(in millions except per share, daily production, and average price amounts) Year Ended December 31, Increase/ ----------------------- 2006 2005 (Decrease) -------------- -------- ---------- Net income $ 92.4 $ 103.4 (11)% Diluted earnings per share $ 1.75 $ 2.09 (16)% Oil and natural gas revenues $ 493.3 $ 457.3 8% Cash flows from operating activities $ 297.3 $ 292.3 2% Total oil and natural gas related capital $ 378.6 $ 574.4 (34)% Average oil price ($/Bbl) $ 47.30 $ 44.82 6% Average natural gas price ($/Mcf) $ 6.24 $ 7.09 (12)% Average combined price ($/BOE) $ 43.87 $ 44.05 - % Daily production volumes (BOE) 30,807 28,442 8% Diluted shares outstanding 52.7 49.5 6%
The Company's reported oil and natural gas revenues represent an eight percent increase over $457.3 million in 2005. The Company attributed its higher revenues to an eight percent increase in production volumes, which rose from an average of 28,442 barrels of oil equivalent per day ("BOEPD") in 2005 (10.4 MMBOE in total) to an average of 30,807 BOEPD (11.2 MMBOE in total) in 2006. The rise in production volumes was attributed to the Company's development program and acquisitions completed in the second half of 2005. The net profits interests reduced reported production by approximately 1,278 BOE per day in 2006 versus 1,155 BOE per day in 2005. Oil represented 65 percent and 66 percent of the Company's total production volumes in 2006 and 2005, respectively.
Jon S. Brumley, Encore's Chief Executive Officer and President, stated, "We are looking forward to a good year in 2007. Our recent acquisitions are exciting and have rejuvenated our property mix with long-life waterflood and tertiary projects that have upside potential. The acquisitions fit the expertise we have developed at Encore, and we are ready to put the fields through our redevelopment process and witness steady growth of reserves and production. Our West Texas JV is shaping up as expected with four rigs running and good wells coming online. In addition, we are pleased with our natural gas development programs in East Texas and New Mexico. 2007 will be a focused year for Encore with a disciplined capital budget that will be inside cash flow from operations and invest in projects that fit what we do best: low risk exploitation in vintage oil and gas fields. We are focused on what has delivered excellent results in the past."
Encore reported net income for 2006 of $92.4 million ($1.75 per diluted share). Although increases in expenses in 2006 caused net income to drop from $103.4 million ($2.09 per diluted share) in 2005, the Company was able to realize a $5.1 million increase in operating cash flows, up to $297.3 million in 2006 from $292.3 million in 2005, reflecting the current period earnings impact of non-cash stock-based compensation, derivative fair value gain/loss, deferred taxes, and depletion, depreciation, and amortization.
Encore's realized commodity prices, including the effects of hedging, averaged $47.30 per barrel and $6.24 per Mcf during 2006, resulting in an increase of six percent and a decrease of 12 percent, respectively, as compared to 2005. On a combined basis, including the effects of hedging, prices remained fairly constant in 2006 at $43.87 per BOE as compared to $44.05 per BOE in 2005. Hedging expense reduced realized oil prices by $7.12 per barrel and realized natural gas prices by $0.35 per Mcf during 2006. The Company's oil wellhead differential to NYMEX for 2006 was $11.80 per barrel in total and $14.70 per barrel in the CCA.
Fourth Quarter 2006
Encore reported net income for the fourth quarter of 2006 of $10.1 million ($0.19 per diluted share) on oil and natural gas revenues of $116.2 million. The Company's reported oil and natural gas revenues represent a 16 percent decrease from the fourth quarter of 2005 revenues of $138.5 million. The Company attributed the decrease in revenues to lower commodity prices. Encore's realized commodity prices, including the effects of hedging, averaged $42.85 per barrel and $6.32 per Mcf during 2006, resulting in decreases of 11 percent and 26 percent, respectively, as compared to 2005. On a combined basis, including the effects of hedging, prices decreased 16 percent in the fourth quarter of 2006 to $41.13 per BOE as compared to $49.09 per BOE in the fourth quarter of 2005. The Company's oil wellhead differential to NYMEX for the fourth quarter of 2006 was $10.06 per barrel in total and $11.89 per barrel in the CCA. Combined production volumes were 30,704 BOEPD (2.8 MMBOE in total) in 2006 compared to 30,654 BOEPD (2.8 MMBOE in total) in 2005. For the fourth quarter of 2006, cash flows from operating activities of $63.0 million decreased from $88.1 million in the fourth quarter of 2005.
Oil represented 65 percent and 63 percent of the Company's total production volumes in the fourth quarters of 2006 and 2005, respectively.
Encore finished 2006 with total oil and natural gas related capital expenditures of $378.6 million. Encore invested $29.7 million in property acquisitions for 2006, primarily for unproved acreage concentrated in the Company's core areas. The Company invested $348.8 million in its drilling and exploration programs, drilling 271 gross (101.8 net) wells.
At December 31, 2006, the Company's long-term debt, net of discount, was $661.7 million, including $150 million of 6.25% Senior Subordinated Notes due April 15, 2014, $300 million of 6.0% Senior Subordinated Notes due July 15, 2015, $150 million of 7.25% Senior Subordinated Notes due 2017, and $68 million of bank debt under the Company's existing credit facility.
2007 Capital Budget
As a result of the two most recently announced acquisitions, which will be initially financed entirely through debt, Encore's Board of Directors has initially approved a $285 million capital budget for 2007 (exclusive of acquisitions) that will allow the Company to execute a plan to reduce debt levels by year-end 2007. The debt reduction plan is expected to include proceeds from a proposed Master Limited Partnership; the divestiture of certain properties in Oklahoma; and excess cash flows from operations.
First Quarter 2007 Outlook
Encore expects to invest approximately $76.0 million of its capital budget in the first quarter of 2007. The Company expects the following averages in the first quarter of 2007:
Wellhead production volumes 32,000 to 33,000 BOE Net profits production volumes 800 to 1,300 BOE Reported production volumes 30,700 to 32,200 BOE Lease operations expense $ 10.35 per BOE General and administrative expenses $ 2.15 per BOE Depletion, depreciation, and amortization $ 11.60 per BOE Production, ad valorem, and severance taxes 9 % of wellhead revenues Income tax expense 38 % effective rate Income tax expense deferred 97 % deferred
Because of rig and lease commitments, the Company expects its capital expenditures to exceed operating cash flows in the first and second quarters of 2007, but to be below cash flows from operations in the third and fourth quarters of 2007.
Encore Acquisition Company is engaged in the development of onshore North American oil and natural gas reserves. Since 1998, Encore has acquired high-quality assets and grown them through drilling, waterflood, and tertiary projects. Encore's properties are located in the Rockies, the Mid-Continent, and the Permian Basin.
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