UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 1996
OR
( ) Transition report pursuant to section 13 or 15[d] of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-7792
Pogo Producing Company
(Exact name of registrant as specified in its charter)
Delaware 74-1659398
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Greenway Plaza, Suite 2700
Houston, Texas 77046-0504
(Address of principal executive offices) (Zip Code)
(713) 297-5000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days: Yes X No
Registrant's number of common shares outstanding
as of June 30, 1996: 33,197,827
Part I. Financial Information
Pogo Producing Company and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- -------------------------------
1996 1995 1996 1995
------------- --------------- ----------- --------------
(Expressed in thousands, except per share amounts)
Revenues:
Oil and gas $ 51,543 $ 41,738 $ 99,760 $ 83,448
Gains (losses) on sales -- -- (165) 100
------------- --------------- ----------- --------------
Total 51,543 41,738 99,595 83,548
------------- --------------- ----------- --------------
Operating Costs and Expenses:
Lease operating 9,205 8,177 18,080 16,664
General and administrative 4,383 4,335 9,804 8,676
Exploration 3,966 1,117 7,876 2,492
Dry hole and impairment 2,568 943 5,118 2,371
Depreciation, depletion and amortization 15,793 17,939 31,506 36,396
------------- --------------- ----------- --------------
Total 35,915 32,511 72,384 66,599
------------- --------------- ----------- --------------
Operating Income 15,628 9,227 27,211 16,949
Interest:
Charges (3,172) (2,735) (6,184) (5,526)
Income 124 19 139 60
Capitalized 1,004 93 1,830 236
------------- --------------- ----------- --------------
Income Before Income Taxes 13,584 6,604 22,996 11,719
Income Tax Expense (4,647) (2,251) (7,794) (3,935)
------------- --------------- ----------- --------------
Income Before Extraordinary Loss 8,937 4,353 15,202 7,784
Extraordinary Loss on
Early Extinguishment of Debt (821) -- (821) --
------------- --------------- ----------- --------------
Net Income $ 8,116 $ 4,353 $ 14,381 $ 7,784
============= =============== =========== ==============
Primary Earnings Per Share:
Income before extraordinary loss $ 0.26 $ 0.13 $ 0.44 $ 0.23
Extraordinary loss (0.02) -- (0.02) --
------------- --------------- ----------- --------------
Net Income $ 0.24 $ 0.13 $ 0.42 $ 0.23
============= =============== =========== ==============
Fully Diluted Earnings Per Share:
Income before extraordinary loss $ 0.25 $ 0.13 $ 0.44 $ 0.23
Extraordinary loss (0.02) -- (0.02) --
------------- --------------- ----------- --------------
Net Income $ 0.23 $ 0.13 $ 0.42 $ 0.23
============= =============== =========== ==============
Dividends Per Common Share $ 0.03 $ 0.03 $ 0.06 $ 0.06
============= =============== =========== ==============
See accompanying notes to consolidated financial statements.
- 1 -
Pogo Producing Company and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
1996 1995
-------------- -------------
(Unaudited)
(Expressed in thousands,
except share amounts)
Assets
Current Assets:
Cash and cash investments $ 18,835 $ 4,481
Accounts receivable 26,857 21,820
Other receivables 25,367 30,504
Inventories 8,074 6,438
Other 1,465 722
------------- -------------
Total current assets 80,598 63,965
------------- -------------
Property and Equipment:
Oil and gas, on the basis of successful efforts accounting
Proved properties being amortized 977,207 963,330
Unproved properties and properties
under development, not being amortized 77,595 47,431
Other, at cost 7,605 8,811
-------------- -------------
1,062,407 1,019,572
Less--accumulated depreciation, depletion and
amortization, including $4,503 and $5,603,
respectively, applicable to other property 787,674 757,739
-------------- -------------
274,733 261,833
-------------- -------------
Other 17,273 12,379
-------------- -------------
$ 372,604 $ 338,177
============== =============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 9,221 $ 10,007
Other payables 15,623 35,254
Current portion of long-term debt -- 3,000
Accrued interest payable 1,713 1,714
Accrued payroll and related benefits 2,723 1,239
Other 119 103
-------------- -------------
Total current liabilities 29,399 51,317
-------------- -------------
Long-Term Debt 202,550 163,249
Deferred Federal Income Tax 41,942 41,409
Deferred Credits 10,831 10,494
-------------- -------------
Total liabilities 284,722 266,469
-------------- -------------
Shareholders' Equity:
Preferred stock, $1 par; 2,000,000 shares authorized -- --
Common stock, $1 par; 100,000,000 shares
authorized, 33,213,402 and
33,006,972 shares issued, respectively 33,214 33,007
Additional capital 136,428 132,881
Retained earnings (deficit) (81,459) (93,856)
Currency translation adjustment 23 --
Treasury stock, at cost (324) (324)
-------------- -------------
Total shareholders' equity 87,882 71,708
-------------- -------------
$ 372,604 $ 338,177
============== =============
See accompanying notes to consolidated financial statements.
- 2 -
Pogo Producing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
-----------------------------------
1996 1995
-------------- --------------
(Expressed in thousands)
Cash Flows from Operating Activities:
Cash received from customers $ 94,723 $ 91,691
Operating, exploration, and general
and administrative expenses paid (36,546) (28,096)
Interest paid (6,185) (5,479)
Federal income taxes paid (6,000) --
Other (1,632) (1,055)
-------------- --------------
Net cash provided by operating activities 44,360 57,061
-------------- --------------
Cash Flows from Investing Activities:
Capital expenditures (64,089) (50,625)
Purchase of proved reserves -- (11,921)
Proceeds from the sales of properties 100 100
-------------- --------------
Net cash used in investing activities (63,989) (62,446)
-------------- --------------
Cash flows from Financing Activities:
Proceeds from issuance of new debt 115,000 --
Net borrowings (payments) under revolving credit agreement (29,000) 8,000
Net borrowings (payments) under uncommitted lines
of credit with banks (9,000) 1,000
Payments of cash dividends on common stock (1,984) (1,969)
Purchase of 8% debentures due 2005 (40,699) (450)
Payment of debt issue expenses (2,875) --
Proceeds from exercise of stock options 2,518 845
-------------- --------------
Net cash provide by financing activities 33,960 7,426
-------------- --------------
Effect of Exchange Rate Changes 23 __
-------------- --------------
Net Increase in Cash and Cash Investments 14,354 2,041
Cash and Cash Investments at the Beginning of the Year 4,481 2,922
-------------- --------------
Cash and Cash Investments at the End of the Period $ 18,835 $ 4,963
============== ==============
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income $ 14,381 $ 7,784
Adjustments to reconcile net income to
net cash provided by operating activities -
Extraordinary loss on early extinguishment
of debt (net of tax) 821 --
(Gains) losses from the sales of properties 165 (100)
Depreciation, depletion and amortization 31,506 36,396
Dry hole and impairment 5,118 2,371
Interest capitalized (1,830) (236)
Deferred federal income taxes 2,212 4,245
Change in operating assets and liabilities (8,013) 6,601
-------------- --------------
Net Cash Provided by Operating Activities $ 44,360 $ 57,061
============== ==============
See accompanying notes to consolidated financial statements.
- 3 -
Pogo Producing Company and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
Six Months Ended June 30,
--------------------------------------------------------------
1996 1995
-------------------------- -----------------------------
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 33,006,972 $ 33,007 32,825,836 $ 32,826
Stock options exercised 206,430 207 91,458 91
---------- ------------ ---------- -------------
Issued at end of period 33,213,402 33,214 32,917,294 32,917
---------- ------------ ---------- -------------
Additional Capital:
Balance at beginning of year 132,881 130,675
Stock options exercised 3,547 1,229
-------------- -------------
Balance at end of period 136,428 131,904
-------------- -------------
Retained Earnings (Deficit):
Balance at beginning of year (93,856) (99,140)
Net income 14,381 7,784
Dividends ($0.06 per common share) (1,984) (1,969)
------------ -------------
Balance at end of period (81,459) (93,325)
------------ -------------
Treasury Stock:
Balance at beginning of year (15,575) (324) (15,575) (324)
Activity during period -- -- -- --
---------- ------------ ---------- -------------
Balance at end of period (15,575) (324) (15,575) (324)
---------- ------------ ---------- -------------
Cumulative Foreign
Currency Translation 23 --
------------ -------------
Common Stock Outstanding,
at the End of the Period 33,197,827 32,901,719
========== ==========
Total Shareholders' Equity $ 87,882 $ 71,172
============ =============
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. The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's latest annual report.
(2) Long-Term Debt -
Long-term debt and the amount due within one year at June 30,
1996 and December 31, 1995, consists of the following:
June 30, December 31,
1996 1995
-------------- -------------
(Expressed in thousands)
Senior debt --
Bank revolving credit agreement
LIBO Rate based loan, borrowing at
an interest rate of 6.81% $ -- $ 27,000
Prime rate based loan, borrowing at
an interest rate of 8.5% -- 2,000
Uncommitted credit lines with banks, borrowings at
average interest rates of 6.8% -- 9,000
-------------- -------------
Total senior debt -- 38,000
-------------- -------------
Subordinated debt --
5 1/2% Convertible subordinated notes due 2004 86,250 86,250
5 1/2% Convertible subordinated notes due 2006 115,000 --
8% Convertible subordinated debentures due 2005 1,300 41,999
-------------- -------------
Total subordinated debt 202,550 128,249
-------------- -------------
Total debt 202,550 166,249
Amount due within one year consisting of the sinking fund
requirement on the 2005 Debentures -- (3,000)
-------------- -------------
Long-term debt $ 202,550 $ 163,249
============== =============
On June 18, 1996, the Company issued $115,000,000 of 5 1/2%
Convertible Subordinated Notes due 2006 (the "2006 Notes"). The 2006
Notes are convertible into common stock of the Company at a price of
$42.185 per share. The proceeds from the issuance of the 2006 Notes
were used to retire all but $1,300,000 of the remaining balance of the
Company's 8% Convertible Subordinated Debentures due 2005 (the "2005
Debentures"), to repay the amount outstanding under the Company's bank
revolving credit agreement and uncommitted lines of credit with banks,
and to purchase short-term cash investments. Holders of $1,300,000 of
the 2005 Debentures elected to convert (in July 1996) their holdings
into common stock of the Company at $39.50 per share. Refer to Note
3 of the Notes to Consolidated Financial
Statements included in the Company's latest annual report for a further
discussion of the bank revolving credit agreement and the 5 1/2%
Convertible Subordinated Notes due 2004 (the "2004 Notes").
- 5 -
Pogo Producing Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(3) Earnings per Share -
Earnings per common and common equivalent share (primary earnings
per share) are based on the weighted average number of shares of common
stock and common equivalent shares outstanding during the periods. The
dilutive effect of stock options was considered in the earnings per share
reported for the periods. The 2005 Debentures (all but $1,300,000 of which
were retired on June 28, 1996) are common stock equivalents and were ant-
dilutive in all periods. Earnings per common and common equivalent share
assuming full dilution (fully diluted earnings per share) considered the
2004 Notes, which were dilutive in the 1996 periods, but anti-dilutive in
the 1995 periods, and the 2006 Notes (issued on June 18, 1996) which were
anti-dilutive in the 1996 periods they were outstanding. Earnings per
share are based on the following:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- -------------------------------
1996 1995 1996 1995
------------- --------------- ----------- --------------
(Expressed in thousands)
Earnings applicable to common stock:
Primary --
Income before extraordinary loss $ 8,937 $ 4,353 $ 15,202 $ 7,784
Extraordinary loss (821) -- (821) --
------------- --------------- ----------- --------------
Net Income $ 8,116 $ 4,353 $ 14,381 $ 7,784
============= =============== =========== ==============
Fully diluted --
Income before extraordinary loss $ 9,708 $ 4,353 $ 16,744 $ 7,784
Extraordinary loss (821) -- (821) --
------------- --------------- ----------- --------------
Net Income $ 8,887) $ 4,353 $ 15,923 $ 7,784
============= =============== =========== ==============
Weighted average number of common
stock and common equivalent
shares outstanding:
Primary 33,976 33,495 33,905 33,426
Fully diluted 37,899 37,496 37,821 33,458
- 6 -
Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This discussion should be read in conjunction
with Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the
Company's annual report on Form 10-K for the year
ended December 31, 1995.
Results of Operations -
The Company reported net income for the
second quarter of 1996 of $8,116,000 or $0.24 per share
($0.23 on a fully diluted basis) compared to net income
for the second quarter of 1995 of $4,353,000 or $0.13
per share (on both a primary and a fully diluted basis). For the
first six months of 1996, the Company reported net
income of $14,381,000 or $0.42 per share (on both a primary and
fully diluted basis) compared to net income for the first six months
of 1995 of $7,784,000 or $0.23 per share (on both a primary and a
fully diluted basis). The Company recorded an extraordinary loss
during the second quarter of 1996 of $821,000, or $0.02 per share
related to early
retirement of the Company's 2005 Debentures with the proceeds
from the Company's issuance of its 2006 Notes on June 18, 1996.
Earnings per share are based on the
weighted average number of common and common
equivalent shares outstanding for the second quarter and
first six months of 1996 of 33,976,000 and
33,905,000, respectively, compared to 33,495,000 and
33,426,000, respectively, for the second quarter and
first six months of 1995. The increases in the
weighted average number of common and common equivalent
shares outstanding for the 1996 periods, compared to
the 1995 periods,
resulted primarily from the issuance of shares of common stock
upon the exercise of stock options pursuant to the Company's
stock option plans. Earnings per share
computations on a fully diluted basis in the 1996 periods
primarily reflect
additional shares of common stock issuable upon the assumed
conversion of the Company's 2004 Notes (the only
convertible securities of the Company that were
dilutive during any of the periods presented) and the
elimination of related interest requirements, as adjusted for
applicable federal income taxes. The weighted average
number of shares of common and common equivalent shares
outstanding on a fully diluted basis for the second
quarter and first six months of 1996 were 37,899,000 and
37,821,000, respectively, compared to 33,496,000 and
33,458,000, respectively, for the second quarter and
first six months of 1995. Earnings applicable to common stock,
assuming full dilution, for the second quarter and first six months of
1996 were $8,887,000 and $15,923,000, respectively,
compared to $4,353,000 and $7,784,000, respectively, for
the second quarter and first six months of 1995.
The Company's total revenues for the second
quarter of 1996 were $51,543,000, an increase of
approximately 23% compared to total revenues of
$41,738,000 for the second quarter of 1995. The
- 7 -
Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Company's total revenues for the first six
months of 1996 were $99,595,000, an increase of approximately 19%
compared to total revenues of $83,548,000 for the first six
months of 1995. The increase in the Company's total revenues for
the second quarter and first six months of 1996, compared to the
second quarter and first six months of 1995, resulted primarily
from increases in the prices that the Company received for its
natural gas and liquid hydrocarbon (including crude oil, condensate
and natural gas liquid ("NGL")) production volumes and, to a lesser
extent, the increase in the Company's crude oil and condensate
production volumes, that were only partially offset by decreases in
the Company's natural gas and NGL production volumes. In addition, the
total revenues for the first six months of 1996, compared to the
first six months of 1995, were adversely affected by a $165,000 loss on
the sale of a non-strategic property in the first quarter
of 1996, together with a $100,000 gain on the sale of another
non-strategic property in the first quarter of 1995.
The following table reflects an analysis of
differences in the Company's oil and gas revenues (expressed
in thousands of dollars) between the second quarter and
first six months of 1996 and the same periods in the
preceding year.
2nd Qtr '96 6 mos. '96
Compared to Compared to
2nd Qtr '95 6 mos. '95
----------- ----------
Increase (decrease) in total revenues
resulting from differences in :
Natural gas --
Price . . . . . . . . . . . . . . . . $ 7,673 $ 18,547
Production . . . . . . . . . . . . . . (3,925) (10,982)
--------- ---------
3,748 7,565
--------- ---------
Crude oil and condensate --
Price . . . . . . . . . . . . . . . . 4,515 6,807
Production . . . . . . . . . . . . . . 861 956
--------- ---------
5,376 7,763
--------- ---------
NGL and other, net . . . . . . . . . . . 681 984
--------- ---------
Increase in oil and gas revenues . . . . $ 9,805 $ 16,312
========= =========
- 8 -
Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Prices per thousand cubic feet ("Mcf") that the
Company received for its natural gas production during the second
quarter of 1996 averaged $2.31 per Mcf, an increase of approximately
41% from an average price of
$1.64 per Mcf that the Company received during the
second quarter of 1995. Prices that the Company received
for its natural gas production during
the first six months of 1996 averaged $2.36 per Mcf, an increase
of approximately 47% from an average price of
$1.61 per Mcf that the Company received during the
first six months of 1995.
The Company's natural gas production during the second quarter
of 1996 averaged 106.6 million cubic feet ("MMcf") per day, a decrease
of approximately 15% from an average of 125.3 MMcf
per day that the Company produced during the second
quarter of 1995. The Company's natural gas production
during the first six months of 1996 averaged 108.9 MMcf
per day, a decrease of approximately 19% from an
average of 135.2 MMcf per day that the Company
produced during the first six months of 1995.
The decrease in the Company's natural gas production during
the second quarter and first six months of 1996, compared to
the second quarter and first six months of 1995, was related in large
measure to the lower levels of offshore Gulf of Mexico development drilling
in 1995 (only four wells) resulting from unusually low natural gas prices
in 1995, and from the anticipated decline from certain of the Company's
properties, particularly the shallow reservoir horizontal wells located
at Eugene Island Block 295 and Ship Shoal Block 240 fields, that was not
entirely offset by new and increased production resulting from the Company's
continued offshore drilling and workover program. High 1996 levels of
development drilling activity are expected to result in higher average
daily natural gas production in late 1996 and in 1997. As of August 1, 1996,
the Company was not a party to any future natural gas sales contracts.
Prices received by the Company for its crude
oil and condensate production during the second quarter of 1996
averaged $22.58 per barrel, an increase of approximately 22% from
the average price of $18.51 per barrel that the Company
received during the second quarter of 1995. Prices that the
Company received for its crude oil and condensate production during
the first six months of 1996 averaged $21.14 per barrel, an increase of
approximately 17% from an average price of $18.02 per barrel
that the Company received during the first six months of 1995.
The Company's crude oil and condensate production during the
second quarter of 1996 averaged 12,605 barrels per day, an increase of
approximately 3% from an average of 12,186 barrels per day during
the second quarter of 1995. The Company's crude oil and condensate
production during the first six months of 1996 averaged 12,247
barrels per day, an increase of approximately 2% from an average of
12,065 barrels per day during the first six months of 1995.
The increase in the Company's crude oil and condensate production during
the second quarter and first six months of
- 9 -
Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
1996, compared to the second quarter and first six months of 1995, resulted
primarily from the success of
the Company's ongoing development drilling and workover programs in
the offshore Gulf of Mexico and in Lea and Eddy Counties of
southeastern New Mexico. As of August 1, 1996,
the Company was not a party to any crude oil swap agreements.
The prices that the Company typically receives for its NGL
production is related to the prices that the Company receives for its
crude oil production. However, because NGL is extracted from natural gas,
the Company's NGL production volumes usually parallel the Company's natural
gas production volumes. The Company's oil and gas revenues, and total
liquid hydrocarbon production volumes reflect the production and sale of
NGL by the Company. In addition, the Company's oil and gas revenues for
the second quarter and first six months of 1996 and 1995 also reflect
adjustments for various miscellaneous items of a non-recurring nature.
The Company's NGL and "other" net revenues for the second quarter
and first six months of 1996 increased $681,000 and $984,000,
from the second quarter and first six months of 1995, respectively.
The increase in the Company's NGL and "other" net revenues for the second
quarter and first six months of 1996, compared to the second quarter
and first six months of 1995, was primarily related to an increase in the
average price that the Company received for its NGL production, together
with an increase in various miscellaneous net income items, including
increased revenues resulting from leasing a portion of its interest
in a pipeline located in the Gulf of Mexico, that was partially
offset by decreased NGL production.
The Company's average liquid hydrocarbon (including crude oil,
condensate and NGL) production during the second quarter
of 1996 was 15,077 barrels per day, an increase of
approximately 2% from an average liquid hydrocarbon production
of 14,825 barrels per day during the second quarter of 1995.
The Company's average liquid hydrocarbon production during the first six
months of 1996 was 14,475 barrels per day, a slight decrease
from an average liquid hydrocarbon production
of 14,528 barrels per day during the first six months of 1995.
Lease operating expenses for the second quarter of
1996 were $9,205,000, an increase of approximately 13% from lease
operating expenses of $8,177,000 for the second quarter of 1995.
Lease operating expenses for the first six months of 1996 were
$18,080,000, an increase of approximately 8% from lease operating
expenses of $16,664,000 for the first six months of 1995.
The increases in lease operating expenses for the second quarter
and first six months of 1996, compared to the second quarter
and first six months of 1995, resulted primarily from
increased operating activity by the Company and its industry partners; and,
further, by increased costs to the Company (and the entire offshore oil
industry) because of an increasing shortage of qualified offshore
- 10 -
Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
service contractors, which has permitted such contractors to increase
the costs of their services significantly in the last year, together
with increased severance taxes resulting from increased production
from certain of the Company's properties that have higher severance
tax obligations.
General and administrative expenses for the second
quarter of 1996 were $4,383,000, an increase of approximately 1% from
general and administrative expenses of $4,335,000 for the second
quarter of 1995. The increase in general and administrative expenses
for the second quarter of 1996, compared with the second quarter of 1995,
was related to, among other things, an increase in the size of the Company's
work force resulting from the Company's increased exploration and production
related activities, increased expenses related to changes in the actuarial
assumptions for the Company's salary continuation plan and increased expenses
related to the establishment of a Company office in Bangkok, Thailand, that were
almost entirely offset in the quarter by decreases in miscellaneous general
and administrative expense items. General and administrative expenses for
the first six months of 1996 were $9,804,000, an increase of approximately 13%
from general and administrative expenses of $8,678,000 for the first
six months of 1995. The increase in general and administrative
expenses for the first six months of 1996,
compared to the first six months of 1995, was
related to, among other things, a non-recurring settlement made in
connection with the termination of an employment contract, an increase in
the size of the Company's work force resulting from increased exploration
and production related activities, increased expenses related to the
changes in the actuarial assumptions for the Company's salary continuation
plan and the establishment of
a Company office in Bangkok, Thailand, that were not entirely offset by
decreases in various general and administrative items, primary among
which was a decrease in insurance premiums.
Exploration expenses consist primarily of delay rentals and
geological and geophysical costs which are expensed as incurred.
Exploration expenses for the second quarter of 1996 were $3,966,000, an
increase of approximately 255% from exploration expenses of $1,117,000
for the second quarter of 1995. Exploration expenses for the first
six months of 1996 were $7,876,000, an increase of approximately 216%
from exploration expenses of $2,492,000 for the first six months of 1995.
The increase in exploration expenses for the second quarter and first
six months of 1996, compared to the second quarter and first
six months of 1995,
resulted primarily from increased geophysical activity by the
Company, including principally the costs of conducting and processing certain
proprietary 3-D seismic surveys on Company leases in West Texas, South Louisiana
and East Texas, and to a lesser extent, the cost of participation in, and
acquisition of, certain non-proprietary 3-D seismic surveys in the onshore
and offshore Gulf of Mexico region.
- 11 -
Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
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 second quarter of 1996 were
$2,568,000, an increase of approximately 172% from dry hole and
impairment expenses of $943,000 for the second quarter of 1995. The
Company's dry hole and impairment expenses for the first six months of
1996 were $5,118,000, an increase of approximately 116% from dry hole and
impairment expenses of $2,371,000 for the first six months of 1995.
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. Unproved properties are reviewed whenever events or
changes in circumstances indicate that the carrying amount of such asset
may not be recoverable. Unproved properties are reviewed quarterly, 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's DD&A expense for the second quarter of
1996 was $15,793,000, a decrease of approximately 12% from DD&A
expense of $17,939,000 for the second quarter of 1995. The Company's
DD&A expense for the first six months of 1996 was $31,506,000, a
decrease of approximately 13% from DD&A expense of $36,396,000 for the
first six months of 1995. The decreases in DD&A expense for the second
quarter and first six months of 1996, compared to the second
quarter and first six months of 1995, resulted
primarily from decreased production of oil and gas from the Company's
properties and, to a lesser extent, a decrease in the Company's composite
DD&A rate. The composite DD&A rate for all of the
Company's producing fields for the second quarter of 1996 was $0.87
per equivalent Mcf ($5.22 per equivalent barrel), a decrease of
approximately 4% from a composite DD&A rate of $0.91 per equivalent
Mcf ($5.47 per equivalent barrel) for the second quarter of 1995.
The composite DD&A rate for all of the Company's producing fields for
the first six months of 1996 was $0.87 per equivalent Mcf ($5.24 per equivalent
barrel), a decrease of approximately 3% from a composite DD&A rate of $0.90
per equivalent Mcf ($5.38 per equivalent barrel) for the first six
months of 1995. The decrease in the composite DD&A rate for all of the
Company's producing fields for the second quarter and the first six months
of 1996, compared to the second quarter and
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Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
first six months of 1995,
resulted primarily from an increased percentage of the Company's production
coming from certain of the Company's fields that have DD&A rates that are
lower than the Company's recent historical composite rate and a corresponding
decrease in the percentage of the Company's production coming from fields
that have DD&A rates that are higher than the Company's recent historical
composite DD&A rate. The Company produced 17,932,000 equivalent Mcf
(2,989,000 equivalent
barrels) during the second quarter of 1996, a decrease of approximately
8% from the 19,496,000 equivalent Mcf (3,249,000 equivalent barrels)
produced by the Company during the second quarter of 1995.
The Company produced 35,628,000 equivalent Mcf (5,938,000
equivalent barrels) during the first six months of 1996, a decrease of
approximately 11% from the 40,245,000 equivalent Mcf (6,708,000 equivalent
barrels) produced by the Company during the first six months of 1995.
The Company incurred interest charges for the second quarter
of 1996 of $3,172,000, an
increase of approximately 16% from interest charges of
$2,735,000 for the second quarter of 1995. The increase in interest charges
for the second quarter of 1996, compared to the second quarter of 1995,
resulted primarily from an increase in the average amount of the Company's
outsanding debt and, to a lesser extent, the interest rate levels on such
debt, which was only partially offset by a decrease in commitment fees
(attributable, in part, to a voluntary decrease by the Company in its
commitment amount available under the Company's revolving loan facility and,
in part, to a decreased fee structure on such facility that was negotiated
in 1995). Interest charges incurred by the Company for the first six months
of 1996 were $6,184,000,
an increase of approximately 12% from interest charges of $5,526,000 for the
first six months of 1995. The increase in interest charges for the first six
months of 1996, compared to the first six months of 1995, resulted primarily
from an increase in the amount of the Company's outstanding debt, that was
only partially offset by a slight decrease in the average interest rate level
on such debt and a decrease in the commitment fees paid by the Company on its
revolving loan facility (for the reasons previously discussed). Interest
income for the second quarter of 1996 was $124,000, an increase of
approximately 553% from interest income of $19,000 for the second quarter of
1995. Interest income for the first six months of 1996 was $139,000, an
increase of approximately 132% from interest income of $60,000 for the first
six months of 1995. The increase in interest income for the second quarter
and first six months of 1996, compared to the second quarter and first six
months of 1995, resulted primarily from an increase in the Company's
cash invesments related to the placement of the Company's 2006 Notes in June,
1996. Capitalized interest expense for the second quarter of 1996 was
$1,004,000, an increase of approximately 980% from capitalized interest
expense of $93,000 for the first quarter of 1995. Capitalized interest
expense for the first six months of 1996 was $1,830,000, an increase of
approximately 675% from capitalized interest expense of $236,000 for the
first six months of 1995.
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Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
The increase in capitalized interest expense for
the second quarter and first six months of 1996, compared to the second
quarter and first six months of 1995, resulted primarily from the
requirement to capitalize interest expense attributable to capital
expenditures on non-producing properties, principally capital expenditures
related to the Company's development of the Tantawan field in the Gulf of
Thailand.
As of August 1, 1996, the Company was a party to an interest rate
swap agreement. The swap agreement, which terminates on March 10, 1998,
effectively changes the interest rate that the Company would pay on
$5,000,000 of debt from a market based variable rate to a fixed rate of 7.2%.
Income tax expense for the second quarter of 1996 was
$4,647,000, an increase of approximately 106% from income tax expense
of $2,251,000 for the second quarter of 1995. Income tax expense
for the first six months of 1996 was $7,794,000, an increase of
approximately 98% from income tax expense of $3,935,000 for the
first six months of 1995. The increase in income tax expense for the
second quarter and first six months of 1996, compared to the second
quarter and first six months of 1995, resulted primarily
from increased pre-tax income.
Liquidity and Capital Resources -
The Company's Condensed Consolidated Statement of Cash Flows for
the six months ended June 30, 1996, reflects net cash provided by operating
activities of $44,360,000. In addition to net cash provided by operating
activities, the Company received net proceeds of $112,125,000 from the
issuance of the 2006 Notes on June 18, 1996, $2,518,000 from the exercise
of stock options and $100,000 from the sale of certain non-strategic
properties.
During the first six months of 1996, the Company invested $64,089,000
of such cash flow in capital projects, redeemed $40,699,000 of its 2005
Debentures, repaid $38,000,000 under its revolving credit facility and
uncommitted bank credit lines and paid $1,984,000 ($0.03 per share for each
of the first two quarters of 1996) in cash dividends to holders of the
Company's common stock. Of the $64,089,000
invested in capital projects, $35,254,000 was applicable to 1995 capital
projects and $28,835,000 was applicable to 1996
capital projects. As of June 30, 1996, the Company's cash and cash
investments were $18,835,000 and its long-term debt stood at $202,550,000.
The Company's capital and exploration budget for 1996, 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, previously announced to be $165,000,000, has been
increased by
- 14 -
Pogo Producing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
the Company's Board of Directors to $180,000,000. In addition to anticipated
capital and exploration expenses, other material 1996 cash requirements
that the Company currently anticipates include ongoing operating, general
and administrative, income tax, interest expense and the payment of
dividends on its common stock,
including a $.03 per share dividend on its common stock to be paid on
August 23, 1996 to stockholders of record as of August 9, 1996.
The Company currently anticipates that its available cash and cash
investments, cash provided by operating
activities and funds available under its revolving credit facility
and uncommitted lines of credit with banks will be sufficient to fund
the Company's ongoing expenses, its 1996 capital and exploration
budget, any currently anticipated costs associated with the Company's
Thailand projects during 1996 and anticipated future
dividend payments. The declaration of future dividends will depend upon,
among other things, the Company's future earnings and financial condition,
liquidity and capital requirements, the general economic and regulatory
climate and other factors deemed relevant by the Company's Board of
Directors.
On June 18, 1996, the Company issued $115,000,000 principal amount
of its 2006 Notes. The 2006 Notes bear interest at a rate of 5 1/2%,
payable semi-annually in arrears on June 15 and December 15 of each year,
and are convertible into Common Stock at
$42.185 per share, subject to adjustment upon the occurrence of certain
events. The 2006 Notes will be redeemable, at the option of the Company,
in whole or in part, at any time on or after June 15, 1999, at a redemption
price of 103.85% of their principal amount and decreasing percentages
thereafter. No sinking fund payments are required on the 2006 Notes. The
2006 Notes are redeemable at the option of the holder, upon the occurence
of a repurchase event (a change of control as defined in the indenture
governing the 2006 Notes), at 100% of their principal amount.
- 15 -
Pogo Producing Company and Subsidiaries
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security-Holders
The registrant held it annual meeting of stockholders in
Houston, Texas on April 23, 1996. The following sets forth
the items that were put to a vote of the stockholders and
the results thereof concerning:
(A) the election of four directors, each for a term of
three years. Proxies for the meeting were solicited
pursuant to Regulation 14A under the Securities Exchange
Act of 1934. There were no solicitations in opposition
to management's nominees as listed in the proxy statement
and all such nominees were elected;
(B) the approval of the Company's 1995 Long-Term Incentive Plan
(the "Plan"), with 17,110,067 shares of stock cast for
approval of the Plan, 9,326,566 shares cast against approval
of the Plan either as negative votes or as broker non-votes,
and 372,428 abstentions; and
(C) the appointment of Arthur Andersen LLP, independent
public accountants, to audit the financial statements
of the registrant for the year 1996, with 30,395,829
shares of stock cast for the appointment, 33,691 against
the appointment, and 31,253 abstentions and broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
4(f) --Indenture dated as of June 15, 1996, to Fleet
National Bank, as Trustee.
10(k) --Gas Sales Agreement dated Novemer 7, 1995, among
The Petroleum Authority of Thailand, Thaipo,
Limited, Thai Romo Ltd. and
The Sophonpanich Co., Ltd.
(B) Reports on Form 8-K
A report of Form 8-K was filed on June 12, 1996,
setting forth under Item 5 thereof, certain
information regarding the issuance of new securities
by the registrant and the redemption of certian other
outstanding securities of the registrant.
- 16 -
Pogo Producing Company and Subsidiaries
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pogo Producing Company
Registrant
/s/ THOMAS E. HART
Thomas E. Hart
Vice President and Controller
/s/ JOHN W. ELSENHANS
John W. Elsenhans
Vice President and Treasurer
Date: August 1, 1996
- 17 -