Encore Acquisition Company Announces Second Quarter 2006 Financial and Operating Results

Encore Acquisition Company (NYSE:EAC) today reportedunaudited second quarter 2006 results.
(in millions except per share, daily production, and price per BOE
amounts)

Quarter ended June 30, Increase or
---------------------- -------------
2006 2005 (decrease)
------ ------ -------------
Net income $ 22.2 $ 23.7 (6%)
Diluted earnings per share $ 0.42 $ 0.48 (13%)
Revenues $ 133.5 $ 99.7 34%
Cash flow from operations $ 76.8 $ 62.6 23%
Total oil and gas related capital $ 96.8 $ 89.4 8%
Average combined price ($/BOE) $ 47.52 $ 39.56 20%
Daily production volumes (BOE) 30,867 27,697 11%
Diluted shares outstanding 53.5 49.5 8%

Encore reported net income of $22.2 million ($0.42 per dilutedshare) in the second quarter of 2006 compared with $23.7 million($0.48 per diluted share) in the same period a year ago. Net income inthe second quarter of 2006 rose 24% versus $17.9 million ($0.36 perdiluted share) in the first quarter of 2006. Derivative fair valueexpense of $10.8 million in the second quarter of 2006 reduced netincome by approximately $0.13 per diluted share. Excluding derivativefair value expense, Encore's net income in the second quarter of 2006would have been $0.55 per diluted share. This compares to $1.7 millionin derivative fair value expenses reported in the second quarter of2005. The large expense increase in the second quarter of 2006 wasmostly a reflection of a loss in hedge accounting on certain oilderivative contracts due to the widening of the oil differential inthe Cedar Creek Anticline ("CCA") over the past six months.

Encore's cash flow from operations increased 23% in the secondquarter of 2006 versus the same period in 2005. Record oil revenues of$94.1 million were recorded in the second quarter of 2006 with a 7%rise in production and higher oil prices versus the second quarter of2005. Jonny Brumley, President and CEO, stated, "Increased productionover the second quarter of 2005 and leverage to oil prices drovesignificant increases in cash flow from operations and record oilrevenues in the second quarter of 2006. Looking forward, differentialsin the CCA are continuing to tighten, and the average wellhead oildifferential in the third quarter of 2006 is expected to range between$9 and $11 in the CCA and between $8 and $10 for the total Company."

The oil price on the New York Mercantile Exchange ("NYMEX")averaged $70.70 per barrel for the second quarter of 2006 versus$53.17 per barrel for the second quarter 2005, and the wellhead oildifferential in the CCA was $13.97 per barrel under NYMEX in thesecond quarter 2006 compared with $6.24 per barrel under NYMEX in thesecond quarter of 2005. Although the differential in the secondquarter of 2006 was wider than the long-term historical average, ithas tightened considerably from the $19.46 per barrel under NYMEX theCompany experienced in the CCA during the first quarter of 2006.Viewed on a monthly basis, the oil differential under NYMEX in the CCAhas narrowed from the widest value in March 2006 of $27.32 per barrelto $12.27 per barrel in June 2006. While producer competition andpipeline constraints still exist, the absence of any significantrefinery maintenance and strong demand growth have considerablyimproved oil pricing in the Rockies.

Encore's realized commodity prices, including the effects ofhedging, averaged $51.93 per barrel and $6.58 per Mcf during thesecond quarter of 2006, resulting in increases of 27% and 8%,respectively, over the second quarter of 2005. On a combined basis,including the effects of hedging, prices increased during the secondquarter of 2006 to $47.52 per BOE from $39.56 per BOE in the secondquarter of 2005. Hedging expense reduced realized oil prices by $7.35per barrel and realized natural gas prices by $0.24 per Mcf during thesecond quarter of 2006.

Second quarter 2006 production volumes increased by 11% to 30,867BOE per day (2.8 MMBOE), compared with second quarter 2005 productionof 27,697 BOE per day (2.5 MMBOE). Production would have been 400 BOEper day higher in the second quarter of 2006, but completion delays inthe Barnett Shale deferred production until the third quarter of 2006.The net profits interests in the CCA reduced reported production byapproximately 1,562 BOE per day in the second quarter of 2006 versus859 BOE per day in the second quarter of 2005. Oil represented 65% and67% of the Company's total production volumes in the second quarter of2006 and 2005, respectively. This 11% increase in production wasattained despite a spring storm that caused a loss of power at theCCA, resulting in a shutdown of all CCA fields for four days.

During the second quarter of 2006, lease operations expenseincreased to $23.1 million ($8.23 per BOE) from $16.1 million ($6.38per BOE) in the second quarter of 2005. On a per-unit basis, leaseoperations expense increased due to higher electricity costs, greaterfield activity, and rising service costs in general. Depletion,depreciation, and amortization expense rose to $28.0 million ($9.96per BOE) in the second quarter of 2006 versus $19.0 million ($7.55 perBOE) in the second quarter of 2005. Higher per-unit depletion,depreciation, and amortization costs were primarily attributable tohigher commodity prices along with increased rig rates and oilfieldservices costs, which have elevated finding, development, andacquisition costs. Exploration expense was $4.0 million ($1.43 perBOE) in the second quarter of 2006 as compared to $3.8 million ($1.50per BOE) in the second quarter of 2005.

Operations Update

In the second quarter of 2006 Encore drilled 63 gross (24.5 net)wells, investing $87.8 million in development capital (excludingdevelopment-related asset retirement obligations). The Company alsoinvested $8.2 million in property acquisitions and undeveloped leases.Encore operated between eight and ten rigs during the second quarterof 2006.

In the Little Beaver area of the CCA, Encore's high-pressure airinjection ("HPAI") project continues to keep production stable withoutdrilling additional wells. Implementation of HPAI in Little BeaverPhases I and II was completed in the fourth quarter of 2004. In thePennel and Coral Creek area of the CCA, Encore completed Phases I andII of the HPAI project in the fourth quarter of 2005, and the Companyis seeing initial indications of response and expects to see moremeaningful response toward the end of 2006. Implementation of PhaseIII at Pennel is currently underway.

Progress on Encore's joint venture in West Texas is proceedingvery well, with three rigs currently operating in the region. Two rigsare drilling in the Brown Bassett Field in Val Verde Basin. Theshallow rig is currently on its fourth location drilling to theWolfcamp formation, while the deep rig is targeting its firstEllenberger well. A third rig has reached total depth at its firstlocation in the Wilshire Field in Midland Basin, a dual lateral in theDevonian formation. Wells that have reached total depth were waitingon completion operations or gathering line construction at the end ofthe second quarter, and Encore anticipates production from eachformation in the third quarter of 2006. A fourth rig dedicated to thejoint venture is expected to arrive early in the third quarter of2006.

In addition to the West Texas joint venture, the Company hasnegotiated to farm-in the Wolfcamp formation at the Brown BassettField from another major oil company, bringing the Company's workinginterest on an estimated 75 Wolfcamp locations from 15% to 65%. Thesewells are expected to have gross reserves of approximately 50 Bcf andgenerate a rate of return of about 20%.

In the Mid-Continent, an active region for Encore encompassingOklahoma and East Texas, the Company is currently bringing on a sourgas producer from the Oil Creek zone that may initially yield up to4.0 MMcfe per day gross (1.0 MMcfe per day net) once treatingfacilities are in place. In the third quarter of 2005, Encore broughton a Travis Peak well with initial production of 1.9 MMcfe per daygross (1.4 MMcfe per day net). Following the success of the firstTravis Peak well, Encore drilled an offset in the second quarter of2006, which is expected to show about 1.4 MMcfe per day gross (1.0MMcfe per day net) at first production. Encore expects to drill threeadditional wells within this initially successful program in thefourth quarter of 2006.

Encore has formed a team to develop a drilling program targetingreserves in the prolific Morrow and Atoka formations in Southeast NewMexico. Encore has already developed eight drilling locations andacquired a total of approximately 2,700 gross acres. The team expectsto spud its first well in August 2006 and anticipates selling gas inthe fourth quarter of 2006.

"The wheels are turning fast," remarked Jonny Brumley. "We areseeing success in all of our regions at Encore. It's exciting to seebig wells in Oklahoma, and we are expecting great things from the WestTexas joint venture and the Company's newly formed New Mexico team."

Liquidity Update

At June 30, 2006, long-term debt, net of discount, was $593.4million, including $150 million of 6.25% Senior Subordinated Notes dueApril 15, 2014, $300 million of 6.0% Senior Subordinated Notes dueJuly 15, 2015, and $150 million of 7.25% Senior Subordinated Notes due2017. At that date, the Company's existing credit facility wasundrawn.

Third Quarter 2006 Outlook

For the third quarter of 2006, wellhead production is expected toaverage between 32,200 and 32,600 BOE per day. Net profits interestsin the CCA are estimated to reduce production by 1,500 to 1,700 BOEper day, resulting in a reported production estimate of approximately30,500 to 31,100 BOE per day. Production, ad valorem, and severancetaxes are anticipated to be approximately 9% of oil and natural gasrevenues before hedging. The Company expects lease operations expenseto average approximately $8.60 per BOE in the third quarter of 2006.General and administrative expenses are expected to averageapproximately $2.15 per BOE in the third quarter of 2006. Depletion,depreciation, and amortization should be approximately $10.25 per BOEin the third quarter of 2006. Income tax expense is expected to be atan effective rate of 38% with approximately 95% deferred. The Companyexpects to invest approximately $100 million of its capital budget inthe third quarter of 2006.

Encore has successfully increased its working interests in two ofits most active drilling areas, the Mid-Continent and West Texas.Higher working interests and generally elevated service costs haverequired additional capital for a given well in the Company's 2006program. Encore will maintain investment discipline by pursuing fewerbut higher-quality prospects during the remainder of 2006. Productionattributable to some of these high-graded wells will not have anappreciable effect on this year, since many of the wells will takeseveral months to bring online. The Company is revising its 2006budget from $325 million to $350 million due to the higher workinginterests as well as the increased service costs.

Changes in Hedge Accounting Policy

To increase clarity in its financial statements, the Company haselected to discontinue hedge accounting prospectively for all of itsremaining commodity derivatives beginning in July 2006. While thischange will have no effect on the Company's reported cash flows,future results of operations will be affected by mark-to-market gainsand losses, which fluctuate with the swings in oil and gas prices.Encore will recognize all prospective mark-to-market gains and lossesin earnings rather than deferring the amounts in accumulated othercomprehensive income included in shareholders' equity.

Encore's fixed-price swaps in oil and natural gas, which are theprimary sources of the increase to $10.8 million in derivative fairvalue expense in the second quarter of 2006 versus $1.7 million in thesecond quarter of 2005, are expected to remain in place through 2007,after which the majority of the swaps will be settled. If the currenthigh price environment for oil and natural gas continues into 2008,Encore expects to have a significant reduction in derivative expenseand a corresponding increase in earnings and cash flow.

Conference Call

Title: Encore Acquisition Company Conference Call

Date and Time: Thursday, August 3, 2006 at 9:30 AM Central Time

Webcast: Listen to the live broadcast via http://www.encoreacq.com

Telephone: Dial 877-356-9552 ten minutes prior to the scheduledtime and request the conference call by supplying the title specifiedabove

A replay of the conference call will be archived and available viaEncore's website at the address above or by dialing 800-642-1687 andentering conference ID 3275260. The replay will be available throughAugust 10, 2006. International or local callers can dial 706-679-0419for the live broadcast or 706-645-9291 for the replay.

About the Company:

Encore Acquisition Company, a Delaware corporation ("Encore" orthe "Company"), is a growing independent energy company engaged in theacquisition, development, exploitation, exploration, and production ofonshore North American oil and natural gas reserves. Since theCompany's inception in 1998, Encore has sought to acquire high-qualityassets with potential for upside through drilling, waterflood, andtertiary projects. Encore's properties currently are located in fourcore areas: the Cedar Creek Anticline ("CCA") in the Williston Basinof Montana and North Dakota; the Permian Basin of western Texas andsoutheastern New Mexico; the Mid-Continent area, which includes theArkoma and Anadarko Basins of Oklahoma, the North Louisiana SaltBasin, the East Texas Basin, and the Barnett Shale of northern Texas;and the Rockies, which includes non-CCA assets in the Williston andPowder River Basins of Montana and North Dakota, and the Paradox Basinof southeastern Utah. Encore's latest investor presentation isavailable on the Company's website at www.encoreacq.com.

Cautionary Statements:

This press release includes forward-looking statements, which giveEncore's current expectations or forecasts of future events based oncurrently available information. Forward-looking statements in thispress release relate to, among other things, the following: theexpected amount and focus of Encore's capital expenditures; Encore'sdrilling and exploration program (including, without limitationexpectations regarding the new drilling program in Southeast NewMexico); expected production (including HPAI response and expectationsfor the new wells); anticipated production growth; the level ofproduction, ad valorem and severance taxes, lease operations expense,general and administrative expense, depletion, depreciation andamortization expense, and income tax expense; the effects of hedging;expected effective tax rates; expected differentials to benchmarkprices; and any other statements that are not historical facts.However, the assumptions of management and the future performance ofEncore are subject to a wide range of business risks and uncertaintiesand there is no assurance that these statements and projections willbe met. Factors that could affect Encore's business include, but arenot limited to: the risks associated with operating in a limitednumber of geographic areas; the risks associated with drilling of oiland natural gas wells; risks related to Encore's high-pressure airprogram; Encore's ability to find, acquire, market, develop, andproduce new properties; the risk of drilling dry holes; oil andnatural gas price volatility; widening differentials to benchmarkprices for Encore's oil and natural gas (including, withoutlimitation, widening oil differentials resulting from Canadian andRocky Mountain production increases and refinery turnarounds);uncertainties relating to hedging arrangements (including the costsassociated therewith and the potential impact of mark-to-marketaccounting); uncertainties in the estimation of proved, probable andpotential reserves and in the projection of future rates of productionand reserve growth; inaccuracies in Encore's assumptions regardingitems of income and expense; uncertainties in the timing ofexploitation expenditures; operating hazards attendant to the oil andnatural gas business; drilling and completion losses that aregenerally not recoverable from third parties or insurance; potentialmechanical failure or underperformance of significant wells; climaticconditions; availability and cost of material and equipment; actionsor inactions of third-party operators of Encore's properties; Encore'sability to find and retain skilled personnel; diversion ofmanagement's attention from existing operations while pursuingacquisitions; availability of capital; the strength and financialresources of Encore's competitors; regulatory developments;environmental risks; general economic and business conditions;industry trends; and other factors detailed in Encore's most recentForm 10-K and other filings with the Securities and ExchangeCommission. If one or more of these risks or uncertainties materialize(or the consequences of such a development changes), or shouldunderlying assumptions prove incorrect, actual outcomes may varymaterially from those forecasted or expected. Encore undertakes noobligation to publicly update or revise any forward-lookingstatements.
(All data in thousands, except per share data)

Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Consolidated Statements of (unaudited) (unaudited)
Operations:
Revenues:
Oil $ 94,128 $ 69,559 $ 172,814 $ 136,695
Natural gas 39,343 30,158 76,873 54,603
--------- --------- --------- ---------
Total revenues 133,471 99,717 249,687 191,298
--------- --------- --------- ---------
Expenses:
Production -
Lease operations 23,118 16,068 45,854 31,217
Production, ad
valorem, and
severance taxes 12,580 9,813 24,822 18,899
Depletion, depreciation,
and amortization 27,988 19,038 55,008 35,721
Exploration 4,016 3,785 6,025 6,408
General and
administrative 5,421 4,217 11,949 8,332
Derivative fair value 10,794 1,692 13,100 4,101
Other operating 1,960 1,703 4,489 3,302
--------- --------- --------- ---------
Total operating expenses 85,877 56,316 161,247 107,980
--------- --------- --------- ---------
Operating income 47,594 43,401 88,440 83,318
Interest and other (10,290) (7,363) (21,956) (14,258)
--------- --------- --------- ---------
Income before income taxes 37,304 36,038 66,484 69,060
Current income tax
provision (820) (589) (1,102) (1,390)
Deferred income tax
provision (14,249) (11,781) (25,211) (22,218)
--------- --------- --------- ---------
Net income $ 22,235 $ 23,668 $ 40,171 $ 45,452
========= ========= ========= =========


Net income per common
share:
Basic 0.42 0.49 0.79 0.93
Diluted 0.42 0.48 0.78 0.92

Weighted average common
shares outstanding:
Basic 52,631 48,660 50,724 48,636
Diluted 53,532 49,458 51,663 49,429

Six Months Ended
June 30,
----------------------
2006 2005
--------- ---------
Condensed Consolidated Statements of Cash Flows: (unaudited)
Net income $ 40,171 $ 45,452
Adjustments to reconcile net income to net cash
provided by operating
activities:
Non-cash and other items 110,177 73,329
Changes in operating assets and liabilities (18,872) (1,316)
--------- ---------
Net cash provided by operating activities 131,476 117,465
--------- ---------

Cash used in investing activities (166,375) (166,103)
--------- ---------

Financing activities:
Net proceeds from (payments on) long-term debt (80,000) 60,796
Net proceeds from issuance of common stock 126,890 -
Other (12,982) (12,238)
--------- ---------
Net cash provided by financing activities 33,908 48,558
--------- ---------

Decrease in cash and cash equivalents (991) (80)
Cash and cash equivalents, beginning of period 1,654 1,103
--------- ---------
Cash and cash equivalents, end of period $ 663 $ 1,023
========= =========

June 30, December 31,
2006 2005
----------- -----------
Condensed Balance Sheets: (unaudited)
Total assets $ 1,804,817 $ 1,705,705
=========== ===========
Liabilities $ 469,889 $ 485,735
Long-term debt 593,439 673,189
Stockholders' equity 741,489 546,781
----------- -----------
Total liabilities and
stockholders' equity $ 1,804,817 $ 1,705,705
=========== ===========

Working capital (a) $ (28,419) $ (56,838)


(a) Working capital is defined as current assets minus current
liabilities.

Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
(unaudited) (unaudited)
Production volumes:
Oil (MBbls) 1,813 1,698 3,678 3,403
Natural gas (MMcf) 5,977 4,933 12,084 9,384
Combined (MBOE) 2,809 2,520 5,692 4,967

Daily production:
Oil (Bbls/d) 19,920 18,662 20,319 18,799
Natural gas (Mcf/d) 65,682 54,213 66,765 51,847
Combined (BOE/d) 30,867 27,697 31,447 27,440

Average prices:
Oil (per Bbl) $ 51.93 $ 40.96 $ 46.98 $ 40.17
Natural gas (per Mcf) 6.58 6.11 6.36 5.82
Combined (per BOE) 47.52 39.56 43.87 38.52

Average costs per BOE:
Lease operations expense $ 8.23 $ 6.38 $ 8.06 $ 6.29
Production, ad valorem, and
severance taxes 4.48 3.89 4.36 3.81
Depletion, depreciation, and
amortization 9.96 7.55 9.66 7.19
Exploration 1.43 1.50 1.06 1.29
General and administrative 1.93 1.68 2.10 1.68


Derivative Summary as of June 30, 2006

Oil Derivative Contracts
-------------------------
Daily Average Daily Average Average
Floor Floor Cap Cap Daily Swap
Volume Price Volume Price Swap Volume Price
Period (Bbls) (per Bbl) (Bbls) (per Bbl) (Bbls) (per
Bbl)
----------- -------- --------- -------- --------- ---------- --------
Second Half
of 2006 13,000 $ 45.00 1,000 $ 29.88 3,000 37.27
2007 8,000 53.75 - - 3,000 36.75
2008 4,000 60.00 - - 1,000 58.59


Natural Gas Derivative Contracts
---------------------------------
Daily Average Daily Average Average
Floor Floor Cap Cap Daily Swap
Volume Price Volume Price Swap Volume Price
Period (Mcf) (per Mcf) (Mcf) (per Mcf) (Mcf) (per
Mcf)
----------- -------- --------- -------- --------- ---------- --------
2006 32,500 $ 6.17 5,000 $ 5.68 12,500 $ 5.02
2007 22,500 6.96 - - 10,000 4.99


Note: Subsequent to June 30, 2006, the Company entered into oil floor
contracts representing 2,000 Bbls/d at an average price of $60/Bbl
for the second half of 2008 and natural gas floor contracts
representing 10,000 Mcf/d at an average price of $6.25/Mcf for 2007
and 2008.