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Lacking Bidders, Houston Exploration May Falter

Fueled by takeover speculation and activist pressures, The Houston Exploration Co. (THX) has been trading up for the past month. But the rally may soon run out of steam if no deal is consummated, according to some observers.

Houston Exploration shares began to rise in mid-June after $5 billion hedge fund activist Jana Partners offered to buy the company for $62 a share, an extremely unusual move for a hedge fund. Houston Exploration shares have increased by more than 13.4% since the Jana bid, including a 1% gain in a difficult tape Friday (and a 0.2% rise to $61.95 on Monday).

One reason for Friday's rally: Wexford Capital, a $5 billion hedge fund with a 1.5% stake in the company, urged management to solicit bids other than Jana's offer, which management previously rejected. The letter, sent last Wednesday, marked the commitment by yet another large shareholder to put pressure on the company.

Representatives of Jana and Wexford declined to comment.

Houston Exploration is trading at a discount to its peers and could be seen as a perfect target. Even RBC Capital Markets analyst Scott Hanold, who recently downgraded the stock to underperform, sees it as relatively cheap. His price target of $65 implies an enterprise value of 5 times estimated 2006 EBITDA, lower than the peer group, which is trading at close to 6.5 times 2006 EBITDA.

Yet some believe that the rally has reached its climax, because a takeover is unlikely to take place despite the activists' efforts.

"The stock is up in response to the [Jana] offer, and we're saying: 'Take your profit,'" says Ivan Feinseth, director of research at Matrix Investment Research, who downgraded the stock to sell last week. "The stock is fully valued."

With the stock reaching hovering around the $62 level, the market seems to think the Jana bid remains in play, or that a higher one is possible. But there needs to be a buyer, and so far there have not been any.

"Let Jana buy the company. If the company is thinking it can get more, where are the buyers?" says Feinseth.
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