Denbury to Acquire Encore

Denbury Resources Inc. (DNR - Analyst Report) has entered into a definitive agreement with Encore Acquisition Company (EAC - Snapshot Report) to acquire the company for $4.5 billion. This includes an assumption of debt and the value of the minority interest in Encore Energy Partners L.P. (ENP - Snapshot Report). Denbury intends to finance this transaction with a combination of equity and debt.

The combined company will operate under the Denbury name and trade under the DNR ticker symbol. Post-merger, it is expected that Denbury stockholders will own between 63% and 68% of the combined company and the Encore stockholders will own between 32% and 37% of the combined company. The completion of the merger is subject to regulatory approvals and is expected to take place in the first quarter of 2010.

We view the transaction as a win-win for shareholders of both companies. The transaction will position the combined company as one of the largest crude oil-focused independent North American exploration and production companies. In addition, it will also create one of the largest CO2-enhanced oil recovery platforms diversified across the Gulf Coast and Rocky Mountain regions.

The merger will allow the combined company to undertake significantly larger CO2 projects on the Gulf Coast and the Rockies, given Encore’s significant asset portfolio in these areas. On a cash-flow basis, the transaction is expected to benefit Denbury by 8% to 18%, depending on the ultimate number of Denbury shares issued.

Under the terms of the agreement, Encore stockholders will receive $50.00 for each share of Encore common stock, comprising $15.00 in cash and $35.00 in Denbury common stock, subject to both an election feature and a collar mechanism on the stock portion of the consideration.

To fund this transaction, Denbury may issue 115 million to 146 million of common stock, and intends to sell some of its non-core properties in 2010. The company also stated that it may decide to sell some of its Encore properties to reduce its debt level.

We think that Encore is a good fit for Denbury as both the companies have exposure in tertiary recovery techniques to increase the value of acquired properties. As Denbury had sold its 60% interest in Barnett Shale assets in June to focus on its core tertiary oil operations, the Encore acquisition is another prudent step in this direction.