10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to ________

Commission file number 1-16295

ENCORE ACQUISITION COMPANY

(Exact name of registrant as specified in its charter)

Delaware	75-2759650
(State or other jurisdiction	(IRS Employer
of incorporation)	Identification No.)

777 Main Street, Suite 1400, Fort Worth, Texas	76102
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (817) 877-9955

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes þ No o

     Number of shares of Common Stock, $0.01 par value, outstanding as of July 29, 2005 ....................... 49,327,156

ENCORE ACQUISITION COMPANY

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		1
Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004		2
Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2005		3
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004		4
Notes to Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote for Security Holders		29
Item 6. Exhibits		30
Signatures		31
Purchase Agreement
Rule 13a-14(a)/15d-14(a) Certification - Pricipal Executive Officer
Rule 13a-14(a)/15d-14(a) Certification - Pricipal Financial Officer
Section 1350 Certifiation - Principal Executive Officer
Section 1350 Certifiation - Principal Financial Officer

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This Quarterly Report on Form 10-Q contains forward-looking statements, which give our current expectations or forecasts of future events. You can identify our forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should” and other words and terms of similar meaning. Our actual results may differ significantly from the results discussed in the forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, the matters discussed in the subsection entitled “Factors That May Affect Future Results and Financial Condition” in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. We undertake no responsibility to update forward-looking statements for changes related to these or any other factors that may occur subsequent to this filing for any reason.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENCORE ACQUISITION COMPANY

CONSOLIDATED BALANCE SHEETS
(in thousands except shares and per share amounts)

	June 30,			December 31,
	2005			2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,023		$	1,103
Accounts receivable		50,944			43,839
Inventory		10,191			6,550
Derivatives		776			2,665
Deferred taxes		20,869			11,118
Other		3,124			5,842
Total current assets		86,927			71,117
Properties and equipment, at cost — successful efforts method:
Proved properties		1,295,489			1,134,220
Unproved properties		30,825			29,740
Accumulated depletion, depreciation, and amortization		(206,655	)		(171,691	)
		1,119,659			992,269
Other property and equipment		14,495			10,425
Accumulated depreciation		(4,288	)		(3,551	)
		10,207			6,874
Goodwill		37,908			37,995
Other		15,110			15,145
Total assets	$	1,269,811		$	1,123,400
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,221		$	24,375
Derivatives		49,977			24,270
Accrued and other current		42,327			38,038
Total current liabilities		110,525			86,683
Derivatives		54,865			31,477
Future abandonment costs		11,161			6,601
Other		1,336			—
Deferred taxes		159,907			146,064
Long-term debt		440,000			379,000
Total liabilities		777,794			649,825
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $.01 par value, 144,000,000 authorized, 49,338,036 and 48,982,197 issued and outstanding		493			490
Additional paid-in capital		323,631			314,573
Deferred compensation		(10,256	)		(4,603	)
Retained earnings		244,964			199,512
Accumulated other comprehensive loss		(66,815	)		(36,397	)
Total stockholders’ equity		492,017			473,575
Total liabilities and stockholders’ equity	$	1,269,811		$	1,123,400

The accompanying notes are an integral part of these consolidated financial statements.

1

ENCORE ACQUISITION COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues:
Oil	$	69,559		$	52,885		$	136,695		$	99,649
Natural gas		30,158			17,237			54,603			29,764
Total revenues		99,717			70,122			191,298			129,413
Expenses:
Production —
Lease operations		15,721			10,921			30,589			21,163
Production, ad valorem, and severance taxes		9,813			7,161			18,899			13,000
Depletion, depreciation, and amortization		19,038			11,249			35,721			20,512
Exploration		3,772			1,697			6,383			1,697
General and administrative (excluding non-cash stock based compensation)		3,571			2,530			7,206			4,758
Non-cash stock based compensation		1,006			307			1,779			617
Derivative fair value loss		1,692			965			4,101			1,123
Other operating		1,703			1,091			3,302			2,093
Total expenses		56,316			35,921			107,980			64,963
Operating income		43,401			34,201			83,318			64,450
Other income (expenses):
Interest		(7,448	)		(6,308	)		(14,407	)		(10,214	)
Other		85			106			149			157
Total other income (expenses)		(7,363	)		(6,202	)		(14,258	)		(10,057	)
Income before income taxes		36,038			27,999			69,060			54,393
Current income tax provision		(589	)		(919	)		(1,390	)		(2,004	)
Deferred income tax provision		(11,781	)		(9,089	)		(22,218	)		(17,496	)
Net income	$	23,668		$	17,991		$	45,452		$	34,893
Net income per common share:
Basic	$	0.49		$	0.39		$	0.93		$	0.76
Diluted		0.48			0.39			0.92			0.75
Weighted average common shares outstanding:
Basic		48,660			46,089			48,636			45,684
Diluted		49,458			46,680			49,429			46,271

The accompanying notes are an integral part of these consolidated financial statements.

2

ENCORE ACQUISITION COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
June 30, 2005
(in thousands)
(unaudited)

													Accumulated
	Shares of					Additional							Other			Total
	Common			Common		Paid-In		Deferred			Retained		Comprehensive			Stockholders’
	Stock			Stock		Capital		Compensation			Earnings		Loss			Equity
Balance at December 31, 2004		48,982		$	490	$	314,573	$	(4,603	)	$	199,512	$	(36,397	)	$	473,575
Exercise of stock options		92			—		1,629		—			—		—			1,629
Deferred compensation:
Issuance of restricted Common Stock		270			3		7,106		(7,109	)		—		—			—
Amortization to expense		—			—		—		1,779			—		—			1,779
Other changes		(6	)		—		323		(323	)		—		—			—
Components of comprehensive income:
Net income		—			—		—		—			45,452		—			45,452
Change in deferred hedge loss, net of income taxes of $18,120		—			—		—		—			—		(30,418	)		(30,418	)
Total comprehensive income																	15,034
Balance at June 30, 2005		49,338		$	493	$	323,631	$	(10,256	)	$	244,964	$	(66,815	)	$	492,017

The accompanying notes are an integral part of these consolidated financial statements.

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ENCORE ACQUISITION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Six months ended
	June 30,
	2005			2004
Operating activities
Net income	$	45,452		$	34,893
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, and amortization		35,721			20,512
Dry hole expense		3,329			1,697
Deferred taxes		22,218			17,496
Non-cash stock based compensation		1,779			617
Non-cash derivative fair value loss		8,278			6,106
Other non-cash		1,844			779
Loss on disposition of assets		160			109
Changes in operating assets and liabilities:
Accounts receivable		(7,059	)		(3,882	)
Other current assets		(2,952	)		(8,357	)
Other assets		(4,113	)		(309	)
Accounts payable and accrued liabilities		12,808			4,829
Cash provided by operating activities		117,465			74,490
Investing activities
Proceeds from disposition of assets		424			425
Purchases of other property and equipment		(4,714	)		(6,597	)
Acquisition of oil and natural gas properties		(17,379	)		(98,608	)
Acquisition of Cortez Oil & Gas, Inc. (net of cash acquired)		—			(123,023	)
Development and exploration of oil and natural gas properties		(144,434	)		(70,573	)
Cash used by investing activities		(166,103	)		(298,376	)
Financing activities
Proceeds from issuance of common stock		—			53,900
Payment of offering cost of common stock		—			(900	)
Proceeds from long-term debt		195,000			169,000
Payments on long-term debt		(134,000	)		(145,000	)
Proceeds from issuance of 61/4% notes		—			150,000
Payments of debt issuance costs		(204	)		(3,128	)
Cash overdrafts and other		(12,238	)		2,374
Cash provided by financing activities		48,558			226,246
Increase (decrease) in cash and cash equivalents		(80	)		2,360
Cash and cash equivalents, beginning of period		1,103			431
Cash and cash equivalents, end of period	$	1,023		$	2,791

The accompanying notes are an integral part of these consolidated financial statements.

4

ENCORE ACQUISITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(unaudited)

1. Formation of Encore

     Encore Acquisition Company, a Delaware corporation (“Encore” or the “Company”), is a growing independent energy company engaged in the acquisition, development, exploitation, exploration, and production of onshore North American oil and natural gas reserves. Since the Company’s inception in 1998, Encore has sought to acquire high-quality assets with potential for upside through low-risk development drilling projects. Encore’s properties currently are located in four core areas: the Cedar Creek Anticline (“CCA”) in the Williston Basin of Montana and North Dakota; the Permian Basin of western Texas and southeastern New Mexico; the Mid-Continent area, which includes the Arkoma and Anadarko Basins of Oklahoma, the ArkLaTx region of northern Louisiana and eastern Texas and the Barnett Shale of northern Texas; and the Rockies, which includes non-CCA assets in the Williston and Powder River Basins of Montana, and the Paradox Basin of southeastern Utah.

2. Basis of Presentation

     In the opinion of management, the accompanying unaudited consolidated financial statements of Encore include all adjustments necessary to present fairly, in all material respects, our financial position as of June 30, 2005, results of operations for the three and six months ended June 30, 2005 and 2004, and cash flows for the six months ended June 30, 2005 and 2004. All adjustments are of a recurring nature. These interim results are not necessarily indicative of results for an entire year.

     Certain amounts and disclosures have been condensed or omitted from these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s 2004 Annual Report on Form 10-K.

Presentation of Number of Shares of Common Stock and Per Share Information

     As discussed at Note 10, “Stockholders’ Equity,” during the three months ended June 30, 2005, the Company’s Board of Directors approved a three-for-two stock split in the form of a stock dividend to shareholders of record on June 27, 2005. All share and per-share information for all periods presented in the accompanying financial statements and related notes thereto have been restated to reflect the stock split that occurred on July 12, 2005.

Stock-based Compensation

     Employee stock options and restricted stock awards are accounted for under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation is recorded for stock options that are granted to employees or non-employee directors with an exercise price equal to or above the common stock price on the grant date. However, compensation expense is recorded for the fair value of the restricted stock granted to employees.

     If compensation expense for the stock based awards had been determined using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):

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	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
As Reported:
Non-cash stock based compensation (net of taxes)	$	630	$	190	$	1,114	$	383
Net income		23,668		17,991		45,452		34,893
Basic net income per common share		0.49		0.39		0.93		0.76
Diluted net income per common share		0.48		0.39		0.92		0.75
Pro Forma:
Non-cash stock based compensation (net of taxes)	$	971	$	518	$	1,618	$	924
Net income		23,327		17,663		44,948		34,352
Basic net income per common share		0.48		0.38		0.92		0.75
Diluted net income per common share		0.47		0.38		0.91		0.74

     There were 269,555 shares of restricted stock granted during the six months ended June 30, 2005, of which 266,636 shares are outstanding at June 30, 2005. During the first half of 2005, 2,536 shares of restricted stock, which were issued and outstanding at December 31, 2004, were forfeited. There were 115,284 shares of stock options granted in the six months ended June 30, 2005, of which 114,375 shares of stock options are outstanding at June 30, 2005.

New Accounting Standards

Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation,” and supersedes APB 25. SFAS No. 123R eliminates the option of using the intrinsic value method of accounting previously available, and requires companies to recognize in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards. The effective date of SFAS No. 123R was initially scheduled to be the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year companies. However, on April 14, 2005, the Securities and Exchange Commission (“SEC”) announced that the effective date of SFAS No. 123R will be delayed until January 1, 2006, for calendar year companies.

     SFAS No. 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date, and for all unvested awards granted prior to the effective date of SFAS No. 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but it also permits entities to restate financial statements of previous periods based on pro-forma disclosures made in accordance with SFAS No. 123. The Company has not yet determined which of the aforementioned adoption methods it will use.

     The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees to calculate the pro-forma effect of applying the fair value provisions of SFAS No. 123 as disclosed above under “Stock-based Compensation.” While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS No. 123R.

     Under the revised standard, the pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. See the discussion of stock-based compensation above for the pro forma net income and net income per share amounts for the three and six months ended June 30, 2004 and 2005, as if the Company had used a fair-value-based method similar to the methods required under SFAS No. 123R to measure compensation expense for employee stock incentive awards.

     SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options and the Company’s stock price at that time.

6

     The Company plans to adopt SFAS No. 123R effective January 1, 2006, based on the new effective date announced by the SEC. The Company has not yet determined the financial statement impact of adopting SFAS No. 123R for periods beyond 2005.

FASB Staff Position 19-1, “Accounting for Suspended Well Costs”

     On April 4, 2005 the FASB adopted FASB Staff Position (“FSP”) 19-1 “Accounting for Suspended Well Costs” that amends SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies,” to permit the continued capitalization of exploratory well costs beyond one year if the well found a sufficient quantity of reserves to justify its completion as a producing well and the entity is making sufficient progress assessing the reserves and the economic and operating viability of the project. FSP 19-1 is effective for the first reporting period beginning after April 4, 2005, which for the Company will be the third quarter of 2005. Its adoption is not expected to have a material impact on the Company’s results of operations, financial condition, or cash flows.

Emerging Issues Task Force (EITF) Issue 04-13 “Accounting for Purchases and Sales of Inventory with the Same Counterparty”

     The Emerging Issues Task Force considered Issue No. 04-13 in its May 17, 2005 and June 16, 2005 meetings to discuss inventory sales to another entity in the same line of business from which it also purchases inventory. The Task Force reached consensus on the issue that purchases and sales of inventory with the same counterparty should be combined as a single nonmonetary transaction (net) and noted factors that may indicate that transactions were entered into in contemplation for one another. The Task Force also concluded that transfers of finished goods inventory in exchange for work-in-progress or raw materials should be recognized at fair value and prescribes additional disclosures. The Task Force is expected to ratify Issue No. 04-15 at its September 2005 meeting, which would be applicable for transactions completed in reporting periods beginning after March 15, 2006. The Company has previously reported transactions of this nature on a net basis; therefore, the Company does not expect Issue No. 04-15 to have a material impact on the Company’s results of operations, financial condition, or cash flows.

3. Inventories

     Inventories are comprised principally of materials and supplies and oil in pipelines, which are stated at the lower of cost (determined on an average basis) or market. Oil produced at the lease which resides unsold in pipelines is carried at an amount equal to its operating costs to produce. Oil in pipelines purchased from third parties is carried at average purchase price. The Company’s inventories consisted of the following as of the dates indicated (amounts in thousands):

	June 30, 2005		December 31, 2004
Warehouse inventory	$	6,952	$	6,321
Oil in pipelines (purchased)		3,239		—
Oil in pipelines (produced)		—		229
	$	10,191	$	6,550

4. Cortez Acquisition and Goodwill

     On April 14, 2004, the Company purchased all of the outstanding capital stock of Cortez Oil & Gas, Inc. (“Cortez”), a privately held, independent oil and natural gas company, for a total purchase price of $127.0 million, which includes cash paid to Cortez’ former shareholders of $85.8 million, the repayment of $39.4 million of Cortez’ debt, and transaction costs incurred of $1.8 million.

     The acquired oil and natural gas properties are located primarily in the CCA of Montana, the Permian Basin of West Texas and Southeastern New Mexico and in the Mid-Continent area, including the Anadarko and Arkoma Basins of Oklahoma and the Barnett Shale north of Fort Worth, Texas. Cortez’ operating results are included in the Company’s Consolidated Statement of Operations beginning in April 2004.

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     The calculation of the total purchase price and the allocation as of June 30, 2005 to the fair value of net assets acquired at April 14, 2004, are as follows (in thousands):

Calculation of total purchase price:
Cash paid to Cortez’ former owners	$	85,805
Cortez debt repaid		39,449
Transaction costs		1,760
Total purchase price	$	127,014
Allocation of purchase price to the fair value of net assets acquired:
Cash	$	3,206
Current assets, excluding cash		5,946
Proved oil and natural gas properties		120,503
Unproved oil and natural gas properties		3,011
Goodwill		37,908
Total assets acquired		170,574
Current liabilities		(5,673	)
Non-current liabilities		(996	)
Deferred income taxes		(36,891	)
Total liabilities assumed		(43,560	)
Fair value of net assets acquired	$	127,014

     The purchase price allocation resulted in $37.9 million of goodwill primarily as the result of the difference between the fair value of acquired oil and natural gas properties and their lower carryover tax basis, which resulted in deferred taxes of $36.9 million. Management believes the goodwill will be recovered through operating synergies resulting from the close proximity of the properties acquired to existing operations, particularly the additional interest in the CCA and Permian properties. None of the goodwill is deductible for income tax purposes.

5. Derivative Financial Instruments

     The following tables summarize the Company’s open commodity derivative instruments designated as hedges as of June 30, 2005:

Oil Derivative Instruments at June 30, 2005

	Daily		Floor		Daily		Cap		Daily		Swap		Fair
	Floor Volume		Price		Cap Volume		Price		Swap Volume		Price		Value
Period	(Bbls)		(per Bbl)		(Bbls)		(per Bbl)		(Bbls)		(per Bbl)		(000s)
July – Dec 2005		12,500	$	27.84		2,500	$	31.07		1,000	$	25.12	$	(18,513	)
Jan – June 2006		7,000		33.93		1,000		29.88		2,000		25.03		(16,927	)
July – Dec 2006		6,500		35.00		1,000		29.88		2,000		25.03		(16,233	)
Jan – Dec 2007		—		—		—		—		2,000		25.11		(22,001	)

Natural Gas Derivative Instruments at June 30, 2005

	Daily		Floor		Daily		Cap		Daily		Swap		Fair
	Floor Volume		Price		Cap Volume		Price		Swap Volume		Price		Value
Period	(Mcf)		(per Mcf)		(Mcf)		(per Mcf)		(Mcf)		(per Mcf)		(000s)
July – Dec 2005		17,500	$	5.12		5,000	$	5.97		12,500	$	4.99	$	(6,004	)
Jan – Dec 2006		12,500		5.34		5,000		5.68		12,500		5.08		(15,576	)
Jan – Dec 2007		—		—		—		—		10,000		4.99		(8,458	)

     Encore recognizes in the Consolidated Statements of Operations derivative fair value gains and losses related to changes in the mark-to-market value of basis swaps and certain other commodity derivatives that are not designated for hedge accounting; ineffectiveness of commodity futures contracts designated as hedges; and changes in the mark-to-market value of its interest rate swap.

     In order to more effectively hedge the cash flows received on oil and natural gas production, the Company enters into financial instruments, commonly called basis swaps, whereby Encore swaps certain per Bbl or per Mcf floating market indices for a fixed amount. These market indices are a component of the price the Company is paid on its actual production and by fixing this component of the Company’s marketing price, Encore is able to realize a net price with a more consistent differential to

8

NYMEX. Since NYMEX is the basis of all the Company’s derivative oil hedging contracts and some of Company’s natural gas contracts, a more consistent differential results in more effective hedges. However, management has elected not to use hedge accounting for certain of these contracts. Instead, the Company marks these contracts to market each quarter through ‘Derivative fair value (gain) loss’ in the Consolidated Statements of Operations. Thus, as these contracts do not change the Company’s overall hedged volumes, average prices presented in the table above are exclusive of any effect of these non-hedge instruments. As of June 30, 2005, the mark-to-market value of these contracts is $0.5 million.

     The actual gains or losses the Company realizes from derivative transactions may vary significantly from the deferred loss amount recorded in stockholders’ equity at June 30, 2005 due to fluctuation of prices in the commodities markets.

Interest Rate Derivatives

     The Company does not currently have any interest rate swap contracts outstanding. During the quarter ended June 30, 2005, a gain of $0.03 million related to an interest rate swap that expired in June 2005 was recorded in the Consolidated Statement of Operations.

6. Asset Retirement Obligations

     The Company’s primary asset retirement obligations relate to future plugging and abandonment expenses on oil and natural gas properties and related facilities disposal. The Company does not provide for a market risk premium associated with asset retirement obligations because a reliable estimate cannot be determined. The following table summarizes the changes in the Company’s future abandonment liability recorded in ‘Future abandonment costs’ on the Company’s Consolidated Balance Sheet for the period from January 1, 2005 through June 30, 2005 (in thousands):

	Six months ended
	June 30, 2005
Future abandonment liability at January 1, 2005	$	6,601
Wells drilled		564
Accretion expense		224
Plugging and abandonment costs incurred		(530	)
Revision of estimates		4,302
Future abandonment liability at June 30, 2005	$	11,161

     During the first half of 2005, the Company increased its discounted estimate of future plugging liability by $4.3 million as actual plugging costs experienced during the first quarter of 2005 increased due to plugging cost escalations (which outpaced inflation), the cost of outside services, and changes in various state regulations.

7. Debt

Issuance of 6% Senior Subordinated Notes

     On June 30, 2005, the Company priced $300.0 million of 6% senior subordinated notes due July 15, 2015 (the “6% notes”). The Company issued and sold the notes on July 13, 2005. The offering was made through a private placement pursuant to Rule 144A and Regulation S. The Company estimates net proceeds of approximately $293.5 million after paying all costs associated with the offering. The net proceeds are expected to be used to redeem all $150.0 million of the Company’s outstanding 8³/₈% senior subordinated notes due 2012, and to reduce outstanding indebtedness under the Company’s existing revolving credit facility. Concurrently with the issuance of the 6% notes, the Company entered into a registration rights agreement whereby the Company agreed to file a registration statement offering to exchange the 6% notes for publicly registered notes with substantially identical terms.

     The 6% notes mature on July 15, 2015 and all amounts then outstanding will be due and payable at that time. Interest is paid semi-annually on July 15 and January 15. The indenture governing the 6% notes contains substantially the same covenants and restrictions as the Company’s outstanding 6¹/4% senior subordinated notes due 2014.

Line of Credit

     On April 29, 2005, the Company amended its existing credit facility to increase the borrowing base from $400.0 million to $500.0 million. Other changes to the facility include a change in the definition of EBITDA to add back exploration expense (EBITDAX), and an increase in the availability of letters of credit from 15% of the borrowing base to 20%.

9

     Upon the issuance of the 6% notes on July 13, 2005 (see above), the Company’s borrowing base was reduced from $500.0 million to $450.0 million.

Letters of Credit

     The Company had $56.1 million of outstanding letters of credit at June 30, 2005. These letters of credit are posted primarily with two counterparties to the Company’s hedging contracts and are used in lieu of cash margin deposits with those counterparties.

8. Income Taxes

     Reconciliation of income tax expense with tax at the Federal statutory rate is as follows (in thousands):

	Six months ended
	June 30,
	2005			2004
Income before income taxes	$	69,060		$	54,393
Tax at statutory rate		24,171			19,038
State income taxes, net of federal benefit		1,371			1,632
Section 43 credits generated		(1,446	)		(1,663	)
Permanent differences and other		(488	)		493
Income tax provision	$	23,608		$	19,500

9. Earnings Per Share (EPS)

     The following table sets forth basic and diluted EPS computations for the three and six months ended June 30, 2005 and 2004 (in thousands, except per share data):

	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Numerator:
Net income	$	23,668	$	17,991	$	45,452	$	34,893
Denominator:
Denominator for basic earnings per share –
Weighted average shares outstanding		48,660		46,089		48,636		45,684
Effect of dilutive options and dilutive restricted stock (a)		798		591		793		587
Denominator for diluted earnings per share		49,458		46,680		49,429		46,271
Net income per common share:
Basic	$	0.49	$	0.39	$	0.93	$	0.76
Diluted	$	0.48	$	0.39	$	0.92	$	0.75

(a) For the quarter ended June 30, 2005 and 2004, outstanding employee stock options of 114,375 and 37,500 were excluded from the calculation of diluted earnings per share because their effect would have been antidilutive.

     As discussed in Note 10, “Stockholders’ Equity,” during the three months ended June 30, 2005, the Company’s Board of Directors approved a three-for-two stock split in the form of a stock dividend to shareholders of record on June 27, 2005. All share and per-share information in the table above have been restated to reflect the stock split.

10

10. Stockholders’ Equity

     During the three months ended June 30, 2005, the Company’s Board of Directors approved a three-for-two stock split in the form of a stock dividend on each share of common stock outstanding as of the close of business on June 27, 2005 (the “Record Date”). The stock dividend was distributed on July 12, 2005 to stockholders of record as of the Record Date. In lieu of issuing fractional shares, the Company paid cash for such fractional shares based on the closing price of the common stock on the record date.

     The pro-forma effect of the stock split on the December 31, 2004 balance sheet is to reduce additional paid-in-capital by $0.2 million and increase common stock by $0.2 million. The beginning balances of additional paid-in-capital and common stock at December 31, 2004 have been adjusted in the June 30, 2005 Consolidated Balance Sheet and Consolidated Statement of Stockholders’ Equity to reflect this pro-forma effect of the stock split. All share and per-share information have been restated to reflect the stock split that became effective July 12, 2005.

     On May 3, 2005, the Company’s stockholders approved an amendment to the Company’s Second Amended and Restated Certificate of Incorporation to increase the authorized number of shares of common stock, par value $.01 per share, from 60 million to 144 million.

11. Comprehensive Income (Loss)

Components of comprehensive income (loss), net of related tax, are as follows (in thousands):

	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income	$	23,668		$	17,991		$	45,452		$	34,893
Change in unrealized loss on derivative hedged instruments		3,383			(9,854	)		(30,156	)		(17,794	)
Change in deferred gain on interest rate swap		(317	)		358			(262	)		483
Comprehensive income		26,734			8,495			15,034			17,582

The components of accumulated other comprehensive loss, net of related tax, are as follows (in thousands):

	June 30, 2005			December 31, 2004
Unrealized loss on derivative hedged instruments	$	(66,997	)	$	(36,841	)
Deferred gain on interest rate swap		182			444
Accumulated other comprehensive loss	$	(66,815	)	$	(36,397	)

12. Financial Statements of Subsidiary Guarantors

     As of June 30, 2005, all of the Company’s subsidiaries were subsidiary guarantors of the Company’s outstanding 8³/₈% and 6¹/4% notes. Since (i) each subsidiary guarantor is 100% owned by the Company, (ii) the Company has no assets or operations that are independent of its subsidiaries, (iii) the subsidiary guarantees are full and unconditional and joint and several and (iv) all of the Company’s subsidiaries are subsidiary guarantors, the Company has not included the financial statements of each subsidiary in this report. The subsidiary guarantors may, without restriction, transfer funds to the Company in the form of cash dividends, loans, and advances.

13. Related Party Transactions

     The Company paid to Hanover Compressor Company $0.4 million and $0.01 million in the first six months of 2005 and 2004, respectively, for field compression services. Mr. I. Jon Brumley, the Company’s Chairman, and CEO, also serves as a director of Hanover Compressor Company.

14. Subsequent Events

     8³/₈% Notes

     On July 13, 2005, the Company issued a notice of redemption (the “Redemption Notice”) pursuant to the provisions of the Indenture, dated as of June 25, 2002, among the Company, certain subsidiaries of the Company and Wells Fargo Bank, National

11

Association, as Trustee (the “Trustee”), pursuant to which the 8³/₈% senior subordinated notes of the Company (the “8³/₈% notes”) were issued. In the Redemption Notice, the Company indicated that it was exercising its right to redeem on August 15, 2005 (the “Redemption Date”) all $150 million aggregate principal amount of 8³/₈% notes currently outstanding. The Company expects the redemption price to approximate $168.6 million, including a make-whole premium and accrued interest through the redemption date. The exact redemption price will be determined in part using the latest Treasury yields at the redemption date and, thus, it will not be known until that time. However, the Company does not expect the estimate to change materially.

     Combined with the unamortized balance of debt issuance costs of the 8³/₈% notes, the Company estimates a pre-tax charge to earnings from the redemption to be recorded in the third quarter of 2005 of $21.8 million at June 30, 2005.

12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This document contains forward-looking statements, which give our current expectations or forecasts of future events. Actual results may differ materially from those discussed in our forward-looking statements due to many factors, including, but not limited to, those set forth under “FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION” contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Encore’s 2004 Annual Report on Form 10-K. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this document and Encore’s 2004 Form 10-K.

Second Quarter 2005 Highlights

     Our financial and operating results for the quarter ended June 30, 2005 included the following highlights:

• During the second quarter of 2005, we had oil and natural gas revenues of $99.7 million. This represents a 42% increase over the $70.1 million of oil and natural gas revenues reported for the second quarter of 2004. Our realized commodity prices, including the effects of hedging, averaged $40.96 per barrel and $6.11 per Mcf during the second quarter of 2005, increases of 31% and 14%, respectively, from the second quarter of 2004. On a combined basis, including the effects of hedging, prices increased 25% during the second quarter of 2005 to $39.56 per BOE from $31.54 per BOE in the second quarter of 2004.

• We reported net income of $23.7 million, or $0.48 per diluted share, in the three months ended June 30, 2005. This represents a 32% increase from the $17.9 million of net income, or $0.39 per diluted share, reported for the second quarter of 2004.

• Higher net income in the second quarter of 2005 resulted as production volumes for the quarter increased 13% to 27,697 BOE per day (2.5 MMBOE), compared with second quarter 2004 production of 24,434 BOE per day (2.2 MMBOE). The rise in production volumes was attributable to the continued success of our drilling program, uplift from our HPAI tertiary recovery project on the CCA, and acquisitions completed in 2004. Oil represented 67% and 76% of our total production volumes in the second quarter of 2005 and 2004, respectively.

• We invested $89.0 million in oil and natural gas activities during the second quarter of 2005 (excluding development-related asset retirement obligations). We invested $81.0 million in development, exploitation, expanding our HPAI program in the CCA, and exploration activities yielding 110 gross (65.7 net) wells. We also invested $8.0 million in acquiring proved properties and undeveloped leases. We are currently investing capital in an eleven-rig conventional operated drilling program on the onshore continental United States, with five rigs in Montana, three rigs in East Texas, two rigs in West Texas, and one rig in Oklahoma.

• We were able to fund the majority of the $89.0 million of investments in oil and natural gas activities made in the second quarter of 2005 using the $62.6 million of operating cash flows generated during the quarter. The remaining $26.4 million was funded through borrowings under our existing revolving credit facility. Long-term debt at June 30, 2005 increased to $440.0 million from $379.0 million at December 31, 2004.

• On June 30, 2005, we priced the sale of $300.0 million 6% senior subordinated debt. We issued and sold the notes on July 13, 2005. We expect to redeem our 8³/₈% notes during the third quarter of 2005, and use the remaining net cash received to reduce amounts outstanding under our existing revolving credit facility.

13

Results of Operations

Comparison of Quarter Ended June 30, 2005 to Quarter Ended June 30, 2004

     Set forth below is our comparison of operations during the second quarter of 2005 with the second quarter of 2004.

     Revenues and Production. The following table illustrates the primary components of oil and natural gas revenues for the three months ended June 30, 2005 and 2004, as well as each quarter’s respective oil and natural gas volumes (in thousands, except per unit and per day amounts):

	Three months ended June 30,						Increase /
	2005			2004			(Decrease)
							$			%
Revenues:
Oil wellhead	$	80,178		$	60,638		$	19,540
Oil hedges		(10,619	)		(7,753	)		(2,866	)
Total Oil Revenues	$	69,559		$	52,885		$	16,674			32%
Natural gas wellhead	$	32,448		$	17,948		$	14,500
Natural gas hedges		(2,290	)		(711	)		(1,579	)
Total Natural Gas Revenues	$	30,158		$	17,237		$	12,921			75%
Combined wellhead	$	112,626		$	78,586		$	34,040
Combined hedges		(12,909	)		(8,464	)		(4,445	)
Total Combined Revenues	$	99,717		$	70,122		$	29,595			42%
Revenues ($/Unit):
Oil wellhead	$	47.21		$	35.90		$	11.31
Oil hedges		(6.25	)		(4.58	)		(1.67	)
Total Oil Revenues	$	40.96		$	31.32		$	9.64			31%
Natural gas wellhead	$	6.57		$	5.59		$	0.98
Natural gas hedges		(0.46	)		(0.22	)		(0.24	)
Total Natural Gas Revenues	$	6.11		$	5.37		$	0.74			14%
Combined wellhead	$	44.69		$	35.35		$	9.34
Combined hedges		(5.13	)		(3.81	)		(1.32	)
Total Combined Revenues	$	39.56		$	31.54		$	8.02			25%

	Three months ended June 30,				Increase /
	2005		2004		(Decrease)
Total production volumes:
Oil (Bbls)		1,698		1,689		9
Natural gas (Mcf)		4,933		3,209		1,724
Combined (BOE)		2,520		2,223		297
Daily production volumes:
Oil (Bbls/day)		18,662		18,557		105
Natural gas (Mcf/day)		54,213		35,260		18,953
Combined (BOE/day)		27,697		24,434		3,263
NYMEX Prices:
Oil (per Bbl)	$	53.17	$	38.32	$	14.85
Natural gas (per Mcf)		6.95		6.07		0.88

14

     Oil revenues increased from second quarter 2004 to second quarter 2005 by $16.7 million, due primarily to a higher realized average oil price. Our realized average oil price increased $9.64 per Bbl in the second quarter of 2005 over the same period in 2004 as a result of an increase in our average wellhead price of $11.31 per Bbl, offset by an increase in hedging payments of $1.67 per Bbl. The increase in our average wellhead price and hedging payments resulted from the increase in the overall market price for oil as reflected in the $14.85 per Bbl increase in the average NYMEX price over the same period.

     Natural gas revenues increased by $12.9 million, or $0.74 per Mcf, in the second quarter of 2005 from the second quarter of 2004 due to an increase in volumes and an increase in our realized average natural gas price. Production volumes increased 1,724 MMcf in the second quarter of 2005 as compared to the second quarter of 2004 due to our drilling activities and the Overton acquisition, which closed on June 17, 2004, and is included in our financial statements beginning July 1, 2004. The $0.74 per Mcf increase in our realized average natural gas price was due to the $0.98 per Mcf increase in the wellhead price for our natural gas from the second quarter of 2004 to the second quarter of 2005. The NYMEX price for natural gas increased by $0.88 per Mcf over the same period.

     The table below illustrates the relationship between oil and natural gas wellhead prices and average NYMEX prices for the quarters ended June 30, 2005 and 2004:

	Three months ended June 30,
	2005			2004
Oil wellhead ($/Bbl)	$	47.21		$	35.90
Average NYMEX ($/Bbl)	$	53.17		$	38.32
Differential to NYMEX	$	(5.96	)	$	(2.42	)
Oil wellhead to NYMEX percentage		89	%		94	%
Natural gas wellhead ($/Mcf)	$	6.57		$	5.59
Average NYMEX ($/Mcf)	$	6.95		$	6.07
Differential to NYMEX	$	(0.38	)	$	(0.48	)
Natural gas wellhead to NYMEX percentage		95	%		92	%

     Management uses this wellhead to NYMEX margin analysis to assess trends in our anticipated oil and natural gas revenues. As indicated, our oil differential to the NYMEX price widened from the second quarter of 2004 to the second quarter of 2005 as NYMEX increased at a higher rate than our average wellhead price increased. This oil differential between our wellhead price received and NYMEX has been wider primarily as differentials tend to widen in a period of higher general oil prices. We also have been adversely affected by wider differentials in the market price for our production in two particular areas: the Permian Basin, where much of our production has been tied to a West Texas Sour price, and the Rockies, where much of our production has been tied to a Wyoming Sweet price. Both the West Texas Sour differential and the Wyoming Sweet differential have widened in the second quarter of 2005 versus the second quarter of 2004, and each has therefore contributed to a widening of our overall oil wellhead differential to NYMEX.

15

     Expenses. The following table summarizes our expenses for the quarters ended June 30, 2005 and 2004:

	Three months ended June 30,				Increase/
	2005		2004		(Decrease)
					$		%
Expenses (in thousands):
Production —
Lease operations	$	15,721	$	10,921	$	4,800
Production, ad valorem, and severance taxes		9,813		7,161		2,652
Total production expenses		25,534		18,082		7,452		41%
Other —
Depletion, depreciation, and amortization		19,038		11,249		7,789
Exploration		3,772		1,697		2,075
General and administrative (excluding non-cash stock based compensation)		3,571		2,530		1,041
Non-cash stock based compensation		1,006		307		699
Derivative fair value loss		1,692		965		727
Other operating		1,703		1,091		612
Total operating		56,316		35,921		20,395		57%
Interest		7,448		6,308		1,140
Current and deferred income tax provision		12,370		10,008		2,362
Total expenses	$	76,134	$	52,237	$	23,897		46%
Expenses (per BOE):
Production —
Lease operations	$	6.24	$	4.91	$	1.33
Production, ad valorem, and severance taxes		3.89		3.22		0.67
Total production expenses		10.13		8.13		2.00		25%
Other —
Depletion, depreciation, and amortization		7.55		5.06		2.49
Exploration		1.50		0.76		0.74
General and administrative (excluding non-cash stock based compensation)		1.42		1.14		0.28
Non-cash stock based compensation		0.40		0.14		0.26
Derivative fair value loss		0.67		0.43		0.24
Other operating		0.68		0.50		0.18
Total operating		22.35		16.16		6.19		38%
Interest		2.96		2.84		0.12
Current and deferred income tax provision		4.91		4.50		0.41
Total expenses	$	30.22	$	23.50	$	6.72		29%

     Production expenses (Lease operations and production, ad valorem, and severance taxes). Total production expenses for the second quarter of 2005 increased $7.5 million as compared to the second quarter of 2004. This increase resulted from an increase in total production volumes, as well as a $2.00 increase in production expenses per BOE in the second quarter of 2005 as compared to the second quarter of 2004. The $2.00 increase in production expenses per BOE in the second quarter of 2005 represents a 25% increase over the second quarter of 2004. This increase is in line with the 25% increase in revenues per BOE over the same period, giving rise to a 26% increase in our production margin (revenues less production expenses) per BOE, which increased from $23.41 in the second quarter of 2004 to $29.43 in the second quarter of 2005.

     The production expense attributable to lease operations for the second quarter of 2005 increased as compared to the second quarter of 2004 by $4.8 million. The increase in total lease operations expense resulted from an increase in production volumes as a result of our 2005 drilling program, the Overton acquisition, and our high-pressure air injection (“HPAI”) program; and an increase in the per BOE rate. The increase in our average per BOE rate was attributable to increase in prices paid for outside services due to a current higher price environment, increased operational activity to maximize production, and the addition of higher operating cost barrels as lower margin wells are operated in the current higher price environment. LOE expenses are expected to increase because of a continued high-price environment and in the third quarter we expect to begin expensing HPAI costs attributable to Little Beaver Phase 1 that previously have been capitalized during the pressurization phase. We expect additional LOE costs for HPAI to be approximately $0.7 million in the third quarter of 2005.

16

     The production expense attributable to production, ad valorem, and severance taxes for the second quarter of 2005 increased as compared to the same period in 2004 by approximately $2.7 million due to an increase in total revenues. As a percentage of oil and natural gas revenues (excluding the effects of hedges), production, ad valorem, and severance taxes for the second quarter of 2005 decreased to 8.7% from 9.1% in the second quarter of 2004 as a result of higher production levels in states with lower production, ad valorem, and severance taxes. The effect of hedges is excluded from oil and natural gas revenues in the calculation of these percentages because this method more closely reflects the method used to calculate actual production, ad valorem, and severance taxes paid to taxing authorities.

     Depletion, depreciation, and amortization (“DD&A”) expense. DD&A expense for the second quarter of 2005 increased by $7.8 million as compared to the second quarter of 2004, due to a $2.49 increase in the per BOE rate and an increase in production. This per BOE rate increase was due to the 2004 acquisitions, which had higher acquisition costs than our historical average, as well as higher drilling costs per BOE of reserves than our historical DD&A rate in certain areas.

     Exploration expense. Exploration expense was $3.8 million in the second quarter of 2005, while it was $1.7 million in the second quarter of 2004. During the second quarter of 2005, we expensed twelve exploratory dry holes totaling $2.0 million. Out of the twelve exploratory dry holes expensed, one was drilled in the CCA and eleven were drilled in the shallow gas area of Montana. In the second quarter of 2004, we had one dry hole drilled in the Barnett Shale area that was spud by Cortez and acquired in the Cortez acquisition. The following table details our exploration-related expenses for the second quarter of 2005 and 2004 (in thousands):

	Three months ended June 30,				Increase /
	2005		2004		(Decrease)
Exploration expenses:
Dry hole	$	2,010	$	1,697	$	313
Geological and geophysical		278		—		278
Seismic		965		—		965
Delay rental		108		—		108
Impairment of undeveloped leasehold		411		—		411
Total	$	3,772	$	1,697	$	2,075

     General and administrative (“G&A”) expense. G&A expense (excluding non-cash stock based compensation) increased $1.0 million for the second quarter of 2005 as compared to the second quarter of 2004. The overall increase, as well as the $0.28 increase in the per BOE rate, is a result of increased staffing to manage our larger asset base, higher rent expense for our corporate office, and higher directors’ and officers’ insurance costs. Additionally, we have experienced increased competition for human resources from other companies within the industry that has increased the cost to hire and retain experienced industry personnel.

     Non-cash stock based compensation expense. Non-cash stock based compensation expense for the second quarter of 2005 increased $0.7 million as compared to the same period in 2004. This expense represents the amortization of deferred compensation recorded in equity related to restricted stock granted under the 2000 Incentive Stock Plan. Both deferred compensation and related amortization increased from second quarter 2004 to second quarter 2005 as the Company’s stock price per share increased and the number of shares granted in the second quarter of 2005 increased as compared to the second quarter of 2004.

     Derivative fair value loss. During the second quarter of 2005 we recorded a $1.7 million derivative fair value loss as compared to the $1.0 million loss recorded in the second quarter of 2004. This derivative fair value loss represents the ineffective portion of the mark-to-market loss on our derivative hedging instruments, settlements received on our fixed-to-floating interest rate swap, (gains) losses related to commodity derivatives not designated as hedges, and changes in the mark-to-market value of our fixed–to-floating interest rate swap.

17

     The components of the derivative fair value (gain) loss reported in the second quarter of 2005 and 2004 are as follows (in thousands):

	Three months ended June 30,						Increase /
	2005			2004			(Decrease)
Designated cash flow hedges:
Ineffectiveness – Commodity contracts	$	1,942		$	181		$	1,761
Undesignated derivative contracts:
Mark-to-market (gain) loss – Interest rate swap		(31	)		1,130			(1,161	)
Mark-to-market (gain) loss – Commodity contracts		(219	)		(346	)		127
Derivative fair value loss	$	1,692		$	965		$	727

     Ineffectiveness loss related to our derivative commodity contracts increased $1.8 million due primarily to an increase in oil wellhead differentials on our production in the CCA.

     Other operating expense. Other operating expense for the second quarter of 2005 increased by $0.6 million when compared to the same period in 2004. This increase is mainly due to an increase in third party natural gas transportation costs attributable to higher production volumes for the second quarter of 2005 over the same period in 2004.

     Interest expense. Interest expense increased $1.1 million in the quarter ended June 30, 2005 from the quarter ended June 30, 2004. This increase is due primarily to an increase in debt outstanding under our credit facility, offset slightly by a decrease in our weighted average interest rate from period to period. We incurred additional debt in the second quarter of 2004 to fund the Cortez and Overton acquisitions and to fund the Company’s development, exploitation, and exploration capital programs. The weighted average interest rate, net of hedges, for the quarter ended June 30, 2005 was 7.0% compared to 7.9% for the quarter ended June 30, 2004. This lower weighted average interest rate is the result of the issuance of $150 million aggregate principal amount of 6¹/4% senior subordinated notes in April 2004. The following table illustrates the components of interest expense for the three months ended June 30, 2005 and 2004 (in thousands):

	Three months ended June 30,					Increase /
	2005			2004		(Decrease)
83/8% notes due 2012 (2)	$	3,141		$	3,141	$	—
61/4% notes due 2014		2,344			2,318		26
Revolving credit facility		1,367			230		1,137
Interest rate hedges (1)		(72	)		153		(225	)
Debt issuance cost		277			262		15
Banking fees and other		391			204		187
Total	$	7,448		$	6,308	$	1,140

(1)	Amount represents non-cash amortization of the deferred (gain) loss on interest rate swaps from other comprehensive income to interest expense. This deferred (gain) loss relates to previously outstanding interest rate swaps. We have since cash settled these interest rate swaps and the swaps are no longer outstanding.
(2)	On July 13, 2005 we issued $300 million of 6% senior subordinated notes and issued a redemption notice on our 83/8% notes. Giving effect to the issuance of the 6% notes and the use of proceeds therefrom, we expect a decrease in our future weighted average interest rate.

     Income taxes. Income tax expense for the second quarter of 2005 increased $2.4 million over the same period in 2004. This increase is due primarily to the $8.0 million increase in income before income taxes from the second quarter of 2004 to the second quarter of 2005, offset by a decrease in our effective tax rate from 35.7% for the second quarter in 2004 to 34.3% in the second quarter of 2005.

18

Comparison of Six Months Ended June 30, 2005 to Six Months Ended June 30, 2004

     Set forth below is our comparison of operations during the first six months of 2005 with the first six months of 2004.

     Revenues and Production. The following table illustrates the primary components of oil and natural gas revenues for the six months ended June 30, 2005 and 2004, as well as each period’s respective oil and natural gas volumes (in thousands, except per unit amounts and per day amounts):

	Six months ended June 30,						Increase /
	2005			2004			(Decrease)
							$			%
Revenues:
Oil wellhead	$	156,898		$	113,017		$	43,881
Oil hedges		(20,203	)		(13,368	)		(6,835	)
Total Oil Revenues	$	136,695		$	99,649		$	37,046			37%
Natural gas wellhead	$	58,124		$	30,870		$	27,254
Natural gas hedges		(3,521	)		(1,106	)		(2,415	)
Total Natural Gas Revenues	$	54,603		$	29,764		$	24,839			83%
Combined wellhead	$	215,022		$	143,887		$	71,135
Combined hedges		(23,724	)		(14,474	)		(9,250	)
Total Combined Revenues	$	191,298		$	129,413		$	61,885			48%
Revenues ($/Unit):
Oil wellhead	$	46.11		$	34.25		$	11.86
Oil hedges		(5.94	)		(4.05	)		(1.89	)
Total Oil Revenues	$	40.17		$	30.20		$	9.97			33%
Natural gas wellhead	$	6.20		$	5.38		$	0.82
Natural gas hedges		(0.38	)		(0.19	)		(0.19	)
Total Natural Gas Revenues	$	5.82		$	5.19		$	0.63			12%
Combined wellhead	$	43.30		$	33.82		$	9.48
Combined hedges		(4.78	)		(3.40	)		(1.38	)
Total Combined Revenues	$	38.52		$	30.42		$	8.10			27%

	Six months ended June 30,				Increase /
	2005		2004		(Decrease)
Total production volumes:
Oil (Bbls)		3,403		3,299		104
Natural gas (Mcf)		9,384		5,733		3,651
Combined (BOE)		4,967		4,255		712
Daily production volumes:
Oil (Bbls/day)		18,799		18,128		671
Natural gas (Mcf/day)		51,847		31,501		20,346
Combined (BOE/day)		27,440		23,378		4,062
NYMEX Prices:
Oil (per Bbl)	$	51.51	$	36.73	$	14.78
Natural gas (per Mcf)		6.71		5.90		0.81

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     Oil revenues increased from the first six months of 2004 to the first six months of 2005 by $37.0 million, due primarily to a higher realized average oil price. Our realized average oil price increased $9.97 per Bbl in the six months ended June 30, 2005 over the same period in 2004 as a result of an increase in our average wellhead price of $11.86 per Bbl, offset by an increase in hedging payments of $1.89 per Bbl. The increase in our average wellhead price and hedging payments resulted from the increase in the overall market price for oil as reflected in the $14.78 per Bbl increase in the average NYMEX price over the same period.

     Natural gas revenues increased by $24.8 million, or $0.63 per Mcf, in the first six months of 2005 from the first six months of 2004 due to an increase in volumes and an increase in our realized average natural gas price. Production volumes increased 3,651 MMcf in the six months ended June 30, 2005 as compared to the same period in 2004 due to our drilling activities and the 2004 acquisitions. The $0.63 per Mcf increase in our realized average natural gas price was due to the $0.82 per Mcf increase in the wellhead price for our natural gas from the first six months of 2004 to the same period in 2005. The NYMEX price for natural gas increased by $0.81 per Mcf over the same period.

     The table below illustrates the relationship between oil and natural gas wellhead prices and average NYMEX prices for the six months ended June 30, 2005 and 2004:

	Six months ended June 30,
	2005			2004
Oil wellhead ($/Bbl)	$	46.11		$	34.25
Average NYMEX ($/Bbl)	$	51.51		$	36.73
Differential to NYMEX	$	(5.40	)	$	(2.48	)
Oil wellhead to NYMEX percentage		90	%		93	%
Natural gas wellhead ($/Mcf)	$	6.20		$	5.38
Average NYMEX ($/Mcf)	$	6.71		$	5.90
Differential to NYMEX	$	(0.51	)	$	(0.52	)
Natural gas wellhead to NYMEX percentage		92	%		91	%

     Management uses this wellhead to NYMEX margin analysis to assess trends in our anticipated oil and natural gas revenues. As indicated, our oil differential to the NYMEX price widened from the first half of 2004 to the first half of 2005 as NYMEX increased at a higher rate than our average wellhead price increased. This oil differential between our wellhead price received and NYMEX has been wider primarily as differentials tend to widen in a period of higher general oil prices. We also have been adversely affected by wider differentials in the market price for our production in two particular areas: the Permian Basin, where much of our production has been tied to a West Texas Sour price, and the Rockies, where much of our production has been tied to a Wyoming Sweet price. Both the West Texas Sour differential and the Wyoming Sweet differential have widened in the first half of 2005 versus the same period in 2004, and each has therefore contributed to a widening of our overall oil wellhead differential to NYMEX.

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     Expenses. The following table summarizes our expenses for the six months ended June 30, 2005 and 2004:

	Six months ended June 30,				Increase /
	2005		2004		(Decrease
					$		%
Expenses (in thousands):
Production —
Lease operations	$	30,589	$	21,163	$	9,426
Production, ad valorem, and severance taxes		18,899		13,000		5,899
Total production expenses		49,488		34,163		15,325		45	%
Other —
Depletion, depreciation, and amortization		35,721		20,512		15,209
Exploration		6,383		1,697		4,686
General and administrative (excluding non-cash stock based compensation)		7,206		4,758		2,448
Non-cash stock based compensation		1,779		617		1,162
Derivative fair value loss		4,101		1,123		2,978
Other operating		3,302		2,093		1,209
Total operating		107,980		64,963		43,017		66	%
Interest		14,407		10,214		4,193
Current and deferred income tax provision		23,608		19,500		4,108
Total expenses	$	145,995	$	94,677	$	51,318		54	%
Expenses (per BOE):
Production —
Lease operations	$	6.16	$	4.97	$	1.19
Production, ad valorem, and severance taxes		3.81		3.06		0.75
Total production expenses		9.97		8.03		1.94		24	%
Other —
Depletion, depreciation, and amortization		7.19		4.82		2.37
Exploration		1.29		0.40		0.89
General and administrative (excluding non-cash stock based compensation)		1.45		1.12		0.33
Non-cash stock based compensation		0.36		0.15		0.21
Derivative fair value loss		0.83		0.26		0.57
Other operating		0.66		0.49		0.17
Total operating		21.75		15.27		6.48		42	%
Interest		2.90		2.40		0.50
Current and deferred income tax provision		4.75		4.58		0.17
Total expenses	$	29.40	$	22.25	$	7.15		32	%

     Production expenses (Lease operations and production, ad valorem, and severance taxes). Production expenses for the first half of 2005 increased $15.3 million as compared to the same period in 2004. This increase resulted from an increase in total production volumes, as well as a $1.94 increase in production expenses per BOE in the second quarter of 2005 as compared to the second quarter of 2004. The $1.94 increase in production expenses per BOE in the six months ended June 30, 2005 represents a 24% increase over the six months ended June 30, 2004. This increase is in line with the 27% increase in revenues per BOE over the same period, giving rise to a 28% increase in our production margin (revenues less production expenses) per BOE, which increased from $22.39 in the six months ended June 30, 2004 to $28.55 in the six months ended June 30, 2005.

     The production expense attributable to lease operations for the first six months of 2005 increased as compared to the same period in 2004 by $9.4 million. The increase in total lease operations expense resulted from an increase in production volumes as a result of our 2005 drilling program, the 2004 acquisitions, and our high-pressure air injection program. The increase in our average per BOE rate was attributable to increase in prices paid for outside services due to a current higher price environment, increased operational activity to maximize production, and the addition of higher operating cost barrels as lower margin wells are operated in the current higher price environment.

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     The production expense attributable to production, ad valorem, and severance taxes for the six months ended June 30, 2005 increased as compared to the same period in 2004 by approximately $5.9 million due to an increase in total revenues. As a percentage of oil and natural gas revenues (excluding the effects of hedges), production, ad valorem, and severance taxes for the first six months of 2005 decreased slightly from 9.0% in the first half of 2004 to 8.8% in the first six months of 2005. The effect of hedges is excluded from oil and natural gas revenues in the calculation of these percentages because this method more closely reflects the method used to calculate actual production, ad valorem, and severance taxes paid to taxing authorities.

     Depletion, depreciation, and amortization (“DD&A”) expense. DD&A expense for the first six months of 2005 increased by $15.2 million as compared to the same period in 2004, due to a $2.37 increase in the per BOE rate and an increase in production. This per BOE rate increase was due to the 2004 acquisitions, which had higher acquisition costs than our historical average, as well as higher drilling costs per BOE of reserves than our historical DD&A rate in certain areas.

     Exploration expense. Exploration expense increased $4.7 million in the six months ended June 30, 2005 as compared to the same period in 2004. During the first six months of 2005, we expensed seventeen exploratory dry holes totaling $3.3 million. Of the seventeen exploratory dry holes expensed, one was drilled in Crockett County, Texas, fifteen were drilled in the shallow gas area of Montana, and one was drilled in the CCA. In the first half of 2004, we had one dry hole drilled in the Barnett Shale area that was spud by Cortez and acquired in the Cortez acquisition. The following table details our exploration-related expenses (in thousands):

	Six months ended June 30,				Increase /
	2005		2004		(Decrease)
Exploration expenses:
Dry hole	$	3,329	$	1,697	$	1,632
Geological and geophysical		630		—		630
Seismic		1,091		—		1,091
Delay rental		375		—		375
Impairment of undeveloped leasehold		958		—		958
Total	$	6,383	$	1,697	$	4,686

     General and administrative (“G&A”) expense. G&A expense (excluding non-cash stock based compensation) increased $2.4 million for the first six months of 2005 as compared to the same period in 2004. The overall increase, as well as the $0.33 increase in the per BOE rate, is a result of increased staffing to manage our larger asset base, higher rent expense for our corporate office, and higher directors’ and officers’ insurance costs. Additionally, we have experienced increased competition for human resources from other companies within the industry that has increased the cost to hire and retain experienced industry personnel.

     Non-cash stock based compensation expense. Non-cash stock based compensation expense for the six months ended June 30, 2005 increased $1.2 million as compared to the same period in 2004. This expense represents the amortization of deferred compensation recorded in equity related to restricted stock granted under the 2000 Incentive Stock Plan. Both deferred compensation and related amortization increased from the six months ended June 30, 2004 to the same period in 2005 as the Company’s stock price per share increased and the number of shares granted from the first half of 2004 to the second half of 2005 increased.

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     Derivative fair value loss. During the six months ended June 30, 2005 we recorded a $4.1 million derivative fair value loss as compared to the $1.1 million loss recorded in the same period in 2004. This derivative fair value loss represents the ineffective portion of the mark-to-market loss on our derivative hedging instruments, settlements received on our fixed-to-floating interest rate swap, (gains) losses related to commodity derivatives not designated as hedges, and changes in the mark-to-market value of our fixed-to-floating interest rate swap. The components of the derivative fair value (gain) loss reported in the six months ended June 30, 2005 and 2004 are as follows (in thousands):

	Six months ended June 30,					Increase /
	2005			2004		(Decrease)
Designated cash flow hedges:
Ineffectiveness – Commodity contracts	$	4,667		$	455	$	4,212
Undesignated derivative contracts:
Mark-to-market (gain) loss – Interest rate swap		150			420		(270	)
Mark-to-market (gain) loss – Commodity contracts		(716	)		248		(964	)
Derivative fair value loss	$	4,101		$	1,123	$	2,978

     Ineffectiveness loss related to our derivative commodity contracts increased $4.2 million due primarily to an increase in oil

     wellhead differentials on our production in the CCA.

     Other operating expense. Other operating expense for the first six months of 2005 increased by $1.2 million when compared to the same period in 2004. This increase is mainly due to an increase in third party natural gas transportation costs attributable to higher production volumes for the first half of 2005 over the same period in 2004.

     Interest expense. Interest expense increased $4.2 million in the six months ended June 30, 2005 from the six months ended June 30, 2004. This increase is due primarily to an increase in debt outstanding under our credit facility and the new 6¹/4% notes, offset slightly by a decrease in our weighted average interest rate from period to period. We incurred additional debt in the second quarter of 2004 to fund the Cortez and Overton acquisitions. The weighted average interest rate, net of hedges, for the six months ended June 30, 2005 was 7.0% compared to 8.1% for the six months ended June 30, 2004. This lower weighted average interest rate is the result of the issuance of $150 million aggregate principal amount of 6¹/4% senior subordinated notes in April 2004.

     The following table illustrates the components of interest expense for the six months ended June 30, 2005 and 2004 (in thousands):

	Six months ended June 30,					Increase/
	2005			2004		(Decrease)
83/8% notes due 2012 (2)	$	6,281		$	6,281	$	—
61/4% notes due 2014		4,688			2,318		2,370
Revolving credit facility		2,297			442		1,855
Interest rate hedges (1)		(32	)		365		(397	)
Debt issuance cost		527			457		70
Banking fees and other		646			351		295
Total	$	14,407		$	10,214	$	4,193

(1)	Amount represents non-cash amortization of the deferred (gain) loss on interest rate swaps from other comprehensive income to interest expense. This deferred (gain) loss relates to previously outstanding interest rate swaps. We have since cash settled these interest rate swaps and the swaps are no longer outstanding.
(2)	On July 13, 2005 we issued $300 million of 6% senior subordinated notes and issued a redemption notice on our 83/8% notes. Giving effect to the issuance of the 6% notes and the use of proceeds therefrom, we expect a decrease in our future weighted average interest rate.

     Income taxes. Income tax expense for the first six months of 2005 increased $4.1 million over the same period in 2004. This increase is due primarily to the $14.7 million increase in income before income taxes from the six months ended June 30, 2004 to the six months ended June 30, 2005, offset by a decrease in our effective tax rate from 35.9% for the first six months of 2004 to 34.2% in the first six months of 2005.

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Capital Commitments, Capital Resources, and Liquidity

Capital Resources and Capital Commitments

     Our primary capital resources are net cash provided by operating activities and proceeds from financing activities. Our primary needs for cash are as follows:

• Development, exploitation, and exploration of our existing oil and natural gas properties

• High-pressure air injection programs on our CCA properties

• Acquisitions of oil and natural gas properties

• Leasehold and acreage costs

• Other general property and equipment

• Funding of necessary working capital

• Payment of contractual obligations

     Development, Exploitation, and Exploration. The following table summarizes our costs incurred (excluding asset retirement obligations) related to development, exploitation, and exploration activities during the three and six months ended June 30, 2005 and 2004 (in thousands):

	Three months ended June 30,				Increase/		Six months ended June 30,				Increase/
	2005		2004		(Decrease)		2005		2004		(Decrease)
Development, Exploitation, and Exploration Expenditures:
Development and exploitation	$	57,979	$	27,889	$	30,090	$	100,884	$	48,155	$	52,729
Exploration		13,706		4,481		9,225		28,403		5,676		22,727
HPAI		9,299		9,261		38		17,241		16,913		328
Total	$	80,984	$	41,631	$	39,353	$	146,528	$	70,744	$	75,784

     Development, Exploitation, and Exploration. Our expenditures for conventional development and exploitation investments primarily relate to drilling development and infill wells, workovers of existing wells, and field related facilities (excluding development-related asset retirement obligations).

     Our development and exploitation capital for the three months ended June 30, 2005 included a total of 76 gross (39.4 net) successful wells. We also drilled 3 gross (2.1 net) development dry holes during the second quarter of 2005.

     Our development drilling capital for the first half of 2005 included 132 gross (80.7 net) successful development wells, and 3 gross (2.9 net) developmental dry holes. We currently have 11 operated rigs drilling on the onshore continental United States with 5 rigs in Montana, 3 rigs in East Texas, 2 rigs in West Texas, and 1 rig running in Oklahoma.

     Our expenditures for exploration investments primarily relate to drilling exploratory wells, seismic, delay rentals, and geological and geophysical costs. During the three months ended June 30, 2005, our exploration capital included 19 (14.2 net) exploratory wells which are productive and 12 gross (10.0 net) exploratory dry holes.

     During the six months ended June 30, 2005, our exploration capital yielded 24 (17.1 net) exploratory wells which are productive and 17 gross (14.8 net) exploratory dry holes.

     The total exploratory drilling capital incurred was $12.3 million and $26.3 million for the three and six months ended June 30, 2005, respectively, excluding $1.4 million and $2.1 million in seismic, delay rentals, and geological and geophysical costs.

     For the remainder of 2005, we expect to invest $147.2 million in development, exploitation, and exploration activities. We have based our 2005 forecasts on the assumptions of $36.00 per Bbl and $6.00 per Mcf NYMEX prices. If NYMEX prices trend downward below our base prices, we may reevaluate capital projects and may adjust the capital budgeted for development and exploitation investments accordingly.

     High-Pressure Air Injection. High-pressure air injection in the Little Beaver unit of the CCA was initiated in late 2003, and full implementation of the project was completed in the fourth quarter of 2004. We continue to see positive production response in line with expectations. Total production in the Little Beaver HPAI project area has stabilized, and is projected to increase from current levels in the future.

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     In the Pennel and Coral Creek area of the CCA, where we have been operating a successful HPAI appraisal project (Phase 1) for nearly three years, we have continued to expand the Phase 2 portion of the HPAI project. We have been injecting air in the Phase 2 project area since April 2005, and expect full implementation of the Phase 2 HPAI project to be completed by year-end 2005. We estimate that production will respond on a timetable similar to the Little Beaver project, with positive production indications initially expected by late 2006.

     For the remainder of 2005, we expect to invest $10.8 million for high-pressure air injection capital, primarily related to our Pennel program.

     Acquisitions, Leasehold and Acreage Costs. The following table summarizes our costs incurred (excluding asset retirement obligations) for oil and natural gas proved property acquisitions during the three and six months ended June 30, 2005 and 2004 (in thousands):

	Three months ended June 30,				Increase/			Six months ended June 30,				Increase/
	2005		2004		(Decrease)			2005		2004		(Decrease)
Acquisitions, Leasehold and Acreage Costs:
Acquisitions	$	4,986	$	211,433	$	(206,447	)	$	10,657	$	211,596	$	(200,939	)
Leasehold and acreage costs		3,039		8,457		(5,418	)		6,722		9,557		(2,835	)
Total	$	8,025	$	219,890	$	(211,865	)	$	17,379	$	221,153	$	(203,774	)

     Acquisitions. Our capital expenditures for proved oil and natural gas properties during the three months ended June 30, 2005 totaled $5.0 million as compared to $211.4 million in the same period in 2004. The $5.0 million of the acquisition capital in the second quarter of 2005 was invested primarily in additional working interests in our Mid-Continent region, while the $211.4 million in the second quarter of 2004 was invested in our Cortez and Overton acquisitions. We do not budget for acquisitions but we will continue to evaluate acquisition opportunities as they arise in 2005 with the same disciplined commitment to acquire assets that fit our portfolio and create value. We will continue to pursue acquisitions of properties with similar upside potential to our current producing properties portfolio.

     Leasehold and Acreage Costs. For the remainder of 2005, we expect to invest an additional $2.3 million for leasehold and acreage costs.

     Other General Property and Equipment. Our capital expenditures for other general property and equipment during the three months ended June 30, 2005 and 2004 totaled $2.0 million and $5.7 million, respectively. The decrease was due primarily due to higher levels of field equipment purchased in the second quarter of 2004 in anticipation of our expected increased development activities. The $2.0 million incurred for the second quarter of 2005 primarily relate to leasehold improvements.

     Our capital expenditures for other general property and equipment during the six months ended June 30, 2005 and 2004 totaled $4.7 million and $6.6 million, respectively. The decrease was due primarily due to higher levels of field equipment purchased in the second quarter of 2004 in anticipation of our expected increased development activities. The $4.7 million incurred for the first half of 2005 primarily relate to leasehold improvements and field equipment purchased.

     Working Capital. At June 30, 2005, our working capital was $(23.6) million while at December 31, 2004, our working capital was $(15.6) million, a decrease of $8.0 million. The decrease is primarily attributable to changes in the fair value of outstanding derivative contracts, net of the deferred tax effect of marking these contracts to market.

     For 2005, we expect working capital to remain negative. Negative working capital is expected mainly due to fair values of our derivative contracts, which hedge settlements will be offset by cash flows from hedged production. We anticipate cash reserves to be close to zero as we use any cash to fund capital obligations, with any excess cash being used to pay down our existing credit facility. We do not plan to pay cash dividends in the foreseeable future. The overall 2005 commodity prices for oil and natural gas will be the largest variable driving the different components of working capital. Our operating cash flow is determined in a large part by commodity prices. Assuming moderate to high commodity prices, our operating cash flow should remain positive for the foreseeable future. For the full year 2005, Encore’s Board of Directors has approved an increase in development and exploration and other capital to $315.0 million, reflecting an increase in activity levels and the current industry cost environment. The level of these and other future expenditures is largely discretionary, and the amount of funds devoted to any particular activity may increase or decrease significantly, depending on available opportunities, timing of projects, and

25

market conditions. We plan to finance our ongoing expenditures using internally generated cash flow, cash on hand, and our existing credit agreement.

     Contractual Obligations. The following table illustrates our contractual obligations and commercial commitments outstanding at June 30, 2005 (in thousands):

Contractual Obligations	Payments Due by Period
and Capital Commitments	Total		2005		2006 – 2007		2008 – 2009		Thereafter
83/8% notes (a,b)	$	237,937	$	6,281	$	25,125	$	25,125	$	181,406
61/4% notes (a)		234,375		4,687		18,750		18,750		192,188
Revolving credit facility (a,b)		164,604		3,000		11,903		149,701		—
Derivative obligations (c)		104,119		24,317		79,802		—		—
Operating leases (d)		11,908		676		2,932		2,902		5,398
Asset retirement obligations (e)		77,500		542		1,084		1,084		74,790
Totals	$	830,443	$	39,503	$	139,596	$	197,562	$	453,782

(a)	Amounts included in the table above include both principal and projected interest payments.
(b)	On July 13, 2005 we issued $300 million of 6% senior subordinated notes and issued a redemption notice on our 83/8% notes. Giving effect to the issuance of the 6% notes and the use of proceeds therefrom, our pro-forma contractual obligations and commitments by period is as follows (in thousands):

Contractual Obligations	Payments Due by Period
and Capital Commitments	Total		2005		2006 – 2007		2008 – 2009		Thereafter
6% notes	$	480,000	$	—	$	36,000	$	36,000	$	408,000
61/4% notes		234,375		4,687		18,750		18,750		192,188
Revolving credit facility		17,998		324		1,284		16,390		—
Derivative obligations		104,119		24,317		79,802		—		—
Operating leases		11,908		676		2,932		2,902		5,398
Asset retirement obligations		77,500		542		1,084		1,084		74,790
Totals	$	925,900	$	30,546	$	139,852	$	75,126	$	680,376

(c)	Derivative obligations represent liabilities for derivatives that were valued as of June 30, 2005. The ultimate settlement amounts of the remaining portions of our derivative obligations are unknown because they are subject to continuing market risk.
(d)	Operating leases represent office space and equipment obligations that have remaining non-cancelable lease terms in excess of one year.
(e)	Asset retirement obligations represent the undiscounted future plugging and abandonment expenses on oil and natural gas properties and related facilities disposal at the completion of field life.

     Other Contingencies and Commitments. In order to facilitate ongoing sales of our oil production in the CCA, we ship a portion of our production on pipelines downstream and sell to purchasers at major U.S. market hubs. From time to time, shipping delays or purchaser stipulations may require that we sell our oil production in periods subsequent to the period in which it is produced. In such case, the deferred sale would have an adverse effect in the prior period on reported production volumes, revenues, and costs as measured on a unit-of-production basis.

     The sale of our CCA oil production is dependent on transportation through Butte Pipeline to markets in Guernsey, Wyoming. To a lesser extent, our production also depends on transportation through Platte Pipeline to Wood River, Illinois. Any restrictions on the available capacity for us to transport oil through these pipelines could have a material adverse effect on price received, production volumes, and revenues.

Capital Resources

     Our primary capital resource is net cash provided by operating activities and proceeds from financing activities, which are used to fund our capital commitments. Our primary needs for cash include development, exploitation, and exploration of our existing oil and natural gas properties, including our high-pressure air injection program in the CCA; acquisitions of oil and natural gas properties; acquisition of leasehold and acreage interest; funding of necessary working capital; and payment of contractual obligations.

     Operating Activities. For the first six months of 2005, cash provided by operating activities increased by $43.0 million as compared to the same period in 2004. This increase resulted mainly from increases in revenues due to increased volumes and increased commodity prices. Our production volumes increased 712 MBOE from 4,255 MBOE in the first half of 2004 to 4,967 MBOE in the first half of 2005, our oil prices received increased $9.97 per Bbl from $30.20 per Bbl in the first six months of

26

2004 to $40.17 in the same period in 2005, our realized natural gas prices increased $0.63 per Mcf from $5.19 in the six months ended June 30, 2004 to $5.82 in the six months ended June 30, 2005, increasing our cash flows from operations $43.0 million from $74.5 million in the first half of 2004 to $117.5 million in the first half of 2005.

     Financing Activities. For the first six months of 2005, we increased the level of debt outstanding under our revolving credit facility at the beginning of the period by $61 million, while in the first six months of 2004 we increased our debt outstanding by $24 million and issued our $150 million 6¹/4% notes to finance our Cortez and Overton acquisitions.

     Issuance of 6% Senior Subordinated Notes Due 2015. On June 30, 2005, we priced the sale of $300.0 million of 6% senior subordinated notes due July 15, 2015 (the “6% notes”). We issued and sold the notes on July 13, 2005. The offering was made through a private placement pursuant to Rule 144A and Regulation S. We estimate net proceeds of approximately $293.5 million after paying all costs associated with the offering. The net proceeds are expected to be used to redeem all $150.0 million of our outstanding 8³/₈% senior subordinated notes due 2012 at an estimated cost of $168.6 million, and to reduce outstanding indebtedness under our existing revolving credit facility. Concurrently with the issuance of the 6% notes, we entered into a registration rights agreement whereby Encore agreed to file a registration statement, offering to exchange the 6% notes for publicly registered notes with substantially identical terms.

     The 6% notes mature on July 15, 2015, and all amounts then outstanding will be due and payable at that time. Interest is paid semi-annually on July 15 and January 15. The indenture governing the 6% notes contains substantially the same covenants and restrictions as our outstanding 6¹/4% senior subordinated notes due 2014.

     Redemption of 8³/₈% Senior Subordinated Notes Due 2012. On July 13, 2005, we issued a notice of redemption (the “Redemption Notice”) pursuant to the provisions of the Indenture, dated as of June 25, 2002, among the Company, certain subsidiaries of the Company and Wells Fargo Bank, National Association, as Trustee (the “Trustee”), pursuant to which the 8³/₈% senior subordinated notes due 2012 (the “8³/₈% notes”) were issued. In the Redemption Notice, we indicated that we were exercising our right to redeem on August 15, 2005 (the “Redemption Date”) all $150 million aggregate principal amount of 8³/₈% notes currently outstanding. We expect the redemption price to approximate $168.6 million, including a make-whole premium and accrued interest through the redemption date. The exact redemption price will be determined in part using the latest Treasury yields at the redemption date and, thus, it will not be known until that time. However, we do not expect the estimate to change materially.

     Combined with the unamortized balance of debt issuance costs of the 8³/₈% notes, we estimate a pre-tax charge to earnings from the redemption to be recorded in the third quarter of 2005 of $21.8 million at June 30, 2005.

     Capitalization. At June 30, 2005, Encore had total assets of $1.3 billion. Total capitalization was $932.0 million, of which 53% was represented by stockholders’ equity and 47% by long-term debt. At December 31, 2004, we had total assets of $1.1 billion. Total capitalization was $852.6 million, of which 56% was represented by stockholders’ equity and 44% by senior debt.

     On July 13, 2005, we issued $300 million of 6% senior subordinated notes and issued a redemption notice on our 8³/₈% notes. Giving effect to the issuance of the 6% notes and the use of proceeds therefrom, our pro-forma total capitalization at June 30, 2005 would have been $938.0 million, of which 51% would have been represented by stockholders’ equity and 49% by long-term debt.

Liquidity

     Revolving Credit Facility. Our principal source of short-term liquidity is our revolving credit facility. We amended and restated our revolving credit facility on August 19, 2004. Borrowings under the facility are secured by a first priority lien on our proved oil and natural gas reserves. Availability under the facility is determined through semi-annual borrowing base determinations and may be increased or decreased. The initial borrowing base was $400 million and may be increased to up to $750 million. On June 30, 2005, we had $140 million outstanding under the credit facility. The amended and restated credit facility matures on August 19, 2009.

     On April 29, 2005, we amended our existing credit facility to increase the borrowing base from $400 million to $500 million. Other changes to the facility include a change in the definition of EBITDA to add back exploration expense (EBITDAX), and an increase in the availability of letters of credit from 15% of the borrowing base to 20%. After the issuance of our $300.0 million

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6% senior subordinated notes due July 15, 2015 (see above), the borrowing base was reduced according to the terms of the credit facility to $450 million from $500 million.

     Letters of Credit. As of July 29, 2005, we had $56.0 million in letters of credit posted with two of our commodity derivative contract counterparties. At any point in time, we have hedge margin deposits and letters of credit equal to the amount by which the current mark-to-market liability of our commodity derivative contracts exceeds the margin maintenance thresholds we have negotiated with our counterparties. Once a margin threshold is reached, we are required to maintain cash reserves in an account with the counterparty or post letters of credit in lieu of cash to ensure future settlement is made pursuant to our contracts. These funds are released back to us as our mark-to-market liability decreases due to either a drop in the futures price of oil and natural gas or due to the passage of time as settlements are made.

Description of Critical Accounting Estimates

     Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Description of Critical Accounting Estimates” in Encore’s 2004 Annual Report on Form 10-K for more information. There have been no material changes to our critical accounting estimates since December 31, 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The information included in “Quantitative and Qualitative Disclosures about Market Risk” in Encore’s 2004 Annual Report on Form 10-K is incorporated herein by reference. Such information includes a description of Encore’s potential exposure to market risks, including commodity price risk and interest rate risk. The Company’s outstanding derivative contracts as of June 30, 2005 are discussed in Note 5 to the accompanying consolidated financial statements. As of June 30, 2005, the fair value of our open commodity derivative contracts was a liability of $103.2 million.

Item 4. Controls and Procedures

     In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2005 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     There has been no change in our internal controls over financial reporting that occurred during the three months ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     The Company’s annual meeting of stockholders was held Tuesday, May 3, 2005. The items submitted to stockholders for vote were the election of seven nominees to serve on the Company’s Board of Directors during 2005 and until the Company’s next annual meeting, to amend the Company’s Second Amended and Restated Certificate of Incorporation, and to ratify the appointment of the independent registered public accounting firm for 2005. Notice of the meeting and proxy information was distributed to stockholders prior to the meeting in accordance with law. There were no solicitations in opposition to the nominees or amendment of the Company’s Second Amended and Restated Certificate of Incorporation. Out of a total of 32,870,815 shares of the Company’s Common Stock outstanding and entitled to vote, 29,856,946 shares (90.8%) were present at the meeting in person or by proxy.

Election of Directors

     There were seven nominees for election as directors of the Company. The vote tabulation with respect to each nominee to Encore’s Board of Directors was as follows:

NOMINEE	FOR		WITHHELD
I. Jon Brumley		29,446,013		410,933
Jon S. Brumley		29,580,878		276,068
Martin C. Bowen		29,585,269		271,677
Ted Collins, Jr.		29,580,569		276,377
Ted A. Gardner		29,586,019		270,927
John V. Genova		29,575,869		281,077
James A. Winne III		29,583,269		273,677

Second Amended and Restated Certificate of Incorporation

     The Board of Directors recommended that the Company’s stockholders approve amendments to the Company’s Second Amended and Restated Certificate of Incorporation. The vote tabulation with respect to the amendments to the Company’s Second Amended and Restated Certificate of Incorporation was as follows:

	FOR		AGAINST		ABSTAIN
Increase the number of shares of the Company’s common stock from 60 million to 144 million		27,883,927		1,952,515		20,504
Deletion of Article Six in its entirety (outdated provision)		29,772,743		47,620		36,583

Appointment of Independent Registered Public Accounting Firm

     The Board of Directors recommended that the Company’s stockholders to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm. The vote tabulation with respect to the ratification of the appointment of independent registered public accounting firm was as follows:

	FOR		AGAINST		ABSTAIN
Appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm		29,774,885		76,369		5,692

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Item 6. Exhibits

Exhibits

3.1.1	Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001, filed with the SEC on November 7, 2001).
3.1.2	Certificate of Amendment to Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1.2 to the Company Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005, filed with the SEC on May 5, 2005).
3.2	Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001, filed with the SEC on November 7, 2001).
4.1	Indenture dated as of July 13, 2005 among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association with respect to the 6% Senior Subordinated Notes due 2015 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 13, 2005).
4.2	Form of 6% Senior Subordinated Note due 2015 (included Exhibit A to Exhibit 4.1 above).
4.3	Registration Rights Agreement dated as of July 13, 2005 among the Company, the subsidiary guarantors party thereto and Credit Suisse First Boston LLC (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed with the SEC on July 13, 2005).
10.1	Purchase Agreement dated as of June 30, 2005, among the Company, the subsidiary guarantors party thereto and Credit Suisse First Boston LLC
31.1	Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2	Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
32.1	Section 1350 Certification (Principal Executive Officer)
32.2	Section 1350 Certification (Principal Financial Officer)

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ENCORE ACQUISITION COMPANY
Date: August 8, 2005	By:	/s/ Roy W. Jageman
	Roy W. Jageman
	Chief Financial Officer, Executive Vice President,
	Corporate Secretary and Principal Financial Officer
Date: August 8, 2005	By:	/s/ Robert C. Reeves
	Robert C. Reeves
	Vice President, Controller and Principal Accounting Officer

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EX-10.1

Execution Copy

$300,000,000

ENCORE ACQUISITION COMPANY

6.0% Senior Subordinated Notes due 2015

PURCHASE AGREEMENT

June 30, 2005

Credit Suisse First Boston LLC

Eleven Madison Avenue
New York, New York 10010

Dear Sirs:

     1. Introductory. Encore Acquisition Company, a Delaware corporation (the “Company”), proposes, subject to the terms and conditions stated herein, to issue and sell to Credit Suisse First Boston LLC (“CSFB”) as the sole initial purchaser (the “Purchaser”) U.S.$300,000,000 principal amount of its 6.0% Senior Subordinated Notes due 2015 (“Offered Securities”) to be issued under an indenture, to be dated as of July 13, 2005 (the “Indenture”), among the Company, the subsidiary guarantors named therein (the “Subsidiary Guarantors”) and Wells Fargo Bank, National Association, as Trustee. The Offered Securities will be guaranteed (the “Subsidiary Guarantees”) by the Subsidiary Guarantors. The United States Securities Act of 1933, as amended, is herein referred to as the “Securities Act.”

     The holders of the Offered Securities will be entitled to the benefits of a Registration Rights Agreement among the Company, the Subsidiary Guarantors and the Purchaser (the “Registration Rights Agreement”), pursuant to which the Company and the Subsidiary Guarantors agree to file a registration statement with the Securities and Exchange Commission (the “Commission”) registering, under the Securities Act, notes (the “Exchange Securities”) identical in all material respects to the Offered Securities to be offered in exchange for the Offered Securities.

     The Company will use the net proceeds of the Offered Securities to (A) to repay outstanding indebtedness under the Company’s U.S.$500,000,000 senior revolving credit facility (the “Senior Credit Facility”), (B) to redeem $150 million aggregate principal amount of the Company’s 8.375% Senior Subordinated Notes due 2012, notice of which shall be given at or prior to the Closing, (C) to pay transaction costs relating to the issue and sale of the Offered Securities and (D) for general corporate purposes.

     The Company hereby agrees with the Purchaser as follows:

     2. Representations and Warranties of the Company. The Company and the Subsidiary Guarantors represent and warrant to, and agree with, the Purchaser that:

     (a) An offering circular relating to the Offered Securities to be offered by the Purchaser has been prepared by the Company. Such offering circular (the “Offering Circular”), as supplemented as of the date of this Agreement, together with all documents incorporated by reference therein are hereinafter collectively referred to as the “Offering Document”. On the date of this Agreement, the Offering Document does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from the Offering Document in reliance upon and in conformity with information furnished to the Company in

writing by or through CSFB specifically for use in the Offering Document. Except as disclosed in the Offering Document, on the date of this Agreement, the Company’s Annual Report on Form 10-K most recently filed with the Commission and all subsequent reports (collectively, the “Exchange Act Reports”) which have been filed by the Company with the Commission or sent to stockholders pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such documents, when they were filed with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder; and any further documents so filed and incorporated by reference in the Offering Document, when such documents become effective or are filed with the Commission will conform in all material respects to the requirements of the Exchange Act and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

     (b) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified would, individually or in the aggregate, not have a material adverse effect on the condition (financial or other), business, properties, earnings, assets, stockholders’ equity, prospects or results of operations of the Company and its subsidiaries taken as a whole (a “Material Adverse Effect”).

     (c) Each subsidiary of the Company has been duly incorporated or organized and is an existing corporation, limited partnership or limited liability company in good standing under the laws of the jurisdiction of its incorporation or organization, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and each subsidiary of the Company is duly qualified to do business as a foreign corporation, limited partnership or limited liability company in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; all outstanding shares of capital stock of each Subsidiary Guarantor that is a corporation have been duly and validly authorized and issued and are fully paid and non-assessable, and the limited partnership agreements or limited liability company agreements governing all outstanding limited partnership interests or limited liability company interests of each Subsidiary Guarantor that is a limited partnership or limited liability company, as the case may be, have been validly executed and delivered, and all capital contributions required under such limited partnership agreements or limited liability company agreements have been paid in full; and the capital stock, limited partnership interests or limited liability company interests of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects, except for liens under or permitted by the Senior Credit Facility. The Subsidiary Guarantors are the only direct or indirect subsidiaries of the Company.

     (d) This Agreement has been duly authorized, executed and delivered by the Company and the Subsidiary Guarantors.

     (e) The Registration Rights Agreement has been duly authorized, and when the Registration Rights Agreement has been duly executed and delivered, the Registration Rights Agreement will be a valid and binding agreement of the Company, enforceable against the Company in accordance with their respective terms, subject to (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equitable principles regardless of whether enforcement is sought in law or equity and (ii) limitations on indemnification and contribution under federal or state securities laws. On the Closing Date (as defined below), the Registration Rights Agreement will, in all material respects, conform to the description thereof in the Offering Document.

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     (f) The Indenture has been duly authorized by the Company and each Subsidiary Guarantor; the Offered Securities have been duly authorized by the Company; each Subsidiary Guaranty has been duly authorized by each respective Subsidiary Guarantor; and when the Offered Securities are delivered and paid for pursuant to this Agreement and executed and authenticated by the trustee in accordance with the provisions of the Indenture on the Closing Date (as defined below), (i) the Indenture will have been duly executed and delivered by the Company and will conform in all material respects to the description thereof contained in the Offering Document, (ii) such Offered Securities will have been duly executed, authenticated, issued and delivered and will conform in all material respects to the description thereof contained in the Offering Document and (iii) the Indenture, the Subsidiary Guarantees and such Offered Securities will constitute valid and legally binding obligations of the Company and the Subsidiary Guarantors, enforceable against the Company or the Subsidiary Guarantors, as the case may be, in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equitable principles regardless of whether enforcement is sought in law or equity.

     (g) On the Closing Date (as defined below), the Exchange Securities will have been duly authorized by the Company; and when the Exchange Securities are issued, executed and authenticated in accordance with the terms of the Exchange Offer (as defined in the Registration Rights Agreement) and the Indenture, the Exchange Securities and the Subsidiary Guarantees will be entitled to the benefits of the Indenture and will be the valid and legally binding obligations of the Company and the Subsidiary Guarantors, enforceable against the Company or the Subsidiary Guarantors, as the case may be, in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equitable principles regardless of whether enforcement is sought in law or equity.

     (h) On the Closing Date (as defined below) the Subsidiary Guaranty of each Subsidiary Guarantor will conform in all material respects to the description thereof contained in the Offering Document. When the Exchange Securities have been issued, executed and authenticated in accordance with the terms of the Exchange Offer (as defined in the Registration Rights Agreement) and the Indenture, the Subsidiary Guaranty of each Subsidiary Guarantor will constitute valid and legally binding obligations of such Subsidiary Guarantor, enforceable against the Subsidiary Guarantor in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equitable principles regardless of whether enforcement is sought in law or equity.

     (i) Except as disclosed in the Offering Document, there are no contracts, agreements or understandings between the Company or any Subsidiary Guarantor and any person that would give rise to a valid claim against the Company, any Subsidiary Guarantor or any Purchaser for a brokerage commission, finder’s fee or other like payment with respect to the offer and sale of the Offered Securities.

     (j) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by (i) this Agreement or the Registration Rights Agreement in connection with the issuance and sale of the Offered Securities, or (ii) the issuance of the Subsidiary Guarantees by the Subsidiary Guarantors, except as may be required under applicable state securities laws.

     (k) The execution, delivery and performance by the Company and the Subsidiary Guarantors of the Indenture, this Agreement and the Registration Rights Agreement, the issuance and sale of the Offered Securities, and the consummation of the transactions contemplated herein and in the Offering Circular (including the use of proceeds from the sale of the Offered Securities as described in the Offering Circular), and compliance with the terms and provisions thereof do not and will not (i) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is

3

subject, except for such breaches, violations and defaults as would not have a Material Adverse Effect, or (ii) result in any violation of the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities, and each Subsidiary Guarantor has full power and authority to authorize, offer and sell its respective Subsidiary Guaranty.

     (l) The Company and its subsidiaries have (1) good and indefeasible title to all of their interests in the oil and gas properties described in the Offering Document, (2) good and indefeasible title in fee simple to all other real property owned by the Company or any of its subsidiaries and (3) good title to all personal property owned by the Company or any of its subsidiaries, in each case, free and clear of all liens, encumbrances and defects, except (i) as described in the Offering Document, (ii) liens securing taxes and other governmental charges, or claims of materialmen, mechanics and similar persons, not yet due and payable, (iii) liens and encumbrances under oil and gas leases, options to lease, operating agreements, utilization and pooling agreements, participation and drilling concessions agreements and gas sales contracts, securing payment of amounts not yet due and payable and of a scope and nature customary in the oil and gas industry, (iv) liens arising under or permitted by the Senior Credit Facility or (v) liens, encumbrances and defects that do not, individually or in the aggregate, materially affect the value of such properties or materially interfere with the use made or proposed to be made of such properties by the Company or the Subsidiary Guarantors; except as described in the Offering Document, the leases, options to lease, drilling concessions or other arrangements held by the Company and its subsidiaries reflect in all material respects the right of the Company and its subsidiaries to explore the unexplored and undeveloped acreage described in the Offering Document, and the care taken by the Company and its subsidiaries with respect to acquiring or otherwise procuring such leases, options to lease, drilling concessions and other arrangements was generally consistent with standard industry practices for acquiring or procuring leases to explore acreage for hydrocarbons; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such real property and buildings by the Company or its subsidiaries.

     (m) The Company and its subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their business and the value of their respective properties as is customary for companies engaged in similar businesses in similar industries; and neither the Company nor any of its subsidiaries has (i) received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage at reasonable cost from similar insurers as may be necessary to continue its business.

     (n) Except as disclosed in the Offering Document, no relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries on the other hand, that would be required by the Securities Act to be described in the Offering Document if the Offering Document were a prospectus included in a registration statement on Form S-1 filed with the Commission.

     (o) The Company and its subsidiaries possess all licenses, franchises, certificates, permits, approvals, consents and other authorizations (collectively, “Governmental Licenses”) issued by and have made all declarations and filings with, the appropriate federal, state, local or foreign governmental or regulatory authorities that are necessary for the ownership or lease of their respective properties or the conduct of their respective businesses as described in Offering Document except where the failure to possess such Governmental Licenses or make such declaration and filings would not, individually or in the aggregate, have a Material Adverse Effect. The Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses except where the failure to so comply would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect; all of such Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect; and neither

4

the Company nor any of its subsidiaries has received notice of any revocation or modification of any such license, certificate, permit or authorization or has any reason to believe that any such Governmental Licenses will not be renewed in the ordinary course, except for notices, modifications or non-renewals as would not, individually or in the aggregate, have a Material Adverse Effect.

     (p) No labor disturbance or dispute with employees of the Company or any of its subsidiaries exists or, to the best knowledge of the Company, is contemplated or threatened, which disturbance or dispute would have a Material Adverse Effect.

     (q) The Company and its subsidiaries own, possess or can acquire on reasonable terms adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, “intellectual property rights”) necessary to conduct the business now operated by them, or presently employed by them, except where the failure to own, possess or acquire such intellectual property rights would not, individually or in the aggregate, have a Material Adverse Effect, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect.

     (r) Except as disclosed in the Offering Document, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, “environmental laws”), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim.

     (s) Except as disclosed in the Offering Document, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under the Indenture, this Agreement or the Registration Rights Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are, to the Company’s knowledge, threatened or contemplated.

     (t) The financial statements and the notes related thereto of the Company and its consolidated subsidiaries included or incorporated by reference in the Offering Document present fairly in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and changes in their consolidated cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis; the assumptions used in preparing any pro forma financial data included in the Offering Document provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma data therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts; and the other financial information included or incorporated by reference in the Offering Document, including oil and gas production information, has been derived from the accounting records of the Company and its subsidiaries and presents fairly in all material respects the information shown thereby.

     (u) Except as disclosed in the Offering Document, since the date of the latest audited financial statements included in the Offering Document there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Offering Document, there has been no dividend or distribution of any

5

kind declared, paid or made by the Company on any class of its capital stock (other than the stock dividend declared on June 15, 2005).

     (v) Ernst & Young LLP, who has certified certain financial statements of the Company, is the independent registered public accounting firm with respect to the Company as required by the Securities Act.

     (w) Miller and Lents, Ltd. (the “Engineer”), whose reserve evaluations are referenced or appear, as the case may be, in the Offering Document were, as of December 31, 2002, December 31, 2003 and December 31, 2004, and are, as of the date hereof, independent engineers with respect to the Company; and the historical information underlying the estimates of the reserves of the Company supplied by the Company to the Engineer for the purposes of preparing the reserve reports of the Company referenced in the Offering Document (the “Reserve Reports”), including, without limitation, production volumes, sales prices for production, contractual pricing provisions under oil or gas sales or marketing contracts or under hedging arrangements, costs of operations and development, and working interest and net revenue information relating to the Company’s ownership interests in properties, was true and correct in all material respects on the date of each such Reserve Report was prepared in all material respects in accordance with customary industry practices.

     (x) The Company is subject to the reporting requirements of either Section 13 or Section 15(d) of the Exchange Act and files reports with the Commission on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

     (y) On the Closing Date (as defined below), the Indenture will conform in all material respects to the requirements of the Trust Indenture Act of 1939, as amended (the “TIA” or “Trust Indenture Act”), and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder.

     (z) Neither the Company nor any Subsidiary Guarantor is an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940 (the “Investment Company Act”); and neither the Company nor any Subsidiary Guarantor is or, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Offering Document, will be an “investment company” as defined in the Investment Company Act.

     (aa) No securities of the same class (within the meaning of Rule 144A(d)(3) under the Securities Act) as the Offered Securities or the Subsidiary Guarantees are listed on any national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system.

     (bb) Assuming the accuracy of the representations of the Purchaser set forth in Section 4 and the performance by the Purchaser of its obligations hereunder, the offer and sale of the Offered Securities and Subsidiary Guarantees in the manner contemplated by this Agreement will be exempt from the registration requirements of the Securities Act by reason of Section 4(2) thereof; and it is not necessary to qualify an indenture in respect of the Offered Securities under the Trust Indenture Act.

     (cc) No “nationally recognized statistical rating organization” as such term is defined for purposes of Rule 436(g)(2) under the Securities Act has notified the Company that it is considering (i) the downgrading, suspension or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating assigned to the Company or any securities of the Company or (ii) any change with negative implications in the outlook for any rating of the Company or any securities of the Company.

     (dd) None of the Company or any Subsidiary Guarantor, nor any of their affiliates, nor any person acting on its or their behalf (i) has, within the six-month period prior to the date hereof, offered or sold in the United States or to any U.S. person (as such terms are defined in Regulation S under the Securities Act (“Regulation S”)) the Offered Securities, the Subsidiary Guarantees or any security of the same class or

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series as the Offered Securities or the Subsidiary Guarantees, other than pursuant to this Agreement, or (ii) has offered or will offer or sell the Offered Securities or the Subsidiary Guarantees (A) in the United States by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or (B) with respect to any such securities sold in reliance on Rule 903 of Regulation S, by means of any directed selling efforts within the meaning of Rule 902(c) of Regulation S. The Company, its affiliates and any person acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S. The Company has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities or the Subsidiary Guarantees except for this Agreement and the Registration Rights Agreement.

     (ee) The Company and its subsidiaries maintain systems of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

     (ff) Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included in the Offering Document is not based on or derived from sources that are reliable and accurate in all material respects.

     (gg) The Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15 and 15d-15 under the Exchange Act); such disclosure controls and procedures are designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s principal executive officer and its principal financial officer by others within those entities, and such disclosure controls and procedures are effective at the reasonable assurance level to perform the functions for which they were established; the Company’s auditors and the Audit Committee of the Board of Directors have been advised of: (i) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize, and report financial information; and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting; since the date of the most recent evaluation of such disclosure controls and procedures, there has not been any change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; the principal executive officer and principal financial officer of the Company have made all certifications required by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and any related rules and regulations promulgated by the Commission, and the statements contained in any such certification are complete and correct; and the Company is otherwise in compliance with all applicable provisions of the Sarbanes-Oxley Act that are effective.

     (hh) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound except where such violations or defaults would not have a Material Adverse Effect.

     (ii) There are no contracts, agreements or understandings between the Company or any subsidiary and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company (except as disclosed in the Offering Document) or to require the Company to include such securities with the Offered Securities registered pursuant to any registration statement.

     (jj) Neither the Company nor any of its subsidiaries has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Offered Securities to violate

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Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System. The Company does not own, and none of the proceeds from the offering of the Offered Securities will be used directly or indirectly to purchase or carry any “margin stock” as defined in Regulation U.

     (kk) Neither the Company nor any of its subsidiaries has distributed or, prior to the later to occur of (A) the Closing Date (as defined below) and (B) completion of the distribution of the Offered Securities, will distribute any material in connection with the offering and sale of the Offered Securities other than the Offering Document or other material, if any, not prohibited by the Securities Act and the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”) (or regulations promulgated under the Securities Act or the FSMA) and approved by the Purchaser, such approval not to be unreasonably withheld or delayed.

     (ll) The Company and its subsidiaries have paid all federal, state, local and foreign taxes and filed all tax returns required to be paid or filed through the date hereof to the extent that such taxes have become due and are not being contested in good faith with such exceptions as would not singly or in the aggregate result in a Material Adverse Effect; and except as otherwise disclosed in the Offering Document, there is no tax deficiency that has been asserted against the Company or any of its subsidiaries or any of their respective properties or assets which has had, nor does the Company have any knowledge of any tax deficiency, which if determined adversely to the Company or its subsidiaries might have, a Material Adverse Effect

     (mm) Except as described in the Offering Document, no subsidiary of the Company is currently prohibited, directly or indirectly, under any agreement or other instrument to which it is a party or is subject, from paying any dividends to the Company, from making any other distribution to the Company on such subsidiary’s capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary’s properties or assets to the Company or any other subsidiary of the Company.

     3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Company, at a purchase price (the “Purchase Price”) of 98.00% of the principal amount thereof plus accrued interest from July 13, 2005 to the Closing Date (as hereinafter defined), the Offered Securities.

     The Company will deliver against payment of the Purchase Price the Offered Securities in the form of one or more permanent global securities in definitive form (the “Global Securities”) deposited with the Trustee as custodian for The Depository Trust Company (“DTC”) and registered in the name of Cede & Co., as nominee for DTC. Interests in any permanent Global Securities will be held only in book-entry form through DTC, except in the limited circumstances described in the Offering Document. The Purchaser shall make payment of the Purchase Price for the Offered Securities in Federal (same day) funds by official check or checks or wire transfer to the bank account designated by the Company at the office of Baker Botts L.L.P. at 9:00 A.M. (Houston, Texas time), on July 13, 2005, or at such other time not later than seven full business days thereafter as CSFB and the Company determine, such time being herein referred to as the “Closing Date”, against delivery to the Trustee as custodian for DTC of the Global Securities representing all of the Offered Securities. The Global Securities will be made available for checking at the above office of Baker Botts L.L.P. at least 24 hours prior to the Closing Date.

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     4. Representations by Purchaser; Resale by Purchaser.

     (a) The Purchaser represents and warrants to the Company and the Subsidiary Guarantors that it is an institutional “accredited investor” as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act.

     (b) The Purchaser acknowledges that the Offered Securities and the Subsidiary Guarantees have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the Securities Act. The Purchaser represents and agrees that it has offered and sold the Offered Securities and the Subsidiary Guarantees, and will offer and sell the Offered Securities and the Subsidiary Guarantees (i) as part of its distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 or Rule 144A under the Securities Act (“Rule 144A”). Accordingly, neither such Purchaser nor its affiliates, nor any persons acting on its or their behalf, have engaged or will engage in any directed selling efforts with respect to the Offered Securities or the Subsidiary Guarantees, and such Purchaser, its affiliates and all persons acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S. The Purchaser agrees that, at or prior to confirmation of sale of the Offered Securities, other than a sale pursuant to Rule 144A, such Purchaser will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases the Offered Securities from it during the restricted period a confirmation or notice to substantially the following effect:

“The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the “Securities Act”) and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the date of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meanings given to them by Regulation S.”

     Terms used in this subsection (b) have the meanings given to them by Regulation S.

     (c) The Purchaser agrees that it and each of its affiliates has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities except with the prior written consent of the Company.

     (d) The Purchaser represents and warrants that it has not offered or sold, and agrees that it will not offer or sell, the Offered Securities or the Subsidiary Guarantees as part of the initial offering thereof, except (1) within the United States of America to persons whom it reasonably believes to be “qualified institutional buyers” (as defined in Rule 144A) and in connection with each such sale, it has taken or will take reasonable steps to ensure that the purchaser of the Offered Securities and the Subsidiary Guarantees is aware that such sale is being made in reliance on Rule 144A or (2) in offshore transactions in compliance with the offering restrictions requirement of Regulation S.

     (e) The Purchaser agrees that it and each of its affiliates will not offer or sell the Offered Securities or the Subsidiary Guarantees in the United States by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act, including, but not limited to (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. The Purchaser agrees, with respect to resales made in reliance on Rule 144A of any of the Offered Securities or the Subsidiary Guarantees, to deliver either with the confirmation of such resale or otherwise prior to settlement of such resale a notice to the effect that the resale of such Offered Securities and the Subsidiary Guarantees has been made in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A.

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     (f) The Purchaser represents and agrees that (i) it has not offered or sold and, prior to the expiry of a period of six months from the Closing Date will not offer or sell any Offered Securities or Subsidiary Guarantees to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has only communicated or caused to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (“FSMA”) received by it in connection with the issue or sale of any Offered Securities in circumstances in which Section 21(1) does not apply to the Company; and (iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Offered Securities and the Subsidiary Guarantees in, from or otherwise involving the United Kingdom.

     5. Certain Agreements of the Company. The Company agrees with the Purchaser that:

     (a) The Company will advise CSFB promptly of any proposal to amend or supplement the Offering Document which shall not be disapproved by CSFB promptly after reasonable notice thereof. If, at any time prior to the completion of the resale of the Offered Securities by the Purchaser, any event occurs as a result of which the Offering Document as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or, if it is necessary at any such time to amend or supplement the Offering Document to comply with any applicable law, the Company promptly will notify CSFB of such event and promptly will prepare, at its own expense, an amendment or supplement which will correct such statement or omission or effect such compliance. Neither CSFB’s consent to, nor the Purchaser’s delivery to offerees or investors of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6.

     (b) The Company will furnish to CSFB copies of any Offering Document and all amendments and supplements to such documents, in each case as soon as available and in such quantities as CSFB requests, and if, at any time prior to the expiration of six months after the date of the Offering Circular, any event shall have occurred as a result of which the Offering Circular as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Offering Circular is delivered, not misleading, or, if for any other reason it shall be necessary or desirable during such same period to amend or supplement the Offering Circular, to notify you and upon your request to prepare and furnish without charge to each Purchaser and to any dealer in securities as many written and electronic copies as you may from time to time reasonably request of an amended Offering Circular or a supplement to the Offering Circular which will correct such statement or omission or effect such compliance. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish or cause to be furnished to CSFB and, upon request of holders and prospective purchasers of the Offered Securities, to such holders and purchasers, copies of the information required to be delivered to holders and prospective purchasers of the Offered Securities pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) in order to permit compliance with Rule 144A in connection with resales by such holders of the Offered Securities. The Company will pay the expenses of printing and distributing to the Purchaser all such documents.

     (c) The Company will arrange for the qualification of the Offered Securities for sale and the determination of their eligibility for investment under the laws of such jurisdictions in the United States and Canada as CSFB designates and will continue such qualifications in effect so long as required for the resale of the Offered Securities by the Purchaser, provided that the Company will not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction.

     (d) During the period of five years after the Closing Date, the Company will furnish or will make generally available via the EDGAR System to CSFB promptly upon their becoming available, copies of (i) all reports or other publicly available information that the Company shall mail or otherwise make available to its public stockholders and (ii) all reports, financial statements and proxy or information statements filed

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by the Company with the Commission or any national securities exchange and such other publicly available information concerning the Company and its subsidiaries including, without limitation, press releases, as the Purchaser may reasonably request.

     (e) During the period of two years after the Closing Date, the Company will, upon request, furnish to CSFB and any holder of Offered Securities a copy of the restrictions on transfer applicable to the Offered Securities.

     (f) During the period of two years after the Closing Date, the Company will not, and will not permit any of its affiliates (as defined in Rule 144 under the Securities Act) to, resell any of the Offered Securities that have been reacquired by any of them.

     (g) During the period of two years after the Closing Date, neither the Company nor any Subsidiary Guarantor will be or become, an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act.

     (h) The Company will pay all expenses incidental to the performance of its obligations under this Agreement, the Indenture, and the Registration Rights Agreement, including (i) the fees and expenses of the Trustee and its professional advisers; (ii) all expenses in connection with the execution, issue, authentication, packaging and initial delivery of the Offered Securities and, as applicable, the Exchange Securities (as defined in the Registration Rights Agreement), the preparation and printing of this Agreement, the Registration Rights Agreement, the Offered Securities, the Indenture, the Offering Document and amendments and supplements thereto, and any other document relating to the issuance, offer, sale and delivery of the Offered Securities and as applicable, the Exchange Securities; (iii) the cost of qualifying the Offered Securities for trading in The Portal^SM Market (“PORTAL”) and any expenses incidental thereto; (iv) the cost of any advertising approved by the Company in connection with the issue of the Offered Securities; (v) any expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities or the Exchange Securities for sale under the laws of such jurisdictions in the United States and Canada as CSFB designates and the printing of memoranda relating thereto, (vi) any fees charged by investment rating agencies for the rating of the Offered Securities or the Exchange Securities; and (vii) expenses incurred in distributing the Offering Document (including any amendments and supplements thereto) to the Purchaser. The Company will also pay or reimburse the Purchaser (to the extent incurred by it) for all travel expenses of the Purchaser and the Company’s officers and employees and any other expenses of the Purchaser and the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities from the Purchaser.

     (i) In connection with the offering, until CSFB shall have notified the Company and the other Purchaser of the completion of the resale of the Offered Securities, neither the Company nor any of its affiliates has or will, either alone or with one or more other persons, bid for or purchase for any account in which it or any of its affiliates has a beneficial interest any Offered Securities or attempt to induce any person to purchase any Offered Securities; and neither it nor any of its affiliates will make bids or purchases for the purpose of creating actual, or apparent, active trading in, or of raising the price of, the Offered Securities.

     (j) For a period of 90 days after the date of the initial offering of the Offered Securities by the Purchaser, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any United States dollar-denominated debt securities, other than the Exchange Securities, issued or guaranteed by the Company and having a maturity of more than one year from the date of issue. The Company will not at any time offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any securities under circumstances where such offer, sale, pledge, contract or disposition would cause the exemption afforded by Section 4(2) of the Securities Act or the safe harbor of Regulation S thereunder to cease to be applicable to the offer and sale of the Offered Securities.

     6. Conditions of the Obligations of the Purchaser. The obligations of the Purchaser to purchase and pay for the Offered Securities will be subject to the accuracy of the representations and warranties on the part of the

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Company herein, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent:

     (a) The Purchaser shall have received a letter, dated the date of this Agreement, of Ernst & Young LLP in agreed form confirming that they are the independent registered public accounting firm of the Company within the meaning of the Securities Act and the applicable published rules and regulation thereunder (“Rules and Regulations”) and to the effect that:

     (i) in their opinion the financial statements examined by them and included in the Offering Document and in the Exchange Act Reports comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations;

     (ii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that:

     (A) the unaudited financial statements included in the Offering Document or in the Exchange Act Reports do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles;

     (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Offering Document; or

     (C) for the period from the closing date of the latest income statement included in the Offering Document to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement included in the Offering Document, in consolidated net sales, net operating income, income before extraordinary items or consolidated net income or in the ratio of earnings to fixed charges;

except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which are described in such letter; and

     (iii) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Offering Document and the Exchange Act Reports (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company’s accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter.

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     (b) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as one enterprise which, in the judgment of CSFB, is material and adverse and makes it impractical or inadvisable to proceed with completion of the offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any “nationally recognized statistical rating organization” (as defined for purposes of Rule 436(g) under the Securities Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating) or any announcement that the Company has been placed on negative outlook; (iii) any change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the judgment of CSFB, be likely to prejudice materially the success of the proposed issue, sale or distribution of the Offered Securities, whether in the primary market or in respect of dealings in the secondary market, (iv) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (v) any banking moratorium declared by U.S. Federal or New York authorities; (vi) any major disruption of settlements of securities or clearance services in the United States or (vii) any attack on, outbreak or escalation of hostilities or act of terrorism involving the United States, any declaration of war by Congress or any other national or international calamity or emergency if, in the judgment of CSFB, the effect of any such attack, outbreak, escalation, act, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the offering or sale of and payment for the Offered Securities.

     (c) The Purchaser shall have received an opinion, dated the Closing Date, of Baker Botts L.L.P., counsel for the Company, that:

     (i) The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of organization. The Company and its subsidiaries have all corporate, partnership or limited liability company power and authority necessary to own or hold their respective properties and to conduct their respective businesses as described in the Offering Document.

     (ii) All the outstanding shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable; and all the outstanding shares of capital stock or other equity interests of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid (in the case of limited partnership or limited liability company interests, to the extent required under the respective partnership or limited liability company agreements) and non-assessable (in the case of limited partnership or limited liability company interests, except as such non-assessability may be limited by the limited partnership or limited liability company statute of the jurisdiction of organization of such entity) and are owned by the Company, free and clear of all liens, encumbrances, equities or claims, except as otherwise described in the Offering Document or as set forth in or permitted by the Senior Credit Facility.

     (iii) The Company has the corporate power and authority to execute and deliver this Agreement, the Indenture and the Registration Rights Agreement and to incur and perform all of its obligations thereunder (including the use of proceeds from the sale of the Offered Securities as described in the Offering Document); and all action required to be taken by the Company for the due and proper authorization, execution and delivery of each of this Agreement, the Indenture and the Registration Rights Agreement and the consummation of the transactions contemplated thereby (including the use of proceeds from the sale of the Offered Securities as described in the Offering Document) have been duly and validly taken or, in connection with the redemption of the Company’s 8.375% Senior Subordinated Notes due 2012, authorized.

     (iv) This Agreement has been duly authorized, executed and delivered by the Company and the Subsidiary Guarantors.

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     (v) The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and the Subsidiary Guarantors. The Registration Rights Agreement is a valid and binding agreement of the Company and the Subsidiary Guarantors, enforceable against the Company and the Subsidiary Guarantors in accordance with their respective terms, subject to (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equitable principles regardless of whether enforcement is sought in law or equity and (ii) limitations on indemnification and contribution under Federal or state securities laws.

     (vi) The Indenture has been duly authorized, executed and delivered by the Company and each Subsidiary Guarantor; the Offered Securities have been duly authorized, executed, issued and delivered, and assuming the Offered Securities have been duly executed and authenticated by the Trustee and paid for by the Purchaser in accordance with the terms of this Agreement, each of the Indenture and the Offered Securities constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equitable principles regardless of whether enforcement is sought in law or equity.

     (vii) The Exchange Securities have been duly authorized by the Company; and when the Exchange Securities are issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Exchange Securities will be entitled to the benefits of the Indenture and will be the valid and legally binding obligations of the Company and the Subsidiary Guarantors, enforceable against the Company and the Subsidiary Guarantors in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equitable principles regardless of whether enforcement is sought in law or equity.

     (viii) Each Subsidiary Guaranty has been duly authorized by the relevant Subsidiary Guarantor. When the Offered Securities have been issued, executed and authenticated in accordance with the Indenture and delivered to and paid for by the Purchaser in accordance with the terms of this Agreement, the Subsidiary Guaranty of each Subsidiary Guarantor endorsed thereon will be a valid and legally binding obligation of such Subsidiary Guarantor, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws relating to or affecting the enforcement of creditors’ rights generally and to general equitable principles regardless of whether enforcement is sought in law or equity.

     (ix) The execution, delivery and performance by the Company and the Subsidiary Guarantors of the Indenture, this Agreement and the Registration Rights Agreement, the issuance and sale of the Offered Securities being delivered on the Closing Date, and the consummation of the transactions contemplated thereunder (including the use of proceeds from the sale of the Offered Securities as described in the Offering Document) will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any agreement or instrument set forth on Exhibit A to such counsel’s opinion (to be limited to documents filed as exhibits to the Company’s Form 10-K for the fiscal year ended December 31, 2004 and any filings since such Form 10-K made by the Company with the Commission), (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Company or any of its subsidiaries or (iii) result in the violation of any law or statute or any judgment, order or regulation of any court or governmental or regulatory authority except, in the case of clauses (i) and (iii) above, for such conflicts, breaches or violations that would not, individually or in the aggregate, have a Material Adverse Effect and, with respect to the Registration Rights Agreement, except for limitations of indemnification and contribution under Federal or state securities laws.

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     (x) No consent, approval, authorization, order, registration or qualification of or with any court or governmental or regulatory authority of the United States of America, the State of Delaware (solely with respect to the Delaware General Corporation Law) or the State of Texas is required for the execution, delivery and performance by the Company of the Indenture, this Agreement and the Registration Rights Agreement, the issuance and sale of the Offered Securities being delivered on the Closing Date, and the consummation of the transactions contemplated by this Agreement, except such consents, approvals, authorizations, orders and registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Offered Securities by the Purchaser.

     (xi) To the knowledge of such counsel, except as described in the Offering Document, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries is or may be the subject which, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect; and to the knowledge of such counsel, no such investigations, actions, suits or proceedings are threatened or contemplated by any governmental or regulatory authority or threatened by others.

     (xii) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Offering Document, will not be an “investment company” within the meaning of the Investment Company Act.

     (xiii) The documents incorporated by reference in the Offering Document or any further amendment or supplement thereto made by the Company prior to the Closing Date, (other than the financial statements and related schedules, other financial data and oil and gas reserve and production data therein, as to which such counsel need express no opinion), when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder.

     (xiv) The statements in the Offering Circular under the caption “Certain United States Federal Income Tax Considerations,” insofar as they refer to statements of law or legal conclusions, fairly summarize the matters referred to therein in all material respects, subject to the qualifications and assumptions stated therein.

     (xv) The statements in the Offering Circular under the captions “Description of Other Indebtedness,” and “Description of Notes” insofar such statements purport to summarize certain provisions of documents referred to therein and reviewed by such counsel, fairly summarize such provisions in all material respects, subject to the qualifications and assumptions stated therein.

     (xvi) Assuming the accuracy of the representations and warranties of the Company and the Purchaser as to matters of fact of the parties contained in this Agreement, the performance by them of the agreements contained therein and compliance with the procedures set forth in the Offering Circular, it is not necessary in connection with (i) the offer, sale and delivery of the Offered Securities and of the Subsidiary Guarantees by the Company and the Subsidiary Guarantors to the Purchaser pursuant to this Agreement or (ii) the initial resales of the Offered Securities by the Purchaser in the manner contemplated by this Agreement, to register the Offered Securities or the Subsidiary Guarantees under the Securities Act or to qualify the Indenture under the Trust Indenture Act, it being understood that no opinion is expressed as to any subsequent resale of the Offered Securities or the Subsidiary Guarantees.

     Such counsel shall also state that they have participated in conferences with officers and representatives of the Company, and with representatives of its independent registered public accounting firm and reserve engineer and with the Purchaser and its counsel at which the contents of the Offering

15

Document and related matters were discussed and, although such counsel assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Offering Document (except as expressly provided above), no facts have come to the attention of such counsel to lead such counsel to believe that the Offering Document (other than (i) the financial statements or schedules included or incorporated by reference therein, including the notes thereto and the auditors’ reports thereon, (ii) the estimated oil and natural gas reserve evaluations and related calculations of Miller and Lents, Ltd., independent petroleum engineers, (iii) the other information of a financial or reserve nature (including production data) included or incorporated by reference therein, and (iv) the exhibits thereto, as to which such counsel need not comment), as of its date or as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

     (d) The Purchaser shall have received from Andrews Kurth LLP, counsel for the Purchaser, such opinion or opinions, dated the Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities, the Offering Circular, the exemption from registration for the offer and sale of the Offered Securities and the Subsidiary Guarantees by the Company and the Subsidiary Guarantors to the Purchaser and the resales by the Purchaser as contemplated hereby and other related matters as CSFB may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters.

     (e) The Purchaser shall have received a certificate, dated the Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that the representations and warranties of the Company in this Agreement are true and correct, that the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date, and that, subsequent to the date of the most recent financial statements in the Offering Document there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Offering Document or as described in such certificate.

     (f) The Engineer shall have delivered to the Purchaser on the Closing Date, a letter in form and substance reasonably satisfactory to the Purchaser, stating, as of the date hereof and as of the Closing Date (or, with respect to matters involving changes or developments since the respective dates as of which specified information with respect to the oil and gas reserves is given or incorporated in the Offering Circular as of the date not more than five days prior to the date of such letter), the conclusions and findings of such firm with respect to the oil and gas reserves of the Company.

     (g) The Purchaser shall have received a letter, dated the Closing Date, of Ernst & Young LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to the Closing Date for the purposes of this subsection.

     (h) The Purchaser shall have received on the Closing Date, and dated a date as of or not more than three (3) business days prior to the Closing Date (five (5) business days in the case of evidence of good standing in foreign jurisdictions), satisfactory evidence of the good standing of the Company and its subsidiaries in their respective jurisdictions of organization and their good standing as foreign entities in such other jurisdictions as the Purchaser may reasonably request, in each case in writing or in any standard form of telecommunication from the appropriate Governmental Authorities of such jurisdictions.

     (i) The Company shall have delivered to Wells Fargo Bank, National Association, as trustee of the Company’s 8 3/8% Senior Subordinated Notes due 2014, an irrevocable notice of redemption of such securities pursuant to the terms of the indenture governing such securities.

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     The Company will furnish the Purchaser with such conformed copies of such opinions, certificates, letters and documents as the Purchaser reasonably requests. CSFB may in its sole discretion waive as the Purchaser compliance with any conditions to the obligations of the Purchaser hereunder.

     7. Indemnification and Contribution. (a) Each of the Company and the Subsidiary Guarantors, jointly and severally, will indemnify and hold harmless the Purchaser, its partners, directors and officers and each person, if any, who controls such Purchaser within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities to which such Purchaser may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto, or the Exchange Act Reports, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, including any losses, claims, damages or liabilities arising out of or based upon the Company’s failure to perform its obligations under Section 5(a) of this Agreement, and will reimburse each Purchaser for any legal or other expenses reasonably incurred by such Purchaser in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company and the Subsidiary Guarantors will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by or through CSFB specifically for use therein.

     (b) The Purchaser will indemnify and hold harmless the Company, the Subsidiary Guarantors, their respective directors and officers and each person, if any, who controls the Company or any Subsidiary Guarantor within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Company or any Subsidiary Guarantor may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto, or any related offering circular, or arise out of or are based upon the omission or the alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by or through CSFB specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company or a Subsidiary Guarantor in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred.

     (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes (i) an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or failure to act by or on behalf of any indemnified party.

17

     (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Subsidiary Guarantors on the one hand and the Purchaser on the other from the offering of the Offered Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Subsidiary Guarantors on the one hand and the Purchaser on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Subsidiary Guarantors on the one hand and the Purchaser on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Subsidiary Guarantors bear to the total discounts and commissions received by the Purchaser from the Company under this Agreement. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or any Subsidiary Guarantor or the Purchaser and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this subsection (d), no Purchaser shall be required to contribute any amount in excess of the amount by which the total discounts, fees and commissions received by such Purchaser exceeds the amount of any damages which such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

     (e) The obligations of the Company and the Subsidiary Guarantors under this Section shall be in addition to any liability which the Company and the Subsidiary Guarantors may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Purchaser within the meaning of the Securities Act or the Exchange Act; and the obligations of the Purchaser under this Section shall be in addition to any liability which the Purchaser may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Company or any Subsidiary Guarantor within the meaning of the Securities Act or the Exchange Act.

     8. Default of Purchaser. [INTENTIONALLY OMITTED].

     9. Survival of Certain Obligations. If for any reason the Securities are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Purchaser through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Purchaser in making preparations for the purchase, sale and delivery of the Securities, but the Company shall then be under no further liability to any Purchaser except as provided in Sections 5(h) and 7 hereof.

     10. Notices. All communications hereunder will be in writing and, if sent to the Purchaser will be mailed, delivered or telegraphed and confirmed to Credit Suisse First Boston LLC, Eleven Madison Avenue, New York, New York 10010, Attention: Investment Banking Services, with a copy to: Andrews Kurth LLP, 600 Travis Street, Suite 4200, Houston, Texas 77002 (fax: (713) 220-4285), Attention: David C. Buck, or if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 777 Main Street, Suite 1400, Fort Worth, Texas 76102 (fax: (817) 339-0933); Attention: I. Jon Brumley, with a copy to: Baker Botts L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas 77002 (fax: (713) 229-7868), Attention: Sean T. Wheeler; provided, however, that any notice to a Purchaser pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Purchaser.

     11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

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     12. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.

     13. Absence of Fiduciary Relationship. The Company acknowledges and agrees that:

     (a) The Purchaser has been retained solely to act as the initial purchaser in connection with the sale of the Company’s securities and no fiduciary, advisory or agency relationship between the Company and the Purchaser has been created in respect of any of the transactions contemplated by this Agreement, irrespective of whether the Purchaser has advised or is advising the Company on other matters;

     (b) the price of the securities set forth in this Agreement was established by the Company following discussions and arms-length negotiations with the Purchaser, and the Company is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated by this Agreement;

     (c) it has been advised that the Purchaser and its affiliates are engaged in a broad range of transactions which may involve interests that differ from those of the Company and that the Purchaser has no obligation to disclose such interests and transactions to the Company by virtue of any fiduciary, advisory or agency relationship; and

     (d) it waives, to the fullest extent permitted by law, any claims it may have against the Purchaser for breach of fiduciary duty or alleged breach of fiduciary duty with respect to the transactions contemplated by this Agreement, the process leading thereto and any previous transactions in which the Purchaser and the Company were both involved and agrees that the Purchaser shall have no liability (whether direct or indirect) to the Company with respect thereto.

19

     If the foregoing is in accordance with the Purchaser’s understanding of our agreement, kindly sign and return to us one of the counterparts hereof, whereupon it will become a binding agreement between the Company and the Purchaser in accordance with its terms.

Very truly yours,
ENCORE ACQUISITION COMPANY
By:	/s/ Roy W. Jageman
	Name:	Roy W. Jageman
	Title:	Executive Vice President, Chief Financial
		Officer and Corporate Secretary
EAP ENERGY, INC.
By:	/s/ Roy W. Jageman
	Name:	Roy W. Jageman
	Title:	Executive Vice President, Chief Financial
		Officer and Corporate Secretary
EAP ENERGY SERVICES, L.P.
By:	EAP Energy, Inc.,
	its general partner
	By:	/s/ Roy W. Jageman
		Name:	Roy W. Jageman
		Title:	Executive Vice President, Chief
			Financial Officer and
			Corporate Secretary
EAP OPERATING, INC.
By:	/s/ Roy W. Jageman
	Name:	Roy W. Jageman
	Title:	Executive Vice President, Chief Financial
		Officer and Corporate Secretary
EAP PROPERTIES, INC.
By:	/s/ Robert A. Sagedy
	Name:	Robert A. Sagedy
	Title:	Vice President

ENCORE OPERATING, L.P.
	By:	EAP Operating, Inc.,
		its general partner
		By:	/s/ Roy W. Jageman
			Name:	Roy W. Jageman
			Title:	Executive Vice President, Chief
				Financial Officer, and
				Corporate Secretary
ENCORE OPERATING LOUISIANA LLC
By:	/s/ Tom Olle
	Name: Tom Olle
	Title: President

The foregoing Purchase Agreement
is hereby confirmed and accepted
as of the date first above written.

Credit Suisse First Boston LLC

          /s/ Phil Z. Pace

     Phil Z. Pace

     Managing Director

EX-31.1

Exhibit 31.1

Rule 13a-14(a)/15d-14(a) Certification

I, I. Jon Brumley, certify that:

1.	I have reviewed this report on Form 10-Q of Encore Acquisition Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005	By:	/s/ I. Jon Brumley
		I. Jon Brumley
		Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

13a-14(a)/15d-14(a) Certification

I, Roy W. Jageman, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Encore Acquisition Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005	By:	/s/ Roy W. Jageman
		Roy W. Jageman
		Chief Financial Officer, Executive Vice President, Corporate Secretary, and Principal Financial Officer

EX-32.1

Exhibit 32.1

Section 1350 Certification

     In connection with the Quarterly Report of Encore Acquisition Company (the “Company”) on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, I. Jon Brumley, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

     Date: August 8, 2005

/s/ I. Jon Brumley

I. Jon Brumley

Chairman and Chief Executive Officer

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Note: The certification of the registrant furnished in this exhibit is not deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing.

EX-32.2

Exhibit 32.2

Section 1350 Certification

     In connection with the Quarterly Report of Encore Acquisition Company (the “Company”) on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Roy W. Jageman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 8, 2005	/s/ Roy W. Jageman
	Roy W. Jageman
	Chief Financial Officer, Executive Vice President, Corporate Secretary and Principal Financial Officer

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Note: The certification of the registrant furnished in this exhibit is not deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing.