Encore: Change Partners and Dance (EAC, ENP)

Yesterday, we reported on a deal involving a master limited partnership buying a property from the owner of its general partner. Last night, Encore Energy Partners (NYSE:ENP) announced that it bought about 1,800 producing and royalty interest properties from Encore Acquistion Company (NYSE:EAC) for $49 million. The properties currently produce about 500 barrels of oil equivalent daily, most of which is natural gas. The properties are expected to produce for another 15 years or so.

Encore Energy’s CEO and president said that these properties are "agood match" for a master limited partnership because they offer "highmargins, predictable production profiles, and shallow declines." Thecompany is using its revolving credit to fund the purchase. About $3million of the purchase price was used to hedge production for the nextfour years at an average price of $7.51/thousand cubic feet of naturalgas.

Encore Acquistion owns two-thirds of the common shares of Encore Energyand all the interests of Encore Energy’s general partner. At the end ofSeptember, Encore Energy reported long-term debt of $164.7 million, andEncore Acquistion reported long-term debt of $1.2 billion.

Encore Energy had $34 million in operating cash flow in the thirdquarter, and paid out about $23 million in distributions. This latestpurchase will allow the company to increase its operating cash flow,and juice its payouts a bit for the current quarter. And that’s whatMLPs are all about: increasing distributions.

Paul Ausick
December 10, 2008