ITEM 1. BUSINESS.
Pogo Producing Company (the "Company"), incorporated in 1970, is engaged in oil and gas exploration, development and production activities on its properties located offshore in the Gulf of Mexico and onshore in the United States. The Company is also engaged in exploration of its license concession in the Gulf of Thailand, and has proposed to its joint venture partners a development program in connection with its oil and gas discoveries on that concession. The Company has interests in 73 lease blocks offshore Louisiana and Texas, approximately 125,000 gross acres onshore in the United States and approximately 2,635,000 gross acres offshore in the Kingdom of Thailand.
DOMESTIC OFFSHORE OPERATIONS
Historically, the Company's interests have been concentrated in the Gulf of Mexico, where approximately 81% of the Company's domestic proved reserves and 63% of its total proved reserves are now located. During 1994, approximately 82% of the Company's natural gas equivalent production was from its domestic offshore properties, contributing approximately 82% of consolidated oil and gas revenues. Five offshore producing areas, Eugene Island, Main Pass, South Marsh Island, South Pass and East Cameron, account for approximately 50% of the Company's net proved natural gas reserves and approximately 56% of the Company's proved crude oil, condensate and natural gas liquids reserves. Eugene Island is the Company's largest producing area with 1994 average net revenue production (net to the Company's interest and net of royalty burdens) of approximately 81 million cubic feet ("MMcf") per day of natural gas and 5,300 barrels ("Bbls") per day of oil, condensate and natural gas liquids. The table in Item 2
ITEM 2. PROPERTIES.
The information appearing in Item 1 of this Annual Report is incorporated herein by reference.
PRINCIPAL PROPERTIES
As of January 1, 1995, approximately 81% of the Company's domestic proved oil and gas equivalent reserves and approximately 63% of the Company's total proved oil and gas equivalent reserves were located on properties in the Gulf of Mexico. Six significant producing areas, of which five are located in the Gulf of Mexico and the sixth is located in New Mexico, accounted for approximately 56% of the estimated proved natural gas reserves and approximately 72% of the estimated oil, condensate and natural gas liquids reserves of the Company as of January 1, 1995. These producing areas accounted for approximately 83% of natural gas production and 94% of oil, condensate and natural gas liquids production for 1994. Net proved reserves, as estimated by Ryder Scott, and average net daily production data for the six significant producing areas are shown in the following table. No other major producing area accounted for more than 5% of the estimated discounted future net revenues attributable to the Company's estimated proved reserves as of January 1, 1995. However, the Company's Thailand concession, which is currently not a producing property, accounts for approximately 23% of the Company's total estimated net proved reserves of natural gas, approximately 23% of the Company's total estimated net proved reserves of oil, condensate and natural gas liquids and approximately 23% of the Company's total net proved oil and gas equivalent reserves.
SIGNIFICANT PRODUCING AREAS
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(a) "Liquids," includes oil, condensate and natural gas liquids.
(b) Before income taxes, discounted at 10%.
Set forth below are descriptions of certain of the Company's significant producing areas. Unless otherwise specifically identified, the information set forth in such descriptions, including the number of wells, platforms and blocks, is presented on a gross, rather than a net to the Company basis.
Eugene Island
The Company's most significant reserves and production are located in the Eugene Island area off the Louisiana coast in the Gulf of Mexico. The Eugene Island area has been an important part of the Company's operations since the first lease in that area was purchased in 1970 and production began in 1973. The Company currently holds interests in 13 blocks in the Eugene Island area. These blocks comprise eight fields containing 94 oil and gas wells producing from multiple reservoirs and horizons.
The Eugene Island Block 330 field is the Company's most significant asset, with 28 productive Pleistocene horizons between 4,000 and 8,000 feet, containing multiple reservoirs. The field, located in 245 feet of water, contains three drilling and production platforms in which the Company holds a 35% working
interest, as well as an additional platform in which the Company holds a 30% working interest. There are currently 17 wells producing primarily natural gas and 36 wells producing primarily oil on the block. In 1994, a successful drilling program off of the field's "D" platform resulted in the completion of three oil wells and one high volume horizontal gas well. Since initial production in 1973, the Eugene Island Block 330 field has produced approximately 641 billion cubic feet ("Bcf ") of natural gas and 127 million barrels ("MMBbls") of oil and condensate (173 Bcf and 37 MMBbls attributable to the Company's net revenue interest). Reserves have been added to this field consistently since production commenced. These increases have been derived from new exploratory horizons, infill drilling, field expansions and higher than anticipated recovery efficiencies.
Another significant field to the Company is the Eugene Island Block 295 field. On production since February 1973, this block has recorded gross production of over 416 Bcf of natural gas and over 3.0 MMBbls of oil and condensate during its twenty two-year life. In August 1993, the Company effected an exchange of working interests in Eugene Island Block 295 with another working interest owner in such block. Pursuant to this exchange, the Company increased its working interest in Eugene Island Block 295 to 100% on 3,125 acres above 3,000 feet, to 20% on 1,875 acres above 3,000 feet and to 20% on all of the block below 3,000 feet. During the fourth quarter of 1993, the Company successfully drilled and completed five horizontal wells to exploit the natural gas potential located in certain shallow reservoirs on this block in an area where it has a 100% working interest. A platform was set and production commenced from these wells in late February 1994. In September 1994, an additional horizontal well was also drilled from this platform. Production from this field is largely responsible for the substantial increase in the Company's average daily production of natural gas from the Eugene Island area for 1994, compared to 1993.
The Eugene Island Block 212 field consists of Eugene Island Blocks 211 and 212 and Ship Shoal Block 175. The field contains eight productive horizons which have four oil wells and two natural gas wells producing from a platform set in 1985. The Company and its partners completed a successful three well workover and recompletion program in this field during the fourth quarter of 1994.
Main Pass
The Company's nine blocks in the Main Pass area are located near the mouth of the Mississippi River in the Gulf of Mexico and include leases purchased from 1974 to 1992. The primary drilling objectives in these fields are Pliocene and Miocene sandstone reservoirs with productive formation depths from 5,000 to 12,000 feet. The Company's interests in the Main Pass area include 42 producing oil and gas wells producing from six platforms.
A field including Main Pass Blocks 72, 73 and 72/74 was unitized in 1982 with the Company's working interest at 14%. In late 1994, the Company increased its working interest in this field to 35% by purchasing another working interest owner's interests in the field. This field contains 23 producing oil wells and 8 producing natural gas wells from three platforms operated by one of the Company's joint venture partners. The field is located in 125 feet of water with 38 mapped horizons adjacent to and surrounding a salt dome. These horizons contain over 150 separate reservoirs between 5,000 and 12,000 feet. A successful 10 well workover program in this field was completed in 1994. In addition, the first three wells of a four well development program were drilled in 1994. The Company currently plans to continue its workover program and drill six additional wells in this field during 1995 based in part on the analysis of a proprietary 3-D seismic survey over the field that the Company acquired rights to in 1994.
Main Pass Block 123 was acquired in the federal lease sale of 1990. Pogo Gulf Coast, for which the Company is the general partner, has a 75% working interest and is the operator on the block. Along with its non-operating joint venture partner, Pogo Gulf Coast drilled two discovery wells on the block in 1993. Subsequently, Pogo Gulf Coast drilled two additional wells on this block in 1994. Installation of a platform and construction of a pipeline from the platform to an existing main pipeline was completed in January 1995. Platform start-up was completed and full production from this field commenced in February 1995.
South Marsh Island
The Company currently owns interests in portions of seven blocks in the South Marsh Island area, located offshore Louisiana. Three of the leases were acquired in 1974, a fourth in 1980, a fifth in 1992 and portions of two more leases were acquired in 1994 through farmins. Three blocks contain a total of five drilling and production platforms. These platforms currently have 44 oil and gas wells producing from Pleistocene age sandstone reservoirs located at depths from 5,000 to 10,000 feet.
The South Marsh Island Block 128 field, in which the Company owns a 16% working interest, comprises South Marsh Island Blocks 125, 127, 128 and 141. This field primarily produces oil, with 32 oil wells and eight natural gas wells producing from 20 separate reservoirs. In 1994, a five well drilling program in this field was completed which resulted in increased oil and gas deliverability and reserves. Additional drilling is currently planned for 1995. The wells that were drilled in 1994 and those planned for 1995 have been based on the ongoing analysis of a 3-D seismic survey in conjunction with a detailed reservoir study of the field.
The Company also owns a 25% working interest in the South Marsh Island Block 160 field which is producing from three oil wells at a depth of approximately 9,700 feet. A single platform was set on this block in 1983. A two-well drilling program in this field resulting from analysis of a 3-D seismic survey covering the field was completed in the fourth quarter of 1994.
South Pass
The Company acquired its first South Pass area leasehold interest in September 1972. The Company currently owns interests in portions of six blocks in this area on which four production platforms have been set that produce oil and gas from 27 wells which have been completed principally in Pleistocene, Pliocene and Miocene reservoirs at depths ranging from approximately 4,000 to 14,800 feet.
The Company's most significant field in the South Pass area is located on South Pass Blocks 49 and 50. The Company increased its working interest in South Pass Bock 49 from 6% to 20% late in 1994. In addition, in late 1993, the Company successfully completed the drilling of a highly deviated well into two reservoirs on South Pass Block 50, in which the Company holds a 50% working interest, from a platform located on South Pass Block 49 that substantially increased the Company's production from this area.
East Cameron
Production commenced from the Company's first East Cameron area leasehold interest in February 1973. Presently, the Company has interests in 3 offshore blocks in this area which contain two fields and 13 producing gas wells.
During 1992, the Company and its partners conducted a 3-D seismic survey of the East Cameron Block 334/335 field area where the Company has a 42% working interest. Analysis of this 3-D seismic survey resulted in the drilling of four successful development wells. As of February 1, 1995, an exploratory well was also being drilled on East Cameron Block 334.
New Mexico
The Company considers southeastern New Mexico to be an area of significant growth in both production and reserves as a result of recent exploration and development activities. The Company believes that during the past four years it has been one of the most active companies drilling for oil and natural gas in the southeastern New Mexico (Lea and Eddy Counties) portion of the Permian Basin where the Company has interests in over 70,000 gross acres. The Company's primary drilling objective for crude oil is the Brushy Canyon (Delaware) formation. Fields in the Brushy Canyon (Delaware) formation in the southeastern New Mexico portion of the Permian Basin are generally characterized by production from relatively shallow depths (6,000 to 9,000 feet), multiple producing zones in most wells and relatively high initial rates of production (frequently equaling the top field allowables which range from of 142 Bbls to 230 Bbls per day, depending on the depth of production from the field). The Company has achieved rapid cost recovery with respect to its New Mexico wells drilled to date because of relatively low capital costs and high initial rates of production.
Since the Company began exploring in the Brushy Canyon (Delaware) formation in October 1989, it has participated in the drilling of 209 wells through December 31, 1994, including, among others, 84 wells in the Sand Dunes field where the Company's working interest ranges from 4% to 89%, 27 wells in the East Loving field where the Company's working interest ranges from 33% to 98%, 45 wells in the Livingston Ridge field where the Company's working interest ranges from 25% to 100%; and 29 wells in the Red Tank field where the Company's working interest ranges from 89% to 100%. The oil fields in this area are generally developed on a 40 acre spacing pattern. The Company anticipates drilling many additional locations in these and other fields in southeastern New Mexico during 1995 and in future years.
DOMESTIC OFFSHORE PROPERTIES
The following is a listing of the Company's domestic offshore properties as of December 31, 1994.
(footnotes at end of table)
(footnotes at end of table)
[A] Block farmed out -- Overriding Royalty Interest only
[B] Includes offset contribution well
[C] Block farmed in
[D] Pogo owns 35% in "A", "B", and "C" platform area and 30% in platform "D" area
[E] Portion of block farmed out
[F] Includes one farmout well
[G] Pogo owns 20% in a non-unit area
* Pogo owns 20% in rights below 3,000 feet and 100% in rights at 3,000 feet and above in certain portions of the block
[+] Represents portion of block
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In 1989, a large number of exploration and production companies, including the Company, were circularized with Special Notice Letters in accordance with CERCLA from the EPA regarding a particular waste disposal site in Louisiana known as the "Gulf Coast Vacuum Site" utilized by a trucking company. The EPA subsequently developed a list based on its investigation showing the Company bearing an approximate 1% responsibility for this site based on the trucking company's shipping records. The Company utilized the trucking company to dispose of salt water produced from a well in which the Company had an interest. The Company, however, believes that none of this salt water was delivered to the Gulf Coast Vacuum Site. In any
event, the Company believes that the trucking company shipped only oilfield waste for the Company which is exempt pursuant to CERCLA and, further, that such shipments, if any, were sent to a properly permitted waste disposal site. The Company has learned that the EPA has recently entered a consent decree, the details of which have not been made fully public, with certain parties that are believed to be responsible for a majority of the disposal occurring at the site.
The Company is a party to various other legal proceedings consisting of routine litigation incidental to its businesses, but believes that any potential liabilities resulting from these proceedings are adequately covered by insurance or are otherwise immaterial at this time.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
ITEM S-K 401(B). EXECUTIVE OFFICERS OF REGISTRANT.
Executive officers of the Company are appointed annually to serve for the ensuing year or until their successors have been elected or appointed. The executive officers of the Company, their age as of February 1, 1995, and the year each was elected to his present position are as follows:
Prior to assuming their present positions with the Company, the business experience of each executive officer for more than the last five years was as follows: Mr. Van Wagenen was President and Chief Operating Officer of the Company since 1990, Senior Vice President and General Counsel of the Company since 1986, Vice President and General Counsel of the Company since 1982, and General Counsel of the Company since 1979; Mr. Good was Vice President -- Land of the Company since 1988 and Chief Landman of the Company since 1977; Mr. Slack was Regional Manager of Chemical Bank of New York's Southwest Energy and Minerals Division since 1982; Mr. Burbach was Vice President of Norfolk Holding Inc. since 1986 and Exploration Manager for Tricentrol Ltd. Canada and Tricentrol U.S. since 1981; Mr. Cooper was a Division Landman for the Company since 1983 and a Landman for the Company since 1979; Mr. Gold was Manager of Reservoir Engineering for the Company since 1977; Mr. Hart was Controller for the Company since 1977; Mr. Laney was International Exploration Manager for the Company since 1983 and Exploration Coordinator
for the Gulf Coast Division of the Company since 1977; Mr. McCoy was Director of Personnel and Administration for the Company since 1978; Mr. McGregor was Manager of Hydrocarbon Sales and Contracts for the Company since 1981; Mr. Shaw was Operations Manager for the Company since 1981; Mr. Manning was an Associate General Counsel for the Company since 1989 and prior thereto was an attorney with the Federal Bureau of Investigation, and Chevron U.S.A., and Assistant to the General Counsel of Primary Fuels, Inc.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The following table shows the range of low and high sales prices of the Company's Common Stock (the "Common Stock") on the New York Stock Exchange composite tape where the Company's common stock trades under the symbol PPP. The Company's common stock is also listed on the Pacific Stock Exchange.
In 1994, the Company paid $0.06 per share in dividends on its Common Stock since it commenced paying dividends in August 1994. In this regard, the Company reinstated the practice of declaring a quarterly cash dividend commencing in the third quarter of 1994. However, the declaration and payment of future dividends will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors.
Pursuant to the Company's revolving credit agreement with its banks under which the Company has borrowed funds, the Company may not, subject to certain exceptions, pay any dividends on its capital stock or make any other distributions on shares of its capital stock (other than dividends or distributions payable solely in shares of such capital stock) or apply any funds, property or assets to the purchase, redemption, sinking fund or other retirement of its capital stock, if the aggregate amount of all such dividends, purchases, and redemptions would exceed an amount determined based on the consolidated income of the Company and its consolidated subsidiaries from and after a specified date plus the proceeds of the issuance of capital stock after the same specified date or if the net worth of the Company is negative. As of December 31, 1994, $64,037,000 was available for dividends under this limitation.
As of March 3, 1995, there were 3,815 holders of record of the Company's Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company reported net income for 1994 of $27,067,000 or $0.81 per share (on both a primary and fully diluted basis) compared to net income for 1993 of $25,061,000 or $0.76 per share (on both a primary and fully diluted basis) and net income for 1992 of $18,495,000 or $0.66 per share (on both a primary and fully diluted basis). Included in net income for 1994 is an extraordinary loss of $307,000 (net of taxes) or $0.01 per share in connection with the retirement of the Company's 10.25% Convertible Subordinated Notes, due 1999 (the "10.25% Notes") on April 18, 1994. Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding for 1994 of 33,352,000 compared to 32,860,000 for 1993 and 27,929,000 for 1992. The increases in the weighted average number of common and common equivalent shares outstanding for 1993 resulted primarily from the issuance of 4,500,000 shares of common stock in December 1992 as set forth in the Consolidated Statements of Shareholders' Equity included in "Item 8.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
POGO PRODUCING COMPANY AND SUBSIDIARIES
HOUSTON, TEXAS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Pogo Producing Company:
We have audited the accompanying consolidated balance sheets of Pogo Producing Company (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of Pogo's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pogo Producing Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas February 3, 1995
POGO PRODUCING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes to consolidated financial statements are an integral part hereof.
POGO PRODUCING COMPANY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
The accompanying notes to consolidated financial statements are an integral part hereof.
POGO PRODUCING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part hereof.
POGO PRODUCING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part hereof.
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation --
The consolidated financial statements include the accounts of Pogo Producing Company and its wholly-owned subsidiaries (the "Company"), after elimination of all significant intercompany transactions.
Inventories --
Inventories consist primarily of tubular goods used in the Company's operations and are stated at the lower of average cost or market value.
Interest Capitalized --
Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are evaluated.
Earnings per Share --
Earnings per common and common equivalent share (primary earnings per share) are based on the weighted average number of shares of Common Stock and common equivalent shares outstanding during the periods. The dilutive effect of stock options was considered in the earnings per share reported for the periods. The 8% Debentures are common stock equivalents and were anti-dilutive in all periods. Earnings per common and common equivalent share assuming full dilution (fully diluted earnings per share) considered the 10.25% Notes (retired on April 18, 1994) which were anti-dilutive in all periods in which they were outstanding and the 5 1/2% Notes (issued on March 16, 1994) which were dilutive for the portion of 1994 in which they were outstanding, but such dilution was not sufficient to change reported earnings per share. Earnings per share are based on the following:
Production Imbalances --
Owners of an oil and gas property often take more or less production from a property than entitled to based on their ownership percentages in the property. This results in a condition known in the industry as a production imbalance. The Company follows the "take" (cash) method of accounting for production imbalances. Under this method, the Company recognizes revenues on production as it is taken and delivered to its purchasers. The Company's crude oil imbalances are not significant. At December 31, 1994, the
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company had taken approximately 4,873 MMcf of natural gas less than it was entitled to based on its interest in certain properties, and approximately 1,994 MMcf more than its entitlement in certain other properties placing the Company at year end in a net under-delivered position of approximately 2,879 MMcf of natural gas based on its working interest ownership in the properties.
Oil and Gas Activities and Depreciation, Depletion, and Amortization --
The Company follows the successful efforts method of accounting for its oil and gas activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. 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 is based on the capitalized costs mentioned above plus future costs to abandon offshore wells and platforms and is determined on a field-by-field basis using the units of production method.
Other properties are depreciated using a straight-line method in amounts which in the opinion of management are adequate to allocate the cost of the properties over their estimated useful lives.
Consolidated Statements of Cash Flows --
For the purpose of cash flows, the Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. Significant transactions may occur which do not directly affect cash balances and as such will not be disclosed in the Consolidated Statements of Cash Flows. Certain such noncash transactions are disclosed in the Consolidated Statements of Shareholders' Equity relating to the acquisition of treasury stock in 1993 in exchange for stock options exercised and the conversion in 1993 of a debenture into Common Stock. In addition, the Company in 1993, exchanged its working interest in thirteen Gulf of Mexico oil and gas properties for an increased working interest in five other Gulf of Mexico oil and gas properties in a noncash "like kind" exchange. The oil and gas property and accumulated depreciation, depletion and amortization accounts as reflected in the Consolidated Balance Sheets have been adjusted to reflect the appropriate amounts to record the working interests acquired and disposed of. The oil and gas reserves acquired and disposed of are reflected as purchases and sales in the "Estimates of Proved Reserves" roll forward included in the "Unaudited Supplementary Financial Data" included elsewhere herein.
Commitments and Contingencies --
The Company's office rent expense was $819,000, $868,000, and $808,000 in 1994, 1993, and 1992, respectively. The Company has lease commitments for office space of $822,000 in 1995, $1,039,000 in 1996 and 1997, $1,007,000 in 1998, and $962,000 in 1999.
(2) INCOME TAXES
The components of income (loss) before income taxes for each of the three years in the period ended December 31, 1994, are as follows (expressed in thousands):
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of federal income tax expense (benefit) for each of the three years in the period ended December 31, 1994, are as follows (expressed in thousands):
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(a) Excludes $165,000 of deferred tax benefits on a $472,000 extraordinary loss in 1994.
Total federal income tax expense (benefit) for each of the three years in the period ended December 31, 1994, differs from the amounts computed by applying the statutory federal income tax rate to income before taxes as follows: (expressed as a percent of pretax income):
The deferred federal income tax provision is the result of the difference between deferred tax liabilities determined at each balance sheet date. The deferred tax liabilities are determined by applying current tax laws to temporary differences in the recognition of revenue and expense for tax and financial purposes. The principal components of the Company's deferred income tax liability include the following at December 31, 1994 and 1993 (expressed in thousands):
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) LONG-TERM DEBT
Long-term debt and the amount due within one year at December 31, 1994 and 1993, consists of the following (dollars expressed in thousands):
The bank revolving credit agreement entered into in December, 1993, extends to the Company a $100,000,000 revolving/term credit facility which will be fully revolving until June 29, 1996 and will convert to a term loan with eight quarterly installments commencing July 31, 1996. The amount that may be borrowed under the facility may not exceed a borrowing base, determined semiannually by the lenders based on the discounted present value of the Company's oil and gas reserves and the provisions of the agreement. The borrowing base currently exceeds $100,000,000. The agreement provides that total debt and total debt for borrowed money, as defined, may not exceed $230,000,000 and $200,000,000, respectively. The facility is governed by various financial covenants including the maintenance of positive working capital (excluding current maturities of debt), a fixed charge ratio, as defined, of 1.7 or greater, a $10,000,000 limit on other senior debt, and a $10,000,000 limit on prepayment (without refinancing) of subordinated debt in any one year and $20,000,000 in total through July 31, 1996. Upon the occurrence of an event of default or certain other specified events, the banks would be entitled to a security interest in the borrowing base properties, which constitute substantially all of the Company's domestic oil and gas properties. Borrowings under the facility bear interest at a Base (Prime) rate, certificate of deposit rate plus 1 5/8%, or LIBOR plus 1 1/2%, at the Company's option. A commitment fee of 1/2 of 1% per annum of the unborrowed amount under the facility is
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also due. The Company incurred commitment fees of $409,000 in 1994, $149,000 in 1993, and $80,000 in 1992 under this and a prior revolving credit agreement.
The Company has entered into separate letter agreements with two banks under which each bank may provide a $10,000,000 uncommitted line of credit. The two $10,000,000 lines of credit are on an as available or offered basis and the banks have no obligations to make any advances under the lines. Loans made under the agreements are for a maximum term of 30 days and are reflected as long-term as the Company has the intent and ability to reborrow such amounts under its bank revolving credit agreement discussed above. The agreements may be terminated at any time by the Company or either bank.
The 5 1/2% convertible subordinated notes, due 2004 (the "5 1/2% Notes") are convertible into Common Stock at $22.188 per share subject to adjustment upon the occurrence of certain events. The 5 1/2% Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after March 15, 1998, at a redemption price of 103.3% and decreasing percentages thereafter. No sinking fund is provided. The 5 1/2% Notes are redeemable at the option of the holder, upon the occurrence of a repurchase event (a change in control, as defined), at 100% of the principal amount.
The 8% convertible subordinated debentures, due 2005 (the "8% Debentures") are convertible into Common Stock at $39.50 per share subject to adjustments under certain circumstances, including stock splits. The 8% Debentures are redeemable at the option of the Company at 102.4% through December 30, 1995, and decreasing percentages thereafter, and are subject to mandatory annual sinking fund requirements of $3,000,000 which commenced December 31, 1990. Such requirements will be sufficient to retire all but $15,000,000 of the issue prior to maturity. As of December 31, 1994, the Company has purchased $13,998,000 principal amount of the bonds at less than face value resulting in both ordinary and extraordinary gains. The Company has tendered $12,000,000 principal amount of the bonds to the trustee in satisfaction of sinking fund requirements and $280,000 principal amount of the bonds have been called by the trustee. The Company currently has $1,718,000 principal amount of bonds purchased in excess of current sinking fund requirements which may be tendered in satisfaction of future sinking fund requirements.
Current maturities and sinking fund requirements during the next five years in connection with the above long-term debt are $1,282,000 in 1995, $9,300,000 in 1996, $13,500,000 in 1997, $7,200,000 in 1998 and $3,000,000 in 1999. Included in the current maturities reflected above are $6,300,000 in 1996, $10,500,000 in 1997, and $4,200,000 in 1998 relative to bank debt. The Company has established a history of refinancing its bank debt before scheduled maturities and expects to do so again before the amortization of bank debt commences in 1996.
(4) SALES TO MAJOR CUSTOMERS
The Company is an oil and gas exploration and production company that generally sells its oil and gas to numerous customers on a month-to-month basis. Sales to the following customers exceeded 10 percent of revenues during the years indicated (expressed in thousands):
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) CREDIT RISK
Substantially all the Company's accounts receivable at December 31, 1994, result from oil and gas sales and joint interest billings to other companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. Such receivables are generally not collateralized. Historically, credit losses incurred by the Company on receivables generally have not been material. No known material credit losses were experienced during 1994.
(6) EMPLOYEE BENEFITS
A total of 3,476,430 shares of Common Stock are reserved for issuance to key employees and non-employee directors under the Company's stock option plans. The stock option plans authorize the granting of options at prices equivalent to the market value at the date of grant. Options generally become exercisable in three annual installments commencing one year after the date granted and, if not exercised, expire 10 years from the date of grant. At January 1, 1994, 1,490,676 shares were issuable under stock options outstanding. Options for 291,000 shares were granted during 1994 at prices ranging from $19.13 to $22.25 per share. During 1994, 376,639 options were exercised at prices ranging from $4.38 to $17.44 per share and options to purchase 17,500 shares at a price of $16.25 were cancelled. At December 31, 1994, options to purchase 1,387,537 shares were outstanding (902,455 were exercisable) at prices ranging from $4.38 to $22.25.
The Company has a tax-advantaged savings plan in which all salaried employees may participate. Under such plan, a participating employee may allocate up to 10% of his salary, and the Company makes matching contributions of up to 6% thereof. Funds contributed by the employee and the matching funds contributed by the Company are held in trust by a bank trustee in six separate funds. Amounts contributed by the employee and earnings and accretions thereon may be used to purchase shares of Common Stock, invest in a money market fund or invest in four stock, bond, or blended stock and bond mutual funds according to instructions from the employee. Matching funds contributed to the savings plan by the Company are invested only in Common Stock. The Company contributed $375,000 to the savings plan in 1994, $125,000 in 1993, and $288,000 in 1992.
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A trusteed retirement plan has been adopted by the Company for its salaried employees. The benefits are based on years of service and the employee's average compensation for five consecutive years within the final ten years of service which produce the highest average compensation. The Company makes annual contributions to the plan in the amount of retirement plan cost accrued or the maximum amount which can be deducted for federal income tax purposes. The following table sets forth the plan's funded status (in thousands of dollars) as of December 31, 1994, 1993, and 1992.
Effective January 1, 1992, the Company adopted the provisions of the Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Company currently provides full medical benefits to its retired employees and dependents. For current employees, the Company assumes all or a portion of postretirement medical and term life insurance costs based on the employee's age and length of service with the Company. The postretirement medical plan has no assets and is currently funded by the Company on a pay-as-you-go basis.
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis (in thousands of dollars) of the annual expense and activity in the deferred cost and benefits obligation accounts for 1992, 1993 and 1994. The computation assumes that future increases in medical costs will trend down from 13% to 7% per year over the next 12 years for purposes of estimating future costs. The medical cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed medical cost trend rate by one percent in each year would increase the aggregate of service and interest cost components of net periodic postretirement benefit cost for 1994 by $196,000 and the accumulated postretirement benefit obligation as of December 31, 1994, by $897,000.
The accumulated postretirement benefit obligation (in thousands of dollars) at December 31, 1994 is attributable to the following groups:
POGO PRODUCING COMPANY & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
Cash and Cash Investments
Fair value is carrying value as no cash equivalents or cash investments are included in the balances as of December 31, 1994 and 1993.
Debt
The carrying value and estimated fair value of the Company's financial instruments at December 31, 1994 and 1993 (in thousands of dollars) are as follows:
UNAUDITED SUPPLEMENTARY FINANCIAL DATA
OIL AND GAS PRODUCING ACTIVITIES
The results of operations from oil and gas producing activities excludes non-oil and gas revenues, general and administrative expenses, interest charges, interest income and interest capitalized. United States income tax expense was determined by applying the statutory rates to pretax operating results with adjustments for permanent differences. Kingdom of Thailand tax expense was determined by applying the statutory tax rate to Thailand taxable income.
UNAUDITED SUPPLEMENTARY FINANCIAL DATA -- (CONTINUED)
The following table sets forth the Company's capitalized costs (expressed in thousands) incurred for oil and gas producing activities during the years indicated.
The following information regarding estimates of the Company's proved oil and gas reserves, which are located offshore in United States waters of the Gulf of Mexico, onshore in the United States and offshore in the Kingdom of Thailand is based on reports prepared by Ryder Scott Company Petroleum Engineers. Their summary report dated February 3, 1995 is set forth as an exhibit to this Form 10-K and includes definitions and assumptions that served as the basis for the discussions under the caption "Item 1, Business -- Exploration and Production Data -- Reserves." Such definitions and assumptions should be referred to in connection with the following information.
ESTIMATES OF PROVED RESERVES
UNAUDITED SUPPLEMENTARY FINANCIAL DATA -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED
The standardized measure of discounted future net cash flows from the production of proved reserves is developed as follows:
1. Estimates are made of quantities of proved reserves and the future periods in which they are expected to be produced based on year end economic conditions.
2. The estimated future gross revenues from proved reserves are priced on the basis of year end prices, except in those instances where fixed and determinable natural gas price escalations are covered by contracts.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED -- (CONTINUED)
3. The future gross revenue streams are reduced by estimated future costs to develop and to produce the proved reserves, as well as certain abandonment costs based on year end cost estimates, and the estimated effect of future income taxes. These cost estimates are subject to some uncertainty, particularly those estimates relating to the Company's properties located in the Kingdom of Thailand.
The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and the risks inherent in reserve estimates.
The following are the principal sources of change in the standardized measure of discounted future net cash flows. All amounts are related to changes in reserves located in the United States unless otherwise noted.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED -- (CONTINUED)
QUARTERLY RESULTS -- UNAUDITED
Summaries of the Company's results of operations by quarter for the years 1994 and 1993 are as follows:
- ---------------
(a) Represents revenues less lease operating, exploration, dry hole and impairment, and depreciation depletion and amortization expenses.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding nominees and continuing directors in the Company's definitive Proxy Statement for its annual meeting to be held on April 25, 1995, to be filed within 120 days of December 31, 1994 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the Company's "1995 Proxy Statement"), is incorporated herein by reference. See also Item S-K 401(b) appearing in Part I of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information regarding executive compensation in the Company's 1995 Proxy Statement, other than the information regarding the Compensation Committee Report on Executive Compensation, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information regarding ownership of the Company securities by management and certain other beneficial owners in the Company's 1995 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain relationships and related transactions with management in the Company's 1995 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. Financial Statements and Supplementary Data:
2. Financial Statement Schedules:
All Financial Statement Schedules have been omitted because they are not required, are not applicable or the information required has been included elsewhere herein.
3. Exhibits:
- --------------- * Asterisk indicates exhibits incorporated by reference as shown.
(B) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POGO PRODUCING COMPANY (Registrant)
By: /s/ PAUL G. VAN WAGENEN ------------------------------------ Paul G. Van Wagenen Chairman of the Board, President and Chief Executive Officer
Date: March 7, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 7, 1995.
INDEX TO EXHIBITS
- --------------- * Asterisk indicates exhibits incorporated by reference as shown.