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Encore Buying Anadarko WY Assets, Will Form MLP

Continuing its divestiture program, Houston-based Anadarko Petroleum Corp. agreed to sell its interests, most of which are oil, in the Elk Basin and Gooseberry area, primarily located in Park County, WY, to Fort Worth-based Encore Acquisition Co. for $400 million effective Jan. 1. Encore said it expects to create a master limited partnership (MLP) to hold at least some of the assets.

The properties are composed of the Elk Basin Unit and the Gooseberry Unit in Park County, WY. Encore's internal engineers have estimated that the properties have total proved reserves of approximately 20 MMBoe, which are 97% oil and 90% proved developed producing. Encore estimates that the 2 million BOE of proved undeveloped reserves will require approximately $17 million to develop.

The properties currently produce approximately 4,000 net boe/d with an additional 350 net boe/d of natural gas liquids produced by the Elk Basin Gas Plant. The producing properties have a shallow one-year proved developed decline rate estimated at 6%. Encore estimates that the properties have a total proved reserves-to-production ratio of approximately 14 years. These properties will be 100% operated by Encore.

At the deal's Jan. 1 effective date, production was approximately 4,350 boe/d net from 614 wells within two fields in the Elk Basin and Gooseberry area. Oil accounted for approximately 80% of 2006 production. The sale also includes the Clear Fork Pipeline Co., an oil and natural gas gathering system, and the Elk Basin Gas Plant, which processes natural gas liquids from the produced gas in the Elk Basin Unit and injects waste gases into the field to maintain production. The plant has capacity to process about 12 MMcf/d.

Encore's engineers have estimated that the proved developed properties will generate approximately $50 million in annual cash flow (revenues less direct operating expenses) in 2007 and 2008. Lease operating expenses are estimated to be approximately $10.25/boe.

"The luxury of these properties is that production can be held flat with a relatively modest $7 million annual investment and the remaining $43 million is available to grow production or to reduce debt," said Encore CEO Jon S. Brumley. "We are comfortable with waterfloods and tertiary recovery projects because they fit into our basket of expertise."

Anadarko CEO Jim Hackett said the sale further concentrates the company's geographic footprint and high-grades its assets. "We have significant positions in some of the most prolific basins in the Rocky Mountains. We have an extensive inventory of low-risk, repeatable projects, economies of scale and competitive advantages in the Greater Natural Buttes area in Utah, Powder River Basin in Wyoming and Wattenberg field in Colorado. Our divestiture program will enable us to concentrate on these areas where we are confident we can deliver strong, predictable growth for years to come."

In December Anadarko said asset sales are expected to yield proceeds sufficient to avoid the necessity of issuing new equity as part of its debt reduction program (see Daily GPI, Dec. 13, 2006), which was initiated following the company's acquisition of Kerr-McGee Corp. and Western Gas Resources Inc. (see Daily GPI, June 26, 2006).

Top executives at Anadarko have been granted stock options or restricted stock as reward for performance following the Kerr-McGee and Western Gas transactions, the company said Wednesday. Hackett received 122,800 stock options; COO Karl Kurz and Senior Vice Presidents Robert Reeves and R.A. Walker were granted 41,000 options each. Senior Vice President Robert Daniels was given 6,300 shares of restricted stock.

The Encore deal is expected to close by the end of the first quarter of 2007. Tristone Capital marketed the assets, while Lehman Brothers served as Anadarko's financial advisor.

In connection with the acquisition, Encore has purchased put contracts on approximately two-thirds of the acquisition's proved developed producing volumes at $65/bbl for the remainder of 2007 and all of 2008.

Encore also said Wednesday it intends to form an MLP through a public offering to own at least some of the properties to be acquired from Anadarko as well as certain Encore legacy oil and gas properties. Net proceeds are expected to repay debt related to the Anadarko transaction.

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