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Thursday, September 2, 2010

DNR Cancels ENP Property Purchase

* Denbury Resources announced that is has cancelled its plan to negotiate a purchase of Encore Energy Partners' Elk Basin properties located on the border of Wyoming and Montana. In management's view, this potential transaction has held up the process of Denbury divesting its GP and LP ownership stake (46%) in Encore Energy Partners. Positive for DNR since ENP faces operational and business challenges; DNR better off totally divesting its interests in ENP

* Elk Basin property details. Encore Energy Partners' Elk Basin properties are located in the Big Horn Basin, primarily in Wyoming. The oil field has production from three separate formations: Embar-Tensleep, Madison, and Frontier. Proved reserves for this field at year-end 2009 were 12.5 MMBoe (29% of the company's total). Along with the Gooseberry Field (also in the Big Horn Basin), production from the Elk Basin field averaged 4,049 Boe/d, approximately 40-45% of the company's current production.

* Denbury's decision of not pursuing an asset purchase is a highly positive event for Denbury and Encore Energy Partners. No doubt that Denbury is much more suited (vs. Encore Energy Partners) to undertake the tertiary recovery methods (CO2 flooding) at Elk Basin, therefore allowing the company to boost oil recovery. However, this potential transaction had a lot of pitfalls. First, the sizable realized gain expected from this asset sale would most likely wipe out a large portion of Encore Energy Partners' distribution tax shield and might have even resulted in unitholders being a net payer to the taxman, therefore negating the financial benefits of 2010's distribution payments. In addition, with the uncertainty around the ownership stake sale and, more importantly, the price at which the partnership is ultimately valued, shareholders of both companies should be concerned about the wisdom of Denbury purchasing one of Encore Energy Partners' largest assets (29% of year-end 2009 proved reserves) before this transaction is completed.

* Encore Energy Partners is one of the most expensive stocks in the upstream MLP universe on a forward EBITDA basis (9.2x vs. median of 7.9x). Of the two companies, DNR is the stock to own.

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