OilVoice - Encore Energy Partners Acquires Arkoma Basin and Royalty Properties from Encore Acquisition

Encore Energy Partners Acquires Arkoma Basin and Royalty Properties from Encore Acquisition

Thursday, December 11, 2008

Encore Energy Partners LP has signed an agreement to acquire oil and natural gas producing properties in the Arkoma Basin and royalty interest properties primarily in Oklahoma as well as 10,300 unleased mineral acres from Encore Acquisition Company. The purchase price is $49 million in cash, less associated acquisition-related hedge premiums of approximately $3 million, resulting in a net purchase price of approximately $46 million. The acquisition will be effective November 1, 2008 and is expected to close in early January 2009.

The acquisition has been hedged at an average NYMEX equivalent price of $7.51 per thousand cubic feet (“Mcf”) through the 4 years ending December 31, 2012. In addition, as a result of the increase in debt levels from the acquisition, the Partnership entered into an interest rate swap whereby it swapped $50 million of floating rate LIBOR debt to a fixed rate of 2.42 percent and an expected margin of 1.5 percent through March 7, 2012, the maturity date of the Partnership’s revolving credit facility.

The royalty interest properties include interests in over 1,700 wells in Arkansas, Texas, and Oklahoma as well as 10,300 unleased mineral acres. The Arkoma Basin properties consist of non-operated working interests in over 100 producing wells in the Chismville field. The properties have total proved reserves of approximately 2.8 million barrels of oil equivalent (“BOE”), 73 percent of which are proved developed producing and 87 percent of which are natural gas. The properties currently produce approximately 500 BOE per day, or 3 million cubic feet of natural gas equivalent per day, of which 91 percent is natural gas. The estimated average reserve-to-production ratio is 15.3 years.

The properties are expected to average a negative 9 percent differential to NYMEX natural gas prices and a negative 2 percent differential to NYMEX oil prices. Lease operating expenses are expected to average $0.18 on a Mcf equivalent basis. Production taxes are expected to average 4 percent of total wellhead oil and natural gas revenues.

Jon S. Brumley, Chief Executive Officer and President of Encore Energy Partners GP LLC, stated, “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 non-operated natural gas properties in the Chismville field of Arkansas.” He went on to state, “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 4-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.”

In order to fund the purchase price, ENP will borrow under its revolving credit facility. The transaction will be immediately accretive to ENP’s 2009 distributable cash flow per unit.

Bob Reeves, Chief Financial Officer and Senior Vice President of Encore Energy Partners GP LLC, stated, “At a time when managing risks is paramount to making sound investment decisions, we’ve taken as many risks out of the equation with this deal as possible. We have customized the size of this package to ensure the Partnership has adequate liquidity, but at the same time, the Partnership will also receive meaningful accretion. We minimized the performance risks by packaging over 1,800 different producing properties that require very little operating and capital costs. We mitigated the risks associated with commodity prices to the Partnership by hedging 4 years of production at an average price of $7.51 per Mcf and then adjusting the purchase price by the associated premiums to ensure the Partnership realizes the intended cash flow on the investment. Finally, we hedged the associated interest rate risk through the maturity date of the credit facility in 2012 at historically low LIBOR interest rate levels.” Mr. Reeves went on to state, “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. On the property side, there is over 10,000 net acres of unleased minerals in Oklahoma and many remaining low-risk development opportunities in Arkansas. There’s no doubt that this deal looks ideal for the Partnership, and it should, as it was custom made for ENP.”

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