Third Avenue Management Looks For Changes at Pogo Producing (PPP)
In a 13D filing after the close Monday on Pogo Producing Co. (NYSE: PPP), Third Avenue Management disclosed a 6.2% stake (3.6 million shares) in the company. The firm disclosed a letter to the company expressing their dissatisfaction with the company and its CEO.
In the letter the firm said, "we are notifying you that we are actively considering the various alternative courses of action with respect to our investment as described in item 4 of our recent Schedule 13D filing, which we may undertake alone or with others, in an attempt to generate a better return for TAM as well as for all of Pogo's shareholders."Some changes the firm may propose includes: changes in the composition of the board of directors or management, including an increase in the size of the board of directors or in the nominees offered to fill any then existing vacancies on such board, changes to the certificate of incorporation or bylaws, changes in the capitalization or dividend policy, the acquisition or disposition of additional securities of the company and the sale of material assets or another extraordinary corporate transaction, including a sale transaction.
NOTE: Pogo Producing is also the target of activist investor Dan Loeb through his Third Point LLC hedge fund.
A Copy of the Letter:
Dear Mr. Van Wagenen:
Third Avenue Management LLC ("TAM"), on behalf of its advisory clients, currently owns 3.6 million common shares of Pogo Producing Company("Pogo"), representing a 6.2% ownership interest. We have been Pogo shareholders for approximately three years. TAM's philosophy is to investin strongly financed and well-managed companies, and we are typically long-term supportive shareholders. When we originally invested in Pogo, itmet our stringent investment criteria. However, during the three years thatwe have been shareholders, we have become increasingly disappointed with Pogo's operating performance and with your performance as CEO.
Particularly disconcerting is the deterioration in the company's financialposition. As the table below indicates, since 2003 net debt has increased by more than six times and net debt per mcfe of proved reserves has increased by more than five times. While we believe that the debt load is manageable, the apparent strategy of levering up during a period of historically high commodity prices is troubling.
In addition, the company's operations appear to have deteriorated markedly during the last three years. Production per share has dropped by more than 20%. On a unit of production basis, lease operating expense has increased by 178% and G&A has tripled. It is difficult to find a peer company whose operating costs have escalated as rapidly and to the high level that Pogo'shave. Although some increase in operating costs would have been understandable, given industry-wide cost inflation and hurricane related costs and production delays, the magnitude of these increases is alarming.
This combination of higher debt, lower production, higher operating costs,and the underwhelming results from your recent acquisition of NorthrockResources appear to have driven the poor relative performance of Pogo's stock over the last three years. Since the end of 2003, Pogo's stock is down 1% while the S&P Midcap Oil and Gas Exploration and Production Indexis up 78%. In May 2006, Moody's acknowledged the company's deterioration by downgrading Pogo's Corporate Family Rating to Ba3 from Ba2 citing "risingunsustainable reserve replacement costs, inconsistent production trends,and a sharp decline in organic reserve replacement."
It is readily apparent from the numbers contained in the chart below that Pogo is clearly in need of stronger leadership and a new strategic direction.
TABLEDespite Pogo's poor performance over the past several years, your compensation has been rising. In 2005, you received an 11.8% increase in your base salary and your bonus grew by 25%. You also received a restricted stock award valued at approximately $2 million, up 55% compared to 2004. We believe that if Pogo's compensation structure were tied more closely to performance, these significant increases would not have occurred. These increases are even more concerning because they serve to increase the already overly generous termination provisions of your employment agreement, which provides, among other things, that in the event of a termination due to a change of control, you will receive lump sum payments of five years' salary and bonus plus an amount equal to four times the fair market value on the grant date of your most recent equity award.
We have no doubt that the value of Pogo and its business is substantial. To date, however, you have not been able to maximize shareholder value. It is clearly time for a change in direction. As a result, we are notifying you that we are actively considering the various alternative courses of action with respect to our investment as described in item 4 of our recentSchedule 13D filing, which we may undertake alone or with others, in an attempt to generate a better return for TAM as well as for all of Pogo's shareholders.
Portfolio Manager, Co-Chief Investment Officer