Houston Exploration Co. plans strategic restructure

The company estimates closing the transaction during the first quarter 2006. The company has engaged Wachovia Securities as its financial adviser for the sale.

Houston Exploration expects to use the sale proceeds in multiple ways, which may include, but are not limited to, acquiring additional assets in US onshore basins, paying for the recently announced $163 million acquisition in South Texas, decreasing debt under the company’s bank revolver, and potentially purchasing the company’s common stock. In this regard, Houston Exploration intends to structure the GoM sale and all matching acquisitions, including the pending South Texas acquisition, to qualify for like-kind exchange treatment under Section 1031 of the Internal Revenue Code to the extent possible in order to maximize the tax efficiencies.

“For several years we have been building our onshore business and are now beginning more significant strategic moves to transform Houston Exploration. We are taking advantage of the current favorable market conditions for offshore properties in order to monetize the Gulf and focus our people and capital on longer-lived opportunities in the lower 48,” stated William G. Hargett, chairman and CEO. “The returns in the Gulf remain extremely attractive, and our assets would be an excellent complement to the portfolios of several producers and a springboard for new entrants. After our sale, as a pure onshore organization, Houston Exploration should immediately increase its reserve life from six years to eight years and should offer its stockholders solid prospects for more predictable and stable production and reserve growth,” he added.

Stock repurchase program

In conjunction with the sale of its Gulf of Mexico assets, Houston Exploration’s board of directors also approved a discretionary common stock repurchase program of up to $200 million which could be used from time-to-time to enhance shareholder value. These purchases may be in the open market or in privately negotiated transactions and will be subject to market conditions, applicable legal requirements, cash available, competing reinvestment opportunities in the acquisition market for oil and gas, and other factors.

Expansion of credit facility

Houston Exploration is in the process of amending its revolving bank credit facility to increase the available borrowing capacity from $450 million to $750 million, with an initial borrowing base of $600 million.

The Houston Exploration Co. is engaged in the exploration, development, exploitation, and acquisition of natural gas and oil in the continental US. About 94% of the company’s proved reserves at Dec. 31, 2004, were natural gas, of which, 63% were classified as proved developed. The company’s operations are focused in South Texas, offshore in the Gulf of Mexico, the Rocky Mountains, and in the Arkoma basin of Arkansas. The company went public in 1996. $

Wood Mackenzie study highlights success of US E&P companies

Mikaila Adams, Associate Editor-OGFJ

Upstream companies are making a success of renewing their business outside the onshore Lower 48 and shallow-water Gulf of Mexico, according to a recent study by global energy consultancy Wood Mackenzie.

“The perception is that US companies aren’t as adventurous going overseas,” says Wood Mackenzie analyst Alan Murray, but such is not always the case. “Smaller companies can focus more on profitability,” he continues. These companies are successfully finding new reserves in excess of their production to replenish declining conventional US production.

The companies not only have been successful in generating reserve replacement, they also have managed to do it profitably, with Houston-based Apache Corp. having the highest return of any company in the last five years in the study of the leading 28 companies involved in international exploration.

Anadarko Petroleum, Burlington Resources, Devon Energy, Kerr-McGee Corp., and Murphy Oil are also generating returns well in excess of the benchmark 15%. The companies fall into two groups: 1) those who have found success in North America, particularly the deepwater GoM, and 2) those that have gone farther afield to achieve success.

Apache and Murphy belong to the latter camp. Apache’s acquisition-lead exploration strategy has enabled it to leverage exploration in Egypt and Australia. Apache has had a “stellar performance near established hubs,” says Murray. Similarly, Murphy’s strategy of taking its deepwater skills from the Gulf of Mexico to Malaysia has lead to significant returns on investment.

Companies that have traditionally focused on the conventional upstream oil and gas business in North America have been presented with two main options in the face of declining production in their heartlands - move into more complex plays such as deepwater exploration and the exploitation of tight gas, or expand geographically to search for oil in foreign lands.

The companies with the clearest strategy have succeeded the best. Apache’s model of capturing upside through exploration around acquired production hubs has made it a success in Egypt, Australia, and the UK, while Devon and Murphy have managed to take the deepwater expertise developed in the GoM and export this to West Africa and Brazil and Malaysia, respectively.

Kerr-McGee, Devon, and Anadarko all have focused on the deepwater GoM. On the other hand, Burlington’s strategy has been to explore more in Canada and take advantage of improving gas prices across the continent. Burlington and Anadarko have had more success with exploration inside North America, with Burlington expanding its gas business into Canada and Anadarko making some key finds in the deepwater Gulf.

This success can be seen as proof that upstream-focused Houston-based companies are well placed to thrive in the increasingly competitive market for global oil and gas exploration.

All of these companies have benefited from a focused strategy that best fits the company’s risk profile and key competencies. $

New hurricane forecasting model could represent breakthrough

Don Stowers, Editor-OGFJ

Scientists at Tropical Storm Risk, the forecast venture led by the Benfield Hazard Research Centre at University College London, have developed a computer model that they claim significantly improves the ability to predict the strength of hurricane activity in the Atlantic Ocean and elsewhere in any given year.

The implications for the US offshore oil and gas industry as well as coastal refineries and other facilities is enormous because of the impact this new forecasting model will have on insurance rates, which are expected to rise as much as 400% in 2006.

Using forecasts generated by the model, buyers and sellers of hurricane catastrophe reinsurance could have the ability to vastly improve the efficiency of their reinsurance decision making.

The model, developed by Dr. Mark Saunders and Dr. Adam Lea at University College London, uses anomalies in wind patterns over North America, the Eastern Pacific, and the North Atlantic during July to predict the wind energy of hurricanes making possible landfall in the US during the main August to October hurricane season.

Professor Saunders, lead scientist and project manager for Tropical Storm Risk, was in Houston in November to address a group of oil and gas executives at The Houstonian hotel. He and Bill Martin of Benfield Corporate Risk’s Houston office dropped by to visit with OGFJ on their way to the meeting.

Martin commented that 2006 will be an “agenda-setting year” for the insurance industry because of the tremendous losses experienced as a result of Hurricanes Katrina and Rita in 2005.

“What this portends is the need for greater risk transfer in especially active [hurricane] years,” said Martin. “Oil and gas executives shouldn’t be surprised when they learn their premiums may be increasing by 400% -- at least this is the amount the industry is targeting.”

He added that offshore companies are accustomed to paying for one particular product and one particular model, regardless of their degree of exposure to weather-related risk. “All that will be changing soon,” he said.

Saunders planned to discuss four primary topics with the industry executives:

• Extended range outlook for the 2006 hurricane season;

• Outlook for 2006 - 2010 hurricane activity;

• How unusual and well predicted was Gulf hurricane activity in 2004 and 2005; and

• Using hurricane forecasts to adjust peril model loss probabilities for the Gulf of Mexico energy sector.

“Scientists have been trying to deliver accurate season predictions of US landfalling hurricanes for decades,” said Saunders. “The TSR model is the first to offer a level of forecast precision to be practically useful.”

Using the model, Tropical Storm Risk correctly predicted the very active 2004 and 2005 hurricane seasons. When applied retrospectively to the period from 1950 to 2003, the model was 74% accurate in predicting whether US hurricane losses would be higher than normal or lower than normal.

Saunders said that we are now 11 years into an active hurricane cycle that began in 1995. He expects the cycle to last another 15 to 20 years.

“Because of higher ocean temperatures, the active cycles will be more intense - and even the less-active periods will not be as low as they formerly were,” he said. “Ocean temperatures are expected to rise another two to three degrees in the next 100 years.”

Historically, hurricanes rank as the most expensive natural disasters in the US. The average annual damage bill from hurricane strikes on the continental US between 1950 and 2004 is estimated at $5.6 billion (2004 prices). However, the damage caused by Katrina and Rita in 2005 is expected to drive that figure through the roof. $