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 March 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

ENCORE ACQUISITION COMPANY

(Exact name of registrant as specified in its charter)

Delaware		75-2759650
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

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

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of common stock, $0.01 par value, outstanding as of May 4, 2007			53,126,766

 

 

ENCORE ACQUISITION COMPANY

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006			1
Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006			2
Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2007			3
Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006			4
Notes to Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 6. Exhibits			33
Signature			35
Form of Restricted Stock Award - Executive
Form of Stock Option Agreement - Nonqualified
Form of Stock Option Agreement - Incentive
Statement Showing Computation of Ratio of Earnings
Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
Section 1350 Certification (Principal Executive Officer)
Section 1350 Certification (Principal Financial Officer)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     Certain information included in this Quarterly Report on Form 10-Q (the “Report”) and other materials filed with the Securities and Exchange Commission (“SEC”), or in other written or oral statements made or to be made by us, other than statements of historical fact, are forward-looking statements as defined by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements 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 “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 and in our other filings with the SEC. 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.

ENCORE ACQUISITION COMPANY

GLOSSARY OF CERTAIN TERMS

     The following are abbreviations and definitions of certain terms used in this Report:

	•		Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.
	•		Bbl/D. One Bbl per day.
	•		BOE. One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil.
	•		BOE/D. One BOE per day.
	•		Encore or the Company. Encore Acquisition Company, a Delaware corporation, together with its subsidiaries.
	•		Gross Wells. The total number of wells in which we own a working interest.
	•		High-Pressure Air Injection (“HPAI”). HPAI involves utilizing compressors to force air under high pressure into previously produced oil and natural gas formations in order to displace remaining resident hydrocarbons and force them under pressure to a common lifting point for production.
	•		LIBOR. London Interbank Offered Rate.
	•		MBbls. One thousand Bbls.
	•		Mcf. One thousand cubic feet of natural gas.
	•		Mcf/D. One Mcf per day.
	•		Net Wells. Gross wells multiplied by the percentage of the working interest owned by us.
	•		NYMEX. New York Mercantile Exchange.

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for definitions of additional terms that may be used in this Report.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENCORE ACQUISITION COMPANY

(in thousands, except share and per share amounts)

		March 31,				December 31,
		2007				2006
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	626			$	763
Accounts receivable			82,151				81,470
Inventory			21,380				18,170
Derivatives			15,283				17,349
Deferred taxes			21,833				24,978
Prepaid expenses			3,357				2,988
Total current assets			144,630				145,718
Properties and equipment, at cost — successful efforts method:
Proved properties, including wells and related equipment			2,525,564				2,033,914
Unproved properties			47,007				47,548
Accumulated depletion, depreciation, and amortization			(398,893	)			(364,780	)
			2,173,678				1,716,682
Other property and equipment			18,619				18,231
Accumulated depreciation			(8,260	)			(7,791	)
			10,359				10,440
Goodwill			60,606				60,606
Derivatives			40,269				40,715
Acquisition deposit			41,000				—
Other			55,298				32,739
Total assets		$	2,525,840			$	2,006,900
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	26,044			$	18,204
Accrued liabilities:
Lease operations expense			10,868				8,582
Development capital			35,572				44,492
Interest			14,766				11,273
Production, ad valorem, and severance taxes			13,389				10,915
Oil purchases			4,028				11,191
Derivatives			62,113				60,448
Other			24,302				21,358
Total current liabilities			191,082				186,463
Derivatives			35,057				38,688
Future abandonment cost			29,043				19,205
Deferred taxes			268,700				282,825
Long-term debt			1,201,802				661,696
Other			1,124				1,158
Total liabilities			1,726,808				1,190,035
Commitments and contingencies (see Note 13)			—				—
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding			—				—
Common stock, $.01 par value, 144,000,000 shares authorized, 53,126,504 and 53,028,866 issued and outstanding, respectively			532				531
Additional paid-in capital			460,857				457,201
Treasury stock, at cost, of 15,743 and 17,809 shares, respectively			(392	)			(457	)
Retained earnings			365,181				394,917
Accumulated other comprehensive loss			(27,146	)			(35,327	)
Total stockholders’ equity			799,032				816,865
Total liabilities and stockholders’ equity		$	2,525,840			$	2,006,900

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

ENCORE ACQUISITION COMPANY

(in thousands, except per share amounts)

(unaudited)

		Three months ended
		March 31,
		2007				2006
Revenues:
Oil		$	82,623			$	76,115
Natural gas			32,978				37,530
Marketing			14,941				34,316
Total revenues			130,542				147,961
Expenses:
Production:
Lease operations			30,520				22,736
Production, ad valorem, and severance taxes			12,515				12,242
Depletion, depreciation, and amortization			35,028				27,020
Exploration			11,521				2,009
General and administrative			7,360				6,528
Marketing			15,011				32,746
Derivative fair value loss			45,614				2,306
Other operating			2,565				1,528
Total expenses			160,134				107,115
Operating income (loss)			(29,592	)			40,846
Other income (expenses):
Interest			(16,287	)			(11,787	)
Other			431				121
Total other income (expenses)			(15,856	)			(11,666	)
Income (loss) before income taxes			(45,448	)			29,180
Income tax benefit (provision)			16,019				(11,244	)
Net income (loss)		$	(29,429	)		$	17,936
Net income (loss) per common share:
Basic		$	(0.55	)		$	0.37
Diluted		$	(0.55	)		$	0.36
Weighted average common shares outstanding:
Basic			53,077				48,797
Diluted			53,077				49,772

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

ENCORE ACQUISITION COMPANY

(in thousands)

(unaudited)

		Issued																								Accumulated
		Shares of								Additional				Shares of												Other				Total
		Common				Common				Paid-in				Treasury				Treasury				Retained				Comprehensive				Stockholders’
		Stock				Stock				Capital				Stock				Stock				Earnings				Loss				Equity
Balance at December 31, 2006			53,047			$	531			$	457,201				(18	)		$	(457	)		$	394,917			$	(35,327	)		$	816,865
Exercise of stock options and vesting of restricted stock			113				1				451				—				—				—				—				452
Purchase of treasury stock			—				—				—				(16	)			(392	)			—				—				(392	)
Cancellation of treasury stock			(18	)			—				(150	)			18				457				(307	)			—				—
Non-cash stock-based compensation			—				—				3,355				—				—				—				—				3,355
Components of comprehensive loss:
Net loss			—				—				—				—				—				(29,429	)			—				(29,429	)
Amortization of deferred hedge losses, net of tax of $5,216			—				—				—				—				—				—				8,181				8,181
Total comprehensive loss																															(21,248	)
Balance at March 31, 2007			53,142			$	532			$	460,857				(16	)		$	(392	)		$	365,181			$	(27,146	)		$	799,032

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

ENCORE ACQUISITION COMPANY

(in thousands)

(unaudited)

		Three months ended
		March 31,
		2007				2006
Cash flows from operating activities:
Net income (loss)		$	(29,429	)		$	17,936
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation, and amortization			35,028				27,020
Non-cash exploration expense			9,665				534
Deferred taxes			(15,899	)			10,962
Non-cash stock-based compensation expense			3,070				3,653
Non-cash derivative fair value			53,610				6,099
Other			1,047				1,591
Changes in operating assets and liabilities:
Accounts receivable			146				16,907
Current derivatives			(14,732	)			—
Other current assets			(3,685	)			(6,136	)
Long-term derivatives			(18,084	)			—
Other assets			(683	)			(96	)
Accounts payable			(2,056	)			(2,948	)
Other current liabilities			(2,939	)			(20,855	)
Net cash provided by operating activities			15,059				54,667
Cash flows from investing activities:
Proceeds from disposition of assets			1,214				155
Acquisition of oil and natural gas properties			(438,568	)			(7,689	)
Development of oil and natural gas properties			(101,924	)			(60,368	)
Net advances to working interest partners			(13,382	)			—
Other			(606	)			(2,565	)
Net cash used in investing activities			(553,266	)			(70,467	)
Cash flows from financing activities:
Exercise of stock options and vesting of restricted stock, net			60				503
Proceeds from long-term debt			615,000				94,000
Payments on long-term debt			(75,027	)			(75,000	)
Debt issuance costs			(8,222	)			—
Change in cash overdrafts			11,609				(4,006	)
Other			(5,350	)			(200	)
Net cash provided by financing activities			538,070				15,297
Decrease in cash and cash equivalents			(137	)			(503	)
Cash and cash equivalents, beginning of period			763				1,654
Cash and cash equivalents, end of period		$	626			$	1,151

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

ENCORE ACQUISITION COMPANY

(unaudited)

Note 1. About Encore

     Encore Acquisition Company, a Delaware corporation (“Encore” or the “Company”), is a company engaged in the acquisition and development oil and natural gas reserves from onshore fields in the United States. Since 1998, we have acquired producing properties with proven reserves and leasehold acreage and grown the production and proven reserves by drilling, exploring, reengineering or expanding existing waterflood projects and applying tertiary recovery techniques. Encore’s properties – and oil and natural gas reserves – are located in four core areas: the Cedar Creek Anticline (“CCA”) in the Williston Basin of Montana and North Dakota; the Permian Basin of West Texas and southeastern New Mexico; the Rockies, which includes non-CCA assets in the Williston, Big Horn and Powder River Basins of Wyoming, Montana and North Dakota and the Paradox Basin of southeastern Utah; and the Mid-Continent area, which includes the Arkoma and Anadarko Basins of Oklahoma, the North Louisiana Salt Basin, the East Texas Basin, and the Barnett Shale of northern Texas.

Note 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 March 31, 2007, and results of operations and cash flows for the three months ended March 31, 2007 and 2006. All adjustments are of a normal 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 SEC. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s 2006 Annual Report on Form 10-K. Certain amounts in prior periods have been reclassified to conform to the current period presentation. Specifically, the Company reclassified the net gain/loss from the purchases and sales of third-party oil volumes from “Oil revenues” to “Marketing revenues” and “Marketing expense” and reclassified the related marketing transportation costs from “Other operating expense” to “Marketing expense” in the accompanying Consolidated Statements of Operations. These are changes in presentation only and do not affect previously reported net income or earnings per share for either period. The following table details the affected line items from the accompanying Consolidated Statement of Operations for the first quarter of 2006 (in thousands):

As Reported:
Oil revenues		$	78,686
Marketing revenues		$	—
Marketing expenses		$	—
Other operating expenses		$	2,529
As Reclassified:
Oil revenues		$	76,115
Marketing revenues		$	34,316
Marketing expenses		$	32,746
Other operating expenses		$	1,528

     Amounts shown in the Consolidated Balance Sheets as “Proved properties”, include leasehold costs and wells and related equipment, both completed and in process. The components of the amounts shown on the Consolidated Balance Sheets are as follows, as of the dates indicated:

		March 31,				December 31,
		2007				2006
		(in thousands)
Proved leasehold costs		$	1,134,583			$	796,932
Wells and related equipment — Completed			1,360,900				1,200,938
Wells and related equipment — In process			30,081				36,044
Proved property		$	2,525,564			$	2,033,914

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

New Accounting Pronouncements

SFAS No. 157, “Fair Value Measurement” (“SFAS 157”)

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Encore does not expect the implementation of SFAS 157 to have a material impact on its results of operations or financial condition.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”)

     In February 2007, the FASB issued SFAS 159. SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Encore does not expect the implementation of SFAS 159 to have a material impact on its results of operations or financial condition.

Note 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:

		March 31,				December 31,
		2007				2006
		(in thousands)
Warehouse inventory		$	11,536			$	11,784
Oil in pipelines			9,844				6,386
Total		$	21,380			$	18,170

Note 4. Acquisitions

Big Horn Basin

     On January 16, 2007, the Company entered into a purchase and sale agreement with certain subsidiaries of Anadarko Petroleum Corporation (“Anadarko”) to acquire oil and natural gas properties and related assets in the Big Horn Basin of Wyoming and Montana, which included oil and natural gas properties and related assets in or near the Elk Basin field in Park County, Wyoming and Carbon County, Montana and oil and natural gas properties and related assets in the Gooseberry field in Park County, Wyoming. The closing of the Big Horn Basin acquisition occurred on March 7, 2007. Prior to closing, Encore assigned the rights and duties under the purchase and sale agreement relating to the Elk Basin assets to Encore Energy Partners Operating LLC (“EEPO”), a Delaware limited liability company and indirect wholly owned non-guarantor subsidiary of Encore, and the rights and duties under the purchase and sale agreement relating to the Gooseberry assets to Encore Operating, L.P., an indirect wholly owned guarantor subsidiary of Encore. At closing, EEPO paid the sellers approximately $328.4 million for the Elk Basin assets, and Encore Operating, L.P. paid the sellers approximately $63.7 million for the Gooseberry assets. See “Note 12. Financial Statements of Subsidiary Guarantors” below for a discussion of the Company’s guarantor and non-guarantor subsidiaries.

     Based on currently available information, the calculation of the total purchase price and the estimated allocation to the fair value of the Big Horn Basin assets acquired and liabilities assumed from Anadarko are as follows as of March 31, 2007 (in thousands):

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

Calculation of total purchase price:
Cash paid to Anadarko		$	392,085
Estimated transaction costs			990
Total purchase price		$	393,075
Allocation of purchase price to the fair value of net assets acquired:
Accounts receivable		$	1,234
Properties and equipment			404,374
Total assets acquired			405,608
Accrued liabilities			(2,897	)
Future abandonment cost			(9,636	)
Total liabilities assumed			(12,533	)
Fair value of net assets acquired		$	393,075

     At March 31, 2007, the Company had not finalized its estimate of sales taxes payable with the state of Wyoming and was awaiting additional information needed to estimate the fair value of a contract to purchase natural gas at a below market price for use as field fuel. The properties and equipment amount in purchase price allocation above includes the fair value of this contract, proved leasehold costs, lease and well equipment, including flue gas reinjection facilities used to maintain reservoir pressure by compressing and reinjecting the natural gas produced, and an oil pipeline and natural gas pipeline used primarily to transport production from the acquired fields. At March 31, 2007, the Company is awaiting third-party fair value assessments on certain lease and well equipment.

     Hydrocarbon liquids are produced at as a byproduct of the flue gas tertiary recovery project and are sold at market prices. The revenues generated by these hydrocarbon liquids are included in “Oil revenues” in the accompanying Consolidated Statements of Operations. Third party revenues and expenses related to the pipelines are included in “Marketing revenues” and “Marketing costs” in the accompanying Consolidated Statements of Operations.

     The operating results related to the Big Horn Basin assets are included in Encore’s operating results from the date of closing forward.

     Encore financed the Big Horn Basin acquisition through borrowings under its credit facilities. See “Note 7. Debt” for additional discussion of the Company’s revolving credit facilities.

     The following unaudited pro forma combined condensed financial data for the three months ended March 31, 2007 was derived from the historical financial statements of Encore and from the accounting records of Anadarko for the Big Horn Basin assets giving effect to the acquisition as if it had occurred on January 1, 2007. The following unaudited proforma combined condensed financial data for the three months ended March 31, 2006 was derived from the historical financial statements of Encore and from the accounting records of Anadarko for the Big Horn Basin assets giving effect to the acquisition as if it had occurred on January 1, 2006. The unaudited pro forma combined condensed financial information has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the acquisition taken place as of the dates indicated and are not intended to be a projection of future results.

		Three months ended
		March 31,
		2007				2006
		(in thousands, except per share amounts)
Pro forma total revenues		$	141,748			$	163,913
Pro forma net income (loss)		$	(32,569	)		$	15,840
Pro forma net income (loss) per common share:
Basic		$	(0.61	)		$	0.32
Diluted		$	(0.61	)		$	0.32

Note 5. Derivative Financial Instruments

     The Company had $56.7 million of deferred premiums payable recorded at March 31, 2007, of which $29.5 million is considered long-term and is recorded in “Derivative liabilities” in the accompanying Consolidated Balance Sheets. The premiums relate to various oil and natural gas floor contracts and are payable on a monthly basis from April 2007 to January 2010. The Company recorded these amounts at their net present value at the time the contract was entered into and accretes them up to their eventual settlement price by recording interest expense each period.

Commodity Contracts – Mark-to-Market Accounting: Previously designated as hedges

     Prior to July 2006, the Company used hedge accounting for certain of its derivative contracts, whereby the effective portion of changes in the fair value of the contract was deferred in accumulated other comprehensive loss (“AOCL”) included in stockholders’ equity in the accompanying Consolidated Balance Sheets rather than recognized in earnings. In the third quarter of 2006, the Company elected to discontinue hedge accounting prospectively for all remaining commodity derivatives which were previously accounted for as hedges. While this change has no effect on cash flows, results of operations are affected by mark-to-market gains and losses, which fluctuate with the swings in oil and natural gas prices. At the time of dedesignation, the Company marked all contracts to fair value and recorded a deferred loss in AOCL that is being amortized to oil and natural gas revenues over the original term of the hedge contract. The amortization of these amounts is included in oil and natural gas revenues with the revenues from the hedged production. All mark-to-market gains and losses from July 2006 forward are recognized in earnings through “Derivative fair value loss” in the accompanying Consolidated Statements of Operations rather than deferring such amounts in AOCL.

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

     The following tables summarize the Company’s open commodity derivative instruments as of March 31, 2007:

Oil Derivative Instruments

		Daily				Average					Daily				Average					Daily				Average					Asset (Liability)
		Floor				Floor					Short Floor				Short Floor					Swap				Swap					Fair Market
Period		Volume				Price					Volume				Price					Volume				Price					Value
		(Bbl)				(per Bbl)					(Bbl)				(per Bbl)					(Bbl)				(per Bbl)					(in thousands)
Apr. - Dec. 2007			14,500			$	56.72					—			$	—					3,000			$	36.75				$	(21,695	)
Jan. - June 2008			18,500				62.84					(4,000	)			50.00					1,000				58.59					10,340
July - Dec. 2008			14,500				63.62					(4,000	)			50.00					—				—					11,790
Jan. - Dec. 2009			6,000				68.83					(5,000	)			50.00					1,000				68.70					13,226
																													$	13,661

Natural Gas Derivative Instruments

		Daily				Average					Daily				Average					Daily				Average					Asset (Liability)
		Floor				Floor					Short Floor				Short Floor					Swap				Swap					Fair Market
Period		Volume				Price					Volume				Price					Volume				Price					Value
		(Mcf)				(per Mcf)					(Mcf)				(per Mcf)					(Mcf)				(per Mcf)					(in thousands)
Apr. - June 2007			32,500			$	6.74					—			$	—					10,000			$	4.99				$	(1,039	)
July - Dec. 2007			34,500				6.83					—				—					—				—					(2,579	)
Jan. - Dec. 2008			22,000				6.52					—				—					—				—					4,100
Jan. - Dec. 2009			2,000				8.20					—				—					—				—					944
																													$	1,426

Commodity Contracts – Mark-to-Market Accounting: Floor Spreads

     In order to partially finance the cost of premiums on certain purchased floors, the Company may sell floors with a strike price below the strike price of the purchased floor. Together the two floors, known as a floor spread or put spread, have a lower premium cost than a traditional floor contract but provide price protection only down to the strike price of the short floor. During 2006, the Company entered into floor spreads with a $70 per Bbl purchased floor and a $50 per Bbl short floor for 4,000 Bbls/D in 2008 and 5,000 Bbls/D in 2009. As with the Company’s other derivative contracts, these are marked-to-market each quarter through “Derivative fair value (gain) loss” in the accompanying Consolidated Statements of Operations. In the above table, the purchased floor component of these floor spreads has been included with the Company’s other floor contracts and the short floor component is shown separately as negative volumes.

Commodity Contracts – Current Period Impact

     As a result of derivative transactions for oil and natural gas, the Company recognized a pre-tax reduction in oil and natural gas revenues of approximately $13.4 million and $16.5 million during the three months ended March 31, 2007 and 2006, respectively. The Company also recognized derivative fair value gains and losses related to (i) changes in the market value since the date of dedesignation of derivative contracts which were previously designated as hedges, (ii) changes in the market value of certain other commodity derivatives that were never designated as hedges, (iii) settlements on derivative contracts not designated as hedges, and (iv) ineffectiveness of derivative contracts designated as hedges prior to July 2006. The following table summarizes the components of derivative fair value loss for the three months ended March 31, 2007 and 2006:

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

		Three months ended March 31,
		2007				2006
		(in thousands)
Ineffectiveness on designated cash flow hedges		$	—			$	2,839
Mark-to-market loss on commodity contracts not designated as hedges			40,214				1,093
Settlements on commodity contracts			5,400				(1,626	)
Total derivative fair value loss		$	45,614			$	2,306

Commodity Contracts – Future Period Impact

     At March 31, 2007 and December 31, 2006, AOCL consisted entirely of deferred losses on commodity derivatives, net of tax, of $27.1 million and $35.3 million, respectively.

     During the twelve months ending March 31, 2008, the Company expects to reclassify $40.9 million of deferred losses associated with its dedesignated commodity contracts from AOCL to oil and natural gas revenues. The remaining pretax amount of AOCL will be reclassified to oil and natural gas revenues by the end of 2008. The Company also expects to reclassify approximately $15.1 million of net deferred tax assets from AOCL to income tax benefit on the Company’s Consolidated Statements of Operations during the next twelve months.

Note 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 include a market risk premium in its risk estimates as the effect would not be material. As of March 31, 2007, the Company had $5.1 million held in an escrow account from which funds are released only for reimbursement of plugging and abandonment expenses on Encore’s Bell Creek property. This amount is included in “Other assets” in the accompanying Consolidated Balance Sheet. The following table summarizes the changes in the Company’s future abandonment liability, the long-term portion of which is recorded in “Future abandonment cost” on the accompanying Consolidated Balance Sheets, for the first quarter of 2007:

Future abandonment liability at January 1, 2007		$	19,841
Wells drilled			32
Accretion expense			219
Plugging and abandonment costs incurred			(49	)
Acquisition of properties			9,636
Future abandonment liability at March 31, 2007		$	29,679

Note 7. Debt

     The Company’s long-term debt consisted of the following as of the dates indicated:

		March 31,				December 31,
		2007				2006
		(in thousands)
Revolving credit facilities		$	607,973			$	68,000
6 1/4% Notes			150,000				150,000
6% Notes, net of unamortized discount of $4,781 and $4,892, respectively			295,219				295,108
7 1/4% Notes, net of unamortized discount of $1,390 and $1,412, respectively			148,610				148,588
Total		$	1,201,802			$	661,696

Revolving Credit Facilities

     Encore Acquisition Company Senior Secured Credit Agreement

     On March 7, 2007, Encore entered into a five-year amended and restated credit agreement (the “Encore Credit Agreement”) with Bank of America, N.A., as administrative agent and letter of credit issuer, Fortis Capital Corp., and Wachovia Bank, N.A.,

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

as co-syndication agents, BNP Paribas and Calyon New York Branch, as co-documentation agents, Banc of America Securities LLC, as sole lead arranger and sole book manager, and other lenders. The Encore Credit Agreement amended and restated Encore’s Amended and Restated Credit Agreement dated as of August 19, 2004, as amended. The Company incurred approximately $6.6 million of debt issuance costs related to the Encore Credit Agreement, which is being amortized to interest expense over the remaining term.

     The Encore Credit Agreement provides for revolving credit loans to be made to Encore from time to time and letters of credit to be issued from time to time for the account of Encore or any of its restricted subsidiaries. The aggregate amount of the commitments of the lenders under the Encore Credit Agreement is $1.25 billion. Availability under the Encore Credit Agreement is subject to a borrowing base. The initial borrowing base was $650 million, which automatically increased to $950 million upon the closing of Encore’s acquisition of certain properties located in the Williston Basin of Montana and North Dakota. Please see “Note 16. Subsequent Events” below for a discussion of the Williston Basin acquisition. The borrowing base is redetermined semi-annually and upon requested special redeterminations.

     The Encore Credit Agreement matures on March 7, 2012. Encore’s obligations under the Encore Credit Agreement are secured by a first-priority security interest in Encore’s and its restricted subsidiaries proved oil and natural gas reserves and in the equity interests of Encore’s restricted subsidiaries. In addition, Encore’s obligations under the Encore Credit Agreement are guaranteed by its restricted subsidiaries.

     Loans under the Encore Credit Agreement are subject to varying rates of interest based on (i) the total amount outstanding under the credit agreement in relation to the borrowing base and (ii) whether the loan is a Eurodollar loan or a base rate loan. Eurodollar loans bear interest at the Eurodollar rate plus the applicable margin indicated in the following table, and base rate loans bear interest at the base rate plus the applicable margin indicated in the following table:

		Applicable Margin for				Applicable Margin for
Ratio of Total Outstandings to Borrowing Base		Eurodollar Loans				Base Rate Loans
Less than .50 to 1			1.000	%			0.000	%
From .50 to 1 but less than .75 to 1			1.250	%			0.000	%
From .75 to 1 but less than .90 to 1			1.500	%			0.250	%
Greater than .90 to 1			1.750	%			0.500	%

     The “Eurodollar rate” for any interest period (either one, two, three or six months, as selected by Encore) is the rate per year equal to LIBOR, as published by Reuters or another source designated by Bank of America, N.A., for deposits in dollars for a similar interest period. The “base rate” is calculated as the higher of (i) the annual rate of interest announced by Bank of America, N.A. as its “prime rate” and (ii) the federal funds effective rate plus 0.5 percent.

     As of March 31, 2007, the aggregate principal amount of loans outstanding under the Encore Credit Agreement was $488.9 million and the aggregate face amount of outstanding letters of credit was $20 million, all of which related to the ExxonMobil joint development agreement. Any outstanding letters of credit reduce the availability under the Encore Credit Agreement. Borrowings under the Encore Credit Agreement may be repaid from time to time without penalty.

     The Encore Credit Agreement contains covenants that include, among others:

	•		a prohibition against incurring debt, subject to permitted exceptions;
	•		a prohibition against paying dividends or making distributions, purchasing, or redeeming capital stock or prepaying indebtedness, subject to permitted exceptions;
	•		a restriction on creating liens on Encore’s and its restricted subsidiaries’ assets, subject to permitted exceptions;
	•		restrictions on merging and selling assets outside the ordinary course of business;
	•		restrictions on use of proceeds, investments, transactions with affiliates, change of principal business;
	•		a provision limiting oil and natural gas hedging transactions (other than puts) to a volume not exceeding 75 percent of anticipated production from proved producing reserves;
	•		a requirement that Encore maintain a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0; and
	•		a requirement that Encore maintain a ratio of consolidated EBITDA (as defined in the Encore Credit Agreement) to the sum of consolidated net interest expense plus letter of credit fees of not less than 2.5 to 1.0.

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

     The Encore Credit Agreement contains customary events of default. If an event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require Bank of America, N.A. to declare all amounts outstanding under the Encore Credit Agreement to be immediately due and payable.

     Encore incurs a commitment fee on the unused portion of the Encore Credit Agreement determined based on the ratio of amounts outstanding under the Encore Credit Agreement to the borrowing base in effect on such date. The following table summarizes the calculation of the commitment fee under the Encore Credit Agreement:

		Commitment
Ratio of Total Outstandings to Borrowing Base		Fee Percentage
Less than .50 to 1			0.250	%
From .50 to 1 but less than .75 to 1			0.300	%
From .75 to 1 but less than .90 to 1			0.375	%
Greater than .90 to 1			0.375	%

     Encore Energy Partners Operating LLC Credit Agreement

     On March 7, 2007, EEPO entered into a five-year credit agreement (the “EEPO Credit Agreement”) with Bank of America, N.A., as administrative agent and letter of credit issuer, and Banc of America Securities LLC, as sole lead arranger and sole book manager, and other lenders. The EEPO Credit Agreement provides for revolving credit loans to be made to EEPO from time to time and letters of credit to be issued from time to time for the account of EEPO or any of its restricted subsidiaries. The Company incurred approximately $1.6 million of debt issuance costs related to the EEPO Credit Agreement, which is being amortized to interest expense over the remaining term.

     The aggregate amount of the commitments of the lenders under the EEPO Credit Agreement is $300 million. Availability under the EEPO Credit Agreement is subject to a borrowing base, provided that EEPO has the option of borrowing up to $10 million in excess of the borrowing base for a certain period of time following the closing date. The initial borrowing base is $115 million. The borrowing base is redetermined semi-annually and upon requested special redeterminations.

     The EEPO Credit Agreement matures on March 7, 2012. EEPO’s obligations under the EEPO Credit Agreement are secured by a first-priority security interest in EEPO’s and its restricted subsidiaries proved oil and natural gas reserves and in the equity interests of EEPO and its restricted subsidiaries. In addition, EEPO’s obligations under the EEPO Credit Agreement are guaranteed by its direct parent, Encore Energy Partners LP, a Delaware limited partnership (the “Partnership”), and EEPO’s restricted subsidiaries. Obligations under the EEPO Credit Agreement are non-recourse to Encore and its restricted subsidiaries.

     Loans under the EEPO Credit Agreement are subject to varying rates of interest based on (i) the total amount outstanding under the credit agreement in relation to the borrowing base and (ii) whether the loan is a Eurodollar loan or a base rate loan. Eurodollar loans bear interest at the Eurodollar rate plus the applicable margin indicated in the following table, and base rate loans bear interest at the base rate plus the applicable margin indicated in the following table:

		Applicable Margin for				Applicable Margin for
Ratio of Total Outstandings to Borrowing Base		Eurodollar Loans				Base Rate Loans
Less than .50 to 1			1.000	%			0.000	%
From .50 to 1 but less than .75 to 1			1.250	%			0.000	%
From .75 to 1 but less than .90 to 1			1.500	%			0.250	%
Greater than .90 to 1			1.750	%			0.500	%

     The “Eurodollar rate” for any interest period (either one, two, three or six months, as selected by Encore) is the rate per year equal to LIBOR, as published by Reuters or another source designated by Bank of America, N.A., for deposits in dollars for a similar interest period. The “base rate” is calculated as the higher of (i) the annual rate of interest announced by Bank of America, N.A. as its “prime rate” and (ii) the federal funds effective rate plus 0.5 percent.

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

     As of March 31, 2007, the aggregate principal amount of loans outstanding under the EEPO Credit Agreement was $119.1 million and there were no outstanding letters of credit. Any outstanding letters of credit reduce the availability under the EEPO Credit Agreement. Borrowings under the EEPO Credit Agreement may be repaid from time to time without penalty.

     The EEPO Credit Agreement contains covenants that include, among others:

	•		a prohibition against incurring debt, subject to permitted exceptions;
	•		a prohibition against paying dividends or making distributions prior to the IPO Effective Date (as defined in the EEPO Credit Agreement), purchasing or redeeming capital stock or prepaying indebtedness, subject to permitted exceptions;
	•		a restriction on creating liens on the assets of the Partnership, EEPO and its restricted subsidiaries, subject to permitted exceptions;
	•		restrictions on merging and selling assets outside the ordinary course of business;
	•		restrictions on use of proceeds, investments, transactions with affiliates, change of principal business;
	•		a provision limiting oil and natural gas hedging transactions (other than puts) to a volume not exceeding 75 percent of anticipated production from proved producing reserves;
	•		a requirement that EEPO maintain a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0;
	•		a requirement that EEPO maintain a ratio of consolidated EBITDA (as defined in the EEPO Credit Agreement) to the sum of consolidated net interest expense plus letter of credit fees of not less than 2.5 to 1.0; and
	•		a requirement that EEPO maintain a ratio of consolidated funded debt (excluding certain related party debt) to consolidated adjusted EBITDA (as defined in the EEPO Credit Agreement) of credit fees of not more than 3.5 to 1.0.

     The EEPO Credit Agreement contains customary events of default. If an event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require Bank of America, N.A. to declare all amounts outstanding under the EEPO Credit Agreement to be immediately due and payable.

     EEPO incurs a commitment fee on the unused portion of the EEPO Credit Agreement determined based on the ratio of amounts outstanding under the EEPO Credit Agreement to the borrowing base in effect on such date. The following table summarizes the calculation of the commitment fee under the EEPO Credit Agreement:

		Commitment
Ratio of Total Outstandings to Borrowing Base		Fee Percentage
Less than .50 to 1			0.250	%
From .50 to 1 but less than .75 to 1			0.300	%
From .75 to 1 but less than .90 to 1			0.375	%
Greater than .90 to 1			0.375	%

Note 8. Income Taxes

     The components of the income tax benefit (provision) were as follows for the three months ended March 31, 2007 and 2006:

		Three months ended
		March 31,
		2007				2006
		(in thousands)
Federal:
Current		$	120			$	(112	)
Deferred			15,750				(10,353	)
Total federal			15,870				(10,465	)
State, net of federal benefit/expense:
Current			—				(170	)
Deferred			149				(609	)
Total state			149				(779	)
Income tax benefit (provision)		$	16,019			$	(11,244	)

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

     The following table reconciles income tax benefit (provision) with income tax at the Federal statutory rate for the three months ended March 31, 2007 and 2006:

		Three months ended
		March 31,
		2007				2006
		(in thousands)
Income (loss) before income taxes		$	(45,448	)		$	29,180
Tax at statutory rate		$	15,907			$	(10,213	)
State income taxes, net of federal benefit/expense			1,124				(781	)
Change in estimated future tax rate			(972	)			—
Permanent and other			(40	)			(250	)
Income tax benefit (provision)		$	16,019			$	(11,244	)

     On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Subject to statutory exceptions that allow for a possible extension of the assessment period, the Company is no longer subject to U.S. federal, state, and local income tax examinations for years prior to 2003.

     The Company has performed its evaluation of tax positions and has determined that the adoption of FIN 48 did not have a material impact on the Company’s financial condition, results of operations, or cash flows. This evaluation is a review of the appropriate recognition threshold for each tax position recognized in the Company’s financial statements. The evaluation included, but was not limited to: (1) a review of documentation of tax positions taken on previous returns including an assessment of whether the Company followed industry practice or the applicable requirements under the tax code, (2) a review of open tax returns (on a jurisdiction by jurisdiction basis) as well as supporting documentation used to support those tax returns, (3) a review of the results of past tax examinations, (4) a review of whether tax returns have been filed in all appropriate jurisdictions, (5) a review of existing permanent and temporary differences, and (6) consideration of any tax planning strategies that may have been used to support realization of deferred tax assets. Based on this evaluation the Company did not identify any tax positions that did not meet the “highly certain positions” threshold. As a result no additional tax expense, interest, or penalties have been accrued as a result of the review.

     The Company includes interest assessed by the taxing authorities in “Interest expense” and penalties related to income taxes in “Other expense” on the Consolidated Statements of Operations. For the three months ended March 31, 2007 and 2006, the Company recorded only a nominal amount of interest and penalties on certain tax positions.

Note 9. Earnings Per Share (“EPS”)

     The following table reflects EPS data for the three months ended March 31, 2007 and 2006:

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

		Three months ended
		March 31,
		2007				2006
		(in thousands, except per share data)
Numerator:
Net income (loss)		$	(29,429	)		$	17,936
Denominator:
Denominator for basic EPS:
Weighted average shares outstanding			53,077				48,797
Effect of dilutive options and diluted restricted stock (a)			—				975
Denominator for diluted EPS			53,077				49,772
Net income (loss) per common share:
Basic		$	(0.55	)		$	0.37
Diluted		$	(0.55	)		$	0.36

Note 10. Incentive Stock Plan

     During 2000, the Company’s Board of Directors (the “Board”) and stockholders approved the 2000 Incentive Stock Plan (the “Plan”). The Plan was amended and restated effective March 18, 2004. The purpose of the Plan is to attract, motivate, and retain selected employees of the Company and to provide the Company with the ability to provide incentives more directly linked to the profitability of the business and increases in shareholder value. All directors and full-time regular employees of the Company and its subsidiaries and affiliates are eligible to be granted awards under the Plan. The total number of shares of common stock reserved for issuance pursuant to the Plan is 4,500,000. As of March 31, 2007, there were 832,118 shares available for issuance under the Plan. Shares delivered or withheld for payment of the exercise price of an option, shares withheld for payment of tax withholding, or shares subject to options or other awards which expire or are terminated and restricted shares that are forfeited will again become available for issuance under the Plan. The Plan provides for the granting of cash awards, incentive stock options, non-qualified stock options, restricted stock, and stock appreciation rights at the discretion of the Compensation Committee of the Board. The Board also has a Restricted Stock Award Committee having Jon S. Brumley, the Company’s Chief Executive Officer and President, as its sole member. The Restricted Stock Award Committee may grant certain awards of restricted stock to non-executive employees at its discretion.

     The Plan contains the following individual limits:

	•		an employee may not be granted awards covering or relating to more than 225,000 shares of common stock in any calendar year;
	•		a non-employee director may not be granted awards covering or relating to more than 15,000 shares of common stock in any calendar year; and
	•		an employee may not receive awards consisting of cash (including cash awards that are granted as performance awards) in respect of any calendar year having a value determined on the grant date in excess of $1.0 million.

     All options that have been granted under the Plan have a strike price equal to the fair market value of the Company’s common stock on the date of grant. Additionally, all options have a ten-year life and vest equally over a three-year period. Restricted stock granted under the Plan vests over varying periods from one to five years, subject to performance-based vesting for certain members of senior management.

     The compensation cost related to the Plan that has been recorded in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 was $3.1 million and $3.7 million, respectively. The income tax benefit related to the Plan that has been recorded in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 was $1.1 million and $1.3 million, respectively. During the three months ended March 31, 2007 and 2006, the Company also capitalized $0.3 million and $0.2 million, respectively, of non-cash stock-based compensation cost as a component of “Properties and equipment” in the accompanying Consolidated Balance Sheets. Non-cash

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

stock-based compensation expense has been allocated to lease operations expense, general and administrative expense, and exploration expense based on the allocation of the respective cash compensation.

Stock Options

     The fair value of each option award granted during the three months ended March 31, 2007 and 2006 was estimated on the date of grant using a Black-Scholes option valuation model based on the assumptions noted in the following table. The expected volatility is based on the historical volatility of the Company’s stock for a period of time commensurate with the expected term of the award. For options granted in the three months ended March 31, 2007 and 2006, the Company used the “simplified” method prescribed by SEC Staff Accounting Bulletin No. 107 to estimate the expected term of the options, which is calculated as the average midpoint between each vesting date and the life of the option. The risk-free rate is based on the U.S Treasury yield curve in effect at the time of grant for periods commensurate with the expected terms of the options.

		Three months ended March 31,
		2007				2006
Expected volatility			35.7	%			42.8	%
Expected dividend yield			0.0	%			0.0	%
Expected term (in years)			6.0				6.0
Risk-free interest rate			4.8	%			4.6	%

     The following table summarizes the changes in the number of outstanding options and their related weighted average strike prices during the first quarter of 2007:

										Weighted
						Weighted				Average				Aggregate
		Number of				Average				Remaining				Intrinsic
		Options				Strike Price				Contractual Term				Value
														(in thousands)
Outstanding at January 1, 2007			1,337,118			$	14.44
Granted			200,059				25.73
Forfeited			(9,262	)			29.33
Exercised			(29,713	)			13.38
Outstanding at March 31, 2007			1,498,202				15.88				6.3			$	13,642
Exercisable at March 31, 2007			1,193,792				13.11				5.5				13,587

     The weighted average fair value per share of individual options granted during the three months ended March 31, 2007 and 2006 was $11.16 and $14.96, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $0.3 million and $0.4 million, respectively. During each of the three months ended March 31, 2007 and 2006, the Company received proceeds from the exercise of stock options of $0.4 million. During the three months ended March 31, 2007 and 2006, the Company realized related tax benefits of $0.2 million and $0.1 million, respectively. At March 31, 2007, the Company had $3.3 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.5 years.

Restricted Stock

     During the three months ended March 31, 2007 and 2006, the Company recognized expense related to restricted stock of $2.6 million and $3.3 million, respectively. During the three months ended March 31, 2007 and 2006, the Company realized tax benefits related to restricted stock of $1.0 million and $1.2 million, respectively. During the first quarter of 2006, the Company did not realize any tax benefits as no shares vested during that period. A summary of the status of the Company’s unvested restricted stock outstanding as of March 31, 2007, and changes during the three months then ended, is presented below:

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

						Weighted
						Average
		Number of				Grant Date
		Shares				Fair Value
Outstanding at January 1, 2007			828,619			$	26.17
Granted			312,133				25.73
Vested			(83,668	)			26.67
Forfeited			(27,581	)			26.02
Outstanding at March 31, 2007			1,029,503				26.00

     As of March 31, 2007, there were 854,313 shares of unvested restricted stock outstanding, dependent only on the passage of time and continued employment for vesting. Of this amount, 136,943 shares were granted during the first quarter of 2007. Additionally, as of March 31, 2007, there were 175,190 shares of unvested restricted stock outstanding that not only depend on the passage of time and continued employment, but on certain performance measures for vesting, all of which were granted during the first quarter of 2007.

     As of March 31, 2007, there was $16.4 million of total unrecognized compensation cost related to unvested, outstanding restricted stock, which is expected to be recognized over a weighted average period of 3.2 years. During the first quarter of 2007, there were 83,668 shares of restricted stock that vested. Employees elected to satisfy minimum tax withholding obligations related to these shares by allowing the Company to withhold 15,743 shares. These shares are treated as treasury stock by the Company until the shares are formally retired and have been reflected as such in the accompanying Consolidated Balance Sheets and Statements of Cash Flows. There were no shares of restricted stock that vested during the first quarter of 2006.

Note 11. Comprehensive Income (Loss)

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

		Three months ended
		March 31,
		2007				2006
		(in thousands)
Net income (loss)		$	(29,429	)		$	17,936
Amortization of deferred loss on commodity derivatives			8,181				8,250
Amortization of deferred gain on interest rate swap			—				(14	)
Comprehensive income (loss)		$	(21,248	)		$	26,172

     See “Note 5. Derivative Financial Instruments” above for a discussion on the Company’s discontinuance of hedge accounting.

Note 12. Financial Statements of Subsidiary Guarantors

     Effective February 2007, the Company formed certain non-guarantor in anticipation of forming a master limited partnership (“MLP”). See “Note 15. MLP” for additional discussion. As of March 31, 2007, certain of the Company’s wholly owned subsidiaries were subsidiary guarantors of the Company’s outstanding notes. The subsidiary guarantees are full and unconditional, and joint and several. The subsidiary guarantors may, without restriction, transfer funds to the Company in the form of cash dividends, loans, and advances. In accordance with SEC rules, the Company has prepared Consolidating Condensed Financial Statements in order to quantify the assets and results of operations of the subsidiary guarantors. The following Consolidating Condensed Balance Sheet as of March 31, 2007, Consolidating Condensed Statement of Operations and Comprehensive Income for the three months ended March 31, 2007, and Consolidating Condensed Statement of Cash Flows for the three months ended March 31, 2007 present consolidating financial information for Encore Acquisition Company on a stand alone, unconsolidated basis and its combined guarantor and combined non-guarantor subsidiaries. The guarantor subsidiaries are EAP Energy, Inc., EAP Properties Inc., EAP Operating Inc., EAP Energy Services, L.P., Encore Operating, L.P., and Encore Operating Louisiana, LLC and the non-guarantor subsidiaries are EEPO, Encore Partners GP LLC, and Encore Energy Partners LP. All intercompany investments in, loans

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

due to/from, subsidiary equity, income and expenses between Encore Acquisition Company (“Parent”), the guarantor subsidiaries, and non-guarantor subsidiaries are shown prior to final consolidation with the Parent then eliminated to arrive at consolidated totals per the Consolidated Financial Statements of Encore Acquisition Company. Prior to February 2007, all of the Company’s subsidiaries were subsidiary guarantors of the Company’s outstanding senior notes. Therefore, comparative condensed consolidating financial statements are not presented for the first quarter of 2006.

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2007
(in thousands)

						Guarantor				Non-Guarantor								Consolidated
		Parent				Subsidiaries				Subsidiaries				Eliminations				Total
ASSETS
Current assets:
Cash and cash equivalents		$	—			$	106			$	520			$	—			$	626
Other current assets			22,408				113,800				9,248				(1,452	)			144,004
Total current assets			22,408				113,906				9,768				(1,452	)			144,630
Properties and equipment, at cost — successful efforts method:
Proved properties, including wells and related equipment			—				2,185,346				340,218				—				2,525,564
Unproved properties			—				47,007				—				—				47,007
Accumulated depletion, depreciation, and amortization			—				(396,386	)			(2,507	)			—				(398,893	)
			—				1,835,967				337,711				—				2,173,678
Other property and equipment, net			—				10,359				—				—				10,359
Other assets, net			133,997				295,277				8,841				(240,942	)			197,173
Investment in subsidiaries			2,006,162				—				—				(2,006,162	)			—
Total assets		$	2,162,567			$	2,255,509			$	356,320			$	(2,248,556	)		$	2,525,840
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities		$	12,149			$	171,780			$	8,605			$	(1,452	)		$	191,082
Deferred taxes			268,700				—				—				—				268,700
Long-term debt			1,082,686				120,471				239,587				(240,942	)			1,201,802
Other liabilities			—				55,598				9,626				—				65,224
Total liabilities			1,363,535				347,849				257,818				(242,394	)			1,726,808
Commitments and contingencies (see Note 13)
Total stockholders’ equity			799,032				1,907,660				98,502				(2,006,162	)			799,032
Total liabilities and stockholders’ equity		$	2,162,567			$	2,255,509			$	356,320			$	(2,248,556	)		$	2,525,840

ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2007
(in thousands)

						Guarantor				Non-Guarantor								Consolidated
		Parent				Subsidiaries				Subsidiaries				Eliminations				Total
Revenues:
Oil		$	—			$	78,380			$	4,243			$	—			$	82,623
Natural gas			—				32,829				149				—				32,978
Marketing			—				13,703				1,238				—				14,941
Total revenues			—				124,912				5,630				—				130,542
Expenses:
Production:
Lease operations			—				29,552				968				—				30,520
Production, ad valorem, and severance taxes			—				11,878				637				—				12,515
Depletion, depreciation, and amortization			—				32,521				2,507				—				35,028
Exploration			—				11,521				—				—				11,521
General and administrative			24				7,148				188				—				7,360
Marketing			—				13,931				1,080				—				15,011
Derivative fair value loss			—				41,931				3,683				—				45,614
Other operating			41				2,500				24				—				2,565
Total expenses			65				150,982				9,087				—				160,134
Operating loss			(65	)			(26,070	)			(3,457	)			—				(29,592	)
Other income (expenses):
Interest			(15,656	)			(471	)			(1,102	)			942				(16,287	)
Equity (income) loss from subsidiary			(30,156	)			—				—				30,156				—
Other			429				944				—				(942	)			431
Total other income (expenses)			(43,383	)			473				(1,102	)			30,156				(15,856	)
Loss before income taxes			(45,448	)			(25,597	)			(4,559	)			30,156				(45,448	)
Income tax benefit			16,019				—				—				—				16,019
Net loss			(29,429	)			(25,597	)			(4,559	)			30,156				(29,429	)
Amortization of deferred hedge losses, net of tax			8,181				—				—				—				8,181
Comprehensive loss		$	(21,248	)		$	(25,597	)		$	(4,559	)		$	30,156			$	(21,248	)