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Western Gas CEO Considers 'Fresh Look' at Share Repurchases

Denver-based Western Gas Resources Inc.'s largest shareholder last week urged the producer to initiate a stock repurchase program to boost the value of the company, and said he would volunteer to serve on the company's board of directors, according to a regulatory filing Thursday to the Securities and Exchange Commission.

Daniel Loeb, CEO of offshore-based hedge fund Third Point LLC, sent a letter to Western Resources CEO Peter Dea, prodding the producer to spend $300-500 million to buy back 10-15% of its shares. Loeb said he only began buying Western Resources stock this year, but already, his fund controls about 8.6%, or 6.45 million shares, of the company's stock.

In the letter, Loeb indicated that Dea had met with his group earlier this month. He wrote to Dea, "We are impressed with the progress that Western Gas...has made in obtaining permits in the Powder River Basin and elsewhere, which will enable it to reach and exceed its production growth objectives. We were also pleased to be informed of increased throughput volumes in the company's Oklahoma gathering assets.

"These accomplishments, coupled with historically high gas prices, have caused us to reassess our valuation and price target for the company. Our own estimates of the company's intrinsic value are well in excess of both the current trading levels of approximately $42.50 and Street valuations such as that of UBS at $54 per share."

Loeb said that the company needs to "immediately utilize its significant borrowing capacity to initiate a share repurchase program... In addition, we urge the company to use a portion of future operating cash flow to purchase shares. We vehemently disagree with the board's view that the company should wait until the 'cash is in the bank' before pursuing such a course of action, as we believe there is a window of opportunity to buy back shares 'on the cheap' before the market comes to appreciate the impact of the current natural gas strip on future cash flow."

The shareholders, he said, also "would be well served if Western Gas would separate its midstream assets from its exploration and production business," but said that transaction should follow a share repurchase."

In addition, Loeb volunteered to serve on the company's board, filling a seat recently vacated by the retiring Ward Sauvage. "In this way, I will be personally and directly...involved in the company's initiatives to create and build shareholder value."

In response last Thursday, Dea said the board recently considered a share buyback program but opted to use its excess cash to increase natural gas production and to pay dividends to shareholders. However, Dea added that the company would take a "fresh look" at Loeb's proposals.

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