Pogo Producing Co.'s move to acquire privately held North Central Oil Corp. through a $750 million merger will more than double its domestic natural gas holdings and add another core operations area in the Rocky Mountains.
It's part of Pogo's strategy to increase its long-lived North American gas position and improve its exploration and production potential in existing core operating areas in and around the Gulf of Mexico, said Paul G. Van Wagenen, chairman, president, and CEO in announcing the proposed merger Monday. Both companies are Houston-based independents.
North Central's reserves are exclusively North American and 88% natural gas, while 44% of Pogo's current reserves is international.
The acquisition will boost Pogo's total proved oil and gas reserves by 63% to nearly 1.4 tcf of gas equivalent, split 61% gas and 39% oil vs. 44% gas and 56% oil at the start of this year. It also will increase Pogo's projected production by 35% to 165 bcfe this year, while extending its reserve life by 20% to 8.3 years.
Cash flow generated from increased production will fund Pogo's "sizable inventory of high-impact exploration projects," said Van Wagenen.
"North Central has an unbroken 17-year reserve replacement record, as well as a large inventory of operated properties, high-impact potential prospects and attractive exploration acreage. We expect to realize additional benefits from our increased production of natural gas, which we believe will be the energy commodity of choice for the next several years,'' he said.
Pogo's core exploration regions include the Gulf of Mexico, the Permian Basin, Canada, the North Sea, offshore Thailand, and Hungary. Officials say that will be accentuated by North Central's significant onshore potential in South and East Texas, South Louisiana, and the Rocky Mountains, where the downdip potential of its Madden Deep Unit is estimated to be extensive.
In 1998, North Central acquired gas properties in Webb and Zapata Counties in South Texas from Conoco Inc. for $73 million (OGJ, Dec. 14, 1998). The Los Mogotes and Hundido fields in Zapata County contain multiple Wilcox horizons where significant reserve potential has been identified through 124 square miles of licensed 3D seismic. Officials said they have more than 140 identified exploration prospects in the onshore and offshore Gulf Coast regions.
"Addition of North Central's talented employees, including several highly trained scientists and technicians, will further enhance Pogo's first-rate team. The depth of skill sets created by this combination will enable us to seize exciting high-growth opportunities around the world,'' Van Wagenen said.
Agreement details
Under the definitive agreement signed by its directors, Pogo will acquire North Central's parent NORIC Corp. for an equal combination of cash and common stock totaling $630 million, with a collar based on the trading price of Pogo stock prior to closure. The deal is expected to close during the first quarter of 2001, subject to approval of stockholders and the usual regulatory authorities. Pogo also will assume $120 million of North Central's net debt.
The agreement stipulates NORIC's shareholders will receive $315 million of Pogo common shares, based on an average closing price of $22.25-$27.25/share for Pogo stock during a 20-day trading period through the fifth trading day prior to the merger closing.
If the average is less than $22.25/share, 14.2 million Pogo common shares will be issued. If the average exceeds $27.25/share, the issue will decrease to 11.6 million shares.
Pogo will finance the cash portion of that acquisition through cash on hand and a new bank revolving credit facility.
"Pogo has had a record year in terms of both revenues and production. Now, through our exciting combination with North Central, we can look forward to building on these successes in the years ahead," Van Wagenen said.
Last year, Pogo and North Central generated a total $132.5 million of discretionary cash flow. Both companies have since increased production. With commodity prices�especially for gas�expected to continue high through this year, Pogo officials project a 185% increase in pro forma discretionary cash flow to $378 million for this year.
Moreover, Pogo plans to hedge "a significant portion" of North Central's gas production through at least 2002 in a move to lock in some of today's high prices.
The combined company, under the Pogo Producing name, will have an equity value of $1.3 billion and a total enterprise value of $2.2 billion. It also will reduce general and administrative costs by an estimated 40% through eliminating overlaps and improving operating efficiencies, officials said. They expect the merger to be immediately accretive to earnings, cash flow, reserves, and production per share.