Pogo Producing shareholder calls CEO pay 'concerning' in light of poor performance

By Angela McDaniels

Seattle, Jan. 29 - Pogo Producing Co. shareholder Third Avenue Management LLC said that chairman, president and chief executive officer Paul G. Van Wagenen has not been able to maximize shareholder value and it is "clearly time for a change in direction," according to a schedule 13D filed with the Securities and Exchange Commission on Monday.

In a letter to Van Wagenen, Third Avenue portfolio managers Curtis Jensen and Ian Lapey said the company's net debt has increased by more than six times to $2.111 billion at Sept. 30 from $309 million in 2003 and that, while 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 production per share has dropped by more than 20%; on a unit of production basis, lease operating expense has increased by 178%; and general and administrative costs have tripled, according to the filing.

"It is difficult to find a peer company whose operating costs have escalated as rapidly and to the high level that Pogo's have," Jensen and Lapey said in the letter.

In May 2006, Moody's Investors Service acknowledged the company's deterioration by downgrading Pogo's corporate family rating to Ba3 from Ba2, citing "rising unsustainable reserve replacement costs, inconsistent production trends and a sharp decline in organic reserve replacement."

Jensen and Lapey said that despite Pogo' poor performance over the past several years, Van Wagenen received an 11.8% increase in base salary in 2005, a 25% larger bonus and a restricted stock award valued at $2 million, up 55% compared with 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," Jensen and Lapey said.

In an attempt to generate a better return for shareholders, Third Avenue said it may suggest changes to the strategic direction of the company, including:

• Changes in the composition of the board of directors or management, including an increase in the size of board;

• Changes to Pogo's certificate of incorporation or bylaws;

• Changes in the company's capitalization or dividend policy

• The acquisition or disposition of additional Pogo shares; or

• The sale of material assets or another extraordinary corporate transaction, including a sale transaction.

Third Avenue owns 3,609,309 shares, or 6.2%, of Pogo Producing's outstanding stock. The company purchased the shares for $161.7 million through several funds for which Third Avenue acts as investment adviser.

The Houston-based company explores for, develops and produces oil and natural gas.

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