Encore Acquisition off the sales block

Encore Acquisition, a Fort Worth-based energy producer, said Wednesday that rather than sell the company, as it announced in May that it was considering, it will divest noncore properties and boost drilling in 2009.

The company also said it lost $35.7 million in the second quarter, principally because of noncash losses on hedges. Excluding unusual items, Encore earned $88.6 million, or $1.65 a share, compared with the consensus Wall Street estimate of $1.59.

Encore’s shares (ticker: EAC) closed down $3.41, or 6.35 percent, at $50.26 after being down nearly 10 percent immediately after the announcement.

In a prepared release, President Jonny Brumley said: "A sale or merger of the company is not currently in the best interest of our shareholders. The energy and credit markets became very indecisive during the second quarter."

Instead, Brumley said, Encore will sell noncore assets, move other assets into its Encore Energy Partners master limited partnership, and in effect sell 2009’s anticipated production at $110 per barrel.

Money from the two asset divestitures "will pay off most or all of our back debt," Brumley said, and locking in the sales price for 2009 production will ensure strong cash flow. That, he said, will allow a larger drilling program next year and also "increase our acquisition capabilities for long-life properties in our core areas."

Brumley identified those areas as North Dakota’s Bakken Shale, Permian Basin in West Texas, and the Haynesville Shale, Cotton Valley and Bossier formations in Louisiana and East Texas.

In its earnings statement, Encore reported total revenues of $355 million, up 96 percent, as the average selling price of crude oil more than doubled to $102 a barrel. But those same sharply higher prices eroded the value of the company’s hedges against low oil prices, producing a $219.5 million noncash write-down.

Other producers have announced similar charges, which have in some cases been largely reversed by July’s steep decline in petroleum prices.

Encore also said it drilled a natural gas well in West Texas’ Delaware Basin that tested at 12.7 million cubic feet a day, which the company called the largest initial production of any well in the company’s 10-year history. The well is part of a joint venture with Exxon Mobil Corp., with Encore holding a 30 percent working interest.