Pogo Producting Company (NYSE:PPP) shares moved up $1.77, or 3.37%, to $49.55 today after Third Avenue Management LLC voiced their concerns about the company in a Schedule 13D filing with the SEC. This news follows previous concerns about the company's underperformance and valuation voiced by Daniel Loeb's Third Point. Combined, the two activist investors now control roughly 14% of the company's outstanding shares and have both pledged to take further action if necessary to unlock shareholder value. The significant stake in the company along with the threat of a proxy battle may finally warrant a meaningful response from the company's management and board of directors.

What issues do these hedge funds have with the company? Well, Daniel Loeb pointed out in December that the company's stock has appreciated less than half the rate of its peers for every time period in the past decade (on a cumulative basis)! Moreover, he questioned the company's Northrock Resources acquisition in Canada in which spent over $350 million (approximately 20% of the purchase price) in capital trying to improve; however, production in this segment has actually declined 10% from 30,000 barrels of oil equivalents per day to 27,000! Given these failures by management, Third Point recommended that the company immediately put itself up for sale or they would pursue a proxy battle to do it themselves.

Third Avenue Management expressed similar concerns today over the company's mismanagement and poor valuation. The hedge fund pointed out that the company's 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 this amount of debt may be manageable, TAM pointed out that levering up during a period of historically high commodity prices could cause some major problems in the future. Next, TAM noted that company's production per share has dropped by more than 20% while, on a unit of production basis, lease operating expense has increased by 178% and G&A has tripled. The hedge fund insisted that this combination of higher debt, lower production, higher operating costs, and the underwhelming results from the company's recent acquisition of Northrock Resources were the main factors behind the poor relative performance of Pogo's stock over the last three years. And to top it all off, despite Pogo's poor performance over the past several years, the TAM noted that the company's compensation has been rising! In fact, company executives received an 11.8% increase in their base salary with a bonus that grew by 25% in 2005! The company also issued a restricted stock award valued at approximately $2 million to executives, up a staggering 55% compared to 2004! As a result of all of this, Third Avenue Management said that they would begin talks with other shareholders or take actions on their own in order to solve these problems and unlock shareholder value.

Clearly, if Third Avenue Management and/or Third Point are able to take convince the company to put itself up for sale, it could mean significant share appreciation for investors in a relatively short period of time. While we were not able to get a response yet from either of the two hedge funds, we will keep SECInvestor updated on any new information we receive. Overall, this is definitely a stock worth watching!

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