Activist Track: Jana Drills Houston

This morning, Houston Exploration (THX - commentary - Cramer's Take), a stock I wrote about in March, has been attacked by Jana Partners. Jana first came on the scene on Feb. 21, when it filed a 13-D stating it owned a 9.9% position in THX. But today, Jana issued a press release calling on THX's board to conduct prompt share repurchase and to begin exploration of strategic alternatives.

To fully understand the fund's demands, let me first lay out the backdrop to the stock. The Houston Exploration Co. engages in the exploration, development, exploitation and acquisition of natural gas and oil reserves in North America. The stock trades at an EV/EBITDA multiple of 4.397, which is not a rich multiple by any means, and the company has $597 million in debt, $8 million in cash and generated $460 million in operating cash flow on a trailing 12-month basis.

Recently, the company announced it had agreed to sell certain Gulf of Mexico offshore assets for $590 million, and indicated it may use this money to pursue expansion acquisitions and repay debt. Jana disagrees over the prospective use of the proceeds.

In today's letter to management, JANA Managing Partner Barry Rosenstein stated: "that such actions would be far less beneficial to shareholders than a substantial share repurchase, and in fact would likely destroy value given the risks associated with such acquisitions and the Company's history of underperformance."

The idea is that if interest rates are so low, and the company's cash flows are stable or growing (as they have been) then why not use extra cash to buy back shares? Particularly so if the stock is trading at only four times cash flows. Heck, take on more debt!

Rosenstein goes on to state that management has offered no evidence that an acquisition would be anywhere near as accretive as repurchasing shares. He quotes Lehman Brothers analyst Jeffrey W. Robertson's April 10 report in which he said of the company's acquisition plans, "the acquisition case again appears to be the least attractive [scenario] having a lower implied value per share than even if the company simply holds the proceeds in cash."

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At the time of publication, Altucher and/or his fund was long THX, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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