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Pogo Decides to Sell or Find Merger Partner

Push has come to shove for Pogo Producing Co., which Thursday announced it has begun exploring strategic alternatives to sell or find a merger partner for all or part of its assets.

Pogo in a statement said the board of directors has "initiated the exploration of a range of strategic alternatives to enhance shareholder value and is continuing to do so, including the possible sale or merger of Pogo, the sale of its Canadian, Gulf Coast, Gulf of Mexico or other significant assets, and changes to the company's business plan." Goldman, Sachs & Co. and TD Securities Inc. of Canada have been retained as advisers.

The Houston-based independent owns 4.8 million gross leasehold acres on- and offshore in North America, 6.4 million acres in New Zealand and 1.5 million acres in Vietnam. It was ranked 978 on Fortune 500 2006 list of America's largest corporations, with a market value of around $2.8 billion. Pogo's annual growth rate between 1995 and 2005 was 46%.

However, some of Pogo's major shareholders are dissatisfied with the company's performance. In the final three months of 2006, Pogo's U.S. natural gas production actually grew 8.7% to 211.3 MMcf/d, but for the year, its gas output fell 12.9%. And its financial performance in the final quarter also offered no comfort. Pogo swung to a loss of $16.5 million (minus 29 cents/share) in 4Q2006 from profit of $114.5 million ($1.96) in 4Q2005. Operating losses totaled $5.1 million.

The downturn affirmed the view of two major stockholders, which together control about 14.1% of Pogo's shares. New York-based hedge fund Third Point LLC last year began urging Pogo to restructure or sell (see Daily GPI, Dec. 4, 2006; Nov. 27, 2006). In late January, Third Avenue Management LLC criticized CEO Paul van Wagenen's pay and the company's results in the past three years. Van Waggenen has been CEO for the past five years.

The latest quarterly results "are really supportive of the comment we made in our letter, which is that Pogo clearly needs stronger leadership and a new strategic direction," said Third Avenue fund manager Ian Lapey. Pogo's decision to hire strategic advisers "we think is a sensible move at this point."

FirstEnergy Capital Corp.'s Mark Friesen wrote that "at the end of the day, they are not happy because of the stock price performance. The best and immediate fix for that is often an outright sale."

Pogo on Thursday reduced its 2007 production guidance, which concerned Friedman, Billings, Ramsey & Co. Inc. (FBR) analyst Rehan Rashid. The new guidance of 89,000-92,000 boe/d, said Rashid, "is roughly 10,000 boe/d below our earlier estimate. The reduction is largely attributable to the company's plans to reduce [capital expenditures] capex from $825 million to $720 million in 2007 in an effort to preserve free cash flow to pay down debt." FBR revised its base-case net asset value on Pogo to $77/share from $83.

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