Encore Acquisition Company Announces 2004 Results; 29% Increase in Net

    Business Editors/Energy Editors

    FORT WORTH, Texas--(BUSINESS WIRE)--Feb. 16, 2005--Encore Acquisition Company (NYSE:EAC) today reported 2004 results:

(in millions except per share and daily production amounts):

Year Ended December 31, ------------------------- 2004 2003 Increase ------------ ------------ -------- Net income $82.1 $63.6 29% Diluted earnings per share $2.58 $2.10 23% Revenues $298.5 $220.1 36% Cash flow from operations $171.8 $123.8 39% Total oil and gas related capital $428.1 $154.0 178% Daily production volumes (BOE) 24,665 22,218 11%

    Net income for the full year of 2004 increased to $82.1 million, or $2.58 per diluted share, on revenues of $298.5 million. This compares to full year 2003 net income of $63.6 million, or $2.10 per diluted share, on revenues of $220.1 million. Net income for the year ended December 31, 2003 included a $0.9 million ($0.03 per diluted share) cumulative effect of accounting change benefit resulting from the Company's adoption of Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" on January 1, 2003. For 2004, cash flow from operations increased 39% to $171.8 million from the $123.8 million in operating cash flow generated in 2003.
    Higher net income in 2004 resulted as record production volumes for the year increased 11% to 9.0 million barrels of oil equivalent or 24,665 BOE per day, compared with 2003 production of 8.1 MMBOE or 22,218 BOE per day. The rise in production volumes was attributable to continued organic growth through the drill bit, as well as strategic acquisitions in existing core areas. Oil represented 74% and 81% of the Company's total production volumes in 2004 and 2003, respectively. Encore's realized commodity prices, including the effects of hedging, averaged $33.04 per barrel and $5.53 per Mcf during 2004, increases of 24% and 14%, respectively, from the prior year. On a combined basis, including the effects of hedging, prices increased 22% during 2004 to $33.07 per BOE from $27.14 per BOE in 2003.
    Net income for the fourth quarter 2004 was $26.2 million, or $0.80 per diluted share, on revenues of $89.9 million. The Company's comparative fourth quarter 2003 net income was $15.7 million, or $0.51 per diluted share, on revenues of $57.3 million. Cash provided by operating activities for the fourth quarter 2004 was $44.7 million, a 54% increase from the $29.0 million reported for the same period last year.
    Fourth quarter 2004 production averaged 26,096 BOE per day, a 15% increase from 22,712 BOE per day for the same period in 2003. Encore's realized commodity prices, including the effects of hedging, averaged $37.24 per barrel and $6.32 per Mcf during the fourth quarter of 2004, increases of 37% and 34%, respectively, from the same period of 2003. On a combined basis, including the effects of hedging, prices increased 36% during the fourth quarter of 2004 to $37.43 per BOE from $27.44 per BOE in the same period in 2003.

    Year-End Reserves

    As previously announced, the Company's independent petroleum engineers, Miller and Lents, Ltd., estimated proved oil and gas reserves increased by 23% to 173 MMBOE as of December 31, 2004. During 2004, Encore replaced 456% of the 9.0 million BOE it produced in 2004. At December 31, 2004, oil reserves accounted for 77% of total proved reserves, and 71% of proved reserves were developed. Based on fourth quarter 2004 production of 26,096 BOE per day, Encore's reserve-to-production ratio is approximately 18 years for total proved reserves and 13 years for proved developed reserves.

    Operations Update

    Encore finished 2004 with total oil and natural gas related capital expenditures of $428.1 million. Encore invested $238.8 million in property acquisitions for 2004, primarily for the Cortez and Overton properties. The Company invested $187.6 million in its development, exploitation, and exploration programs, drilling 240 gross (169.7 net) wells. Additionally, the Company incurred $1.2 million for acquisition and $0.5 million for development-related asset retirement obligations.

    Liquidity Update

    At December 31, 2004, long-term debt was $379.0 million, including $150.0 million of 8.375% Senior Subordinated Notes due June 15, 2012, $150.0 million of 6.25% Senior Subordinated Notes due April 15, 2014, and $79.0 million of bank debt. The Company had $290.7 million of additional borrowing capacity available under its credit facility at December 31, 2004. The Company's capitalization was $852.6 million, which was comprised of 44% debt and 56% equity.

    2005 Outlook

    As previously announced, Encore's Board of Directors has approved a $223 million capital budget for 2005 (exclusive of acquisitions). The budget includes plans to invest up to $159 million on conventional exploitation drilling on the Company's existing properties.
    For the full year of 2005, production is expected to increase 8% to 12% from 2004 levels. Production, ad valorem, and severance taxes are anticipated to remain at approximately 9% of oil and natural gas revenues before hedging. The Company expects lease operations expense to average approximately $5.90 per BOE. General and administrative expenses are expected to average approximately $1.40 per BOE. Depletion, depreciation, and amortization during 2005 should be approximately $7.00 per BOE. Income tax expense is expected to be at an effective rate of 36% with approximately 90% deferred.
    For the first quarter of 2005, production is expected to average 26,350 BOE per day. Production, ad valorem, and severance taxes are anticipated to remain at approximately 9% of oil and natural gas revenues before hedging. The Company expects lease operations expense to average approximately $5.50 per BOE. General and administrative expenses are expected to average approximately $1.40 per BOE. Depletion, depreciation, and amortization should be approximately $6.80 per BOE. Income tax expense is expected to be at an effective rate of 36% with approximately 95% deferred. We expect to invest approximately $51.3 million of our capital budget in the first quarter of 2005.

    Conference Call

    Title: Encore Acquisition Company Conference Call

    Date and Time: Thursday, February 17, 2005 at 9:30 a.m. Central Time

    Webcast: Listen to the live broadcast via http://www.encoreacq.com

    Telephone: Dial 877-356-9552 ten minutes prior to the scheduled time and request the conference call by supplying the title specified above
    A replay of the conference call will be archived and available via Encore's website at the address above or by dialing 800-642-1687 and entering conference ID 3858335. The replay will be available through February 24, 2005. International or local callers can dial 706-679-0419 for the live broadcast or 706-645-9291 for the replay.

    About the Company:

    Organized in 1998, Encore is a growing independent energy company engaged in the acquisition, development and exploitation of North American oil and natural gas reserves. Encore's oil and natural gas reserves are in four core areas: the Cedar Creek Anticline of Montana and North Dakota; the Permian Basin of West Texas and Southeastern New Mexico; the Mid Continent area, which includes the Arkoma and Anadarko Basins of Oklahoma, the North Louisiana Salt Basin, the East Texas Basin and the Barnett Shale; and the Rocky Mountains. Encore's latest investor presentation is available on the Company's website at www.encoreacq.com.

    Cautionary Statements:

    This press release includes forward-looking statements, which give Encore's current expectations or forecasts of future events based on currently available information. Forward-looking statements in this press release relate to, among other things, the following: the expected amount and focus of the Encore's capital expenditures; expected production; anticipated production growth; the level of production, ad valorem and severance taxes, lease operations expense, general and administrative expenses, depletion, depreciation and amortization expenses, and income tax expense; expected effective tax rates; and any other statements that are not historical facts. However, the assumptions of management and the future performance of Encore are subject to a wide range of business risks and uncertainties and there is no assurance that these statements and projections will be met. Factors that could affect Encore's business include, but are not limited to: the risks associated with operating in a limited number of geographic areas; the risks associated with drilling of oil and natural gas wells; risks related to Encore's high-pressure air program; Encore's ability to find, acquire, market, develop, and produce new properties; the risk of drilling dry holes; oil and natural gas price volatility; hedging arrangements (including the costs associated therewith); uncertainties in the estimation of proved, probable and potential reserves and in the projection of future rates of production and reserve growth; inaccuracies in Encore's assumptions regarding items of income and expense; uncertainties in the timing of exploitation expenditures; operating hazards attendant to the oil and natural gas business; drilling and completion losses that are generally not recoverable from third parties or insurance; potential mechanical failure or underperformance of significant wells; climatic conditions; availability and cost of material and equipment; actions or inactions of third-party operators of Encore's properties; Encore's ability to find and retain skilled personnel; diversion of management's attention from existing operations while pursuing acquisitions; availability of capital; the strength and financial resources of Encore's competitors; regulatory developments; environmental risks; general economic and business conditions; industry trends; and other factors detailed in Encore's most recent Form 10-K and other filings with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize (or the consequences of such a development changes), or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. Encore undertakes no obligation to publicly update or revise any forward-looking statements.

(All data in thousands, except per share data)

Three Months Ended Year Ended December 31, December 31, --------------------- ---------------------- 2004 2003 2004 2003 ---------- --------- ------------ --------- Consolidated Statements (unaudited) (unaudited) of Operations: Revenues: Oil $62,757 $44,677 $220,649 $176,351 Natural gas 27,111 12,665 77,884 43,745 ---------- --------- ------------ --------- Total revenues 89,868 57,342 298,533 220,096 Expenses: Production - Lease operations 13,390 9,958 47,142 37,846 Production, ad valorem, and severance taxes 9,196 5,300 30,313 22,013 Depletion, depreciation, and amortization 15,260 9,573 48,522 33,530 Exploration 1,748 - 3,907 - G&A (excluding non- cash stock based compensation) 3,366 1,884 10,982 8,680 Non-cash stock based compensation 357 154 1,770 614 Derivative fair value (gain) loss 1,587 933 5,011 (885) Other operating 1,566 1,568 5,028 3,481 ---------- --------- ------------ --------- Total operating expenses 46,470 29,370 152,675 105,279 ---------- --------- ------------ --------- Operating income 43,398 27,972 145,858 114,817 Interest and other (6,693) (3,879) (23,219) (15,937) ---------- --------- ------------ --------- Income before income taxes and cumulative effect of accounting change 36,705 24,093 122,639 98,880 Current income tax benefit (provision) 1,133 656 (1,913) (991) Deferred income tax provision (11,598) (9,087) (38,579) (35,111) ---------- --------- ------------ --------- Income before cumulative effect of accounting change 26,240 15,662 82,147 62,778 Cumulative effect of accounting change, net of taxes - - - 863 ---------- --------- ------------ --------- Net income $26,240 $15,662 $82,147 $63,641 ========== ========= ============ =========

Income before cumulative effect of accounting change per common share: Basic $0.81 $0.52 $2.62 $2.09 Diluted 0.80 0.51 2.58 2.07

Net income per common share: Basic $0.81 $0.52 $2.62 $2.11 Diluted 0.80 0.51 2.58 2.10

Weighted average common shares outstanding: Basic 32,343 30,160 31,393 30,102 Diluted 32,851 30,473 31,825 30,333

Year Ended December 31, ---------------------- 2004 2003 ------------ --------- Condensed Consolidated (unaudited) Statements of Cash Flows: Net income $82,147 $63,641 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash and other items 105,133 69,842 Changes in operating assets and liabilities (15,459) (9,665) ------------ --------- Net cash provided by operating activities 171,821 123,818

Cash used in investing activities (433,470) (153,747)

Financing activities: Net proceeds from issuance of common stock 52,929 175,474 Purchase of treasury stock - (175,560) Net proceeds from long-term debt 195,192 12,875 Other 14,200 4,514 ------------ --------- Net cash provided by financing activities 262,321 17,303 ------------ ---------

Increase (decrease) in cash and cash equivalents 672 (12,626) Cash and cash equivalents, beginning of period 431 13,057 ------------ --------- Cash and cash equivalents, end of period $1,103 $431 ============ =========

December 31, December 31, 2004 2003 ------------ ------------ Condensed Balance (unaudited) Sheets: Total assets $1,123,400 $672,138 ============ ========= Liabilities $270,825 $134,163 Long-term debt 379,000 179,000 Stockholders' equity 473,575 358,975 ------------ --------- Total liabilities and stockholders' equity $1,123,400 $672,138 ============ =========

Working capital (a) $(15,566) $(52)

(a) Working capital is defined as current assets minus current liabilities.

Three Months Ended Year Ended December 31, December 31, ------------------ ---------------- 2004 2003 2004 2003 ---------- ------- ------- -------- (unaudited) (unaudited) Production volumes: Oil (MBbls) 1,685 1,640 6,679 6,601 Natural gas (MMcf) 4,293 2,696 14,089 9,051 Combined (MBOE) 2,401 2,090 9,027 8,110

Daily production: Oil (Bbls/d) 18,320 17,828 18,249 18,085 Natural gas (Mcf/d) 46,660 29,309 38,493 24,798 Combined (BOE/d) 26,096 22,712 24,665 22,218

Average prices: Oil ( per Bbl) $37.24 $27.24 $33.04 $26.72 Natural gas (per Mcf) 6.32 4.70 5.53 4.83 Combined (per BOE) 37.43 27.44 33.07 27.14

Average costs per BOE: Lease operations expense $5.58 $4.77 $5.22 $4.67 Production, ad valorem, and severance taxes 3.83 2.54 3.36 2.71 DD&A 6.36 4.58 5.38 4.13 G&A (excluding non-cash stock based compensation) 1.40 0.90 1.22 1.07

Encore Acquisition Company

Changes in Proved Reserves (unaudited) Natural Oil Gas Combined (MBbls) (MMcf) (MBOE) -------- -------- --------- Balance, December 31, 2002 111,674 (a) 99,818 (a) 128,310 (a) Acquisitions of minerals-in- place 13 37,464 6,257 Extensions and discoveries 3,957 7,354 5,182 Improved recovery 12,773 (178) 12,744 Revisions of estimates (4,084) 3,543 (3,493) Production (6,601) (9,051) (8,110) -------- -------- --------- Balance, December 31, 2003 117,732 (b) 138,950 (b) 140,890 (b) Acquisitions of minerals-in- place 7,853 86,314 22,239 Extensions and discoveries 4,226 27,248 8,768 Improved recovery 11,826 (80) 11,812 Revisions of estimates (910) (4,313) (1,629) Production (6,679) (14,089) (9,027) -------- -------- --------- Balance, December 31, 2004 134,048 (c) 234,030 (c) 173,053 (c) ======== ======== =========

(a) Average prices used in estimating proved reserves at December 31, 2002 were $31.20 per Bbl and $4.79 per Mcf.

(b) Average prices used in estimating proved reserves at December 31, 2003 were $32.55 per Bbl and $5.83 per Mcf.

(c) Average prices used in estimating proved reserves at December 31, 2004 were $43.46 per Bbl and $6.19 per Mcf.

Encore Acquisition Company

Derivative Summary as of December 31, 2004

Oil Derivative Contracts ------------------------ Average Average Average Floor Daily Cap Daily Swap Daily Price Cap Price Swap Price Floor Volume (per Volume (per Volume (per Period (Bbls) Bbl) (Bbls) Bbl) (Bbls) Bbl) -------------- ------------ ------ -------- ------- ------- ------- Jan - June 2005 15,500 $27.55 3,500 $31.89 1,000 $25.12 July - Dec 2005 12,500 27.84 2,500 31.07 1,000 25.12 Jan - Jun 2006 3,000 32.50 1,000 29.88 2,000 25.03 July - Dec 2006 1,000 27.50 1,000 29.88 2,000 25.03 Jan - Dec 2007 - - - - 2,000 25.11

Natural Gas Derivative Contracts -------------------------------- Average Average Average Floor Daily Cap Daily Swap Daily Price Cap Price Swap Price Period Floor Volume (per Volume (per Volume (per (Mcf) Mcf) (Mcf) Mcf) (Mcf) Mcf) -------------- ------------ ------- -------- ------- ------- ------- Jan - Dec 2005 10,000 $4.84 5,000 $5.97 12,500 $4.96 Jan - Dec 2006 5,000 4.85 5,000 5.68 12,500 5.02 Jan - Dec 2007 - - - - 10,000 4.99

Interest Rate Swap ------------------

Expiration Notional Encore Pays Encore Receives ---------- ----------- ------------ --------------- June 15, 2005 $80,000,000 LIBOR + 3.89% 8.375%

--30--MJR/da*

CONTACT: Encore Acquisition Company, Fort Worth Roy W. Jageman, 817-339-0861 or William J. Van Wyk, 817-339-0812

KEYWORD: TEXAS INDUSTRY KEYWORD: OIL/GAS BANKING ENERGY EARNINGS CONFERENCE CALLS SOURCE: Encore Acquisition Company

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