Jonny Brumley, president, said, "The Overton Field acquisition and the Cortez acquisition, which closed two weeks ago, should result in continued growth through the drill bit for years. At the same time, we continue to keep a high R/P ratio. Having a long-life profile and a great drilling inventory is as good as it gets." Brumley added, "This acquisition has more upside than most of Encore's acquisitions. The Overton Field assets are in the same core area as our interests in Elm Grove Field and have similar geology. We expect to double production from 7 million cubic feet of gas equivalent (MMcfe) per day to 14 MMcfe per day within 12 months and add another 7 MMcfe per day within 24 months."
Encore's internal reservoir engineers have identified total reserve potential of approximately 111 billion cubic feet of gas equivalent (Bcfe) with 46 Bcfe in the proved category at the end of 2004. Encore plans to allocate $63 million to the 46 Bcfe of proved reserves, $17 million to the 66 Bcfe of upside potential and $2 million to the gathering system. Encore has identified over 100 undrilled locations in the Travis Peak and Cotton Valley formations on the acreage in Overton Field. The properties currently produce approximately 7 MMcfe per day, primarily from multiple tight sandstone reservoirs in the Travis Peak and Cotton Valley formations at depths ranging between 8,000 and 11,500 feet. The production is 94% natural gas and will be operated by Encore. Encore has identified additional upside in the shallower Pettit and Rodessa formations. Development costs for the proved undeveloped reserves are estimated to be $1.06 per thousand cubic feet of gas equivalent (Mcfe).
Lease operation expenses are expected to average $0.50 per Mcfe, and production taxes are estimated to be $0.35 per Mcfe. The differential to NYMEX is negative $0.15 per Mcfe. Encore has hedged approximately 60% of expected production at NYMEX-equivalent prices of $5.96 per MMBtu for the second half of 2004 and $5.22 per MMBtu for January 2005 through December 2007. Subject to due diligence and other customary closing conditions, Encore expects to close the transaction in June 2004 with an effective date of June 1, 2004. Encore plans to initially fund the acquisition with bank debt from its existing credit facility.
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