Houston Exploration Reports Quarterly Results, Updates Guidance



The Houston Exploration Company reported third quarter 2006 net income of $34.0 million, or $1.22 per diluted share. This compares to $8.1 million of net income, or $0.28 per diluted share, reported in the third quarter 2005.

Excluding certain items described below and in the attached schedules, the company's adjusted net income for the third quarter 2006 was $20.0 million, or $0.72 per diluted share, versus $1.30 per diluted share in the third quarter 2005 on a comparable basis. Cash from operations before changes in operating assets and liabilities totaled $86.2 million for the quarter compared to $138.9 million reported in the third quarter 2005.

The comparability of the company's third quarter and year-to-date 2006 results to those of the prior year were impacted by the sale of substantially all of the company's Gulf of Mexico assets during the first half of 2006. Adjusted net income and cash from operations before changes in operating assets and liabilities are non-GAAP financial measures that are defined and reconciled to GAAP measures in the attached schedules.

"I am pleased with our overall performance in this, our first full quarter as predominantly an onshore operator," stated William G. Hargett, chairman, president and chief executive officer. "Despite a challenging price environment, our third quarter production growth, coupled with our healthy balance sheet and liquidity position, provides us with a strong platform for growth in 2007."

Third Quarter 2006 Consolidated Results

Daily production for the third quarter 2006 averaged 204 million cubic feet of natural gas equivalent per day (MMcfe/d), compared to 308 MMcfe/d in the third quarter 2005. This 34 percent decline was primarily due to the sale of substantially all of the company's Gulf of Mexico assets during the first half of 2006.

The company's average unhedged natural gas sales price for the third quarter 2006 was $5.85 per thousand cubic feet (Mcf), compared to $8.15 per Mcf in the third quarter 2005. The company's average realized natural gas price for the third quarter 2006 was $5.70 per Mcf, compared to $5.78 per Mcf reported during the third quarter 2005. Crude oil prices averaged $59.86 per barrel for this year's third quarter compared to $54.08 per barrel reported during the comparable 2005 period.

Revenues for the third quarter 2006 totaled $131.3 million, compared to $125.4 million during the third quarter 2005. Total revenues for the third quarter 2006 included $19.9 million of net gains associated with the company's natural gas hedging activities, compared to $108.1 million of net losses in the third quarter 2005. The current period net gains of $19.9 million were comprised of the following:

  • $1.8 million of realized losses associated with the settlement of hedge contracts;
  • $0.9 million of realized losses associated with the unwinding of certain hedge contracts following the sale of the company's Gulf of Mexico assets; and
  • $22.6 million of net unrealized gains resulting primarily from changes in the fair value of the company's hedge portfolio, all of which is now being accounted for using mark-to-market accounting.

The company's lease operating, severance tax and transportation expenses for the third quarter 2006 totaled $1.04 per thousand cubic feet of natural gas equivalent (Mcfe) versus $0.89 per Mcfe reported in the third quarter 2005. Total depreciation, depletion and amortization and asset retirement accretion expenses for the quarter were $2.83 per Mcfe compared to $2.61 per Mcfe in the third quarter 2005. Third quarter 2006 net general and administrative expenses were $0.50 per Mcfe compared to $0.36 per Mcfe in the prior year period.

Third Quarter 2006 Onshore Results

The company's onshore production increased by 10 percent during the third quarter 2006, to an average rate of 204 MMcfe/d, compared to 185 MMcfe/d during the third quarter 2005. The company's average unhedged natural gas sales price for its onshore production was $5.86 per Mcf for the third quarter 2006, compared to $7.75 per Mcf in the third quarter 2005. This 24 percent decline in price more than offset the 10 percent increase in production, resulting in a 15 percent decline in onshore oil and gas revenues during the quarter, to $112.5 million, from $132.0 million during the third quarter 2005. Onshore lease operating, severance tax and transportation expenses during the third quarter 2006 totaled $1.03 per Mcfe compared to $0.82 per Mcfe reported in the third quarter 2005.

Strategic Restructuring Plan Update

Since November 2005, Houston Exploration has been implementing a strategic restructuring plan, the primary purpose of which is to improve the company's financial and operating performance by focusing its operations onshore. The following is a recap of the key restructuring milestones achieved to date, along with an update on certain related initiatives:

Recap of Key Milestones

  • In March 2006, the company completed the sale of the Texas portion of its Gulf of Mexico assets, which included 58.5 billion cubic feet of natural gas equivalent (Bcfe) of estimated proved reserves at year-end 2005, for a gross sales price of $220 million.
  • In May 2006, the company initiated activity under its share repurchase program. To date, the company has repurchased 1,176,500 shares of its common stock, or approximately 4 percent of its outstanding shares, for approximately $61.6 million.
  • In June 2006, the company completed the sale of substantially all of the Louisiana portion of its Gulf of Mexico assets, which included 186.1 Bcfe of estimated proved reserves at year-end 2005, for a gross sales price of $590 million. Net cash proceeds from the sale totaled $530.8 million, of which $314.2 million was deposited with qualified intermediaries for potential reinvestment in like-kind exchange transactions under Section 1031 of the Internal Revenue Code. The remaining balance of these escrowed funds is shown on the company's balance sheet as designated cash.
  • In June 2006, and in connection with the sale of its Gulf of Mexico assets, the company completed the unwinding of natural gas hedges totaling 60,000 million British thermal units per day (MMBtu/d) for the period July 2006 through December 2006 for a cost of $14.3 million.
  • In June 2006, the company announced that its Board of Directors had engaged Lehman Brothers to assist the company in an evaluation of a broad range of strategic alternatives. This evaluation is ongoing.

Update on Related Initiatives

  • In August 2006, following the sale of its Gulf of Mexico assets, the company elected to unwind natural gas hedges totaling 20,000 MMBtu/d for the period September 2006 through October 2006 for a cost of $0.9 million.
  • On November 27, 2006, the 180-day time period prescribed by Section 1031 for reinvestment of the company's designated cash associated with the sale of its offshore Louisiana assets will expire. Currently, the company does not expect to complete any qualifying like-kind exchange transactions prior to that expiry date. As a result, the company anticipates that during the fourth quarter 2006, (i) the remaining balance of the company's designated cash will be released from escrow and reclassified as cash, and (ii) a tax gain of $250 million to $260 million on the sale of the company's offshore assets will be recognized. The company estimates that, after considering available net operating losses, alternative minimum tax credits and other corporate tax attributes, this gain will result in a current net income tax liability of $35 million to $40 million.
  • The company is continuing to explore a broad range of strategic alternatives. These alternatives may complement or replace the continued execution of the company's existing business plan and include, but are not limited to, a recapitalization of the company either through additional share repurchases or a special dividend; operating partnerships and/or strategic alliances; and the sale or merger of the company. The company does not expect to make any public comments regarding this process until after the company's Board of Directors has completed its review of the strategic alternatives and approved a definitive course of action.

Guidance

As described in the following table, the company has updated its guidance for the fourth quarter and full-year 2006 and for 2007. The estimated financial and operational results do not reflect any decision regarding the ongoing review of strategic alternatives and assume no additional capital spending for potential acquisitions. Other factors that could materially impact the company's actual results are noted below in the forward-looking statements section of this release.



                            4Q06                 2006                2007
                           Total    Onshore  Offshore (A)  Total     Total
    Capital Spending
    (in millions)
      Exploration and
       development          $121       $470       $49      $519      $466
      Acquisitions             0         18        21 (B)    39         0
        Subtotal            $121       $488       $70      $558      $466
      Capitalized
       interest, G&A
       and other               5        ---       ---        26        24
        Total               $126       $488       $70      $584      $490

    Production
      Total (Bcfe)            20         75        14        89        85
      Average daily
      (MMcfe/d)              215         205       37       242       233
      Percent hedged          82%        N/A      N/A        86%       12% ©

    Unit Costs ($/Mcfe)
      Lease operating
       expense              0.64        0.64     1.23      0.73      0.66
      Severance tax         0.27        0.28      N/A      0.24      0.30
      Transportation        0.15        0.14     0.05      0.13      0.14
      DD&A and ARO          2.80         N/A      N/A      2.85      2.75
      General and
       administrative, net  0.45         N/A      N/A      0.40      0.41
      Interest expense,
       net                  0.27         N/A      N/A      0.29      0.17

     (A)  Substantially all of the company's offshore assets were sold during
          the first half of 2006.
     (B)  Reflects a net profits interest payment to a predecessor owner in
          certain of the company's offshore Louisiana properties that were
          sold during the first half of 2006.
     (C)  Based on existing 2007 hedge portfolio of 30,000 MMBtu/d.

The Houston Exploration Company is an independent natural gas and crude oil producer engaged in the exploration, development, exploitation and acquisition of natural gas and crude oil properties. The company's operations are focused in South Texas, the Arkoma Basin, East Texas, and the Rocky Mountains.

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