Company Review – Pogo Producing Company

Profile:  Pogo Producing Company (PPP)

Pogo Producing Company is engaged in oil and gas exploration, development, acquisition and production activities in North America, both onshore in Canada and the states of New Mexico, Texas, Louisiana, Wyoming and Indiana, and offshore in the Gulf of Mexico (primarily in federal waters offshore Louisiana and Texas). The Company also conducts exploration activities in offshore New Zealand. As of December 31, 2005, it owned approximately 3,885,000 gross leasehold acres in oil and gas provinces in North America and approximately 1,044,000 gross acres in New Zealand. As of December 31, 2005, approximately 86% of Pogo Producing Company’s reserves are located onshore. On August 17, 2005, it closed the sale of Thaipo Limited, a wholly owned subsidiary of the Company (Thaipo), and all of the Company’s 46.34% interest in B8/32 Partners Limited. On September 27, 2005, it completed the acquisition of Northrock Resources, Ltd. In May 2006, the Company acquired Latigo Petroleum, Inc.

 

Business and Management Review

 

1) Is the business simple and understandable?

As with many of the other companies we have reviewed on this site, the details of the business of gas and oil exploration is difficult to understand.  The average investor does not hold an engineering degree and may not understand how the refining of oil works or the process of the development of new fuels.  However, the fundamentals of the business are simple:  Look for the raw materials, extract them, then refine and sell them.

 

2) Does the business have a consistent operating history?

Pogo Producing Company was founded in 1970 as an oil and gas exploration company and remains in that operating business today.  In the past 10 years, the company has paid a dividend consistently and has only experienced one year with a negative net income.  In our view, Pogo Producing Company does have a consistent operating history.

 

3) Does the business have favorable long term prospects?

Recently, I had a conversation with a couple of intelligent individuals about economic moats.  A detailed explanation about a moat will be forthcoming, but for now think of it simply as an advantage a company holds that makes it difficult for competition to hold a significant factor in the company’s long-term prospects.  Looking at Pogo, it does not appear that they have a significant moat, if they have any at all.  This may or may not end up being a big deal, but it certainly does not help as there are 178 other companies in the Oil & Gas Operations sector as listed on Google Finance. 

 

4) Is management rational?

We are unconvinced of the rationality of some of management’s ideas.  Though we agree that the company should repurchase common shares as they are at an attractive price, we are concerned about the rise in long-term debt and pursuit of growth through acquisitions.  Growth should be made through investments from operational income, not from the increase in debt.  Especially when the company is trying to repurchase shares – the debt/equity structure of Pogo is changing, and the current shareholders may or may not want that to happen.

 

5) Is management candid with its shareholders?

Pogo Producing has a detailed investor relations page, including webcasts, presentations, and other interesting and helpful information.  The only thing we would like to see more from the website would be a more detailed company information and history page.

 

6) Does management resist the institutional imperative?

We are not entirely convinced that the management of Pogo is resisting the institutional imperative.  Their pursuit of acquisitions through increased debt is a common path of many companies.  In addition, we have not seen evidence of the company clearly avoiding the institutional imperative.

 

Financial and Value Review

 

Defensive:

1) Size of firm

Pogo’s market cap is approximately $3 billion, which is greater than the requirement of $2 billion for the defensive investor.

 

2) Strong financial condition

Pogo does not have a current ratio of higher than 2 (the current ratio is 0.87).  Therefore, it fails this test.

 

3) Earnings stability

Pogo had a negative net income in 1998, which eliminates it from the earnings stability requirement.

 

4) Dividend record

Having paid a dividend since 1994, it passes the requirement of dividend payments for 10 straight years.

 

5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years. 

 

6) Price to earnings analysis

With a PE ratio of 13.09 (see our methods), it passes the requirement of 20 or below.

 

7) Price to assets analysis

With a Price to book ratio of 1.18, it passes this test as well.

 

Overall, Pogo Producing Company does not pass enough of the tests to be suitable for the defensive investor.  Its total score is 6 out of 8.

 

Enterprising:

1) Strong financial condition

Since the current ratio is not higher than 1.5, Pogo fails this test.

 

2) Earnings stability

Earnings have been positive for the last 5 years.  Pogo passes this test.

 

3) Dividend record

The company currently pays a dividend.  Another pass.

 

4) Earnings growth

Earnings are greater now than they were 5 years ago.  Pass.

 

Overall, with a score of 3 out of 4, Pogo is suitable for the enterprising investor.

 

Valuation:

Our valuation model finds a fair value to be about $84, so there is certainly room for this company’s price to rise as the intrinsic value and market price approach each other in the long-term.

Opinion:

Overall, we believe Pogo Producing Company to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, and at an attractive undervalued price.

Neither of us held a position in Pogo Producing Company at the time of publication.  Also, please read our disclaimer and Our Methods.

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