The CEO of New York-based hedge fund Third Point LLC, which in November purchased a substantial stake in Pogo Producing Co. (see Daily GPI, Nov. 27), on Friday demanded that the Pogo board initiate a process to sell the company "in whole or part." In a letter, Third Point CEO Daniel S. Loeb called the track record of Pogo's CEO "long and meager" and said it was time for a change.
Third Point filed a Schedule 13D with the Securities and Exchange Commission, which indicated it had sent a letter to Pogo Chairman and CEO Paul G. Van Wagenen. Loeb indicated in the letter that he had met with Van Wagenen at a Friedman Billings Ramsey investors conference on Thursday.
"We approached the meeting with an open mind and the sincere hope that you would answer our questions in a way that might help dispel your poor reputation among your peers, energy analysts and investors," the letter read. "While the meeting reinforced our positive view of the Company's underlying asset value, it also contributed to investor concerns that Pogo's management has failed to pursue cohesive exploration, development, acquisition and financial plans.
"One particularly vexing transaction, the Northrock Resources acquisition in Canada, typifies the inopportune type of capital allocation decisions made by the Company. On July 11, 2005, you announced the acquisition of Northrock for $1.8 billion in cash, a significant transaction for Pogo, exceeding half of the then $3.2 billion market capitalization of the Company" (see Daily GPI, July 12, 2005). "At the time, you commented that, 'Pogo is a very particular and discriminating buyer of assets.' Unfortunately, the results realized since the acquisition belie your contention."
Loeb claimed that in the year since the acquisition closed, Pogo has spent more than $350 million, or 20% of the purchase price, to improve Northrock's assets, but said production actually declined 10% from 30,000 boe/d to 27,000 boe/d.
"Given the significant scope of the acquisition and poor performance of the assets to date, we were hoping your answers to our questions would help us understand the strategic thinking behind the acquisition and what return on capital the Company expected to achieve. Your answers were not satisfactory.
"When we asked you about the natural annual decline rate of the assets, you responded '7 to 8%,' which seems unlikely given the 10% annual decline experienced during your first year of ownership while you invested significant capital attempting to increase production. This is especially troubling and gives credence to reports by industry participants that Pogo's management did only minimal due diligence before consummating the transaction last year."
The letter stated, "the true measurement of your performance as a chief executive is the return you have generated for shareholders. Unfortunately, the results are not encouraging."
Loeb noted share prices of Pogo's peers on the Standard & Poor's Midcap Oil & Gas Exploration & Production Index appreciated at a compound rate of 11.7% while Pogo's price had appreciated "only 5.8% annually, less than half the rate of your peers." The letter included a graph showing Pogo's performance over the past decade.
"In the one and a half decades you have run Pogo, shareholders have suffered subpar returns," Loeb stated. "Your track record is long and meager, and it is time for change. Accordingly, we demand that the Board immediately initiate a process to sell the Company in whole or several parts to the highest bidder or bidders. To underscore our commitment to this process, we are advising you today that we intend to conduct a proxy contest at your 2007 annual meeting of shareholders that will allow us to elect new directors comprising a majority of the Company's board of directors."
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