| POGO PRODUCING CO ITEM 1A Risk Factors |
| Natural gas and oil prices fluctuate widely, and low prices could have a material adverse impact on the Company’s business |
| The Company’s revenues, profitability and future growth depend substantially on prevailing prices for natural gas and oil |
| Oil and natural gas market prices have historically been seasonal, cyclical and volatile |
| The average prices that the Company has recently received for its production are significantly higher than their historic average |
| A future drop in oil and natural gas prices could have a material adverse effect on the Company’s cash flow and profitability |
| A sustained period of low prices could have a material adverse effect on the Company’s operations and financial condition and could also result in a reduction in funds available under the Company’s credit facility and associated prepayments |
| Lower prices may also reduce the amount of natural gas and oil that the Company can economically produce |
| Among the factors that can cause oil and natural gas price fluctuation are: · the level of consumer product demand; · weather conditions; · domestic and foreign governmental regulations; · the price and availability of alternative fuels; · political conditions in natural gas and oil producing regions; · the domestic and foreign supply of natural gas and oil, including the decisions of the Organization of Petroleum Exporting Countries relating to export quotas and its ability to maintain oil price and production controls; · the price of foreign imports; and · overall economic conditions |
| 21 ______________________________________________________________________ The Company’s integration of Northrock may not be successful |
| The acquisition of Northrock in September, 2005 is the largest acquisition in the Company’s history |
| The Company may not be able to realize anticipated economic, operational and other benefits from the acquisition due to the following risks and difficulties, among others: · Northrock’s properties may not produce revenues, earnings or cash flow at anticipated levels; · the Company may have exposure to unanticipated liabilities and costs as a result of the acquisition, some of which may materially exceed the Company’s estimates; · the Company may lose key employees on whom management is substantially dependent in the operation of Northrock’s assets; · the Company may lose customers, suppliers, partners and agents of Northrock; · the Company may experience material difficulties and additional costs in continuing to integrate Northrock’s operations, systems and personnel with those of the Company |
| Please see “—The Company will continue to pursue acquisitions and dispositions,” below |
| The natural gas and oil business involves many operating risks that can cause substantial losses or hinder marketing efforts |
| Numerous risks affect the Company’s drilling activities, including the risk of drilling non-productive wells or dry holes |
| The cost of drilling, completing and operating wells and of installing production facilities and pipelines is often uncertain |
| Also, the Company’s drilling operations could diminish or cease because of any of the following: · title problems; · weather conditions; · fires; · explosions; · blow-outs and surface cratering; · uncontrollable flows of underground natural gas, oil and formation water; · natural disasters; · pipe or cement failures; · casing collapses; · embedded oilfield drilling and service tools; · abnormally pressured formations; · environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases; · noncompliance with governmental requirements; or · shortages or delays in the delivery or availability of material, equipment or fabrication yards |
| Offshore operations are also subject to a variety of operating risks related to the marine environment, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions |
| These hazards may interrupt production and can cause substantial losses to the Company due to injury or 22 ______________________________________________________________________ loss of life, severe damage to facilities, or pollution or other environmental damage |
| As a result, the Company could incur substantial liabilities that could reduce or eliminate the funds available for exploration, development or leasehold acquisitions |
| Information regarding the impact of Hurricanes Katrina and Rita on the Company’s operations, please read “Business: Domestic Offshore Operations |
| ” Moreover, effective marketing of the Company’s natural gas production depends on a number of factors, such as the following: · existing market supply of and demand for natural gas; · the proximity of the Company’s reserves to pipelines; · the available capacity of such pipelines; and · government regulations |
| The marketing of oil and natural gas production similarly depends on the availability of pipelines and other transportation, processing and refining facilities, and the existence of adequate markets |
| As a result, even if hydrocarbons are discovered in commercial quantities, a substantial period of time may elapse before commercial production commences |
| If pipeline facilities in an area are insufficient, the Company may have to wait for the construction or expansion of pipeline capacity before the Company can market production from that area |
| The Company may not be able to obtain sufficient drilling equipment and experienced personnel to conduct its operations |
| In periods of increased drilling activity resulting from high commodity prices, demand exceeds availability for drilling rigs, drilling vessels, supply boats and personnel experienced in the oil and gas industry in general, and the offshore oil and gas industry in particular |
| The market for oilfield services is currently very competitive |
| This may lead to difficulty and delays in consistently obtaining services and equipment from vendors, obtaining drilling rigs and other equipment at favorable rates, and scheduling equipment fabrication at factories and fabrication yards |
| Obtaining drilling rigs for our New Zealand operations is presently difficult |
| The Company’s foreign operations subject it to additional risks |
| The Company’s ownership and operations in Canada, New Zealand, Vietnam and any other foreign areas where it does business are subject to the various risks inherent in foreign operations |
| These risks may include the following: · currency restrictions and exchange rate fluctuations; · risks of increases in taxes and governmental royalties and renegotiation of contracts with governmental entities; and · changes in laws and policies governing operations of foreign-based companies |
| United States laws and policies on foreign trade, taxation and investment may also adversely affect the Company’s international operations |
| In addition, if a dispute arises from foreign operations, foreign courts may have exclusive jurisdiction over the dispute, or the Company may not be able to subject foreign persons to the jurisdiction of United States courts |
| Local laws and customs in many countries differ significantly from those in the United States |
| In many foreign countries, particularly in those with developing economies like Vietnam, it is common to engage in business practices that are prohibited by United States regulations applicable to the Company |
| The US 23 ______________________________________________________________________ Foreign Corrupt Practices Act prohibits corporations and individuals, including the Company and its employees, from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity |
| Although the Company has implemented policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of the Company’s employees, contractors and agents, including those based in or from countries where practices which violate such United States laws may be customary, will not take actions in violation of the Company’s policies |
| Any such violation, even if prohibited by the Company’s policies, could have a material adverse effect on the Company’s business |
| In addition, the Company’s foreign competitors that are not subject to the US Foreign Corrupt Practices Act or similar laws may be able to secure business or other preferential treatment in such countries by means that such laws prohibit with respect to the Company |
| The Company cannot control the activities on properties it does not operate; operators of those properties may act in ways that are not in the Company’s best interests |
| Other companies operate a portion of the oil and natural gas properties in which the Company has an interest |
| As a result, the Company has limited influence over operations on some of those properties or their associated costs |
| The Company’s limited influence on non-operated properties could result in the following: · the operator may initiate exploration or development projects on a different schedule than the Company prefers; · the operator may propose to drill more wells or build more facilities on a project than the Company has funds for, which may mean that the Company cannot participate in those projects or share in revenues from those projects; and · if the operator refuses to initiate an exploration or development project, the Company may not be able to pursue the project |
| Any of these events could significantly affect the Company’s anticipated exploration and development activities and the economic value of those properties to the Company |
| Maintaining reserves and revenues in the future depends on successful exploration and development activities and/or acquisitions |
| The Company must continually explore for and develop or acquire new oil and natural gas reserves to replace those produced and sold |
| The Company’s hydrocarbon reserves and revenues will decline if the Company is not successful in its drilling, exploration or acquisition activities |
| Although the Company has historically maintained its reserves base primarily through successful exploration and development operations, its future efforts may not be similarly successful |
| The Company’s operations are subject to casualty risks against which it cannot fully insure |
| The Company’s operations are subject to inherent casualty risks such as blowouts, fires, explosions, cratering, uncontrollable flows of oil, natural gas or well fluids, pollution and other environmental risks, marine hazards and natural disasters |
| If any such event occurred, the Company could be subject to substantial financial losses due to personal injury, property damage, environmental discharge, or suspension of operations |
| The impact on the Company of one of these events could be significant |
| Although the Company purchases insurance at levels it believes to be customary for a company of its size in its industry, the Company is not fully insured against all risks incident to its business |
| For some risks, the Company may not obtain insurance if it believes the cost of available insurance is excessive relative to the risks presented |
| For example, escalating costs for business interruption insurance may lead the Company to reduce or eliminate its business interruption coverage |
| In addition, pollution and environmental risks 24 ______________________________________________________________________ generally are not fully insurable |
| If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect the Company’s operations and financial condition |
| Moreover, there is no assurance that recoveries for insured events will be sufficient to cover cash flow that the Company would have otherwise generated from affected properties |
| The Company has substantial capital requirements |
| The Company requires substantial capital to replace its reserves and generate sufficient cash flow to meet its financial obligations |
| If the Company cannot generate sufficient cash flow from operations or raise funds externally in the amounts and at the times needed, it may not be able to replace its reserves or meet its financial obligations |
| The Company recently paid approximately dlra1dtta7 billion in cash to acquire Northrock |
| The Company’s ongoing capital requirements consist primarily of the following items: · funding its 2006 capital and exploration budget of dlra725 million; · other allocations for acquisition, development, production, exploration and abandonment of oil and natural gas reserves; · future dividends and stock repurchases |
| The Company plans to finance anticipated ongoing expenses and capital requirements with funds generated from the following resources: · available cash and cash investments; · cash provided by operating activities; · funds available under the Company’s credit facility; · the Company’s uncommitted bank line(s) of credit; and · capital the Company believes it can raise through opportunistic debt and equity offerings |
| However, the Company financed a substantial part of the Northrock acquisition utilizing cash on hand and public debt issuance |
| In addition, the Company utilized borrowings under its credit facility related to the acquisition, thereby reducing the availability of those resources for other capital requirements |
| Moreover, the uncertainties and risks associated with future performance and revenues, as described in these Risk Factors, will ultimately determine the Company’s liquidity and ability to meet anticipated capital requirements |
| The Company will continue to pursue acquisitions and dispositions |
| The Company will continue to seek opportunities to generate value through business combinations, purchases and sales of assets |
| The Company examines potential transactions on a regular basis, depending on market conditions, available opportunities and other factors |
| In addition, the Company competes with other companies in pursuing acquisitions, many of which have greater financial and other resources to acquire attractive companies and properties |
| Dispositions of portions of the Company’s existing business or properties would be intended to result in the realization of immediate value but would consequently result in lower cash flows over the longer term, unless the proceeds are reinvested in more productive assets |
| The successful acquisition of oil and gas properties requires an assessment of several factors, including recoverable reserves, development and exploratory potential, projected future cash flows that are, in part, based upon future oil and gas prices, current and projected operating, general and administrative and other costs, and contingent liabilities associated with the properties or entities acquired, including potential environmental and other liabilities |
| The accuracy of the Company’s assessment of these factors is inherently uncertain, and the Company’s review and assessment of potential acquisitions will not reveal all existing or potential problems nor will it permit the Company to become sufficiently familiar with the 25 ______________________________________________________________________ properties or entities to fully assess their deficiencies and capabilities |
| Even when problems are identified, the other party may be unwilling or unable to provide effective contractual protection against all or part of the problems |
| Furthermore, the Company may not be entitled to contractual indemnification for certain liabilities, or it may acquire the properties on an “as is, where is” basis |
| For a discussion of additional risks associated with the Northrock acquisition, see “—The Company’s Acquisition of Northrock may not be successful,” above |
| The Company’s reserve data are estimates and should not be unduly relied on |
| No one can measure underground accumulations of oil and natural gas in an exact way |
| Projecting future production rates and the timing and amount of development expenditures is also an uncertain process |
| Accuracy of reserve estimates depends on the quality of available data and on economic, engineering and geological interpretation and judgment |
| To estimate economically recoverable reserves, various assumptions are made regarding future oil and natural gas prices, production levels and operating and development costs that may prove incorrect |
| Any significant variance from those assumptions could greatly affect estimates of economically recoverable reserves and future net revenues |
| It should not be assumed that the present value of future net cash flows from the Company’s proven reserves is the current value of the estimated natural gas and oil reserves |
| Estimates of discounted future net cash flows from proven reserves are based on prices and costs on the date of the estimate |
| Actual future prices and costs may differ materially from those used in net present value estimates, and future net present value estimates using then-current prices and costs may be significantly less than current estimates |
| The Company faces significant competition and is smaller than many of its competitors |
| The oil and gas industry is highly competitive |
| The Company competes with major and independent oil and natural gas companies for property acquisitions and for the equipment and labor required to operate and develop properties |
| Many of the Company’s competitors have substantially greater financial and other resources |
| As a result, those competitors may be better able to withstand sustained periods of unsuccessful drilling |
| In addition, larger competitors may be able to absorb the burden of any changes in applicable laws and regulations more easily than the Company can, which would adversely affect the Company’s competitive position |
| These competitors may also be able to pay more for exploratory prospects and productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than the Company can |
| The Company’s ability to explore for oil and natural gas prospects and to acquire additional properties in the future will depend on its ability to conduct operations and to evaluate and select suitable properties and transactions in this highly competitive environment |
| Moreover, the oil and natural gas industry itself competes with other industries in supplying the energy and fuel needs of industrial, commercial and other consumers |
| Increased competition causing oversupply or depressed prices could greatly affect the Company’s operational revenues |
| The Company’s competitors may use superior technology |
| The Company’s industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies |
| As the Company’s competitors use or develop new technologies, the Company may be placed at a competitive disadvantage, and competitive pressures may force the Company to implement new technologies at a substantial cost |
| In addition, the Company’s competitors may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before the Company can |
| The Company cannot be certain that it will be able to implement technologies on a timely basis or at a cost that is acceptable to it |
| One or more of the technologies that the Company 26 ______________________________________________________________________ currently uses or that it may implement in the future may become obsolete, and the Company may be adversely affected |
| The Company is subject to legal limitations that may adversely affect the cost, manner or feasibility of doing business |
| The Company and its subsidiaries are subject to extensive domestic and foreign laws and regulations on taxation, exploration and development, and environmental and safety matters in countries where it owns or operates properties |
| These laws and regulations are under continuing review for amendment or expansion, and the Company could be forced to expend significant resources to comply with new laws or regulations or changes to existing requirements |
| Many laws and regulations require drilling permits and govern the spacing of wells, the prevention of waste, rates of production and other matters |
| These statutes and regulations, and any others that are passed by the jurisdictions where the Company has production could limit the total number of wells drilled or the total allowable production from successful wells, which could limit revenues |
| Noncompliance with these statutes or failure to establish exemptions from regulations could also result in substantial penalties, require the posting of substantial surety bonds, or in the suspension or termination of the Company’s operations |
| The Company is subject to various environmental liabilities |
| The Company could incur liability to governments or third parties for any unlawful discharge of oil, natural gas or other pollutants into the air, soil or water, including responsibility for remedial costs |
| The Company’s onshore and offshore operations could potentially discharge oil or natural gas into the environment in any of the following ways: · from a well, or drilling equipment at a drill site; · leakage from storage tanks, pipelines or other gathering and transportation facilities; · damage to oil or natural gas wells resulting from accidents during normal operations; and · blowouts, cratering or explosions |
| Environmental discharges may move through soil to water supplies or adjoining properties, giving rise to additional liabilities |
| Some laws and regulations could impose liability for failure to notify the proper authorities of a discharge and other failures to comply with those laws |
| Environmental laws may also affect the Company’s costs to acquire properties |
| The Company does not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry |
| However, there is no assurance that environmental laws will not, in the future, result in decreased production, substantially increased operational costs or other adverse effects to the Company’s combined operations and financial condition |
| Pollution and similar environmental risks generally are not fully insurable |
| Derivative instruments expose the Company to risks of financial loss in a variety of circumstances |
| The Company uses derivative instruments in an effort to reduce its exposure to fluctuations in the prices of oil and natural gas |
| The Company’s derivative instruments expose it to risks of financial loss in a variety of circumstances, including when: · a counterparty to the Company’s derivative instruments is unable to satisfy its obligations; · production is delayed or less than expected; or · there is an adverse change in the expected differential between the underlying price in the derivative instrument and actual prices received for the Company’s production |
| 27 ______________________________________________________________________ Derivative instruments also may limit the Company’s ability to realize increased revenue from increases in the prices for oil and natural gas |
| The Company follows the provisions of Statement of Financial Accounting Standards Nodtta 133, “Accounting for Derivative Instruments and Hedging Activities,” which generally requires the Company to record each hedging transaction as an asset or liability measured at its fair value |
| Each quarter, the Company must record changes in the fair value of its hedges, which could result in significant fluctuations in net income and stockholders’ equity from period to period |
| The Company is subject to restrictive debt covenants |
| Covenants in the credit facility and the indentures governing the Company’s senior subordinated notes impose significant operating and financial restrictions on it, including the maintenance of specified financial ratios |
| These restrictions may adversely affect the Company’s ability to finance its future operations and capital needs, to react to changes in its business or industry or to pursue available business opportunities |
| If certain events of default occurred under these debt instruments, the Company’s outstanding indebtedness thereunder may be accelerated, and its assets may not be sufficient to repay such indebtedness |
| Moreover, any new indebtedness that the Company incurs may impose similar or more restrictive covenants on the Company |