Following days of silence, Houston Exploration Co. (THX) late Monday said its board of directors has unanimously decided that the unsolicited acquisition proposal by JANA Partners LLC (see Daily GPI, June 23) was not in the best interests of its shareholders. Instead, the independent announced that Lehman Brothers Inc. will help “in exploring a broad range of strategic alternatives to further enhance shareholder value.”

JANA has offered the Houston-based producer $62/share in cash for the company. But THX said it wanted to consider other alternatives, such as a share repurchase, special dividend, operating partnerships or strategic alliances and perhaps a sale or merger.

“Since announcing our restructuring plan in the fall of 2005, decisive actions have been taken to improve the company’s financial and operating performance,” THX said. “We have completed the sale of our offshore assets and are now focused onshore where the company has a proven track record of more stable and predictable production and reserve growth — in fact, we currently estimate onshore production to grow by approximately 9% this year and 19% in 2007. With the company’s portfolio successfully realigned, the board believes that now is an appropriate time to explore additional strategic alternatives that may be available to further enhance shareholder value.”

THX CEO William Hargett, in a letter to JANA Managing Partner Barry Rosenstein Monday, said the company had “reviewed and thoroughly considered the proposal outlined in your June 12, 2006 letter. The Board has unanimously determined that your proposal is not in the best interest of Houston Exploration shareholders. We believe that your proposal undervalues Houston Exploration’s portfolio of assets and opportunities.”

Hargett noted that “well before” JANA had disclosed its 12%-plus holdings in THX, the company had begun a major restructuring plan to improve its financial and operating performance. Since the plan’s inception last November, THX has completed the sale of its offshore assets and begun a share repurchase program. THX now is concentrated in the domestic onshore and focused on natural gas exploration.

“We believe that with our current asset portfolio we can deliver substantial increases to production in 2006 and 2007,” Hargett wrote. “Our current net production rate is over 200 MMcfe/d, and as previously announced, we plan to exit 2006 at a rate of 225 MMcfe/d with our existing drilling program of more than 400 wells. In 2007, we expect to step-up our drilling activity to over 550 wells, which we believe will result in an average production rate of 245 MMcfe/d, based on a capital expenditure program of approximately $490 million.”

Hargett added that “while we have confidence in the company’s plan, the Houston Exploration board is, and has always been, committed to pursuing the path that provides the greatest value to Houston Exploration shareholders.” He said, “in sum, our board and senior leadership team continue to be focused on fully realizing the value of Houston Exploration. Thank you for your interest in the company.”

Lehman is serving as financial adviser to THX; Akin Gump Strauss Hauer & Feld LLP and Morris, Nichols, Arsht & Tunnell LLP are legal advisers.

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