The 2005 results for the third quarter and first nine months include non- cash charges of $18,739,000 ($11,899,000 net of tax), or approximately $0.20 per share, associated with the fair market value of commodity hedges, which no longer qualify for hedge accounting. This charge is primarily due to shut-in offshore production volumes related to recent hurricanes. Without the effect of this item, net income from continuing operations for the quarter would have been $73,802,000, or $1.24 per share, and $187,289,000, or $3.06 per share, for the first nine months of 2005.
Discretionary cash flow in the third quarter and the first three quarters of 2005 was $177,598,000 and $590,639,000, respectively, compared to discretionary cash flow of $196,468,000 in the third quarter and $574,279,000 in the first nine months of 2004. Net cash provided by operating activities during the third quarter and first three quarters of 2005 was $215,050,000 and $652,383,000, respectively, compared to $224,592,000 and $572,849,000 for the same time periods in 2004.
Pogo's Chairman and Chief Executive Officer, Paul G. Van Wagenen, said, "We are extremely pleased to report the successful completion of so many of Pogo's 2005 strategic initiatives that were identified as this year began. Paramount among our third quarter successes is the significant upgrading of Pogo's future exploration prospectivity resulting from the August 17, 2005 closing of the sale of our Gulf of Thailand license interests plus the September 27, 2005 closing of the purchase of Northrock Resources. We foresee many years of active drilling emanating from Northrock's outstanding inventory of western Canadian properties. Facilitating the closing of the Northrock purchase, Pogo successfully placed $500 million of 6 7/8% senior subordinated debt on September 21, 2005."
Mr. Van Wagenen also noted that the quarter just concluded was transformational in nature. "Pogo is becoming a different and better company. Third quarter results reflect that important transition. We completed our exit from Thailand, strengthened our balance sheet with the placement of new long-term notes, began the fourth quarter with a strong new Canada presence, and opened the door to a new offshore Asian opportunity in offshore Vietnam. We have some exciting opportunities ahead."
In accordance with applicable accounting rules, beginning at the time of the agreement to sell Pogo's Thailand properties and extending until that transaction closed, the current and historic Thailand production volumes have been eliminated from Pogo's daily production numbers, and the income derived therefrom is reflected as the results of "discontinued operations."
Third quarter production was additionally impacted by the shut-in of virtually all of Pogo's outer continental shelf volumes due to the successive hurricanes Katrina and Rita. Approximately 45 million cubic feet per day (mmcf/d) of Pogo's natural gas production capacity and 13,000 barrels per day (bpd) of crude oil production is still being postponed. Those volumes reflect most of Pogo's offshore productive capacity, and those curtailments will continue until completion of repairs of mostly outside-owned shore base facilities and gathering lines, as well as joint venture-owned platform facilities.
Nearly all of Pogo's Gulf of Mexico production was shut-in during most of the third quarter, and only now it is starting to come back on-stream. Only 4,000 bpd and 4 mmcf/d of Pogo's net Gulf of Mexico production capacity is currently flowing. Most of those suspended daily production volumes are expected to be restored by approximately the start of 2006, but some blocks, including Viosca Knoll Block 823, Main Pass Block 123, Eugene Island Block 330 and South Marsh Island Block 128 are likely to remain shut-in awaiting platform repairs and/or facilities replacement throughout virtually all of 2006.
One of Pogo's third quarter Gulf of Mexico drilling successes involved the 100%-owned 10,500 feet deep exploratory well, Eugene Island Block 275 No. 1. That well encountered 182 feet of net oil and natural gas pay. Production facilities for that block should be installed by mid-2006, yielding estimated production of up to 20 mmcf/d. Much of Pogo's planned fourth quarter exploratory drilling also has been delayed due to storm-related rig availability issues, but the Company still expects to spud exploratory wells at Viosca Knoll Block 992 and Eugene Island Block 280 by December. The balance of Pogo's ambitious 2005 offshore exploration drilling program, including Vermilion Block 147, has been rescheduled for early 2006.
Pogo's drilling program in the Permian Basin was extremely active and equally successful. All 40 third quarter wells that were drilled were completed as producers. Notable among the successes were two Apollo field wells in Winkler County, Texas. The University 20-12A No. 2, which is 100% Pogo-owned, encountered three Bone Spring formation sands and is flowing 400 bpd of oil and 0.4 mmcf/d of gas. The University 20-14A No. 2, also 100% Pogo-owned, tested 2.3 mmcf/d from the Morrow at 14,586 feet to 14,971 feet subsurface, and encountered additional pay in the shallower Strawn and Atoka horizons. On test, the Atoka interval flowed at over 1 mmcf/d. A Strawn formation production test in that same well will follow soon.
In Loving County, Texas, the Haley field J. J. Wheat No. 1 well, which is 84% Pogo-owned, flowed from an Atoka interval at approximately 16,260 feet subsurface at a rate of 1.7 mmcf/d. More Haley field wells are planned. Similarly, the Loving County, West Starman field Medicine Man No. 1, which is 100% Pogo-owned, tested 1.2 mmcf/d from the Atoka at about 15,500 feet subsurface and encountered additional pay, which tested 4 mmcf/d at approximately 14,950 feet subsurface in the Strawn.
In Duval County, Texas, in the South Rosita field, Pogo drilled the No. 2 Hoffman 116, which is 47% Pogo-owned, encountered 65 feet of Wilcox pay sands in two different intervals, each of which tested at more than 5 mmcf/d. Another Wilcox discovery was the Goliad County, Texas, Creekwood field Pogo No. 1 Fuller Newton, which is 35% Pogo-owned. It tested a 39 foot pay interval at a rate of more than 5 mmcf/d.
Seventeen Lower Fort Union horizon discoveries were logged during the third quarter in the Madden field in Wyoming, in which Pogo generally owns about 14%. A deeper Frontier horizon test, the Frontier 1-4, is drilling at 14,400 feet toward a planned total depth of 20,585 feet. It is anticipated that total depth will be reached by about February 2006. A successful Frontier well could lead to many future drilling opportunities in the fine Madden field. A very deep, 26,000 foot Madison formation test in the same Madden field is slated to spud in the first quarter of next year.
Forty fourth quarter 2005 wells are budgeted for Pogo's newly acquired Northrock Resources subsidiary. Some 25 of those wells will be company operated, utilizing four contracted drilling rigs in Alberta and two more in Saskatchewan. Fifteen other wells are expected to be drilled by the company's partners.
Important locations of focus in Canada also include five Red Rock area wells targeting Chinook and Cardium Cretaceous sands in Northern Alberta.
Central Alberta drilling will include five Kaybob area wells seeking the Lower Cretaceous Bluesky formation and seven more wells targeting the same interval at the Ansell field area.
Seven to ten horizontal wells to Midale and Forbisher Mississippian carbonate horizons are also slated to be drilled during the fourth quarter in southeastern Saskatchewan.
COMMON STOCK REPURCHASES
Pogo's common stock repurchase program, announced in January, continues. The Board of Directors authorized share repurchases totaling not less than $275 million or more than $375 million. To date, repurchases have totaled $315 million, acquiring more than 6.4 million shares, at an average price of just over $49 per share. Stock repurchases are continuing.
QUARTERLY DIVIDEND DECLARED
The Board of Directors today declared a cash dividend of $0.0625 (six and one-quarter cents) per share of common stock to be paid November 28, 2005 to shareholders of record as of November 11, 2005.
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