review in 1998 and expensed $30,813,000 related to its domestic oil and gas properties, which is included in the Consolidated Statements of Income as dry hole and impairment expense. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for DD&A expense is based on the capitalized costs, as determined in the preceding paragraph, plus future costs to abandon offshore wells and platforms, and is determined on a cost center by cost center basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its oil and gas activities onshore in the United States and Canada. The decrease in the Company's DD&A expenses for 1999, compared to 1998, resulted primarily from a decrease in the Company's natural gas and liquid hydrocarbon production, that was only partially offset by a slight increase in the Company's composite DD&A rate. The increase in the Company's DD&A expenses for 1999, compared to 1997, resulted primarily from an increase in the Company's composite rate, that was not entirely offset by a decline in the Company's natural gas and liquid hydrocarbon production. The increase in the composite DD&A rate for all of the Company's producing fields for 1999, compared to 1997, resulted primarily from an increased percentage of the Company's production coming from certain of the Company's fields that have DD&A rates that are higher than the Company's recent historical composite rate and a corresponding decrease in the percentage of the Company's production coming from fields that have DD&A rates that are lower than the Company's recent historical composite DD&A rate. Management currently anticipates that this trend, as it relates to currently producing properties, will continue for the foreseeable future, resulting in generally increasing DD&A rates for the Company's existing producing properties. Interest Interest Charges. The increase in the Company's interest charges for 1999, compared to 1998 and 1997, resulted primarily from an increase in the average interest rates on the debt outstanding (resulting primarily from the issuance of the 2009 Notes on January 15, 1999, which bear interest at a 10 3/8% annual interest rate) and, to a lesser extent, an increase in the average amount of the Company's outstanding debt and increased debt issuance expense being amortized. Capitalized Interest. The increase in capitalized interest for 1999, compared to 1998 and 1997, resulted primarily from an increase in the amount of capital expenditures subject to interest capitalization during 1999 ($217,183,000), compared to 1998 ($137,956,000) and 1997 ($96,530,000), and from an increase in the computed rate that the Company uses to apply on such capital expenditures to arrive at the total amount of capitalized interest. With the completion of the Benchamas Field and the Garden Banks Block 367 project in the Gulf of Mexico in third quarter of 1999, management currently expects that capitalized interest expense should decrease significantly in the next several quarters. Minority Interest -- Dividends and Costs Associated with Preferred Securities of a Subsidiary Trust Pogo Trust I, a subsidiary business trust, issued $150,000,000 of Trust Preferred Securities on June 2, 1999. The amounts recorded for 1999 under Minority Interest -- Dividends and Costs Associated with Preferred Securities of a Subsidiary Trust principally reflect cumulative dividends and, to a lesser extent, the amortization of issuance expenses related to the offering and sale of the Trust Preferred Securities. 29 31 Foreign Currency Transaction Gains (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. This led to a precipitous decline in the value of the Baht against the U.S. dollar, resulting in the foreign currency transaction loss recorded by the Company in 1997. During both 1998 and 1999, the value of the Thai Baht generally strengthened against the U.S. dollar resulting in the gains recorded for each year. The Company cannot predict what the Thai Baht to U. S. dollar exchange rate may be in the future. Although it has been relatively stable throughout much of 1999, the exchange rate could become more volatile again in the future. See "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues" and "Business -- International Operations; Contractual Terms Governing the Thailand Concession." As of March 3, 2000, 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 1999 and 1997 resulted primarily from pre-tax income from the Company's North American operations, that was only partially offset by tax benefits of accrued foreign losses from the Company's operations in the Kingdom of Thailand. The Company's income tax benefit for 1998 resulted primarily from a pre-tax loss resulting from 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. The Company's income tax expense for 1999 was also affected by a pre-tax gain on the sale of the Lopeno Field and was partially reduced by dividends and costs associated with the Trust Preferred Securities, for which no corresponding expenses were incurred in 1998 or 1997. LIQUIDITY AND CAPITAL RESOURCES Cash Flows The Company's Consolidated Statement of Cash Flows for 1999 reflects net cash provided by operating activities of $68,757,000. In addition to net cash provided by operating activities, the Company received net proceeds of $81,944,000 from the sale of certain non-strategic properties and tubular stock (including the Lopeno Field and other properties) and $1,115,000 from the exercise of stock options. In addition, on January 15, 1999, the Company consummated the offering of $150,000,000 of its 2009 Notes and on June 2, 1999, it received $150,000,000 in proceeds from the issuance of the Trust Preferred Securities. During 1999, the Company repaid a net $209,947,000 under its senior credit facility and other senior debt agreements, invested $202,281,000 of such cash flow in capital projects, spent $19,042,000 to purchase proved reserves, paid $12,347,000 in debt issuance expenses, paid $4,825,000 ($0.03 per share for each quarter of 1999) in cash dividends to holders of the Company's common stock and paid $4,999,999 in cash dividends to holders of its Trust Preferred Securities. As of December 31, 1999, the Company's cash and cash investments were $6,267,000, its long-term debt stood at $375,000,000 and it had $150,000,000 in Trust Preferred Securities outstanding. 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 or any interest which may be capitalized resulting from projects in progress, was established by the Company's Board of Directors at $200,000,000. The Company currently anticipates that its available cash and cash investments, cash provided by operating activities and funds available under its revolving credit facility and uncommitted credit lines, 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 payments at current levels. The declaration of future dividends on the Company's common stock will depend upon, among other things, the 30 32 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 Material Long-Term Commitments As of February 9, 1996, Tantawan Services, L.L.C. ("TS"), a company that is currently a wholly-owned subsidiary of the Company, entered into a Bareboat Charter Agreement (the "Charter") with Tantawan Production B.V. for the charter of the FPSO for use in the Tantawan Field. See "Business -- International Operations." Effective May 1, 1999, TS assigned the charter to Thaipo and its joint venture partners (the "Charterers"). The term of the Charter is for a period ending July 31, 2008, subject to extension. In addition, Thaipo and its joint venture partners have a purchase option on the FPSO throughout the term of the Charter. SBM Marine Services Thailand Ltd., has been contracted to operate the FPSO on a reimbursable basis throughout the initial term of the Charter. Performance of both the Charter and the agreement to operate the FPSO are non-recourse to the Company. Liability on the Charter is full recourse as to each joint venturer, as to performance but the payment obligations are several, meaning that each joint venturer's payment obligations under the Charter are still limited to its percentage interest in the Tantawan Field. The Charter currently provides for a charter hire commitment of $24,000,000 per year ($11,122,000 net to Thaipo) for the first ten years and a decreasing amount thereafter. As of August 24, 1998, the Charterers entered into a Bareboat Charter Agreement (the "BCA") with Watertight Shipping B.V. for the charter of the FSO. See "Business -- International Operations." The term of the BCA is for a period of ten years commencing on May 15, 1999. In addition, the Charterers have a purchase option on the FSO throughout the term of the BCA. The Charterers have also contracted with another company, Tanker Pacific (Thailand) Co. Ltd, to operate the FSO on a fixed fee basis throughout the initial term of the BCA. Performance of both the BCA and the agreement to operate the FSO are non- recourse to the Company. However the obligations of each joint venturer are full recourse to each joint venturer, but the payment obligations under the BCA are several, meaning that each joint venturer's payment obligations are limited to its percentage interest in the Thailand Concession. The BCA currently provides for a charter hire commitment of $8,515,000 per year ($3,946,000 net to Thaipo). Capital Structure Credit Facility and Uncommitted Credit Line. The Company has entered into a reserve-based credit facility (the "Credit Facility"), which was amended most recently on November 17, 1999. The Credit Facility provides for a $250,000,000 revolving credit facility until July 1, 2002, after which the balance will be due in eight quarterly term loan installments, commencing October 31, 2002. The amount that may be borrowed may not exceed a borrowing base which is determined semi-annually and is calculated based upon substantially all of the Company's proved oil and gas properties. As of March 3, 2000, the Company's borrowing base was set at $160,000,000. The Credit Facility is governed by various financial and other covenants, including requirements to maintain positive working capital (excluding current maturities of debt) and a fixed charge coverage ratio, and limitations on indebtedness (including a total indebtedness limit of $525,000,000), creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Credit Facility bear interest, at the Company's option, at a base (prime) rate plus a variable margin (currently none) or LIBOR plus a variable margin (currently 1.25%). The margin varies as a function of the percentage of the borrowing base being utilized. A commitment fee on the unborrowed amount that is currently available under the Credit Facility is also charged based upon the percentage of the borrowing base that is being utilized. As of March 3, 2000, there was $11,000,000 outstanding under the Credit Facility. As of March 3, 2000, the Company also has available an uncommitted money market line of credit with a commercial bank. The line of credit is on an as available or as offered basis. Loans made under the line of credit are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under its Credit Facility. Under its Credit Facility, the Company 31 33 is currently limited to incurring a maximum of $20,000,000 of additional senior debt, which would include debt incurred under the line of credit and under the banker's acceptances discussed below. Further, the 2007 Notes and the 2009 Notes also restrict the incurrence of additional senior indebtedness. See "; 2007 Notes" and "; 2009 Notes." The letter agreement permits either party to terminate it at any time. As of March 3, 2000, there was $10,000,000 outstanding under the line of credit at an interest rate of 6.65%. Banker's Acceptances. The Company has entered into a Master Banker's Acceptance Agreement under which one of the Company's lenders has offered to accept up to $20,000,000 in bank drafts from the Company. The banker's drafts are available on an uncommitted basis and the bank has no obligation to accept the Company's request for drafts. Drafts drawn under this agreement are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under the Credit Facility. The Credit Facility limits senior debt, including amounts incurred under this agreement and debt incurred under the line of credit discussed previously, to a maximum of $20,000,000. Further, the 2007 Notes and the 2009 Notes offered also restrict the incurrence of additional senior indebtedness. See "; 2007 Notes" and "; 2009 Notes." The Master Banker's Acceptance Agreement permits either party to terminate the letter agreement at any time upon five business days notice. As of December 31, 1999, no amounts were outstanding under this agreement. 2009 Notes. On January 15, 1999, the Company issued $150,000,000 principal amount of 2009 Notes. The 2009 Notes bear interest at a rate of 10 3/8%, payable semi-annually in arrears on February 15 and August 15 of each year. 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 Facility, its unsecured credit line and its banker's acceptances, are equal in right of payment to the 2007 Notes, but are senior in right of payment to the Company's 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. The indenture governing the 2009 Notes also imposes certain covenants on the Company that are substantially identical 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. 2007 Notes. On May 22, 1997, the Company issued $100,000,000 principal amount of 2007 Notes. The 2007 Notes bear interest at a rate of 8 3/4%, payable semi-annually in arrears on May 15 and November 15 of each year. The 2007 Notes are general unsecured senior subordinated obligations of the Company, are subordinated in right of payment to the Company's senior indebtedness, are equal in right of payment to the 2009 Notes, but are senior in right of payment to the Company's subordinated indebtedness. The Company, at its option, may redeem the 2007 Notes in whole or in part, at any time on or after May 15, 2002, at a redemption price of 104.375% of their principal value and decreasing percentages thereafter. The indenture governing the 2007 Notes also imposes certain covenants on the Company that are substantially identical to the covenants contained in the indenture governing the 2009 Notes described previously. 2006 Notes. The outstanding principal amount of 2006 Notes was $115,000,000 as of December 31, 1999. The 2006 Notes are convertible into Common Stock at $42.185 per share, subject to adjustment upon the occurrence of certain events. The 2006 Notes bear interest at a rate of 5 1/2% and are currently redeemable at the option of the Company, in whole or in part, at any time, at a redemption price of 103.85% of their principal. The redemption premium will decline over the next several years. 2004 Notes. The Company's 2004 Notes were called for redemption on March 16, 1998, at a price equal to 103.30% of their principal amount. Prior thereto, holders of all but $95,000 principal amount of the 2004 Notes chose to convert their 2004 Notes into Common Stock at a conversion price of $22.188 per common share, rather than receive cash for their 2004 Notes resulting in the issuance of 3,879,726 shares of Common Stock. 32 34 Trust Preferred Securities. Pogo Trust I, a business trust in which the Company owns all of the issued common securities (the "Trust"), issued 3,000,000 Trust Preferred Securities having a liquidation preference of $50 per Trust Preferred Security, on June 2, 1999. The proceeds from the issuance of the Trust Preferred Securities were used to purchase $150,000,000 of the Company's 6 1/2% Junior Subordinated Convertible Debentures, due 2029 (the "Debentures"). The Debentures are the sole asset of the Trust. The financial terms of the Debentures are generally the same as those of the Trust Preferred Securities. The Trust Preferred Securities accrue and pay distributions quarterly in arrears at a rate of 6 1/2% per annum on the stated liquidation amount of $50 per Trust Preferred Security on March 1, June 1, September 1, and December 1 of each year to securities holders of record on the business day immediately preceding the distribution payment date. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Trust Preferred Securities to the extent that there are funds available in the Trust. The Company currently believes that, taken as a whole, the Company's guarantee of the Trust's obligations under the Preferred Securities constitutes a full and unconditional guarantee by the Company of the Trust's performance obligations. The Company may cause the Trust to defer the payment of distributions for successive periods up to 20 consecutive quarterly periods unless an event of default on the Debentures has occurred and is continuing. During such periods, accrued distributions on the Trust Preferred Securities will compound quarterly and the Company will generally not be permitted to declare or pay distributions on its common stock or debt securities that rank equal or junior to the Debentures. The Trust Preferred Securities are convertible at the option of the holder at any time into common stock of the Company at the rate of 2.1053 shares of Company common stock per Trust Preferred Security. This conversion rate will be subject to adjustment to prevent dilution and is currently equivalent to a conversion price of $23.75 per share of Company common stock. The Trust Preferred Securities are mandatorily redeemable upon maturity of the Debentures on June 1, 2029, or to the extent of any earlier redemption of any Debentures by the Company and are callable by the Trust at any time after June 1, 2002. In addition, if certain tax changes occur so that the Trust becomes subject to federal income taxes or interest payments made by the Company to the Trust on the Debentures are no longer deductible for federal income tax purposes, the Trust may liquidate and distribute Debentures to holders of the Trust Preferred Securities and, in certain circumstances, the Company may shorten the stated maturity of the Debentures to as early as June 2, 2014. Other Matters Inflation. Publicly held companies are asked to comment on the effects of inflation on their business. Currently annual inflation in terms of the decrease in the general purchasing power of the U.S. dollar is running much below the general annual inflation rates experienced in the past. While the Company, like other companies, continues to be affected by fluctuations in the purchasing power of the U.S. dollar due to inflation, such effect is not currently considered significant. Southeast Asia Economic Issues. A substantial portion of the Company's oil and gas operations are conducted in Southeast Asia, and a substantial portion of its natural gas and liquid hydrocarbon production is sold there. Southeast Asia in general, and the Kingdom of Thailand in particular, experienced severe economic difficulties in 1997 and 1998 which were characterized by sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. The government of the Kingdom of Thailand and other governments in the region are currently acting to address these issues. However, the economic difficulties currently being experienced in Thailand, together with the volatility of the Thai Baht against the U.S. dollar, will continue to have a material impact on the Company's operations in the Kingdom of Thailand, together with the prices that the company receives for its oil and natural gas production there. See "-- Results of Operations; Oil and Gas Revenues" and "-- Results of Operations; Foreign Currency Transaction Gain (Loss)." All of the Company's current natural gas production from the Thailand Concession is committed under a long-term Gas Sales Agreement to PTT at a price denominated in Thai Baht which is determined in accordance with a formula that is intended to ameliorate, at least in part, any decline in the purchasing power of the Thai Baht against the U.S. dollar. See "Business -- International Operations; Contractual Terms Governing the Thailand Concession" and "Business -- Miscellaneous; Sales." Although the Company 33 35 currently believes that PTT will honor its commitments under the Gas Sales Agreement, a failure by PTT to honor such commitments could have a material adverse effect on the Company. The Company's crude oil and condensate production from the Thailand Concession is currently sold on a tanker load by tanker load basis. Prices that the Company receives for such production are based on world benchmark prices, which are denominated in U.S. dollars, and are typically paid in U.S. dollars. See "Business -- International Operations; Contractual Terms Governing the Thailand Concession and Related Production" and "Business-Miscellaneous; Sales." Year 2000 Readiness Disclosure. Many computer software systems, as well as certain hardware and equipment using date-sensitive data, were structured to use a two-digit date field meaning that they may not be able to properly recognize dates in the year 2000. The Company addressed this issue through a process that entailed evaluation of the Company's critical software and, to the extent possible, its hardware and equipment to identify and assess Year 2000 issues. It then remediated, replaced or established alternative procedures addressing non-Year 2000 compliant systems, hardware and equipment. The Year 2000 problem has caused no material disruption to the Company's facilities or operations, and resulted in no material costs. However, Year 2000-related problems may yet occur due to hidden defects in the Company's or other third parties' computer hardware or software. The Company currently anticipates that the Year 2000 problem will not create material disruptions to its facilities, equipment or operations, and will not create material costs, however, there can be no assurance that this will in fact be the case. The disclosure set forth in this section is provided pursuant to the Securities Act Release No. 33-7558. As such, it is protected as a forward-looking statement under the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements." This disclosure is also subject to protection under the Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk, including adverse changes in commodity prices, interest rates and foreign currency exchange rates as discussed below. COMMODITY PRICE RISK The Company produces, purchases and sells natural gas, crude oil, condensate and NGLs. As a result, the Company's financial results can be significantly affected as these commodity prices fluctuate widely in response to changing market forces. In the past, the Company has made limited use of a variety of derivative financial instruments only for non-trading purposes as a hedging strategy to manage commodity prices associated with oil and gas sales and to reduce the impact of commodity price fluctuations. See "Business -- Competition and Market Conditions." INTEREST RATE RISK From time to time, the Company has entered into various financial instruments, such as interest rate swaps, to manage the impact of changes in interest rates. As of March 10, 2000, the Company has no open interest rate swap or interest rate lock agreements. Therefore, the Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The following table presents principal or notional amounts (stated in thousands) and related average interest rates 34 36 by year of maturity for the Company's debt obligations and their indicated fair market value at December 31, 1999:
FAIR 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE ---- ---- ------ ------ ------ ---------- -------- -------- Liabilities -- Long-Term Debt: Variable Rate........... $ 0 $ 0 $1,500 $5,500 $3,000 $ 0 $ 10,000 $ 10,000 Average Interest Rate... 7.3% 7.3% 6.8% 6.8% 6.8% -- 7.3% -- Fixed Rate............ $ 0 $ 0 $ 0 $ 0 $ 0 $365,000 $365,000 $346,631 Average Interest Rate... -- -- -- -- -- 8.4% 8.4% --
FOREIGN CURRENCY EXCHANGE RATE RISK The Company conducts business in Thai Baht and the Canadian dollar and is therefore subject to foreign currency exchange rate risk on cash flows related to sales, expenses, financing and investing transactions. The Company conducts a substantial portion of its oil and gas production and sales in Southeast Asia. Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties, including sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations; Foreign Currency Transaction Gain (Loss") and " -- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." However, the economic difficulties in Thailand and the volatility of the Thai Baht against the U.S. dollar will continue to have a material impact on the Company's Thailand operations and prices that the Company receives for its oil and gas production there. Although the Company's sales to PTT under the Gas Sales Agreement are denominated in Baht, because predominantly all of the Company's crude oil sales and its capital and most other expenditures in the Kingdom of Thailand are denominated in U.S. dollars, the U.S. dollar is the functional currency for the Company's operations in the Kingdom of Thailand. As of March 10, 2000, the Company is not a party to any foreign currency exchange agreement. Exposure from market rate fluctuations related to activities in Canada, where the Company's functional currency is the Canadian dollar, is not material at this time. CURRENT HEDGING ACTIVITY From time to time, the Company has used and expects to 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, they may also limit future revenues from favorable price movements. The use of hedging transactions 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. Subsequent to December 31, 1999, the Company entered into commodity price swap transactions for natural gas and crude oil and, during 1999, approximately 7% of the Company's equivalent production was subject to hedge positions. No significant amounts of hedge positions were held by the Company in prior years. 35 37 Natural Gas. As of December 31,1999, 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 VOLUME IN ----------------- FAIR MARKET PERIOD MMBTU(A) SWAPS FLOORS CEILINGS VALUE(B) ------ ----------- ----- ------ -------- ----------- Price Swap Contracts: January 2000 -- March 2000........ 910 $3.11 -- -- $ 637,000 January 2000 -- May 2000.......... 760 $2.70 -- -- $ 243,000 January 2000 -- August 2000....... 3,660 $2.87 -- -- $1,805,000 Collar Contracts: April 2000 -- September 2000...... 7,320 -- $2.25 $2.80 --
- --------------- (a) "MMBtu" means million British Thermal Units. (b) Fair Market Value is calculated using prices derived from NYMEX futures contract prices existing at December 31, 1999. Subsequent to December 31, 1999, the Company entered into natural gas price swap agreements for the period February 1 through August 31, 2000 for 4,260 MMBtu's at a weighted average fixed price of $2.53 per thousand British Thermal Units ("MBtu"). These hedging transactions are settled based upon the average of the reported settlement prices on the NYMEX for the last three trading days or, occasionally, the penultimate trading day of a particular contract month. With respect to any particular swap transaction, the counterparty is required to make a payment to the Company in the event that the settlement price for any settlement period is less than the swap price for such transaction, and the Company is required to make payment to the counterparty in the event that the settlement price for any settlement period is greater than the swap price for such transaction. For any particular collar transaction, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price for such transaction, and the Company is required to make payment to the counterparty if the settlement price for any settlement period is above the ceiling price for such transaction. For any particular floor transaction, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price for such transaction. The Company is not required to make any payment in connection with the settlement of a floor transaction. The Company believes that it has no material basis risk with respect to gas swaps because it only enters into them with respect to its domestic offshore natural gas production, substantially all of which is sold under spot contracts that have historically correlated with the swap price. Crude Oil. As of December 31, 1999, 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 VOLUME IN ------------------- FAIR MARKET PERIOD BBLS SWAPS FLOORS CEILINGS VALUE(A) ------ --------- ------- ------- --------- ----------- Price Swap Contracts: January 2000 -- March 2000......... 136,500 $21.12 -- -- $(544,000) January 2000 -- December 2000...... 732,000 $21.15 -- -- $(748,000) Collar Contracts: January 2000 -- March 2000......... 91,000 -- $21.15 $23.00 $(191,000) April 2000 -- September 2000....... 183,000 -- $21.00 $25.00 $(152,000)
- --------------- (a) Fair Market Value is calculated using prices derived from NYMEX futures contract prices existing at December 31, 1999. 36 38 Subsequent to December 31, 1999, the Company entered into a crude oil collar contract is for the period July 1 through December 31, 2000 for 184,000 barrels at $21.00 -- $25.03 per barrel. Substantially all of the Company's domestic oil production is sold under spot contracts that generally correlate to the NYMEX West Texas Intermediate price. Therefore, the Company believes that it currently has no material basis risk with respect to these transactions. The actual cash price that the Company receives, however, varies from the NYMEX West Texas Intermediate price when adjusted for location, quality and other differences. These differences could give rise to basis risk in the future. 37 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Pogo Producing Company: We have audited the accompanying consolidated balance sheets of Pogo Producing Company (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pogo Producing Company and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Houston, Texas February 25, 2000 38 40 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES: Oil and gas............................................... $230,499 $200,154 $284,851 Pipeline sales and other.................................. 7,159 2,741 349 Gains (losses) on sales................................... 37,458 (92) 1,100 -------- -------- -------- Total............................................. 275,116 202,803 286,300 -------- -------- -------- OPERATING COSTS AND EXPENSES: Lease operating........................................... 69,936 69,071 63,501 Pipeline operating and natural gas purchases.............. 6,481 2,142 -- General and administrative................................ 29,865 26,356 21,412 Exploration............................................... 5,982 9,802 10,530 Dry hole and impairment................................... 4,594 41,736 9,631 Depreciation, depletion and amortization.................. 104,266 110,916 103,157 -------- -------- -------- Total............................................. 221,124 260,023 208,231 -------- -------- -------- OPERATING INCOME (LOSS)..................................... 53,992 (57,220) 78,069 INTEREST: Charges................................................... (35,874) (24,682) (21,886) Income.................................................... 1,208 719 453 Capitalized............................................... 17,733 9,381 6,175 MINORITY INTEREST -- Dividends and costs associated with mandatorily redeemable convertible preferred securities of a subsidiary trust........................................ (5,914) -- -- FOREIGN CURRENCY TRANSACTION GAINS (LOSS)................... 572 953 (7,604) -------- -------- -------- INCOME (LOSS) BEFORE TAXES.................................. 31,717 (70,849) 55,207 INCOME TAX BENEFIT (EXPENSE)................................ (9,583) 27,751 (18,091) -------- -------- -------- NET INCOME (LOSS)........................................... $ 22,134 $(43,098) $ 37,116 ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE: Basic..................................................... $ 0.55 $ (1.14) $ 1.11 ======== ======== ======== Diluted................................................... $ 0.55 $ (1.14) $ 1.06 ======== ======== ======== DIVIDENDS PER COMMON SHARE.................................. $ 0.12 $ 0.12 $ 0.12 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part hereof. 39 41 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------ 1999 1998 ----------- ---------- (EXPRESSED IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents................................. $ 6,267 $ 7,959 Accounts receivable....................................... 37,321 24,054 Other receivables......................................... 35,870 38,977 Inventory -- product...................................... 7,209 969 Inventories -- tubulars................................... 10,352 10,594 Other..................................................... 2,370 2,814 ----------- ---------- Total current assets............................... 99,389 85,367 ----------- ---------- PROPERTY AND EQUIPMENT: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized....................... 1,638,321 1,485,125 Unevaluated properties and properties under development, not being amortized.................................... 144,357 215,244 Pipelines, at cost........................................ 6,984 6,793 Other, at cost............................................ 13,103 11,122 ----------- ---------- 1,802,765 1,718,284 ----------- ---------- Accumulated depreciation, depletion and amortization Oil and gas............................................. (1,006,542) (985,897) Pipelines............................................... (1,534) (1,963) Other................................................... (7,329) (4,899) ----------- ---------- (1,015,405) (992,759) ----------- ---------- Property and equipment, net............................... 787,360 725,525 ----------- ---------- OTHER ASSETS: Foreign tax net operating losses.......................... 16,237 12,546 Foreign value added taxes receivable...................... 12,025 10,456 Debt issue expenses....................................... 12,686 7,727 Other..................................................... 20,496 20,775 ----------- ---------- 61,444 51,504 ----------- ---------- $ 948,193 $ 862,396 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable -- operating activities.................. $ 21,724 $ 12,197 Accounts payable -- investing activities.................. 62,878 90,102 Accrued interest payable.................................. 7,457 3,226 Accrued dividends associated with preferred securities of a subsidiary trust...................................... 813 -- Accrued payroll and related benefits...................... 2,149 1,952 Other..................................................... 208 2 ----------- ---------- Total current liabilities.......................... 95,229 107,479 LONG-TERM DEBT.............................................. 375,000 434,947 DEFERRED FEDERAL INCOME TAX................................. 51,177 53,869 DEFERRED CREDITS............................................ 13,524 16,441 ----------- ---------- Total liabilities.................................. 534,930 612,736 ----------- ---------- MINORITY INTERESTS: Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust, net of unamortized issue expenses.............................. 144,751 -- ----------- ---------- SHAREHOLDERS' EQUITY: Preferred stock, $1 par; 2,000,000 shares authorized...... -- -- Common stock, $1 par; 100,000,000 shares authorized, and 40,279,661 and 40,136,254 shares issued, respectively... 40,279 40,136 Additional capital........................................ 291,909 290,655 Retained earnings (deficit)............................... (62,291) (79,600) Treasury stock (15,575 shares) and other, at cost......... (1,385) (1,531) ----------- ---------- Total shareholders' equity......................... 268,512 249,660 ----------- ---------- $ 948,193 $ 862,396 =========== ==========
The accompanying notes to consolidated financial statements are an integral part hereof. 40 42 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 ----------- --------- --------- (EXPRESSED IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers.............................. $ 218,936 $ 222,433 $ 272,004 Federal income taxes received............................. 6,446 -- 7,037 Operating, exploration and general and administrative expenses paid........................................... (105,924) (116,272) (86,445) Interest paid............................................. (29,606) (26,221) (20,713) Federal income taxes paid................................. (21,000) -- (19,500) Value added taxes received (paid)......................... 101 (6,161) (1,630) Other..................................................... (196) (2,850) (21) ----------- --------- --------- Net cash provided by operating activities.......... 68,757 70,929 150,732 ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (202,281) (201,946) (197,326) Purchase of proved reserves............................... (19,042) (2,961) (31,234) Proceeds from the sale of property and tubular stock...... 81,944 7,164 387 ----------- --------- --------- Net cash used in investing activities.............. (139,379) (197,743) (228,173) ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of new debt........................ 150,000 -- 100,000 Proceeds from issuance of new financing................... 150,000 -- -- Borrowings under senior debt agreements................... 287,053 449,947 502,000 Payments under senior debt agreements..................... (497,000) (313,500) (500,000) Proceeds from exercise of stock options................... 1,115 1,034 3,874 Payment of cash dividends on common stock................. (4,825) (4,531) (4,012) Payment of preferred dividends of a subsidiary trust...... (4,999) -- -- Payment of financing issue expenses....................... (12,347) (2,635) (3,165) Principal payment of production payment obligation........ -- (15,246) -- Other..................................................... -- (621) -- ----------- --------- --------- Net cash provided by financing activities.......... 68,997 114,448 98,697 ----------- --------- --------- Effect of exchange rate changes on cash..................... (67) 679 (4,664) ----------- --------- --------- Net increase (decrease) in cash and cash equivalents........ (1,692) (11,687) 16,592 Cash and cash equivalents at the beginning of the year...... 7,959 19,646 3,054 ----------- --------- --------- Cash and cash equivalents at the end of the year............ $ 6,267 $ 7,959 $ 19,646 =========== ========= ========= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income (loss)......................................... $ 22,134 $ (43,098) $ 37,116 Adjustments to reconcile net income to net cash provided by operating activities Minority interest....................................... 5,914 -- -- Foreign currency transaction (gain) loss................ (572) (953) 7,604 (Gains) losses on sales................................. (37,458) 92 (1,100) Depreciation, depletion and amortization................ 104,266 110,916 103,157 Dry hole and impairment................................. 4,594 41,736 9,631 Interest capitalized.................................... (17,733) (9,381) (6,175) (Decrease) increase in deferred income taxes............ (2,410) (24,250) 12,999 Change in assets and liabilities: (Increase) decrease in accounts receivable............ (13,006) 15,307 (12,483) Increase in inventory -- product...................... (6,117) (259) (713) (Increase) decrease in other current assets........... 453 1,258 (6,470) Increase in other assets.............................. (2,886) (20,551) (7,418) Increase (decrease) in accounts payable............... 9,714 (1,122) 8,998 Increase in accrued interest payable.................. 4,314 95 1,173 Increase in accrued payroll and related benefits...... 201 14 448 Increase (decrease) in other current liabilities...... 210 (637) 469 Increase (decrease) in deferred credits............... (2,861) 1,762 3,496 ----------- --------- --------- Net cash provided by operating activities................... $ 68,757 $ 70,929 $ 150,732 =========== ========= =========
The accompanying notes to consolidated financial statements are an integral part hereof. 41 43 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TREASURY RETAINED STOCK SHARE- SHARES COMMON ADDITIONAL EARNINGS AND HOLDERS' OUTSTANDING STOCK CAPITAL (DEFICIT) OTHER EQUITY ----------- ------- ---------- --------- -------- -------- (DOLLARS EXPRESSED IN THOUSANDS) BALANCE AT DECEMBER 31, 1996........................ 33,305,806 $33,321 $139,337 $(65,075) $ (301) $107,282 Net income.................... -- -- -- 37,116 -- 37,116 Exercise of stock options..... 229,024 230 5,461 -- -- 5,691 Shares issued in connection with the conversion of 2004 Notes....................... 2,297 2 50 -- -- 52 Dividends ($0.12 per common share)...................... -- -- -- (4,012) (4,012) Other......................... -- -- -- -- (23) (23) ---------- ------- -------- -------- ------- -------- BALANCE AT DECEMBER 31, 1997........................ 33,537,127 33,553 144,848 (31,971) (324) 146,106 Net loss...................... -- -- -- (43,098) -- (43,098) Exercise of stock options..... 147,240 147 1,835 -- -- 1,982 Shares issued in connection with the conversion of 2004 Notes....................... 3,879,726 3,880 80,712 -- -- 84,592 Shares issued for stock and debt of acquired company.... 2,539,582 2,539 62,944 -- -- 65,483 Shares issued as compensation................ 17,004 17 316 -- -- 333 Dividends ($0.12 per common share)...................... -- -- -- (4,531) (4,531) Other......................... -- -- -- -- (1,207) (1,207) ---------- ------- -------- -------- ------- -------- BALANCE AT DECEMBER 31, 1998........................ 40,120,679 40,136 290,655 (79,600) (1,531) 249,660 Net income.................... -- -- -- 22,134 -- 22,134 Exercise of stock options..... 130,275 130 1,267 -- -- 1,397 Adjustment for fractional shares and other............ 13,132 13 (13) -- -- -- Dividends ($0.12 per common share)...................... -- -- -- (4,825) -- (4,825) Other......................... -- -- -- -- 146 146 ---------- ------- -------- -------- ------- -------- BALANCE AT DECEMBER 31, 1999........................ 40,264,086 $40,279 $291,909 $(62,291) $(1,385) $268,512 ========== ======= ======== ======== ======= ========
The accompanying notes to consolidated financial statements are an integral part hereof. 42 44 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -- Pogo Producing Company was incorporated in 1970. Pogo Producing Company and its subsidiaries (the "Company") are engaged in oil and gas exploration, development and production activities in the United States both offshore in the Gulf of Mexico (primarily in federal waters offshore Louisiana and Texas) and onshore principally in the states of New Mexico, Texas and Louisiana. The Company also conducts exploration, development and production activities internationally in the Kingdom of Thailand (offshore in the Gulf of Thailand) and Canada (primarily in the provinces of Alberta, British Columbia and Saskatchewan) and exploration activities in Hungary and the British and Danish sectors of the North Sea. Use of Estimates -- The preparation of these financial statements require the use of certain estimates by management in determining the Company's assets, liabilities, revenues and expenses. Depreciation, depletion and amortization of oil and gas properties and the impairment of oil and gas properties are determined using estimates of proved oil and gas reserves. There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. Proved reserves of crude oil, condensate, natural gas and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions. Principles of Consolidation -- The consolidated financial statements include the accounts of Pogo Producing Company and its subsidiary and affiliated companies, after elimination of all significant intercompany transactions. Majority owned subsidiaries are fully consolidated. Minority owned oil and gas subsidiaries or affiliates are pro rata consolidated in the same manner as the Company, and the oil and gas industry generally, accounts for its operating or working interest in oil and gas joint ventures. See note 4 of the notes to consolidated financial statements for a discussion of the Company's accounting for its minority interest in Pogo Trust I. Prior-Year Reclassifications -- Certain prior-year amounts have been reclassified to conform with the current year presentation. Foreign Currency -- The U. S. dollar is the functional currency for all areas of operations of the Company except Canada. Accordingly, monetary assets and liabilities and items of income and expense denominated in a foreign currency are remeasured to U. S. dollars at the rate of exchange in effect at the end of each month or the average for the month and the resulting gains or losses on foreign currency transactions are included in the consolidated statements of income for the period. The Canadian dollar is the functional currency for the Company's Canadian operations. Accordingly, monetary assets and liabilities and items of income and expense denominated in Canadian dollars are translated to U. S. dollars at the rate of exchange in effect at the end of each month and the resulting gains or losses on Canadian currency transactions are included in the consolidated statement of shareholders' equity for the period. Inventory -- Product Crude oil and condensate from the Company's producing fields located in the Kingdom of Thailand are produced into storage vessels and sold periodically as economic quantities are accumulated. The product 43 45 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) inventory at December 31, 1999 and 1998, consists of approximately 287,000 and 90,000 barrels, respectively of crude oil and condensate, net to the Company's interest, and is carried at its estimated net realizable value of $25.09 and $10.76 per barrel, respectively. Inventories -- Tubulars Tubular inventories consist primarily of goods used in the Company's operations and are stated at the lower of average cost or market value. Interest Capitalized -- Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are evaluated or until production commences if the projects are evaluated as successful. Earnings per Share -- Earnings (loss) per common share (basic earnings per share) are based on the weighted average number of shares of common stock outstanding during the periods. Earnings (loss) per common 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.
FOR THE YEAR ENDED DECEMBER 31, 1999 ------------------------------ INCOME SHARES PER SHARE ------- ------ --------- BASIC EARNINGS PER SHARE.................................... $22,134 40,178 $ 0.55 Effect of potential dilutive securities: Shares assumed issued from the exercise of options to purchase common shares, net of treasury shares assumed purchased from the proceeds, at the average market price for the period................................... -- 212 -- ------- ------ ------ DILUTED EARNINGS PER SHARE.................................. $22,134 40,390 $ 0.55 ======= ====== ====== Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period or the effect of the assumed exercise would be antidilutive................. $ -- 2,388 $21.46 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes............................ $ 4,111 2,726 $ 1.51 Minority interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $23.75 per share of the Trust Preferred Securities, issued on June 2, 1999................................. $ 3,681 3,668 $ 1.00
44 46 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------- INCOME SHARES PER SHARE -------- ------ --------- BASIC AND DILUTED EARNINGS (LOSS) PER SHARE................. $(43,098) 37,902 $(1.14) ======== ====== ====== Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period or the effect of the assumed exercise would be antidilutive................. $ -- 2,464 $19.37 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes............................ $ 4,111 2,726 $ 1.51 Interest expense avoided, net of taxes, and shares issued from the assumed conversion at $22.188 per share of the 2004 Notes............................................. $ 478 594 $ 0.80
FOR THE YEAR ENDED DECEMBER 31, 1997 ------------------------------ INCOME SHARES PER SHARE ------- ------ --------- BASIC EARNINGS PER SHARE.................................... $37,116 33,421 $ 1.11 Effect of potential dilutive securities: Shares assumed issued from the exercise of options to purchase common shares, net of treasury shares assumed purchased from the proceeds, at the average market price for the period................................... -- 758 -- Interest expense avoided, net of taxes, and shares issued from the assumed conversion at $22.188 per share of the 2004 Notes............................................. 3,082 3,885 -- ------- ------ ------ DILUTED EARNINGS PER SHARE.................................. $40,198 38,064 $ 1.06 ======= ====== ====== Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period............................ $ -- 471 $40.82 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes............................ $ 4,111 2,726 $ 1.51
Production Imbalances -- Owners of an oil and gas property often take more or less production from a property than entitled based on their ownership percentages in the property. This results in a condition known in the industry as a production imbalance. The Company follows the "take" (cash) method of accounting for production imbalances. Under this method, the Company recognizes revenues on production as it is taken and delivered to its purchasers. The Company's crude oil imbalances are not significant. At December 31, 1999, the Company had taken approximately 2,289 MMcf of natural gas less than it was entitled to based on its interest in those properties, and approximately 1,853 MMcf more than its entitlement on other properties placing the Company at year-end in a net under-delivered position of approximately 436 MMcf of natural gas based on its working interest ownership in the properties. Oil and Gas Activities and Depreciation, Depletion and Amortization -- The Company follows the successful efforts method of accounting for its oil and gas activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved properties 45 47 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Proved oil and gas properties are reviewed when circumstances suggest the need for such a review and, if required, the proved properties are written down to their estimated fair value. Estimated fair value includes the estimated present value of all reasonably expected future production, prices, and costs. As a result of poor reservoir performance and persistent low oil and gas prices, the Company performed such a review in 1998 and expensed $30,813,000 related to its domestic oil and gas properties which is included in the Consolidated Statements of Incomes as dry hole and impairment expense. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for depreciation, depletion and amortization is based on the capitalized costs as determined above, plus future costs to abandon offshore wells and platforms, and is on a cost center by cost center basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and the Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its onshore oil and gas activities. In connection with an ongoing asset rationalization process, the Company had designated certain non-strategic and/or under performing properties to be disposed of to generate cash and maximize its focus on properties with greater exploration potential. These properties, including the previously announced sale of the Lopeno Field in South Texas were sold in the first quarter of 1999 at an aggregate gain of $37,344,000. Other properties are depreciated using a straight-line method in amounts which in the opinion of management are adequate to allocate the cost of the properties over their estimated useful lives. Consolidated Statements of Cash Flows -- For the purpose of cash flows, the Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. Significant transactions may occur which do not directly affect cash balances and as such will not be disclosed in the Consolidated Statements of Cash Flows. Certain such noncash transactions are disclosed in the following acquisition section of this note and the Consolidated Statements of Shareholders' Equity relating to shares issued in connection with the conversion of notes into common stock in 1997 and 1998, shares issued for stock and debt of an acquired company in 1998 and shares issued as compensation in 1998. Acquisition -- In August 1998, a wholly owned subsidiary of the Company merged with Arch Petroleum Inc. ("Arch") in a tax-free, stock for stock transaction accounted for as a purchase through which Arch became a wholly owned subsidiary of the Company. As a result, approximately 2,500,000 shares of the Company's common stock (valued at approximately $64.8 million) were issued in exchange for Arch preferred and common stock and its convertible debt. The value of the Company's common stock in excess of the book value of the net assets acquired (approximately $52.9 million) has been allocated to oil and gas properties and is being amortized using the units of production method over the life of the oil and gas reserves acquired. The following summary presents unaudited pro forma consolidated results of operations as if the acquisition had occurred at the beginning of each period presented. The pro forma results are for illustrative purposes only and are not 46 48 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) necessarily indicative of the operating results that would have occurred had the acquisition been consummated at that date, nor are they necessarily indicative of future operating results.
YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------------------- 1998 1997 ---------- ---------- (UNAUDITED) Revenues.................................................... $217,915 $366,803 Net income (loss)........................................... $(48,369) $ 36,691 Earnings (loss) per share Basic..................................................... $ (1.22) $ 1.02 Diluted................................................... $ (1.22) $ 0.98
Commitments and Contingencies -- The Company has commitments for operating leases (primarily for office space) in Houston, Midland, Calgary and Bangkok and commitments for operating leases related to an FPSO and FSO in the Gulf of Thailand. Rental expense for office space was $1,855,000 in 1999, $1,545,000 in 1998, and $1,440,000 in 1997. Expenses for the FPSO lease were $11,122,000 in each of the years 1999, 1998 and 1997. Expenses for the floating storage and offloading system ("FSO") (which commenced in May 1999) were $2,497,000 in 1999 and are expected to be approximately $3,950,000 in the year 2000 and each year thereafter. Future minimum office, FPSO and FSO lease expenses (in thousands of dollars) at December 31, 1999 are as follows: 2000...................................................... $17,100 2001...................................................... $17,000 2002...................................................... $15,400 2003...................................................... $15,200 2004...................................................... $15,300 Thereafter................................................ $52,300
Price Risk Management -- The Company enters into various commodity price hedging contracts with respect to its oil and gas production. While the use of these hedging arrangements limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements. The use of hedging transactions also involves the risk that the counterparties will be unable to meet the financial terms of such transactions. Such contracts are accounted for as hedges, in accordance with Statement of Financial Accounting Standards No. 80 ("SFAS 80"). Gains and losses on these contracts are recognized in revenue in the period in which the underlying production is delivered. In 1999, the Company recorded hedge gains of $933,000 in connection with its natural gas contracts and hedge losses of $1,947,000 in connection with its crude oil contracts. These instruments are measured for correlation at both the inception of the contract and on an ongoing basis. If these instruments cease to meet certain criteria for deferral accounting, any subsequent gains or losses are recognized in revenue. If these instruments are terminated prior to maturity, resulting gains and losses continue to be deferred until the hedged item is recognized in revenue. Neither the hedging contracts nor the unrealized gains or losses on these contracts are recognized in the financial statements. 47 49 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) INCOME TAXES The components of income (loss) before income taxes for each of the three years in the period ended December 31, 1999, are as follows (expressed in thousands):
1999 1998 1997 ------- -------- ------- United States.......................................... $40,472 $(57,112) $62,953 Foreign................................................ (8,755) (13,737) (7,746) ------- -------- ------- Income (loss) before income taxes.................... $31,717 $(70,849) $55,207 ======= ======== =======
The components of federal income tax expense (benefit) for each of the three years in the period ended December 31, 1999, are as follows (expressed in thousands):
1999 1998 1997 ------- -------- ------- United States, current................................. $21,000 $ -- $16,000 United States, deferred................................ (6,978) (20,750) 5,964 Foreign, deferred...................................... (4,439) (7,001) (3,873) ------- -------- ------- Federal income tax expense (benefit)................. $ 9,583 $(27,751) $18,091 ======= ======== =======
Total federal income tax expense (benefit) for each of the three years in the period ended December 31, 1999, differs from the amounts computed by applying the statutory federal income tax rate to income before taxes as follows (expressed as a percent of pretax income):
1999 1998 1997 ---- ------ ---- Federal statutory income tax rate........................... 35.0% (35.0)% 35.0% Increases (reductions) resulting from: Statutory depletion in excess of tax basis................ (0.8) (0.4) (0.2) Foreign taxes............................................. (4.1) (3.8) (2.1) Other..................................................... 0.1 -- 0.1 ---- ------ ---- 30.2% (39.2)% 32.8% ==== ====== ====
Deferred income taxes are determined based upon the differences between the financial statement and tax basis of the Company's assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the future tax benefit will be realized. The presentation in the consolidated balance sheets and the principal 48 50 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) components of the Company's deferred income tax assets and liabilities at December 31, 1999 and 1998 (expressed in thousands) are as follows:
DECEMBER 31, --------------------- 1999 1998 --------- --------- Deferred federal income tax liability....................... $ 51,177 $ 53,869 Other assets -- foreign tax net operating losses............ (16,237) (12,546) --------- --------- Net deferred tax liability.................................. $ 34,940 $ 41,323 ========= ========= Deferred tax liabilities: Intangible drilling costs, capitalized and amortized for financial statement purposes and deducted for income tax purposes........................................... $ 162,526 $ 182,760 Charges to property and equipment, expensed for financial statement purposes, and capitalized and amortized for income tax purposes.................................... 24,254 27,192 Interest charges, capitalized and amortized for financial statement purposes and deducted for income tax purposes............................................... 15,037 16,231 --------- --------- 201,817 226,183 --------- --------- Deferred tax asset: Differences in depletion and depreciation rates used for tangible assets for financial and income tax purposes............................................... (145,630) (162,017) Foreign net operating loss carryforwards.................. (16,237) (12,546) Domestic net operating loss carryforwards................. (3,979) (10,116) Tax credits and other..................................... (1,031) (181) --------- --------- (166,877) (184,860) --------- --------- Net deferred tax liability.................................. $ 34,940 $ 41,323 ========= =========
The Company has a federal consolidated net operating loss carryforward for tax purposes of approximately $11,400,000, which will begin to expire in 2009. The Company also has a net operating loss carryforward applicable to non-U.S. subsidiaries of approximately $32,500,000, which will begin to expire in 2007. The domestic and foreign net operating loss carryforwards are projected to be utilized before their expiration periods. The benefits of the domestic and foreign net operating losses have been recognized as deferred tax assets. 49 51 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LONG-TERM DEBT Long-term debt and the amount due within one year at December 31, 1999 and 1998, consists of the following (dollars expressed in thousands):
DECEMBER 31, ------------------- 1999 1998 -------- -------- Senior debt -- Bank revolving credit agreement: LIBO Rate based loans, borrowings at December 31, 1999 and 1998 at average interest rates of 7.8% and 7.4%, respectively......................................... $ 5,000 $205,000 Uncommitted credit lines with banks, borrowings at December 31, 1999 and 1998 at average interest rates of 5.9% and 6.1%, respectively............................ 5,000 4,000 Banker's acceptance loans, borrowing at December 31, 1998 at an average interest rate of 5.9%.................... -- 10,947 -------- -------- Total senior debt........................................... 10,000 219,947 -------- -------- Subordinated debt -- 8 3/4% Senior subordinated notes, due 2007................ 100,000 100,000 10 3/8% Senior subordinated notes, due 2009............... 150,000 -- 5 1/2% Convertible subordinated notes, due 2006........... 115,000 115,000 -------- -------- Total subordinated debt..................................... 365,000 215,000 -------- -------- Total debt.................................................. 375,000 434,947 -------- -------- Amount due within one year --............................... -- -- -------- -------- Long-term debt.............................................. $375,000 $434,947 ======== ========
The Company entered into a reserve-based credit facility (the "Credit Facility"), which was amended most recently on November 17, 1999. The Credit Facility provides for a $250,000,000 revolving credit facility until July 1, 2002, after which the balance will be due in eight quarterly term loan installments, commencing on October 31, 2002. The amount that may be borrowed may not exceed a borrowing base which determined semi-annually and is calculated based upon substantially all of the Company's proved oil and gas properties. As of December 31, 1999, the Company's borrowing base was set at $160,000,000. The Credit Facility is governed by various financial and other covenants, including requirements to maintain positive working capital (excluding current maturities of debt) and a fixed charge coverage ratio, and limitations on indebtedness (including a total indebtedness limit of $525,000,000), creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Credit Facility bear interest, at the Company's option, at a base (prime) rate plus a variable margin (currently none) or LIBOR plus a variable margin (currently 1.25%). The margin varies as a function of the percentage of the borrowing base utilized. A commitment fee on the unborrowed amount at a base rate or LIBOR plus 1.75%, at the Company's option. A commitment fee on the unborrowed amount that is currently available under the Credit Facility is also charged based upon the percentage of the borrowing base that is being utilized. As of December 31, 1999, the Company also has available an uncommitted money market line of credit with a commercial bank. The line of credit is on an as available or as offered basis. Loans made under the line of credit are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under its Credit Facility. Under its Credit Facility, the Company is currently limited to incurring a maximum of $20,000,000 of additional senior debt, which would include debt incurred under the line of credit and under the banker's acceptances discussed below. Further, 50 52 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the 2007 Notes and the 2009 Notes also restrict the incurrence of additional senior indebtedness. The letter agreement permits either party to terminate it at any time. The Company entered into a Master Banker's Acceptance Agreement under which one of the Company's lenders has offered to accept up to $20,000,000 in bank drafts from the Company. The banker's drafts are available on an uncommitted basis and the bank has no obligation to accept the Company's request for drafts. Drafts drawn under this agreement are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under the Credit Facility. The Credit Facility limits senior debt, including amounts incurred under this agreement and debt incurred under the line of credit discussed previously, to a maximum of $20,000,000. Further, the 2007 Notes and the 2009 Notes offered also restrict the incurrence of additional senior debt. The Master Banker's Acceptance Agreement permits either party to terminate the letter agreement at any time upon five business days notice. On May 22, 1997, the Company issued $100,000,000 of principal amount of 2007 Notes. The 2007 Notes bear interest at a rate of 8 3/4%, payable semi-annually in arrears on May 15 and November 15 of each year. The 2007 Notes are general unsecured senior subordinated obligations of the Company and are subordinated in right of payment to the Company's senior indebtedness, are equal in right of payment to the 2009 Notes, but are senior in right of payment to the Company's subordinated indebtedness. The Company, at its option, may redeem the 2007 Notes in whole or in part, at any time on or after May 15, 2002, at a redemption price of 104.375% of their principal value and decreasing percentages thereafter. The indenture governing the 2007 Notes also imposes certain covenants on the Company that are substantially identical to the covenants contained in the indenture governing the 2009 Notes described below. On January 15, 1999, the Company issued $150,000,000 principal amount of 2009 Notes. The 2009 Notes bear interest at a rate of 10 3/8%, payable semi-annually in arrears on February 15 and August 15 of each year. 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 Facility, its unsecured credit lines and its 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. The indenture governing the 2009 Notes also imposes certain covenants on the Company that are substantially identical 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 assets sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and mergers, consolidations and the sale of assets. As of December 31, 1999, $16,516,000 was available for dividends under this limitation, which is currently the Company's most restrictive covenant. The outstanding principal amount of 2006 Notes was $115,000,000 as of December 31, 1999. The 2006 Notes are convertible into Common Stock at $42.185 per share subject to adjustment upon the occurrence of certain events. The 2006 Notes bear interest at a rate of 5 1/2% and are currently redeemable at the option of the Company, in whole or in part, at any time, at a redemption price of 103.85% of their principal. The redemption premium will decline over the next several years. Current maturities and sinking fund requirements during the next five years in connection with the above long-term debt are none in 2000 and 2001, $1,500,000 in 2002, $5,500,000 in 2003 and $3,000,000 in 2004. All of the current maturities reflected above are related to the retirement of the Company's bank debt. The Company has established a history of refinancing its senior debt before scheduled maturity payments commence and expects to do so again before the amortization of senior debt commences in 2002. 51 53 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) MINORITY INTEREST -- Pogo Trust I, a business trust in which the Company owns all of the issued common securities (the "Trust"), issued $150,000,000 (3,000,000 securities having a liquidation preference of $50 each) of 6 1/2% Cumulative Quarterly Income Convertible Preferred Securities, Series A (the "Trust Preferred Securities") on June 2, 1999. The proceeds of the issuance of the Trust Preferred Securities were used to purchase $150,000,000 of the Company's 6 1/2% Junior Subordinated Convertible Debentures, due June 1, 2029 (the "Debentures"). The Debentures are the sole asset of Pogo Trust I. The financial terms of the Debentures are generally the same as those of the Trust Preferred Securities. The Trust Preferred Securities accrue and pay distributions quarterly in arrears at a rate of 6 1/2% per annum on the stated liquidation amount of $50 per Trust Preferred Security on March 1, June 1, September 1, and December 1 of each year to security holders of record on the business day immediately preceding the distribution payment date. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Trust Preferred Securities to the extent that there are funds available in the Trust. The Company currently believes that, taken as a whole, the Company guarantee of Pogo Trust I's obligation under the Preferred Securities constitutes a full and unconditional guarantee by the Company of Pogo Trust I's performance obligation. The Company may cause the Trust to defer the payment of distributions for successive periods up to 20 consecutive periods unless an event of default on the Debentures has occurred and is continuing. During such periods, accrued distributions on the Trust Preferred Securities will compound quarterly and the Company will generally not be permitted to declare or pay distributions on its common stock or debt securities that rank equal or junior to the Debentures. The Trust Preferred Securities are convertible at the option of the holder at any time into common stock of the Company at the rate of 2.1053 shares of Company common stock per Trust Preferred Security. This conversion rate will be subject to adjustment to prevent dilution and is currently equivalent to a conversion price of $23.75 per share of Company stock. The Trust Preferred Securities are mandatorily redeemable upon maturity of the Debentures on June 1, 2029, or to the extent of any earlier redemption of any Debenture by the Company and are callable by the Trust at any time after June 1, 2002. In addition, if certain tax changes occur so that the Trust becomes subject to federal income taxes or if interest payments made by the Company to the Trust or the Debentures are no longer deductible for federal income tax purposes, the Trust may liquidate and distribute Debentures to holders of the Trust Preferred Securities and, in certain circumstances, the Company may shorten the stated maturity of the Debentures to as early as June 2, 2014. The amounts recorded in 1999 under Minority Interests -- Dividends and costs associated with preferred securities of a subsidiary trust principally reflect cumulative dividends and, to a lesser extent, the amortization of issuance expenses related to the offering and sale of the Trust Preferred Securities. (5) BUSINESS SEGMENT INFORMATION - At December 31, 1998, the Company adopted the Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures About Segments of an Enterprise and Related Information, which established Standards for the way enterprises report information about operating segments and related information. The Company has three reportable segments, which are primarily in the business of natural gas and crude oil exploration and production. The accounting policies of the segments are the same as those described in the summary of significant policies. The Company evaluates performance based on profit or loss from operations before income and expense items incidental to oil and gas operations 52 54 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and income taxes. The Company's reportable segments are managed separately because of their geographical locations. Financial information by operating segment is presented below:
GAINS TOTAL OIL (LOSSES) COMPANY AND GAS PIPELINES & OTHER -------- -------- --------- -------- (EXPRESSED IN THOUSANDS) LONG-LIVED ASSETS: 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 ======== ======== ====== ======= 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 year ended December 31, 1999 United States................................... $217,339 $172,683 $7,462 $37,194 Kingdom of Thailand............................. 54,444 54,480 -- (36) Canada.......................................... 3,333 3,336 -- (3) -------- -------- ------ ------- Total........................................... $275,116 $230,499 $7,462 $37,155 ======== ======== ====== ======= For the year ended December 31, 1998 United States................................... $165,873 $163,438 $2,431 $ 4 Kingdom of Thailand............................. 35,649 35,445 -- 204 Canada.......................................... 1,281 1,271 -- 10 -------- -------- ------ ------- Total........................................... $202,803 $200,154 $2,431 $ 218 ======== ======== ====== ======= For the year ended December 31, 1997 United States................................... $246,965 $245,458 $ -- $ 1,507 Kingdom of Thailand............................. 39,335 39,393 -- (58) -------- -------- ------ ------- Total........................................... $286,300 $284,851 $ -- $ 1,449 ======== ======== ====== ======= OPERATING INCOME (LOSS): For the year ended December 31, 1999 United States................................... $ 59,130 $ 21,564 $ 372 $37,194 Kingdom of Thailand............................. (3,491) (3,455) -- (36) Canada.......................................... (1,647) (1,644) -- (3) -------- -------- ------ ------- Total........................................... $ 53,992 $ 16,465 $ 372 $37,155 ======== ======== ====== ======= For the year ended December 31, 1998 United States................................... $(42,743) $(43,036) $ 289 $ 4 Kingdom of Thailand............................. (13,050) (13,254) -- 204 Canada.......................................... (1,427) (1,437) -- 10 -------- -------- ------ ------- Total........................................... $(57,220) $(57,727) $ 289 $ 218 ======== ======== ====== ======= For the year ended December 31, 1997 United States................................... $ 83,865 $ 82,358 $ -- $ 1,507 Kingdom of Thailand............................. (5,796) (5,738) -- (58) -------- -------- ------ ------- Total........................................... $ 78,069 $ 76,620 $ -- $ 1,449 ======== ======== ====== =======
(6) SALES TO MAJOR CUSTOMERS The Company is an oil and gas exploration and production company that generally sells its oil and gas to numerous customers on a month-to-month basis. No customer accounted for more than 10% of the 53 55 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's sales during 1999. For purposes of comparison, 1999 sales have been presented for those customers who have in either of the previous two years exceeded 10% of revenues (expressed in thousands):
1999 1998 1997 ------- ------- ------- Petroleum Authority of Thailand(PTT).................... $24,315 $23,137 $30,108 Enron Corp. and affiliates.............................. $10,911 $29,539 $57,965
(7) CREDIT RISK Substantially all of the Company's accounts receivable at December 31, 1999 and 1998, result from oil and gas sales and joint interest billings to other companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. Such receivables are generally not collateralized. Historically, credit losses incurred by the Company on receivables have not been material. No material credit losses were experienced during 1999 or 1998. A substantial portion of the Company's oil and gas operations are conducted in Southeast Asia, and a substantial portion of its natural gas and liquids hydrocarbon production are sold there. In the last two years, Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties which have been characterized by sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. The government of the Kingdom of Thailand and other governments in the region are currently acting to address these issues. However, the economic difficulties currently being experienced in Thailand, together with the volatility of the Thai Baht against the U.S. dollar, will continue to have a material impact on the Company's operations in the Kingdom of Thailand together with the prices that the Company receives for its oil and natural gas production there. All of the Company's current natural gas production from its Thailand operations are committed under a long-term Gas Sales Agreement to PTT at a price denominated in Thai Baht. The Company's crude oil and condensate production from its Thailand operations is currently sold on a tanker load by tanker load basis. Prices that the Company receives for such crude oil production are based on world benchmark prices, which are denominated in U.S. dollars and are generally expected on future crude oil sales to be paid in U.S. dollars. (8) EMPLOYEE BENEFITS The Company has a tax-advantaged savings plan in which all U.S. salaried employees may participate. Under such plan, a participating employee may allocate up to 10% of his salary, up to a maximum allowed by law ($10,500 for 2000), and the Company will then match the employee's contribution on a dollar for dollar basis up to 6% of the employee's salary. Funds contributed by the employee and the matching funds contributed by the Company are held in trust by a bank trustee in six separate funds. Amounts contributed by the employee and earnings and accretions thereon may be used to purchase shares of Common Stock, invest in a money market fund or invest in four stock, bond, or blended stock and bond mutual funds according to instructions from the employee. Matching funds contributed to the savings plan by the Company are invested only in Common Stock. The Company contributed $963,000 to the savings plan in 1999, $701,000 in 1998, and $588,000 in 1997. A trusteed retirement plan has been adopted by the Company for its U.S. salaried employees. The benefits are based on years of service and the employee's average compensation for five consecutive years within the final ten years of service which produce the highest average compensation. The Company makes annual contributions to the plan in the amount of retirement plan cost accrued or the maximum amount which can be deducted for federal income tax purposes. Although the Company has no obligation to do so, the Company currently provides full medical benefits to its retired U.S. employees and dependents. For current 54 56 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) employees, the Company assumes all or a portion of post-retirement medical and term life insurance costs based on the employee's age and length of service with the Company. The post-retirement medical plan has no assets and is currently funded by the Company on a pay-as-you-go basis. The following table sets forth the plans' status (in thousands of dollars) as of December 31, 1999 and 1998.
POST-RETIREMENT RETIREMENT PLAN MEDICAL PLAN ------------------- ----------------- 1999 1998 1999 1998 -------- -------- ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year............ $ 13,849 $ 11,220 $ 6,284 $ 6,906 Service cost.................................... 1,177 938 489 418 Interest cost................................... 840 843 418 374 Participant contributions....................... -- -- 5 4 Benefits paid................................... (903) (2,099) (213) (191) Actuarial (gain) or loss........................ (3,494) 2,947 104 (1,227) -------- -------- ------- ------- Benefit obligation at end of year.................. $ 11,469 $ 13,849 $ 7,087 $ 6,284 ======== ======== ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year..... $ 37,404 $ 31,312 $ -- $ -- Actual return on plan assets.................... 1,075 8,439 -- -- Employer contributions.......................... -- -- 208 187 Participant contributions....................... -- -- 5 4 Benefits paid................................... (903) (2,099) (213) (191) Administrative expenses......................... (277) (248) -- -- -------- -------- ------- ------- Fair value of plan assets at end of year........... $ 37,299 $ 37,404 $ -- $ -- ======== ======== ======= ======= RECONCILIATION OF FUNDED STATUS Funded status...................................... $ 25,830 $ 23,555 $(7,087) $(6,284) Unrecognized actuarial gain........................ (14,307) (14,670) (1,544) (1,742) Unrecognized transition (asset) or obligation...... (129) (233) 1,826 2,132 Unrecognized past service cost..................... (214) (257) -- -- -------- -------- ------- ------- Prepaid (accrued) benefit cost at year-end......... $ 11,180 $ 8,395 $(6,805) $(5,894) ======== ======== ======= ======= Discount rate...................................... 7.75% 6.75% 7.75% 6.75% Expected return on plan assets..................... 9.50% 9.50% -- -- Rate of compensation increase...................... 4.75% 4.75% -- -- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost....................................... $ 1,177 $ 938 $ 489 $ 418 Interest cost...................................... 840 843 418 374 Expected return on plan assets..................... (3,544) (2,926) -- -- Amortization of prior service cost................. (43) (43) -- -- Amortization of transition (asset) obligation...... (103) (104) 305 305 Recognized actuarial gain.......................... (1,112) (781) (93) (127) -------- -------- ------- ------- $ (2,785) $ (2,073) $ 1,119 $ 970 ======== ======== ======= =======
For measurement purposes, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate is assumed to decrease gradually to 5% for 2005 and remain at that level thereafter. 55 57 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accumulated post-retirement benefit obligation (in thousands) at December 31 is attributable to the following groups:
POST-RETIREMENT MEDICAL PLAN --------------- 1999 1998 ------ ------ Retirees and beneficiaries.................................. $2,703 $2,603 Fully eligible active employees............................. 626 578 Active employees, not fully eligible........................ 3,758 3,103 ------ ------ $7,087 $6,284 ====== ======
Assumed health care cost trends have a significant effect on the amount reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
ONE PERCENTAGE POINT ------------------- INCREASE DECREASE -------- -------- Effect on total of service and interest cost components for 1999...................................................... $ 188 $(148) Effect on year-end 1999 postretirement benefit obligation... $1,156 $(946)
(9) STOCK OPTION PLANS The Company's stock option plans authorize the granting of options to key employees and non-employee directors at prices equivalent to the market value at the date of grant. Options generally become exercisable in three annual installments commencing one year after the date of grant and, if not exercised, expire 10 years from the date of grant. The Company accounts for employee stock-based compensation using the intrinsic value method and since the exercise price of the options granted is equal to the quoted market price of the Company's stock at the grant date, no compensation cost has been recognized for its stock option plans. Had compensation costs been determined based on fair value at the grant dates for awards made in 1999, 1998, 1997 and 1996, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands of dollars, except per share amounts):
1999 1998 1997 ------- -------- ------- Net income (loss): As reported.......................................... $22,134 $(43,098) $37,116 Pro forma............................................ $20,118 $(44,602) $34,220 Earnings (loss) per share: As reported -- Basic................................. $ 0.55 $ (1.14) $ 1.11 As reported -- Diluted............................... $ 0.55 $ (1.14) $ 1.06 Pro forma -- Basic................................... $ 0.51 $ (1.19) $ 1.04 Pro forma -- Diluted................................. $ 0.51 $ (1.20) $ 0.98
The fair value of grants was estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used in 1999, 1998 and 1997, respectively: risk free interest rates of 5.92%, 5.31% and 6.10%, expected volatility of 42.73%, 35.58% and 34.63%, dividend yields of 0.63%, 0.64% and 0.29%, and an expected life of the options of 5 years in 1999, 4 years in 1998 and 1997. 56 58 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of the Company's plans as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates is presented below:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE --------- -------- Outstanding, December 31, 1996.............................. 1,707,187 $19.70 Granted in 1997........................................ 480,400 $40.49 Exercised in 1997...................................... (229,024) $16.83 --------- Outstanding, December 31, 1997............................ 1,958,563 $25.13 ========= Exercisable, December 31, 1997............................ 1,196,803 $18.15 ========= Available for grant, December 31, 1997.................... 832,993 ========= Weighted-average fair value of options granted during 1997................................................... $14.63 Outstanding, December 31, 1997............................ 1,958,563 $25.13 Granted in 1998........................................ 985,659 $19.62 Exercised in 1998...................................... (145,317) $ 6.87 Canceled in 1998....................................... (334,748) $37.13 --------- Outstanding, December 31, 1998............................ 2,464,157 $19.37 ========= Exercisable, December 31, 1998............................ 1,223,484 $19.00 ========= Available for grant, December 31, 1998.................... 682,082 ========= Weighted-average fair value of options granted during 1998................................................... $ 5.35 Outstanding, December 31, 1998............................ 2,464,157 $19.37 Granted in 1999........................................ 676,900 $19.03 Exercised in 1999...................................... (130,275) $ 8.57 Canceled in 1999....................................... (5,167) $ 7.31 --------- Outstanding, December 31, 1999............................ 3,005,615 $19.78 ========= Exercisable, December 31, 1999............................ 1,607,695 $20.11 ========= Available for grant, December 31, 1999.................... 205,182 ========= Weighted-average fair value of options granted during 1999................................................... $ 8.31
57 59 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ---------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE OPTION PRICES OUTSTANDING (DAYS) PRICE EXERCISABLE PRICE ------------- ----------- ----------- -------- ----------- -------- $ 5.63 to $ 7.81........................ 197,085 992 $ 6.53 197,085 $ 6.53 $12.31 to $12.72........................ 9,000 3,609 $12.54 1,333 $12.31 $15.13 to $19.56........................ 1,697,859 3,347 $18.55 595,494 $17.75 $20.28 to $24.81........................ 885,138 2,673 $21.40 609,207 $21.80 $25.38 to $29.06........................ 49,962 3,386 $25.72 46,974 $25.52 $30.23 to $33.94........................ 30,962 2,709 $33.75 30,641 $33.79 $35.13 to $36.00........................ 53,109 2,656 $35.97 52,628 $35.97 $40.62 to $44.00........................ 82,500 3,084 $41.00 74,333 $41.04 --------- --------- Total......................... 3,005,615 2,970 $19.78 1,607,695 $20.11 ========= =========
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents Fair value is carrying value. There are no cash equivalents included in the balances as of December 31, 1999 and 1998. Debt
INSTRUMENT BASIS OF FAIR VALUE ESTIMATE ---------- ---------------------------- Bank revolving credit agreement Fair value is carrying value as of December 31, 1999 and 1998 based on the market value interest rates. Uncommitted credit lines with banks and Fair value is carrying value as of December banker's acceptance loans 31, 1999 and 1998 based on the market value interest rates. 2007 Notes Fair value is 97.5% and 94%, of carrying value as of December 31, 1999 and 1998, respectively, based on quoted market values. 2009 Notes Fair value is 106% of carrying value as of December 31, 1999 based on quoted market value. 2006 Notes Fair value is 78.375% and 68.375%, of carrying value as of December 31, 1999 and 1998, respectively, based on quoted market values. Minority interest in company obligated Fair value is 101.25% of carrying value as preferred securities of a subsidiary trust of December 31, 1999 based on quoted market value.
58 60 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying value and estimated fair value of the Company's financial instruments at December 31, 1999 and 1998 (in thousands of dollars) are as follows:
1999 1998 --------------------- --------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE --------- --------- --------- --------- Cash and cash investments...................... $ 6,267 $ 6,267 $ 7,959 $ 7,959 Debt: Bank revolving credit agreement.............. $ (5,000) $ (5,000) $(205,000) $(205,000) Uncommitted credit lines with banks.......... $ (5,000) $ (5,000) $ (4,000) $ (4,000) Banker's acceptance loans.................... -- -- $ (10,947) $ (10,947) 2007 Notes................................... $(100,000) $ (97,500) $(100,000) $ (94,000) 2009 Notes................................... $(150,000) $(159,000) -- -- 2006 Notes................................... $(115,000) $ (90,131) $(115,000) $ (78,637) Minority interest in company obligated mandatorily redeemable preferred securities of a subsidiary trust,....................... $(150,000) $(151,875) -- -- net of unamortized issue expenses of......... $ 5,249 $ 5,249 -- --
The Company occasionally enters into forward and futures contracts to minimize the impact of oil and gas price fluctuations. However, the Company does not consider its forward and futures contracts to be financial instruments since these contracts require or permit settlement by the delivery of the underlying commodity. (11) 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. (12) 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 in the balance sheet as either an asset or liability measured at its fair market value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge 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 No. 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 No. 133. The Company has not yet quantified the impact the adoption of SFAS 133 or determined the timing or methods of adoption. (13) PRICE HEDGE TRANSACTIONS During 1999, approximately 7% of the Company's equivalent production was subject to hedge positions. No significant amounts of hedge positions were held by the Company in 1998 and 1997. 59 61 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1999, 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 VOLUME IN ----------------- FAIR MARKET PERIOD MMBTU(A) SWAPS FLOORS CEILINGS VALUE(B) ------ --------- ----- ------ -------- ----------- Price Swap Contracts January 2000 -- March 2000.................. 910 $3.11 -- -- $ 637,000 January 2000 -- May 2000.................... 760 $2.70 -- -- $ 243,000 January 2000 -- August 2000................. 3,660 $2.87 -- -- $1,805,000 Collar Contracts April 2000 -- September 2000................ 7,320 -- $2.25 $2.80 --
As of December 31, 1999, 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 VOLUME IN ----------------- FAIR MARKET PERIOD BBLS SWAPS FLOORS CEILINGS VALUE(B) ------ --------- ------ ------ -------- ----------- Price Swap Contracts January 2000 -- March 2000................. 136,500 $21.12 -- -- $(544,000) January 2000 -- December 2000.............. 732,000 $21.15 -- -- $(748,000) Collar Contracts January 2000 -- March 2000................. 91,000 -- $21.15 $23.00 $(191,000) April 2000 -- September 2000............... 183,000 -- $21.00 $25.00 $(152,000)
- --------------- (a) MMBtu means million British Thermal Units (b) Fair market value is calculated using prices derived from NYMEX futures contract prices existing at December 31, 1999 Subsequent to December 31, 1999, the Company entered into additional commodity price swap transactions for natural gas and crude oil. The natural gas contracts are for the period February 1 through August 31, 2000 for 4,260 MMBtu's at a weighted average fixed price of $2.53 per MBtu. The crude oil collar contract is for the period July 1 through December 31, 2000 for 184,000 barrels at $21.00 -- $25.03 per barrel. These hedging transactions are settled based upon the average of the reporting settlement prices on the NYMEX for the last three trading days or occasionally, the penultimate trading day of a particular contract month (the "settlement price"). With respect to any particular swap transaction, the counterparty is required to make a payment to the Company in the event that the settlement price for any settlement period is less than the swap price for such transaction, and the Company is required to make payment to the counterparty in the event that the settlement price for any settlement period is greater than the swap price for such transaction. For any particular collar transaction, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price for such transaction, and the Company is required to make payment to the counterparty if the settlement price for any settlement period is above the ceiling price of such transaction. 60 62 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Except as indicated in the foregoing table, the Company did not have any basis swaps associated with the indicated hedging contracts. Because substantially all of the Company's natural gas production is sold under spot contracts that have historically correlated with the swap price, the Company believes that it has no material basis risk with respect to gas swaps that are not coupled with basis swaps. Substantially all of the Company's crude oil and condensate production is sold under spot contracts that generally correlate to the NYMEX West Texas Intermediate price. Therefore, the Company believes that it currently has no material basis risk with respect to these transactions. The actual cash price the Company receives, however, varies from the NYMEX West Texas Intermediate price when adjusted for location, quality and other differences. These differences could give rise to basis risk in the future. 61 63 POGO PRODUCING COMPANY & SUBSIDIARIES UNAUDITED SUPPLEMENTARY FINANCIAL DATA OIL AND GAS PRODUCING ACTIVITIES The results of operations from oil and gas producing activities excludes non-oil and gas revenues, general and administrative expenses, interest charges, interest income and interest capitalized. Income tax (expense) or benefit was determined by applying the statutory rates to pretax operating results with adjustments for permanent differences.
TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA --------- -------- ---------- ------- (EXPRESSED IN THOUSANDS) 1999: Revenues........................................ $ 230,499 $172,683 $ 54,480 $ 3,336 Lease operating expense......................... (69,816) (46,341) (21,815) (1,660) Exploration expense............................. (5,982) (3,766) (1,673) (543) Dry hole and impairment expense................. (4,594) (4,259) -- (335) Depreciation, depletion and amortization expense...................................... (102,265) (73,886) (27,174) (1,205) --------- -------- -------- ------- Pretax operating results........................ 47,842 44,431 3,818 (407) Income tax (expense) benefit.................... (16,315) (16,794) 291 188 --------- -------- -------- ------- Operating results............................... $ 31,527 $ 27,637 $ 4,109 $ (219) ========= ======== ======== ======= 1998: Revenues........................................ $ 200,154 $163,438 $ 35,445 $ 1,271 Lease operating expense......................... (68,883) (47,294) (20,913) (676) Exploration expense............................. (9,802) (8,835) (289) (678) Dry hole and impairment expense................. (41,736) (41,736) -- -- Depreciation, depletion and amortization expense...................................... (109,288) (85,969) (22,753) (566) --------- -------- -------- ------- Pretax operating results........................ (29,555) (20,396) (8,510) (649) Income tax benefit.............................. 11,916 7,401 4,255 260 --------- -------- -------- ------- Operating results............................... $ (17,639) $(12,995) $ (4,255) $ (389) ========= ======== ======== ======= 1997: Revenues........................................ $ 284,851 $245,458 $ 39,393 $ -- Lease operating expense......................... (63,501) (43,934) (19,567) -- Exploration expense............................. (10,530) (6,242) (4,288) -- Dry hole and impairment expense................. (9,631) (9,631) -- -- Depreciation, depletion and amortization expense...................................... (101,273) (84,443) (16,830) -- --------- -------- -------- ------- Pretax operating results........................ 99,916 101,208 (1,292) -- Income tax (expense) benefit.................... (30,353) (32,390) 2,037 -- --------- -------- -------- ------- Operating results............................... $ 69,563 $ 68,818 $ 745 $ -- ========= ======== ======== =======
62 64 POGO PRODUCING COMPANY & SUBSIDIARIES UNAUDITED SUPPLEMENTARY FINANCIAL DATA -- (CONTINUED) The following table sets forth the Company's costs incurred (expressed in thousands) for oil and gas producing activities during the years indicated.
TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA -------- -------- ---------- ------- Costs incurred (capitalized unless otherwise indicated): 1999: Property acquisition Proved...................................... $ 19,532 $ 19,532 $ -- $ -- Unproved.................................... 7,129 6,506 -- 623 Exploration Capitalized................................. 20,263 15,448 3,500 1,315 Expensed.................................... 5,982 4,147 1,682 153 Development................................... 150,096 54,204 95,163 729 Interest...................................... 17,733 6,599 11,134 -- -------- -------- -------- ------- Total oil and gas costs incurred.............. $220,735 $106,436 $111,479 $ 2,820 ======== ======== ======== ======= Provision for depreciation, depletion and amortization.................................. $102,265 $ 73,886 $ 27,174 $ 1,205 ======== ======== ======== ======= 1998: Property acquisition Proved...................................... $139,346 $133,474 $ -- $ 5,872 Unproved.................................... 10,557 10,557 -- -- Exploration Capitalized................................. 36,465 24,685 11,631 149 Expensed.................................... 9,802 8,831 293 678 Development................................... 156,718 64,052 89,365 3,301 Interest...................................... 9,381 3,209 6,172 -- -------- -------- -------- ------- Total oil and gas costs incurred.............. $362,269 $244,808 $107,461 $10,000 ======== ======== ======== ======= Provision for depreciation, depletion and amortization.................................. $109,288 $ 85,969 $ 22,753 $ 566 ======== ======== ======== ======= 1997: Property acquisition Proved...................................... $ 31,234 $ 2,617 $ 28,617 $ -- Unproved.................................... 11,875 11,875 -- -- Exploration Capitalized................................. 45,203 24,016 21,187 -- Expensed.................................... 10,530 6,242 4,288 -- Development................................... 156,764 95,768 60,996 -- Interest...................................... 6,175 3,427 2,748 -- -------- -------- -------- ------- Total oil and gas costs incurred.............. $261,781 $143,945 $117,836 $ -- ======== ======== ======== ======= Provision for depreciation, depletion and amortization.................................. $101,273 $ 84,443 $ 16,830 $ -- ======== ======== ======== =======
The following information regarding estimates of the Company's proved oil and gas reserves, which are located offshore in United States waters of the Gulf of Mexico, onshore in the United States and Canada and offshore in the Kingdom of Thailand is based on reports prepared by Ryder Scott Company Petroleum Engineers. The definitions and assumptions that serve as the basis for the discussions under the caption 63 65 POGO PRODUCING COMPANY & SUBSIDIARIES UNAUDITED SUPPLEMENTARY FINANCIAL DATA -- (CONTINUED) "Item 1. Business -- Exploration and Production Data -- Reserves" should be referred to in connection with the following information. ESTIMATES OF PROVED RESERVES
OIL, CONDENSATE AND NATURAL GAS LIQUIDS (BBLS.) ----------------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ---------- ---------- ---------- -------- Proved Reserves as of December 31, 1996....... 49,602,182 28,270,402 21,331,780 -- Revisions of previous estimates............. 1,033,664 2,194,936 (1,161,272) -- Extensions, discoveries and other additions................................ 9,316,407 4,649,856 4,666,551 -- Purchase of properties...................... 5,175,501 409,428 4,766,073 -- Sale of properties.......................... (6,155) (6,155) -- -- Estimated 1997 production................... (6,957,246) (6,136,957) (820,289) -- ---------- ---------- ---------- -------- Proved Reserves as of December 31, 1997....... 58,164,353 29,381,510 28,782,843 -- Revisions of previous estimates............. (263,410) 1,316,467 (1,417,472) (162,405) Extensions, discoveries and other additions................................ 10,111,879 2,767,537 7,341,791 2,551 Purchase of properties...................... 6,226,804 5,496,985 -- 729,819 Sale of properties.......................... (28,024) (28,024) -- -- Estimated 1998 production................... (6,702,038) (5,724,933) (896,200) (80,905) ---------- ---------- ---------- -------- Proved Reserves as of December 31, 1998....... 67,509,564 33,209,542 33,810,962 489,060 Revisions of previous estimates............. 7,274,136 8,922,125 (1,634,802) (13,187) Extensions, discoveries and other additions................................ 8,673,230 2,647,306 5,797,988 227,936 Purchase of properties...................... 3,698,016 3,698,016 -- -- Sale of properties.......................... (1,690,467) (1,690,467) -- -- Estimated 1999 production................... (6,688,062) (5,232,860) (1,318,451) (136,751) ---------- ---------- ---------- -------- Proved Reserves as of December 31, 1999....... 78,776,417 41,553,662 36,655,697 567,058 ========== ========== ========== ======== Proved Developed Reserves as of: December 31, 1996........................... 31,090,407 25,898,414 5,191,993 -- December 31, 1997........................... 33,149,612 26,167,519 6,982,093 -- December 31, 1998........................... 33,368,347 28,581,175 4,298,112 489,060 December 31, 1999........................... 53,894,653 35,136,156 18,407,852 350,645
64 66 POGO PRODUCING COMPANY & SUBSIDIARIES UNAUDITED SUPPLEMENTARY FINANCIAL DATA -- (CONTINUED)
NATURAL GAS (MMCF) --------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ------- ------- ---------- ------ Proved Reserves as of December 31, 1996............... 360,944 215,946 144,998 -- Revisions of previous estimates..................... (16,860) (5,582) (11,278) -- Extensions, discoveries and other additions......... 92,063 49,651 42,412 -- Purchase of properties.............................. 30,319 8,919 21,400 -- Sale of properties.................................. (1,864) (1,864) -- -- Estimated 1997 production........................... (63,114) (50,350) (12,764) -- ------- ------- ------- ------ Proved Reserves as of December 31, 1997............... 401,488 216,720 184,768 -- Revisions of previous estimates..................... (13,376) 7,391 (17,943) (2,824) Extensions, discoveries and other additions......... 70,649 55,859 14,418 372 Purchase of properties.............................. 38,689 32,259 -- 6,430 Sale of properties.................................. (2,738) (2,738) -- -- Estimated 1998 production........................... (54,543) (41,136) (12,854) (553) ------- ------- ------- ------ Proved Reserves as of December 31, 1998............... 440,169 268,355 168,389 3,425 Revisions of previous estimates..................... 7,704 27,327 (17,617) (2,006) Extensions, discoveries and other additions......... 61,717 44,563 16,991 163 Purchase of properties.............................. 7,060 7,060 -- -- Sale of properties.................................. (90,164) (90,164) -- -- Estimated 1999 production........................... (51,788) (37,012) (14,175) (601) ------- ------- ------- ------ Proved Reserves as of December 31, 1999............... 374,698 220,129 153,588 981 ======= ======= ======= ====== Proved Developed Reserves as of: December 31, 1996................................... 238,032 192,034 45,998 -- December 31, 1997................................... 239,732 179,972 59,760 -- December 31, 1998................................... 225,054 181,205 40,424 3,425 December 31, 1999................................... 245,257 156,398 88,041 818
65 67 POGO PRODUCING COMPANY & SUBSIDIARIES STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED
1999 ---------------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA ---------- ---------- ---------- ------- (EXPRESSED IN THOUSANDS) Future gross revenues.......................... $2,752,682 $1,511,517 $1,225,327 $15,838 Future production costs: Lease operating expense...................... (744,848) (408,533) (332,786) (3,529) Future development and abandonment costs....... (301,148) (163,862) (136,684) (602) ---------- ---------- ---------- ------- Future net cash flows before income taxes...... 1,706,686 939,122 755,857 11,707 Discount at 10% per annum...................... (552,040) (363,286) (186,263) (2,491) ---------- ---------- ---------- ------- Discounted future net cash flow before income taxes........................................ 1,154,646 575,836 569,594 9,216 Future income taxes, net of discount at 10% per annum........................................ (285,963) (127,207) (159,126) 370 ---------- ---------- ---------- ------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves..................................... $ 868,683 $ 448,629 $ 410,468 $ 9,586 ========== ========== ========== =======
1998 ---------------------------------------------- Future gross revenues.......................... $1,624,242 $ 880,743 $ 732,942 $10,557 Future production costs: Lease operating expense...................... (540,332) (281,421) (255,252) (3,659) Future development and abandonment costs....... (331,607) (167,724) (163,680) (203) ---------- ---------- ---------- ------- Future net cash flows before income taxes...... 752,303 431,598 314,010 6,695 Discount at 10% per annum...................... (257,077) (142,293) (113,413) (1,371) ---------- ---------- ---------- ------- Discounted future net cash flow before income taxes........................................ 495,226 289,305 200,597 5,324 Future income taxes, net of discount at 10% per annum........................................ (72,505) (22,494) (52,132) 2,121 ---------- ---------- ---------- ------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves..................................... $ 422,721 $ 266,811 $ 148,465 $ 7,445 ========== ========== ========== =======
1997 ---------------------------------------------- Future gross revenues.......................... $1,801,254 $1,002,609 $ 798,645 $ -- Future production costs: Lease operating expense...................... (604,665) (269,505) (335,160) -- Future development and abandonment costs....... (401,970) (155,179) (246,791) -- ---------- ---------- ---------- ------- Future net cash flows before income taxes...... 794,619 577,925 216,694 -- Discount at 10% per annum...................... (331,838) (171,764) (160,074) -- ---------- ---------- ---------- ------- Discounted future net cash flow before income taxes........................................ 462,781 406,161 56,620 -- Future income taxes, net of discount at 10% per annum........................................ (113,316) (93,386) (19,930) -- ---------- ---------- ---------- ------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves..................................... $ 349,465 $ 312,775 $ 36,690 $ -- ========== ========== ========== =======
The standardized measure of discounted future net cash flows from the production of proved reserves is developed as follows: 1. Estimates are made of quantities of proved reserves and the future periods in which they are expected to be produced based on year end economic conditions. 66 68 POGO PRODUCING COMPANY & SUBSIDIARIES STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED -- (CONTINUED) 2. The estimated future gross revenues from proved reserves are priced on the basis of year end prices, except in those instances where fixed and determinable natural gas price escalations are covered by contracts. 3. The future gross revenue streams are reduced by estimated future costs to develop and to produce the proved reserves, as well as certain abandonment costs based on year end cost estimates, and the estimated effect of future income taxes. These cost estimates are subject to some uncertainty, particularly those estimates relating to the Company's properties located in the Kingdom of Thailand. The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and the risks inherent in reserve estimates. The following are the principal sources of change in the standardized measure of discounted future net cash flows. All amounts are related to changes in reserves located in the United States, the Kingdom of Thailand, and Canada, as noted.
YEAR ENDED DECEMBER 31, 1999 -------------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA --------- --------- ---------- ------- (EXPRESSED IN THOUSANDS) Beginning balance................................ $ 422,721 $ 266,811 $ 148,465 $ 7,445 Revisions to prior years' proved reserves: Net changes in prices and production costs..... 481,570 246,516 228,424 6,630 Net changes due to revisions in quantity estimates................................... 82,304 127,719 (40,328) (5,087) Net changes in estimates of future development costs....................................... (61,267) (19,920) (40,470) (877) Accretion of discount.......................... 49,523 28,931 20,060 532 Changes in production rate and other........... 37,017 5,429 30,583 1,005 --------- --------- --------- ------- Total revisions............................. 589,147 388,675 198,269 2,203 New field discoveries and extensions, net of future production and development costs........ 177,822 66,956 108,230 2,636 Purchases of properties.......................... 29,421 29,421 -- -- Sales of properties.............................. (128,555) (128,555) -- -- Sales of oil and gas produced, net of production costs.......................................... (160,683) (126,342) (32,665) (1,676) Previously estimated development costs incurred....................................... 152,268 56,376 95,163 729 Net change in income taxes....................... (213,458) (104,713) (106,994) (1,751) --------- --------- --------- ------- Net change in standardized measure of discounted future net cash flows....... 445,962 181,818 262,003 2,141 --------- --------- --------- ------- Ending balance................................... $ 868,683 $ 448,629 $ 410,468 $ 9,586 ========= ========= ========= =======
67 69 POGO PRODUCING COMPANY & SUBSIDIARIES STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA --------- --------- ---------- ------ (EXPRESSED IN THOUSANDS) Beginning balance................................. $ 349,465 $ 312,775 $ 36,690 $ -- Revisions to prior years' proved reserves: Net changes in prices and production costs...... (165,355) (151,407) (13,948) -- Net changes due to revisions in quantity estimates.................................... 5,592 13,681 (8,089) -- Net changes in estimates of future development costs........................................ (10,777) (43,419) 32,642 -- Accretion of discount........................... 46,278 40,616 5,662 -- Changes in production rate and other............ 1,649 (6,485) 7,539 595 --------- --------- --------- ------ Total revisions.............................. (122,613) (147,014) 23,806 595 New field discoveries and extensions, net of future production and development costs......... 101,142 55,418 45,338 386 Purchases of properties........................... 46,907 41,969 -- 4,938 Sales of properties............................... (17,158) (17,158) -- -- Sales of oil and gas produced, net of production costs........................................... (131,271) (116,144) (14,532) (595) Previously estimated development costs incurred... 155,438 66,073 89,365 -- Net change in income taxes........................ 40,811 70,892 (32,202) 2,121 --------- --------- --------- ------ Net change in standardized measure of discounted future net cash flows........ 73,256 (45,964) 111,775 7,445 --------- --------- --------- ------ Ending balance.................................... $ 422,721 $ 266,811 $ 148,465 $7,445 ========= ========= ========= ======
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND CANADA --------- --------- ---------- ------ (EXPRESSED IN THOUSANDS) Beginning balance................................. $ 686,040 $ 560,221 $ 125,819 $ -- Revisions to prior years' proved reserves: Net changes in prices and production costs...... (473,086) (344,493) (128,593) -- Net changes due to revisions in quantity estimates.................................... (18,624) 9,619 (28,243) -- Net changes in estimates of future development costs........................................ (83,170) (75,649) (7,521) -- Accretion of discount........................... 95,455 77,313 18,142 -- Changes in production rate and other............ (31,132) (4,518) (26,614) -- --------- --------- --------- ------ Total revisions.............................. (510,557) (337,728) (172,829) -- New field discoveries and extensions, net of future production and development costs......... 79,258 76,687 2,571 -- Purchases of properties........................... 10,189 5,899 4,290 -- Sales of properties............................... (6,069) (6,069) -- -- Sales of oil and gas produced, net of production costs........................................... (221,350) (201,524) (19,826) -- Previously estimated development costs incurred... 156,764 95,768 60,996 -- Net change in income taxes........................ 155,190 119,521 35,669 -- --------- --------- --------- ------ Net change in standardized measure of discounted future net cash flows........ (336,575) (247,446) (89,129) -- --------- --------- --------- ------ Ending balance.................................... $ 349,465 $ 312,775 $ 36,690 $ -- ========= ========= ========= ======
68 70 QUARTERLY RESULTS -- UNAUDITED Summaries of the Company's results of operations by quarter for the years 1999 and 1998 are as follows:
QUARTER ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------- -------- ------------- ------------ (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 Revenues....................................... $76,046(c) $44,828 $69,138 $ 85,104 Gross profit (a)............................... $33,987 $ 5,116 $18,912 $ 25,842 Net income (loss).............................. $14,313 $(3,006) $ 2,737 $ 8,090 Earnings (loss) per share (b): Basic........................................ $ 0.36 $ (0.07) $ 0.07 $ 0.20 Diluted...................................... $ 0.36 $ (0.07) $ 0.07 $ 0.20 1998 Revenues....................................... $60,730 $52,663 $46,179 $ 43,231 Gross profit (loss)(a)......................... $ 8,621 $ 4,758 $(3,908) $(40,335) Net income (loss).............................. $ 184 $(2,668) $(8,322) $(32,292)(d) Earnings (loss) per share (b): Basic........................................ $ 0.01 $ (0.07) $ (0.22) $ (0.80) Diluted...................................... $ 0.01 $ (0.07) $ (0.22) $ (0.80)
- --------------- (a) Represents revenues less lease operating, pipeline operating and natural gas purchases, exploration, dry hole, and impairment, and depreciation, depletion and amortization expenses. (b) The sum of the individual quarterly earnings (loss) per share may not agree with year-to-date earnings (loss) per share as each quarterly computation is based on the weighted average number of common shares outstanding during that period. (c) Revenues for the first quarter of 1999 include $37,344,000 related to gains on the sales of properties. (d) The net loss for the fourth quarter of 1998 includes an impairment charge of approximately $24,500,000 resulting from poor reservoir performance and persistent low oil and gas prices. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding nominees and continuing directors in the Company's definitive Proxy Statement for its annual meeting to be held on April 25, 2000, to be filed within 120 days of December 31, 1999 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the Company's "2000 Proxy Statement"), is incorporated herein by reference. See also Item S-K 401(b) appearing in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information regarding executive compensation in the Company's 2000 Proxy Statement, other than the information regarding the Compensation Committee Report on Executive Compensation, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information regarding ownership of the Company securities by management and certain other beneficial owners in the Company's 2000 Proxy Statement is incorporated herein by reference. 69 71 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information regarding certain relationships and related transactions with management in the Company's 2000 Proxy Statement in incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements and Supplementary Data, Financial Statement Schedules and Exhibits
PAGE ---- 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Report of Independent Public Accountants.................... 38 Consolidated statements of income........................... 39 Consolidated balance sheets................................. 40 Consolidated statements of cash flows....................... 41 Consolidated statements of shareholders' equity............. 42 Notes to consolidated financial statements.................. 43 Unaudited supplementary financial data...................... 62
2. FINANCIAL STATEMENT SCHEDULES: All Financial Statement Schedules have been omitted because they are not required, are not applicable or the information required has been included elsewhere herein. 3. EXHIBITS: *3.1 -- Restated Certificate of Incorporation of Pogo Producing Company (Exhibit 3(a), Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-7792). *3.2 -- Certificate of Designation, Preferences and Rights of Preferred Stock of Pogo Producing Company, dated March 25, 1987 (Exhibit 3(a)(1), Annual Report on Form 10-K for the year ended December 31, 1987, File No. 0-5468). *3.3 -- Bylaws of Pogo Producing Company, as amended and restated through January 27, 1998 (Exhibit 3(b), Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-7792). *4.1 -- 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 (Exhibit 4(a), Quarterly Report on Form 10-Q for the quarter ended, June 30, 1997, File No. 1-7792). *4.2 -- First Amendment dated as of December 21, 1998, 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 (Exhibit 4.1, Amendment No. 1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-7792). *4.3 -- Second Amendment dated July 16, 1999, 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 (Exhibit 4.1, Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 1-7792).
70 72 *4.4 -- Indenture dated as of June 15, 1996 to Fleet National Bank, as Trustee (Exhibit 4(f), Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 001-7792). *4.5 -- Indenture dated as of May 15, 1997 between Pogo Producing Company and Fleet National Bank (now State Street Bank & Trust Company as successor in interest under the Indenture) as Trustee (Exhibit 4.3, Registration Statement on Form S-4, filed July 2, 1997, File No. 333-30613). *4.6 -- Indenture dated as of January 15,1999 between Pogo Producing Company and State Street Bank & Trust Company as Trustee (Exhibit 4.2, Registration Statement on Form S-4, filed February 10, 1999, File No. 333-72129). *4.7 -- Amended and Restated Declaration of Trust of Pogo Trust I dated as of June 2, 1999 (Exhibit 4.1, Current Report on Form 8-K, filed June 2, 1999, File No. 1-7792). *4.8 -- Junior Subordinated Indenture dated as of June 1, 1999, between Pogo Producing Company and Wilmington Trust Company, as Trustee (Exhibit 4.3, Current Report on Form 8-K, filed June 2, 1999, File No. 1-7792). *4.9 -- Supplemental Indenture No. 1 dated as of June 1, 1999 to Junior Subordinated Indenture dated as of June 1, 1999, between Pogo Producing Company and Wilmington Trust Company, as Trustee (Exhibit 4.4, Current Report on Form 8-K, filed June 2, 1999, File No. 1-7792). *4.10 -- Rights Agreement dated as of April 26, 1994 between Pogo Producing Company and Harris Trust Company of New York, as Rights Agent (Exhibit 4, Current Report on Form 8-K filed April 26, 1994, File No. 1-7792). *4.11 -- Certificate of Designations of Series A Junior Participating Preferred Stock of Pogo Producing Company dated April 26, 1994 (Exhibit 4(d), Registration Statement on Form S-8 filed August 9, 1994, File No. 33-54969). Other instruments defining the rights of holders of long-term debt of Pogo Producing Company and its subsidiaries are not being filed because the total amount of securities authorized by such instruments does not exceed 10% of the total assets of Pogo Producing Company and its subsidiaries on a consolidated basis as of December 31, 1999. Pogo Producing Company hereby agrees to furnish to the Commission a copy of any such debt instrument upon request. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (COMPRISING EXHIBITS 10.1 THROUGH 10.37, INCLUSIVE). *10.1 -- 1989 Incentive and Nonqualified Stock Option Plan of Pogo Producing Company, as amended and restated effective January 25, 1994 (Exhibit 99, Definitive Proxy Statement on Schedule 14A, filed March 22, 1994, File No. 1-7792). *10.2 -- Form of Stock Option Agreement under 1989 Incentive and Nonqualified Stock Option Plan, as amended and restated effective January 22, 1991 (Exhibit 10(d)(1), Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-5468). *10.3 -- Form of Director Stock Option Agreement under 1989 Incentive and Nonqualified Stock Option Plan as amended and restated effective January 22, 1991 (Exhibit 10(d)(2), Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-5468). *10.4 -- 1995 Long-Term Incentive Plan (Exhibit 4(c), Registration Statement on Form S-8 filed May 22, 1996, File No. 333-04233). *10.5 -- 1998 Long-Term Incentive Plan (Exhibit 10.5, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792).
71 73 *10.6 -- Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated February 1, 1996 (Exhibit 10(f)(1), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.7 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated effective February 1, 1999 (Exhibit 10.7, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.8 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated effective February 1, 2000. *10.9 -- Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated February 1, 1996 (Exhibit 10(f)(2), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.10 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated effective February 1, 1999 (Exhibit 10.9, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.11 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated effective February 1, 2000. *10.12 -- Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated February 1, 1996 (Exhibit 10(f)(3), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.13 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated effective February 1, 1999 (Exhibit 10.11, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.14 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated effective February 1, 2000. *10.15 -- Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated February 1, 1996 (Exhibit 10(f)(4), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.16 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated effective February 1, 1999 (Exhibit 10.12, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.17 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated effective February 1, 2000. *10.18 -- Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, Jr., dated February 1, 1996 (Exhibit 10(f)(5), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.19 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, Jr., dated effective February 1, 1999 (Exhibit 10.15, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792).
72 74 10.20 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, dated effective February 1, 2000. *10.21 -- Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated February 1, 1996 (Exhibit 10(f)(6), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.22 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated effective February 1, 1999 (Exhibit 10.17, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.23 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated effective February 1, 2000. *10.24 -- Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated as of February 1, 1998 (Exhibit 10(c)(7)(i), Annual Report on Form 10-K for the year ended December 31, 1997, File No. 001-7792). *10.25 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated effective February 1, 1999 (Exhibit 10.19, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.26 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated effective February 1, 2000. *10.27 -- Executive Employment Agreement by and between Pogo Producing Company and David R. Beathard, dated as of February 1, 1999 (Exhibit 10.20, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.28 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and David R. Beathard, dated effective February 1, 2000. *10.29 -- Executive Employment Agreement by and between Pogo Producing Company and Stephen R. Brunner, dated as of February 1, 1999 (Exhibit 10.21, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.30 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Stephen R. Brunner, dated effective February 1, 2000. *10.31 -- Executive Employment Agreement by and between Pogo Producing Company and J. D. McGregor, dated as of February 1, 1999 (Exhibit 10.22, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.32 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and J. D. McGregor, dated effective February 1, 2000. *10.33 -- Executive Employment Agreement by and between Pogo Producing Company and Gerald A. Morton, dated as of February 1, 1999 (Exhibit 10.23, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.34 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Gerald A. Morton, dated effective February 1, 2000. 10.35 -- Executive Employment Agreement by and between Pogo Producing Company and James P. Ulm, II, dated as of February 1, 2000.
73 75 *10.36 -- Excess Benefits Letter Agreement by and between Pogo Producing Company and Kenneth R. Good, dated March 2, 1995 (Exhibit 10(g)(1), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.37 -- Excess Benefits Letter Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated March 2, 1995 (Exhibit 10(g)(2), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.38 -- Amended and Restated Bareboat Charter Agreement by and between Tantawan Services, L.L.C. and Tantawan Production B.V., dated as of February 9,1996 (Exhibit 10.26, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). *10.39 -- Bareboat Charter Agreement by and between Thaipo Limited, Thai Romo Limited, Palang Sophon Limited, B8/32 Partners Limited and Watertight Shipping B.V. dated as of August 24, 1998 (Exhibit 10.27, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). *10.40 -- Gas Sales Agreement dated November 7, 1995, among The Petroleum Authority of Thailand, Thaipo, Limited, Thai Romo Ltd. and The Sophonpanich Co., Ltd. (Exhibit 10(k), Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 001-7792). *10.41 -- The First Amendment to the Gas Sales Agreement dated November 12, 1997, among The Petroleum Authority of Thailand, B8/32 Partners Limited, Thaipo, Limited, Thai Romo Limited and Palang Sophon Limited (Exhibit 10(g)(ii), Annual Report on Form 10-K for the year ended December 31, 1998, File No. 001-7792). *21 -- List of Subsidiaries of Pogo Producing Company (Exhibit 21, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 23.1 -- Consent of Independent Public Accountants. 23.2 -- Consent of Independent Petroleum Engineers. 24 -- Powers of Attorney from each Director of Pogo Producing Company whose signature is affixed to this Form 10-K for the year ended December 31, 1999. 27 -- Financial Data Schedule.
- --------------- * Asterisk indicates exhibits incorporated by reference as shown. (b) Reports on Form 8-K None 74 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) By: /s/ PAUL G. VAN WAGENEN ---------------------------------- Paul G. Van Wagenen Chairman of the Board, President and Chief Executive Officer Date: March 17, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 17, 2000.
SIGNATURES TITLE ---------- ----- /s/ PAUL G. VAN WAGENEN Principal Executive Officer and Director - ----------------------------------------------------- Paul G. Van Wagenen Chairman of the Board, President and Chief Executive Officer /s/ JAMES P. ULM, II Principal Financial Officer - ----------------------------------------------------- James P. Ulm, II Vice President and Chief Financial Officer /s/ THOMAS E. HART Principal Accounting Officer - ----------------------------------------------------- Thomas E. Hart Vice President and Chief Accounting Officer * Director - ----------------------------------------------------- Jerry M. Armstrong * Director - ----------------------------------------------------- Tobin Armstrong * Director - ----------------------------------------------------- Jack S. Blanton * Director - ----------------------------------------------------- W. M. Brumley, Jr. * Director - ----------------------------------------------------- Robert H. Campbell * Director - ----------------------------------------------------- William L. Fisher * Director - ----------------------------------------------------- Gerrit W. Gong
75 77
SIGNATURES TITLE ---------- ----- * Director - ----------------------------------------------------- J. Stuart Hunt * Director - ----------------------------------------------------- Frederick A. Klingenstein * Director - ----------------------------------------------------- Jack A. Vickers * Director - ----------------------------------------------------- Stephen A. Wells
*By: /s/ THOMAS E. HART ------------------------------- Thomas E. Hart Attorney-in-Fact 76 78 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- *3.1 -- Restated Certificate of Incorporation of Pogo Producing Company (Exhibit 3(a), Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-7792). *3.2 -- Certificate of Designation, Preferences and Rights of Preferred Stock of Pogo Producing Company, dated March 25, 1987 (Exhibit 3(a)(1), Annual Report on Form 10-K for the year ended December 31, 1987, File No. 0-5468). *3.3 -- Bylaws of Pogo Producing Company, as amended and restated through January 27, 1998 (Exhibit 3(b), Annual Report on Form 10-K for the year ended December 31, 1998, File No. 1-7792). *4.1 -- 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 (Exhibit 4(a), Quarterly Report on Form 10-Q for the quarter ended, June 30, 1997, File No. 1-7792). *4.2 -- First Amendment dated as of December 21, 1998, 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 (Exhibit 4.1, Amendment No. 1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-7792). *4.3 -- Second Amendment dated July 16, 1999, 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 (Exhibit 4.1, Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 1-7792). *4.4 -- Indenture dated as of June 15, 1996 to Fleet National Bank, as Trustee (Exhibit 4(f), Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 001-7792). *4.5 -- Indenture dated as of May 15, 1997 between Pogo Producing Company and Fleet National Bank (now State Street Bank & Trust Company as successor in interest under the Indenture) as Trustee (Exhibit 4.3, Registration Statement on Form S-4, filed July 2, 1997, File No. 333-30613). *4.6 -- Indenture dated as of January 15,1999 between Pogo Producing Company and State Street Bank & Trust Company as Trustee (Exhibit 4.2, Registration Statement on Form S-4, filed February 10, 1999, File No. 333-72129). *4.7 -- Amended and Restated Declaration of Trust of Pogo Trust I dated as of June 2, 1999 (Exhibit 4.1, Current Report on Form 8-K, filed June 2, 1999, File No. 1-7792). *4.8 -- Junior Subordinated Indenture dated as of June 1, 1999, between Pogo Producing Company and Wilmington Trust Company, as Trustee (Exhibit 4.3, Current Report on Form 8-K, filed June 2, 1999, File No. 1-7792). *4.9 -- Supplemental Indenture No. 1 dated as of June 1, 1999 to Junior Subordinated Indenture dated as of June 1, 1999, between Pogo Producing Company and Wilmington Trust Company, as Trustee (Exhibit 4.4, Current Report on Form 8-K, filed June 2, 1999, File No. 1-7792). *4.10 -- Rights Agreement dated as of April 26, 1994 between Pogo Producing Company and Harris Trust Company of New York, as Rights Agent (Exhibit 4, Current Report on Form 8-K filed April 26, 1994, File No. 1-7792).
79
EXHIBIT NUMBER DESCRIPTION ------- ----------- *4.11 -- Certificate of Designations of Series A Junior Participating Preferred Stock of Pogo Producing Company dated April 26, 1994 (Exhibit 4(d), Registration Statement on Form S-8 filed August 9, 1994, File No. 33-54969). Other instruments defining the rights of holders of long-term debt of Pogo Producing Company and its subsidiaries are not being filed because the total amount of securities authorized by such instruments does not exceed 10% of the total assets of Pogo Producing Company and its subsidiaries on a consolidated basis as of December 31, 1999. Pogo Producing Company hereby agrees to furnish to the Commission a copy of any such debt instrument upon request. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (COMPRISING EXHIBITS 10.1 THROUGH 10.37, INCLUSIVE). *10.1 -- 1989 Incentive and Nonqualified Stock Option Plan of Pogo Producing Company, as amended and restated effective January 25, 1994 (Exhibit 99, Definitive Proxy Statement on Schedule 14A, filed March 22, 1994, File No. 1-7792). *10.2 -- Form of Stock Option Agreement under 1989 Incentive and Nonqualified Stock Option Plan, as amended and restated effective January 22, 1991 (Exhibit 10(d)(1), Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-5468). *10.3 -- Form of Director Stock Option Agreement under 1989 Incentive and Nonqualified Stock Option Plan as amended and restated effective January 22, 1991 (Exhibit 10(d)(2), Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-5468). *10.4 -- 1995 Long-Term Incentive Plan (Exhibit 4(c), Registration Statement on Form S-8 filed May 22, 1996, File No. 333-04233). *10.5 -- 1998 Long-Term Incentive Plan (Exhibit 10.5, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). *10.6 -- Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated February 1, 1996 (Exhibit 10(f)(1), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.7 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated effective February 1, 1999 (Exhibit 10.7, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.8 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Stuart P. Burbach, dated effective February 1, 2000. *10.9 -- Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated February 1, 1996 (Exhibit 10(f)(2), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.10 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated effective February 1, 1999 (Exhibit 10.9, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.11 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Jerry A. Cooper, dated effective February 1, 2000.
80
EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.12 -- Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated February 1, 1996 (Exhibit 10(f)(3), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.13 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated effective February 1, 1999 (Exhibit 10.11, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.14 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Kenneth R. Good, dated effective February 1, 2000. *10.15 -- Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated February 1, 1996 (Exhibit 10(f)(4), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.16 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated effective February 1, 1999 (Exhibit 10.12, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.17 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and R. Phillip Laney, dated effective February 1, 2000. *10.18 -- Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, Jr., dated February 1, 1996 (Exhibit 10(f)(5), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.19 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, Jr., dated effective February 1, 1999 (Exhibit 10.15, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.20 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and John O. McCoy, dated effective February 1, 2000. *10.21 -- Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated February 1, 1996 (Exhibit 10(f)(6), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.22 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated effective February 1, 1999 (Exhibit 10.17, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.23 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated effective February 1, 2000. *10.24 -- Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated as of February 1, 1998 (Exhibit 10(c)(7)(i), Annual Report on Form 10-K for the year ended December 31, 1997, File No. 001-7792). *10.25 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated effective February 1, 1999 (Exhibit 10.19, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792).
81
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.26 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Bruce E. Archinal, dated effective February 1, 2000. *10.27 -- Executive Employment Agreement by and between Pogo Producing Company and David R. Beathard, dated as of February 1, 1999 (Exhibit 10.20, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.28 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and David R. Beathard, dated effective February 1, 2000. *10.29 -- Executive Employment Agreement by and between Pogo Producing Company and Stephen R. Brunner, dated as of February 1, 1999 (Exhibit 10.21, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.30 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Stephen R. Brunner, dated effective February 1, 2000. *10.31 -- Executive Employment Agreement by and between Pogo Producing Company and J. D. McGregor, dated as of February 1, 1999 (Exhibit 10.22, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.32 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and J. D. McGregor, dated effective February 1, 2000. *10.33 -- Executive Employment Agreement by and between Pogo Producing Company and Gerald A. Morton, dated as of February 1, 1999 (Exhibit 10.23, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 10.34 -- Extension Agreement to Continue Executive Employment Agreement by and between Pogo Producing Company and Gerald A. Morton, dated effective February 1, 2000. 10.35 -- Executive Employment Agreement by and between Pogo Producing Company and James P. Ulm, II, dated as of February 1, 2000. *10.36 -- Excess Benefits Letter Agreement by and between Pogo Producing Company and Kenneth R. Good, dated March 2, 1995 (Exhibit 10(g)(1), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.37 -- Excess Benefits Letter Agreement by and between Pogo Producing Company and Paul G. Van Wagenen, dated March 2, 1995 (Exhibit 10(g)(2), Annual Report on Form 10-K for the year ended December 31, 1995, File No. 001-7792). *10.38 -- Amended and Restated Bareboat Charter Agreement by and between Tantawan Services, L.L.C. and Tantawan Production B.V., dated as of February 9,1996 (Exhibit 10.26, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). *10.39 -- Bareboat Charter Agreement by and between Thaipo Limited, Thai Romo Limited, Palang Sophon Limited, B8/32 Partners Limited and Watertight Shipping B.V. dated as of August 24, 1998 (Exhibit 10.27, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). *10.40 -- Gas Sales Agreement dated November 7, 1995, among The Petroleum Authority of Thailand, Thaipo, Limited, Thai Romo Ltd. and The Sophonpanich Co., Ltd. (Exhibit 10(k), Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No. 001-7792).
82
EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.41 -- The First Amendment to the Gas Sales Agreement dated November 12, 1997, among The Petroleum Authority of Thailand, B8/32 Partners Limited, Thaipo, Limited, Thai Romo Limited and Palang Sophon Limited (Exhibit 10(g)(ii), Annual Report on Form 10-K for the year ended December 31, 1998, File No. 001-7792). *21 -- List of Subsidiaries of Pogo Producing Company (Exhibit 21, Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-7792). 23.1 -- Consent of Independent Public Accountants. 23.2 -- Consent of Independent Petroleum Engineers. 24 -- Powers of Attorney from each Director of Pogo Producing Company whose signature is affixed to this Form 10-K for the year ended December 31, 1999. 27 -- Financial Data Schedule.
- --------------- * Asterisk indicates exhibits incorporated by reference as shown. EX-10.8 2 EXTENSION AGREEMENT - STUART P. BARBACH 1 EXHIBIT 10.8 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN STUART P. BURBACH ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ----------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ----------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ STUART P. BURBACH --------------------- Stuart P. Burbach EX-10.11 3 EXTENSION AGREEMENT - JERRY A. COOPER 1 EXHIBIT 10.11 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN JERRY A. COOPER ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ---------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ----------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ JERRY A. COOPER -------------------------------- Jerry A. Cooper EX-10.14 4 EXTENSION AGREEMENT - KENNETH R. GOOD 1 EXHIBIT 10.14 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN KENNETH R. GOOD ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. -------------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ------------------------------------ Assistant Corporate Secretary EMPLOYEE: /s/ KENNETH R. GOOD ----------------------------------- Kenneth R. Good EX-10.17 5 EXTENSION AGREEMENT - R. PHILLIP LANEY 1 EXHIBIT 10.17 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN R. PHILLIP LANEY ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ----------------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - -------------------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ R. PHILLIP LANEY -------------------------------------- R. Phillip Laney EX-10.20 6 EXTENSION AGREEMENT - JOHN O. MCCOY 1 EXHIBIT 10.20 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN JOHN O. McCOY, JR. ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ PAUL G. VAN WAGENEN ----------------------------------- Chairman, President and Chief Executive Officer ATTEST: /s/ JOE ANN KINGDON - ------------------------------------ Assistant Corporate Secretary EMPLOYEE: /s/ JOHN O. McCOY, JR. --------------------------------------- John O. McCoy, Jr. EX-10.23 7 EXTENSION AGREEMENT - PAUL G. VAN WAGENEN 1 EXHIBIT 10.23 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN PAUL G. VAN WAGENEN ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1996; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1996 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1996, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ---------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ----------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ PAUL G. VAN WAGENEN ----------------------- Paul G. Van Wagenen EX-10.26 8 EXTENSION AGREEMENT - BRUCE E. ARCHINAL 1 EXHIBIT 10.26 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN BRUCE E. ARCHINAL ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1998; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1998 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1998, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ---------------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - -------------------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ BRUCE E. ARCHINAL ------------------------------------- Bruce E. Archinal EX-10.28 9 EXTENSION AGREEMENT - DAVID R. BEATHARD 1 EXHIBIT 10.28 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN DAVID R. BEATHARD ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1999; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1999 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1999, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ----------------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - -------------------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ DAVID R. BEATHARD -------------------------------------- David R. Beathard EX-10.30 10 EXTENSION AGREEMENT - STEPHEN R. BRUNNER 1 EXHIBIT 10.30 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN STEPHEN R. BRUNNER ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1999; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1999 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1999, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ------------------------------------ Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - --------------------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ STEPHEN R. BRUNNER --------------------------------------- Stephen R. Brunner EX-10.32 11 EXTENSION AGREEMENT - J.D. MCGREGOR 1 EXHIBIT 10.32 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN J. DON MCGREGOR ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1999; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1999 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1999, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ------------------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ----------------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ J. DON McGREGOR ------------------------------------- J. Don McGregor EX-10.34 12 EXTENSION AGREEMENT - GERALD A. MORTON 1 EXHIBIT 10.34 EXTENSION AGREEMENT TO CONTINUE EMPLOYMENT AGREEMENT BETWEEN GERALD A. MORTON ("EXECUTIVE") AND POGO PRODUCING COMPANY, A DELAWARE CORPORATION ("COMPANY"), DATED EFFECTIVE FEBRUARY 1, 2000 WHEREAS, Executive and Company are parties to an "Employment Agreement" bearing an original "Effective Date" of February 1, 1999; and WHEREAS, February 1, 2000, (even date herewith) is hereby deemed to be the "Renewal Date" in that Employment Agreement; and WHEREAS, Executive and Company each wish to extend said Employment Agreement for an additional one-year period so as to terminate (unless further extended) two years thereafter, (to-wit January 31, 2002); and WHEREAS, Company desires to retain the services of Executive for the benefit of Company and its shareholders, and desires to induce Executive to remain in its employ for that extended time period; and WHEREAS, Executive has agreed to continue to serve as an employee of Company for the period specified herein from and after the date of this Extension Agreement; and WHEREAS, Company and Executive desire to enter into this Extension Agreement in order to formally secure for Company the benefit of the experience and abilities of Executive, and to set forth the agreements and understandings of Company and Executive; and WHEREAS, Company has advised Executive that execution and performance of this Extension Agreement by Company has been duly authorized and approved by all requisite corporate action on the part of the Company. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements herein contained, and in consideration of the sum of $10 paid by Company to Executive, receipt whereof is hereby acknowledged by Executive, Executive and Company do hereby agree as follows: 1. The Employment Agreement between Executive and Company bearing an "Effective Date" of February 1, 1999 and a "Renewal Date" which is deemed herein to be February 1, 2000, is hereby extended for an additional one-year period commencing February 1, 2001 and ending January 31, 2002, unless such employment period is hereafter further extended for an additional period by both Executive and Company. 2. All provisions of the Employment Agreement between Executive and Company dated as of February 1, 1999, and as it is herein amended, are continued in full force and effect without change as if the Employment Agreement had been initially effective as of February 1, 2000. POGO PRODUCING COMPANY By: /s/ JOHN O. McCOY, JR. ---------------------------- Senior Vice President and Chief Administrative Officer ATTEST: /s/ JOE ANN KINGDON - ----------------------------- Assistant Corporate Secretary EMPLOYEE: /s/ GERALD A. MORTON -------------------------------- Gerald A. Morton EX-10.35 13 EXECUTIVE EMPLOYMENT AGMT. - JAMES P. ULM, II 1 EXHIBIT 10.35 EXECUTIVE EMPLOYMENT AGREEMENT AGREEMENT by and between POGO PRODUCING COMPANY, a Delaware corporation (the "Company") and James P. Ulm, II (the "Executive"), dated as of the 1st day of February, 2000. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, and to provide the Executive with compensation and benefits arrangements which are competitive with those of other corporations and which ensure that the compensation and benefits expectations of the Executive will be satisfied. The Board also believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to insure the continuation of favorable compensation and benefits upon a Change of Control. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS; 1. Certain Definitions. (a) The "Effective Date" shall mean the date of this Agreement. (b) The "Employment Period" shall mean the period commencing on the Effective Date and ending on the second anniversary of such date; provided, however, that on each annual anniversary of the Effective Date (the "Renewal Date"), the Employment Period shall be reviewed, to determine whether, in the discretion of the Company, it should be extended for one additional year so as to terminate two years from such Renewal Date. Any such one year extension shall be effective only if, prior to the Renewal Date, the Company shall give notice to the Executive that the Employment Period shall be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"). 2 Notwithstanding anything in this Agreement to the contrary, the following shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by State Farm Mutual Automobile Insurance Company and certain affiliates ("State Farm") or Klingenstein, Fields & Co., L.P. ("Klingenstein") ("Specified Stockholders") of beneficial ownership of Outstanding Company Voting Securities resulting in an accumulation of said securities up to and including the following amounts: A. In the case of State Farm, 30% of Outstanding Voting Securities, and B. In the case of Klingenstein, 30% of Outstanding Voting Securities, or (v) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 2 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who where the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, -2- 3 immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more, respectively, of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person [excluding the Company, any Specified Stockholder, any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be] beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation where members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 3. Employment Agreement. The Company hereby agrees to continue the Executive in its employ in accordance with the terms and provisions of this Agreement, for the Employment Period. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the later of the Effective Date, the most recent Renewal Date or a Change of Control, if any, (the "Applicable Date") and (B) the Executive's services shall be performed at the -3- 4 location where the Executive was employed immediately preceding the Applicable Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement; provided Executive may not serve on the board of a publicly traded for profit corporation or similar body of a publicly traded for profit business organized in other than corporate form without the consent of the Compensation Committee of the Board of Directors of the Company. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Applicable Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Applicable Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Applicable Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and may be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded at the discretion of the Company for any fiscal year ending during the Employment Period, a bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, equal to the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Applicable Date. -4- 5 (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other executives of the Company and its affiliated companies. Such plans, practices, policies and programs shall provide the Executive with benefits which are equal, in the aggregate, to the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Applicable Date. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Applicable Date. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by -5- 6 the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material violation by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such violation is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such violation or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason; Window Period; Other Terminations. The Executive's employment may be terminated (i) during the Employment Period by the Executive for Good Reason, (ii) during the Window Period by the Executive without any reason or (iii) by Executive other than (A) for Good Reason or (B) during a Window Period. For purposes of this Agreement, the "Window Period" shall mean the 180-day period immediately following the date a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or cessation of status as an officer (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "date a Change of Control occurs" shall mean the date immediately prior to the date of such termination of employment or cessation of status as an officer. For purposes of this Agreement, "Good Reason" shall mean (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities excluding for this purpose an insubstantial or inadvertent action which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an insubstantial or inadvertent failure which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) hereof; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or -6- 7 (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive without any reason during the Window Period or for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's right hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive during the Window Period or for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be, and (iv) if the Executive's employment is terminated by the Executive other than for Good Reason or during a Window Period, the date of the receipt of the Notice of Termination or any later date specified therein. 6. Obligations of the Company upon Termination. (a) Good Reason or during the Window Period; Other than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment either for Good Reason or without any reason during the Window Period: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid and (2) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and -7- 8 B. the amount (such amount shall be hereinafter referred to as the "Severance Amount") equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) any bonus described in Section 4(b)(ii) paid or payable in respect of the most recently completed fiscal year of the Company; and, provided further, that such amount shall be reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code")) of any other amount of severance relating to salary or bonus continuation to be received by the Executive upon termination of employment of the Executive under any severance plan, severance policy or severance arrangement of the Company; and C. a separate lump sum supplemental retirement benefit equal to the difference between (1) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Employees Retirement Plan for Pogo Producing Company (or any successor plan thereto) (the "Retirement Plan") during the 90-day period immediately preceding the Applicable Date) of the benefit payable under the Retirement Plan and any supplemental and/or excess retirement plan of the Company and its affiliated companies providing benefits for the Executive (the "SERP") which the Executive would receive if the Executive's employment continued at the compensation level provided for in Sections 4(b)(i) and 4(b)(ii) of this Agreement for the remainder of the Employment Period, assuming for this purpose that all accrued benefits are fully vested and that benefit accrual formulas are no less advantageous to the Executive than those in effect during the 90-day period immediately preceding the Applicable Date, and (2) the actuarial equivalent (utilizing for this purpose the actuarial assumptions utilized with respect to the Retirement Plan during the 90-day period immediately preceding the Applicable Date) of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP (the amount of such benefit shall be hereinafter referred to as the "Supplemental Retirement Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to -8- 9 be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other executives and their families during the 90-day period immediately preceding the Applicable Date (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the sum of the Severance Amount and the Supplemental Retirement Amount. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the greater of (A) the sum of the Severance Amount and the Supplemental Retirement Amount and (B) the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any long term disability plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (B) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; By Executive Other than for Good Reason And Other Than During a Window Period. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination either for Good Reason or without any reason during the Window Period, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Except as provided in Section 6(a) (ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its -9- 10 affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. If there is any contest by the Company concerning the Payments or benefits to be provided to the Executive hereunder whether through litigation, arbitration or mediation, or with respect to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, and the Executive is the prevailing party, the Company agrees to pay promptly upon conclusion of the contest all legal fees and expenses which the Executive may reasonably have incurred. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that Good Reason did not exist, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) hereof as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking (which need not be secured) by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed -10- 11 with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, -11- 12 (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of -12- 13 the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be an unfunded obligation of the Company. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ------------------- ------------------- ------------------- -13- 14 If to the Company: Pogo Producing Company P.O. Box 2504 Houston, Texas 77252-2504 Attention: Senior Vice President and Chief Administrative Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ JAMES P. ULM, II -------------------------------- James P. Ulm, II POGO PRODUCING COMPANY By /s/ PAUL G. VAN WAGENEN ----------------------------- Paul G. Van Wagenen -14- EX-23.1 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 25, 2000 included in this Annual Report on Form 10-K, into Pogo Producing Company's previously filed Registration Statement File Nos. 33-54969, 333-04233, 333-72129, 333-75105, 333-75105-01, 333-75105-02, 333-74861. ARTHUR ANDERSEN LLP Houston, Texas March 17, 2000 EX-23.2 15 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS As independent petroleum engineers, we hereby consent to the use of our name in the Annual Report on Form 10-K for the year ended December 31, 1999. We further consent to the inclusion of our estimate of reserves and present value of future net reserves in such Annual Report. /s/ RYDER SCOTT COMPANY RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas March 17, 2000 EX-24 16 POWERS OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY I JERRY M. ARMSTRONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ JERRY M. ARMSTRONG ---------------------------------- Jerry M. Armstrong 2 POWER OF ATTORNEY I TOBIN ARMSTRONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ TOBIN ARMSTRONG -------------------------------- Tobin Armstrong 3 POWER OF ATTORNEY I JACK S. BLANTON, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25 day of January, 2000. /s/ JACK S. BLANTON -------------------------------- Jack S. Blanton 4 POWER OF ATTORNEY I W. M. BRUMLEY, JR., in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ W. M. BRUMLEY, JR. -------------------------------- W. M. Brumley, Jr. 5 POWER OF ATTORNEY I ROBERT H. CAMPBELL, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ ROBERT H. CAMPBELL -------------------------------- Robert H. Campbell 6 POWER OF ATTORNEY I WILLIAM L. FISHER, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25 day of January, 2000. /s/ WILLIAM L. FISHER -------------------------------- William L. Fisher 7 POWER OF ATTORNEY I GERRIT W. GONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25 day of January, 2000. /s/ GERRIT W. GONG -------------------------------- Gerrit W. Gong 8 POWER OF ATTORNEY I J. STUART HUNT, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ J. STUART HUNT -------------------------------- J. Stuart Hunt 9 POWER OF ATTORNEY I FREDERICK A. KLINGENSTEIN, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ FREDERICK A. KLINGENSTEIN -------------------------------- Frederick A. Klingenstein 10 POWER OF ATTORNEY I JACK A. VICKERS, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ JACK A. VICKERS -------------------------------- Jack A. Vickers 11 POWER OF ATTORNEY I STEPHEN A. WELLS, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1999, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the forgoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 25th day of January, 2000. /s/ STEPHEN A. WELLS -------------------------------- Stephen A. Wells EX-27 17 FINANCIAL DATA SCHEDULE
5 This Financial Data Schedule contains summary financial information extracted for the Consolidated Financial Statements (Unaudited) of Pogo Producing Company, including the Consolidated Balance Sheets of December 31, 1999 and the Consolidated Statements of Income for the twelve months ended December 31, 1999, and is qualified in its entirety by reference to such Consolidated Financial Statements. 1,000 12-MOS DEC-31-1999 DEC-31-1999 6,267 0 73,191 0 17,561 99,389 1,802,765 1,015,405 948,193 95,229 375,000 144,751 0 40,279 228,233 948,193 237,658 275,116 76,417 76,417 144,707 0 35,874 31,717 9,583 22,134 0 0 0 22,134 0.55 0.55 This amount is not disclosed on the face of the Consolidated Financial Statements due to lack of materiality, but is included as a common-asset in Accounts receivable. Does not include Gains or losses on sales. Includes Lease operating and Pipeline operating and natural gas purchases 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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