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Encore Builds Onshore Stake in EXCO Deal

Encore Acquisition Co. is expanding its holdings in East Texas and the Midcontinent in a $375 million cash deal with EXCO Resources Inc., the companies said last week. It was the first of two EXCO transactions announced last week -- the other a mega-deal with BG Group (see related story).

The purchase would give Encore, based in Fort Worth, TX, a stake in the Gladewater field in East Texas, which produces primarily from the natural gas-rich Cotton Valley Sands. The package includes 495 wells (gross) with estimated output of 17.3 MMcfe/d. Proved developed reserves are estimated at 10.3 million boe, 95% weighted to gas.

In the Midcontinent Encore would pick up an estimated 12.8 million boe in proved developed reserves, nearly equally weighted in oil and natural gas liquids, and 100% proved developed. The biggest piece of the package is the Norge Marchand Unit in Grady County, OK, which has an estimated 200 million bbl of original oil in place and output estimated at 1,955 boe/d. Encore also would acquire a stake in some properties in the Texas Panhandle, southwestern Kansas and western Oklahoma.

"This acquisition is vintage Encore," said CEO Jon S. Brumley. "Purchasing long-life properties at a time when prices are below long-term marginal costs has been a tried and true strategy Encore has been practicing for the past 11 years. Acquisition opportunities like this do not happen very often, so when they become available you must be ready."

The industry "is in a state of underinvestment and with unconventional horizontal plays becoming a larger percentage of Lower 48 gas production," said Brumley. "We believe that the market will be ripe for prices to increase in 2010. This acquisition has a production profile that in today's poor price environment is much safer and more desirable than a drilling program.”

The proved developed properties are expected to contribute $40 million to Encore's cash flow this year and $65 million in 2010, including hedges. To finance the transaction, which is set to close in August, Encore plans to use debt and would sell some of its Rockies and Permian Basin properties to its partnership Encore Energy Partners LP for $190 million in cash.

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