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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (88)	5/22/2008 8:41:30 AM
From: Dennis Roth	Respond to of 111

Encore Acquisition Company (EAC): Company exploring strategic alternatives; raising target price to $76 - Goldman Sachs - May 22, 2008 What's changed Encore announced May 21 it plans to explore strategic alternatives that may include a sale of the company. Shares have risen 90% year to date. Implications The timing of this announcement is unique both because it comes from a seeming position of strength and because it follows a multi-month sharp rally in Encore shares. Recent strong quarterly results, drilling results from the Bakken, Louisiana and West Texas, and higher oil prices have led the Street to refocus on the stock. While we do not expect a wave of M&A among E&Ps, we believe that companies looking to sell themselves will find buyers. We see Encore's long-lived oil exposure as attractive to those looking to lengthen reserve life as well as exposure to emerging oil plays. Valuation The two key valuation questions are (1) what oil price deck will be used, especially considering the sharp rise in long-dated oil prices; and (2) how much unbooked resource should be considered. We believe a $100/barrel long-term WTI oil price would lead to a high case $76 per share value, though if the current $135/barrel strip price is used we see Encore worth $112 per share. In addition to 230 MMBOE of proved reserves, these assumptions include unbooked resource potential of 100 MMBOE, mainly from the Bakken/ Madison, West Texas and Cedar Creek Anticline. Arguably this could prove conservative (management highlights 450 MMBOE of unbooked potential), especially as we are not giving any direct credit for Haynesville or the Tuscaloosa Marine oil shale. We have revised our 12-month DCF-based target to $76 from $65 to reflect our high case value which we believe is more consistent with industry M&A values. We rate Encore Buy relative to an Attractive coverage view. Key risks Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks.