Several analysts expressed cautious reassurance, while others responded with concern-and sharply reduced ratings-upon news of Pogo Producing Co.'s (NYSE: PPP) plan for several drastic changes in its business. Pogo will buy back up to $375 million of common stock, or 12% of outstanding; delay the drilling of all discretionary 2005 development wells-a total of some 210 gross wells-until 2006, which may result in a 2005 budget savings of about $280 million; and has retained Goldman Sachs as advisor on a possible sale or swap of Pogo's license holdings in Thailand and Hungary. The Thailand assets alone account for roughly 29% of current company production. It will accelerate exploration drilling, and spend on domestic acquisitions and balance-sheet improvements. "Although Pogo is sacrificing growth in the near term, we believe that its plan to repurchase stock is a reasonable and economically viable use of anticipated cash flow given the company's valuation relative to its peers," says Rehan Rashid, an analyst with Friedman Billings Ramsey. Pogo doesn't have a clearly defined reinvestment plan but its decisions "could crystallize the disparity between the current stock price and our estimated net asset value of nearly $78 per share." He adds that "positive results from three high-impact, deep-shelf wells, which we expect to be announced in first-quarter 2005, as well as the sale of the company's Thai assets at stronger-than-expected prices, could provide the required catalysts to close the current valuation gap." Rashid reiterated his Outperform rating on Pogo shares and 12-month price target of $63.25. Morgan Stanley E&P analyst Lloyd Byrne reduced his rating on the stock from Equal-weight to Underweight. "While Pogo management is likely doing the right thing longer term, it's a change in strategy and execution risk that likely caps upside over the near term," Byrne says. "Pogo must now not only divest international assets, but also successfully reinvest proceeds. Pogo will likely support its stock with a front-end-loaded buyback program, limiting initial underperformance." Following the announcements, Zacks E&P analyst Joel Musante issued a Hold rating on Pogo's stock and Petrie Parkman & Co. analyst Joseph Magner lowered his rating from Market Performer to Sell. Magner says, "Rather than improving the visibility on the company's operations, we believe the latest moves provide a below-average operational outlook for 2005 and beyond." Magner reduced his 12-month price target from $53 per share to $36. Pogo will be under investors' microscope. Byrne says, "We applaud management's desire to divest lower-return/mature assets, capitalize on a limited tax window and reallocate proceeds. However, execution will be watched closely by investors, in our view: in particular, reinvestment of proceeds in the ultracompetitive North American marketplace, where several competitors with lower costs of capital are also searching 'high and low' for incremental quality assets." Pogo shares fell from $47 at closing the day prior to the announcement to $44.65 at closing the following day. At press time, the stock was trading at $45.12. -Bertie Taylor
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