Denbury to acquire Encore for $2.64 billion

Denbury Resources Inc., Dallas, (NYSE: DNR) plans to acquire Fort Worth, Texas-based Encore Acquisition Co. (NYSE: EAC) for approximately $2.64 billion in cash, stock and debt assumption, including the value of the minority interest in the MLP Encore Energy Partners LP (NYSE: ENP).

Denbury will pay $50 per Encore share comprised of $15 in cash and $35 in stock subject to a collar mechanism. The acquisition also involves some $1 billion in Encore Acquisition debt. Denbury stockholders will hold approximately 63% to 68% of the combined company.

Encore Acquisition’s total proved reserves are 186 million barrels of oil equivalent (BOE), with 72% oil, and 80% proved developed. Production for first-half 2009 averaged 41,652 bbl. 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 BOE 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.”

Pro forma, the combined company will have more than 500 million BOE 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.

The companies value the combined deal at $4.5 billion.

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

Denbury has received a commitment letter for an underwritten financing from J.P. Morgan for a new $1.6-billion bank revolving credit facility and a $1.25-billion bridge financing to subordinated debt facility. The new debt financing will be used to fund the cash portion of the consideration, potentially retire and replace $825 million of Encore’s outstanding subordinated notes, replace Encore’s existing bank facility, which has approximately $180 million currently drawn and outstanding, and to pay other fees and expenses. Denbury expects to issue between 115 million and 146 million shares of stock to fund the equity portion.

During 2010, Denbury intends to sell noncore properties to reduce debt, with targeted sales of at least $500 million. Denbury will additionally own 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.

The deal is expected to close in first-quarter 2010. Denbury’s board and senior management will remain unchanged.

In August, Encore Acquisition acquired 176 billion cu. ft. equivalent of proved reserves in East Texas and the Midcontinent from Exco Resources Inc., Dallas, (NYSE: XCO) for $356.1 million in cash.

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

Denbury is the largest operator in Mississippi and owns the largest reserves of CO2 used for tertiary oil recovery east of the Mississippi River, as well as interests in the Barnett shale play near Fort Worth, Texas, and properties onshore in Louisiana, Alabama and southeastern Texas.

Based on the $4.5-billion price, Denbury is paying approximately $3.78 per proved thousand cu. ft. equivalent (Mcfe) based on 2008 year-end proved reserves, and $17,143 per million cu. ft. per day, according to Pritchard Capital Partners analysts. “Given the resource upside on EAC’s properties beyond just proved reserves, we believe it is a fair price.”

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 bbl. equivalent from CO2 EOR-related properties, 57 million bbl. equivalent from the Bakken, 70 million bbl. equivalent from the Haynesville, and 55 million bbl. from the West Texas joint venture.