Encore Acquisition Announces Tertiary Recovery Project

Buy-recommended Encore Acquisition Company (EAC) offers unlevered appreciation potential of 15% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $44 a share. On July 14 we reduced NPV from $48 when we reduced estimated Present Value of North American Natural Gas by 20%.

Released late July 28, second quarter results demonstrated strong recovery in unlevered cash flow (Ebitda) from the first quarter not only with oil price, but also in lower than expected operating cost. Volume is resisting decline despite reduced drilling. The turn in Ebitda may be the start of a new trend. Futures prices for oil over the next six years provide another sign of change after crossing the 40-week average into an uptrend at the end of May.

Finally, EAC announced an agreement to procure a supply of carbon dioxide in Wyoming for injecting into the Bell Creek oil field in Montana. A $345 million capital investment is planned for the next two years to neutralize the presumed pollutant as it facilitates the production of an additional 30 million barrels of oil beginning in 2012. Encore has a larger potential project to inject carbon dioxide for greater oil production from its Cedar Creek Anticline in North Dakota, perhaps taking advantage of the political interest in reducing emissions.

Originally published on July 29, 2009.

Comments

[PizzaMan:]

Kurt,

The Belle Creek field used to be a lot larger than it was. Also, one thing that I know about Encore is that they re-entered wells in the Cedar Creek Anticline after they bought it from Shell. The production increase there as well as the increase in the price of oil since they bought the field built the rest of the company.

I don't know if they are planning a similar thing, but there are a lot of old wells in the Belle Creek field that might be brought back to life with CO2 injection. Could be very nice if it EAC could do it again and it worked out.

I also believe that during the Shell days there was a pilot project that showed that CO2 injection would work in the Cedar Creek Anticline. Belle Creek was also bought as a stepping stone to getting CO2 to the Cedar Creek Anticline. Again, it would be sweet for that one to work out too.

The problem might come in that the costs for getting CO2 to Montana (The Ceddar Creek Anticline is primarily in Montana) is keeping the project costs under control. I agree that there is sigificant political interest in reducing CO2, and even some talk about sequestering it. However, this political interest doesn't seem to have any money with it. No matter how much CO2 you get out of the atmosphere.

EAC also has a history of buying more than they can really afford. How does this $345M go along with their recent acquisitions from EXCO?

In the end, I like these guys too. There are just a few risks too.

Aug 25 07:36 PM