Exploration and production independent Pogo Producing, more in a selling mode these past few months, has taken a giant leap to the buy side, agreeing to purchase Unocal Canadian subsidiary Northrock Resources for a cool $1.8 billion in cash.
The deal would boost Pogo’s reserves, eroded by the sale or pending sale of the company’s Hungarian and Thailand assets, by a hefty 45 percent and put the Houston-based company back on the road to production growth.
Meanwhile, Unocal shareholders continue to weigh offers for their company from super-major Chevron and China state-owned oil company CNOOC. Reportedly, Unocal’s board of directors decided to sell Northrock before taking on the sale of Unocal, raising questions by some industry analysts about the quality of Northrock’s oil and gas reserves.
Of the more than 1.3 billion cubic feet in estimated gas equivalent reserves to be acquired by Pogo, slightly less than half or 644 bcfe are classified as proven, according to Pogo. The remaining reserves are considered to be probable and possible, with around 200 bcfe falling into the probable category and some 500 bcfe falling into the more uncertain possible category, the company said.
Moreover, Unocal’s investment in Northrock the past few years reflected “less than optimum spending levels,” Pogo chief executive Paul Van Wagenen conceded during a July 11 conference call with industry analysts. “It obviously needs a bit of enthusiastic regeneration of spending.”
He added: “However, there is significant developmental opportunity to set up production rates by investing the necessary capital to grow Northrock’s production volumes. I think it is safe to say that in 2006 we would be able to beat 10 percent growth on these properties.”
Northrock most of Canadian properties
Northrock represents essentially all of Unocal’s Canadian oil and gas reserves and production, located in Canada’s western sedimentary basin of British Columbia, Alberta and Saskatchewan.
Based on recent financial reports, Canada accounted for less than 7 percent of Unocal’s worldwide reserves at year-end 2004 and less than 7 percent of production during this year’s first quarter. Unocal said it expects to realize after-tax proceeds from the sale of about $1.5 billion.
Pogo itself held back on some U.S. Lower 48 drilling projects this year, primarily because of what Van Wagenen characterized as “high” rig and oilfield service costs and a lack of trained rig crews.
“We still have all those same discretionary developments wells to drill and we intend to drill them beginning now,” he said. “Why now? In our opinion, the available crews are now somewhat better trained and, as a result, more efficient, thereby saving significant operating costs. The wait is over.”
He said Pogo plans to ramp up development drilling on company acreage in South Texas and in the Permian basin of West Texas and southeast New Mexico, as well as on the Canadian properties once the deal with Unocal closes, probably in this year’s third quarter.
“By early 2006, we expect to begin seeing rising production and increasing reserve additions at Pogo,” Van Wagenen said, disclosing that in two weeks Pogo management intends to ask its board to increase the company’s 2005 capital budget to $500 million from the current $345 million, a nearly 45 percent increase in planned spending.
Sale also includes production
Upon closing, in addition to reserves, Pogo would get daily Canadian production of about 16,000 barrels of oil and 85 million cubic feet of natural gas. The company expects to invest about $50 million on the properties in the 2005 fourth quarter and roughly $200 million on them in 2006, resulting in the drilling of about 150 to 175 development wells next year alone, Van Wagenen said.
“We’re very optimistic that we can make this happen,” he said, adding that Pogo hopes to keep much of Northrock’s staff and that Northrock would become a wholly owned subsidiary of Pogo. Northrock incorporated in 1986 and was acquired by Unocal in 2000.
Pogo’s chief executive said Unocal’s properties would establish a new core area for Pogo and indicated the company would be on the hunt for more Canadian oil and gas properties.
“We foresee a new and vigorous chapter in Northrock’s growth story,” he said. “We see accelerated drilling and opportunistic Canadian acquisitions yielding exponential growth potential.”
About 45 percent of Northrock’s reserves and 40 percent of the company’s total production are located predominantly in the oil-bearing region of southern Saskatchewan. The company said opportunities targeting the Ordovician Red River and Devonian Winnipegosis horizons appear to be particularly promising. Further, the company said Northrock has identified numerous exploration and exploitation drilling prospects, targeting the Midale and Frobisher Alida horizons at the Bryant field area.
Significant upside potential
Moreover, Pogo said there is significant upside potential for the region, where more than 300 infill and step-out drilling locations have been identified. Pogo also noted that future waterflood opportunities exist in Northrock oil fields in the southern Saskatchewan region.
About 37 percent of Northrock’s reserves and 39 percent of company production are in west central Alberta where established fields with development potential exist, as well as natural gas focused exploration, including Deep basin and Foothills opportunities, Pogo said.
Northrock’s Alberta drilling agenda for the next few years includes more than 250 locations, including dozens of deep gas Cadomin and Bluesky targets in or near the Ansell field, Pogo said, adding that much of the development drilling also will offer additional hydrocarbon potential in the same wells at shallower horizons.
Fields in northern Alberta, British Columbia and the Northwest Territories provide about 18 percent of Northrock’s reserves and 21 percent of company production. Additionally, Northrock has more than 200 drilling locations and well recompletion opportunities identified in the areas. Northrock also is evaluating coalbed methane projects in the region, Pogo said.
Northrock also owns a large acreage position in the highly prospective Central Mackenzie Valley area of the Northwest Territories, Pogo said.
45% increase in proven reserves
The deal would increase Pogo’s total proven oil and gas reserves by 45 percent, from 1.437 trillion cubic feet of natural gas equivalent to 2.081 tcfe. The company’s worldwide net leasehold acreage also would increase by a whopping 82 percent, from about 1.73 million acres to roughly 3.15 million acres.
Pogo volumes gained from Northrock would offset production losses from the sale of Pogo’s Hungary assets. The sale of Pogo’s Thailand properties is pending, according to the company. Pogo agreed to buy all of the stock of Northrock Resources, Ltd.
“Pogo expects to utilize significant proceeds generated from international asset sales, as well as the cash we have on hand, as the primary funding source,” Jim Ulm, Pogo’s chief financial officer said, adding that the company also plans to tap its credit facility to help finance a portion of the Northrock acquisition, followed by a refinancing of the debt.
Ulm said Northrock’s $1.8 billion sales price would increase Pogo’s debt to 45 percent of capitalization from 32 percent at the end of this year’s first quarter. However, he said that because of expected strong cash flow generated by the run up in worldwide oil and gas prices, Pogo anticipates reducing its debt to a range of 30 to 40 percent over the next couple of years.
“Maintaining a strong balance sheet with ample liquidity and financial flexibility will continue to be an important goal of Pogo,” Ulm said.
Despite criticism from some quarters, the Pogo-Unocal deal was generally accepted as a good move for Pogo, although one analyst believed Pogo is paying a high premium for Northrock.
Pogo noted that since the first of the year, a total of 15 acquisitions involving western Canadian properties were announced, with proven reserves sold for as little as $2 per thousand cubic feet of gas equivalent to as much as $5.50 per mcfe. The average price was about $3.40 per mcfe. Pogo would pay about $2.80 per mcfe for proven reserves.
“None of those 15 deals was this large (and) none of those deals had the exploration potential on undeveloped acreage that this has,” Van Wagenen asserted.
