Whether you agree with Jana Partners' criticisms of Houston Exploration
Jana Partners' objections seem to center around a few central themes. First, it protests the compensation given to management, particularly in comparison with the stock's relative performance. Second, it points to relatively uninspiring results in terms of operating margins and reserve replacement as indicative of management's skill (or lack thereof) in running the business.
Last and not least, the hedge fund seems to particularly object to the company's plans for the cash gained from the sale of offshore assets. While the company wants to use these assets to repay debt and buy onshore assets, the hedge fund wants the cash steered toward share buybacks.
Whether or not Jana Partners can actually do the deal is a question I cannot answer. The company apparently has something close to $5 billion in assets, which it says is sufficient to execute this deal, worth roughly $1.8 billion in total.
I can, however, comment on Jana Partners' claims and accusations. It's right when it says that Houston Exploration hasn't done especially well. But it's wrong in wanting those asset sale proceeds to be directed toward share repurchase. Share repurchases may enrich an investor like Jana Partners, but they don't build value for the actual business.
You can argue whether management would ultimately overpay in a deal and undermanage the acquired assets -- and therein destroy value -- but that's an argument with no clear answer. Jana's offer also strikes me as somewhat deficient. I think Houston Exploration is worth a little more than the hedge fund is offering, though at least it's in the ballpark.
Since reaction to this news has sucked up a big chunk of what I saw as the value in Houston Exploration shares, I'm not inclined to buy today. What's more, better operators like Total
For more energetic Foolishness:
- Occidental Gets Hosed
- Houston Exploration: What's in Store Onshore?
- Those greener pastures await you.