S&P: Encore outlook negative

Standard & Poor's said it affirmed its corporate credit ratings for independent oil and gas company Encore Acquisition Co. and revised its outlook to negative following the announcement that Encore plans to acquire natural gas properties in Overton Field in East Texas for $82 million from private sellers.

S&P affirmed Encore Acquisition Co.'s corporate credit rating at BB- and subordinated debt rating at B.

The relatively high-priced, debt-financed acquisition ($1.78 per thousand cubic feet equivalent (mcfe)) of Overton Field's estimated reserves of about 8 million barrels of oil equivalent with 46 billion cubic feet equivalent proved reserves (80% proved undeveloped) will be financed through bank borrowings.

The revised outlook reflects S&P's heightened concern about Encore's aggressive debt-financed growth and its significant development program, potentially constraining the company's ability to improve its somewhat high leverage for the current ratings. Furthermore, using S&P's oil and gas price assumptions, Encore will outspend its cash flow in 2004, heightening concerns about the company's ability to restore its financial profile over the next 12 to 18 months to levels more commensurate with current ratings.

S&P's concerns are partially mitigated by the substantial natural gas hedging Encore has undertaken with this acquisition. Through 2007, 60% of Overton Field's production is hedged at $5.22 per mcfe. Encore's long-lived reserve base (about 17 years) also provides a measure of protection during periods of higher leverage.

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