##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 Commission File No. 001-11899
 
 THE HOUSTON EXPLORATION COMPANY
 (Exact name of registrant as specified in its charter)
 Delaware
    
    22-2674487(State or Other Jurisdiction of
    
    (IRS Employer Identification No.)Incorporation or Organization)1100 Louisiana, Suite 2000Houston, Texas
    
    77002-5215(Address of Principal Executive Offices)
    
    (Zip Code)
 (713) 830-6800
(Registrants Telephone Number, including Area Code)
 
 þ o
 þ o
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TABLE OF CONTENTS
 Forward-Looking Statements and Other Information
    
    
    2Part I. Financial Information
    
    
    4Item 1. Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    33Part II. Other Information
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35Compensation Table for Executive OfficersComputation of ratio of earnings to fixed chargesCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906
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Forward-Looking Statements and Other Information
  n
    
    business strategy;n

    
    natural gas and oil reserves;n
    
    future production;n
    
    hedge positions;n
    
    expected realized natural gas and oil prices;n
    
    expected costs and expenses;n
    
    anticipated capital expenditures and financings;n
    
    future operating results;n
    
    future cash flows and borrowings;n
    
    pursuit of potential future acquisition or disposition opportunities;n
    
    potential stock repurchases;n
    
    future tax payments;n
    
    identified drilling locations; andn
    
    sources of funding and the timing of exploration and development activities.
  n
    
    the volatility of natural gas and oil prices;n
    
    the requirement to take writedowns if natural gas and oil prices decline or if
our finding and development costs continue to increase;n
    
    the relatively short production lives of our reserves;
·
our ability to find, replace, develop and acquire natural gas and oil reserves;n
    
    consummation and integration of the pending South Texas
acquisition;n
    
    our ability to dispose of our Gulf of Mexico assets;n
    
    our ability to maximize tax efficiencies involving tax free asset exchanges transactions;n
    
    the maturity of North American gas basins;n
    
    acquisition and investment risks;n
    
    our ability to manage rising costs;n
    
    our ability to meet our substantial capital requirements;n
    
    our outstanding indebtedness and pending credit agreement
amendment;n
    
    the uncertainty of estimates of natural gas and oil reserves and production rates;n
    
    the inherent hazards and risks involved in our operations;n
    
    dependence upon geographically concentrated operations;n
    
    drilling risks;n
    
    our hedging activities;n
    
    compliance with environmental and other governmental regulations;n
    
    stock market conditions;n
    
    the competitive nature of our industry;n
    
    weather risks and other natural disasters;n
    
    the ability to resume curtailed production caused by damage to third party pipelines and facilities; andn
    
    our customers ability to meet their obligations.
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Part I. Financial Information
 
 Item 1. Condensed Consolidated Financial Statements
 THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2005
    
    
    2004Assets:Cash and cash equivalents
    
    $
    8,777
    
    
    $
    18,577Accounts receivable
    
    
    129,261
    
    
    
    103,069Inventories
    
    
    2,329
    
    
    
    976Deferred tax asset
    
    
    173,898
    
    
    
    24,101Prepayments and other
    
    
    17,660
    
    
    
    9,107Total current assets
    
    
    331,925
    
    
    
    155,830Natural gas and oil properties, full cost methodUnevaluated properties
    
    
    122,085
    
    
    
    122,691Properties subject to amortization
    
    
    3,202,764
    
    
    
    2,777,097Other property and equipment
    
    
    12,475
    
    
    
    11,7403,337,324
    
    
    
    2,911,528Less: Accumulated depreciation, depletion and amortization
    
    
    1,578,430
    
    
    
    1,363,2721,758,894
    
    
    
    1,548,256Other non-current assets
    
    
    16,674
    
    
    
    18,491Total Assets
    
    $
    2,107,493
    
    
    $
    1,722,577Liabilities:Accounts payable and accrued expenses
    
    $
    155,296
    
    
    $
    118,971Derivative financial instruments
    
    
    537,139
    
    
    
    68,081Asset retirement obligation
    
    
    1,503
    
    
    
    662Total current liabilities
    
    
    693,938
    
    
    
    187,714Long-term debt and notes
    
    
    349,000
    
    
    
    355,000Derivative financial instruments
    
    
    159,540
    
    
    
    7,068Deferred income taxes
    
    
    272,688
    
    
    
    288,069Asset retirement obligation
    
    
    99,701
    
    
    
    91,084Other non-current liabilities
    
    
    15,450
    
    
    
    10,722Total Liabilities
    
    
    1,590,317
    
    
    
    939,657Commitments and Contingencies (see Note 4)Stockholders Equity:Preferred Stock, $0.01 par value, 5,000,000 shares authorized and no shares issued
    
    
    
    
    
    
    Common Stock, $.01 par value, 100,000,000 shares authorized and 28,847,363 shares
issued and outstanding at September 30, 2005 and 50,000,000 shares authorized and
28,380,207 shares outstanding at December 31, 2004
    
    
    288
    
    
    
    284Additional paid-in capital
    
    
    297,958
    
    
    
    273,002Unearned compensation
    
    
    (7,652
    )
    
    
    (2,537
    )Retained earnings
    
    
    643,547
    
    
    
    558,198Accumulated other comprehensive (loss)
    
    
    (416,965
    )
    
    
    (46,027
    )Total Stockholders Equity
    
    
    517,176
    
    
    
    782,920Total Liabilities and Stockholders Equity
    
    $
    2,107,493
    
    
    $
    1,722,577
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Natural gas and oil revenues
    
    $
    124,997
    
    
    $
    162,472
    
    
    $
    466,011
    
    
    $
    486,684Other
    
    
    416
    
    
    
    288
    
    
    
    939
    
    
    
    734Total revenues
    
    
    125,413
    
    
    
    162,760
    
    
    
    466,950
    
    
    
    487,418Operating expenses:Lease operating
    
    
    17,771
    
    
    
    14,301
    
    
    
    52,263
    
    
    
    39,506Severance tax
    
    
    4,165
    
    
    
    3,356
    
    
    
    11,629
    
    
    
    10,304Transportation expense
    
    
    3,000
    
    
    
    3,006
    
    
    
    8,759
    
    
    
    8,911Asset retirement accretion expense
    
    
    1,313
    
    
    
    1,098
    
    
    
    3,964
    
    
    
    3,576Depreciation, depletion and amortization
    
    
    72,702
    
    
    
    66,926
    
    
    
    215,249
    
    
    
    195,082General and administrative, net of
amounts capitalized
    
    
    10,229
    
    
    
    5,679
    
    
    
    27,552
    
    
    
    21,528Total operating expenses
    
    
    109,180
    
    
    
    94,366
    
    
    
    319,416
    
    
    
    278,907Income from operations
    
    
    16,233
    
    
    
    68,394
    
    
    
    147,534
    
    
    
    208,511Other (income) expense
    
    
    (101
    )
    
    
    (1,588
    )
    
    
    286
    
    
    
    (1,856
    )Interest expense, net of amounts capitalized
    
    
    3,541
    
    
    
    2,000
    
    
    
    10,171
    
    
    
    6,593Income before income taxes
    
    
    12,793
    
    
    
    67,982
    
    
    
    137,077
    
    
    
    203,774Provision for taxes
    
    
    4,712
    
    
    
    24,984
    
    
    
    51,728
    
    
    
    75,736Net income
    
    $
    8,081
    
    
    $
    42,998
    
    
    $
    85,349
    
    
    $
    128,038Earnings per share:Net income per share  basic
    
    $
    0.28
    
    
    $
    1.53
    
    
    $
    2.98
    
    
    $
    4.26Net income per share  diluted
    
    $
    0.28
    
    
    $
    1.51
    
    
    $
    2.95
    
    
    $
    4.22Weighted average shares outstanding  basic
    
    
    28,744
    
    
    
    28,082
    
    
    
    28,641
    
    
    
    30,068Weighted average shares outstanding  diluted
    
    
    29,120
    
    
    
    28,486
    
    
    
    28,966
    
    
    
    30,330
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended
    
    
    September 30,2005
    
    
    2004Operating Activities:Net income
    
    $
    85,349
    
    
    $
    128,038Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation, depletion and amortization
    
    
    215,249
    
    
    
    195,082Deferred income tax expense
    
    
    39,202
    
    
    
    39,585Asset retirement accretion expense
    
    
    3,964
    
    
    
    3,576Stock compensation expense
    
    
    3,719
    
    
    
    2,044Tax benefit non-qualified stock options
    
    
    2,909
    
    
    
    3,529Loss due to ineffectiveness of derivative instruments
    
    
    47,324
    
    
    
    2,600Amortization of premiums paid on derivative contracts
    
    
    
    
    
    
    4,432Debt extinguishment
    
    
    
    
    
    
    211Changes in operating assets and liabilities:Accounts receivable
    
    
    (26,192
    )
    
    
    (9,749
    )Inventories
    
    
    (1,353
    )
    
    
    (183
    )Prepayments and other
    
    
    (9,665
    )
    
    
    519Other non-current assets
    
    
    1,817
    
    
    
    (2,784
    )Accounts payable and accrued expenses
    
    
    16,930
    
    
    
    29,381Other non-current liabilities
    
    
    4,728
    
    
    
    8,590ARO liability for assets abandoned
    
    
    
    
    
    
    (2,569
    )Net cash provided by operating activities
    
    
    383,981
    
    
    
    402,302Investing Activities:Investment in property and equipment
    
    
    (401,881
    )
    
    
    (296,752
    )Deposit paid for property acquisition
    
    
    
    
    
    
    (11,350
    )Dispositions and other
    
    
    883
    
    
    
    13,425Net cash used in investing activities
    
    
    (400,998
    )
    
    
    (294,677
    )Financing Activities:Proceeds from long-term borrowings
    
    
    364,000
    
    
    
    247,000Repayments of long-term borrowings
    
    
    (370,000
    )
    
    
    (294,000
    )Debt issue costs
    
    
    
    
    
    
    (1,555
    )Proceeds from issuance of common stock from exercise of stock options
    
    
    13,218
    
    
    
    20,934Proceeds from issuance of common stock
    
    
    
    
    
    
    310,727Repurchase of common stock
    
    
    
    
    
    
    (388,979
    )Net cash provided by (used in) financing activities
    
    
    7,218
    
    
    
    (105,873
    )(Decrease) Increase in cash and cash equivalents
    
    
    (9,800
    )
    
    
    1,752Cash and cash equivalents, beginning of period
    
    
    18,577
    
    
    
    2,569Cash and cash equivalents, end of period
    
    $
    8,777
    
    
    $
    4,321Supplemental Information:Non-cash transactions:Divesture and exchange of Appalachian Basin assets
    
    $
    
    
    
    $
    60,000Investments in property and equipment accrued, not paid
    
    
    (19,395
    )
    
    
    (5,628
    )Cash paid during period for:Interest
    
    $
    12,664
    
    
    $
    8,649Federal and state income taxes
    
    
    19,297
    
    
    
    35,900
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  Summary of Organization and Significant Accounting Policies
 Our Business
   Principles of Consolidation
    Interim Financial Statements
   Use of Estimates
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Reclassifications
  Business Segment Information
   Revenue Recognition and Gas Imbalances
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Net Income Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Numerator:Net income
    
    $
    8,081
    
    
    $
    42,998
    
    
    $
    85,349
    
    
    $
    128,038Denominator:Weighted average shares outstanding
    
    
    28,744
    
    
    
    28,082
    
    
    
    28,641
    
    
    
    30,068Add dilutive securities: Stock options
    
    
    376
    
    
    
    404
    
    
    
    325
    
    
    
    262Total weighted average shares outstanding and dilutive securities
    
    
    29,120
    
    
    
    28,486
    
    
    
    28,966
    
    
    
    30,330Earnings per share  basic:
    
    $
    0.28
    
    
    $
    1.53
    
    
    $
    2.98
    
    
    $
    4.26Earnings per share  diluted:
    
    $
    0.28
    
    
    $
    1.51
    
    
    $
    2.95
    
    
    $
    4.22
  Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Net income
    
    $
    8,081
    
    
    $
    42,998
    
    
    $
    85,349
    
    
    $
    128,038Other comprehensive income (loss)
Derivative contracts settled and reclassified,
net of tax
    
    
    40,192
    
    
    
    6,990
    
    
    
    65,069
    
    
    
    23,011Change in unrealized (loss) fair value of open
derivative contracts, net of tax
    
    
    (311,008
    )
    
    
    (34,680
    )
    
    
    (436,007
    )
    
    
    (92,463
    )Total other comprehensive income (loss)
    
    
    (270,816
    )
    
    
    (27,690
    )
    
    
    (370,938
    )
    
    
    (69,452
    )Comprehensive income (loss)
    
    $
    (262,735
    )
    
    $
    15,308
    
    
    $
    (285,589
    )
    
    $
    58,586
 Natural Gas and Oil Properties
 Full Cost Accounting
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  n
    
    full cost pool (including assets associated with retirement obligations); plus,n
    
    estimates for future development costs (excluding asset retirement obligations); less,n
    
    unevaluated properties and their related costs; less,n
    
    estimates for salvage.
    Unevaluated Properties
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Asset Retirement Obligations
   Nine Months EndedSeptember 30,2005
    
    
    2004(in thousands)ARO liability at January 1
    
    $
    91,746
    
    
    $
    92,357Accretion expense
    
    
    3,963
    
    
    
    3,576Liabilities incurred from drilling
    
    
    5,496
    
    
    
    4,982Liabilities incurred from assets acquired
    
    
    169
    
    
    
    7,626Liabilities settled   assets sold
    
    
    (32
    )
    
    
    (12,714
    )Liabilities settled  assets abandoned
    
    
    (937
    )
    
    
    (4,287
    )Changes in estimates
    
    
    799
    
    
    
    ARO liability at September 30
    
    $
    101,204
    
    
    $
    91,540
 Derivative Instruments and Hedging Activities
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Accounting for Stock Options and Restricted Stock
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except share data)Net income  as reported
    
    $
    8,081
    
    
    $
    42,998
    
    
    $
    85,349
    
    
    $
    128,038Add: Stock-based compensation expense included in
net income, net of tax
    
    
    831
    
    
    
    361
    
    
    
    1,705
    
    
    
    1,016Less: Stock-based compensation expense determined
using fair value method, net of tax
    
    
    (1,183
    )
    
    
    (1,266
    )
    
    
    (2,769
    )
    
    
    (3,999
    )Net income  pro forma
    
    $
    7,729
    
    
    $
    42,093
    
    
    $
    84,285
    
    
    $
    125,055Net income per share  basic  as reported
    
    $
    0.28
    
    
    $
    1.53
    
    
    $
    2.98
    
    
    $
    4.26Net income per share  diluted  as reported
    
    
    0.28
    
    
    
    1.51
    
    
    
    2.95
    
    
    
    4.22Net income per share  basic  pro forma
    
    $
    0.27
    
    
    $
    1.50
    
    
    $
    2.94
    
    
    $
    4.16Net income per share  diluted  pro forma
    
    
    0.27
    
    
    
    1.48
    
    
    
    2.91
    
    
    
    4.12
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Nine Months EndedSeptember 30,2005
    
    2004Risk-free interest rate
    
    
    4.0
    %
    
    
    3.7
    %Expected years until exercise
    
    
    5
    
    
    
    5Expected stock volatility
    
    
    34.0
    %
    
    
    37.2
    %Expected dividends
    
    
    
    
    
    
    
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Options
    
    $
    1,185
    
    
    $
    684
    
    
    $
    2,768
    
    
    $
    1,588Restricted stock
    
    
    512
    
    
    
    31
    
    
    
    951
    
    
    
    456Stock compensation expense, gross
    
    
    1,697
    
    
    
    715
    
    
    
    3,719
    
    
    
    2,044Amounts capitalized
    
    
    (581
    )
    
    
    (159
    )
    
    
    (1,250
    )
    
    
    (481
    )Stock compensation expense, net
of amounts capitalized
    
    $
    1,116
    
    
    $
    556
    
    
    $
    2,469
    
    
    $
    1,563
 Recent Accounting Pronouncements
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2  Long-Term Debt and Notes
 September 30, 2005
    
    
    December 31, 2004(in thousands)Senior Debt:Revolving bank credit facility, due April 1, 2008
    
    $
    174,000
    
    
    $
    180,000Subordinated Debt:7% senior subordinated notes, due June 15, 2013
    
    
    175,000
    
    
    
    175,000Total long-term debt and notes
    
    $
    349,000
    
    
    $
    355,000
  Revolving Bank Credit Facility
   n
    
    on base rate loans, at a fluctuating rate, or base rate, equal to the sum of (a)
the greater of the Federal funds rate plus 0.5% or Wachovias prime rate plus (b) a variable
margin between 0.00% and 0.50%, depending on the amount of borrowings outstanding under the
credit facility, orn
    
    on fixed rate loans, a fixed rate equal to the sum of (a) a quoted LIBOR rate
divided by one minus the average maximum rate during the interest period set for certain
reserves of member banks of the Federal Reserve System in Dallas, Texas, plus (b) a variable
margin between 1.25% and 2.00%, depending on the amount of borrowings outstanding under the
credit facility.
   n
    
    maintain a ratio of earnings before interest, taxes, depreciation, depletion and
amortization (EBITDA) to cash interest payments of at least 3.00 to 1.00;n
    
    maintain a ratio of total debt to EBITDA of not more than 3.50 to 1.00; andn
    
    hedge no more than 85% of our projected production during any calendar year.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Senior Subordinated Notes
   n
    
    incurrence of additional indebtedness and issuance of preferred stock;n
    
    repayment of certain other indebtedness;n
    
    payment of dividends or certain other distributions;n
    
    investments and repurchases of equity;n
    
    use of the proceeds of assets sales;n
    
    transactions with affiliates;n
    
    creation, incurrence or assumption of liens;n
    
    merger or consolidation and sales or other dispositions of all or substantially all of our assets;n
    
    entering into agreements that restrict the ability of our subsidiaries to make
certain distributions or payments; orn
    
    guarantees by our subsidiaries of certain indebtedness.
   NOTE 3  Stockholders Equity
 Increase in Number of Shares Outstanding
  NOTE 4 Commitments and Contingencies
 Legal Proceedings
  Operating Leases
 th
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Purchase Obligations
  Letters of Credit
  Drilling Contract
  NOTE 5  Related Party Transactions
 Employment Agreements
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 6  Acquisitions
 South Texas Acquisition
  East Texas Acquisitions
   NOTE 7  Subsequent Events
 Acquisition of South Texas Properties
  Increase in Borrowing Base of Revolving Bank Credit Facility
  Disposition of Gulf of Mexico Assets.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Repurchase of Common Stock.
  Expansion of Revolving Bank Credit Facility.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview of Our Business
    Plan to Divest of Gulf of Mexico Assets
    - 19 -




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.
 Source of Our Revenues
  Critical Accounting Estimates and Significant Accounting Policies
  - 20 -




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Recent Accounting Pronouncements
    Overview of Results for the Third Quarter of 2005
  n
    
    We incurred relatively minor structural damage from Hurricanes Katrina and Rita
and anticipate these losses will be covered by insurance. However, the curtailment of
production as a result of these storms impacted operating revenues by an estimated $12.9
million during the third quarter and will impact the fourth quarter of 2005 and possibly
2006 as we wait for repairs to third-party pipelines and processing facilities;n
    
    We currently estimate total deferred production for 2005 as a result of
hurricanes of between 8 Bcfe and 10 Bcfe, of which an estimated 2.0 Bcfe was deferred during
the third quarter of 2005. Further, we estimate additional production shortfall for 2005 of
between 6 Bcfe and 7 Bcfe caused by drilling delays, in part due to offshore rig
availability during the first six months of 2005 and in part to delays caused by the third
quarter hurricanes, and various operational issues;n
    
    We generated $8.1 million in net income, a decrease of 81% from $43.0 million in
the third quarter 2004 due primarily to hedge ineffectiveness of $29.7
million net of tax in the third quarter of 2005;n
    
    We produced approximately 28 Bcfe and our average daily production rate was 308
MMcfe per day compared to 328 Mcfe/day during the second quarter of 2005 and 343 MMcfe per
day during the third quarter of 2004, a decrease of 6% and 10%, respectively;
 - 21 -




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##### Table of Contents



n
    
    We generated $102.7 million in net cash flows from operating activities compared
to $156.9 million during the third quarter of 2004, a decrease of 35%;n
    
    We increased our outstanding borrowings under our revolving bank credit facility
by a net $19 million:n
    
    We invested $142.1 million in natural gas and oil properties compared to $136.7
million during the third quarter of 2004, an increase of 4% ;n
    
    We drilled 79 wells, of which 73, or 92%, were successful with three offshore,
seven in East Texas, 20 in South Texas, 13 in Arkoma and 30 in the Rockies;n
    
    Onshore, we had 12 rigs drilling by quarter end: six in South Texas; two in
Arkansas, two in East Texas, one in Colorado and one in Utah;n
    
    We were able to begin development projects at Main Pass 264 and Eugene Island
331 and to spud exploratory wells at Brazos 366 and West Cameron 39; andn
    
    The side track to our deep well at High Island 115 was unsuccessful and the side
track of the A1 well at High Island 47, completed during the second quarter of 2005, is not
producing as anticipated. Both of these fields were key producers prior to being shut-in
December 2004;
  n
    
    We entered into a purchase and sale agreement, on October 21, 2005, to acquire
producing properties and undeveloped acreage in four South Texas fields for $163 million in
cash, representing an estimated 88 Bcfe of proved reserves. We made a cash deposit of $16.3
million and plan to finance the remaining portion of the net purchase price with borrowings
on our revolving bank credit facility. The acquisition is expected to close on or before
November 30, 2005;n
    
    Effective, October 25, 2005, the borrowing base on our revolving bank credit
facility was increased from $400 million to $450 million and as of the date of our report,
we have increased our outstanding borrowings by $112 million for
a total outstanding of $286
million, excluding letter of credit obligations of $10.3 million;n
    
    On October 25, 2005, we increased our 2005 capital expenditure budget by $221
million from $512 million to $733 million. A portion of the increase will cover the planned
acquisition of the four South Texas fields for $163 million;n
    
    On November 8, 2005, we announced our intention to divest all our Gulf of Mexico
assets and to shift our operating focus onshore. We plan to reinvest the net cash proceeds
from the sale into longer-lived oil and gas assets onshore in North
America or retire debt;n
    
    Our Board of Directors approved discretionary stock repurchases from time to time up to $200
million of our common stock, subject to market conditions, applicable legal requirements,
available cash, competing reinvestment opportunities in the acquisition market for oil and
gas assets and other factors; andn
    
    We plan to amend our revolving bank credit facility to
increase our banks lending commitments from $450 million to $750 million. Following the amendment, all borrowings will be
secured by 80% of our onshore natural gas and oil assets. The amendment is planned to be effective
by November 29, 2005 and our initial borrowing base is expected to be set at $600 million.
 - 22 -




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##### Table of Contents



Operating and Financial Results for the Three Months Ended September 30, 2005 Compared to the Three
Months Ended September 30, 2004 and the Nine Months Ended September 30, 2005 Compared to the Nine
Months Ended September 30, 2004.
 Three Months Ended September 30,
    
    Nine Months Ended September 30,Summary Operating Information:
    
    2005
    
    2004
    
    Variance
    
    2005
    
    2004
    
    Variance(in thousands, except average sales price)Natural gas revenues
    
    $
    213,643
    
    
    $
    160,924
    
    
    $
    52,719
    
    
    
    33
    %
    
    $
    558,666
    
    
    $
    490,103
    
    
    $
    68,563
    
    
    
    14
    %Oil revenues
    
    
    19,470
    
    
    
    13,269
    
    
    
    6,201
    
    
    
    47
    %
    
    
    55,395
    
    
    
    34,801
    
    
    
    20,594
    
    
    
    59
    %Gain (loss) on settled derivatives
    
    
    (62,216
    )
    
    
    (10,821
    )
    
    
    (51,395
    )
    
    
    475
    %
    
    
    (100,726
    )
    
    
    (38,220
    )
    
    
    (62,506
    )
    
    
    164
    %Unrealized gain (loss) derivative
ineffectiveness
    
    
    (45,900
    )
    
    
    (900
    )
    
    
    (45,000
    )
    
    
    n/a
    
    
    
    (47,324
    )
    
    
    (2,600
    )
    
    
    (44,724
    )
    
    
    n/aOperating revenues
    
    
    125,413
    
    
    
    162,760
    
    
    
    (37,347
    )
    
    
    -23
    %
    
    
    466,950
    
    
    
    487,418
    
    
    
    (20,468
    )
    
    
    -4
    %Operating expenses
    
    
    109,180
    
    
    
    94,366
    
    
    
    14,814
    
    
    
    16
    %
    
    
    319,416
    
    
    
    278,907
    
    
    
    40,509
    
    
    
    15
    %Income from operations
    
    
    16,233
    
    
    
    68,394
    
    
    
    (52,161
    )
    
    
    -76
    %
    
    
    147,534
    
    
    
    208,511
    
    
    
    (60,977
    )
    
    
    -29
    %Net income
    
    
    8,081
    
    
    
    42,998
    
    
    
    (34,917
    )
    
    
    -81
    %
    
    
    85,349
    
    
    
    128,038
    
    
    
    (42,689
    )
    
    
    -33
    %Production:Natural gas (MMcf)
    
    
    26,217
    
    
    
    29,465
    
    
    
    (3,248
    )
    
    
    -11
    %
    
    
    81,014
    
    
    
    87,735
    
    
    
    (6,721
    )
    
    
    -8
    %Oil (MBbls)
    
    
    360
    
    
    
    343
    
    
    
    17
    
    
    
    5
    %
    
    
    1,172
    
    
    
    995
    
    
    
    177
    
    
    
    18
    %Total (MMcfe) (1)
    
    
    28,377
    
    
    
    31,523
    
    
    
    (3,146
    )
    
    
    -10
    %
    
    
    88,046
    
    
    
    93,705
    
    
    
    (5,659
    )
    
    
    -6
    %Average daily production (MMcfe/d)
    
    
    308
    
    
    
    343
    
    
    
    (35
    )
    
    
    -10
    %
    
    
    323
    
    
    
    342
    
    
    
    (19
    )
    
    
    -6
    %Average Sales Prices:Natural Gas (per Mcf) unhedged
    
    $
    8.15
    
    
    $
    5.46
    
    
    $
    2.69
    
    
    
    49
    %
    
    $
    6.90
    
    
    $
    5.59
    
    
    $
    1.31
    
    
    
    23
    %Natural Gas (per Mcf) realized (2)
    
    
    5.78
    
    
    
    5.09
    
    
    
    0.69
    
    
    
    14
    %
    
    
    5.65
    
    
    
    5.18
    
    
    
    0.47
    
    
    
    9
    %Natural Gas (per Mcf) all-in(3).
    
    
    4.03
    
    
    
    5.06
    
    
    
    (1.03
    )
    
    
    -20
    %
    
    
    5.07
    
    
    
    5.15
    
    
    
    (0.08
    )
    
    
    -2
    %Oil (per Bbl) realized
    
    
    54.08
    
    
    
    38.69
    
    
    
    15.39
    
    
    
    40
    %
    
    
    47.27
    
    
    
    34.98
    
    
    
    12.29
    
    
    
    35
    %
 
 (1)
    
    Mcfe is defined as one thousand cubic feet equivalent of natural gas,
determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or
natural gas liquids.(2)
    
    Average prices include gains and losses realized on hedge contracts
settled during the period.(3)
    
    Average prices include both the effect of gains and losses realized on
contracts settled during the period as well as unrealized gains and losses for the measured
ineffectiveness of open contracts at the end of the period. Income from Operations
   Production Volume
  Onshore.
 - 23 -




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##### Table of Contents



Offshore
   Commodity Prices and Effects of Hedging
   - 24 -




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##### Table of Contents



Operating Expenses
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Operating Expenses per Mcfe
    
    2005
    
    
    2004
    
    
    Variance
    
    
    2005
    
    
    2004
    
    
    VarianceLease operating expense
    
    $
    0.63
    
    
    $
    0.45
    
    
    $
    0.18
    
    
    
    40
    %
    
    $
    0.59
    
    
    $
    0.42
    
    
    $
    0.17
    
    
    
    40
    %Severance tax
    
    
    0.15
    
    
    
    0.11
    
    
    
    0.04
    
    
    
    36
    %
    
    
    0.13
    
    
    
    0.11
    
    
    
    0.02
    
    
    
    18
    %Transportation expense
    
    
    0.11
    
    
    
    0.10
    
    
    
    0.01
    
    
    
    10
    %
    
    
    0.10
    
    
    
    0.10
    
    
    
     ̄
    
    
    
     ̄Asset retirement accretion expense
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.02
    
    
    
    67
    %
    
    
    0.05
    
    
    
    0.04
    
    
    
    0.01
    
    
    
    25
    %Depreciation, depletion and
amortization
    
    
    2.56
    
    
    
    2.12
    
    
    
    0.44
    
    
    
    21
    %
    
    
    2.44
    
    
    
    2.08
    
    
    
    0.36
    
    
    
    17
    %General and administrative, net
    
    
    0.36
    
    
    
    0.18
    
    
    
    0.18
    
    
    
    100
    %
    
    
    0.31
    
    
    
    0.23
    
    
    
    0.08
    
    
    
    35
    %Total operating expenses per
unit of production
    
    $
    3.86
    
    
    $
    2.99
    
    
    $
    0.87
    
    
    
    29
    %
    
    $
    3.62
    
    
    $
    2.98
    
    
    $
    0.64
    
    
    
    21
    %
  Lease Operating Expense
 Severance Tax
 Depreciation, Depletion and Amortization
 Asset Retirement Accretion Expense.
 - 25 -




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##### Table of Contents



General and Administrative Expenses, Net of Overhead Reimbursements and Capitalized General and
Administrative Expenses
 Absolute Dollars
    
    
    Unit of Production - McfeThree Months Ended September 30,
    
    
    Three Months Ended September 30,General and Administrative Expense
    
    2005
    
    
    2004
    
    
    Variance
    
    
    2005
    
    
    2004
    
    
    Variance(in thousands)Gross general and administrative expense
    
    $
    14,917
    
    
    $
    10,086
    
    
    $
    4,831
    
    
    
    48
    %
    
    $
    0.53
    
    
    $
    0.32
    
    
    $
    0.21
    
    
    
    66
    %Operating overhead reimbursements
    
    
    (508
    )
    
    
    (529
    )
    
    
    21
    
    
    
    -4
    %
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    
    
    
    
    Capitalized general and administrative
    
    
    (4,180
    )
    
    
    (3,878
    )
    
    
    (302
    )
    
    
    8
    %
    
    
    (0.15
    )
    
    
    (0.12
    )
    
    
    (0.03
    )
    
    
    25
    %General and administrative expense, net
    
    $
    10,229
    
    
    $
    5,679
    
    
    $
    4,550
    
    
    
    80
    %
    
    $
    0.36
    
    
    $
    0.18
    
    
    $
    0.18
    
    
    
    100
    %
   Absolute Dollars
    
    
    Unit of Production - McfeNine Months Ended September 30,
    
    
    Nine Months Ended September 30,General and Administrative Expense
    
    2005
    
    
    2004
    
    
    Variance
    
    
    2005
    
    
    2004
    
    
    Variance(in thousands)Gross general and administrative expense
    
    $
    41,395
    
    
    $
    34,826
    
    
    $
    6,569
    
    
    
    19
    %
    
    $
    0.47
    
    
    $
    0.37
    
    
    $
    0.10
    
    
    
    27
    %Operating overhead reimbursements
    
    
    (1,583
    )
    
    
    (1,618
    )
    
    
    35
    
    
    
    -2
    %
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    
    
    
    
    Capitalized general and administrative
    
    
    (12,260
    )
    
    
    (11,680
    )
    
    
    (580
    )
    
    
    5
    %
    
    
    (0.14
    )
    
    
    (0.12
    )
    
    
    (0.02
    )
    
    
    17
    %General and administrative expense, net
    
    $
    27,552
    
    
    $
    21,528
    
    
    $
    6,024
    
    
    
    28
    %
    
    $
    0.31
    
    
    $
    0.23
    
    
    $
    0.08
    
    
    
    35
    %
  Employment Agreements
  - 26 -




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##### Table of Contents



Other Income and Expense, Interest and Taxes
 Other Income and Expense
 Interest Expense, Net of Capitalized Interest
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Interest and Average Borrowings
    
    2005
    
    
    2004
    
    
    Variance
    
    
    2005
    
    
    2004
    
    
    Variance(dollars in thousands)Gross interest
    
    $
    5,898
    
    
    $
    4,162
    
    
    $
    1,736
    
    
    
    42
    %
    
    $
    16,943
    
    
    $
    12,771
    
    
    $
    4,172
    
    
    
    33
    %Capitalized interest
    
    
    (2,357
    )
    
    
    (2,162
    )
    
    
    (195
    )
    
    
    9
    %
    
    
    (6,772
    )
    
    
    (6,178
    )
    
    
    (594
    )
    
    
    10
    %Interest expense, net of capitalized interest
    
    $
    3,541
    
    
    $
    2,000
    
    
    $
    1,541
    
    
    
    77
    %
    
    $
    10,171
    
    
    $
    6,593
    
    
    $
    3,578
    
    
    
    54
    %Average total borrowings (1)
    
    $
    350,435
    
    
    $
    265,207
    
    
    $
    85,228
    
    
    
    32
    %
    
    $
    347,066
    
    
    $
    269,920
    
    
    $
    77,146
    
    
    
    29
    %Average total interest rate (1)
    
    
    6.24
    %
    
    
    5.79
    %
    
    
    0.45
    %
    
    
    8
    %
    
    
    6.04
    %
    
    
    5.69
    %
    
    
    0.35
    %
    
    
    6
    %Average bank borrowings
    
    $
    175,435
    
    
    $
    90,207
    
    
    $
    85,228
    
    
    
    94
    %
    
    $
    172,066
    
    
    $
    94,920
    
    
    $
    77,146
    
    
    
    81
    %Average bank interest rate
    
    
    5.64
    %
    
    
    3.60
    %
    
    
    2.04
    %
    
    
    57
    %
    
    
    5.14
    %
    
    
    3.46
    %
    
    
    1.68
    %
    
    
    49
    %
 
 (1)
    
    Average borrowings and average interest rate includes our $175 million
senior notes at 7% due June 2013 and average borrowings under our revolving bank credit
facility.  Income Tax Provision. Employment
Agreements
 Liquidity
 Capital Requirements
  n
    
    Funding our South Texas acquisition, expected to close
November 30, 2005;n
    
    Costs of acquiring and maintaining our lease acreage position and our seismic resources;n
    
    Costs of drilling and completing new natural gas and oil wells;
 - 27 -




---



##### Table of Contents



n
    
    Costs of acquiring additional reserves;n
    
    Costs of installing new production infrastructure;n
    
    Costs of maintaining, repairing, and enhancing existing natural gas and oil wells;n
    
    Costs related to plugging and abandoning unproductive or uneconomic wells; andn
    
    Indirect costs related to our exploration activities, including payroll and
other expense attributable to our exploration professional staff.
   Future Commitments
   Future CommitmentsPayments Due by PeriodReference
    
    
    Total
    
    
    1 year or less
    
    
    2  3 years
    
    
    4  5 years
    
    
    after 5 years(in thousands)Contractual Obligations:Revolving bank credit facility, due April 2008
    
    Note 7
    
    $
    286,000
    
    
    $
    
    
    
    $
    286,000
    
    
    
    
    
    
    $
    7% senior subordinated notes, due June 2013
    
    Note 2
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,000Derivative instruments
    
    Note 1
    
    
    696,679
    
    
    
    537,139
    
    
    
    159,540
    
    
    
    
    
    
    
    South Texas acquisition, remaining purchase
price
    
    Note 7
    
    
    146,700
    
    
    
    146,700
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    Note 4
    
    
    6,098
    
    
    
    1,549
    
    
    
    3,196
    
    
    
    1,353
    
    
    
    Letters of credit
    
    Note 7
    
    
    10,300
    
    
    
    10,300
    
    
    
    
    
    
    
    
    
    
    
    Seismic data purchase
    
    Note 4
    
    
    7,749
    
    
    
    7,749
    
    
    
    
    
    
    
    
    
    
    
    Drilling contract
    
    Note 4
    
    
    1,492
    
    
    
    1,492
    
    
    
    
    
    
    
    
    
    
    
    1,330,018
    
    
    
    704,929
    
    
    
    448,736
    
    
    
    1,353
    
    
    
    175,000Other Long-Term Obligations:Asset retirement obligations
    
    Note 1
    
    
    101,204
    
    
    
    1,503
    
    
    
    12,288
    
    
    
    7,065
    
    
    
    80,348Total contractual obligations and
commitments
    
    
    
    
    
    $
    1,431,222
    
    
    $
    706,432
    
    
    $
    461,024
    
    
    $
    8,418
    
    
    $
    255,348
 - 28 -




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##### Table of Contents



Capital Resources
   Nine Months Ended September 30,2005
    
    
    2004
    
    
    variance
    
    
    % change(in thousands)Net cash provided by operating activities
    
    $
    383,981
    
    
    $
    402,302
    
    
    $
    (18,321
    )
    
    
    -5
    %Net cash (used) for investments in property and equipment
    
    
    (400,998
    )
    
    
    (294,677
    )
    
    
    (106,321
    )
    
    
    36
    %Net cash provided by (used in) financing activities
    
    
    7,217
    
    
    
    (105,873
    )
    
    
    113,090
    
    
    
    -107
    %Net change in cash
    
    $
    (9,800
    )
    
    $
    1,752
    
    
    $
    (11,552
    )
    
    
    -659
    %
  Operating Activities
 Investing Activities.
 - 29 -




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##### Table of Contents



Natural Gas and Oil Expenditures and DispositionsThree Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Producing property acquisitions
    
    $
    57
    
    
    $
    30,042
    
    
    $
    31,691
    
    
    $
    32,742Leasehold and lease acquisition costs (1)
    
    
    10,398
    
    
    
    17,427
    
    
    
    45,973
    
    
    
    44,063Development
    
    
    102,732
    
    
    
    63,858
    
    
    
    250,784
    
    
    
    180,558Exploration
    
    
    28,857
    
    
    
    25,327
    
    
    
    91,986
    
    
    
    44,026Total natural gas and oil capital expenditures
    
    
    142,044
    
    
    
    136,654
    
    
    
    420,434
    
    
    
    301,389Producing property dispositions (2)
    
    
    (718
    )
    
    
    (287
    )
    
    
    (868
    )
    
    
    (72,854
    )Net natural gas and oil capital expenditures
    
    $
    141,326
    
    
    $
    136,367
    
    
    $
    419,566
    
    
    $
    228,535
 
 (1)
    
    Leasehold and lease acquisition costs include capitalized interest and
general and administrative expenses of $6.5 million and $6.0 million, respectively, for the
three months ended September 30, 2005 and 2004 and $19.0 million and $17.8 million,
respectively, for the nine months ended September 30, 2005 and 2004.(2)
    
    Producing property dispositions during 2005 include dispositions of Rockies
properties and acreage during the first quarter of $0.1 million and $0.7 million during the
third quarter. Producing property dispositions during 2004 include $0.3 million for the
disposition of Rockies acreage in July 2004, $13.1 million associated with the divestment of
our South Louisiana operations in February 2004 and $59.4 million associated with the
divestment of our Appalachian Basin properties as part of the asset exchange transaction with
KeySpan in June 2004. Financing Activities
 Access to Capital Markets
 .
  Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
 - 30 -




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##### Table of Contents



Interest Rate Market Risk
  Commodity Risk
   Changes in Fair Value of Derivative Instruments
  Nine Months Ended September 30,2005
    
    
    2004Change in Fair Value of Derivatives Instruments:
    
    Before Tax(in thousands)Fair value of contracts at January 1
    
    $
    (75,149
    )
    
    $
    (36,862
    )Realized loss on contracts settled
    
    
    100,726
    
    
    
    35,620(Decrease) in fair value of all open contracts
    
    
    (722,256
    )
    
    
    (149,500
    )Net (decrease) during period
    
    
    (621,530
    )
    
    
    (113,880
    )Fair value of contracts outstanding at September 30
    
    $
    (696,679
    )
    
    $
    (150,742
    )
 - 31 -




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##### Table of Contents



Derivatives in Place as of the Date of Our Report
   Daily Volume
    
    
    NYMEX Price
    
    
    Floor Price
    
    
    Ceiling PriceYear
    
    
    Transaction Type
    
    (MMBtu/day)
    
    
    ($/MMBtu)
    
    
    ($/MMBtu)
    
    
    ($/MMBtu)2005
    
    
    Swap
    
    
    20,000
    
    
    $
    4.75
    
    
    
    
    
    
    
    2005
    
    
    Swap
    
    
    10,000
    
    
    
    4.77
    
    
    
    
    
    
    
    2005
    
    
    Swap
    
    
    20,000
    
    
    
    4.78
    
    
    
    
    
    
    
    2005
    
    
    Swap
    
    
    20,000
    
    
    
    6.15
    
    
    
    
    
    
    
    2005
    
    
    Swap
    
    
    10,000
    
    
    
    6.30
    
    
    
    
    
    
    
    Total swaps
    
    
    80,0002005
    
    
    Costless collar
    
    
    100,000
    
    
    
    
    
    
    $
    4.50
    
    
    $
    5.502005
    
    
    Costless collar
    
    
    30,000
    
    
    
    
    
    
    
    4.50
    
    
    
    6.052005
    
    
    Costless collar
    
    
    10,000
    
    
    
    
    
    
    
    4.50
    
    
    
    6.062005
    
    
    Costless collar
    
    
    10,000
    
    
    
    
    
    
    
    4.50
    
    
    
    6.072005
    
    
    Costless collar
    
    
    10,000
    
    
    
    
    
    
    
    6.50
    
    
    
    10.152005
    
    
    Costless collar
    
    
    20,000
    
    
    
    
    
    
    
    6.50
    
    
    
    10.19Total collars
    
    
    180,000Total daily volume 2005
    
    
    260,0002006
    
    
    Swap
    
    
    20,000
    
    
    $
    5.87
    
    
    
    
    
    
    
    2006
    
    
    Swap
    
    
    10,000
    
    
    
    5.94
    
    
    
    
    
    
    
    Total swaps
    
    
    30,0002006
    
    
    Costless collar
    
    
    10,000
    
    
    
    
    
    
    $
    5.50
    
    
    $
    7.202006
    
    
    Costless collar
    
    
    10,000
    
    
    
    
    
    
    
    5.50
    
    
    
    7.252006
    
    
    Costless collar
    
    
    40,000
    
    
    
    
    
    
    
    5.50
    
    
    
    7.262006
    
    
    Costless collar
    
    
    20,000
    
    
    
    
    
    
    
    5.75
    
    
    
    7.202006
    
    
    Costless collar
    
    
    30,000
    
    
    
    
    
    
    
    5.80
    
    
    
    7.002006
    
    
    Costless collar
    
    
    50,000
    
    
    
    
    
    
    
    5.82
    
    
    
    7.002006
    
    
    Costless collar
    
    
    30,000
    
    
    
    
    
    
    
    6.00
    
    
    
    7.002006
    
    
    Costless collar
    
    
    20,000
    
    
    
    
    
    
    
    6.00
    
    
    
    7.022006
    
    
    Costless collar
    
    
    10,000
    
    
    
    
    
    
    
    6.00
    
    
    
    7.05Total collars
    
    
    220,000Total daily volume 2006
    
    
    250,0002007
    
    
    Costless collar
    
    
    20,000
    
    
    
    
    
    
    $
    5.00
    
    
    $
    6.502007
    
    
    Costless collar
    
    
    10,000
    
    
    
    
    
    
    
    5.00
    
    
    
    6.79Total daily volume 2007
    
    
    30,0002008
    
    
    Costless collar
    
    
    20,000
    
    
    
    
    
    
    $
    5.00
    
    
    $
    5.72Total daily volume 2008
    
    
    20,000
  - 32 -




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##### Table of Contents



Item 4. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 Part II. Other Information
 
 Item 5. Other Information
 Changes to Executive Compensation.
  - 33 -




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##### Table of Contents



Item 6. Exhibits
 EXHIBITS
    
    
    
    DESCRIPTION10.1
    
    
    
    Third Amendment dated effective as of October 25, 2005, to the Amended and Restated
Credit Agreement dated April 1, 2004, among The Houston Exploration Company and Wachovia Bank,
National Association, as Issuing Bank and Administrative Agent; The Bank of Nova Scotia and
Bank of America as Co-Syndication Agents; and BNP Paribas and Comerica Bank as
Co-Documentation Agents (Exhibit 99.2 to Current Report on Form 8-K dated October 27, 2005
(File No. 001-11899) and incorporated by reference).10.2(1)(2)
    
    
    
    Compensation Table for Executive Officers.12.1(1)
    
    
    
    Computation of ratio of earnings to fixed charges.31.1(1)
    
    
    
    Certification of William G. Hargett, Chief Executive Officer, as required pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2(1)
    
    
    
    Certification of John H. Karnes, Chief Financial Officer, as required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1(1)
    
    
    
    Certification of William G. Hargett, Chief Executive Officer, as required pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2(1)
    
    
    
    Certification of John H. Karnes, Chief Financial Officer, as required pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Filed herewith.(2)
    
    Identified as a management contract or compensation plan or arrangement. - 34 -




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##### Table of Contents



SIGNATURES
  THE HOUSTON EXPLORATION COMPANYBy:
    
    /s/ William G. HargettWilliam G. HargettDate: November 8, 2005
    
    
    
    Chairman, President and Chief Executive
OfficerBy:
    
    /s/ John H. KarnesJohn H. KarnesDate: November 8, 2005
    
    
    
    Senior Vice President and Chief Financial
OfficerBy:
    
    /s/ James F. WestmorelandJames F. WestmorelandDate: November 8, 2005
    
    
    
    Vice President and Chief Accounting Officer
 - 35 -




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##### Table of Contents



EXHIBIT INDEX
 EXHIBITS
    
    
    
    DESCRIPTION10.1
    
    
    
    Third Amendment dated effective as of October 25, 2005, to the Amended and Restated
Credit Agreement dated April 1, 2004, among The Houston Exploration Company and Wachovia Bank,
National Association, as Issuing Bank and Administrative Agent; The Bank of Nova Scotia and
Bank of America as Co-Syndication Agents; and BNP Paribas and Comerica Bank as
Co-Documentation Agents (Exhibit 99.2 to Current Report on Form 8-K dated October 27, 2005
(File No. 001-11899) and incorporated by reference).10.2(1)(2)
    
    
    
    Compensation Table for Executive Officers.12.1(1)
    
    
    
    Computation of ratio of earnings to fixed charges.31.1(1)
    
    
    
    Certification of William G. Hargett, Chief Executive Officer, as required pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2(1)
    
    
    
    Certification of John H. Karnes, Chief Financial Officer, as required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1(1)
    
    
    
    Certification of William G. Hargett, Chief Executive Officer, as required pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2(1)
    
    
    
    Certification of John H. Karnes, Chief Financial Officer, as required pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Filed herewith.(2)
    
    Identified as a management contract or compensation plan or arrangement.