-----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, HVL+EOFiO6N6LXbFlBj2iXlbLOcqJSjhTCeBJwIQEzy/0zgB0H0JU8iHHR7qU/LH S9oYjOpD32aAYxIiivBu0A== 0001047469-98-045079.txt : 19981228 0001047469-98-045079.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-045079 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POGO PRODUCING CO CENTRAL INDEX KEY: 0000230463 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741659398 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-07792 FILM NUMBER: 98775654 BUSINESS ADDRESS: STREET 1: 5 GREENWAY PLAZA STE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 BUSINESS PHONE: 7132975017 MAIL ADDRESS: STREET 1: 5 GREENWAY PLAZA SUITE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL OFFSHORE GAS OPERATORS INC /TX/ DATE OF NAME CHANGE: 19600201 10-Q/A 1 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 /X/ Quarterly report pursuant to section 13 or 15[d] of the Securities Exchange Act of 1934 For the quarterly period ended _________ September 30, 1998 _________ or / / Transition report pursuant to section 13 or 15[d] of the Securities Exchange Act of 1934 For the transition period from . . . . . . to . . . . . . Commission file number 1-7792 POGO PRODUCING COMPANY [ Exact Name of Registrant as Specified in Its Charter ] DELAWARE 74-1659398 [State or Other Jurisdiction of [I.R.S. Employer Incorporation or Organization] Identification No.] 5 GREENWAY PLAZA, SUITE 2700 HOUSTON, TEXAS 77046-0504 [Address of principal executive offices] [Zip Code] [713] 297-5000 - -------------------------------------------------------------------------------- [Registrant's Telephone Number, Including Area Code] Not Applicable [Former Name, Former Address and Former Fiscal Year, if - -------------------------------------------------------------------------------- Changed Since Last Report] Indicate by check mark whether the registrant: [1] has filed all reports required to be filed by Section 13 or 15 [d] of the Securities Exchange Act of 1934 during the preceding 12 months [or for such shorter period that the registrant was required to file such reports], and [2] has been subject to such filing requirement for the past 90 days: Yes X No . . . Registrant's number of common shares outstanding as of December 22, 1998: 40,133,811 PART I. FINANCIAL INFORMATION POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------ 1998 1997 1998 1997 --------- --------- ---------- ----------- (Expressed in thousands, except per share amounts) REVENUES: Oil and gas $ 45,287 $ 77,017 $ 158,836 $ 212,639 Pipeline and other 1,055 301 842 1,274 Gains (losses) on sales (163) (141) (106) 1,318 --------- --------- ---------- ----------- Total 46,179 77,177 159,572 215,231 --------- --------- ---------- ----------- OPERATING COSTS AND EXPENSES: Lease operating 18,612 16,628 51,196 45,116 General and administrative 8,556 4,789 19,843 15,746 Exploration 1,426 1,870 7,260 7,823 Dry hole and impairment 5,128 1,919 7,906 6,926 Depreciation, depletion and amortization 24,921 29,112 83,739 75,989 --------- --------- ---------- ----------- Total 58,643 54,318 169,944 151,600 --------- --------- ---------- ----------- OPERATING INCOME (LOSS) (12,464) 22,859 (10,372) 63,631 --------- --------- ---------- ----------- INTEREST: Charges (6,236) (5,940) (17,513) (15,771) Income 284 142 534 271 Capitalized 2,476 833 6,540 3,463 FOREIGN CURRENCY TRANSACTION GAIN (LOSS) 760 (6,522) 953 (6,522) --------- --------- ---------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (15,180) 11,372 (19,858) 45,072 INCOME TAX BENEFIT (EXPENSE) 6,858 (3,986) 9,052 (15,694) --------- --------- ---------- ----------- NET INCOME (LOSS) (8,322) 7,386 (10,806) 29,378 --------- --------- ---------- ----------- --------- --------- ---------- ----------- EARNINGS (LOSS) PER COMMON SHARE Basic $ (0.22) $ 0.22 $ (0.29) $ 0.88 --------- --------- ---------- ----------- --------- --------- ---------- ----------- Diluted $ (0.22) $ 0.21 $ (0.29) $ 0.83 --------- --------- ---------- ----------- --------- --------- ---------- ----------- DIVIDENDS PER COMMON SHARE $ 0.03 $ 0.03 $ 0.09 $ 0.09 --------- --------- ---------- ----------- --------- --------- ---------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND POTENTIAL COMMON SHARES OUTSTANDING: Basic 38,781 33,403 37,171 33,374 Diluted 38,781 38,091 37,171 38,064
See accompanying notes to consolidated financial statements. - 1 - POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
September 30, December 31, 1998 1997 ------------ ------------ (Expressed in thousands except share amounts) ASSETS CURRENT ASSETS: Cash and cash investments $ 17,422 $ 19,646 Accounts receivable 23,428 39,540 Other receivables 33,237 46,951 Inventory - Product 3,511 713 Inventories - Tubulars 7,121 8,334 Other 3,429 4,087 ----------- ----------- Total current assets 88,148 119,271 ----------- ----------- PROPERTY AND EQUIPMENT: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized 1,468,907 1,321,817 Unevaluated properties and properties under development, not being amortized 170,271 110,231 Pipelines, at cost 6,242 1,346 Other, at cost 11,516 11,273 ----------- ----------- Total property and equipment 1,656,936 1,444,667 ----------- ----------- Less--accumulated depreciation, depletion and amortization Oil and gas 956,873 911,359 Pipelines 1,179 1,103 Other 5,175 4,901 ----------- ----------- Total accumulated depreciation, depletion and amortization 963,227 917,363 ----------- ----------- Net property and equipment 693,709 527,304 ----------- ----------- DEBT ISSUE EXPENSES 5,251 7,200 OTHER 36,242 22,842 ----------- ----------- $ 823,350 $ 676,617 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - operating activities $ 11,467 $ 13,639 Accounts payable - investing activities 50,270 90,833 Accrued interest payable 6,304 3,130 Accrued payroll and related benefits 3,071 1,938 Other - 632 ----------- ----------- Total current liabilities 71,112 110,172 LONG-TERM DEBT 381,854 348,179 DEFERRED FEDERAL INCOME TAX 68,721 57,502 DEFERRED CREDITS 17,839 14,658 ----------- ----------- Total liabilities 539,526 530,511 ----------- ----------- SHAREHOLDERS' EQUITY: Preferred stock, $1 par; 2,000,000 shares authorized - - Common stock, $1 par; 100,000,000 shares authorized, 40,119,250 and 33,552,702 shares issued, respectively 40,119 33,553 Additional capital 290,133 144,848 Retained earnings (deficit) (46,104) (31,971) Treasury stock and other, at cost (324) (324) ----------- ----------- Total shareholders' equity 283,824 146,106 ----------- ----------- $ 823,350 $ 676,617 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. - 2 - POGO PRODUCING COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ---------------------------- 1998 1997 ----------- ----------- (Expressed in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 177,750 $ 197,367 Operating, exploration, and general and administrative expenses paid (88,263) (64,549) Interest paid (15,974) (12,309) Federal income taxes received - 7,037 Federal income taxes paid - (13,500) Other (3,047) (1,064) ----------- ----------- Net cash provided by operating activities 70,466 112,982 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (135,964) (163,203) Purchase of reserves (2,961) (28,617) Proceeds from the sale of properties 350 100 ----------- ----------- Net cash used in investing activities (138,575) (191,720) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of new debt - 100,000 Borrowings under senior debt agreements 340,854 408,000 Payments under senior debt agreements (257,500) (414,000) Payments of production payment (15,246) - Payments of cash dividends on common stock (3,327) (3,004) Payment of debt issue expenses - (3,144) Proceeds from exercise of stock options 998 3,800 Other (621) - ----------- ----------- Net cash provided by financing activities 65,158 91,652 ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 727 (3,524) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS (2,224) 9,390 CASH AND CASH INVESTMENTS AT THE BEGINNING OF THE YEAR 19,646 3,054 ----------- ----------- CASH AND CASH INVESTMENTS AT THE END OF THE PERIOD $ 17,422 $ 12,444 ----------- ----------- ----------- ----------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income (loss) $ (10,806) $ 29,378 Adjustments to reconcile net income to net cash provided by operating activities - Foreign currency transaction (gain) loss (953) 6,522 (Gains) losses from the sales of properties 106 (1,318) Depreciation, depletion and amortization 83,739 75,989 Dry hole and impairment 7,906 6,926 Interest capitalized (6,540) (3,463) Deferred federal income taxes (9,389) 9,719 Change in operating assets and liabilities 6,403 (10,771) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 70,466 $ 112,982 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. - 3 - POGO PRODUCING COMPANY AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Unaudited)
Nine Months Ended September 30, ------------------------------------------------------ 1998 1997 ------------------------- ------------------------- Shares Amount Shares Amount ---------- ----------- ---------- ----------- (Expressed in thousands, except share amounts) COMMON STOCK: $1.00 par-100,000,000 shares authorized Balance at beginning of year 33,552,702 33,553 33,321,381 33,321 Conversion of 2004 Notes 3,879,726 3,880 1,396 1 Issued for common stock of acquired company 1,665,491 1,665 - - Issued for exchangeable convertible preferred stock of acquired company 699,273 699 - - Issued for convertible debt of acquired company 174,818 175 - - Stock options exercised 147,240 147 220,652 222 ---------- ----------- ---------- ----------- Issued at end of period 40,119,250 40,119 33,543,429 33,544 ---------- ----------- ---------- ----------- ADDITIONAL CAPITAL: Balance at beginning of year 144,848 139,337 Conversion of 2004 Notes 80,712 30 Issued for common stock of acquired company 38,818 - Issued for exchangeable convertible preferred stock of acquired company 19,301 - Issued for convertible debt of acquired company 4,825 - Cancellation of treasury shares (206) - Stock options exercised 1,835 5,320 ----------- ----------- Balance at end of period 290,133 144,687 ----------- ----------- RETAINED EARNINGS (DEFICIT): Balance at beginning of year (31,971) (65,075) Net income (loss) (10,806) 29,378 Dividends ($0.09 per common share) (3,327) (3,004) ----------- ----------- Balance at end of period (46,104) (38,701) ----------- ----------- TREASURY STOCK AND OTHER: Balance at beginning of year, as restated (15,575) (324) (15,575) (301) Acquisition of treasury shares of acquired company (9,615) (206) - - Cancellation of treasury shares of acquired company 9,615 206 - - Change in cumulative foreign currency translation loss and other - - - (23) ---------- ----------- ---------- ----------- Balance at end of period (15,575) (324) (15,575) (324) ---------- ----------- ---------- ----------- COMMON STOCK OUTSTANDING, AT THE END OF THE PERIOD 40,103,675 33,527,854 ---------- ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY $ 283,824 $ 139,206 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. - 4 - POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1) GENERAL INFORMATION - The consolidated financial statements included herein have been prepared by Pogo Producing Company (the "Company") without audit and include all adjustments (of a normal and recurring nature) which are, in the opinion of management, necessary for the fair presentation of interim results which are not necessarily indicative of results for the entire year. Certain prior year amounts have been reclassified to conform with current year presentation. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. (2) 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 through which Arch became a wholly owned subsidiary of the Company. The merger was initially accounted for as a pooling of interests which requires the financial results for all periods prior to the merger to be combined and restated as if the Company and Arch had always been combined. Consequently, the Company restated its consolidated financial statements for periods prior to the merger, including the third quarter and first nine months of 1997 and 1998, to reflect the combined results of both the Company and Arch. A report on Form 10-Q for the periods ended September 30, 1998 was filed on that basis. The Company has recently concluded that, as a result of the current environment of low crude oil and natural gas prices, the Company must maintain maximum flexibility to address its cash flow needs, including the option of selling certain of the Company's assets. Under the current application of accounting principles, such transactions would preclude the pooling of interest method of accounting and require that the Company account for the merger using the purchase method of accounting. The Company is filing this amended report on Form 10-Q for the periods ended September 30, 1998 to restate that report to reflect the change from the pooling method of accounting to the purchase method of accounting. The merger agreement provides for a fixed exchange ratio of one share of the Company's common stock for each 10.4 shares of Arch common stock. In addition, holders of Arch preferred stock received one share of the Company's common stock for each 1.04 shares of Arch preferred stock held. As a result, 2.5 million 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 2.5 million shares 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. Expenses related to the acquisition of approximately $2.3 million ($1.5 million after taxes) have been expensed in the quarter just ended. Under the purchase method of accounting for the acquisition, the Arch results of operations are included in the consolidated results of operations from August 17, 1998, the date of acquisition, through September 30, 1998. 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 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.
Nine Months Ended September 30, Year Ended ---------------------------------- December 31, 1998 1997 1997 ------------ ------------ ------------ Revenues $ 174,684 $ 287,318 $ 366,803 Net income (loss) $ (16,077) $ 30,820 $ 36,691 Earnings (loss) per share: Basic $ (0.41) $ 0.86 $ 1.02 Diluted $ (0.41) $ 0.82 $ 0.98
- 5 - POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (3) LONG-TERM DEBT - Long-term debt and the amount due within one year at September 30, 1998 and December 31, 1997, consists of the following (in thousands) :
September 30, December 31, 1998 1997 ------------- ------------ Senior debt - Bank revolving credit agreement LIBO Rate based loans, borrowings at September 30, 1998 and December 31, 1997 at average interest rates of 6.4% and 6.5%, respectively $154,000 $ 47,000 Uncommitted credit lines with banks, at an interest rate of 6.3% 2,000 - -------- -------- Total bank revolving credit agreement senior debt 156,000 47,000 Banker's acceptance loans, borrowings at an average interest rate of 6.1% 10,854 - -------- -------- Total senior debt 166,854 47,000 -------- -------- Subordinated debt - 8 3/4% Senior subordinated notes due 2007 ("2007 Notes") 100,000 100,000 5 1/2% Convertible subordinated notes due 2006 ("2006 Notes") 115,000 115,000 5 1/2% Convertible subordinated notes due 2004 ("2004 Notes") - 86,179 -------- -------- Total subordinated debt 215,000 301,179 -------- -------- Total debt 381,854 348,179 Amount due within one year - - -------- -------- Long-term debt $381,854 $348,179 -------- -------- -------- --------
Refer to Note 3 of Notes to Consolidated Financial Statements included in the Company's annual report on Form 10-K for the year ended December 31, 1997 for a further discussion of the bank revolving credit agreement, the Company's uncommitted credit lines, the 2007 Notes and the 2006 Notes. On February 12, 1998, the Company announced its intent to redeem the 2004 Notes on March 16, 1998 at 103.3% of their principal amount plus accrued interest. Holders of $86,084,000 principal amount of the 2004 Notes elected to convert their notes into 3,879,726 common shares at $22.188 per share plus $640 in cash for fractional shares. The value of the shares issued was credited to common stock and additional capital lessthe unamortized debt issue expenses applicable to the 2004 Notes. The remaining $95,000 principal amount of the 2004 Notes were redeemed for $98,135, representing 103.3% of the principal amount of such 2004 Notes. In June 1998, the Company entered into a master banker's acceptance agreement under which it may request banker's drafts for up to $20,000,000. The banker's drafts are on an as available basis and the bank does not have an obligation to accept the Company's request for drafts. Drafts drawn under this agreement are for a maximum maturity of 182 days; however, they are reflected as long-term debt as the Company has both the ability and intent to reborrow such amounts under its revolving credit agreement. - 6 - POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (4) SEGMENT AND GEOGRAPHIC REPORTING - The Company's long-lived assets and revenues by segment and geographic area are as follows:
Gains Total Oil (Losses) Company and Gas Pipelines & Other -------- -------- --------- -------- (Expressed in thousands) Long-Lived Assets: As of September 30, 1998: United States $501,541 $491,637 $ 5,063 $ 4,841 Kingdom of Thailand 171,196 169,380 - 1,816 Canada 20,972 21,288 - (316) -------- -------- --------- -------- Total $693,709 $682,305 $ 5,063 $ 6,341 -------- -------- --------- -------- -------- -------- --------- -------- As of December 31, 1997: United States $365,142 $360,440 $ 243 $ 4,459 Kingdom of Thailand 162,162 160,249 - 1,913 -------- -------- --------- -------- Total $527,304 $520,689 $ 243 $ 6,372 -------- -------- --------- -------- -------- -------- --------- -------- Revenues: For the three months ended September 30, 1998 United States $ 36,919 $ 36,113 $ 810 $ (4) Kingdom of Thailand 8,845 8,772 - 73 Canada 415 402 - 13 -------- -------- --------- -------- Total $ 46,179 $ 45,287 $ 810 $ 82 -------- -------- --------- -------- -------- -------- --------- -------- For the three months ended September 30, 1997 United States $ 65,690 $ 65,562 $ - $ 128 Kingdom of Thailand 11,487 11,455 - 32 -------- -------- --------- -------- Total $ 77,177 $ 77,017 $ - $ 160 -------- -------- --------- -------- -------- -------- --------- -------- For the nine months ended September 30, 1998 United States $130,250 $129,621 $ 810 $ (181) Kingdom of Thailand 28,907 28,813 - 94 Canada 415 402 - 13 -------- -------- --------- -------- Total $159,572 $158,836 $ 810 $ (74) -------- -------- --------- -------- -------- -------- --------- -------- For the nine months ended September 30, 1997 United States $186,831 $185,242 $ - $ 1,589 Kingdom of Thailand 28,400 27,397 - 1,003 -------- -------- --------- -------- Total $215,231 $212,639 $ - $ 2,592 -------- -------- --------- -------- -------- -------- --------- --------
(5) COMPREHENSIVE INCOME - During 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). Currently there are no significant amounts to be included in the computation of comprehensive income of the Company, as defined, that are required to be disclosed under the provisions of SFAS 130. As such, total comprehensive income and net income (loss) are the same for the three and nine month periods ended September 30, 1998 and 1997, respectively. - 7 - POGO PRODUCING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (6) EARNINGS PER SHARE - In 1997, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Prior periods have been restated in conformity with the provisions of SFAS 128. Earnings per common share (basic earnings per share) are based on the weighted average number of shares of common stock outstanding during the periods. Earnings per share and potential common share (diluted earnings per share) consider the effect of dilutive securities as set out below in thousands, except per share amounts:
Three Months Ended Nine Months Ended September 30, 1998 September 30, 1998 ------------------------------- -------------------------------- Income Shares Per Share Income Shares Per Share ------- ------ --------- --------- ------ --------- BASIC EARNINGS PER SHARE $(8,322) 38,781 $(0.22) $(10,806) 37,171 $(0.29) ------ ------ ------ ------ DILUTED EARNINGS PER SHARE $(8,322) 38,781 $(0.22) $(10,806) 37,171 $(0.29) ------ ------ ------ ------ Antidilutive securities: Options to purchase common shares - 2,476 $24.73 - 2,476 $24.73 2004 Notes (a) - - $ - 560 816 $ 0.69 2006 Notes 1,051 2,726 $ 0.39 3,118 2,726 $ 1.14
(a) The 2004 Notes were called or converted to common stock in the first quarter of 1998.
Three Months Ended Nine Months Ended September 30, 1997 September 30, 1997 ------------------------------- -------------------------------- Income Shares Per Share Income Shares Per Share ------- ------ --------- --------- ------ --------- BASIC EARNINGS PER SHARE $ 7,386 33,403 $ 0.22 $29,378 33,374 $ 0.88 ------ ------ ------ ------ Effect of dilutive securities - Options to purchase common shares - 803 - 805 2004 Notes 770 3,885 2,311 3,885 ------- ------ ------- ------ DILUTED EARNINGS PER SHARE $ 8,156 38,091 $ 0.21 $31,689 38,064 $ 0.83 ------- ------ ------ ------- ------ ------ ------- ------ ------ ------- ------ ------ Antidilutive securities: Options to purchase common shares - 20 $44.54 - 468 $40.83 2006 Notes 1,028 2,726 $ 0.38 3,083 2,726 $ 1.13
(7) IMPACT OF SFAS 133 - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair market value and that changes in the derivative's fair market value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 is effective for the Company in 2000 but early adoption is allowed. The Company has not yet quantified the impacts of adopting SFAS 133 or determined the timing or method of adoption. However, SFAS 133 could increase volatility in earnings and other comprehensive income should the Company enter into transactions covered by this pronouncement. - 8 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's annual report on Form 10-K for the year ended December 31, 1997. Certain statements contained herein are "Forward Looking Statements" and are thus prospective. As further discussed in the Company's annual report on Form 10-K for the year ended December 31, 1997, such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. This amendment to the Company's Form 10-Q for the period ended September 30, 1998 reflects a change in accounting method for the Company's acquisition of Arch Petroleum Inc. ("Arch") on August 17, 1998 from the "pooling of interests" method to the "purchase" method. For an explanation of the purpose for the change of accounting methods, please see Part II, Item 5, of this amended Form 10-Q. RESULTS OF OPERATIONS -- INCOME AND REVENUE DATA NET INCOME (LOSS) The Company reported a net loss of $8,322,000 for the third quarter of 1998 or $0.22 per share (on both a basic and a diluted basis) compared to net income for the third quarter of 1997 of $7,386,000 or $0.22 per share ($8,156,000 or $0.21 on a diluted basis). For the first nine months of 1998, the Company reported a net loss of $10,806,000 or $0.29 per share (on both a basic and a diluted basis) compared to net income for the first nine months of 1997 of $29,378,000 or $0.88 per share ($31,689,000 or $0.83 on a diluted basis). Among other items affecting net income for the third quarter and first nine months of 1998, were 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. Earnings per share are based on the weighted average number of common shares outstanding for the third quarter and first nine months of 1998 of 38,781,000 and 37,171,000, respectively, compared to 33,403,000 and 33,374,000, respectively, for the third quarter and first nine months of 1997. The increases in the weighted average number of common shares outstanding for the 1998 periods, compared to the 1997 periods, 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 merger and, to a lesser extent, the issuance of common stock upon the exercise of stock - 9 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations options pursuant to the Company's stock option plans. Earnings per share computations on a diluted basis in the 1998 periods are identical to basic earnings per share computations because there were no securities of the Company that were dilutive during the periods. Earnings per share computations on a diluted basis in the 1997 periods primarily reflect 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. The weighted average number of common shares outstanding on a diluted basis for the third quarter and first nine months of 1997 were 38,091,000 and 38,064,000, respectively. REVENUES TOTAL REVENUES The Company's total revenues for the third quarter of 1998 were $46,179,000, a decrease of approximately 40% compared to total revenues of $77,177,000 for the third quarter of 1997. The decrease in the Company's total revenues for the third quarter of 1998, compared to the third quarter of 1997, resulted primarily from a decrease in revenues from the Company's oil and gas operations that was only partially offset by an increase in the revenues from the Company's pipelines and other miscellaneous items. The Company's total revenues for the first nine months of 1998 were $159,572,000, a decrease of approximately 26% compared to total revenues of $215,231,000 for the first nine months of 1997. The decrease in the Company's total revenues for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from decreases in revenue from the Company's oil and gas operations and, to a lesser extent, a decline in revenue from the sale of non- strategic properties, pipeline sales revenues and other miscellaneous items. Total revenues for the third quarter and first nine months of 1998 reflect the inclusion of pipeline revenues from Saginaw Pipeline, L.C. and its marketing subsidiary, Industrial Natural Gas, L.C., which the Company acquired through its acquisition of Arch on August 17, 1998. Total revenues for the first nine months of 1997 include a net gain of $1,459,000 on the sale of a compressor by the Company during the first half of 1997. OIL AND GAS REVENUES The following table reflects an analysis of differences in the Company's oil and gas revenues (expressed in thousands of dollars) between the third quarter and first nine months of 1998 and the same periods in the preceding year. - 10 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations
3rd Qtr '98 9 mos. '98 Compared to Compared to 3rd Qtr '97 9 mos. '97 ----------- ----------- Increase (decrease) in oil and gas revenues resulting from differences in : NATURAL GAS -- Price ........................................... $ (6,148) $(13,598) Production ...................................... (11,640) (11,108) -------- -------- (17,788) (24,706) -------- -------- CRUDE OIL AND CONDENSATE -- Price ........................................... (9,114) (26,366) Production ...................................... (1,713) 866 -------- -------- (10,827) (25,500) -------- -------- NGL -- ............................................ (3,115) (3,597) -------- -------- Increase (decrease) in oil and gas revenues ....... $(31,730) $(53,803) -------- -------- -------- --------
Prices and production volumes attributable to the Company's operations in Canada are included in the Company's domestic oil and gas prices and production volumes. This information is not presented separately because the Company does not believe that such information is material to an understanding of the Company's results of operations for the periods presented due to the relatively small portion of the Company's oil and gas revenues which were attributable to such operations during the applicable periods. NATURAL GAS PRICES. Prices per thousand cubic feet ("Mcf") that the Company received for its natural gas production during the third quarter of 1998 averaged $1.93 per Mcf, a decrease of approximately 14% from an average price of $2.25 per Mcf that the Company received for its natural gas production during the third quarter of 1997. Prices that the Company received for its natural gas production during the first nine months of 1998 averaged $2.04 per Mcf, a decrease of approximately 12% from an average price of $2.31 per Mcf that the Company received for its natural gas production during the first nine months of 1997. DOMESTIC PRICES. Prices that the Company received for its domestic natural gas production during the third quarter of 1998 averaged $2.01 per Mcf, a decrease of approximately 13% from an average price of $2.31 per Mcf that the Company received for its domestic natural gas production during the third quarter of 1997. Prices that the Company received for its domestic natural gas production during the first nine months of 1998 averaged $2.13 per Mcf, a decrease of approximately 10% from an average price of $2.37 per Mcf that the Company received for its domestic natural gas production during the first nine months of 1997. - 11 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations THAILAND PRICES. The Company's Tantawan Field located in the Kingdom of Thailand commenced production of natural gas and liquid hydrocarbons in February 1997. During the third quarter of 1998, the prices that the Company received under its long term gas sales contract for natural gas production from the Tantawan Field averaged approximately 69 Thai Baht per Mcf. Based on the Thai Baht to U.S. dollar exchange rates in effect at the time that such production was recorded on the Company's financial statements, the average price in U.S. dollars that the Company recorded during the third quarter and first nine months of 1998 for such production was approximately $1.73 per Mcf, a decrease of approximately 14% from an average price of $2.00 per Mcf that the Company recorded in the third quarter and first nine months of 1997. The price that the Company receives under its gas sales agreement normally adjusts on a semi-annual basis. However, the gas sales agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. Due to the volatility of the Thai Baht and the current economic difficulties in the Kingdom of Thailand and throughout Southeast Asia, the price that the Company received under the gas sales agreement was adjusted several times during the first nine months of 1998. The Company cannot predict what the Baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. NATURAL GAS PRODUCTION. The Company's total natural gas production during the third quarter of 1998 averaged 140.4 million cubic feet ("MMcf") per day, a decrease of approximately 32% from an average of 206.1 MMcf per day that the Company produced during the third quarter of 1997. The Company's total natural gas production during the first nine months of 1998 averaged 164.4 MMcf per day, a decrease of approximately 11% from an average of 184.5 MMcf per day that the Company produced during the first nine months of 1997. DOMESTIC PRODUCTION. The Company's domestic natural gas production during the third quarter of 1998 averaged 105.2 MMcf per day, a decrease of approximately 37% from an average of 166.7 MMcf per day that the Company produced during the third quarter of 1997. The decrease in the Company's natural gas production during the third quarter of 1998, compared to the third quarter of 1997, was related in large measure to decreased production from the Company's East Cameron Block 334 "E" platform, and to a lesser extent, three periods in the third quarter of 1998 during which most of the Company's offshore production was shut-in as a precautionary measure due to hurricanes in the Gulf of Mexico. The decrease in production was partially offset by increased production from the Company's onshore properties located in South Texas and South Louisiana. The Company's domestic natural gas production during the first nine months of 1998 averaged 125.5 MMcf per day, a decrease of approximately 18% from an average of 152.4 MMcf per day that the Company produced during the first nine months of 1997. The decrease in the Company's natural gas production during the first nine months of 1998, compared to the first nine months of 1997, was related in large measure to decreased production from the Company's East Cameron Block 334 "E" platform, as well as the previously discussed weather related downtime and natural production declines, that was partially offset by increased production from the Company's onshore properties located in South Texas and South Louisiana. As of December 21, - 12 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations 1998, the Company was not a party to any future natural gas sales contracts. THAILAND PRODUCTION. During the third quarter of 1998, the Company's share of natural gas production from the Tantawan Field averaged approximately 35.3 MMcf per day, a decrease of approximately 10% from an average of 39.3 MMcf per day that the Company produced during the third quarter of 1997. The decrease in the Company's average daily natural gas production from the Tantawan Field during the third quarter of 1998, compared to the third quarter of 1997, is primarily related to declining production from existing wells, 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. As a result of these factors, commencing on October 1, 1998, the Company and its joint venture partners are currently delivering less natural gas than is being nominated by the Petroleum Authority of Thailand ("PTT") under the natural gas contract governing the Tantawan Field. This could result in the Company receiving only 75% of the current contract price on a portion of its future natural gas sales to PTT. The Company is taking actions that it currently believes will minimize the penalty that it will incur on future gas sales to PTT by, among other things, increasing production from the Tantawan Field. The Company's share of natural gas production from the Tantawan Field during the first nine months of 1998 averaged 38.9 MMcf per day, an increase of approximately 21% from an average of 32.1 MMcf per day that the Company produced during the first nine months of 1997. The increase in the Company's average daily natural gas production from the Tantawan Field during the first nine months of 1998, compared to the first nine months of 1997, reflects the fact that production from the Tantawan Field did not commence until early in February 1997 and did not achieve sustained commercial production rates until March 15, 1997. CRUDE OIL AND CONDENSATE PRICES. Prices received by the Company for its crude oil and condensate production during the third quarter of 1998 averaged $12.85 per barrel, a decrease of approximately 31% from an average price of $18.62 per barrel that the Company received during the third quarter of 1997. Prices that the Company received for its crude oil and condensate production during the first nine months of 1998 averaged $13.49 per barrel, a decrease of approximately 31% from an average price of $19.58 per barrel that the Company received during the first nine months of 1997. DOMESTIC PRICES. Prices received by the Company for its domestic crude oil and condensate production during the third quarter of 1998 averaged $12.78 per barrel, a decrease of approximately 31% from an average price of $18.42 per barrel that the Company received during the third quarter of 1997. Prices that the Company received for its domestic crude oil and condensate production during the first nine months of 1998 averaged $13.44 per barrel, a decrease of approximately 32% from an average price of $19.69 per barrel that the Company received during the first nine months of 1997. THAILAND PRICES. Since the inception of production from the Tantawan Field, crude oil and condensate have been stored in a Floating Production, Storage and Offloading System (the - 13 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations "FPSO") until an economic quantity is accumulated for offloading and sale. The first such sale of crude oil and condensate from the Tantawan Field occurred in July 1997. The price that the Company recorded for its crude oil and condensate production stored on the FPSO for the third quarter of 1998 was $13.08 per barrel, a decrease of approximately 34% from the price of $19.83 per barrel that was recorded for the third quarter of 1997. The price that the Company recorded for its crude oil and condensate production stored on the FPSO for the first nine months of 1998 was $13.72 per barrel, a decrease of approximately 27% from the price of $18.84 per barrel that was recorded for the first nine months of 1997. Prices that the Company receives for its crude oil and condensate production from Thailand are based on world benchmark prices, which are denominated in dollars. In addition, the Company is generally paid for its crude oil and condensate production from Thailand in U.S. dollars. CRUDE OIL AND CONDENSATE PRODUCTION. The Company's total crude oil and condensate production during the third quarter of 1998 averaged 15,722 barrels per day, a decline of approximately 8% from an average of 17,171 barrels per day during the third quarter of 1997. The Company's total crude oil and condensate production during the first nine months of 1998 averaged 16,090 barrels per day, an increase of approximately 1% from an average of 15,856 barrels per day during the first nine months of 1997. DOMESTIC PRODUCTION. The Company's domestic crude oil and condensate production during the third quarter of 1998 averaged 13,124 barrels per day, a decrease of approximately 12% from an average of 14,869 barrels per day during the third quarter of 1997. The Company's domestic crude oil and condensate production during the first nine months of 1998 averaged 13,317 barrels per day, a decrease of approximately 4% from an average of 13,927 barrels per day during the first nine months of 1997. The decrease in the Company's domestic crude oil and condensate production during the third quarter and first nine months of 1998, compared to the third quarter and first nine months of 1997, resulted primarily from a decrease in condensate production from the Company's East Cameron Block 334 "E" platform, which was in part due to damage sustained in a marine accident at the crude oil and condensate pipeline from the platform, that was only partially offset by increased production from the Company's ongoing development drilling and workover programs in the offshore and onshore Gulf of Mexico regions. As of December 21, 1998, the Company was not a party to any crude oil swaps or futures contracts. THAILAND PRODUCTION. During the third quarter of 1998, the Company's share of crude oil and condensate production from the Tantawan Field averaged 2,598 barrels per day, an increase of approximately 13% from an average of 2,304 barrels per day during the third quarter of 1997. The increase in the Company's crude oil and condensate production from the Tantawan Field during the third quarter of 1998, compared to the third quarter of 1997, resulted primarily from the Company's efforts to emphasize oil production from the field. The Company's share of crude oil and condensate production from the Tantawan Field during the first nine months of 1998 averaged 2,773 barrels per day, an increase of approximately 44% from an average of 1,930 barrels per day during the first nine months of 1997. The increase in the Company's average daily - 14 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations crude oil and condensate production from the Tantawan Field during the first nine months of 1998, compared to the first nine months of 1997, primarily reflects the fact that production from the Tantawan Field did not commence until early in February 1997 and did not achieve sustained commercial production rates until March 15, 1997. NGL PRODUCTION. The Company's oil and gas revenues, and its total liquid hydrocarbon production volumes, reflect the production and sale by the Company. The Company's NGL revenues for the third quarter and first nine months of 1998 decreased $3,115,000 and $3,597,000, from the third quarter and first nine months of 1997, respectively. The decrease in the Company's NGL for the third quarter of 1998, compared to the third quarter of 1997, resulted from a decrease in the Company's NGL production from its domestic offshore properties due, in part, to the Company's recent decision not to remove NGL from a portion of its domestic natural gas production because it has not been economically advantageous to do so. This decision is reviewed by the Company on an ongoing basis and is largely dependent on the relationship between current natural gas and NGL prices and the cost of processing natural gas to separate NGL. In addition, the decline is also attributable to a decrease in the average price that the Company received for its NGL production volumes. The decrease in the Company's NGL for the first nine months of 1998, compared to the first nine months of 1997, was related to both a decrease in NGL production volumes from the Company's domestic offshore properties and a decrease in the price that the Company received for its NGL production volumes. TOTAL LIQUID HYDROCARBON PRODUCTION. The Company's average liquid hydrocarbon production during the third quarter of 1998 was 17,809 barrels per day, a decrease of approximately 17% from an average liquid hydrocarbon production of 21,557 barrels per day during the third quarter of 1997. The Company's average liquid hydrocarbon production during the first nine months of 1998 was 18,858 barrels per day, a decrease of approximately 2% from an average liquid hydrocarbon production of 19,280 barrels per day during the first nine months of 1997. OPERATING COSTS AND EXPENSES LEASE OPERATING EXPENSES Company-wide lease operating expenses for the third quarter of 1998 were $18,612,000, an increase of approximately 12% from lease operating expenses of $16,628,000 for the third quarter of 1997. Company-wide lease operating expenses for the first nine months of 1998 were $51,196,000, an increase of approximately 13% from lease operating expenses of $45,116,000 for the first nine months of 1997. A discussion of lease operating expenses attributable to the Company's operations in Canada is included in the Company's domestic lease operating expenses. The information is not presented separately because the Company does not believe that such information is material to an understanding of the Company's results of operations for the periods presented due to the relatively small portion of the Company's lease operating - 15 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations expenses which were attributable to such operations during the applicable periods. DOMESTIC LEASE OPERATING EXPENSES. The Company's domestic lease operating expenses for the third quarter of 1998 were $12,523,000, an increase of approximately 18% from domestic lease operating expenses of $10,603,000 for the third quarter of 1997. The increase in domestic lease operating expenses for the third quarter of 1998, compared to the third quarter of 1997, resulted primarily from expenses related to purchasing natural gas for transportation and subsequent resale on the pipeline system acquired in the merger with Arch, operating expenses related to the pipeline system and increased expenses on certain properties acquired in the merger with Arch, which were partially offset by a cost savings program instituted by the Company, including the sale of certain non-strategic properties with high operating costs and entering into cost sharing arrangements with its industry partners in the offshore Gulf of Mexico. The Company's domestic lease operating expenses for the first nine months of 1998 were $35,249,000, an increase of approximately 11% from domestic lease operating expenses of $31,802,000 for the first nine months of 1997. The increase in domestic lease operating expenses for the first nine months of 1998, compared to the first nine months of 1997, were affected by a non-recurring maintenance project on the Company's East Cameron 334 "E" platform during the first quarter of 1998 and by expenses related to purchasing natural gas for transportation and subsequent resale on the pipeline system acquired in the merger with Arch, operating expenses related to the pipeline system for which no corresponding expenses were recorded during the first nine months of 1997. In addition, lease operating expenses for the first nine months of 1997 were reduced by a $954,000 refund in connection with the Company's audit of a joint venture partner, for which no corresponding refund of a similar magnitude was obtained in the first nine months of 1998. THAILAND LEASE OPERATING EXPENSES. The Company's lease operating expenses in the Kingdom of Thailand for the third quarter of 1998 were $6,089,000, an increase of approximately 1% from lease operating expenses of $6,025,000 for the third quarter of 1997. The increase in lease operating expenses in the Kingdom of Thailand for the third quarter of 1998, compared to the third quarter of 1997, was primarily related to increased production related activity, including the addition of two production platforms, which was almost entirely offset by cost savings resulting from recently instituted cost control efforts. The Company's lease operating expenses in the Kingdom of Thailand for the first nine months of 1998 were $15,947,000, an increase of approximately 20% from lease operating expenses of $13,314,000 for the first nine months of 1997. The increase in lease operating expenses in the Kingdom of Thailand for the first nine months of 1998, compared to the first nine months of 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. Consequently, the Company does not believe that a comparison of lease operating expenses in the Kingdom of Thailand between the first nine months of 1998 and the first nine months of 1997 is meaningful. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relate to lease payments made by a subsidiary of the Company in connection with its bareboat charter - 16 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations of the FPSO, which amounted to $2,803,000 (net to the Company's interest) during the third quarters of 1998 and 1997, and $8,318,000 and $7,404,000 (net to the Company's interest) for the first nine months of 1998 and 1997, respectively. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the third quarter of 1998 were $8,556,000, an increase of approximately 79% from general and administrative expenses of $4,789,000 for the third quarter of 1997. General and administrative expenses for the first nine months of 1998 were $19,843,000, an increase of approximately 26% from general and administrative expenses of $15,746,000 for the first nine months of 1997. The increase in general and administrative expenses for the third quarter and first nine months of 1998, compared with the third quarter and first nine months of 1997, was primarily related to 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. In addition, the increase in general and administrative expense was attributable, in part, to 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. Exploration expenses for the third quarter of 1998 were $1,426,000, a decrease of approximately 24% from exploration expenses of $1,870,000 for the third quarter of 1997. Exploration expenses for the first nine months of 1998 were $7,260,000, a decrease of approximately 7% from exploration expenses of $7,823,000 for the first nine months of 1997. The decreases in exploration expenses for the third quarter and first nine months of 1998, compared to the third quarter and first nine months of 1997, resulted primarily from decreased geophysical activity in the Gulf of Mexico and West Texas, and a decrease in delay rental payments, that were partially offset, during the comparable nine month periods, by increased geophysical activity by the Company in East Texas, South Louisiana and in the Gulf of Thailand. DRY HOLE AND IMPAIRMENT EXPENSES Dry hole and impairment expenses relate to costs of unsuccessful wells drilled, along with impairments due to decreases in expected reserves from producing wells. The Company's dry hole and impairment expenses for the third quarter of 1998 were $5,128,000, an increase of approximately 167% from dry hole and impairment expenses of $1,919,000 for the third quarter of 1997. The Company's dry hole and impairment expenses for the first nine months of 1998 were - 17 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations $7,906,000, an increase of approximately 14% from dry hole and impairment expenses of $6,926,000 for the first nine months of 1997. DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES The Company accounts for its oil and gas activities using the successful efforts method of accounting. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved properties are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for depreciation, depletion and amortization ("DD&A") is based on the capitalized costs, as determined in the preceding paragraph, plus future costs to abandon offshore wells and platforms, and is determined on a cost center by cost center basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its oil and gas activities onshore in the United States. The Company's DD&A expense for the third quarter of 1998 was $24,921,000, a decrease of approximately 14% from DD&A expense of $29,112,000 for the third quarter of 1997. The decrease in DD&A expense for the third quarter of 1998, compared to the third quarter of 1997, resulted primarily from decreased production of oil and natural gas from the Company's properties that was only partially offset by an increase in the Company's composite DD&A rate. The Company's DD&A expense for the first nine months of 1998 was $83,739,000, an increase of approximately 10% from DD&A expense of $75,989,000 for the first nine months of 1997. The increases in DD&A expense for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from an increase in the Company's composite DD&A rate that was only partially offset by a decrease in production of oil and natural gas. The composite DD&A rate for all of the Company's producing fields for the third quarter of 1998 was $1.08 per equivalent Mcf ($6.46 per equivalent barrel), an increase of approximately 17% from a composite DD&A rate of $0.92 per equivalent Mcf ($5.53 per equivalent barrel) for the third quarter of 1997. The composite DD&A rate for all of the Company's producing fields for the first nine months of 1998 was $1.09 per equivalent Mcf ($6.54 per equivalent barrel), an increase of approximately 20% from a composite DD&A rate of $0.91 per equivalent Mcf ($5.46 per equivalent barrel) for the first nine months of 1997. The increase in the composite DD&A rate for all of the Company's producing fields for the third quarter and the first nine months of 1998, compared to the third quarter and first nine months of 1997, resulted primarily from an increased percentage of the Company's production coming from certain of the Company's fields that have - 18 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations DD&A rates that are higher than the Company's recent historical composite rate and a corresponding decrease in the percentage of the Company's production coming from fields that have DD&A rates that are lower than the Company's recent historical composite DD&A rate. The Company produced 22,754,000 equivalent Mcf (3,792,000 equivalent barrels) during the third quarter of 1998, a decrease of approximately 26% from the 30,857,000 equivalent Mcf (5,143,000 equivalent barrels) produced by the Company during the third quarter of 1997. The Company produced 75,781,000 equivalent Mcf (12,630,000 equivalent barrels) during the first nine months of 1998, a decrease of approximately 8% from the 82,036,000 equivalent Mcf (13,673,000 equivalent barrels) produced by the Company during the first nine months of 1997. INTEREST INTEREST CHARGES The Company incurred interest charges for the third quarter of 1998 of $6,236,000, an increase of approximately 5% from interest charges of $5,940,000 for the third quarter of 1997. Interest charges incurred by the Company for the first nine months of 1998 were $17,513,000, an increase of approximately 11% from interest charges of $15,771,000 for the first nine months of 1997. The increase in interest charges for the third quarter and first nine months of 1998, compared to the third quarter and first nine months of 1997, resulted primarily from an increase in the average amount of debt outstanding and, to a lesser extent, the average interest rate charged on the Company's outstanding debt. As of December 21, 1998, the Company was not a party to any interest rate swap agreements. CAPITALIZED INTEREST Capitalized interest expense for the third quarter of 1998 was $2,476,000, an increase of approximately 197% from capitalized interest expense of $833,000 for the third quarter of 1997. The increase in capitalized interest for the third quarter of 1998, compared to the third quarter of 1997, resulted primarily from an increase in the amount of capital expenditures subject to interest capitalization during the third quarter of 1998 ($141,259,000), compared to the third quarter of 1997 ($47,135,000), and from an increase in the computed rate that the Company uses to apply to such capital expenditures to arrive at the total amount of capitalized interest. A substantial percentage of the Company's capitalized interest expense during the latter half of 1997 and the first nine months of 1998 resulted from capitalization of interest related to such capital expenditures for the development of the Benchamas Field in the Gulf of Thailand and, to a lesser extent, several development projects in the Gulf of Mexico. Capitalized interest expense for the first nine months of 1998 was $6,540,000, an increase of approximately 89% from capitalized interest expense of $3,463,000 for the first nine months of 1997. The increase in capitalized interest for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from an increase in the amount of capital expenditures subject to interest capitalization during the first nine months of 1998 ($122,414,000), compared to the first nine months of 1997 - 19 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations ($73,086,000), 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. FOREIGN CURRENCY TRANSACTION GAIN (LOSS) The Company experienced foreign currency transaction gains of $760,000 during the third quarter and $953,000 during the first nine months of 1998, compared to foreign currency transaction losses of $6,522,000 during the third quarter and first nine months of 1997. The foreign currency transaction gains and losses 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 and, to a much lesser extent, the fluctuation of the Canadian dollar against the U.S. dollar. 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 substantial decline in value of the Thai Baht compared to the U.S. dollar, resulting in the foreign currency transaction losses during the 1997 periods presented. During the 1998 periods presented, the value of the Thai Baht has generally strengthened against the U.S. dollar, resulting in corresponding foreign currency transaction gains. However, the Company cannot predict what the Thai Baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. As of December 15, 1998, 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 experienced an income tax benefit for the third quarter of 1998 of $6,858,000, compared to income tax expense of $3,986,000 for the third quarter of 1997. The Company experienced an income tax benefit for the first nine months of 1998 of $9,052,000, compared to income tax expense of $15,694,000 for the first nine months of 1997. The income tax benefit for the third quarter and first nine months of 1998, compared to the income tax expense for the third quarter and first nine months of 1997, 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. LIQUIDITY AND CAPITAL RESOURCES -- CASH FLOWS The Company's Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 1998, reflects net cash provided by operating activities of $70,446,000. In addition to net cash provided by operating activities, the Company received net proceeds of $998,000 from the exercise of stock options, $350,000 from the sale of certain non-strategic - 20 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations properties, and had net borrowings of $83,354,000 under its revolving credit agreement and other senior debt facilities. During the first nine months of 1998, the Company invested $135,964,000 of such cash flow in capital projects, retired a production payment obligation for $15,246,000, spent $2,961,000 to purchase proved reserves, paid $3,327,000 ($0.03 per share for each of the first three quarters of 1998) in cash dividends to holders of the Company's common stock and paid a net amount of $621,000 in miscellaneous other expenditures. As of September 30, 1998, the Company's cash and cash investments were $17,422,000 and its long-term debt stood at $381,854,000. FUTURE CAPITAL REQUIREMENTS The Company's capital and exploration budget for 1998, which does not include any amounts that may be expended for the purchase of proved reserves or any interest which may be capitalized resulting from projects in progress, was established by the Company's Board of Directors at $230,000,000. Substantially all of the Company's 1998 capital and exploration budget was spent or incurred during 1998. The Company currently anticipates that its available cash and cash investments, cash provided by operating activities, funds available under its revolving credit facility and an uncommitted line of credit and amounts that the Company currently believes that it can obtain from external sources including the issuance of new debt and convertible preferred securities, or asset sales, will be sufficient to fund the Company's ongoing operating, interest and general and administrative expenses, the remainder of its 1998 capital and exploration budget, any currently anticipated costs associated with the Company's projects during 1999, and future dividend payments at current levels. Subject to favorable market conditions and other factors, the Company currently intends to issue convertible preferred equity securities during 1999 to assist in funding its future capital and exploration plans. The declaration of future dividends on the Company's common stock will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, its ability to pay dividends under certain covenants contained in its debt instruments, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors. YEAR 2000 READINESS DISCLOSURE Many computer software systems, as well as certain hardware and equipment utilizing date-sensitive data, were structured to use a two-digit date field meaning that they will not be able to properly recognize dates in the year 2000. The Company is addressing this issue through a process that entails evaluation of the Company's critical software and, to the extent possible, its hardware and equipment to identify and assess Year 2000 issues and to remediate, replace or establish alternative procedures addressing non-Year 2000 compliant systems, hardware and equipment. - 21 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations The Company has substantially completed an inventory of its systems and equipment including computer systems and business applications. Based upon this review, the Company currently believes that all of its critical software and computer hardware systems are either Year 2000 compliant or will be within the next six months. The Company continues to inventory its equipment and facilities to determine if they contain embedded date-sensitive technology. If problems are discovered, remediation, replacement or alternative procedures for non-compliant equipment and facilities will be undertaken on a business priority basis. This process will continue and, depending upon the equipment and facilities, is scheduled for completion during the first three quarters of 1999. As of September 30, 1998, the Company had incurred approximately $50,000 in expenses related to its Year 2000 compliance efforts. These costs are currently being expensed as they are incurred. However, in certain instances the Company may determine that replacing existing equipment may be more efficient, particularly where additional functionality is available. These replacements may be capitalized and therefore would reduce the estimated 1998 and 1999 expenses associated with the Year 2000 issue. The Company currently expects total out-of-pocket costs to become Year 2000 compliant to be less than $1,000,000. The Company currently expects that such costs will not have a material adverse effect on the Company's financial condition, operations or liquidity. The foregoing timetable and assessment of costs to become Year 2000 compliant reflect management's current best estimates. These estimates are based on many assumptions, including assumptions about the cost, availability and ability of resources to locate, remediate and modify affected systems, equipment and facilities. Based upon its activities to date, the Company does not currently believe that these factors will cause results to differ significantly from those estimated. However, the Company cannot reasonably estimate the potential impact on its financial condition and operations if key third parties including, among others, suppliers, contractors, joint venture partners, financial institutions, customers and governments do not become Year 2000 compliant on a timely basis. The Company is contacting many of these third parties to determine whether they will be able to resolve in a timely fashion their Year 2000 issues as they may affect the Company. In the event that the Company is unable to complete the remediation or replacement of its critical systems, facilities and equipment, establish alternative procedures in a timely manner, or if those with whom the Company conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on the Company's liquidity and results of operations. At this time, the potential effect in the event the Company and/or third parties are unable to timely resolve their Year 2000 problems is not determinable; however, the Company currently believes that it will be able to resolve its own Year 2000 issues in a timely manner. The disclosure set forth in this section is provided pursuant to 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. This disclosure is also subject to protection under the Year 2000 - 22 - POGO PRODUCING COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein. AMENDED AND RESTATED CREDIT AGREEMENT Effective August 1, 1997, the Company entered into an amended and restated Credit Agreement, which has subsequently been amended several times, most recently on December 21, 1998. The Credit Agreement provides for a $250,000,000 revolving/term credit facility which will be fully revolving until July 1, 2000, after which the balance will be due in eight quarterly term loan installments, commencing October 31, 2000. A portion of the amount that may be borrowed under the Credit Agreement (the "Primary Tranche") may not exceed a borrowing base which is composed of domestic, Canadian and Thai properties. Generally, the borrowing base is determined semi-annually by the lenders in accordance with the Credit Agreement, based on the lenders' usual and customary criteria for oil and gas transactions. As of December 21, 1998, the Company's total borrowing base was set at $200,000,000, which amount cannot be reduced until after April 30, 1999. In addition, certain lenders that are parties to the Credit Agreement have agreed to extend an additional $50,000,000 in credit (the "Secondary Tranche") under the Credit Agreement without reference to the borrowing base limitations of the Credit Agreement. The term of the Secondary Tranche is until the earlier of April 30, 1999 or the completion of certain debt or equity offerings. The Credit Agreement 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, creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. Upon the occurrence or declaration of certain events, the lenders would be entitled to a security interest in the Company's domestic borrowing base properties. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Primary Tranche bear interest at a rate based upon the percentage of the borrowing base that is being utilized, ranging from a base (prime) rate or LIBOR plus 1.25% to a base rate plus 0.25% or LIBOR plus 2.0%, at the Company's option. Borrowings under the Primary Tranche currently bear interest at a base rate plus 0.25% or LIBOR plus 2.0%, at the Company's option. Borrowings under the Secondary Tranche currently bear interest at a base rate plus 0.75% or LIBOR plus 2.5% , at the Company's option. A commitment fee on the unborrowed amount under the Primary Tranche is also charged and is based upon the percentage of the borrowing base that is being utilized, ranging from 0.25% to 0.375%. The commitment fee is currently 0.375% per annum on unborrowed amounts under the Primary Tranche. As of December 21, 1998, there was $155,000,000 outstanding under the Primary Tranche and $50,000,000 outstanding under the Secondary Tranche. - 23 - POGO PRODUCING COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders A special meeting of the stockholders of Arch was held in Ft. Worth, Texas on August 14, 1998. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. Of a total of 24,594,534 shares of Arch Common Stock outstanding and entitled to vote (including shares of Arch preferred stock on an "as converted basis"), 18,577,341 were present at the meeting in person or by proxy, representing approximately 75.5% of the outstanding Arch Common Stock. In addition, holders of all 727,273 shares of Arch preferred stock that were outstanding and entitled to vote as a separate class on the merger were present at the meeting in person or by proxy. At the meeting, Arch stockholders approved the proposal to approve and adopt the Agreement and Plan of Merger, dated as of May 28, 1998, pursuant to which Arch would, upon consummation of the merger described therein, be the survivor and become a wholly-owned subsidiary of Pogo Producing Company. The vote tabulation (including shares of Arch's convertible preferred stock on an "as converted basis") with respect to the proposal was 18,262,906 shares of Arch common stock for, 261,948 shares against, 52,487 abstentions and zero broker non-votes. In addition, all 727,273 shares of Arch preferred stock, voting separately as a class, were voted in favor of the proposal. The merger was consummated on August 17, 1998, following the special meeting of Arch stockholders. Item 5. Other Information. In August 1998, a wholly owned subsidiary of the Company merged with Arch in a tax free, stock for stock, transaction through which Arch became a wholly owned subsidiary of the Company. The merger was initially accounted for as a pooling of interests which requires the financial results for all periods prior to the merger to be combined and restated as if the Company and Arch had always been combined. Consequently, the Company restated its consolidated financial statements for periods prior to the merger, including the third quarter and first nine months of 1997, and the first nine months of 1998, to reflect the combined results of both the Company and Arch. A report on Form 10-Q for the periods ended September 30, 1998 was filed on that basis. The Company has recently concluded that, as a result of the current environment of low crude oil and natural gas prices, the Company must maintain maximum flexibility to address its cash flow needs, including the option of selling certain of the Company's assets. Under the current application of accounting principles, such transactions would preclude the pooling of interests method of accounting and require that the Company account for the merger using the purchase method of accounting. The Company is filing this amended report on Form 10-Q for the period ended September 30, 1998 primarily for the purpose of restating the financial statements contained in such report and to make conforming changes to "Management's Discussion and - 24 - POGO PRODUCING COMPANY AND SUBSIDIARIES Analysis of Financial Condition and Results of Operations" to reflect the change from the pooling method of accounting to the purchase method of accounting for the Arch acquisition. On December 23, 1998, the Company issued the following news release: HOUSTON, TX -- December 23, 1998 -- Pogo Producing Company ("PPP" -- NYSE) responded to today's announcement that Rutherford-Moran Oil Corporation, a joint venture partner of Pogo's in the Gulf of Thailand, has agreed to be acquired by a unit of Chevron Corporation. The announcement made by Rutherford-Moran indicates that the acquisition is conditioned upon several things, including Chevron reaching certain agreements with Pogo regarding the B8/32 Concession in the Gulf of Thailand. Paul G. Van Wagenen, Pogo's Chairman and CEO, stated that Pogo has been contacted by Chevron in connection with Chevron's acquisition of Rutherford-Moran, but that Pogo would not speculate whether any agreement would be reached between Pogo and Chevron, or what the terms of any such agreement may be. Pogo Producing Company explores for, develops and produces oil and natural gas. Headquartered in Houston, Pogo owns various ownership interests in 105 federal and state Gulf of Mexico lease blocks offshore Louisiana and Texas. Pogo also owns approximately 378,000 gross leasehold acres in major oil and gas provinces onshore in the United States, approximately 734,000 gross acres in the Kingdom of Thailand, approximately 113,000 gross acres in the United Kingdom, and approximately 150,000 gross acres in Canada. Pogo common stock is listed on the New York Stock Exchange under the symbol PPP. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 4.1 -- 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. 27 -- Financial Data Schedule (B) Reports on Form 8-K None - 25 - POGO PRODUCING COMPANY AND SUBSIDIARIES Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POGO PRODUCING COMPANY (Registrant) /s/ THOMAS E. HART --------------------------------- Thomas E. Hart, Vice President and Controller /s/ JOHN W. ELSENHANS --------------------------------- John W. Elsenhans, Vice President and Chief Financial Officer Date: December 24, 1998 - 26 - EX-4.1 2 EXHIBIT 4.1 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ POGO PRODUCING COMPANY ------------------------------ First Amendment Dated as of December 21, 1998 to Amended and Restated Credit Agreement Dated as of August 1, 1997 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 21, 1998 (the "AMENDMENT"), between Pogo Producing Company, a Delaware corporation (the "BORROWER"), the various financial institutions which are or may become parties to the Credit Agreement, as amended hereby (collectively, the "LENDERS"), Bank of Montreal, acting through its Chicago, Illinois branch, (the "BANK"), as administrative agent (the "AGENT") for the Lenders, and Paribas, formerly known as Banque Paribas, as documentation agent (the "CO-AGENT", and together with the Agent, the "AGENTS"), for the Lenders, W I T N E S S E T H WHEREAS the Borrower, the Lenders, the Agent and the Co-Agent are parties to a certain Amended and Restated Credit Agreement, dated as of August 1, 1997, as previously amended (the "CREDIT AGREEMENT"); and WHEREAS the Borrower desires to amend certain provisions of the Credit Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. DEFINITIONS. Unless otherwise defined herein or the context otherwise requires, or except as the definition may be amended by this Amendment, terms used in this Amendment, including its preamble and recitals, shall have the meanings provided in the Credit Agreement, as hereby amended. 2. AMENDMENTS TO CREDIT AGREEMENT. (a) The PREAMBLE to the Credit Agreement is amended hereby in its entirety to the following: " THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of August 1, 1997, among POGO PRODUCING COMPANY, a Delaware corporation (the "BORROWER"), the various financial institutions which are or may become parties hereto (collectively, the "LENDERS"), and BANK OF MONTREAL, acting through its Chicago, Illinois branch ("the BANK"), as administrative agent (the "AGENT") for the Lenders and PARIBAS, formerly known as Banque Paribas, as documentation agent (the "CO-AGENT") for the Lenders,". (b) The definitions of "Alternate Thailand Reserve Report", "Alternate U.S Reserve Report", "Applicable Margin", "Borrowing Base", "Deficiency Period", "Loan Documents", "Non-Standard Determination", "Revolving Loan Commitment Amount", "Subordinated Indebtedness" and "U.S. Reserve Report" appearing in SECTION 1.1 of the Credit Agreement are amended hereby in their entirety to the following: " "ALTERNATE THAILAND RESERVE REPORT" means a report, in form and detail satisfactory to the Agent and the Required Lenders, on reserves updated internally by the Borrower making adjustments for any changes in production volumes, expenses, Applicable Prices and for dispositions of properties in the six-month period subsequent to the immediately preceding Reserve Report Date and based upon the immediately preceding Thailand Reserve Report and, at the Borrower's option, for any acquisitions of properties not included in the immediately preceding Thailand Reserve Report or the restoration to the Borrowing Base of properties previously removed from the Borrowing Base by the Borrower." " "ALTERNATE U.S. RESERVE REPORT" means a report, in form and detail satisfactory to the Agent and the Required Lenders, on reserves updated internally by the Borrower making adjustments for any changes in production volumes, expenses, Applicable Prices and for dispositions of properties in the six-month period subsequent to the immediately preceding Reserve Report Date and based upon the immediately preceding U.S. Reserve Report and, at the Borrower's option, for any acquisitions of properties not included in the immediately preceding U.S. Reserve Report or the restoration to the Borrowing Base of properties previously removed from the Borrowing Base by the Borrower." " "APPLICABLE MARGIN" means: (a) for any time prior to or on the Revolving Loan Commitment Termination Date, (i) with respect to any Prime Rate Loan, LIBO Rate Loan or the Commitment Fees payable hereunder with respect to Tranche A, as the case may be, the applicable percentage per annum set forth below under the caption "Prime Spread", "LIBO Spread" or "Unused Fee", as the case may be, determined by reference to the percentage of the Borrowing Base that the outstanding Loans represent at that time:
- ------------------------------------------------------------------------------- BORROWING BASE USAGE PRIME SPREAD LIBO SPREAD UNUSED FEE - ------------------------------------------------------------------------------- 75% of the Borrowing Base 0.25% 2.00% 0.375% LESS THAN outstanding Loans LESS THAN OR EQUAL TO 100% of the Borrowing Base - ------------------------------------------------------------------------------- 60% of the Borrowing Base 0.00% 1.75% 0.375% LESS THAN outstanding Loans LESS THAN OR EQUAL TO 75% of the Borrowing Base - ------------------------------------------------------------------------------- 40% of the Borrowing Base 0.00% 1.50% 0.250% LESS THAN outstanding Loans LESS THAN OR EQUAL TO 60% of the Borrowing Base - -------------------------------------------------------------------------------
2 - ------------------------------------------------------------------------------- Outstanding Loans LESS THAN 0.00% 1.25% 0.250% OR EQUAL TO 40% of the Borrowing Base - -------------------------------------------------------------------------------
PROVIDED, HOWEVER, that during any Deficiency Period, then the "Prime Spread" with respect to Prime Rate Loans under Tranche A shall be "0.25%" per annum and the "LIBO Spread" with respect to LIBO Rate Loans under Tranche A shall be "2.50%" per annum, and (ii) with respect to any Prime Rate Loan or LIBO Rate Loan with respect to Tranche B, as the case may be, the "Prime Spread" shall be "0.75%" per annum and the "LIBO Spread" shall be "2.50%" per annum, PROVIDED, HOWEVER, that, notwithstanding the foregoing, if all outstanding amounts under Tranche B have not been repaid in full prior to February 28, 1999, then the "Prime Spread" with respect to Prime Rate Loans under Tranche A and Tranche B shall be "0.75%" per annum and the "LIBO Spread" with respect to LIBO Rate Loans under Tranche A and Tranche B shall be "2.50%" per annum; and (b) for any time after the Revolving Loan Commitment Termination Date, with respect to any Prime Rate Loan or LIBO Rate Loan, as the case may be, the "Prime Spread" shall be "0.25%" per annum and the "LIBO Spread" shall be "2.00%" per annum." " "BORROWING BASE" means, at any time, that amount, determined in accordance with SECTION 2.6 and calculated using the Lenders' usual and customary criteria for oil and gas reserve evaluation. During the period from December 21, 1998, to the date of the next determination of the Borrowing Base pursuant to the provisions of SECTION 2.6, the amount of the Borrowing Base shall be Two Hundred Million Dollars ($200,000,000); PROVIDED, HOWEVER, that in the event that New Subordinated Debt is issued prior to April 30, 1999, then such Borrowing Base shall be reduced by 40% of the principal amount of such New Subordinated Debt." " "DEFICIENCY PERIOD" means any period commencing upon any date that the Agent determines that the aggregate principal amount of all Senior Debt exceeds the Senior Debt Capacity then in effect, and continuing until the date that, pursuant to the redetermination of the Borrowing Base, or by reason of mandatory prepayments or scheduled repayments, with respect to Loans, the aggregate outstanding principal amount of Senior Debt no longer exceeds the Senior Debt Capacity." " "LOAN DOCUMENT" means this Agreement, the Notes, any Subsidiary Guaranty and any Security Documents." " "NON-STANDARD DETERMINATION" means a determination or redetermination of the Borrowing Base that may be made either (i) at the discretion of the Required Borrowing Base Lenders, no more than once during any six month period ending either October 31st, or April 30th, as applicable, or (ii) at the request of the 3 Borrower, no more than once during any six month period ending either October 31st, or April 30th, as applicable, in either case as provided in SECTION 2.6(b)." " "REVOLVING LOAN COMMITMENT AMOUNT" means, on any date, $250,000,000, as such Revolving Loan Commitment Amount may be changed from time to time pursuant to SECTION 2.2." " "SUBORDINATED INDEBTEDNESS" means (i) the five and one half percent (5 1/2%) Convertible Subordinated Notes due 2006 issued by the Borrower pursuant to the Indenture dated as of June 15, 1996 between the Borrower and State Street Bank and Trust Company, as Trustee, (ii) the eight and three quarters percent (8 3/4%) Senior Subordinated Notes due 2007 issued by the Borrower pursuant to the Indenture dated as of May 15, 1997 between the Borrower and State Street Bank and Trust Company, as Trustee, (iii) the New Subordinated Debt, and (iv) new Indebtedness incurred, PROVIDED that: (a) such new Indebtedness has subordination terms not materially less favorable to the holders of the Notes than the then existing Subordinated Indebtedness unless such terms are approved by the Required Lenders; (b) the aggregate principal payments for such new Indebtedness scheduled to be paid (i) in any Fiscal Year ending prior to the Stated Maturity Date for the Term Loans are no greater than the aggregate principal payments under the existing schedule of principal payments of the Subordinated Indebtedness being repaid and (ii) prior to a period ending thirty-six (36) months after the Stated Maturity Date for the Term Loans shall not exceed the aggregate principal payments under the existing schedule of principal payments of the Subordinated Indebtedness being repaid; (c) the maturity dates thereof are no earlier than thirty-six (36) months after the Stated Maturity Date of the Term Loans; and (d) other than with respect to issuance of the New Subordinated Debt on or before February 28, 1999, the Required Borrowing Base Lenders shall have the option for a period of 30 days after the issuance of Subordinated Indebtedness to adjust the Borrowing Base in effect at the time of the issuance of such Subordinated Indebtedness." " "U.S. RESERVE REPORT" means a report of Ryder Scott Company Petroleum Engineers or other independent petroleum engineers satisfactory to the Agent and the Required Lenders showing, in form and detail satisfactory to the Agent and Required Lenders, such engineers' estimate of the Proved Reserves on the Borrowing Base Properties located in the United States or Canada and the future Gross Revenue and 4 Future Net Income to be derived from such Proved Reserves as of the Reserve Report Date for each year. The Reserve Report shall estimate the Proved Reserves and income data for the Proved Developed Producing Reserves, the Proved Developed Shut-In Reserves, the Proved Developed Behind Pipe Reserves and the Proved Undeveloped Reserves, and shall, in each case, report only the Proved Reserves and income data attributable to Borrower's working interest percentage in or Borrower's pro rata share of, as the case may be, any Proved Reserves located on the Borrowing Base Properties located in the United States, less the Borrower's obligations or pro rata share of such obligations, as the case may be, for advance payments for each such property. All calculations including the calculation of Applicable Prices in the Reserve Report shall be made on a property-by-property and an interest-by-interest basis in order to reflect the varying royalties, costs and expenses, working interests and advance payments applicable to the various Borrowing Base Properties covered by the Reserve Report. Except as otherwise specifically required herein, the Reserve Report shall be prepared and presented in accordance with the requirements of the S.E.C. from time to time in effect." (c) SECTION 1.1 of the Credit Agreement is amended hereby by adding the following definitions of "Arch Subsidiaries", "Collateral", "Collateral Agent", "New Subordinated Capital", "New Subordinated Debt", "Required Borrowing Base Lenders", "Security Documents", "Senior Debt Capacity", "Tranche A" and "Tranche B" in appropriate alphabetical order: " "ARCH SUBSIDIARIES" means Arch Petroleum, Inc., a Delaware corporation and its Subsidiaries." " "COLLATERAL" is defined in SECTION 7.11." " "COLLATERAL AGENT" means BMO Financial, Inc., its successor or such Person as may be designated pursuant to SECTION 11.14." " "NEW SUBORDINATED CAPITAL" means the New Subordinated Debt, convertible preferred, preferred, common stock or any combination thereof issued by the Borrower in an aggregate principal amount of at least $125,000,000." " "NEW SUBORDINATED DEBT" means up to $150,000,000 of subordinated Indebtedness which (i) complies with the requirements for new subordinated Indebtedness incurred contained in the definition of Subordinated Indebtedness and (ii) is issued on or before April 30, 1999." " "REQUIRED BORROWING BASE LENDERS" means (a) with respect to any increase in the Borrowing Base, the Agent and Lenders holding at least 100% of the then aggregate outstanding principal amount of the Notes then held by the Lenders, or, if no such principal amount is then outstanding, the Agent and Lenders responsible for 5 at least 100% of the then current Commitment Amount, and (b) with respect to any action other than an increase in the Borrowing Base, the Agent and Lenders holding at least 66 2/3% of the then aggregate outstanding principal amount of the Notes then held by the Lenders, or, if no such principal amount is then outstanding, the Agent and Lenders responsible for at least 66 2/3% of the then current Commitment Amount." " "SECURITY DOCUMENTS" means, collectively, the Mortgage, Deed of Trust, Assignment, Security Agreement and Financing Statement from the Borrower or any of its Subsidiaries as the case may be, substantially in the form attached hereto as EXHIBIT G (with any modifications necessary to comply with applicable state laws or filing requirements), and any and all further documents, financing statements, agreements and instruments which may be required under applicable law, or which the Agent may reasonably request, in order to satisfy the requirements of SECTION 7.11." " "SENIOR DEBT CAPACITY" means the sum of (i) the Borrowing Base then in effect PLUS (ii) when available, Tranche B." " "TRANCHE A" means that portion of the Commitment Amount equal to the then effective Borrowing Base." " "TRANCHE B" means (a) until April 30, 1999, a portion of the Commitment Amount equal to the greater of (i) $0 or (ii) the sum of Fifty Million Dollars ($50,000,000) LESS the proceeds from the issuance of New Subordinated Capital not allocated (as set forth in the definition of "Borrowing Base") to the reduction of the Borrowing Base, and (b) at all times after the date of the next scheduled determination of the Borrowing Base pursuant to the provisions of SECTION 2.6(a), $0." (d) SECTION 1.1 of the Credit Agreement is amended hereby by deleting the definitions of "Activation Amount", "Active Revolving Loan Commitment Amount", "Applicable Percentage", "Audited Reserve Report", "Implied Senior Debt Rating", "Inactive Revolving Loan Commitment Amount", "Majority Borrowing Base Lenders", "New Subordinated Indebtedness", "Revised Borrowing Base", "Thailand Borrowing Base", "Updated Reserve Report" and "U.S. Borrowing Base". (e) The definition of "Borrowing Base Properties" appearing in SECTION 1.1 of the Credit Agreement is amended hereby (i) by inserting the phrase "or Canada" following in the phrase "properties located outside the United States", and (ii) by inserting the phrase "and properties owned by the Arch Subsidiaries" following in the phrase "other than Qualified Partnership Properties". (f) SECTION 2.1.1 of the Credit Agreement is amended hereby in its entirety to the following: 6 " SECTION 2.1.1 REVOLVING LOAN COMMITMENT. From time to time on any Business Day occurring prior to the Revolving Loan Commitment Termination Date, each Lender will make revolving loans (relative to such Lender, its "REVOLVING LOAN") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing requested by the Borrower to be made on such day. The Commitment of each Lender described in this SECTION 2.1.1 is herein referred to as its "REVOLVING LOAN COMMITMENT". On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Revolving Loans attributable to Tranche A. On the terms and subject to the conditions hereof, the Borrower may borrow on December 21, 1998 the Revolving Loans attributable to Tranche B, may from time to time prepay such Revolving Loans attributable to Tranche B and such amounts may not be reborrowed." (g) SUBSECTION 2.1.3(a) and SUBSECTION 2.1.3(b) of the Credit Agreement are amended hereby in their entirety to the following: " (a) in the case of Revolving Loans, the aggregate outstanding principal amount of all Revolving Loans outstanding would exceed the lesser of (i) the Revolving Loan Commitment Amount and (ii) the Senior Debt Capacity then in effect minus all other Senior Debt outstanding; (b) in the case of Term Loans, the aggregate original principal amount of all Term Loans would exceed the lesser of (i) the Term Loan Commitment Amount and (ii) the Senior Debt Capacity then in effect minus all other Senior Debt outstanding;". (h) SECTION 2.2.1 of the Credit Agreement is amended hereby in its entirety to the following: " SECTION 2.2.1 OPTIONAL. The Borrower may, from time to time on any Business Day occurring after the time of the initial Borrowing hereunder, voluntarily reduce the amount of any Commitment Amount; PROVIDED, HOWEVER, that all such reductions shall require at least three Business Days' prior notice to the Agent, and such reduction of the Commitment Amount shall be in a minimum amount of $5,000,000 and in increments of $1,000,000." (i) SECTION 2.2.2 of the Credit Agreement is amended hereby by deleting SUBSECTION (c) thereof in its entirety. (j) SECTION 2.6 of the Credit Agreement is amended hereby in its entirety to the following: 7 " SECTION 2.6 DETERMINATION OF BORROWING BASE. Upon delivery of a Reserve Report or Alternate Reserve Report pursuant to SECTION 7.2 hereof and PROVIDED, that such delivery shall be on or before the dates required therein, then: (a) With respect to the annual or semi-annual, as the case may be, determination of the Borrowing Base, the Agent will propose to the Lenders a Borrowing Base for acceptance by the Required Borrowing Base Lenders. If such Borrowing Base, as proposed by the Agent is accepted by the Required Borrowing Base Lenders, then such agreed Borrowing Base shall be communicated by the Agent to the Borrower on or before (i) the next April 30th, in the case of a Reserve Report and (ii) the next October 31st, in the case of an Alternate Reserve Report, and shall remain in effect until the next October 31st or April 30th; PROVIDED THAT if such proposed Borrowing Base is not approved by the Required Borrowing Base Lenders prior to the applicable date then, within thirty (30) days following the applicable date, the Required Borrowing Base Lenders will establish and agree to a Borrowing Base, and such amount will be promptly communicated to the Borrower; PROVIDED THAT the then current Borrowing Base shall remain in effect until the Borrower is notified of the new Borrowing Base. The new Borrowing Base shall become effective as of the date that the Borrower receives notification from the Agent of the new Borrowing Base. The Borrowing Base, as determined and established pursuant to this SECTION 2.6(a) shall be subject, at all times after April 30, 1999, to the redetermination of the then effective Borrowing Base as a result of a Non-Standard Determination. (b) With respect to a redetermination of the Borrowing Base resulting from a Non-Standard Determination, the Agent or the Required Lenders and the Borrower shall have the right, but not the obligation on no more than one occasion during each six month period ending on April 30th and October 31st, to notify the Borrower or the Agent, respectively, of its intent to perform a Non-Standard Determination of the Borrowing Base. In connection with the Non-Standard Determination and notwithstanding the delivery of any new Alternate Reserve Report, the Agent shall propose, and the Required Borrowing Base Lenders shall agree to and approve, a new Borrowing Base which shall become effective upon receipt by the Borrower of notice of such new Borrowing Base until such new Borrowing Base may be redetermined as a result of a scheduled semi-annual determination of the Borrowing Base pursuant to SECTION 2.6(a). In connection with any Non-Standard Determination, the Borrower shall deliver promptly upon the request of the Agent a new Alternate Reserve Report to the Agent." (k) SECTION 3.1 of the Credit Agreement is amended hereby by inserting the following SECTION 3.1.5 following SECTION 3.1.4 thereof: 8 " SECTION 3.1.5 REPAYMENT OF TRANCHE B. The Borrower shall immediately repay all Loans outstanding under Tranche B on April 30, 1999; PROVIDED, HOWEVER, that in the event of any issuance of New Subordinated Capital prior to April 30, 1999, the Borrower shall within seven (7) days of such issuance repay Loans outstanding under Tranche B in an amount equal to the proceeds from the issuance of such New Subordinated Capital which were not allocated (as set forth in the definition of "Borrowing Base") to the reduction of the Borrowing Base." (l) SECTION 3.1.2 of the Credit Agreement is amended hereby in its entirety to the following: " SECTION 3.1.2 MANDATORY PREPAYMENTS ON REVOLVING LOANS. If at any time prior to the Revolving Loan Commitment Termination Date, the aggregate principal amount of all Senior Debt outstanding shall exceed the Senior Debt Capacity then in effect, the Borrower shall forthwith repay the Revolving Loans in an aggregate amount equal to such excess; PROVIDED that with respect to prepayment of amounts outstanding under Tranche A, Borrower shall have the option to prepay such Revolving Loans under Tranche A, in no more than five substantially equal monthly installments, in an amount such that upon the conclusion of such mandatory prepayments, the aggregate principal amount of all outstanding Senior Debt will not exceed the Senior Debt Capacity. If the aggregate principal amount of all Senior Debt outstanding exceeds the Senior Debt Capacity at any time, the first such payment pursuant to the proviso in the preceding sentence shall be due within 90 days after the commencement date of a Deficiency Period, and the remaining payments shall be due on the numerically corresponding day of each of the subsequent months. If a subsequent month does not contain a numerically corresponding day, the Borrower shall make such payment on the last Business Day of such month, or if the numerically corresponding day is not a Business Day, such payment will be due on the preceding Business Day." (m) SECTION 3.1.3 of the Credit Agreement is amended hereby in its entirety to the following: " SECTION 3.1.3 MANDATORY PREPAYMENTS ON TERM LOANS. If at any time after the making of the Term Loans, the aggregate principal amount of all Senior Debt outstanding shall exceed the Borrowing Base then in effect, the Borrower shall, at the Borrower's option, either (i) forthwith repay the Term Loans in an aggregate amount equal to such excess or (ii) prepay the Term Loans, in no more than five substantially equal monthly installments, in an amount such that upon the conclusion of such mandatory prepayments, the aggregate principal amount of all outstanding Senior Debt will not exceed the Borrowing Base. If the aggregate principal amount of all Senior Debt outstanding exceeds the Borrowing Base at any time, the first such payment pursuant to CLAUSE (ii) above shall be due within 90 days after the 9 commencement date of a Deficiency Period, and the remaining payments shall be due on the numerically corresponding day of each of the subsequent months. If a subsequent month does not contain a numerically corresponding day, the Borrower shall make such payment on the last Business Day of such month, or if the numerically corresponding day is not a Business Day, such payment will be due on the preceding Business Day. Mandatory prepayments pursuant to this SECTION 3.1.3 shall be in addition to and not in lieu of payments required pursuant to SECTION 3.1.1. Mandatory prepayments pursuant to this SECTION 3.1.3 shall be applied to the next scheduled repayment or repayments required pursuant to SECTION 3.1.1 if, as of such repayment date, after giving effect to such scheduled repayment, the aggregate principal amount of all Senior Debt outstanding does not exceed the Borrowing Base then in effect, however, the repayments pursuant to SECTION 3.1.1 shall always be required." (n) SECTION 3.3.1 of the Credit Agreement is amended hereby in its entirety to the following: " SECTION 3.3.1 RATES. Pursuant to an appropriately delivered Borrowing Request or Continuation/Conversion Notice, the Borrower may elect that Loans comprising a Borrowing accrue interest at a rate per annum: (1) on that portion maintained from time to time as a Prime Rate Loan with respect to Tranche A, equal to the sum of the Prime Rate from time to time in effect PLUS the Applicable Margin applicable to Tranche A from time to time in effect; (2) on that portion maintained from time to time as a Prime Rate Loan with respect to Tranche B, equal to the sum of the Prime Rate from time to time in effect PLUS the Applicable Margin applicable to Tranche B from time to time in effect; (3) on that portion maintained as a LIBO Rate Loan with respect to Tranche A, during each Interest Period applicable thereto, equal to the sum of the LIBO Rate for such Interest Period PLUS the Applicable Margin applicable to Tranche A; and (4) on that portion maintained as a LIBO Rate Loan with respect to Tranche B, during each Interest Period applicable thereto, equal to the sum of the LIBO Rate for such Interest Period PLUS the Applicable Margin applicable to Tranche B. The LIBO Rate for any Interest Period for LIBO Rate Loans will be determined by the Agent on the basis of the applicable rates furnished to and received by the Agent from the Reference Banks, two Business Days before the first day of such Interest 10 Period. All Fixed Rate Loans shall bear interest from and including the first day of the applicable Interest Period to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Fixed Rate Loan." (o) SECTION 3.4.1 of the Credit Agreement is amended hereby in its entirety to the following: " SECTION 3.4.1 COMMITMENT FEE. The Borrower agrees to pay to the Agent for the account of each Lender, for the period (including any portion thereof when any of Commitments are suspended by reason of the Borrower's inability to satisfy any condition of ARTICLE V) commencing on the Effective Date and continuing through the Revolving Loan Commitment Termination Date, commitment fees (collectively, the "COMMITMENT FEES") at a rate per annum for each day of such period equal to the percentage set forth under the "Unused Fee" column of the Applicable Margin times such Lender's respective Percentage of the sum of the average daily unused portion of Tranche A. Fees payable pursuant to this SECTION 3.4.1 shall be payable by the Borrower in arrears on each Quarterly Payment Date, commencing with the first such day following the Effective Date, and on the Revolving Loan Commitment Termination Date." (p) SUBSECTION 5.2.1(d) of the Credit Agreement is amended hereby in its entirety to the following: " (d) the Senior Debt outstanding does not exceed the Senior Debt Capacity and the Borrower is in compliance with the Current Ratio and Fixed Charge Coverage Ratio as required by SECTIONS 8.4(c) and 8.4(d), respectively, and, immediately after giving effect to the proposed Borrowing, Senior Debt shall not exceed the Senior Debt Capacity then in effect and the Indebtedness of the Borrower shall not exceed the amount permitted under CLAUSE (a) of SECTION 8.4." (q) SUBSECTION 6.2(c) of the Credit Agreement is amended hereby in its entirety to the following: " (c) result in, or require the creation or imposition of, any Lien on any properties of the Borrower or its Subsidiaries except as Liens will be imposed, created, or required upon execution and delivery of the Security Documents pursuant to SECTION 7.11." (r) ARTICLE VI of the Credit Agreement is amended hereby by inserting the following SECTION 6.18 following SECTION 6.17 thereof: " SECTION 6.18 YEAR 2000 MATTERS. Any reprogramming required to permit the proper functioning in all respects (but only to the extent that such proper 11 functioning would otherwise be impaired by the occurrence of the year 2000) in and following the year 2000, of material computer systems and other material equipment containing embedded microchips, in either case owned or operated by Borrower or any Subsidiary, and the testing of all such systems and other equipment as so reprogrammed, will be completed by December 31, 1999. Prior to December 31, 1999, the Borrower shall have made reasonable inquiry of parties whose operations are material to the Borrower's and its Subsidiaries' business, taken as a whole, and who have computer systems and other equipment containing embedded microchips, as to such parties' preparedness for any impairments to such systems resulting from the occurrence of the year 2000. The costs to the Borrower and its Subsidiaries that have not been incurred as of the date hereof for such reprogramming and testing and for the other reasonably foreseeable consequences to them of any improper functioning of other computer systems and equipment containing embedded microchips owned or operated by Borrower or any Subsidiary due to the occurrence of the year 2000 could not reasonably be expected to result in a Default or Event of Default." (s) SUBSECTION 7.2(c)(i)(B) of the Credit Agreement is amended hereby in its entirety to the following: "(B) the Borrower has fulfilled all its obligations under this Agreement, the Notes and the other Loan Documents". (t) SUBSECTION 7.2(e) of the Credit Agreement is amended hereby in its entirety to the following: " (e) (i) as soon as available, but in no event later than 90 days after the close of each Fiscal Year of the Borrower, commencing with the Fiscal Year ended December 31, 1998, Reserve Reports prepared by Ryder Scott Company Petroleum Engineers or another independent engineering firm acceptable to the Agent and the Required Lenders as of January 1 of the next succeeding year, and (ii) as soon as available, but in no event later than 45 days after each June 30, commencing June 30, 1999, Alternate Reserve Reports dated as of July 1;". (u) SUBSECTION 7.2(m) of the Credit Agreement is amended hereby in its entirety to the following: " (m) as soon as reasonably possible and in any event within ten (10) Business Days if the principal of the Senior Debt outstanding (including the Loans) shall exceed the Senior Debt Capacity then in effect, notice of such excess." (v) ARTICLE VII of the Credit Agreement is amended hereby by inserting the following SECTION 7.11 following SECTION 7.10 thereof: 12 " SECTION 7.11 SECURITY DOCUMENTS. If the Borrower fails to issue the New Subordinated Capital prior to February 28, 1999, then, without affecting in any way any other rights of the Lenders hereunder, the Borrower shall: (i) duly execute and deliver to the Collateral Agent and cause each such Security Document to be filed, registered and recorded, as the law may require or the Agent may request, in each jurisdiction where so required or requested, and deliver to the Collateral Agent an acknowledgment copy, or other evidence satisfactory to it, of each such filing, registration and recordation, in order to mortgage, assign, grant a security interest in and pledge to the Collateral Agent, acting on behalf of the Lenders, right, title and interest (and, with respect to any Qualified Partnership Properties, the Borrower's PRO RATA share of the right, title and interest of any partnership Subsidiary) in and to the Borrowing Base Properties located in the United States, and the proceeds thereof, having a Discounted Present Value, as of the date of the most recent Reserve Report, of 80% of the Discounted Present Value of such Borrowing Base Properties (the "COLLATERAL") in such request, and to perfect and evidence the first priority of all such Security Documents (subject to liens and encumbrances permitted by the terms of such instruments); PROVIDED that the Borrower shall not, and shall not permit any of its Subsidiaries to, on or after the Effective Date enter into any amendment of any such contract or agreement, or enter into any other contract or agreement, that in either case would result in any additional such material consent, authorization or approval requirement; and (ii) deliver to the Agent, prior to March 31, 1999, evidence acceptable to the Agent, in its reasonable discretion, indicating that a Security Document covering 80% of the Discounted Present Value of the Borrowing Base Properties located in the United States have been filed, registered and recorded, as the law may require or the Agent may request, in each jurisdiction where so required or requested. The Borrower further agrees to execute, or cause its Subsidiaries to execute, any and all further documents, financing statements, agreements and instruments, and take all further actions (including filing Uniform Commercial Code financing statements), which may be required under applicable law, or which the Agent may reasonably request, in order to effectuate the transactions contemplated by this Agreement and in order to grant, preserve, protect and perfect the validity and first priority of any security interests created pursuant to CLAUSE (i) above. The Borrower will also provide and cause its Subsidiaries to provide at their own expense to the Agent such title opinions, operating agreements and other instruments and documents relating to the Collateral then in the possession of the Borrower or any Subsidiary as the Agent may reasonably request." 13 (w) SECTION 8.2 of the Credit Agreement is amended hereby by (i) deleting "or;" at the end of SUBSECTION (a) thereof, (ii) replacing "." following SUBSECTION (b) thereof with "; or", and (iii) inserting the following SUBSECTION (c) following SUBSECTION (b) thereof: " (c) create, incur, assume or suffer to exist or otherwise become or be liable in respect of any subordinated Indebtedness except as specifically permitted by the definition of "Subordinated Indebtedness"." (x) SECTION 8.3 of the Credit Agreement is amended hereby by (i) deleting "and" at the end of SUBSECTION (l) thereof, (ii) replacing "." following SUBSECTION (m) thereof with "; and", and (iii) inserting the following SUBSECTION (n) following SUBSECTION (m) thereof: " (n) Liens securing payment of the Senior Debt, granted pursuant to any Security Document executed by the Borrower pursuant to SECTION 7.11." (y) SUBSECTION 8.6(b)(i) of the Credit Agreement is amended hereby by replacing "August 1, 2000" with "July 1, 2000". (z) SECTION 10.3 of the Credit Agreement is amended hereby in its entirety to the following: " SECTION 10.3 EXCULPATION. Neither the Agent, the Co-Agent nor any of their directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any other Loan Document, or in connection herewith or therewith, except for their own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Loan Document, nor for the creation, perfection or priority of any Liens which may be created in the future by any of the Security Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any Collateral nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other Loan Document. The Agent and the Co-Agent shall each be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent or the Co-Agent believes to be genuine and to have been presented by a proper Person." (aa) SUBSECTION 11.1(b) of the Credit Agreement is amended hereby in its entirety to the following: " (b) modify this SECTION 11.1, change the definition of "REQUIRED LENDERS", increase any Commitment Amount or the Percentage of any Lender, change the definition of "PRIME RATE" or "LIBO RATE" to reduce interest payable or the Applicable Margin by the Borrower, reduce any fees described in ARTICLE III, release 14 any Collateral, or extend any Revolving Loan Commitment Termination Date or Term Loan Commitment Termination Date, without the consent of each Lender and each holder of a Note;". (bb) SECTION 11.3 of the Credit Agreement is amended hereby by (i) deleting "and" at the end of SUBSECTION (a), (ii) relettering SUBSECTION (b) thereof as SUBSECTION (c), and (iii) inserting the following SUBSECTION (b) following SUBSECTION (a) thereof: " (b) any costs incurred pursuant to obtaining a security interest in the Borrower's property, including fees and disbursements to special counsel to Lenders and expenses of any filing, recording, refiling or rerecording of the Security Documents and/or any Uniform Commercial Code financing statements relating thereto and all amendments, supplements and modifications to any thereof and any and all other documents or instruments of further assurance which may be required to be filed or recorded or refiled or rerecorded pursuant to the terms of SECTION 7.11 or relating to any Lien for benefit of the Lenders, and". (cc) SECTION 11.4 of the Credit Agreement is amended hereby by replacing "the Co-Agents and each Agent" with "the Agent, the Collateral Agent and the Co-Agent". (dd) ARTICLE XI of the Credit Agreement is amended hereby by inserting the following SECTION 11.14 following SECTION 11.13 thereof: " SECTION 11.14 COLLATERAL AGENT. Each Lender and BMO Financial, Inc. hereby agree that, upon the execution and delivery of any Security Document pursuant to SECTION 7.11, BMO Financial, Inc. shall serve as Collateral Agent and each Lender hereby appoints BMO Financial, Inc. as its Collateral Agent under and for purposes of the Security Documents. Each Lender and the Borrower also agree that, upon the execution and delivery of any Security Document pursuant to SECTION 7.11, all benefits of ARTICLE X shall inure to the benefit of BMO Financial, Inc., as if it were Agent, as to any actions taken or omitted to be taken while it acts as Collateral Agent and BMO Financial, Inc., in its capacity as Collateral Agent shall, in addition, become vested with all rights, privileges and protections afforded to the Agent pursuant to SECTION 11.1(d) and 11.3. Nothing contained herein or in the Exhibits hereto shall require BMO Financial, Inc. to act as Collateral Agent under the Security Documents unless it receives such indemnifications and other assurances as it deems appropriate in its sole discretion and in the event that BMO Financial, Inc. does not act as Collateral Agent, the Required Lenders may designate another Collateral Agent." (ee) The second paragraph of EXHIBIT B - BORROWING REQUEST to the Credit Agreement is amended hereby by deleting the second and third sentences of such paragraph in their entirety. 15 (ff) The Credit Agreement is hereby amended by inserting EXHIBIT G to this Amendment as EXHIBIT G to the Credit Agreement following EXHIBIT F to the Credit Agreement. 3. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders and the Agents to enter into this Amendment, the Borrower hereby reaffirms, as of the date hereof, its representations and warranties contained in ARTICLE VI of the Credit Agreement (except to the extent any such representation and warranty relates solely to an earlier date) and additionally represents and warrants as follows: 3.1 ORGANIZATION. The Borrower and each of its corporate Subsidiaries is a corporation validly organized and existing and in good standing under the laws of the state, or country, of its incorporation, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business requires such qualification, except where failure to qualify would not have a material adverse effect on the business or financial condition of the Borrower and its Subsidiaries taken as a whole or the Borrower's ability to perform the Loan Documents, as such may be amended hereby, or this Amendment. Each of the Borrower's Subsidiaries which is organized as a partnership is validly organized and existing and in good standing under the laws of the state of its formation, and is duly qualified to do business and is in good standing as a foreign partnership where the nature of its business requires such qualification, except where failure to qualify would not have a material adverse effect on the business or financial condition of the Borrower, or the Borrower and its Subsidiaries taken as a whole or the Borrower's ability to perform under the Loan Documents, as such may be amended hereby, or this Amendment. The Borrower and each of its Subsidiaries has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its Obligations under the Credit Agreement, as amended hereby, each other Loan Document and this Amendment and to own and hold under lease its property and to conduct its business substantially as currently conducted by it. 3.2 DUE AUTHORIZATION, NON-CONTRAVENTION. The execution, delivery and performance by the Borrower of this Amendment and the consummation of the transactions contemplated hereby and by the Credit Agreement as so amended, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrower's Organic Documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower or any Subsidiary; or (c) result in, or require the creation or imposition of, any Lien on any properties of the Borrower or its Subsidiaries except as Liens will be imposed, created, or required upon execution and delivery of the Security Documents pursuant to SECTION 7.11 of the Credit Agreement. 16 3.3 GOVERNMENTAL APPROVAL. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery or performance by the Borrower of this Amendment. 3.4 VALIDITY, ETC. This Amendment and the Credit Agreement as amended hereby constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms except as such enforceability is subject to the effect of (i) any applicable bankruptcy, insolvency, reorganization or similar law relating to or affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), including concepts of materiality, reasonableness, good faith and fair dealing. 4. COVENANT. The Borrower agrees that, at the request of the Agent, Borrower will enter into a restated Credit Agreement with the Agent, the Co-Agent and the Lenders in substantially the form of the Credit Agreement as amended by this Amendment. 5. EFFECT OF AMENDMENT. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended hereby. 6. GOVERNING LAW, SEVERABILITY, ETC. THIS AMENDMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. Whenever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. THIS WRITTEN AMENDMENT AND THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 7. MISCELLANEOUS. 7.1 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 17 7.2 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 7.3 EFFECTIVENESS. This Amendment shall become effective when (i) counterparts hereof executed on behalf of the Borrower and each Lender (or notice thereof satisfactory to the Agent) shall have been received by the Agent, (ii) Agent has received, for the account of each Lender, the amendment fee described in that certain fee letter agreement dated of even date with this Amendment, between the Borrower and the Agent, (iii) when the Agent and the Co-Agent shall have received the fees described in those certain fee letter agreements dated of even date with this Amendment, between the Borrower and the Agent and the Co-Agent, respectively, and (iv) notice thereof shall have been given by the Agent to the Borrower and each Lender. 18 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first written above. POGO PRODUCING COMPANY By: /s/ JOHN W. ELSENHHANS ---------------------- Name: John W. Elsenhans Title: Vice President and Chief Financial Officer S - 1 BANK OF MONTREAL, acting through its U.S. branches and agencies, including initially its Chicago Illinois branch, as Agent By: /s/ ROBERT L. ROBERTS --------------------- Name: Robert L. Roberts Title: Director, U.S. Corporate Banking S - 2 PARIBAS, formerly known as Banque Paribas, as Co-Agent By: /s/ BARTON P. SCHOUEST ---------------------- Name: Barton P. Schouest Title: Managing Director By: /s/ DOUGLAS R. LIFTMAN ---------------------- Name: Douglas R. Liftman Title: Vice President S - 3 BANK OF MONTREAL, as a Lender By: /s/ ROBERT L. ROBERTS --------------------- Name: Robert L. Roberts Title: Director, U.S. Corporate Banking S - 4 PARIBAS, formerly known as Banque Paribas, as a Lender By: /s/ BARTON P. SCHOUEST ---------------------- Name: Barton P. Schouest Title: Managing Director By:/s/ DOUGLAS R. LIFTMAN ---------------------- Name: Douglas R. Liftman Title: Vice President S - 5 BANKBOSTON, N.A., as a Lender By: /s/ TERRENCE RONEN ------------------ Name: Terrence Ronen Title: Director S - 6 NATIONSBANK, N.A., as a Lender By: /s/ PAUL A. SQUIRES -------------------- Name: Paul A. Squires Title: Senior Vice President S - 7 THE CHASE MANHATTAN BANK, N.A., as a Lender By: /s/ STEVEN WOOD --------------- Name: Steven Wood Title: Vice President S - 8 SOCIETE GENERALE, as a Lender By: /s/ PAUL E. CORNELL ------------------- Name: Paul E. Cornell Title: Managing Director S - 9 TORONTO DOMINION (TEXAS), INC., as a Lender By: /s/ CAROL BRANDT ---------------- Name: Carol Brandt Title: Vice President S - 10 THE SANWA BANK LIMITED, NEW YORK BRANCH, as a Lender By: /s/ MR. TAKURO OJIMA -------------------- Name: Mr. Takuro Ojima Title: Assistant Vice President S - 11 EX-27 3 EXHIBIT 27
5 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OF POGO PRODUCING COMPANY, INCLUDING THE CONSOLIDATED BALANCE SHEETS AS OF SEPT. 30, 1998 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPT. 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1998 17,422 0 56,665 0 10,632 88,148 1,656,936 963,227 823,350 71,112 381,854 0 0 40,119 243,705 823,350 159,678 159,572 51,196 51,196 118,748 0 17,513 (19,858) 9,052 (10,806) 0 0 0 (10,806) (0.29) (0.29) THIS AMOUNT IS NOT DISCLOSED ON THE FACE OF THE CONSOLIDATED FINANCIAL STATEMENTS DUE TO LACK OF MATERIALITY, BUT IS INCLUDED AS A CONTRA-ASSET IN ACCOUNTS RECEIVABLE. DOES NOT INCLUDE GAINS OR LOSSES ON PROPERTY SALES. INCLUDES LEASE OPERATING EXPENSE AND NATURAL GAS PURCHASES AND PIPELINE OPERATIONS, 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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