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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from     to    

Commission File No. 001-11899

THE HOUSTON EXPLORATION COMPANY

(713) 830-6800
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $499,877,963, based on the closing sales price of $34.70 per share of the registrant’s common stock as reported by on the New York Stock Exchange as of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter.. For purposes of the preceding sentence only, all directors, executive officers and beneficial owners of ten percent or more of the common stock are assumed to be affiliates. As of March 11, 2004, 31,786,097 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2004 are incorporated by reference into Part III of this Form 10-K.

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Forward-Looking Statements

This Annual Report on Form 10-K (“Annual Report”) and the documents we have incorporated by reference into this Annual Report contain forward-looking statements as that term is defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, these forward-looking statements generally can be identified by words such as “anticipate,” “believe,” “continue,” “expect,” “estimate,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “goal,” “objective” or similar expressions. All statements under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” relating to our anticipated capital expenditures, future production and reserves, schedules, plans, timing of development, future cash flows and borrowings, pursuit of potential future acquisition opportunities and sources of funding for exploration and development are forward-looking statements. Although we believe that these forward-looking statements are based on reasonable estimates and assumptions, our expectations may not occur and we cannot guarantee that the anticipated future results will be realized. A number of factors could cause our actual future results to differ materially from those anticipated or implied in the forward-looking statements. These factors include, among other things, the volatility of natural gas and oil prices, the requirement to take write downs if natural gas and oil prices decline, our ability to meet our substantial capital requirements, our substantial outstanding indebtedness, the uncertainty of estimates of natural gas and oil reserves and production rates, our ability to replace reserves, and our hedging activities. For additional discussion of these and other risks, uncertainties and assumptions, see “Items 1 and 2. Business and Properties” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements.

In this Annual Report, unless the context requires otherwise, when we refer to “we,” “us” and “our,” we are describing The Houston Exploration Company and its sole subsidiary on a consolidated basis.

If you are not familiar with the natural gas and oil terms used in this report please refer to the explanations of the terms under the caption “Glossary of Natural Gas and Oil Terms” included on pages G-1 through G-2. When we refer to “equivalents,” we are doing so to compare quantities of oil with quantities of natural gas or to express these different commodities in a common unit. In calculating equivalents, we use a generally recognized standard in which one barrel of oil is equal to six thousand cubic feet of natural gas.

Part I.

Items 1. and 2. Business and Properties

Overview of Our Business

We are an independent natural gas and oil company engaged in the exploration, development, exploitation and acquisition of natural gas and oil reserves in North America. Natural gas is our primary focus. Our core areas of operations are South Texas, offshore in the shallow waters of the Gulf of Mexico, the Arkoma Basin of Oklahoma and Arkansas and the Appalachian Basin of West Virginia. During 2003, we began operations in the Rocky Mountain Region with an initial focus in the Uinta Basin of northeastern Utah.

We were founded in December 1985 as a Delaware corporation and began exploring for natural gas and oil on behalf of KeySpan Corporation. KeySpan, a member of the Standard & Poor’s 500 Index, is a diversified energy provider whose principal natural gas distribution and electric generation operations are located in the Northeastern United States. In September 1996 we completed our initial public offering and sold approximately 31% of our shares to the public. As of December 31, 2003, THEC Holdings Corp., an indirect wholly owned subsidiary of KeySpan, owned approximately 55% of the outstanding shares of our common stock.

In February 2003, KeySpan divested three million shares of our common stock. KeySpan has publicly announced it does not consider its investment in Houston Exploration a part of its core asset group and that it may sell or dispose of all or a portion of its non-core assets, including its investment in our company. Because market conditions are unpredictable, KeySpan is unable to determine if or when any additional dispositions of all or a portion of its remaining ownership interest in our company will take place.

Our corporate offices are located at 1100 Louisiana Street, Suite 2000, Houston, Texas 77002. Our telephone number is (713) 830-6800.

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Investment Strategy

We strive to maximize shareholder value while maintaining our financial flexibility by pursuing an investment strategy involving elements of each of the following activities:

•		Exploitation. Exploitation, both onshore and offshore, is one of our core competencies and the cornerstone of our investment strategy. We invest in exploitation and development properties intended to generate stable and growing cash flows from which we can fund future expansion of our business and reserve base.
•		Exploration. Founded as an exploration company, we continue to invest in exploratory prospects to supplement the reserves added through our exploitation activities. We generate the majority of our exploration prospects through our in-house geo-science personnel and currently have assembled a three-year inventory of offshore drilling prospects.
•		Acquisitions. We augment our exploration and exploitation activities with acquisitions of new properties that we believe conform to our operating philosophy and offer unexploited reserve potential.

We typically fund exploitation and exploration activities out of cash flows from operations. We typically fund acquisitions through our revolving bank credit facility. When we incur debt in connection with an acquisition, we focus on prompt repayment in order to minimize our debt service obligations. Our current debt levels provide flexibility to continually review and adjust our capital budgets during the year based on operational developments, commodity prices, service costs, acquisition opportunities and numerous other factors.

Operating Philosophy

•		Natural Gas Emphasis. Our production and reserve base is heavily weighted toward natural gas. We have focused our growth and operations in the United States. There is intense competition for the acquisition and development of domestic reserves. Since natural gas can only be transported from overseas in liquefied form and is thus more difficult to import than crude oil, we believe natural gas is better insulated from the price volatility associated with global geopolitical instability. The lease operating expense associated with natural gas properties is also typically less than oil properties, which allows us to maintain our low per-unit cost structure.
•		Operating Control. Whenever possible, we prefer to operate our properties because this allows us more control over the nature and timing of capital expenditures and overall operating expenses. As operator, we supervise production, maintain production records, employ or contract for field personnel, distribute revenues and perform other functions. As operator, we receive reimbursement for direct expenses incurred, as well as monthly per-well producing and drilling overhead reimbursements at rates customarily charged in the area by unaffiliated third parties. We currently operate approximately 85% of our wells.
•		Geographic Focus. By concentrating our operations within geographically focused areas, we can manage a large asset base with a relatively small number of employees and can integrate additional properties at relatively low incremental costs. Our strategy of focusing drilling activities on properties in relatively concentrated offshore and onshore areas permits us to more efficiently utilize our base of geological, engineering, exploration and production experience in these regions. At December 31, 2003, 90% of our reserves were located in our three core areas: South Texas, the Gulf of Mexico and the Arkoma Basin. Future growth opportunities may likely require the addition of new core areas.
•		Operating Environment. We focus our operations in areas that are conducive to low cost operations, avoiding areas where fractionalized ownership issues, local regulation or lack of a qualified workforce would drive up operational, legal and other costs.
•		Cash Flow Hedging. We maintain an active hedging program designed to reduce the impact of commodity price fluctuations and provide more predictable cash flows that allow us to better plan our capital expenditures. We utilize a variety of hedging strategies, including fixed price swaps, options and collars under which we are assured a minimum floor price for our production and the benefit of price increases up to a predetermined ceiling price. Depending on the outlook for future prices and the state of the derivatives markets, we may hedge up to 80% of our production for 2004 and up to 70% for 2005.

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Properties and Operating Areas

The table below summarizes certain data for our core operating areas for the year ended December 31, 2003.

South Texas. Our South Texas properties are concentrated in the Charco, Haynes and South Trevino Fields of Zapata County; the Alexander, Hubbard and South Laredo Fields of Webb County; and the Northeast Thompsonville Field in Jim Hogg County. In total, our South Texas properties cover approximately 65,000 net acres and we own interests in 581 producing wells, 476 of which we operate. Our average working interest is 82%. Average well depth is between 8,000 to 12,500 feet with production from the Wilcox formations.

When we acquired the Charco Field in July 1996, it had approximately 150 producing wells and average daily production was 38 MMcfe per day, net to our interest. In December 2001, we expanded our existing production and reserve base with the acquisition of the Alexander, Hubbard and South Laredo Fields, and again, in May 2002, with the acquisition of the Northeast Thompsonville Field. In total, our net South Texas production has more than tripled since July 1996, to an average of 143 MMcfe per day during December 2003. Over the course of seven and a half years, we have drilled 228 successful wells at an average success rate of 82%, produced 241 Bcfe and added 444 Bcfe in reserves through drilling and acquisitions.

Gulf of Mexico. Our offshore properties are located in the shallow waters of the Outer Continental Shelf. Our key producing properties are located in the western and central Gulf of Mexico and include the Mustang Island, High Island, East Cameron, Vermilion and South Timbalier areas. In October 2003, we added to our existing production base through the acquisition of 11 producing fields in the central Gulf of Mexico. The properties were purchased for a net $147.5 million and had estimated proved reserves of 88.5 Bcfe. Of the proved reserves acquired, 75% were classified as natural gas and 68% were proved undeveloped. Taking into account the recent acquisition and as of December 31, 2003, we hold interests in 127 blocks in federal and state waters, of which 69 are developed. We operate 32 of our developed blocks, which accounts for approximately 65% of our offshore production. We have a total of 80 producing platforms and production caissons of which we operate 49.

Arkoma Basin. Our Arkoma Basin properties are located in two primary areas: the Chismville/Massard Field located in Logan and Sebastian Counties of Arkansas and the Wilburton and South Panola Fields located in Latimer County, Oklahoma. We have approximately 36,000 net acres under lease and we own working interests in 275 producing natural gas wells, 170 of which we operate. Wells average a depth of 5,500 feet and production is from the Atoka formation. As a result of the downspacing from 640 acres to 160 acres per well approved by the Arkansas Oil and Gas Commission in September 2002, we were able to more than double the number of wells drilled during 2003 from 24 wells in 2002 to 51 wells in 2003. By December 2003, our average daily production had increased by 35% from an average of 20 MMcfe per day in 2002 to 27 MMcfe per day, net to our interest. In September 2003, the Arkansas Oil and Gas Commission approved further downspacing to 80 acres per well, allowing for continued expansion of our drilling opportunities.

Appalachian Basin. Our property base is located in central West Virginia and includes the Belington, Clarksburg and Seneca Upshur Fields located in Barbour, Randolph, Upshur and Mingo Counties of West Virginia. On December 31,

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2003, we extended our existing reserve base through an acquisition of additional producing properties. The properties acquired are adjacent to our existing production base and include the Crawford and Pennsboro Fields in Lewis, Harrison, Tyler and Ritchie Counties of West Virginia and the Waynesburg and Yatesboro Fields in Greene and Armstrong Counties of southwestern Pennsylvania. We purchased net proved reserves of 23.4 Bcfe for $27.9 million. Average daily production is estimated at approximately 4 MMcfe per day, net to our interest. The properties purchased cover approximately 146,000 gross (83,950 net) acres and include approximately 774 producing wells. In addition, the interests acquired include approximately 300 wells in which we will have an overriding royalty interest. Giving effect to the acquisition and as of December 31, 2003, we have approximately 129,000 net acres under lease and own working interests in 1,411 wells of which we operate 1,304 or 92%. Our average working interest is 73%.

Other Onshore. During 2003, we also owned properties in East Texas and South Louisiana. East Texas properties are located in the Willow Springs Field in Gregg County, Texas and include interests in 24 wells of which we operate 23. The South Louisiana properties are located in the South Lake Arthur and Lake Pagie Fields located primarily in Vermillion and Terrebonne Parishes. On February 4, 2004 we completed the sale of our South Louisiana producing properties. The sale was effective November 1, 2003 and the properties represented 12.3 Bcfe proved reserves as of December 31, 2003 and included interests in 33 gross (9.5 net) producing wells and covered approximately 6,300 gross (2,300 net) acres. The net proceeds from the sale of $12.8 million were used to repay borrowings under our revolving bank credit facility.

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Natural Gas and Oil Reserves

The following table summarizes the estimates of our historical net proved reserves as of December 31, 2003, 2002 and 2001, and the present values attributable to these reserves at these dates. The reserve data and present values were fully engineered by Netherland, Sewell & Associates, Inc. and Miller and Lents, Ltd., independent petroleum engineering consultants.

	(1)		The present value of future net revenues attributable to our reserves was prepared using prices in effect at the end of the respective periods presented, discounted at 10% per annum (“PV10”) on a pre-tax basis. In accordance with current Securities and Exchange Commission (“SEC”) guidelines, the PV10 includes the fair value of our natural gas and oil hedges in place at December 31, 2003, 2002 and 2001 of a negative $101.2 million, a negative $38.6 million and a positive $65.8 million, respectively. Year-end prices per Mcf of natural gas used in making the present value determinations as of December 31, 2003, 2002 and 2001 were $ 5.79, $4.35 and $2.38, respectively. Year-end prices per Bbl of oil used in making the present value determinations as of December 31, 2003, 2002 and 2001 were $30.27, $28.74 and $17.78, respectively.
	(2)		The standardized measure of discounted future net cash flows represents the PV10 after income tax and has been calculated in accordance with SFAS 69, “Disclosures About Oil and Gas Producing Activities” (see Note 12 — Supplemental Information on Natural Gas and Oil Exploration, Development and Production Activities (Unaudited)) and, in accordance with current SEC guidelines, does not include estimated future cash inflows from our hedging program.

In accordance with applicable requirements of the SEC, we estimate our net proved reserves and future net revenues using sales prices estimated to be in effect as of the date we make the reserve estimates. We hold the estimates constant throughout the life of the properties, except to the extent a contract specifically provides for escalation. Natural gas and oil prices have fluctuated widely in recent years. Volatility is expected to continue and price fluctuations directly affect estimated quantities of proved reserves and future net revenues. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond our control. The reserve data contained in this Annual Report on Form 10-K represent only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates prepared by one engineer may vary from those prepared by another. Estimates are subject to revision based on numerous factors including, reservoir performance, prices and economic conditions. In addition, results of drilling, testing and actual production subsequent to the date of estimate may justify revision of that estimate. Revisions to prior estimates may be material. Reserve estimates are often different from the quantities of natural gas and oil that we are ultimately able to recover and are highly dependent upon the accuracy of the underlying assumptions. Our estimated proved reserves have not been filed with or included in reports to any federal agency.

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Drilling Activity

We engage in numerous drilling activities on properties presently owned by us and intend to drill or develop other properties we may acquire in the future. The following table sets forth the results of our drilling activities during the year ended December 31, 2003. Gross wells are the sum of all wells in which we owned an interest. Net wells are the sum of our working interests in the gross wells.

As of December 31, 2003, we were drilling or participating in the drilling of 16 gross (12.2 net) wells. Of these wells, through March 12, 2004, 12 gross (9.7 net) wells have been determined to be successful and 3 gross (23 net) were unsuccessful with the remaining 1 gross (0.2 net) wells still in progress.

Productive Wells

The following table sets forth the number of productive wells in which we owned an interest as of December 31, 2003. Productive wells consist of producing wells and wells capable of production, including wells awaiting connections. Wells that are completed in more than one producing horizon are counted as one well. The day-to-day operations of natural gas properties are the responsibility of an operator designated under an operating agreement.

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Acreage Data

The following table sets forth the approximate developed and undeveloped acreage in which we held a leasehold mineral or other interest as of December 31, 2003. Undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas or oil, regardless of whether or not the acreage contains proved reserves. Gulf of Mexico acreage includes leases in federal and state waters.