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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/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
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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 77046-0504
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
(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 September 30,
1998: 40,103,675
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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
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES:
Oil and gas..................................... $ 47,524 $ 82,784 $ 170,453 $ 229,702
Pipeline sales.................................. 1,848 1,451 4,226 49,598
Other........................................... 19 301 111 1,657
Gains (losses) on sales......................... (163) 4,902 (106) 6,361
------------ ------------ ------------ ------------
Total......................................... 49,228 89,438 174,684 287,318
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Lease operating................................. 19,214 18,881 56,894 51,358
Natural gas purchases and pipeline operations... 1,483 1,335 3,853 47,542
General and administrative...................... 10,281 5,947 24,245 19,571
Exploration..................................... 1,472 1,961 7,450 8,116
Dry hole and impairment......................... 5,128 2,477 7,906 7,484
Depreciation, depletion and amortization........ 25,162 30,931 87,360 81,195
------------ ------------ ------------ ------------
Total......................................... 62,740 61,532 187,708 215,266
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS)........................... (13,512) 27,906 (13,024) 72,052
------------ ------------ ------------ ------------
INTEREST:
Charges......................................... (7,747) (6,674) (21,303) (18,136)
Income.......................................... 326 242 789 539
Capitalized..................................... 2,476 833 6,540 3,463
MINORITY INTEREST................................. -- -- -- (448)
FOREIGN CURRENCY TRANSACTION GAIN (LOSS).......... 608 (6,567) 801 (6,609)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES................. (17,849) 15,740 (26,197) 50,861
INCOME TAX BENEFIT (EXPENSE)...................... 8,155 (5,435) 11,592 (17,608)
------------ ------------ ------------ ------------
NET INCOME (LOSS)................................. (9,694) 10,305 (14,605) 33,253
DIVIDENDS ON PREFERRED STOCK...................... (213) (400) (1,013) (1,200)
------------ ------------ ------------ ------------
INCOME (LOSS) TO COMMON STOCK..................... $ (9,907) $ 9,905 $ (15,618) $ 32,053
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS (LOSS) PER COMMON SHARE
Basic........................................... $ (0.26) $ 0.28 $ (0.42) $ 0.92
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted......................................... $ (0.26) $ 0.24 $ (0.42) $ 0.76
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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 35,067 37,171 35,036
Diluted......................................... 38,781 46,765 37,171 46,733
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 $ 21,806
Accounts receivable............................. 23,428 42,005
Other receivables............................... 33,237 48,071
Inventory--Product.............................. 3,511 713
Inventories--Tubulars........................... 7,121 9,219
Other........................................... 3,429 4,631
------------- ------------
Total current assets.......................... 88,148 126,445
------------- ------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of successful efforts
accounting Proved properties being
amortized..................................... 1,443,791 1,416,712
Unevaluated properties and properties under
development, not being amortized............ 170,271 113,629
Pipelines, at cost.............................. 6,967 7,003
Other, at cost.................................. 12,280 12,306
------------- ------------
Total property and equipment................ 1,633,309 1,549,650
------------- ------------
Less--accumulated depreciation, depletion and
amortization..................................
Oil and gas................................. 984,030 935,426
Pipelines................................... 1,904 1,706
Other....................................... 5,939 5,551
------------- ------------
Total accumulated depreciation, depletion
and amortization.......................... 991,873 942,683
------------- ------------
Net property and equipment.................... 641,436 606,967
------------- ------------
OTHER........................................... 41,076 36,376
------------- ------------
$ 770,660 $ 769,788
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--operating activities.......... $ 11,467 $ 15,046
Accounts payable--investing activities.......... 50,270 95,441
Accrued interest payable........................ 6,304 3,354
Accrued payroll and related benefits............ 3,071 1,938
Other........................................... 0 943
------------- ------------
Total current liabilities..................... 71,112 116,722
LONG-TERM DEBT.................................... 381,854 383,179
PRODUCTION PAYMENT OBLIGATION..................... -- 13,317
DEFERRED FEDERAL INCOME TAX....................... 50,425 63,272
DEFERRED CREDITS.................................. 17,839 17,054
------------- ------------
Total liabilities............................... 521,230 593,544
------------- ------------
EXCHANGEABLE CONVERTIBLE PREFERRED STOCK.......... -- 20,000
------------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par; 2,000,000 shares
authorized.................................... -- --
Common stock, $1 par; 100,000,000 shares
authorized, 40,119,250 and 35,218,193 shares
issued, respectively.......................... 40,119 35,218
Additional capital.............................. 255,960 149,493
Retained earnings (deficit)..................... (45,616) (26,671)
Treasury stock and other, at cost............... (1,033) (1,796)
------------- ------------
Total shareholders' equity...................... 249,430 156,244
------------- ------------
$ 770,660 $ 769,788
------------- ------------
------------- ------------
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
---------- ----------
(RESTATED)
(EXPRESSED IN
THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers........................................................... $ 187,045 $ 277,455
Operating, exploration, and general and administrative expenses paid................... (92,200) (122,712)
Interest paid.......................................................................... (18,353) (14,639)
Federal income taxes received.......................................................... -- 7,037
Federal income taxes paid.............................................................. -- (13,500)
Other.................................................................................. (3,184) (5,525)
---------- ----------
Net cash provided by operating activities............................................ 73,308 128,116
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................... (148,929) (183,166)
Purchase of proved reserves............................................................ (2,961) (28,617)
Proceeds from the sale of properties................................................... 350 7,920
---------- ----------
Net cash used in investing activities................................................ (151,540) (203,863)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of new debt..................................................... -- 100,000
Borrowings under senior debt agreements................................................ 346,354 417,500
Payments under senior debt agreements.................................................. (256,500) (424,864)
Payments of production payment......................................................... (13,317) (2,689)
Payments of cash dividends on common stock............................................. (3,327) (3,004)
Payments of preferred stock dividends.................................................. (1,324) (800)
Payment of debt issue expenses......................................................... -- (3,144)
Proceeds from exercise of stock options................................................ 998 3,840
Other.................................................................................. 237 --
---------- ----------
Net cash provided by financing activities............................................ 73,121 86,839
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................................. 727 (3,624)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS..................................... (4,384) 7,468
CASH AND CASH INVESTMENTS AT THE BEGINNING OF THE YEAR................................... 21,806 6,246
---------- ----------
CASH AND CASH INVESTMENTS AT THE END OF THE PERIOD....................................... $ 17,422 $ 13,714
---------- ----------
---------- ----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)...................................................................... $ (14,605) $ 33,253
Adjustments to reconcile net income to net cash provided by operating activities --
Foreign currency transaction (gain) loss........................................... (801) 6,609
(Gains) losses from the sales of properties........................................ 106 (6,361)
Depreciation, depletion and amortization........................................... 87,360 81,195
Dry hole and impairment............................................................ 7,906 7,484
Interest capitalized............................................................... (6,540) (3,463)
Deferred federal income taxes...................................................... (8,399) 11,986
Change in operating assets and liabilities......................................... 8,281 (2,587)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................ $ 73,308 $ 128,116
---------- ----------
---------- ----------
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, as reported..................... 33,552,702 $ 33,553 33,321,381 $ 33,321
Adjustment to reflect pooling of interests.................... 1,665,491 1,665 1,660,684 1,661
----------- --------- ----------- ---------
Balance at beginning of year, as restated..................... 35,218,193 35,218 34,982,065 34,982
Conversion of 2004 Notes...................................... 3,879,726 3,880 1,396 1
Issued for exchangeable convertible preferred stock of
acquired company............................................ 699,273 699 -- --
Issued for convertible debt of acquired company............... 174,818 175 -- --
Stock issued as compensation.................................. -- -- 2,885 3
Stock options exercised....................................... 147,240 147 222,575 223
----------- --------- ----------- ---------
Issued at end of period....................................... 40,119,250 40,119 35,208,921 35,209
----------- --------- ----------- ---------
ADDITIONAL CAPITAL:
Balance at beginning of year, as reported..................... 144,848 139,337
Adjustment to reflect pooling of interests.................... 4,645 4,523
--------- ---------
Balance at beginning of year, as restated..................... 149,493 143,860
Conversion of 2004 Notes...................................... 80,712 30
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 issued as compensation.................................. -- 84
Stock options exercised....................................... 1,835 5,358
--------- ---------
Balance at end of period...................................... 255,960 149,332
--------- ---------
RETAINED EARNINGS (DEFICIT):
Balance at beginning of year, as reported..................... (31,971) (65,075)
Adjustment to reflect pooling of interests.................... 5,300 4,072
--------- ---------
Balance at beginning of year, as restated..................... (26,671) (61,003)
Net income (loss)............................................. (14,605) 33,253
Dividends ($0.09 per common share)............................ (3,327) (3,004)
Dividends on exchangeable convertible preferred stock......... (1,013) (1,200)
--------- ---------
Balance at end of period...................................... (45,616) (31,954)
--------- ---------
TREASURY STOCK AND OTHER:
Balance at beginning of year, as reported..................... (15,575) (324) (15,575) (301)
Adjustment to reflect pooling of interests.................... (9,615) (1,472) (9,615) (1,191)
----------- --------- ----------- ---------
Balance at beginning of year, as restated..................... (25,190) (1,796) (25,190) (1,492)
Cancellation of treasury shares............................... 9,615 206 -- --
Change in cumulative foreign currency translation gain or
(loss)...................................................... -- (490) -- (77)
Payments, interest, and reclassification of employee notes.... -- 1,047 -- (48)
----------- --------- ----------- ---------
Balance at end of period...................................... (15,575) (1,033) (25,190) (1,617)
----------- --------- ----------- ---------
COMMON STOCK OUTSTANDING, AT THE END OF THE PERIOD.............. 40,103,675 35,183,731
----------- -----------
----------- -----------
TOTAL SHAREHOLDERS' EQUITY...................................... $ 249,430 $ 150,970
--------- ---------
--------- ---------
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 and the Arch Petroleum Inc. ("Arch") 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 in
a tax-free, stock for stock transaction through which Arch became a wholly owned
subsidiary of the Company. The merger agreement provided 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 the Company's common stock were issued in
exchange for Arch preferred and common stock and its convertible debt. In
connection with the merger, nonrecurring transaction costs totaling
approximately $3.6 million ($2.3 million after taxes) were charged to expense in
the third quarter of 1998. The merger has been accounted for as a "pooling of
interests". As a result the Company's financial statements for periods prior to
August 1998 have been restated to include combined results with Arch.
PERIODS ENDED
SEPTEMBER 30, 1997
---------------------------
THREE MONTHS NINE MONTHS
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
REVENUES:
Pogo............................................................................... $ 77,177 $ 215,231
Arch............................................................................... 12,361 72,355
Conforming reclassification adjustments............................................ (100) (268)
------------- ------------
$ 89,438 $ 287,318
------------- ------------
------------- ------------
NET INCOME:
Pogo............................................................................... $ 7,386 $ 29,378
Arch............................................................................... 2,919 3,875
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$ 10,305 $ 33,253
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------------- ------------
EARNINGS TO COMMON STOCK:
Pogo............................................................................... $ 7,386 $ 29,378
Arch............................................................................... 2,519 2,675
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$ 9,905 $ 32,053
------------- ------------
------------- ------------
EARNINGS PER SHARE:
BASIC --
Pogo............................................................................. $ 0.22 $ 0.87
Arch............................................................................. 0.14 0.15
Conforming adjustments........................................................... (0.08) (0.10)
------------- ------------
$ 0.28 $ 0.92
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DILUTED --
Pogo............................................................................. $ 0.21 $ 0.83
Arch............................................................................. 0.14 0.15
Conforming adjustments........................................................... (0.11) (0.22)
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$ 0.24 $ 0.76
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-5-
(3) LONG-TERM DEBT --
Long-term debt and the amount due within one year at September 30, 1998
and December 31, 1997, restated to reflect the merger, consists of the
following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(RESTATED)
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 interest rate of 6.3%..................... 2,000 --
Arch bank credit facility, at an effective interest rate of 8.1%.................. -- 30,000
------------- ------------
Total bank revolving credit agreement senior debt................................. 156,000 77,000
Banker's acceptance loans, borrowings at average interest rate of 6.1%............ 10,854 --
------------- ------------
Total senior debt................................................................. 166,854 77,000
------------- ------------
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
9 7/5% Convertible subordinated notes due 2004 ("Series A and B Notes")........... -- 5,000
------------- ------------
Total subordinated debt........................................................... 215,000 306,179
------------- ------------
Total debt.......................................................................... 381,854 383,179
Amount due within one year.......................................................... -- --
------------- ------------
Long-term debt...................................................................... $ 381,854 $ 383,179
------------- ------------
------------- ------------
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 and to Note 6 of
Notes to Consolidated Financial Statements included in Arch's annual report on
Form 10-K for the year ended December 31, 1997 for a further discussion of the
Arch bank credit facility and the Series A and B 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
less the 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 ability and intent to reborrow such amounts under its revolving
credit agreement. As a result of the Arch merger, holders of the Series A and B
Notes converted their notes into 174,818 shares of the Company's common stock.
In addition, Arch's bank credit facility and production payment obligations were
retired with borrowings under the Company's senior debt agreements.
-6-
(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................................................. $ 458,158 $ 448,254 $ 5,063 $ 4,841
Kingdom of Thailand........................................... 171,196 169,380 -- 1,816
Canada........................................................ 12,082 12,398 -- (316)
---------- ---------- --------- -----------
Total......................................................... $ 641,436 $ 630,032 $ 5,063 $ 6,341
---------- ---------- --------- -----------
---------- ---------- --------- -----------
AS OF DECEMBER 31, 1997 (RESTATED):
United States................................................. $ 434,978 $ 424,919 $ 5,297 $ 4,762
Kingdom of Thailand........................................... 162,162 160,249 -- 1,913
Canada........................................................ 9,827 9,747 -- 80
---------- ---------- --------- -----------
Total......................................................... $ 606,967 $ 594,915 $ 5,297 $ 6,755
---------- ---------- --------- -----------
---------- ---------- --------- -----------
REVENUES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
United States................................................. $ 39,618 $ 38,001 $ 1,848 $ (231)
Kingdom of Thailand........................................... 8,845 8,772 -- 73
Canada........................................................ 765 751 -- 14
---------- ---------- --------- -----------
Total......................................................... $ 49,228 $ 47,524 $ 1,848 $ (144)
---------- ---------- --------- -----------
---------- ---------- --------- -----------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (RESTATED)
United States................................................. $ 77,166 $ 70,624 $ 1,451 $ 5,091
Kingdom of Thailand........................................... 11,487 11,455 -- 32
Canada........................................................ 785 705 -- 80
---------- ---------- --------- -----------
Total......................................................... $ 89,438 $ 82,784 $ 1,451 $ 5,203
---------- ---------- --------- -----------
---------- ---------- --------- -----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
United States................................................. $ 143,432 $ 139,328 $ 4,226 $ (122)
Kingdom of Thailand........................................... 28,907 28,813 -- 94
Canada........................................................ 2,345 2,312 -- 33
---------- ---------- --------- -----------
Total......................................................... $ 174,684 $ 170,453 $ 4,226 $ 5
---------- ---------- --------- -----------
---------- ---------- --------- -----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (RESTATED)
United States................................................. $ 256,849 $ 200,335 $ 49,598 $ 6,916
Kingdom of Thailand........................................... 28,400 27,397 -- 1,003
Canada........................................................ 2,069 1,970 -- 99
---------- ---------- --------- -----------
Total......................................................... $ 287,318 $ 229,702 $ 49,598 $ 8,018
---------- ---------- --------- -----------
---------- ---------- --------- -----------
(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-
(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..................... $ (9,907) 38,781 $ (0.26) $ (15,618) 37,171 $ (0.42)
----------- -----------
----------- -----------
DILUTED EARNINGS PER SHARE................... $ (9,907) 38,781 $ (0.26) $ (15,618) 37,171 $ (0.42)
----------- -----------
----------- -----------
Antidilutive securities:
Options to purchase common shares............ -- 2,476 $ 24.73 -- 2,476 $ 24.73
2004 Notes (a)............................... -- -- $ -- 560 816 $ 0.69
2006 Notes................................... 1,028 2,726 $ 0.38 3,118 2,726 $ 1.14
8% Convertible preferred stock (b)........... 213 3,648 $ 0.06 1,013 5,866 $ 0.17
Series A and B notes (b)..................... 41 91 $ 0.45 199 147 $ 1.35
- ------------------------
(a) The 2004 Notes were called or converted to common stock in the first quarter
of 1998.
(b) These securities were converted to common stock in the third quarter of 1998
as a result of the merger.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
(RESTATED) (RESTATED)
--------------------------------- ---------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
--------- --------- ----------- --------- --------- -----------
BASIC EARNINGS PER SHARE...................... $ 9,905 35,067 $ 0.28 $ 32,053 35,036 $ 0.92
----------- -----------
----------- -----------
Effect of dilutive securities --
Options to purchase common shares............. -- 820 -- 819
2004 Notes.................................... 770 3,885 2,311 3,885
8% Convertible preferred stock................ 400 6,993 1,200 6,993
--------- --------- --------- ---------
DILUTED EARNINGS PER SHARE.................... $ 11,075 46,765 $ 0.24 $ 35,564 46,733 $ 0.76
--------- --------- ----------- --------- --------- -----------
--------- --------- ----------- --------- --------- -----------
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
Series A and B notes.......................... 79 175 $ 0.45 238 175 $ 1.36
(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
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.
RESULTS OF OPERATIONS --
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 is
currently 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 has
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.
INCOME AND REVENUE DATA
NET INCOME (Loss)
The Company reported a net loss to common shareholders of $9,907,000 for
the third quarter of 1998 or $0.26 per share (on both a basic and a diluted
basis) compared to net income for the third quarter of 1997 of $9,905,000 or
$0.28 per share ($11,075,000 or $0.24 on a diluted basis). For the first nine
months of 1998, the Company reported a net loss to common shareholders of
$15,618,000 or $0.42 per share (on both a basic and a diluted basis) compared to
net income for the first nine months of 1997 of $32,053,000 or $0.92 per share
($35,564,000 or $0.76 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 $3,601,000 ($2,341,000 or $0.06 per share on an
after-tax basis), related to Arch's merger with the Company.
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 35,067,000 and 35,036,000,
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
-9-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
March 16, 1998, the issuance as of August 17, 1998, of approximately
2,540,000 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 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
Arch's 8% Convertible Preferred Stock and the Company's 2004 Notes and the
elimination of related dividend and 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 46,765,000 and 46,733,000, respectively.
REVENUES
TOTAL REVENUES
The Company's total revenues for the third quarter of 1998 were
$49,228,000, a decrease of approximately 45% compared to total revenues of
$89,438,000 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 and, to a lesser extent, a decline in revenue from the sale of
non-strategic properties and other miscellaneous items, that was only
partially offset by a modest increase in revenue attributable to the
transportation and marketing of natural gas on pipelines that the Company
acquired in the merger with Arch. The Company's total revenues for the first
nine months of 1998 were $174,684,000, a decrease of approximately 39%
compared to total revenues of $287,318,000 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, revenue
attributable to the transportation and marketing of natural gas on pipelines
that the Company acquired in the merger with Arch as a result of Arch's sale
of its interest in the Onyx pipeline effective June 30, 1997 and, to a lesser
extent, a decline in revenue from the sale of non-strategic properties and
other miscellaneous items. Total revenues for the third quarter and first
nine months of 1997 include a gain on sales of $5,043,000, related to the
sale by Arch of its interest in the Onyx pipeline. In addition, total
revenues for the first nine months of 1997 also include a net gain of
$1,459,000 on the sale of a compressor by the Company during the first half
of 1997.
-10-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OIL AND GAS AND "OTHER" REVENUES
The following table reflects an analysis of differences in the Company's
oil and gas and "Other" revenues (expressed in thousands of dollars) between the
third quarter and first nine months of 1998 and the same periods in the
preceding year.
3rd Qtr '98 9 mos. '98
Compared to Compared to
3rd Qtr '97 9 mos. '97
----------- -----------
Increase (decrease) in oil and gas and "Other"
revenues resulting from differences in :
NATURAL GAS --
Price . . . . . . . . . . . . . . . . . . . . . . $ (6,424) $(14,621)
Production. . . . . . . . . . . . . . . . . . . . (12,555) (11,782)
-------- --------
(18,979) (26,403)
-------- --------
CRUDE OIL AND CONDENSATE --
Price . . . . . . . . . . . . . . . . . . . . . . (10,277) (29,407)
Production. . . . . . . . . . . . . . . . . . . . (2,721) 158
-------- --------
(12,998) (29,249)
-------- --------
NGL AND OTHER, NET. . . . . . . . . . . . . . . . . (3,565) (5,143)
-------- --------
Increase in oil and gas and "Other" revenues. . . . $(35,542) $(60,795)
-------- --------
-------- --------
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 $1.91 per Mcf, a decrease of approximately 14% from an average price of
$2.23 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 $2.01 per Mcf, a
decrease of approximately 12% from an average price of $2.28 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 $1.96 per Mcf, a
decrease of approximately 14% from an average price of $2.28 per Mcf that the
Company received for its domestic natural gas
-11-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 $2.08 per Mcf, a decrease of approximately 11% from an
average price of $2.33 per Mcf that the Company received for its domestic
natural gas production during the first nine months of 1997.
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 148.9 million cubic feet ("MMcf") per day, a
decrease of approximately 32% from an average of 220.3 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 177.6 MMcf per day,
a decrease of approximately 11% from an average of 199.1 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 113.6 MMcf per day, a decrease of
approximately 37% from an average of 180.9 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 Gulf of Mexico properties, in particular its East Cameron Block 334
"E" platform, together with 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 138.7 MMcf per day, a
decrease of approximately 17% from an average of 167 MMcf per day that the
Company produced during the first nine
-12-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 Gulf of
Mexico properties, in particular the Company's East Cameron Block 334 "E"
platform, as well as the previously discussed weather related downtime, that
was not entirely offset by increased production from the Company's onshore
properties located in South Texas and South Louisiana. As of November 1,
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
$12.72 per barrel, a decrease of approximately 32% from an average price of
$18.57 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 $13.48 per barrel, a decrease of
approximately 31% from an average price of $19.60 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 $12.65 per
barrel, a decrease of approximately 31% from an average price of $18.40 per
barrel that the Company received during the third quarter of 1997. Prices that
the Company received for its domestic crude oil and
-13-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 has been stored in a Floating Production,
Storage and Offloading System (the "FPSO") until an economic quantity was
accumulated for offloading and sale. The first such sale of crude oil and
condensate from the Tantawan Field occurred in July 1997. 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 16,744 barrels
per day, a decline of approximately 12% from an average of 19,070 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 17,664
barrels per day, a slight increase from an average of 17,621 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 14,141 barrels per day, a
decrease of approximately 16% from an average of 16,761 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 14,890 barrels per day,
a decrease of approximately 5% from an average of 15,689 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 November 1, 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.
-14-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 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 AND "OTHER" NET REVENUE ITEMS. The Company's oil and gas
revenues, and its 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 third quarter and first nine months of 1998 and 1997 also
reflect adjustments for various miscellaneous items. The Company's NGL and
"other" net 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 and "other" net
revenues 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 and "other" net revenues 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 18,831 barrels per
day, a decrease of approximately 20% from an average liquid hydrocarbon
production of 23,456 barrels per day during the third quarter of 1997. The
Company's average liquid hydrocarbon production during the first nine months of
1998 was 20,432 barrels per day, a decrease of approximately 3% from an average
liquid hydrocarbon production of 21,046 barrels per day during the first nine
months of 1997.
PIPELINE SALES REVENUES
The Company's pipeline sales revenues for the third quarter of 1998 were
$1,848,000, an increase of approximately 27% compared to pipeline sales revenues
of $1,451,000 for the third
-15-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
quarter of 1997. The increase in the Company's pipeline sales revenues for
the third quarter of 1998, compared to the third quarter of 1997, resulted
primarily from an increase in revenues from the marketing of natural gas
transported through Company's natural gas pipelines, together with related
transportation fees for such natural gas. The Company's pipeline sales
revenues for the first nine months of 1998 were $4,226,000, a decrease of
approximately 91% compared to pipeline sales revenues of $49,598,000 for the
first nine months of 1997. The decrease in the Company's pipeline sales
revenues for the first nine months of 1998, compared to the first nine months
of 1997, resulted primarily from the sale of Arch's interest in the Onyx
pipeline system effective as of June 30, 1997, which contributed $45,097,000
to pipeline sales revenues for 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
$19,214,000, an increase of approximately 2% from lease operating expenses of
$18,881,000 for the third quarter of 1997. Company-wide lease operating
expenses for the first nine months of 1998 were $56,894,000, an increase of
approximately 11% from lease operating expenses of $51,358,000 for the first
nine months of 1997. A discussion of lease operating expenses attributable to
the Company's operations in Canada are 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 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 $13,125,000, an increase of
approximately 2% from domestic lease operating expenses of $12,856,000 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 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 $40,497,000, an increase of
approximately 7% from domestic lease operating expenses of $38,044,000 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. 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
-16-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 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.
NATURAL GAS PURCHASES AND PIPELINE OPERATIONS
Natural gas purchases and pipeline operations expenses for the third
quarter of 1998 were $1,483,000, an increase of approximately 11% from natural
gas purchases and pipeline operations expenses of $1,335,000 for the third
quarter of 1997. The increase in natural gas purchases and pipeline operations
expenses for the third quarter of 1998, compared with the third quarter of 1997,
was primarily related to an increase in natural gas purchases by the Company for
transportation through the Company's pipeline systems and ultimate resale to
third parties. Natural gas purchases and pipeline operations expenses for the
first nine months of 1998 were $3,853,000, a decrease of approximately 92% from
natural gas purchases and pipeline operations expenses of $47,542,000 for the
first nine months of 1997. The decrease in natural gas purchases and pipeline
operations expenses for the first nine months of 1998, compared with the first
nine months of 1997, was primarily related to the sale by Arch of its interest
in the Onyx pipeline system, effective June 30, 1997, and the corresponding
elimination of the requirement to purchase natural gas for transport on that
system and resale, which was only partially offset by increased purchases of
natural gas for transportation on other Company pipeline systems and ultimate
resale.
-17-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarter of 1998 were
$10,281,000, an increase of approximately 73% from general and administrative
expenses of $5,947,000 for the third quarter of 1997. General and
administrative expenses for the first nine months of 1998 were $24,245,000, an
increase of approximately 24% from general and administrative expenses of
$19,571,000 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 Arch's
merger with the Company totaling approximately $2,969,000, that included
severance payments to former officers and employees of Arch, as well as
investment banker, accounting and legal fees and expenses incurred by Arch and
legal and accounting fees incurred by the Company, each in contemplation of the
merger. 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 $1,472,000, a decrease of
approximately 25% from exploration expenses of $1,961,000 for the third quarter
of 1997. Exploration expenses for the first nine months of 1998 were
$7,450,000, a decrease of approximately 8% from exploration expenses of
$8,116,000 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 107% from dry hole
and impairment expenses of $2,477,000 for the third quarter of 1997. The
Company's dry hole and impairment expenses for the first nine months of 1998
were $7,906,000, an increase of approximately 6% from dry hole and impairment
expenses of $7,484,000 for the first nine months of 1997.
-18-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 $25,162,000, a decrease of approximately 19% from
DD&A expense of $30,931,000 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 $87,360,000, an increase of approximately 8% from DD&A
expense of $81,195,000 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 $1.02 per equivalent Mcf ($6.13 per equivalent
barrel), an increase of approximately 12% from a composite DD&A rate of $0.91
per equivalent Mcf ($5.44 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 $1.05 per equivalent Mcf ($6.29 per equivalent barrel),
an increase of approximately 18% from a composite DD&A rate of $0.89 per
equivalent Mcf ($5.36 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 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
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POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Company produced 24,090,000 equivalent Mcf (4,015,000 equivalent barrels)
during the third quarter of 1998, a decrease of approximately 27% from the
33,214,000 equivalent Mcf (5,536,000 equivalent barrels) produced by the
Company during the third quarter of 1997. The Company produced 81,954,000
equivalent Mcf (13,659,000 equivalent barrels) during the first nine months
of 1998, a decrease of approximately 8% from the 88,919,000 equivalent Mcf
(14,820,000 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
$7,747,000, an increase of approximately 16% from interest charges of $6,674,000
for the third quarter of 1997. Interest charges incurred by the Company for the
first nine months of 1998 were $21,303,000, an increase of approximately 17%
from interest charges of $18,136,000 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 interest rate charged on the Company's
outstanding debt. In addition, the increase in interest charges is partially
attributable to a non-recurring charge of $632,000 that was incurred in the
third quarter of 1998 related to the extinguishment of Arch's convertible debt
in connection with the merger. As of November 1, 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
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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 $608,000
during the third quarter and $801,000 during the first nine months of 1998,
compared to foreign currency transaction losses of $6,567,000 during the third
quarter and $6,609,000 during the 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 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 November 1, 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 $8,155,000, compared to income tax expense of $5,435,000 for the third
quarter of 1997. The Company experienced an income tax benefit for the first
nine months of 1998 of $11,592,000, compared to income tax expense of
$17,608,000 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 and Canada.
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 $73,308,000. In addition to net cash provided by operating
activities, the Company received net proceeds of
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POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
$998,000 from the exercise of stock options, $350,000 from the sale of
certain non-strategic properties and a net $237,000 in miscellaneous other
income, and had net borrowings of $89,854,000 under its revolving credit
agreement and other senior debt facilities.
During the first nine months of 1998, the Company invested $148,929,000 of
such cash flow in capital projects, retired a production payment obligation for
$13,317,000, 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 $1,324,000 in cash dividends
to holders of Arch's preferred stock. Of the $148,929,000 invested in capital
projects, $89,714,000 was applicable to 1997 capital projects and $59,215,000
was applicable to 1998 capital projects. 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. All or a
substantial portion of the Company's 1998 capital and exploration budget which
has not been spent has been committed, and the Company currently believes that
it will be spent during the fourth quarter of 1998 or during the first six
months of 1999. In addition to anticipated capital and exploration expenses,
other material 1998 cash requirements that the Company currently anticipates
include ongoing operating, general and administrative, 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 November 27, 1998 to stockholders of record as of
November 13, 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 uncommitted lines of credit with banks
and amounts that the Company currently believes that it can raise from external
sources will be sufficient to fund the Company's ongoing expenses, its 1998
capital and exploration budget, any currently anticipated costs associated with
the Company's Thailand projects during 1998, 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, 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 ISSUE
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
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POGO PRODUCING COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
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.
-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 Petroleum Inc. ("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 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 -- Financial Data Schedule
(B) Reports on Form 8-K
None
-24-
POGO PRODUCING COMPANY AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pogo Producing Company
[Registrant]
/s/ THOMAS E. HART
-------------------------------
Thomas E. Hart
Vice President and Controller
/s/ JOHN W. ELSENHANS
-------------------------------
John W. Elsenhans
Vice President and
Chief Financial Officer
Date: November 13, 1998
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