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Buried in giant



pending purchase of tiny



is a key piece of

Pogo Producing's



Pogo is a joint-venture partner with Rutherford in Thailand, along with

Palang Sophon

, which is controlled by a Rutherford director. For Pogo, Thailand is important. In 1997, 14% of its $286 million in revenue came from its oil and natural-gas fields in the Gulf of Thailand.

But Rutherford's deal with Chevron casts uncertainty over the joint venture.

The Thai block is governed by two joint operating agreements that are slightly different, says Dave Chavenson, Rutherford's chief financial officer. In at least one area, Pogo has the right to buy Rutherford's stake if Rutherford sells itself. In the other areas, Pogo's right of first refusal is in dispute. Pogo wouldn't comment on any aspect of the joint operating agreement. But Pogo now has to decide whether to buy Rutherford's stake there and go it alone or to take on Chevron as its partner.

If it goes on its own, Pogo, with limited financial resources, could have a tough time, especially considering current commodity prices. Pogo announced Monday it would raise $150 million in the debt market to pay down existing debt. If it decides to stick with Chevron, it would gain a powerful partner. Then there's a third possibility: Chevron could make a bid for Pogo, taking Pogo out of the picture.

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Patrick English, research director at

Fiduciary Management

in Milwaukee, says there's a good chance that Chevron might make such a bid. (Fiduciary is a Pogo shareholder.) English puts the price at as much as 25 per share, a big premium over its price of 12 1/2. Neither Chevron nor Pogo would comment on that possibility.

It's clear that Chevron considers the Thailand operations important, which could give Pogo an upper hand in dealing with Chevron. Chevron and Rutherford will ask Pogo to waive its right to buy the stake, according to a merger plan filed last week with the

Securities and Exchange Commission

. In its SEC filing, Rutherford disclosed that this waiver, as well as a new joint operating agreement, must be in place by Jan. 27 for the merger to proceed. Chavenson at Rutherford says he is confident this deadline will be met; a Chevron spokesman wouldn't comment.

Pogo's decision may come down to commodity prices, English says. For Pogo's Thai investment to work, "they need higher

commodity prices," he says. "Pogo doesn't have endless staying power." Although Pogo is a respected company with the ability to make it through the oil-price decline -- English calls Pogo's longtime top managers "survivors" -- if oil remains depressed, Pogo may not have the money to continue its exploration plans in Thailand.

John Elsenhans, Pogo's chief financial officer, declined to comment on whether Pogo is considering giving up its position as operator in Thailand to Chevron to meet the merger conditions, saying only it is "premature" to talk about it.

"We expect to be here for a long time," he says, "and we'll do whatever is necessary to see shareholder value is enhanced."

On the flip side, having a partner with Chevron's deep pockets and solid reputation as an operator -- after working with financially strapped Rutherford -- could be a boon for Pogo, a $500 million exploration and production company whose interests in Thailand account for about 48% of its total net proved reserves. Proved reserves are backed by engineering data and are considered the actual recoverable amount of hydrocarbons from a known reservoir.

These Thai fields are considered valuable since much of the pipeline infrastructure is already in place, unlike other areas in the kingdom. Further, Pogo and its joint-venture partners have a 20-year deal to provide natural gas to the Thai government. Those are two reasons why Chevron is interested in Thailand and why Pogo wants to remain.

Buying Rutherford is small potatoes for Chevron, which recently announced a $5.1 billion capital-expenditure program for 1999, but it would further its goal of international expansion.

Chevron's international upstream business has been its strongest growth area in recent years, according to

Merrill Lynch

analyst Constantine Fliakos. Fliakos has an accumulate rating on Chevron; Merrill has not performed any recent underwriting for CHV. Earnings from this segment have risen to $1.1 billion in 1997 from $500 million in 1992, and international oil and gas production has grown to 830,000 barrels per day from about 500,000 barrels per day in the late 1980s.

Through Rutherford, "Chevron is getting a toehold on a long-term investment" in Thailand that will pay off in three to 10 years, says Michael Mayer, who follows Chevron at


and rates it a buy. Schroder has not performed underwriting for Chevron.

If it decides to bid for Pogo as well, Chevron's footing in Thailand could be that much stronger.