U.S. Securities and Exchange Commission
Washington, D.C. 20549
NOTICE OF EXEMPT SOLICITATION
Submitted pursuant to Rule 14a-6(g)
1. Name of the Registrant:
The Houston Exploration Company
2. Name of person relying on exemption:
JANA Partners LLC
3. Address of person relying on exemption:
200 Park Avenue, Suite 3300, New York, New York 10166
4. Written materials. Attach written materials required to be submitted
pursuant to Rule 14a-6(g)(1):
AN OPEN LETTER TO THE SHAREHOLDERS OF THE HOUSTON EXPLORATION COMPANY FROM JANA
PARTNERS LLC
April 24, 2006
Ladies & Gentlemen,
We are contacting you because we believe the time has come to deliver a
message to the Board of Directors (the "Board") of The Houston Exploration
Company ("Houston Exploration" or the "Company") that they must reverse the
Company's history of underperformance and immediately embark on a clear path to
maximizing value for shareholders. This week's annual meeting offers the chance
to put directors on notice that shareholders are keenly focused on the Board's
next steps and to warn them of the consequences of squandering the opportunity
they presently have to deliver the highest possible returns to their
shareholders.
As you may know, last week we called upon the Board to use the available
proceeds of the recent $590 million Gulf of Mexico asset sale and the Company's
underleveraged balance sheet to repurchase a significant amount of the Company's
currently undervalued stock. Assuming the Company uses these sale proceeds
together with additional leverage to repurchase approximately 11 million of its
shares, we believe it could increase 2007 EPS by over 40%. As we outlined last
week in our letter to the Board, given the Company's woeful performance in
comparison to its peers, it is all the more apparent that the Board must seize
this opportunity immediately for shareholders.
The Board's response to our analysis on how best to maximize value however
has been unsatisfactory in every way and evidences a shocking disregard for the
pursuit of shareholder value. Rather than committing to seeking the highest
possible return for shareholders, the Board appears intent on following a plan
which we believe is certain to deliver lower returns for shareholders than a
significant share repurchase. Furthermore, the members of the Board appear to
feel no obligation to make any real attempt to offer a coherent explanation for
their unwillingness to deviate from this course.
-- IF YOU WISH TO SEND A MESSAGE TO THE BOARD THAT THEY MUST TAKE IMMEDIATE
STEPS TO DELIVER MAXIMUM VALUE, SELECT THE "WITHHOLD ALL NOMINEES" OPTION
CORRESPONDING TO "DIRECTORS" ON THE PROXY CARD PROVIDED TO YOU BY THE COMPANY OR
ON THE APPLICABLE PROXY VOTING WEBSITE, OR IF YOU ARE VOTING BY TELEPHONE SELECT
SUCH OPTION WHEN PROMPTED.
PROXIES MUST BE SUBMITTED PRIOR TO THE COMPANY'S ANNUAL MEETING, WHICH IS
SCHEDULED TO BE HELD ON FRIDAY, APRIL 28, 2006. SHAREHOLDERS SHOULD THEREFORE
SUBMIT THEIR PROXIES AS SOON AS POSSIBLE. EVEN IF YOU HAVE ALREADY VOTED, YOU
CAN CHANGE YOUR VOTE AT ANY TIME PRIOR TO THE ANNUAL MEETING SIMPLY BY
SUBMITTING A NEW PROXY WITH YOUR NEW ELECTIONS. ONLY SHAREHOLDERS OF RECORD AS
OF MARCH 9, 2006 MAY VOTE AT THIS YEAR'S ANNUAL MEETING. SHAREHOLDERS SHOULD
CONTACT THEIR BROKERS WITH ANY QUESTIONS. --
In response to our call last week for a significant share repurchase, which
followed previous discussions with the Company in which we explained the
benefits of doing so, we received from the Board what looked like a form letter
making a vague reference to exploring the issue and thanking JANA for its
"interest in our company" (an interesting choice of words considering that the
Board members own less than one-half of a percent of the Company's shares). The
Board in its letter then reiterated the Company's intention to repurchase only
$200 million of its shares, rather than putting all of the available Gulf of
Mexico sale proceeds into the share repurchase, and have said they will use the
remainder for other uses including acquisitions and debt repayment. It appears
that about as much thought and effort was put into this response as went into
the Board's earlier responses when presented with our analysis, which is to say
almost none.
We say this because the Board has offered nothing in the way of
quantitative analysis or even rational qualitative analysis to justify its
announced intentions. Rather than attempting to demonstrate that their plans
offer the most value for shareholders, the Board's methodology in arriving at a
$200 million repurchase amount appears to have been limited to selecting a nice,
round number. No effort has been made to prove to shareholders that the Board
has carefully considered its options and is making the best possible use of the
Company's assets. As we have said, it appears quite clear in fact that such an
analysis would show that the opposite is true.
First, we believe the evidence is indisputable that there are no
acquisitions the Company can pursue that will be nearly as accretive as a
substantial share repurchase. Even the simplest analysis demonstrates that the
Company is highly unlikely to find acquisitions at multiples lower than those at
which its stock is currently valued. Even if it were to do so, significant
execution risk for onshore acquisitions is likely to further diminish the
returns such acquisitions might deliver. We note again that we have fully
accounted for the potential tax benefits associated with using the sale proceeds
to purchase new assets in coming to this conclusion.
Second, the Board has offered no compelling justification for using any
of the proceeds of the Gulf of Mexico sale to repay debt rather than to help
fund a significant share repurchase. Nor have they offered a satisfactory
explanation for why they refuse to increase leverage to provide the remainder of
the funding for such a share repurchase, despite clear evidence that doing so
would greatly benefit shareholders while leaving the Company with a more
efficient capital structure. Their sole justification, which is maintaining the
Company's current high debt rating, does almost nothing to improve shareholder
returns, whereas using the strength of the Company's balance sheet to repurchase
additional shares will deliver substantial value. To the extent that the
Company's agreements with its creditors place restraints on their ability to
undertake such actions, the Company should open negotiations with such lenders
to permit them, as is quite common in such situations, or if necessary to
refinance such obligations.
The Board has a fiduciary duty to its shareholders do to more than mouth
empty phrases and platitudes as they proceed blindly with plans which are all
but guaranteed to squander shareholder assets. However, the Board appears to
feel that because the issue regarding the use of the Gulf of Mexico proceeds has
arisen shortly before the annual meeting, at which they are running unopposed,
they are free to pay lip service to demands that they pursue value maximization.
We also note that Houston Exploration's bylaws have been crafted to provide
the Board an extraordinary amount of cover from shareholder demands. A
shareholder seeking to nominate new directors would have to have notified the
Company almost SIX MONTHS in advance of this year's meeting (a length which is
at the far extreme of the range for such periods and is clearly at odds with any
reasonable notion of good corporate governance). In other words, the Board
essentially gives itself a pass for almost a year and a half, knowing that
shareholders wishing to seek new representation as result of the Board's actions
must do so almost six months before the annual meeting or wait up to almost 18
months for the next meeting. This egregiously early deadline is what makes it
possible for the Board to announce that it intends to pursue a course of action
that it appears to have done no legitimate analysis regarding and which we
believe will create far less value for shareholders than a significant share
repurchase, yet remain immune to shareholder challenge at the next annual
meeting.
For these reasons, we are encouraging all shareholders to send a message to
the Board that they must not squander the proceeds of the Gulf of Mexico sale,
assets which belong to the shareholders, on value-destroying acquisitions, and
that they must instead put this money to work for shareholders through a
significant share repurchase.
While the Board faces no opposition this year and thus will undoubtedly be
re-elected, choosing to withhold your vote for all directors at this week's
annual
meeting will tell them that while their seats may be safe for this year,
shareholders are watching them closely and demand results. No board can hide
from its shareholders forever, and we encourage you to take this opportunity to
serve clear notice to the Board that you will not hesitate to hold them
accountable, even if such accountability is deferred until next year, should
they fail to immediately pursue maximum value for all shareholders.
Sincerely,
/s/ Barry Rosenstein
Barry Rosenstein
JANA Partners LLC
Managing Partner
BR/CP/AR