In June, the shares of Houston Exploration (NYSE:THX) woke up from their long slumber as the company became the target of a buyout by JANA Partners LLC. In response, a resistant Houston Exploration hired Lehman Brothers to "explore strategic options," which could include selling the company.

I wouldn't be surprised by another buyout offer. Over the past few months, we've seen Stone Energy (NYSE:SGY) swallowed byEnergy Partners (NYSE:EPL), which won the bidding war against Plains Exploration and Production (NYSE:PXP). At this point, however, we can only guess which course Houston Exploration management will take.

From the ground up
Thursday, Houston Exploration reported second-quarter earnings, and management remained mum on the strategic options. The results, meanwhile, paint a picture of a company that is dramatically different from a year ago.

If you ignore the business shift undertaken by management, the quarterly report looks like a real stinker. Earnings and production both show big decreases from 2005. Earnings per share for the 2006 quarter were $0.81 ($1.00 excluding special items), compared with $1.51 in the year-ago quarter. Average daily production dropped 27% to 239 MMcfe/d (million cubic feet equivalent per day) from 328 MMcfe/d.

However, year-over-year comparisons are basically meaningless. Houston Exploration has sold nearly all of its Gulf of Mexico assets, completing the shift toward becoming an onshore producer of natural gas (93% of production). Therefore, in evaluating the business, a look into the future should be more illuminating.

Terra firma
For several years, the company has had solid results onshore, with the offshore business taking a back seat. Looking at 2002 to 2005, we see somewhat reasonable reserve and production growth.

Year

Reserve growth

Production growth

2002

7%

14%

2003

16%

4.8%

2004

5%

15%

2005

8.6%

(8%)*
* Estimated hurricane impact in 2005 was 11 Bcfe (billion cubic feet equivalent); without hurricane impact, growth would have been 0.8%.

Looking into the details, Gulf of Mexico production was basically stagnant and onshore growth was driven largely by acquisitions.

Houston Exploration now seems to be on solid footing, using the drill bit to drive growth. For the second quarter, onshore production increased 5% over the same period in 2005. Management projects production to increase by 19% in 2007 over 2006. In the Rocky Mountains, reserve growth in existing properties is expected to continue through 2011 or 2012, and production growth is expected to increase through about 2014.

What is the next move?
Given the positive projections for reserve and production growth, the new onshore production focus, and continued shareholder pressure from JANA, shareholders have reason to be optimistic about Houston Exploration. Management has been buying shares for the past year, and it rejected JANA's buyout offer of $62 per share, stating that company assets were worth more. I think this is probably right, so I'm planning to stick around at least until management unveils the strategic plan it works out with Lehman Brothers. At that point, we will at least have a clear picture of what the next move will be.

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Fool contributor Robert Aronen owns shares of Houston Exploration. Feel free to share your comments with him. The Fool has an ironclad disclosure policy.