Houston Exploration Announces Third Quarter 2005 Financial Results

The Houston Exploration Company reported third quarter 2005 net income of $8.1 million, or $0.28 per fully diluted share. By comparison, the company reported third quarter 2004 net income of $43.0 million, or $1.51 per fully diluted share.

Reported revenues for the third quarter 2005 totaled $125.4 million, versus the 2004 corresponding quarter of $162.8 million. The year-over-year decrease in revenue was primarily due to a $45.9 million charge under FAS 133 relating to ineffectiveness in the company's hedging program at third quarter close resulting from the Hurricane Rita disruption at Henry Hub during the last week of September. This charge, which is non-cash, negatively impacted earnings by $29.7 million, or $1.02 per share. Cash from operations before changes in operating assets and liabilities totaled $138.9 million, compared to 2004's third quarter of 130.5 million.

Third quarter 2005 daily production averaged 308 million cubic feet of natural gas equivalent per day (MMcfe/d), down from 2004's third quarter average rate of 343 MMcfe/d. This 10 percent quarter-over-quarter decline in production was primarily due to Hurricanes Katrina and Rita, both of which caused production shut-ins and delayed drilling operations within the company's Gulf of Mexico region, and to a lesser extent in the South Texas region as well. Combined, the two hurricanes negatively impacted net income for the quarter by $12.9 million, or $0.44 per share. The company expects substantially all of its Gulf of Mexico production to be restored by year end and estimates delayed production directly attributable to the hurricanes in the range of 8 billion cubic feet of natural gas equivalent (Bcfe) to 10 Bcfe for 2005. In addition, the company estimates the delay or downward revision of 6 Bcfe to 7 Bcfe for the year through a combination of hurricane related and other operational issues.

Houston Exploration realized an average natural gas sales price for the third quarter 2005 of $8.15 per Mcf, yielding an average realization of $5.78 per Mcf after cash settlements under its hedging program, which excludes the FAS 133 ineffectiveness charge. This compares to a natural gas sales price of $5.46 per Mcf, and a net price of $5.09 per Mcf after cash settlements under its hedging program during the third quarter 2004. Since the price of natural gas continues to be volatile, there will be a possibility of additional hedge ineffectiveness charges in the fourth quarter 2005. Third quarter 2005 crude oil prices averaged $54.08 per barrel, 40 percent higher than the $38.69 per barrel reported during the third quarter 2004.

Third quarter 2005 lifting costs, which are comprised of lease operating, transportation and severance tax expenses, were $0.89 per Mcfe versus the $0.66 per Mcfe reported during the third quarter 2004, due to lower production volumes and an increase in the total lifting costs quarter-over-quarter. Depreciation, depletion and amortization and asset retirement accretion expenses for the third quarter 2005 were $2.61 per Mcfe compared to $2.15 per Mcfe in the third quarter 2004. Third quarter 2005 net general and administrative expenses (G&A) were $0.36 per Mcfe versus the $0.18 per Mcfe reported for 2004's third quarter. Included in the quarter's net G&A results were expenses of $3.8 million, or $2.4 million after tax, as the company incurred additional legal and financial advisory fees and expenses while unsuccessfully pursuing an acquisition opportunity. These transaction-related fees and expenses added $0.13 per Mcfe to the quarter's G&A rate and decreased earnings by $0.08 on a per share basis. The remaining increase to G&A on a unit basis is attributable to the loss in production for the quarter.

South Texas Acquisition:

Concurrent with its third quarter results, Houston Exploration also announced that it has entered into an agreement with Kerr McGee Corporation to purchase an estimated 88 Bcfe of proved reserves in South Texas for $163 million. The reserves are 75 percent gas and 40 percent proved developed.

Net production is approximately 10 MMcfe/d from four fields. The assets, which produce from the Frio, Vicksburg and Lobo formations, will all be operated by Houston Exploration. The effective date is October 1, 2005, and closing is scheduled for November 30, 2005, subject to customary closing conditions.

"These wells complement our existing Lobo operations in the area and further solidify our position as one of the key producers in the South Texas region," stated Billy Hargett, chairman and chief executive officer of Houston Exploration. "These properties will increase our position in the area by 26,300 net acres, and we believe these assets will add nearly 100 low-risk drilling opportunities which will enhance our existing portfolio," he added.

The company intends to finance this transaction with borrowings under its existing revolving credit facility, which was recently expanded to $450 million of capacity.