Encore Acquisition Company Business Information, Profile, and History

Company Perspectives:

Encore Acquisition Company, using the experience of our senior management team, has developed and refined an acquisition program designed to increase our reserves and to complement our core properties. We have over 30 engineering and geoscience professionals who manage our core properties and use their experience and expertise to target attractive acquisition opportunities. Following acquisition, our technical professionals seek to enhance the value of the new assets through a proven development and exploitation program. Since our inception in 1998, Encore has successfully acquired producing oil and natural gas properties totaling over $600 million.

History of Encore Acquisition Company

Encore Acquisition Company is an oil and gas company involved in the acquisition, development, and exploitation of North American reserves. Encore's properties are located in the Williston Basin in Montana and North Dakota, the Permian Basin in Texas and New Mexico, the Arkoma and Anadarko Basins in Oklahoma, the North Louisiana Basin, and in the Rocky Mountains. The company's Cedar Creek Anticline property in the Williston Basin represents its most valuable asset, accounting for 66 percent of its total proved reserves. Encore is led by its founder, I. Jon Brumley, an oil industry veteran with a penchant for pursuing growth via acquisitions.

Origins

Encore Acquisition Company was a fitting name for a start-up venture that most likely represented the entrepreneurial swan song of an oil-patch veteran. I. Jon Brumley had achieved success in the energy industry by heading acquisition-driven companies, and Encore was meant to be, in strategic terms, a repeat performance of the successes he enjoyed during his 30-year career. Born in Pampa, Texas, and raised in Austin, Brumley received his master's degree in business from the University of Pennsylvania's Wharton School of Business. After earning his degree, he returned to Texas and settled in Fort Worth, where he accepted a position as an administrative assistant at Southland Royalty. Brumley joined Southland in 1967, when the company operated as an oil exploration firm with a market capitalization (the number of shares held by investors multiplied by the price per share) of $100 million. The company's market worth increased exponentially after it changed its corporate strategy, a significant turning point for the company and a pivotal event in Brumley's professional career.

When Southland completed an acquisition in 1976, the purchase altered the company's strategy for the future, making a lasting impression on Brumley that would be evinced in his actions for decades to come. In a deal with Dallas-based Aztec Oil & Gas, Southland purchased a group of gas properties in the San Juan Basin that possessed roughly a trillion cubic feet of gas reserves. From that point forward, as Brumley earned promotion through the company's executive ranks, Southland shelved its exploration activities and focused on fueling its growth through additional acquisitions. By 1980, four years of aggressively pursuing oil and gas properties had greatly increased the size of the company. Southland entered the decade with a market capitalization of $4 billion, having quickly become one of the country's major players in the oil and gas industry and convincing Brumley of the merits of an acquisition-driven strategy. In 1985, after Brumley had completed his climb up the company's hierarchy to hold the posts of president and chief executive officer, he presided over the sale of the company to Burlington Northern Santa Fe Corp., a transaction that freed him to pursue his next goal: replicate Southland's strategy with another company.

The business model that served as the basis for Encore's strategy already was ingrained in Brumley's mind by the mid-1980s--nearly 15 years before Encore was formed. During the intervening years, the strategy was refined as its practitioner developed into a seasoned oil and gas executive. In 1986, a year after orchestrating the sale of Southland, Brumley cofounded a company named Cross Timbers Oil Co., a Fort Worth-based firm formed to focus on the acquisition and development of established oil and gas properties. Brumley spent a decade running Cross Timbers, overseeing its conversion to a publicly traded company and spearheading the acquisition of more than $500 million worth of properties by the time he retired in the summer of 1996. Brumley's retirement only lasted several weeks. Before the summer was over, Fort Worth billionaire Richard Rainwater and T. Boone Pickens, who owned a company named Mesa Inc., asked Brumley and his son, Jon S. (Jonny) Brumley, to help turnaround Pickens's beleaguered company. The elder Brumley, who was appointed chairman, was asked to find a merger partner, which he did a year later, when Mesa merged with Parker & Parsley Petroleum Co., creating a new company, the $546 million-in-sales Pioneer Natural Resources Co. Brumley and his son, who served as the company's manager of commodity risk and corporation development, left Pioneer in 1998, one year after the merger. Brumley chose against a return to retirement, deciding instead to fulfill one more goal in his professional career. He wanted to graft the experience he had gained at Southland and Cross Timbers on a new start-up venture, an enterprise that, in April 1998, became known as Encore Acquisition Company. "For some time," Brumley said in an August 2001 interview with Oil and Gas Investor, "Jonny and I wanted to work together in our own company, following the business model that was employed so successfully at Southland and Cross Timbers." Brumley assumed the posts of president, chief executive officer, and chairman, while his son took the title of executive vice-president of business development.

Brumley intended the company to be an acquisition-driven company, an entity that would purchase producing properties from major oil companies and improve their operations while cutting costs. "Reviving Vintage Fields" became the Encore slogan later in its development, as Brumley exercised his skill in churning a profit from properties forsaken by other companies. His timing for launching his venture was regarded by industry onlookers as propitious, occurring at a time when petroleum prices were at a 13-year low and while major energy concerns were directing their efforts offshore and selling their onshore properties for reduced prices. "What's happening," an analyst explained in a December 4, 1998 interview with the Dallas Business Journal, "is that a lot of people are thinking they can go and pick up assets that are being sold by larger companies or companies that could become distressed." Brumley, who began with a dozen employees, ten of whom were partners in his venture, intended to focus on onshore properties, ideally selecting those with roughly eight years worth of production remaining.

Given Brumley's achievements in the oil and gas industry, he had no difficulty in raising the capital to get his acquisition-driven company underway. "When I met Jon Brumley in the spring of 1998," the vice-chairman of New York-based E.M. Warburg, Pincus & Co. said in an August 2001 interview with Oil and Gas Investor, "the question wasn't whether we were going to invest in him, but whether he was going to take our money. From our viewpoint, he was a proven executive with a proven business model who was approaching a part of the industry then out of favor--oil." Warburg, Pincus & Co. contributed roughly $150 million to Encore, providing start-up capital that was augmented by a $100 million investment from Chase Capital Partners, $30 million from Natural Gas Partners, and $20 million from First Union Capital Partners. Individual investors also contributed to Encore's cause, as well as Brumley himself, who invested several million dollars of his own money, giving his company the cash to begin its acquisition campaign. All totaled, Brumley began with approximately $300 million in equity financing, a sum he first put to use in the summer of 1999.

The First Big Acquisition in 1999

Encore's first acquisition was arguably the most important acquisition completed during the company's first seven years in business. In June 1999, Brumley used $86 million of the company's start-up capital to purchase Shell Oil's Cedar Creek Anticline oil properties for a total purchase price of $172 million (the remainder was borrowed from Bank of America). The Cedar Creek Anticline properties would represent the company's core asset well into the ensuing decade, constituting a substantial percentage of its total reserves. The properties were located in the Williston Basin along a swath of land stretching from southeastern Montana to northwestern North Dakota.

Brumley made further investments in Cedar Creek Anticline acreage and added holdings in other basins during the next two years--the period spanning the company's initial acquisition and its debut as a public company. During this period, the company's annual revenues grew substantially, jumping from $31.4 million in 1999 to $108.9 million in 2000 and to $135.9 million in 2001. By the time of Encore's initial public offering (IPO) of stock in March 2001, Brumley had acquired oil and natural gas properties in the Permian Basin, which contained fields in Texas and New Mexico, the Anadarko Basin of Oklahoma, and the Powder River Basin in Montana. The Cedar Creek Anticline properties, by this point, accounted for 57 percent of Encore's total reserve value. The IPO, which was completed in March 2001, consisted of 7.15 million shares offered at $14 per share, yielding net proceeds of approximately $92 million--capital Brumley intended to use to fund the company's acquisition campaign.

Encore in the 21st Century

Brumley continued to focus on Encore's Cedar Creek Anticline properties as the heart of the company's operations following the IPO. Further investments were made, increasing the company's reliance on acreage in the Williston Basin even as Brumley acquired properties in other regions. By the end of 2004, the Cedar Creek Anticline properties accounted for 66 percent of the company's total proved reserves, up markedly from the 57 percent the properties represented in 2001. "The CCA (Cedar Creek Anticline) is our most valuable asset today and in the foreseeable future," Encore's 2004 annual filing with the Securities and Exchange Commission noted. "A large portion of our future success revolves around future exploitation of and production from this property through primary, secondary, and tertiary recovery techniques," the document stressed. Much emphasis was placed on the aggrandizement of the company's first acquisition, but Brumley did explore and seize opportunities elsewhere, completing several deals during the first years of the 21st century that added meaningfully to the company's portfolio of properties.

The most significant acquisitions completed in the wake of Encore's IPO occurred in 2003 and 2004, representing a substantial portion of the nearly $600 million the company spent on oil and natural gas properties during its first five years. In July 2003, Encore paid $52.5 million for natural gas properties on 1,800 acres located in the Elm Grove Field in Louisiana. In a company press release dated July 31, 2003, Brumley commented on the purchase. "This acquisition," he wrote, "provides Encore with a new focus area that is expected to show significant growth through drilling and add-on acquisitions." Encore's next major acquisition followed in April 2004, when the company acquired Cortez Oil & Gas, Inc., a $127 million purchase that increased its presence in the Cedar Creek Anticline area. Cortez owned Cedar Creek Anticline properties adjacent to properties already owned by Encore, as well as properties in the Permian Basin in Texas and New Mexico, the Arkoma and Anadarko Basins of Oklahoma, and mineral rights for 2,000 acres in the Barnett Shale field near Fort Worth. "These properties are a nice fit for us because with the exception of the Barnett Shale, we already operate in those areas," Jonny Brumley remarked in a March 3, 2004 interview with the Fort Worth Star-Telegram. The Cortez acquisition was followed by another purchase that strengthened the company's position in areas where it already operated. In June 2004, the company bought natural gas properties in the Overton Field in Texas that were in the same core area as its properties in the Elm Grove Field acquired one year earlier.

As Encore plotted its future course at the end of 2004, the confidence in Brumley expressed by industry pundits and investors had been substantiated. "This pint-sized oil and gas driller," Fortune noted in its August 8, 2005 issue, "has been a huge success for investors--even relative to most firms in the red-hot energy sector." Brumley's tried-and-true approach to growth in the oil and gas industry underpinned Encore's success during its formative years, creating a well-regarded member of the nation's oil and gas community. In the years ahead, with the younger Brumley being groomed to replace his father, the Encore brand of leadership was expected to inspire continued success into the future.

Principal Subsidiaries: EAP Energy, Inc.; EAP Properties, Inc.; EAP Operating, Inc.; EAP Energy Services, L.P.; Encore Operating, L.P.; Encore Operating Louisiana LLC.

Principal Competitors: Anadarko Petroleum Corporation; BP P.L.C.; Exxon Mobil Corporation.

Chronology

• Key Dates:
• 1998: Encore is formed.
• 1999: In a deal with Shell Oil, Encore acquires oil properties in the Williston Basin in Montana and North Dakota.
• 2003: Encore purchases natural gas properties located in the Elm Grove Field in Louisiana.
• 2004: Encore acquires Cortez Oil & Gas, Inc. and natural gas properties in Texas.