Encore’s sale to Denbury solidifies their oil focus
Plano-based Denbury Resources and Encore Acquisition negotiated for a little more than a month before announcing the merger, which results in a crude-oil focused company with interests in Mississippi, Montana, the Gulf Coast and the Rockies, and also includes for Denbury a minority interest in Encore Energy Partners.
“There are a lot of complementary parts to this,” said Jon S. “Jonny” Brumley, CEO of Encore Acquisition. “For one, we’re both oil focused. They’re 80 percent oil and we’re 67 percent oil. Two: we were becoming more of an enhanced oil recovery company and that’s what they do.”
Denbury Resources, which sold about 60 percent of its Barnett Shale assets for $270 million in May, increasingly has focused on CO2-injected, tertiary oil recovery reserves, with assets in Mississippi. Meanwhile, Encore Acquisition has sought to step away from natural gas assets and increase its oil production, which always has been the stronger focus. The company also was focusing on a CO2 project in the Bell Creek Field of Montana.
“We’ve always felt like oil is the way to go,” Brumley said. “If you look at it, oil is $80. On a six-to-one ratio that’s $13 gas, and gas isn’t anywhere near that. You just make more money being in oil than you do in gas, so that’s one of the complements.”
Encore Acquisition stock is valued at $50 per share in the deal, a 35 percent gain from its previous close of about $37 per share.
The company will operate as Denbury Resources, and the company will retain Encore Acquisition’s Fort Worth base (for about a year) and employees, Brumley said, adding his company’s upper management will step aside.
In a statement, Denbury Resources CEO Phil Rykhoek called Encore “an excellent fit” with Denbury’s CO2 enhanced oil recovery program.
“Encore has built an enviable asset portfolio in the Rockies, anchored by mature legacy crude oil assets, and our combined size and scale of operations will allow us to undertake significantly larger CO2 projects in the Gulf Coast and the Rockies,” Rykhoek said. “This combination will also further enhance Denbury’s position as the natural buyer and owner of mature oil properties in our core regions and the partner of choice for CO2 emitters looking to reduce their carbon footprint.”
He added that Encore’s addition more than doubles Denbury Resources’ current inventory of oil reserves recoverable with CO2. Production growth is expected from 2015 beyond.
“In addition, the growth potential from Encore’s Bakken shale oil play further enhances its value and provides short-term production growth and cash flow as we develop the longer term EOR program,” Rykhoek said.
Encore Acquisition was founded by I. Jon Brumley in 1998, after he left another company he co-founded: Cross Timbers Oil Co., which later would become XTO Energy Inc. The elder Brumley’s son, Jonny Brumley, eventually took the reins.
“I think a lot of people want to do [enhanced oil recovery] but they don’t have big enough oil fields to do it, and Denbury has a lot of expertise in it,” Brumley said. “I think what’s unique is a lot of companies have growth, but not many companies have oil growth – it’s in all these shale resource plays, which really don’t make much money.”
Encore Acquisition originally announced in May 2008 that its board of directors had approved a measure that could have put the company on the auction block or poise the company for a merger. Brumley said at the time that the company’s share price (then more than $60) was not reflective of its operating results and ability to fund projects, and that a sale was a good route to improve shareholder value. The company abandoned those plans in August 2008.
Raymond James analysts considered Encore Acquisition a strong buy before the merger announcement, writing that the 35 percent premium on its price tag reflected the fact that it was discounted.
Meanwhile, a GimmeCredit analyst called the move strategically good, but offered some skepticism about the risk potential being assumed by Denbury Resources, saying that bigger isn’t necessarily better.
“Although Denbury will establish a foothold in the Rockies through this acquisition, it will take some time – and a significant amount of committed capital – before it can put in place the necessary infrastructure (including the 2.6 [billion cubic feet] of estimated CO2 required) to exploit these properties,” wrote Carl Blake, a high yield analyst in New York City.
