Jana Targets Houston Exploration

Shares of Houston Exploration(THX Quote) jumped Monday after the hedge fund Jana Partners urged the company to undertake a big buyback and to explore the sale of the company. Jana, a $5 billion activist hedge fund, owns about 9% of the gas and oil company.

Recently, Houston Exploration's stock was up $2.96, or 5.6%, to $55.92. The level is similar to where the shares traded a year ago.

In a letter sent to the board, Barry Rosenstein, Jana's founder, expressed doubt about management's ability to deliver value to its shareholders. He noted that the stock price is up less than 1% since the start of 2005. In comparison, competitors St. Mary Land and Exploration(SM Quote), KCS Energy(KCS Quote), Forest Oil(FST Quote) and Newfield Exploration(NFX Quote) have seen their shares rise 108%, 94%, 82% and 48%, respectively, during the same period.

On April 10, the company announced that it will sell certain Gulf of Mexico offshore assets for $590 million. Rosenstein noted that given that the company is now a pure-play onshore exploration company, its stock should have moved. Instead it fell 2% since the announcement of the sale.

Rosenstein asked the company to put the proceeds of the Gulf of Mexico sale to work for the shareholders through a repurchase. In his letter, he says that if the company uses the proceeds together with a $158 million leverage to repurchase about 11 million shares at a 15% premium through a Dutch auction, it would increase 2007 earnings per share by more than 40%. Earnings are expected to decrease by about 13% this year and grow by 18.5% next year, according to Thomson First Call Data. At its current $56 price, the stock trades about 11 times next year's projected earnings.

Rosenstein also wrote that considering the company's historical underperformance, the board should explore strategic alternatives, including a sale of the company. He said that he is confident that the process would attract many interested parties willing to pay a big premium to the current stock price.