Houston Exploration Announces Third Quarter 2005 Financial Results - Agrees to Acquire Assets in South Texas and Increases 2005 Capital Spending Program

HOUSTON, Oct. 27 /PRNewswire-FirstCall/ -- The Houston Exploration Company today reported third quarter 2005 net income of $8.1 million, or $0.28 per fully diluted share. By comparison, the company reported third quarter 2004 net income of $43.0 million, or $1.51 per fully diluted share. Reported revenues for the third quarter 2005 totaled $125.4 million, versus the 2004 corresponding quarter of $162.8 million. The year-over-year decrease in revenue was primarily due to a $45.9 million charge under FAS 133 relating to ineffectiveness in the company's hedging program at third quarter close resulting from the Hurricane Rita disruption at Henry Hub during the last week of September. This charge, which is non-cash, negatively impacted earnings by $29.7 million, or $1.02 per share. Cash from operations before changes in operating assets and liabilities totaled $138.9 million, compared to 2004's third quarter of 130.5 million. (Cash from operations is a non-GAAP measure that is defined and reconciled in the table below.)

Third quarter 2005 daily production averaged 308 million cubic feet of natural gas equivalent per day (MMcfe/d), down from 2004's third quarter average rate of 343 MMcfe/d. This 10 percent quarter-over-quarter decline in production was primarily due to Hurricanes Katrina and Rita, both of which caused production shut-ins and delayed drilling operations within the company's Gulf of Mexico region, and to a lesser extent in the South Texas region as well. Combined, the two hurricanes negatively impacted net income for the quarter by $12.9 million, or $0.44 per share. The company expects substantially all of its Gulf of Mexico production to be restored by yearend and estimates delayed production directly attributable to the hurricanes in the range of 8 billion cubic feet of natural gas equivalent (Bcfe) to 10 Bcfe for 2005. In addition, the company estimates the delay or downward revision of 6 Bcfe to 7 Bcfe for the year through a combination of hurricane related and other operational issues.

Houston Exploration realized an average natural gas sales price for the third quarter 2005 of $8.15 per Mcf, yielding an average realization of $5.78 per Mcf after cash settlements under its hedging program, which excludes the FAS 133 ineffectiveness charge. This compares to a natural gas sales price of $5.46 per Mcf, and a net price of $5.09 per Mcf after cash settlements under its hedging program during the third quarter 2004. Since the price of natural gas continues to be volatile, there will be a possibility of additional hedge ineffectiveness charges in the fourth quarter 2005. Third quarter 2005 crude oil prices averaged $54.08 per barrel, 40 percent higher than the $38.69 per barrel reported during the third quarter 2004.

Third quarter 2005 lifting costs, which are comprised of lease operating, transportation and severance tax expenses, were $0.89 per Mcfe versus the $0.66 per Mcfe reported during the third quarter 2004, due to lower production volumes and an increase in the total lifting costs quarter-over-quarter. Depreciation, depletion and amortization and asset retirement accretion expenses for the third quarter 2005 were $2.61 per Mcfe compared to $2.15 per Mcfe in the third quarter 2004. Third quarter 2005 net general and administrative expenses (G&A) were $0.36 per Mcfe versus the $0.18 per Mcfe reported for 2004's third quarter. Included in the quarter's net G&A results were expenses of $3.8 million, or $2.4 million after tax, as the company incurred additional legal and financial advisory fees and expenses while unsuccessfully pursuing an acquisition opportunity. These transaction-related fees and expenses added $0.13 per Mcfe to the quarter's G&A rate and decreased earnings by $0.08 on a per share basis. The remaining increase to G&A on a unit basis is attributable to the loss in production for the quarter.

South Texas Acquisition:

Concurrent with its third quarter results, Houston Exploration also announced that it has entered into an agreement with Kerr McGee Corporation to purchase an estimated 88 Bcfe of proved reserves in South Texas for $163 million. The reserves are 75 percent gas and 40 percent proved developed.

Net production is approximately 10 MMcfe/d from four fields. The assets, which produce from the Frio, Vicksburg and Lobo formations, will all be operated by Houston Exploration. The effective date is October 1, 2005, and closing is scheduled for November 30, 2005, subject to customary closing conditions.

"These wells complement our existing Lobo operations in the area and further solidify our position as one of the key producers in the South Texas region," stated Billy Hargett, chairman and chief executive officer of Houston Exploration. "These properties will increase our position in the area by 26,300 net acres, and we believe these assets will add nearly 100 low-risk drilling opportunities which will enhance our existing portfolio," he added.

The company intends to finance this transaction with borrowings under its existing revolving credit facility, which was recently expanded to $450 million of capacity.

Fourth Quarter 2005 Guidance:

As with past quarters, Houston Exploration has prepared the following table to assist with understanding the company's estimated financial results and near-term performance based on current expectations, which include the South Texas acquisition. Certain factors that could materially impact these forward-looking statements are set forth below in this release.

Costs ($/Mcfe) 4Q05 Estimate -- Lease operating expense $0.71 +/- -- Severance tax $0.25 +/- -- General and administrative, net $0.28 +/- -- Transportation $0.10 +/- -- Depreciation, depletion and amortization and asset retirement accretion $2.69 +/- -- Interest, net $0.21 +/- Capital Spending (MM$) 2005 -- Operations $538 +/- -- Acquisitions $195 +/- -- Total $733 +/- Operations 2005 -- Production estimate (Bcfe) 115 +/- -- Percent natural gas 93% +/-

The company will hold a conference call on Thursday, October 27, at 10:00 a.m. Central Time to further review the quarter's results and the latest acquisition in South Texas. To access the call dial (800) 553-0288 prior to the start and provide the confirmation code 799370. A replay of the call will be available for one week beginning at 12:00 p.m. Central Time on October 27. Dial (800) 475-6701 and provide the confirmation code 799370 for this service.

In addition, the call will be broadcast live over the Internet and can be accessed by following the webcast links at http://www.houstonexploration.com/ .

Forward-looking statements:

This news release and oral statements regarding the subjects of this release contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act. All statements other than statements of historical fact included in this press release are forward- looking statements and reflect the company's current expectations and are based on current available information and numerous assumptions. Important factors that could cause actual results to materially differ from the company's current expectations include, among others, the uncertain timetable of third-party repairs to pipelines and facilities, the extent of damage and delayed recovery from hurricanes, the availability of needed equipment and personnel to restore production, additional hurricane or operational issues, price volatility, the consummation and integration of the South Texas acquisition, the risk of future writedowns, the impact of hedging activities, the accuracy of estimates of reserves and production rates, production and spending requirements, the inability to meet substantial capital requirements, the constraints imposed by the company's outstanding indebtedness, the relatively short production life of the company's reserves, reserve replacement risks, drilling risks and results, the competitive nature of the industry, the risks associated with acquisitions, the successful negotiation and consummation of acquisitions, the integration of acquired assets and other risks and factors inherent in the exploration for and production of natural gas and crude oil discussed in the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2004. The company assumes no responsibility to update any of the information referenced in this news release.

Contact: The Houston Exploration Company Melissa Reynolds 713-830-6887 mreynolds@houstonexp.com The Houston Exploration Company Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 Unaudited Income Statement Data: (in thousands, except (in thousands, except per share data) per share data) Revenues Natural gas and oil revenues $124,997 $162,472 $466,011 $486,684 Other 416 288 939 734 Total revenues 125,413 162,760 466,950 487,418 Operating expenses Lease operating 17,771 14,301 52,263 39,506 Severance tax 4,165 3,356 11,629 10,304 Transportation 3,000 3,006 8,759 8,911 Asset retirement accretion 1,313 1,098 3,964 3,576 Depreciation, depletion and amortization 72,702 66,926 215,249 195,082 General and administrative, net 10,229 5,679 27,552 21,528 Total operating expenses 109,180 94,366 319,416 278,907 Income from operations 16,233 68,394 147,534 208,511 Other (income) and expense (101) (1,588) 286 (1,856) Interest expense 5,898 4,162 16,943 12,771 Capitalized interest (2,357) (2,162) (6,772) (6,178) Interest expense, net 3,541 2,000 10,171 6,593 Income before taxes 12,793 67,982 137,077 203,774 Provision for income tax Current (3,502) 9,041 12,526 36,151 Deferred 8,214 15,943 39,202 39,585 4,712 24,984 51,728 75,736 Net income $8,081 $42,998 $85,349 $128,038 Earnings per share Basic $0.28 $1.53 $2.98 $4.26 Fully diluted $0.28 $1.51 $2.95 $4.22 Weighted average shares 28,744 28,082 28,641 30,068 Weighted average shares - fully diluted 29,120 28,486 28,966 30,330 Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 Operating Data: Production Natural gas (MMcf) 26,217 29,465 81,014 87,735 Oil (MBbls) 360 343 1,172 995 Total (MMcfe) 28,377 31,523 88,046 93,705 Average daily production (MMcfe/d) 308 343 323 342 Average sales price Natural gas realized* ($/Mcf) $5.78 $5.09 $5.65 $5.18 Natural gas unhedged ($/Mcf) 8.15 5.46 6.90 5.59 (*Excludes FAS 133 ineffectiveness) Oil realized ($/Bbl) 54.08 38.69 47.27 34.98 Oil unhedged ($/Bbl) 54.08 38.69 47.27 34.98 September 30, December 31, 2005 2004 Unaudited Balance Sheet Data: (in thousands) Working capital (deficit) (A) $(362,013) $(31,884) Property, plant and equipment, net 1,758,894 1,548,256 Total assets 2,107,493 1,722,577 Long-term debt and notes 349,000 355,000 Total stockholders' equity 517,176 782,920 (A) Working capital deficit caused by negative fair value of derivative instruments. Unaudited Non-GAAP Financial Measures:

Cash from operations represents net cash provided by operating activities before changes in operating assets and liabilities. Cash from operations is presented because management believes it is a useful adjunct to net cash provided by operating activities under accounting principles generally accepted in the United States (GAAP). Cash from operations is widely accepted as a financial indicator of an oil and gas company's ability to generate cash which is used to internally fund exploration and development activities and to service debt. Cash from operations is not a measure of financial performance under GAAP and should not be considered an alternative to net income. The table below reconciles cash from operations to net cash provided by operating activities as disclosed on the company's statement of cash flows. Further, the "Shareholder/Financial" section of the company's Web site includes a disclosure and reconciliation of non-GAAP financial measures that are used in this release and that may be used periodically by management when discussing the company's financial results with investors and analysts.

Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 Reconciliation of Non-GAAP Measures: (in thousands) (in thousands) Cash from operations before changes in operating assets and liabilities $138,935 $130,546 $397,716 $379,097 Plus changes in operating assets and liabilities (36,192) 26,406 (13,735) 23,205 Net cash provided by operating activities $102,743 $156,952 $383,981 $402,302