Shares of

Houston Exploration

( THX) 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) - Get Report

,

KCS Energy

( KCS),

Forest Oil

(FST)

and

Newfield Exploration

(NFX)

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.

Houston Exploration has said it plans to use the proceeds of the asset sale to pursue new acquisitions and repay debt. Rosenstein contends that such measures would be far less beneficial than a stock buyback. Additional debt repayments would be of no real value, given the strength of the company's balance sheet, he says. The company's long term debt is $662 million. In addition, executing an acquisition would be very risky, given today's highly competitive onshore acquisition environment, he noted.

The letter may presage a possible proxy fight. "Should the board continue down the same aimless path, we are quite confident that a majority of our fellow shareholders would support our efforts to bring about change, including at next year's annual meeting," Rosenstein wrote.

Pushing for changes at Houston Exploration does not represent Jana's first battle with an oil company. Last year, the hedge fund allied with Carl Icahn to compel

Kerr-McGee

(KMG)

to buy back 29% of its stock, or $4.225 billion worth of shares.

Calls to Houston Exploration and Jana seeking comments were not returned.