Denbury Finalizes Encore Merger In $4.5B Combination

Acquired company with assets in MT, WY, ND, TX, LA, gaining 186 MMBOE proved, 41,600 BOE/d.

Dallas-based E&P Denbury Resources Inc., (NYSE: DNR) has closed its acquisition of Fort Worth, Texas-based Encore Acquisition Co. (NYSE: EAC) for approximately $4.5 billion in cash, stock and debt assumption, including the value of the minority interest in the MLP Encore Energy Partners LP (NYSE: ENP), making it one of the largest oil-focused independent oil and gas companies in the U.S.

Denbury issued approximately 134.4 million shares of its common stock and paid approximately $829.4 million in cash to Encore stockholders, or about $50 per Encore share comprised of $15 in cash and $35 in stock. The acquisition also involves some $1 billion in Encore Acquisition debt. Encore stockholders hold approximately 34% of the combined company.

Encore Acquisition had total proved reserves of 186 million barrels of oil equivalent (72% oil; 80% proved developed). Production for first-half 2009 averaged 41,652 barrels of oil per day. The reserve-to-production ratio is 13 years.

Encore's assets involve more than 300,000 net acres in the North Dakota Bakken shale, a 30% working interest (22.5% net revenue interest) in 100,000 gross acres in West Texas in a joint venture with ExxonMobil Corp., Irving, Texas, (NYSE: XOM) more than 19,000 net acres in the Haynesville shale play in Caddo and Desoto parishes, Louisiana, and some 99 million barrels of oil equivalent net proved reserves in the Powder River and Williston basins in Montana and Wyoming.

Denbury chief executive Phil Rykhoek says Encore is an excellent fit with Denbury's CO2 enhanced oil recovery (EOR) program. "Encore has built an enviable asset portfolio in the Rockies, anchored by mature legacy crude oil assets, and our combined size and scale of operations will allow us to undertake significantly larger CO2 projects in the Gulf Coast and the Rockies. This combination will also further enhance Denbury's position as the natural buyer and owner of mature oil properties in our core regions and the partner of choice for CO2 emitters looking to reduce their carbon footprint."

The combined company has more than 500 million barrels of oil equivalent of additional potential barrels recoverable with CO2 tertiary operations. Rykhoek says the longer lead-time of CO2 project development in the Rockies is ideally matched with a strong growth profile from low-risk development of unconventional resource plays in the Bakken oil shale in North Dakota and the Haynesville shale in North Louisiana.

Encore chief executive Jonny Brumley says, "The combined companies have a unique blend of large oil fields with huge upside potential. The large reserve and production base will increase the operational and financial flexibility allowing for more efficient development of the assets of both of our companies. We have been impressed by the amount of progress Denbury has made in building a world-class enhanced oil recovery business. Denbury has the experience and expertise to effectively capture the full value of Encore's EOR inventory and the combined entities will provide the necessary size and scale to develop and fully recognize that potential."

Rykhoek adds that the addition of the Encore properties more than doubles Denbury's inventory of oil reserves recoverable with CO2 and expands its growth potential with a second new core EOR area in the Rockies.

"The anticipated EOR production from the Encore properties will fit nicely into our overall EOR program, providing production growth in 2015 and beyond, about the time when we anticipate nearing the production peak of our existing EOR field inventory. In addition, the growth potential from Encore's Bakken shale oil play further enhances its value and provides short-term production growth and cash flow as we develop the longer-term EOR program."

Denbury entered a new credit agreement led by JPMorgan Chase Bank NA and 23 other lenders for $1.6 billion and a $1.25-billion bridge financing, with approximately $600 million to $700 million remaining available.

During 2010, Denbury intends to sell noncore properties to reduce debt, with targeted sales of at least $500 million to $1 billion. Denbury also acquired the general partner interest of Encore Energy Partners and approximately 21 million limited partner units. The company may decide to sell certain properties to Encore Energy Partners.

Denbury's board and senior management remains unchanged.

J.P. Morgan Securities Inc. was financial advisor to Denbury and Baker & Hostetler LLP was legal counsel. Barclay's Capital Inc. was financial advisor to Encore and Baker Botts LLP was legal counsel.

Analysts at Pritchard Capital Partners say that considering Denbury's focus on CO2 EOR projects, "we believe this transaction makes strategic sense, though it does come as a surprise, given Encore's EOR potential in the Rockies (264 million barrels of oil equivalent of potential) with additional resource upside in the Bakken and Three Forks-Sanish plays and the Haynesville shale and in West Texas."

According to the analysts, based on the $4.5-billion price, Denbury is paying approximately $3.78 per proved Mcfe based on 2008 year-end proved reserves, and $17,143 per million cubic feet per day. "Given the resource upside on EAC's properties beyond just proved reserves, we believe it is a fair price."

The Pritchard analysts say that while the price tag appears to be "rich" on a proved reserve basis, "clearly the company is also paying for the unproved resource upside," including 264 million barrels equivalent from CO2 EOR related properties, 57 million barrels equivalent from the Bakken, 70 million barrels equivalent from the Haynesville, and 55 million barrels equivalent from the West Texas joint venture.