Encore Acquisition: Investors Await Better Days

We reduce estimated net present value [NPV] for buy-rated Encore Acquisition (EAC) to $48 a
share from $54. This brings NPV more in line with our correlation with some thirty companies, that takes account of cash flow and reserve life.

Encore remains a strong asset value, while investors await improved performance. In the words of Jonny Brumley, who just completed his first year as chief executive, “2006 was a pretty rough year."

In the conference call discussing fourth quarter 2006 results on February14, Mr. Brumley disclosed that volume response from high pressure air injection in the company’s main field, the Cedar Creek Anticline in Montana and North Dakota, has been less than expected.

The project appears justified at today’s oil prices, but possibly not at the lower levels when the project was begun a few years ago. In 2007, the company has committed to $800 million of acquisitions to be financed by debt and the sale of $200 million in a new income stock. Because the ratio of debt to present value would increase to 0.38 from 0.23, investors would need 20% less Encore stock to maintain the normal unlevered weighting we suggest in our illustrative energy portfolio.

EAC -yr chart

Originally published February 15, 2006