Pogo delays $280M in development drilling

Independent says rig, oilfield service costs too high, rig crews inadequately trained, steel costs double, fuel up 75%

Ray Tyson

Petroleum News Houston Correspondent

Exploration and production independent Pogo Producing has temporarily ditched its so-called “discretionary development drilling” program for 2005 because of escalating rig and oilfield service costs and “inefficiencies” that Pogo chief executive Paul Van Wagenen said included inadequately trained rig crews.

Compared to a year ago, he said, U.S. steel costs have doubled, fuel costs have increased 75 percent and drilling mud and other oilfield supplies are up 25 percent.

“The costs are indeed abnormally high,” Van Wagenen said in an April 26 conference call with industry analysts. “We can revisit this in the earliest part of 2006, to see where those numbers have moved.”

Moreover, he said that because of the heavy demand for drilling rigs and people to operate them, crews often “are not as well trained” as they once were, which he said can lead to delays and rig downtime that costs the company both time and money.

Van Wagenen said Pogo “can redirect that cash into better avenues this year,” including reserve additions through exploration drilling and property acquisitions.

Pogo postponed 210 of 390 development wells until at least next year, resulting in withheld capital expenditures of $280 million. However, 75 development wells were drilled during the first quarter with 105 more planned for the remainder of the year, the company said.

Van Wagenen said that deferring some development drilling would not cause harm to reservoirs or result in “other negative consequences beyond merely postponement of cash flow.”

“We will drill every single development well that needs to be drilled in a timely fashion,” he added. “And we plan to drill any postponed development wells in 2006 when and if rig and service costs show signs of improvement.”

More than 45 exploration wells budgeted

“The continuation of strong energy fundamentals prompts Pogo to seek further growth through a combination of accelerated exploratory drilling and opportunistic acquisitions,” Van Wagenen said.

As part of Pogo’s “multi-faceted strategic plan” for 2005, he added, the company also plans to sell its Thailand and Hungary assets. “Our Thailand and Hungary data rooms have been very busy and the process is well under way,” he said.

However, the company said it was looking to make a large property acquisition this year in the United States. Last year company acquisitions totaled about $515 million.

“You can be certain that when announces an acquisition the property will fit us and the price will be right,” Van Wagenen said.

Pogo ranks among the fastest growing independents in the United States, having quadrupled production and more than doubled its reserve base over the last six years. In the United States the company operates in Wyoming, the Permian basin of West Texas and southeast New Mexico, onshore Gulf Coast and on the Gulf of Mexico’s outer continental shelf.

While Pogo’s net income dropped in the 2005 first quarter, the company registered both record cash flow and revenues during the period, spurred largely by high oil and gas prices, according to the company.

Net income for the 2005 first quarter reportedly came in at $59.2 million or 93 cents per share on revenues of $368.8 million, compared to first quarter 2004 net income of $71.6 million or $1.13 per share on revenues of $307.9 million. Discretionary cash flow was $221.2 million versus $177.8 million for the same quarter last year.

During the 2005 first quarter, the company produced a daily average of 48,767 barrels of liquid hydrocarbons, including crude oil, condensate and plant products, down 10 percent from an average of 54,245 barrels per day produced during the first quarter of last year. However, Pogo produced a near-record 335.1 million cubic feet of natural gas per day during the quarter, up 12 percent from 299.6 million cubic feet per day produced a year-ago.