Pogo Producing Company

5 Greenway Plaza
P.O. Box 2504
Houston, Texas 77252-2504
U.S.A.
Telephone: (713) 297-5000
Fax: (713) 297-5100
Web site: http://www.pogoproducing.com

Public Company
Incorporated: 1970
Employees: 161
Sales: $498 million (2000)
Stock Exchanges: New York Pacific
Ticker Symbol: PPP
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Pogo Producing Company is engaged in the exploration, development, and production of natural gas both domestically and at selected onshore sites in Canada and Hungary and offshore sites in the Gulf of Thailand and in the United Kingdom and Danish sectors of the North Sea. Its major regions in the United States are Louisiana and Texas, both onshore and offshore, and onshore in New Mexico. By century’s end, Pogo’s proven hydrocarbon reserves stood at the highest point in the company’s history. In toto, it had proven reserves of almost 80 million barrels of oil, condensate, and natural gas liquids and 374.7 billion cubic feet of natural gas. Altogether, Pogo had an interest in 900 oil wells and 250 natural gas wells. Additionally, it had an interest in 102 federal and state lease blocks in the Gulf of Mexico, making up nearly 30 percent of its proven reserves of oil and natural gas. Domestically, the company owns about 226,000 gross leasehold acres in major oil and gas producing areas onshore, approximately 734,000 gross acres in the Gulf of Thailand, 778,000 gross acres in Hungary, 114,000 gross acres in Canada, and 194,000 gross acres in the combined U.K. and Danish sectors of the North Sea. The company also has an investment in offshore production pipelines in the Gulf of Mexico and about a one-fifth interest in a gas processing plant.

1970s Origins Through the 1980s Oil Boom

Pogo Producing was established in 1970 as part of the Pennzoil Company, then under the control of William C. Liedtke, Jr., and John Hugh Liedtke. In the 1950s, the Liedtke brothers, in a partnership with George Bush and John Overbey, founded the Zapata Drilling Co. in Midland, Texas, and in 1963 they gained control of Pennzoil. The pair were the co-founders of Pennzoil Products Co. and Pogo Producing. “Pogo,” an acronym for “Pennzoil Offshore Gas Operators,” indicates the earliest focus of the company. At the time that Pennzoil spun off Pogo Producing in 1977, William Liedtke became CEO and president of Pogo. He had served as president of Pennzoil from 1967 until the restructuring turned Pogo into a separate entity.

From the start, Pogo Producing bid competitively with other companies in government sale of leases in federal waters in the Gulf of Mexico off the Texas, Louisiana, and Mississippi coasts. It was through obtaining these leases that Pogo created its reserves of natural gas, condensate, and oil, its “bank” from which to draw as demand required. According to Paul Van Wagenen, who later replaced Liedtke as Pogo’s CEO and president, “Back in the ‘70s, people like Bill Liedtke were big, big bidders for oil and natural gas reserves. They pursued them with vigor. They had enough foresight to not only bid judiciously and aggressively, but they also had a knack for getting the contracts for drilling quicker than the competition.”

Thus Pogo fared well during the oil boom of the 1970s and early 1980s, and at one point, 1983, had to fight off a takeover attempt by Northwest Industries, which in 1981 had acquired a 20 percent interest in Pogo. The takeover attempt turned into a heated court battle when Northwest and Pogo squared off over the total value of Pogo’s proven reserves, which, Pogo’s accountants asserted, Northwest had deliberately undervalued in order to improve its earnings. Matters soon turned moot, however; the motivation drained from both sides when the oil recession hit and Pogo no longer held the boom-time promise.

1984–91: Emerging from Heavy Debts

In fact, when the petroleum industry faced the big market surplus of the mid-1980s, Pogo quickly became burdened with heavy debts. The market price of gas plummeted, eliminating profits and dimming prospects for growth. The glut and cheap prices left the company struggling for profitability. Between 1987 and 1989, a very volatile period in the industry, its revenues dropped from $140.85 million to $121.12 million, although in 1988 sales rose temporarily to $156.43 million. In the same period, its net income fell from $16.43 million to a loss of $5.59 million, and its total assets dropped from $565.51 million to just under $420.9 million.

Over these years and into the early 1990s, Liedtke and his associates took some draconian measures to reverse the company’s downward slide. In the five-year stretch between 1986 and 1991, Pogo reduced its debt from a crushing $515 million to a much more tenable $217 million. It also trimmed its work force from 245 to 101, a belt-tightening necessity common enough in the petroleum industry. The reduced debt load permitted the company to increase its shareholders’stock value. By 1990, the approximate market value of the company’s outstanding shares had reached $159.65 million. Its revenues had climbed to $132.4 million, producing a net income of $18.2 million.

Even while struggling to recover, Pogo had gone about the necessary business of replacing its exhausted reserves. In 1989, with recovery not yet on the corporate horizon, it entered into a limited partnership arrangement with Pogo Gulf Coast, Ltd. As a general partner with Pogo Gulf Coast, Pogo Producing was responsible for investing up to $60 million for exploration in both federal and state waters in the Gulf of Mexico. The company would own a 40 percent interest in all properties leased by the limited partnership. All together, by April 1990, Pogo Gulf Coast had acquired 11 federal leases and purchased an interest in two others. As a result, Pogo Producing entered the spring of 1990 owning outright or holding an interest in 104 leases in federal jurisdictions off Gulf state coasts.

Signs that Pogo’s fortunes were further on the upswing came in 1991, the year that William Liedtke died. Despite a drop in revenues to $124.4 million, the company had made enough progress in its turn-around efforts to ensure its ability to replace its used reserves. By the summer of that year, its reserves had reached about 19 million barrels of oil and condensate and 218 billion cubic feet of natural gas. Further, with its greatly reduced debt load, the company intensified its competitive bidding for gas and oil reserves, its principal means of replacing those either depleted or abandoned as insufficiently productive.

1992–2000: New Challenges and Robust Growth

When Liedtke died, he was succeeded as CEO by Paul G. Van Wagenen, who, like his older mentor, had come to the company with a legal background. He had joined Pogo in 1979 as its first in-house legal counsel. He was appointed vice-president and general counsel in 1982 and senior vice-president in 1986. As general counsel, he had played a very vital role in protecting Pogo’s interests in the industry-wide “take-or-pay” disputes in which many gas buyers were forced to honor long-term purchase contracts with gas producers. In 1990, Liedtke, fighting a losing battle with cancer, had named Van Wagenen chief operating officer and president, in effect passing operational control of Pogo to the younger man before succumbing to his illness.

During the remainder of the 1990s, Pogo compiled an enviable record in replacing its oil, gas, and carbon condensate reserves, its key to achieving higher production levels and growth. Between 1992 and 1999, it replaced an annual average of 185 percent of what it produced and sold. Despite this excellent record of replacing its depleted reserves, Pogo had a couple of lean years, particularly in 1995, when its revenues dropped to $157.6 million and its net income to $9.2 million. On paper, 1998 looked much worse. On revenues of $202.80 million, the company had a net loss of almost $43.1 million, or about $1.14 per share. However, most of the loss resulted from Pogo’s debt assumptions in its merger with Arch Petroleum Inc. of Fort Worth, a major acquisition.

Arch, incorporated in 1980 as Sparkman Producing Co., had originally been a wholly-owned subsidiary of Sparkman Energy, but changed its name to Arch Petroleum, Inc. in 1985, two years after it had been spun off by Sparkman. Its core interests were in gas transmission and marketing as well as exploration and development. It started growing very quickly in the early 1990s. From producing revenues of just $7.2 million in 1992, Arch saw its sales surge to $68 million in 1995, an increase of 950 percent. Much credit for the surge went to its transmission system and its excellent marketing capabilities. In 1996, predictions were that by 2000 it would triple its annual revenues, principally through acquisitions and improved output resulting from enhanced technology. Despite its success, Arch went largely unrecognized by Wall Street, and its stock remained undervalued, making it a good merger target. Pogo took the bait, picking up Arch for a fixed exchange of one share of Pogo common stock for each 10.4 shares of Arch common stock and one share of Pogo common stock for each 1.04 shares of Arch preferred stock, a deal valued at about $115 million. Included in Pogo’s acquisition was its assumption of Arch’s debt service of about $48.5 million and some production payment obligations. Under the terms of the agreement, Arch Petroleum became a wholly owned subsidiary of Pogo operating under that company’s name, not as a separate entity.

Key Dates:

1970:

Company is founded as part of Pennzoil.

1977:

Pogo is spun off from Pennzoil with William C. Liedtke, Jr., as president.

1980:

Arch Petroleum is founded as Sparkman Producing Co., a subsidiary of Sparkman Energy.

1990:

Liedtke names Paul C. Van Wagenen chief operating officer and president.

1991:

Liedtke dies, and Van Wagenen succeeds him as CEO.

1998:

Pogo completes merger agreement with Arch Petroleum Inc.

2000:

Company acquires and merges with Noric Corporation, the parent company of North Central Oil Corporation.

In any case, in 1999, Pogo again turned things around. From revenues of approximately $275.1 million, it earned a net income of $22.1 million. It was also leaner and tougher, in part because by the closing years of the century, the need for greater efficiency in time and cost had encouraged oil and gas exploration and production companies to outsource construction management services to independent construction management teams (CMTs). Pogo followed suit. In the Gulf of Thailand, Pogo contracted Paragon Engineering Services Inc. to complete two of its Gulf of Thailand pre-production projects, giving Paragon considerable authority in the process. It was Paragon’s responsibility to create cohesive, accountable, and effective CMTs from diverse groups of project members. From conceptual design to production start-up, the CMTs directed the first phases of the work. Such outsourcing has allowed and should continue to allow Pogo to maintain its primary focus on its special strengths: reservoir and geophysical interpretation, drilling, and production. It has also abrogated Pogo’s need to maintain, at considerable cost, a sizable staff of engineers.

Towards the end of 2000, Pogo Producing acquired Noric Corporation in a $630 million, evenly split stock and cash deal. The New York-based Noric was the privately owned parent company of North Central Oil Corporation, a Houston-based oil and gas exploration company much like Pogo. Pogo also assumed Norie’s $120 million debt. Part of Norie’s attraction for Pogo was its record of successful reserve replacement, unbroken for 17 years.

With the Noric acquisition, Pogo Producing increased its oil and gas reserves by about 63 percent, notably its onshore natural gas holdings in the United States. Given the sharp rise in the price of natural gas that started in that year, it was a timely acquisition, a fact stressed by Pogo’s chairman, Paul Van Wagenen, who noted that the investment provided “the right commodity—natural gas—at the right price in the right place.” It increased Pogo’s natural gas reserves from 847.4 billion cubic feet to 1.38 trillion cubic feet, accounting for 61 percent of the company’s total reserves. By combining the operations of the two companies, Pogo expected to cut the costs of both by about 40 percent, but the downside would be an unspecified number of layoffs. The merger increased Pogo’s equity value to about $1.3 billion.

As a result of the merger, Pogo claimed a 2001 capital spending budget of around $350 million and a cash flow of $405 million. Between them, the two merging companies had generated a combined $132.5 million discretionary cash flow in 1999. Pogo, which for years had advanced primarily through its international operations, gained a new momentum in the domestic market thanks to its acquisitions near and at the turn of the century.

Principal Subsidiaries

Arch Petroleum Inc.; Industrial Natural Gas LC; Pogo Offshore Pipeline Co.

Principal Competitors

Anadarko Petroleum Corporation; BP Amoco plc; Conoco Inc.; Exxon Mobil Corporation; Royal Dutch/Shell Group; Texaco Inc; USX-Marathon Group.

Further Reading

Coghlan, Keeley, and Paul Merolli, “Pogo Snaps up North Central for $750 Million,” Oil Daily, November 21, 2000.

Davis, Michael, “Houston-Based Oil, Gas Exploration Firm to Buy New York Company,” Knight Ridder/Tribune Business News, November 20, 2000.

Dwyer, Steve, “Pogo Chairman Van Wagenen to Continue Rich Legacy of Mentor,” National Petroleum News, June 1991.

Hill, Matthew, Harold Walling, and Stephen Brunner, “Outsourced Construction Management Enhances Offshore Projects,” Oil and Gas Journal, November 8, 1999, p. 74.

Konrad, Walecia, “Take Your Fees and Come Out Fighting,” Forbes, July 18, 1983, p. 98.

“Pogo Producing Company Completes Arch Merger,” Business Wire, August 17, 1998.

“Pogo Producing Co.,” Oil Daily, April 23, 1990, p. 5.

Share, Jeff, “Transmission Pushing Arch Toward $250 Million Company,” Pipeline & Gas Journal, April 1996, p. 41.

—John W. Fiero