2008-12-10-2008-12-10

To buy nonoperated WI in 100+ producing wells in Arkoma Basin Chismville Field, AR, gaining 2.8 MMBOE proved, 500 BOE/d, (3 MMcfg/d); royalty interest in 1,700 wells in AR, TX, OK; 10,300 unleased acres.

The MLP Encore Energy Partners LP, Fort Worth, Texas, (NYSE: ENP) plans to acquire producing properties in the Arkoma Basin and royalty interest properties primarily in Oklahoma as well as 10,300 unleased mineral acres from parent company Encore Acquisition Co. (NYSE: EAC) for $49 million in cash. Pritchard Capital Partners estimates the deal value at $16.40 per barrel of oil equivalent. The Arkoma Basin properties consist of nonoperated working interests in more than 100 producing wells in Chismville Field. Total proved reserves are approximately 2.8 million barrels of oil equivalent (73% proved developed producing; 87% gas). Current production is approximately 500 barrels of oil equivalent per day (3 million cubic feet of gas equivalent per day; 91% gas). The estimated average reserve-to-production ratio is 15.3 years. The royalty interest properties include interests in more than 1,700 wells in Arkansas, Texas and Oklahoma, as well as 10,300 unleased mineral acres. Encore will fund the deal with borrowings under its revolving credit facility. The acquisition has been hedged at an average Nymex equivalent price of $7.51 per thousand cubic feet through four years ending year-end 2012. In addition, as a result of the increase in debt levels from the acquisition, the partnership entered into an interest rate swap of $50 million of floating rate Libor debt to a fixed rate of 2.42% and an expected margin of 1.5% through March 7, 2012, the maturity date of its revolving credit facility. Jon S. Brumley, Encore Energy Partners GP LLC chief executive and president, says, "About half of the production from these properties is from royalties which have the attribute of no future capital or production costs with production remaining flat. The other half of production is generated from high-margin nonoperated natural gas properties in the Chismville Field of Arkansas. "These properties have what it takes to be a good match for an MLP: high margins, predictable production profiles and shallow declines. When you combine our four-year hedging program with these properties, we'll have excellent accretion for relatively little risk. These properties improve our high-margin base and complement our high-quality inventory of drilling projects. This MLP will now receive the benefit of infinite rate-of-return projects for many years to come from the royalty package. These properties were assembled for generations, and the quality will shine through at ENP." Encore Energy chief financial officer and vice president Bob Reeves says, "We went to great lengths to protect the downside associated with this deal, but the partnership still has a lot of upside remaining with the deal. Our hedging philosophy protects two thirds of the downside commodity price risk but two thirds of the commodity price upside remains intact because of our hedging philosophy that utilizes a combination of floors and swaps." The effective date is Nov. 1, 2008. The deal is expected to close in early January.