2009-08-04-2009-06-29-2009-08-11

Acquired 66,700 net acres in the Midcontinent in Grady Co., OK, and in E. TX in Gregg, Upshur and Smith cos., gaining 176 Bcfe proved, 34.1 MMcfe/d.

Encore Acquisition Co., Fort Worth, Texas, (NYSE: EAC) has acquired properties in the Midcontinent and East Texas from Exco Resources Inc., Dallas, (NYSE: XCO) for $375 million in cash. The Midcontinent properties are comprised of assets primarily in the Norge Marchand Unit in Grady County, Oklahoma, a waterflood that produces from the Marchand sandstone and has estimated original oil in place of 200 million barrels. Forecast production for the unit is 1,955 barrels of oil equivalent per day, and the field is 100% operated. The acquired properties also include assets in the Texas Panhandle, southwestern Kansas, and western Oklahoma. The Midcontinent package has estimated proved developed reserves of approximately 12.8 million barrels equivalent (50% oil and gas liquids; 100% proved developed producing) with a reserve-to-production ratio of 12.1 years. The Norge Marchand reserves represent approximately 63% of the Midcontinent package. The East Texas properties include long-life assets in Gregg, Upshur and Smith counties, mainly in Gladewater Field and including Overton Field which produce primarily from the Cotton Valley sands. The East Texas properties include 495 gross wells with forecasted production of approximately 17.3 million cubic feet equivalent of gas per day (2,889 barrels equivalent). Gladewater's estimated proved developed reserves are approximately 10.3 million barrels equivalent (95% gas; 100% proved developed producing), with total East Texas reserves of 11.8 million barrels equivalent. The East Texas reserve-to-production ratio is 11.1 years. As of year-end 2008, according to Exco estimates, the total estimated proved reserves were 4.7 million barrels of oil and 148 billion cubic feet of gas (176 billion cubic feet of gas equivalent). Current net production includes 1,223 barrels of oil per day and 26.9 million cubic feet of gas per day (34.1 million cubic feet of gas equivalent per day). Encore estimates total proved reserves to be 24.6 million barrels equivalent (100% proved developed producing; 72% gas), production of 5,795 barrels per day, and a reserve-to-production ratio of 11.6 years. The sale includes approximately 66,700 net acres, of which approximately 7,000 acres are undeveloped, as well as gathering systems and compression facilities. The effective date is April 1. Douglas H. Miller, Exco chief executive, says, "As we have previously announced, we have elected to sell certain nonstrategic assets, and this sale is a part of that effort. We have now reached agreement on nearly $450 million of such asset sales and will continue our efforts." Encore chief executive and president Jon S. Brumley says, "Purchasing long-life properties at a time when prices are below long-term marginal costs has been a tried and true strategy Encore has been practicing for the past 11 years. Acquisition opportunities like this do not happen very often, so when they become available you must be ready…The industry is in a state of underinvestment and with unconventional horizontal plays becoming a larger percentage of Lower 48 gas production, we believe that the market will be ripe for prices to increase in 2010. This acquisition has a production profile that in today's poor price environment is much safer and more desirable than a drilling program." He says the properties will contribute approximately $40 million in cash flow in 2009 and $65 million in 2010, including hedges entered into in conjunction with the acquisition. Encore financed the acquisition through proceeds from the sale of certain properties in the Rockies and Permian Basin to MLP subsidiary Encore Energy Partners LP (NYSE: ENP) for $190 million in cash and borrowings under its revolving credit facility for the remaining amount. In connection with the acquisition, Encore entered into derivative contracts on more than 90% of the acquisition's proved developed producing volumes for 2010 through 2012. The company purchased oil puts for 625 barrels per day at a strike price of $67 per barrel for 2010 and $65 per barrel for 2011 and 2012. Additionally, the company entered into oil swap contracts for 625 barrels per day at an average price of $76.21 per barrel for 2010, $79.18 per barrel for 2011, and $81.04 per barrel for 2012. Encore additionally entered into gas swap contracts for $6.99 per Mcf for 20 million cubic feet per day for 2010 through 2012. The acquisition will be completed as a tax-free like-kind exchange. Scotia Waterous (USA) Inc. and Tristone Capital LLC were advisors to Exco. Analysts at Tudor, Pickering, Holt & Co. Securities Inc. say that Exco's "transformation story continues," valuing the deal at $65,000 per flowing barrel, "a good price" and in line with Exco's $70,000 per flowing barrel. Going forward, the analysts say that "$200-plus million in free cash flow, another $400 million in asset sales, and a likely Haynesville joint venture in second-half 2009 drive Exco hopes to pay off $2 billion in debt and hold production at a current 400 million cubic feet per day by year-end." Pritchard Capital Partners analysts value the deal at $15.25 per barrel of proved reserves and $64,710 per flowing barrel, "about in-line with the industry average metrics." Mitchell Wurschmidt, vice president of KeyBanc Capital Markets Inc., says Encore Acquisition paid approximately $15.24 per proved barrel equivalent (based on 24.6 million barrels equivalent proved), and $64,711 per flowing barrel (based on 5,795 net barrels equivalent per day). "We note that EAC conservatively only booked the PDPs from the deal; Exco had estimated 29.3 million barrels equivalent of proved reserves from the properties (including PUDs), which would work out to a price of $12.78 per proved BOE (or $2.13 per Mcfe)." He adds, "We also note that EAC has identified over 100 locations across East Texas and Oklahoma with 8.5 million barrels of oil equivalent of upside potential. Our guess is this is a very early estimate of upside potential and more than likely EAC will identify further upside over time." Standard & Poor's Ratings Services ratings on Encore Acquisition are not immediately affected. Although approximately half of the purchase price will be financed via an asset-sale to its MLP, total adjusted debt will increase to more than $1 billion, says analyst David Lundberg. And despite the increase in leverage, "we don't expect debt to EBITDAX to be more than 5.5x in 2009 or above 5x in 2010, our previously cited thresholds for a negative ratings action."