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Coming under fire Investor Jana Partners urges board to repurchase stock, consider selling Houston Exploration Ray Tyson For Petroleum News
Houston Exploration thought it was doing the right thing to improve company performance by selling a large chunk of its Gulf of Mexico assets and using the $590 million in proceeds to pay down debt and strengthen its U.S. onshore position. Instead, the E&P independent opened itself to attack from one of its major investors, hedge fund manager Jana Partners.
One week after Houston Exploration disclosed the property sale to shareholders, Jana shot back with its own plan urging the Houston-based company to use proceeds from the offshore sale to buy back more of its own stock and consider “strategic alternatives” for Houston Exploration’s future, including an outright sale of the company.
“We would expect them to show some semblance of curiosity about how they might generate increased value,” Jana managing partner Barry Rosenstein said April 17 in a letter to Houston Exploration’s board of directors. “Instead, the response to the detailed quantitative analysis we have shared with management has been the analytical equivalent of a shoulder shrug.”
Houston Exploration had not publicly responded to Jana’s proposal by Petroleum News’ April 19 copy deadline.
Jana, a $5 billion hedge fund with offices in New York and San Francisco, owns about 9 percent of the outstanding shares of Houston Exploration.
Houston Exploration’s full-year 2005 financial report shows that while company reserves jumped 9 percent from 2004, profits fell to $105.2 million from $162.8 million. During the same period, operating revenues declined to $469.6 million from $500.5 million.
Unfortunately, Houston Exploration’s gas production was 83 percent hedged in 2005, “which did not allow (the company) to take advantage of higher prices that occurred during the last half of the year,” Houston Exploration confessed in its year-end report, noting that this action resulted in a hedge loss of $265 million for 2005, $116 million of which occurred during the year’s final quarter.
Louisiana portion of Gulf assets sold At year-end 2005, Houston Exploration also announced it would explore the sale of its Gulf of Mexico assets and concentrate on its onshore operations. The Gulf region accounted for 245 billion cubic feet of natural gas equivalent, or 28 percent of the company’s total proved reserves.
On April 10, Houston Exploration announced the sale of “substantially” the entire Louisiana portion of its Gulf of Mexico assets to an undisclosed private investor for $590 million in cash, adding that at year-end 2005 the proved reserves associated with the assets were estimated at 186.1 billion cubic feet of natural gas equivalent.
The company said it would retain interests in 18 exploration leases in the Louisiana waters and expected to capture additional value from these blocks through some combination of drilling, farm-outs and sales. The deal is expected to close on May 31.
“Transforming a company’s asset base and growth strategy is a challenging task, so we have been patient and thorough during our sales process in order to capture the value of these assets,” said William G. Hargett, Houston Exploration’s chairman, president and chief executive officer.
“Our resources are now focused onshore, where we believe our core competencies will deliver more stable and predictable production and reserve growth through an active program that includes both drilling and acquisitions,” he said.
Prior to closing the sale, Houston Exploration said it would unwind hedged production volumes of about 80,000 million Btu per day for the period from June 2006 through December 2006. The company’s remaining 2006 hedged production volumes were expected to total roughly 170,000 million Btu per day.
Uses of the proceeds from the sale of the Louisiana assets may include acquiring additional properties in U.S. onshore basins, repaying outstanding bank debt, and repurchasing shares of the company’s common stock, Houston Exploration said.
“Any such share repurchases will be made pursuant to the company’s existing $200 million share repurchase program, and, accordingly, will be subject to market conditions, applicable legal and contractual requirements, and other factors,” the company added.
In February, Houston Exploration signed an agreement to sell the Texas portion of its Gulf of Mexico assets, including proved reserves estimated at 58.5 billion cubic feet of gas equivalent, for a purchase price of about $220 million.
Jana: share repurchase better for shareholders Jana’s Rosenstein alleged that Houston Exploration’s plan would be far less beneficial to shareholders than a substantial share repurchase, and would likely destroy value given the risks associated with acquisitions and the company’s performance history.
“As one of the company’s largest investors, we have a substantial interest in seeing its leadership commit to a clear, determined path to delivering maximum value for all shareholders,” Rosenstein said in his letter.
“We believe (Jana’s) analysis leaves no doubt that using the proceeds of the recent Gulf of Mexico asset sale and the strength of the company’s balance sheet to institute an immediate share repurchase is the option that creates the most value for shareholders.”
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