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Houston Exploration Selling Offshore Assets to Focus on Onshore Gas

The Houston Exploration Co. is selling all of its Gulf of Mexico assets to become a pure onshore U.S. natural gas producer, the company said last week. Year-end 2004 offshore reserves totaled 291 Bcfe, or 37% of the company's total proved reserves, and in the third quarter, the shallow water holdings' average daily production was 123 MMcfe/d.

At the end of 2004, 94% of the company's proved reserves were natural gas, of which 63% were classified as proved developed. Onshore, the producer's operations are focused in South Texas and the Arkoma Basin, which together hold about 58% of the total proved reserves, and in the Rocky Mountains, which Houston Exploration entered in 2003.

Historically, Houston Exploration's offshore drilling program has been a combination of developmental and exploratory drilling, with a focus on deep-shelf exploration. To date, the company is six-for-12 when drilling these high-impact exploration targets, three of which have been successfully drilled in 2005. A data room will be opened to qualified bidders in January 2006, and the transaction expected to close by the end of 1Q2006. Wachovia Securities is acting as its financial adviser.

"For several years we have been building our onshore business and are now beginning more significant strategic moves to transform Houston Exploration," said CEO Bill Hargett. "We are taking advantage of the current favorable market conditions for offshore properties in order to monetize the Gulf and focus our people and capital on longer-lived opportunities in the Lower 48."

Hargett, who has been CEO since 2001, said "the returns in the Gulf remain extremely attractive, and our assets would be an excellent complement to the portfolios of several producers and a springboard for new entrants. After our sale, as a pure onshore organization, Houston Exploration should immediately increase its reserve life from six years to eight years and should offer its stockholders solid prospects for more predictable and stable production and reserve growth."

The sale proceeds from the offshore assets will be used in "multiple ways," which may include acquiring more U.S. onshore assets, decreasing debt, repurchasing stock, or paying for a recent $163 million acquisition from Kerr-McGee for an estimated 88 Bcfe of proved reserves in South Texas. The Kerr-McGee reserves are 75% gas and 40% proved developed.

South Texas has been Houston Exploration's most active onshore area; its 3Q2005 output was 127 MMcfe/d. The Arkoma Basin accounted for 47 MMcfe/d and the Rockies accounted for 4 MMcfe/d of output in 3Q2005. The Rockies region is expected to be a high growth area for Houston Exploration -- in September, the company entered into a joint venture agreement with Enduring Resources LLC in Utah's Uinta Basin (see NGI, Sept. 12). Under the terms of the agreement, each company will contribute 40,000 acres, and in turn, earn a 50% working interest in all contiguous 80,000 acres.

In conjunction with the sale of its offshore assets, the board of directors approved a discretionary common stock repurchase program of up to $200 million, which could be used from time-to-time to enhance shareholder value. These purchases may be in the open market or in privately negotiated transactions. The company also is in the process of amending its revolving bank credit facility to increase the available borrowing capacity to $750 million from $450 million, with an initial borrowing base of $600 million. The amendment is expected to be effective by the end of this month. In addition, the board approved a 2006 capital expenditure program of $423 million, excluding any possible acquisition costs.

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