On a pro forma basis (including the impact of the recently announced sale of Pogo's Thailand assets), the acquisition of Northrock's oil and gas assets in Canada is expected to:
Under the agreement, Pogo will acquire 644 Bcfe of estimated proven reserves on approximately 300,000 net acres, plus approximately 1.1 million net acres of undeveloped leasehold. Beyond the proven reserves, Pogo believes that Northrock's properties additionally contain over 200 Bcfe of very high quality probable reserves and more than 500 Bcfe of possible reserves. After allocating $200 million of the purchase price to Northrock's sizeable undeveloped leasehold acreage, Pogo's acquisition cost, if the balance of $1.6 billion were attributed solely to the estimated proven reserves, would be $2.48 per thousand cubic feet equivalent ("mcfe").
"Pogo's previously announced 2005 Strategic Plan included the pursuit of meaningful, high quality acquisitions," said Paul G. Van Wagenen, Chairman and Chief Executive Officer of Pogo. "Over the last few years, Pogo has successfully executed many smaller acquisitions of good domestic properties and reserves at attractive prices. Northrock, however, represents Pogo's first large acquisition since the 2001 purchase of North Central Oil Corporation. We freely admit, Pogo is a very particular and discriminating buyer of assets. North Central turned out to be an extraordinarily successful addition of many fine North American producing fields plus some additional leasehold acreage offering exploration potential. Northrock has that same profile, in our opinion, but it features greater proven, producing reserves and a far larger and more prospective exploration acreage position."
Mr. Van Wagenen also said, "Our 2005 Strategic Plan, announced in January, also contemplated the possible sale of Pogo's international assets in Thailand as well as Hungary. The Hungary sale has closed. The Thailand properties, as was recently announced, are subject to a definitive agreement to sell at what we believe to be a favorable price, evidencing Pogo's commitment to maximizing shareholder value. The pending Thailand sale, combined with today's announcement of the Northrock acquisition, completes a very important part of the Company's Strategic Plan, resulting in a considerable upgrade in Pogo's asset base and its growth opportunities for years to come."
BENEFITS OF THE NORTHROCK TRANSACTION
Critical Mass and Scope. The acquisition provides Pogo with critical mass and scope in a new core area in western Canada.
Significant Exploration and Development Opportunities. Northrock's exploitation and development activities are concentrated in Saskatchewan and Alberta with key exploration plays in Canada's Northwest Territories, British Columbia and the Alberta Foothills.
Mr. Van Wagenen also said, "Combining the fine geoscientists and engineers at Northrock with Pogo's own oil-finders will allow us to aggressively pursue the meaningful exploration component of the Northrock acquisition. Of particular interest to Pogo are Deep Basin natural gas in Central Alberta, frontier exploration on the sizeable Northwest Territories acreage position, and an emerging coalbed methane play. We look forward to tackling these high potential exploratory projects while we vigorously undertake Northrock's large development program. The kick-off of fourth quarter development drilling of the newly acquired Canadian properties will coincide with the resumption of active drilling of Pogo's development projects in south Texas and the Permian Basin. Pogo's domestic discretionary drilling has been curtailed until now due to high drilling and service costs and the shortage of experienced and efficient crews. Since the first of the year, in Pogo's opinion, prices have strengthened, drilling efficiencies have improved and acceptable profit margins have been restored. With the application of adequate capital funding in both Canada and the United States, we expect to achieve noticeable reserves and production growth beginning in early 2006."
Ongoing Operational Synergies. Pogo expects to achieve approximately $5 million, or 25% annual pre-tax cost savings. Such savings are expected to come largely from shared administrative areas and operating costs.
Pogo has begun a hedging program related to the Northrock acquisition. Pogo has entered into costless collars covering most of Northrock's current production volumes extending throughout 2006 and 2007. Pogo has oil costless collars covering 15,000 barrels of oil per day with floors of $50 per barrel and ceilings ranging from $78 to $82 per barrel for all of 2006 and $50 per barrel by $75 to $77.50 per barrel for all of 2007. Similarly, Pogo also has natural gas hedges covering 75 million cubic feet per day with costless collars of $6 per mcf by $13.50 to $14.00 per mcf for 2006 and $6 per mcf by $12 to $12.50 per mcf for 2007.
Pogo intends to finance the Northrock acquisition utilizing cash on hand, proceeds related to international asset sales, excess capacity under its existing revolving credit facility and opportunistic capital market transactions. Pogo remains committed to maintaining a strong balance sheet and expects to reduce the acquisition-related debt during 2006 and 2007.
Pogo affirmed that it will continue its ongoing common stock repurchase program. As previously announced, Pogo's Board of Directors has authorized the repurchase of not less than $275 million nor more than $375 million of Pogo's common stock. Based upon recent stock prices, the stock repurchase program could represent approximately 9% to 12% of Pogo outstanding shares. To date, Pogo has spent approximately $220 million, repurchasing about 4.8 million shares.
The Northrock transaction is subject to customary regulatory approvals. It is expected to close during the third quarter of 2005.
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