Encore Acquisition Company Announces Second Quarter 2005 Financial and Operating Results

(in millions except per share, daily production, and price per BOEamounts; earnings per share and weighted average diluted sharesoutstanding have been restated for a three-for-two stock split thatbecame effective July 12, 2005)
Quarter Ended June 30,
----------------------
2005 2004 Increase
------- ------- --------
Net income $23.7 $18.0 32%
Diluted earnings per share $0.48 $0.39 23%
Revenues $99.7 $70.1 42%
Cash flow from operations $62.6 $43.4 44%
Average combined price ($/BOE) $39.56 $31.54 25%
Daily production volumes (BOE) 27,697 24,434 13%
Diluted shares outstanding 49.5 46.7 6%

Encore generated net income of $23.7 million ($0.48 per dilutedshare) in the second quarter of 2005 as compared to $18.0 million($0.39 per diluted share) in the second quarter of 2004. Net incomeincludes expenses for derivative fair value loss and non-cash stockbased compensation totaling $2.7 million ($0.03 per diluted share) forthe second quarter of 2005 and $1.3 million ($0.02 per diluted share)for the second quarter of 2004.

Jonny Brumley, Encore's President, stated, "What a quarter. Recordproduction, a successful drilling program, and continued good resultsfrom the high pressure air project make for a profitable combination.On top of that, we are raising our 2005 production guidance from theprevious range of 8% to 12% growth to a new range of 11% to 13% growthover 2004."

The Company drilled 110 gross (65.7 net) wells in the secondquarter of 2005, investing $81.0 million in development capital(excluding development-related asset retirement obligations). TheCompany also invested $8.0 million in property acquisitions andundeveloped leases. On average, Encore operated 14 rigs during thesecond quarter of 2005 across all of its core areas.

Production volumes for the second quarter of 2005 increased 13% toa record 27,697 BOE per day (2.5 MMBOE), compared with second quarter2004 production of 24,434 BOE per day (2.2 MMBOE). The net profitsinterests on the Cedar Creek Anticline ("CCA") reduced production byapproximately 859 BOE per day in the second quarter of 2005 versus 848BOE per day in the second quarter of 2004. Oil represented 67% and 76%of the Company's total production volumes in the second quarter of2005 and 2004, respectively.

Encore's realized commodity prices, including the effects ofhedging, averaged $40.96 per barrel and $6.11 per Mcf during thesecond quarter of 2005 resulting in increases of 31% and 14%respectively over the second quarter of 2004. On a combined basis,including the effects of hedging, prices increased 25% during thesecond quarter of 2005 to $39.56 per BOE as compared to $31.54 per BOEin the second quarter of 2004. Hedging expense reduced realized oilprices by $6.25 per barrel and realized natural gas prices by $0.46per Mcf during the second quarter of 2005.

During the second quarter of 2005, lease operating expenseincreased to $15.7 million ($6.24 per BOE) from $10.9 million ($4.91per BOE) in the second quarter of 2004 as a result of higher volumesand a higher cost operating environment. The Company incurredexploration expense of $3.8 million ($0.05 per diluted share) in thesecond quarter of 2005 as compared to $1.7 million ($0.02 per dilutedshare) in the second quarter of 2004.

High-Pressure Air Injection Program Update

In the Little Beaver high-pressure air injection ("HPAI") projectarea, Encore continues to see positive production response in linewith expectations. In the core injection area of the project,production has increased from approximately 900 barrels per day to1,200 barrels per day. This represents an increase of 200 barrels perday over the first quarter of 2005 and a 500 barrel per day upliftover the naturally declining production levels that would have beenexpected prior to the initiation of HPAI. Total production in theLittle Beaver HPAI project area is approximately 1,675 barrels per dayand is expected to increase from these levels in the future.High-pressure air injection in Little Beaver Phases 1 and 2 wascompleted in the fourth quarter of 2004.

In the Pennel and Coral Creek area of the CCA, where the Companyhas been operating a successful HPAI appraisal project (Phase 1) fornearly three years, Encore has continued to expand the Phase 2 portionof the HPAI project. Encore has been injecting air in the Phase 2project area since April 2005, and expects full implementation to becompleted by year-end 2005. The Company estimates that production willrespond on a timetable similar to the Little Beaver project, withpositive production indications initially expected by late 2006.

Liquidity Update

On June 30, 2005, long-term debt was $440.0 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 $140.0 million of bank debt under the Company's existing creditfacility. At this time, the Company announced a $300 million privateplacement of 6.0% Senior Subordinated Notes due 2015. Encore intendsto use the net proceeds of the offering to redeem all $150 million ofits outstanding 8.375% Senior Subordinated Notes due 2012 and toreduce outstanding indebtedness under its existing credit facility.

Encore closed the private placement and issued a notice ofredemption of its 8.375% notes on July 13, 2005. The redemption of the8.375% notes is expected to occur on or about August 15, 2005.Accordingly, the financial impact of the transaction will be reflectedin the third quarter 2005 financial statements. At the time ofclosing, the borrowing base under the Company's existing creditfacility was reduced according to the terms of the credit facilityfrom $500.0 million to $450.0 million. Giving pro forma effect to theclosing of the 6.0% notes and the expected use of proceeds, theCompany had $15.1 million outstanding under its existing creditfacility as of June 30, 2005.

Third Quarter 2005 Outlook

Encore currently is operating 11 drilling rigs in the onshorecontinental United States (5 rigs in Montana, 3 rigs in East Texas, 2rigs in West Texas, and 1 rig in the Mid Continent area). The Companyexpects its development activities to offset natural declines and togrow wellhead production by approximately 300 BOE per day in the thirdquarter of 2005. The impact of the net profits interests in the CCA,which lowers reported production, is expected to rise by about 500 BOEper day to 1,350 BOE per day. Therefore, the Company expects reportedproduction to average approximately 27,500 BOE per day in the thirdquarter of 2005.

Production, ad valorem, and severance taxes are anticipated toremain at approximately 9.0% of oil and natural gas revenues beforehedging. In the third quarter the Company expects to begin expensing$0.7 million ($0.28 per BOE) of HPAI costs attributable to LittleBeaver Phase 1 that previously were being capitalized. Including theHPAI costs, the Company expects lease operations expense to increasefrom $15.7 million ($6.24 per BOE) in the second quarter toapproximately $17 million ($6.65 per BOE) in the third quarter.General and administrative expenses are expected to increase from $3.6million in the second quarter to approximately $4 million in the thirdquarter. Depletion, depreciation, and amortization should increasefrom $19.0 million ($7.55 per BOE) in the second quarter toapproximately $21 million ($8.35 per BOE) in the third quarter. Incometax expense is expected to be at an effective rate of 35% withapproximately 94% deferred.

The Company expects to invest approximately $80 million indevelopment and exploration capital during the third quarter of 2005.For the full year 2005, Encore's Board of Directors has approved anincrease in development and exploration capital to $315 million,reflecting an increase in activity levels and the current industrycost environment.
Conference Call

Title: Encore Acquisition Company Conference Call
Date and Time: Wednesday, July 27, 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 viaEncore's website at the address above or by dialing 800-642-1687 andentering conference ID 7882594. The replay will be available throughAugust 3, 2005. International or local callers can dial 706-679-0419for the live broadcast or 706-645-9291 for the replay.

About the Company:

Organized in 1998, Encore is a growing independent energy companyengaged in the acquisition, development and exploitation of NorthAmerican oil and natural gas reserves. Encore's oil and natural gasreserves are in four core areas: the Cedar Creek Anticline of Montanaand North Dakota; the Permian Basin of West Texas and Southeastern NewMexico; the Mid Continent area, which includes the Arkoma and AnadarkoBasins of Oklahoma, the North Louisiana Salt Basin, the East TexasBasin and the Barnett Shale; and the Rocky Mountains. Encore's latestinvestor presentation is available on the Company's website atwww.encoreacq.com.

Cautionary Statements:

This press release includes forward-looking statements, which giveEncore's current expectations or forecasts of future events based oncurrently available information. Forward-looking statements in thispress release relate to, among other things, the following: theexpected amount and focus of the Encore's capital expenditures;expected drilling results; expected production (including the impactof the Company's net profits interests); anticipated productiongrowth; the level of production, ad valorem and severance taxes, leaseoperations expense, general and administrative expenses, depletion,depreciation and amortization expenses, and income tax expense;expected effective tax rates; and any other statements that are nothistorical facts. The assumptions of management and the futureperformance of Encore are subject to a wide range of business risksand uncertainties and there is no assurance that these statements andprojections will be met. Factors that could affect Encore's businessinclude, but are not limited to: the risks associated with operatingin a limited number of geographic areas; the risks associated withdrilling of oil and natural gas wells; risks related to Encore'shigh-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 (includingthe costs associated therewith); uncertainties in the estimation ofproved, probable and potential reserves and in the projection offuture rates of production and reserve growth; inaccuracies inEncore's assumptions regarding items of income and expense;uncertainties in the timing of exploitation expenditures; operatinghazards attendant to the oil and natural gas business; drilling andcompletion losses that are generally not recoverable from thirdparties or insurance; potential mechanical failure or underperformanceof significant wells; climatic conditions; availability and cost ofmaterial and equipment; actions or inactions of third-party operatorsof Encore's properties; Encore's ability to find and retain skilledpersonnel; diversion of management's attention from existingoperations while pursuing acquisitions or joint ventures; availabilityof capital; the strength and financial resources of Encore'scompetitors; regulatory developments; environmental risks; generaleconomic and business conditions; industry trends; and other factorsdetailed in Encore's most recent Form 10-K and other filings with theSecurities and Exchange Commission. If one or more of these risks oruncertainties materialize (or the consequences of such a developmentchanges), or should underlying assumptions prove incorrect, actualoutcomes may vary materially from those forecasted or expected. Encoreundertakes no obligation to publicly update or revise anyforward-looking statements.
(All data in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
2005 2004 2005 2004
------------ ----------- --------- -----------
Consolidated (unaudited) (unaudited)
Statements of
Operations:
Revenues:
Oil $69,559 $52,885 $136,695 $99,649
Natural gas 30,158 17,237 54,603 29,764
----------- ----------- --------- -----------
Total revenues 99,717 70,122 191,298 129,413
----------- ----------- --------- -----------
Expenses:
Production -
Lease operations 15,721 10,921 30,589 21,163
Production, ad
valorem, and
severance taxes 9,813 7,161 18,899 13,000
Depletion,
depreciation, and
amortization 19,038 11,249 35,721 20,512
Exploration 3,772 1,697 6,383 1,697
G&A (excluding non-
cash stock based
compensation) 3,571 2,530 7,206 4,758
Non-cash stock
based compensation 1,006 307 1,779 617
Derivative fair
value loss 1,692 965 4,101 1,123
Other operating 1,703 1,091 3,302 2,093
----------- ----------- --------- -----------
Total operating expenses 56,316 35,921 107,980 64,963
----------- ----------- --------- -----------
Operating income 43,401 34,201 83,318 64,450
Interest and other (7,363) (6,202) (14,258) (10,057)
----------- ----------- --------- -----------
Income before
income taxes 36,038 27,999 69,060 54,393
Current income tax
provision (589) (919) (1,390) (2,004)
Deferred income tax
provision (11,781) (9,089) (22,218) (17,496)
----------- ----------- --------- -----------
Net income $23,668 $17,991 $45,452 $34,893
=========== =========== ========= ===========

Net income per
common share:
Basic 0.49 0.39 0.93 0.76
Diluted 0.48 0.39 0.92 0.75

Weighted average
common shares
outstanding:
Basic 48,660 46,089 48,636 45,684
Diluted 49,458 46,680 49,429 46,271


Six Months Ended
June 30,
---------------------
2005 2004
--------- ----------
(unaudited)
Condensed Consolidated Statements of Cash Flows:
Net income $45,452 $34,893
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash and other items 73,329 47,316
Changes in operating assets and liabilities (1,316) (7,719)
--------- -----------
Net cash provided by operating activities 117,465 74,490
--------- -----------

Cash used in investing activities (166,103) (298,376)

Financing activities:
Net proceeds from long-term debt 60,796 170,872
Net proceeds from issuance of common stock - 53,000
Cash Overdraft and Other (12,238) 2,374
--------- -----------
Net cash provided by financing activities 48,558 226,246
--------- -----------

Increase (decrease) in cash and cash equivalents (80) 2,360
Cash and cash equivalents, beginning of period 1,103 431
--------- -----------
Cash and cash equivalents, end of period $1,023 $2,791
========= ===========

June 30, December 31,
2005 2004
------------ ------------
Condensed Balance Sheets: (unaudited)

Total assets $1,269,811 $1,123,400
============ ===========
Liabilities $337,794 $270,825
Long-term debt 440,000 379,000
Stockholders' equity 492,017 473,575
------------ -----------
Total liabilities
and stockholders'
equity $1,269,811 $1,123,400
============ ===========

Working capital(a) $(23,598) $(15,566)

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


Three Months Six Months
Ended Ended
June 30, June 30,
--------------- ---------------
2005 2004 2005 2004
------- ------- ------- -------
(unaudited) (unaudited)
Production volumes:
Oil (MBbls) 1,698 1,689 3,403 3,299
Natural gas (MMcf) 4,933 3,209 9,384 5,733
Combined (MBOE) 2,520 2,223 4,967 4,255

Daily production:
Oil (Bbls/d) 18,662 18,557 18,799 18,128
Natural gas (Mcf/d) 54,213 35,260 51,847 31,501
Combined (BOE/d) 27,697 24,434 27,440 23,378

Average prices:
Oil ( per Bbl) $40.96 $31.32 $40.17 $30.20
Natural gas (per Mcf) 6.11 5.37 5.82 5.19
Combined (per BOE) 39.56 31.54 38.52 30.42

Average costs per
BOE:
Lease operations expense $6.24 $4.91 $6.16 $4.97
Production, ad valorem, and
severance taxes 3.89 3.22 3.81 3.06
DD&A 7.55 5.06 7.19 4.82
Exploration 1.50 0.76 1.29 0.40
G&A (excluding non-cash
stock based compensation) 1.42 1.14 1.45 1.12


Derivative Summary as of June 30, 2005

Oil Derivative Contracts
------------------------

Average Average Average
Daily Floor Daily Cap Daily Swap
Floor Price Cap Price Swap Price
Volume (per Volume (per Volume (per
Period (Bbls) Bbl) (Bbls) Bbl) (Bbls) Bbl)
-------------------- ------- ------- ------- ------- ------- -------
July - Dec 2005 12,500 27.84 2,500 31.07 1,000 25.12
Jan - Jun 2006 7,000 33.93 1,000 29.88 2,000 25.03
July - Dec 2006 6,500 35.00 1,000 29.88 2,000 25.03
Jan - Dec 2007 - - - - 2,000 25.11


Natural Gas Derivative Contracts
--------------------------------

Average Average Average
Daily Floor Daily Cap Daily Swap
Floor Price Cap Price Swap Price
Volume (per Volume (per Volume (per
Period (Mcf) Mcf) (Mcf) Mcf) (Mcf) Mcf)
-------------------- ------- ------- ------- ------- ------- -------
July - Dec 2005 17,500 5.12 5,000 5.97 12,500 4.96
Jan - Dec 2006 12,500 5.34 5,000 5.68 12,500 5.02
Jan - Dec 2007 - - - - 10,000 4.99