UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
-------------------------------------------------------------------------------
The Houston Exploration Company
(Name of Issuer)
-------------------------------------------------------------------------------
Common Stock
(Title of Class of Securities)
442120101
-----------------------------
(CUSIP Number)
Sandell Asset Management Corp.
40 West 57th Street
26th Floor
New York, NY 10019
Attention : Richard Gashler, General Counsel
212-603-5700
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications)
July 18, 2006
-----------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of ss.ss. 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the
following box |_|.
SCHEDULE 13D
CUSIP No 84403016
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1 NAME OF REPORTING PERSON
Castlerigg Master Investments Ltd.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_|
3 SEC USE ONLY
4 SOURCE OF FUNDS
WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) |_|
6 CITIZENSHIP OR PLACE OF ORGANIZATION
British Virgin Islands
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 1,405,840
PERSON WITH
9 SOLE DISPOSITIVE POWER
0
10 SHARED DISPOSITIVE POWER
1,405,840
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,405,840
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES |_|
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.04%
14 TYPE OF REPORTING PERSON
CO
1 NAME OF REPORTING PERSON
Sandell Asset Management Corp.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_|
3 SEC USE ONLY
4 SOURCE OF FUNDS
AF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) |_|
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Cayman Islands
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 1,405,840
PERSON WITH
9 SOLE DISPOSITIVE POWER
0
10 SHARED DISPOSITIVE POWER
1,405,840
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,405,840
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES |_|
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.04%
14 TYPE OF REPORTING PERSON
CO
1 NAME OF REPORTING PERSON
Castlerigg International Limited
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_|
3 SEC USE ONLY
4 SOURCE OF FUNDS
AF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) |_|
6 CITIZENSHIP OR PLACE OF ORGANIZATION
British Virgin Islands
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 1,405,840
PERSON WITH
9 SOLE DISPOSITIVE POWER
0
10 SHARED DISPOSITIVE POWER
1,405,840
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,405,840
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES |_|
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.04%
14 TYPE OF REPORTING PERSON
CO
1 NAME OF REPORTING PERSON
Castlerigg International Holdings Limited
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_|
3 SEC USE ONLY
4 SOURCE OF FUNDS
AF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) |_|
6 CITIZENSHIP OR PLACE OF ORGANIZATION
British Virgin Islands
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 1,405,840
PERSON WITH
9 SOLE DISPOSITIVE POWER
0
10 SHARED DISPOSITIVE POWER
1,405,840
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,405,840
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
|_|
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.04%
14 TYPE OF REPORTING PERSON
CO
1 NAME OF REPORTING PERSON
Thomas E. Sandell
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_|
3 SEC USE ONLY
4 SOURCE OF FUNDS
AF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) |_|
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Sweden
7 SOLE VOTING POWER
NUMBER OF
SHARES 0
BENEFICIALLY
OWNED BY 8 SHARED VOTING POWER
EACH
REPORTING 1,405,840
PERSON WITH
9 SOLE DISPOSITIVE POWER
0
10 SHARED DISPOSITIVE POWER
1,405,840
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,405,840
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES |_|
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.04%
14 TYPE OF REPORTING PERSON
IN
Item 1. Security and Issuer
This statement on Schedule 13D relates to the common stock, par value $0.01 per
share (the "Common Stock"), of The Houston Exploration Company, a Delaware
corporation ("Issuer").
The principal executive offices of Issuer are located at:
1100 Louisiana, Suite 2000
Houston, Texas 77002
Item 2. Identity and Background
(a). NAME
The names of the persons filing this statement on Schedule 13D are: Castlerigg
Master Investments Ltd., a British Virgin Islands company ("Castlerigg Master
Investments"), Sandell Asset Management Corp., a Cayman Islands company
("SAMC"), Castlerigg International Limited, a British Virgin Islands company
("Castlerigg International"), Castlerigg International Holdings Limited, a
British Virgin Islands company ("Castlerigg Holdings" and, collectively with
Castlerigg Master Investments and Castlerigg International, the "Fund"), and
Thomas E. Sandell, a citizen of Sweden ("Sandell") (together, the "Reporting
Persons").
The shares of common stock beneficially owned by the Reporting Persons are owned
directly by Castlerigg Master Investments. Castlerigg Holdings is the
controlling shareholder of Castlerigg Master Investments and Castlerigg
International is the controlling shareholder of Castlerigg Holdings.
SAMC is the investment manager of the Fund. The controlling shareholder of SAMC
is Sandell.
(b). RESIDENCE OR BUSINESS ADDRESS
The principal business address for each of Castlerigg Master Investments,
Castlerigg International and Castlerigg Holdings is c/o Citco Fund Services
(Curacao) N.V., Kaya Flamboyan 9, P.O. Box 812, Curacao, Netherlands, Antilles.
The principal business address for each of SAMC and Sandell is 40 West 57th
Street, 26th Floor, New York, New York, 10019.
(c). PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND THE NAME, PRINCIPAL
BUSINESS AND ADDRESS OF ANY CORPORATION OR OTHER ORGANIZATION IN WHICH SUCH
EMPLOYMENT IS CONDUCTED
The Fund is a private investment fund whose investment objective is to achieve
superior investment returns, focusing primarily on a global, event-driven
investment strategy, including global, event-driven risk arbitrage,
reorganizations, mergers, spin-offs, liquidations and distressed securities and
other situations.
The principal business of SAMC is providing investment management services.
Information regarding the directors, executive officers and/or control persons
of Castlerigg Master Investments, Castlerigg International, Castlerigg Holdings,
SAMC, and Sandell (collectively, the "Instruction C Persons") is set forth in
Appendix III attached hereto.
(d), (e). CRIMINAL CONVICTIONS; CIVIL PROCEEDINGS
During the last five years, none of the Reporting Persons have: (i) been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or (ii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations or prohibiting activities subject to federal or state securities laws
or finding any violation of such laws.
(f). CITIZENSHIP
Castlerigg Master Investments, Castlerigg International and Castlerigg Holdings
are British Virgin Islands companies.
SAMC is a Cayman Islands company.
Sandell is a citizen of Sweden.
Item 3. Source and Amount of Funds or Other Consideration
Castlerigg Master Investments acquired the 1,405,840 shares of the Common Stock
at an aggregate cost of $84,835,389.32. The funds used to purchase the shares of
Common Stock were obtained from a combination of the general working capital of
the investment entities managed by the Reporting Persons and margin account
borrowings made in the ordinary course of business.
Item 4. Purpose of Transaction
The Reporting Persons acquired the shares of Common Stock for investment
purposes in the ordinary course of business because they believed the shares to
be undervalued in the market.
Following up on a meeting the Reporting Persons attended with the Issuer on July
13, 2006, SAMC sent on July 25, 2006 a letter (the "Letter") to the Board of
Directors of the Issuer. In the Letter, the Reporting Persons expressed their
view that the most efficient way to maximize shareholder value is through a sale
of the Issuer. SAMC also stated its belief that the Issuer should not use any of
the proceeds it received from the Gulf of Mexico asset sales or the use of its
significantly underlevered balance sheet to acquire any additional onshore
reserves. Instead, SAMC advocates that the Issuer deploy its overcapitalized
balance sheet to undertake a Dutch tender at a meaningful premium for the
Issuer's undervalued Common Stock in conjunction with a sale of the Issuer
immediately thereafter. A copy of the letter is attached hereto as Exhibit A.
Except as described above, none of the Reporting Persons has any plans or
proposals which relate to, or could result in, any of the matters referred to in
paragraphs (a) through (j), inclusive, of the instructions to Item 4 of Schedule
13D. The Reporting Persons may, at any time and from time to time, review or
reconsider their position and/or change their purpose and/or formulate plans or
proposals with respect thereto. Representatives of SAMC may engage in
discussions with members of the Issuer's board of directors as well as with
other shareholders of the Issuer regarding the suggestions contained in the
Letter and other matters of interest to the Issuer's shareholders.
Although none of the Reporting Persons has any specific plan or proposal to
acquire or dispose of the shares of Common Stock, each Reporting Person at any
time and from time to time may (i) acquire additional shares or securities of
the Issuer, (ii) dispose of any or all of its securities of the Issuer, or (iii)
enter into privately negotiated derivative transactions with institutional
counterparties to hedge the market risk of some or all of their positions in its
securities of the Issuer, depending upon an ongoing evaluation of the investment
in such securities, prevailing market conditions, other investment
opportunities, liquidity requirements of the Reporting Persons, and/or other
investment considerations.
Item 5. Interest in Securities of the Issuer
(a). The Reporting Persons as a group beneficially own 1,405,840 shares of
Common Stock, representing 5.04% of the outstanding shares of Common Stock.
(b). None of the Reporting Persons has sole power to vote or to direct the
vote or sole power to dispose or to direct the disposition of the Shares.
Each of the Reporting Persons has shared power to vote and to direct the vote
and shared power to dispose and to direct the disposition of the 1,405,840
shares of Common Stock held by Castlerigg Master Investments.
(c). A list of the transactions in the Issuer's Common Stock that were
effected by the Reporting Persons during the past sixty days is attached as
Appendix I.
(d). N/A
(e). N/A
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer
See Item 5(c) for information regarding certain options.
Item 7. Material to Be Filed as Exhibits
The following documents are filed as exhibits:
Appendix I: List of the transactions in the Issuer's Common Stock that were
effected by the Reporting Persons during the past sixty days.
Appendix II: Joint Filing Agreement.
Appendix III: Instruction C Person Information.
Signature
After reasonable inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: July 25, 2006 CASTLERIGG MASTER INVESTMENTS LTD.
By: /s/Thomas E. Sandell
------------------------------------
Thomas E. Sandell, Director
SANDELL ASSET MANAGEMENT CORP.
By: /s/Thomas E. Sandell
------------------------------------
Thomas E. Sandell, Director
CASTLERIGG INTERNATIONAL LIMITED
By: /s/Thomas E. Sandell
------------------------------------
Thomas E. Sandell, Director
CASTLERIGG INTERNATIONAL HOLDINGS LIMITED
By: /s/Thomas E. Sandell
------------------------------------
Thomas E. Sandell, Director
/s/Thomas E. Sandell
-----------------------------------------
Thomas E. Sandell
APPENDIX I
TRANSACTIONS EFFECTED DURING THE PAST SIXTY DAYS
--------------------- ------------------ ------------------- ------------------ -------------------
Date of transaction Person effecting Amount of Price per share Where and how the
transaction securities or unit transaction was
Bought/ effected
(Sold)
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg 80,240 $52.95460 Privately
6/6/2006* Master negotiated
Investments transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
6/8/2006* Master negotiated
Investments 100,000 52.50080 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 100,000 52.97 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 80,240 53.45 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 4,300 62.60 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 93,600 62.15 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 100,000 62.88 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 15,700 62.35 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 100,000 62.57 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
Castlerigg Privately
7/18/2006**** Master negotiated
Investments 30,400 61.56 transaction
--------------------- ------------------ ------------------- ------------------ -------------------
--------------------- ------------------ ------------------- ------------------ -------------------
* These transactions represent privately negotiated back-to-back call and put
transactions with a financial institution through which the Reporting Persons
acquired an economic interest in such shares of Common Stock and as a result
they were subject to the same economic gain or loss as if they had purchased the
underlying shares.
**** These transactions represent the exercise of call options and the
termination of the related put options with the same counterparty.
APPENDIX II
JOINT FILING AGREEMENT
The undersigned hereby agree that the statement on Schedule 13D with respect to
the common stock of The Houston Exploration Company dated as of July 25, 2006
is, and any further amendments thereto signed by each of the undersigned shall
be, filed on behalf of each of the undersigned pursuant to and in accordance
with the provisions of Rule 13d-1(k)(1) under the Securities Exchange Act of
1934, as amended.
Dated: July 25, 2006 CASTLERIGG MASTER INVESTMENTS LTD.
/s/Thomas E. Sandell
By: -----------------------------------
Thomas E. Sandell, Director
SANDELL ASSET MANAGEMENT CORP.
By: /s/Thomas E. Sandell
------------------------------------
Thomas E. Sandell, Director
CASTLERIGG INTERNATIONAL LIMITED
By: /s/Thomas E. Sandell
------------------------------------
Thomas E. Sandell, Director
CASTLERIGG INTERNATIONAL HOLDINGS LIMITED
By: /s/Thomas E. Sandell
------------------------------------
Thomas E. Sandell, Director
/s/Thomas E. Sandell
------------------------------------------
Thomas E. Sandell
Appendix III
Information Regarding The Instruction C Persons
Castlerigg Master Investments Ltd. Executive Officers
Name Title
---------------------------------- ------------------------------
NONE
---------------------------------- ------------------------------
Castlerigg Master Investments Ltd. Directors
The following table sets forth the name and mailing address (business or
residence) of each of the directors of Castlerigg Master Investments Ltd., and
the principal occupation and citizenship of each of those directors who are
natural persons.
---------------------------- ----------------------- -------------------------------- --------------------------------
Name and Title Principal Occupation Address Citizenship
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
Thomas E. Sandell Portfolio Manager 40 West 57th Street, Sweden
26th Floor
New York, NY 10019
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
Daniel Mignon Executive of an Le Prince de Galles Belgium
investment manager 10 Avenue de Grande-Bretagne
MC-98000 Monte-Carlo
Monaco
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
InterCaribbean Services N/A c/o Citco BVI Limited N/A
Ltd. Citco Building
Wickhams Cay
PO Box 662
Road Town, Tortola
British Virgin Islands
---------------------------- ----------------------- -------------------------------- --------------------------------
Castlerigg International Limited Executive Officers
---------------------------------- ------------------------------
Name Title
---------------------------------- ------------------------------
Thomas E. Sandell President
---------------------------------- ------------------------------
Castlerigg International Limited Directors
The following table sets forth the name and mailing address (business or
residence) of each of the directors of Castlerigg International Limited, and the
principal occupation and citizenship of each of those directors who are natural
persons.
---------------------------- ----------------------- -------------------------------- --------------------------------
Citizenship
Name Principal Occupation Address
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
Thomas E. Sandell Portfolio Manager 40 West 57th Street, Sweden
26th Floor
New York, NY 10019
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
Daniel Mignon Executive of an Le Prince de Galles Belgium
investment manager 10 Avenue de Grande-Bretagne
MC-98000 Monte-Carlo
Monaco
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
InterCaribbean Services N/A c/o Citco BVI Limited N/A
Ltd. Citco Building
Wickhams Cay
PO Box 662
Road Town, Tortola
British Virgin Islands
---------------------------- ----------------------- -------------------------------- --------------------------------
Castlerigg International Holdings Limited Executive Officers
---------------------------------- ------------------------------
Name Title
---------------------------------- ------------------------------
NONE
---------------------------------- ------------------------------
Castlerigg International Holdings Limited Directors
The following table sets forth the name and mailing address (business or
residence) of each of the directors of Castlerigg International Holdings
Limited, and the principal occupation and citizenship of each of those directors
who are natural persons.
---------------------------- ----------------------- -------------------------------- --------------------------------
Citizenship
Name Principal Occupation Address
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
Thomas E. Sandell Portfolio Manager 40 West 57th Street, Sweden
26th Floor
New York, NY 10019
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
Daniel Mignon Executive of an Le Prince de Galles Belgium
investment manager 10 Avenue de Grande-Bretagne
MC-98000 Monte-Carlo
Monaco
---------------------------- ----------------------- -------------------------------- --------------------------------
---------------------------- ----------------------- -------------------------------- --------------------------------
InterCaribbean Services N/A c/o Citco BVI Limited N/A
Ltd. Citco Building
Wickhams Cay
PO Box 662
Road Town, Tortola
British Virgin Islands
---------------------------- ----------------------- -------------------------------- --------------------------------
Sandell Asset Management Corp. Executive Officers
The following table sets forth the name, title, principal occupation and
citizenship of each of the executive officers of Sandell Asset Management Corp..
The business address of each person named below is 40 West 57th Street, 26th
Floor, New York, N.Y. 10019. In each case, the principal occupation is
represented by the person's title.
------------------ ---------------------------------- -------------------------
Name Title Citizenship
------------------ ---------------------------------- -------------------------
------------------ ---------------------------------- -------------------------
Thomas E. Sandell Chairman of the Board of Directors Sweden
Chief Executive Officer and
Portfolio Manager
------------------ ---------------------------------- -------------------------
------------------ ---------------------------------- -------------------------
Timothy O'Brien Chief Financial Officer United States of America
------------------ ---------------------------------- -------------------------
------------------ ---------------------------------- -------------------------
Richard Gashler General Counsel United States of America
------------------ ---------------------------------- -------------------------
Sandell Asset Management Corp. Directors
The following table sets forth the name, mailing address (business or
residence), present principal occupation or employment and citizenship of each
of the directors of Sandell Asset Management Corp.
--------------------- ----------------------- -------------------------------- --------------------------------
Name Principal Occupation Address Citizenship
--------------------- ----------------------- -------------------------------- --------------------------------
--------------------- ----------------------- -------------------------------- --------------------------------
Thomas E. Sandell Portfolio Manager 40 West 57th Street, Sweden
26th Floor
New York, NY 10019
--------------------- ----------------------- -------------------------------- --------------------------------
--------------------- ----------------------- -------------------------------- --------------------------------
Daniel Mignon Executive of an Le Prince de Galles Belgium
investment manager 10 Avenue de Grande-Bretagne
MC-98000 Monte-Carlo
Monaco
--------------------- ----------------------- -------------------------------- --------------------------------
EXHIBIT A
[Sandell Asset Management Letterhead]
July 25, 2006
VIA FACSIMILE
Board of Directors
The Houston Exploration Company
1100 Louisiana Street
Suite 2000
Houston, TX 77002
Attention:
Mr. William Hargett
Chairman, President and Chief Executive Officer
Dear Sirs:
Sandell Asset Management Corp. ("Sandell") and the private investment funds
advised by Sandell (the "Sandell Funds" or we) are the beneficial owners of
1,405,840 shares of common stock of The Houston Exploration Company ("THX" or
the "Company"), representing approximately 5.04% of THX's outstanding shares.
We are writing to follow up on our meeting with senior management on
Thursday, July 13, 2006. Like you, we continue to believe that the Company's
assets remain significantly undervalued and are encouraged by the Board's
decision to engage Lehman Brothers to explore strategic alternatives. However,
among the options that are being considered, we want to reiterate unequivocally
our view that given the large disparity between public market trading and
strategic transaction valuations, the most efficient way to maximize and realize
shareholder value is through a sale of the Company.
During our meeting, management took great effort to lay out details of the
Company's onshore operations and highlighted the unrecognized value enhancing
opportunities of various projects particularly those associated with THX's
properties in the Rockies. All of that reinforces our view that the Company is a
highly attractive acquisition target. We believe the complexity of the various
resource plays also makes it more likely that the value of these assets would be
better recognized by strategic and financial buyers, rather than in the public
markets.
We also want to register our strong opposition to any deployment of
proceeds from THX's recent Gulf of Mexico asset sales or the use of the
significantly underlevered balance sheet(1), to acquire additional onshore
reserves. In our opinion, such a move not only runs counter to the sizeable
future high-impact drilling inventory THX already owns (as highlighted in
management's presentation), it is also fraught with execution risks. The
-------------
(1) Pro forma 1Q06 total debt of $318.3MM less $324.9MM of cash held
in 1031 Trust. Source: THX 8-K dated July 10, 2006.
Company's stock currently trades around $61.87(2) which from the Board's
perspective obviously reflects a substantial discount to fair value given your
recent decision to reject a fully financed $62.00 cash offer. In this regard,
rather than making additional onshore acquisitions, shareholder interests are
much better served by using the overcapitalized balance sheet to undertake a
Dutch tender at a meaningful premium for THX's undervalued stock in conjunction
with a sale of the Company immediately thereafter.
As a major institutional shareholder, we expect our views to be given
serious consideration by the Board. We believe that a majority of shareholders
would support our call to the Board to undertake an auction process to sell the
Company in order to maximize shareholder value. As we have stated before, time
is of the essence and it is neither prudent nor responsible of the Board to take
a protracted strategic review of alternatives.
We remain available to discuss the issues raised in this letter and will
continue to monitor the actions of the Company and the Board. The absence of any
decisive measures to deliver value would only necessitate action by shareholders
at the next Annual Meeting.
Very truly yours,
SANDELL ASSET MANGEMENT CORP.
/s/ Thomas E. Sandell
Thomas E. Sandell
Chief Executive Officer
--------------
(2) THX closing price as of July 24, 2006.