ENP Encore Energy Partners Lp

 

Filed Pursuant to Rule 424(b)(5)
Registration No. 333-153768

 

PROSPECTUS SUPPLEMENT

(To Prospectus dated November 25, 2008)

 

 

8,200,000 Common Units
Representing Limited Partner Interests

 

 

We are selling 8,200,000 common units representing limited partner interests.

 

Our common units are listed on the New York Stock Exchange under the symbol “ENP.” On June 29, 2009, the last reported sale price of our common units on the New York Stock Exchange was $14.30 per common unit.

 

In order to comply with certain U.S. laws relating to the ownership of interests in oil and natural gas leases on federal lands, we require an owner of our units to be an “Eligible Holder.” If you are not an Eligible Holder, you will not be entitled to receive distributions or allocations of income or loss on your common units and your common units will be subject to redemption. Please read “Our Partnership Agreement — Non-Eligible Holders; Redemption” in the accompanying prospectus.

 

See “Risk Factors” beginning on page S-11 of this prospectus supplement and beginning on page 2 of the accompanying prospectus.

 

 

Encore Energy Partners LP has granted the underwriters a 30-day option to purchase up to an additional 1,230,000 common units on the same terms and conditions set forth above if the underwriters sell more than 8,200,000 common units in this offering.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus are truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the common units on or about July 6, 2009.

 

Joint Book-Running Managers

 

 

Co-Managers

 

 

Prospectus Supplement dated June 29, 2009

 

TABLE OF CONTENTS

 

Prospectus Supplement

 

 

 

 

 

This document is in two parts. The first part is the prospectus supplement, which describes the specific terms of this offering and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference into this prospectus supplement and the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information about securities we may offer from time to time. To the extent the information contained in this prospectus supplement differs or varies from the information contained in the accompanying prospectus, the information in this prospectus supplement controls. Before you invest in our common units, you should carefully read this prospectus supplement, along with the accompanying prospectus, in addition to the information contained in the documents we refer to under the heading “Incorporation by Reference” in this prospectus supplement and the accompanying prospectus.

You should rely only on the information contained or incorporated by reference in this prospectus supplement, the accompanying prospectus or any “free writing prospectus” we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement is not an offer to sell or a solicitation of an offer to buy our common units in any jurisdiction where such offer or any sale would be unlawful. You should not assume that the information contained in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the front cover of this prospectus supplement or any information that we have incorporated by reference is accurate as of any date other than the date of the document incorporated by reference. If any statement in one of these documents is inconsistent with a statement in another document having a later date — for example, a document incorporated by reference in this prospectus supplement or the accompanying prospectus — the statement in the document having the later date modifies or supersedes the earlier statement.

 

SUMMARY

	•	the Big Horn Basin in Wyoming and Montana;
	•	the Permian Basin in West Texas;
	•	the Williston Basin in North Dakota and Montana; and
	•	the Arkoma Basin in Arkansas.

Common Units Offered		8,200,000 common units (9,430,000 common units if the underwriters exercise their option to purchase additional common units in full)
Common Units Outstanding After this Offering*		44,037,610 common units (45,267,610 common units if the underwriters exercise their option to purchase additional common units in full)
Use of Proceeds		We will receive net proceeds from this offering of approximately $112.2 million ($129.1 million if the underwriters exercise their option to purchase additional common units in full), after deducting underwriting discounts and commissions and estimated offering expenses. We plan to use the net proceeds from this offering to fund a portion of the purchase price for the Rockies and Permian Basin Acquisition. Please read “Use of Proceeds.”
		The closing of this offering is not contingent upon the closing of the Rockies and Permian Basin Acquisition. Accordingly, if you decide to purchase our common units, you should be willing to do so whether or not we complete the Rockies and Permian Basin Acquisition. If we do not complete the Rockies and Permian Basin Acquisition, we will use the net proceeds from this offering for general partnership purposes, which may include repayments of outstanding borrowings under our revolving credit facility.
Cash Distributions		Our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date. The term “available cash,” for any quarter, means all cash and cash equivalents on hand at the end of that quarter, less the amount of cash reserves established by our general partner to:
		•  provide for the proper conduct of our business;
		•  comply with applicable law, any of our debt instruments or other agreements; or
		•  provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters.
		Our partnership agreement gives our general partner wide latitude to establish reserves for future capital expenditures and operational needs prior to determining the amount of cash available for distribution. Our ability to pay distributions is subject to various restrictions and other factors, and there is no guarantee that unitholders will receive quarterly distributions from us.
		As a general guideline, during high commodity price environments, we plan to distribute to unitholders 50 percent of the excess distributable cash flow above: (1) maintenance capital requirements; (2) an implied minimum quarterly distribution of $0.4325 per unit, or $1.73 per unit annually; and (3) a minimum coverage ratio of 1.10. We may decide to make a fixed quarterly distribution over a specified

		period pursuant to the preceding formula in order to reduce some of the variability in quarterly distributions over the specified period. Accordingly, we may make a distribution during a quarter even if we have not generated sufficient cash flow to cover such distribution by borrowing under our revolving credit facility, and we may reserve some of our cash during a quarter for distributions in future quarters even if the preceding formula would result in the distribution of a higher amount for such quarter. The board of directors of our general partner also may change our distribution philosophy based on prevailing business conditions. There can be no assurance that we will be able to distribute $0.4325 per unit on a quarterly basis or achieve a minimum coverage ratio of 1.10.
		As a result of our expanded property base and expected increased cash flow from the Rockies and Permian Basin Acquisition (and assuming the transaction is completed as scheduled), beginning with our quarterly distribution for the third quarter of 2009, we expect our annualized distribution rate to increase to $2.15 per unit.
		Please read “Cash Distribution Policy” in the accompanying prospectus for more information.
Estimated Ratio of Taxable Income to Distributions		We estimate that if you hold the common units you purchase in this offering through the record date for distributions with respect to the quarter ending December 31, 2012, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 20 percent or less of the cash distributed to you with respect to that period. Please read “Material Tax Consequences” on page S-16 of this prospectus supplement for an explanation of the basis of this estimate.
Eligible Holders and Redemption		Only Eligible Holders will be entitled to receive distributions or be allocated income or loss from us. As used herein, an Eligible Holder means a person or entity qualified to hold an interest in oil and natural gas leases on federal lands. If a transferee or a unitholder, as the case may be, does not properly complete the transfer application or recertification, for any reason, the transferee or unitholder will have no right to receive any distributions or allocations of income or loss on its common units or to vote its units on any matter and we have the right to redeem such units at a price which is equal to the lower of the transferee’s or unitholder’s purchase price or the then-current market price of such units. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Please read “Description of Common Units — Transfer of Common Units” and “Our Partnership Agreement — Non-Eligible Holders; Redemption” in the accompanying prospectus.
New York Stock Exchange Symbol		ENP
Risk Factors		Please read “Risk Factors” beginning on page S-11 of this prospectus supplement and beginning on page 2 of the accompanying prospectus for a discussion of factors you should consider before investing in our common units.

		Three Months Ended
		March 31,								Year Ended December 31,(a)
		2009				2008				2008				2007				2006
		(unaudited)
		(In thousands)
Consolidated Statements of Operations Data:
Revenues:
Oil		$	14,702			$	37,599			$	149,184			$	86,319			$	18,952
Natural gas			3,779				8,787				41,955				30,086				30,374
Marketing(b)			170				2,859				5,324				8,582				—
Total revenues			18,651				49,245				196,463				124,987				49,326
Expenses:
Production:
Lease operating			7,261				6,089				28,863				21,684				7,058
Production, ad valorem, and severance taxes			2,228				4,903				19,218				11,972				4,068
Depletion, depreciation, and amortization			10,385				9,510				39,269				33,900				6,819
Exploration			22				29				194				124				22
General and administrative(c)			2,035				3,052				12,774				12,698				2,195
Marketing(b)			130				2,393				5,466				6,673				—
Derivative fair value loss (gain)(d)			(10,907	)			15,587				(96,880	)			26,301				—
Other operating			717				391				1,489				1,249				682
Total expenses			11,871				41,954				10,393				114,601				20,844
Operating income			6,780				7,291				186,070				10,386				28,482
Other income (expenses):
Interest(e)			(2,216	)			(1,640	)			(6,969	)			(12,702	)			—
Other			5				17				99				196				—
Total other expenses			(2,211	)			(1,623	)			(6,870	)			(12,506	)			—
Income (loss) before income taxes			4,569				5,668				179,200				(2,120	)			28,482
Income tax provision			(1	)			(83	)			(618	)			(78	)			(260	)
Net income (loss)		$	4,568			$	5,585			$	178,582			$	(2,198	)		$	28,222

		Three Months Ended
		March 31,								Year Ended December 31,(a)
		2009				2008				2008				2007				2006
		(unaudited)
		(In thousands)
Net income (loss) allocation(f):
Limited partners’ interest in net income (loss)		$	4,499			$	(247	)		$	163,070			$	(18,877	)
General partner’s interest in net income (loss)		$	69			$	(36	)		$	2,648			$	(394	)
Net income (loss) per common unit(f):
Basic		$	0.14			$	(0.01	)		$	5.33			$	(0.79	)
Diluted		$	0.14			$	(0.01	)		$	5.21			$	(0.79	)
Weighted average common units outstanding(f):
Basic			33,078				28,273				30,568				23,877
Diluted			33,081				28,273				31,938				23,877
Cash distributions declared per common unit		$	0.5000			$	0.3875			$	2.3111			$	0.0530
Consolidated Statements of Cash Flows Data:
Cash provided by (used in):
Operating activities		$	28,608			$	24,742			$	123,936			$	39,981			$	39,921
Investing activities			(1,002	)			(5,342	)			(20,256	)			(377,495	)			(6,816	)
Financing activities			(27,983	)			(19,398	)			(103,064	)			337,517				(33,105	)

		As of				As of December 31,
		March 31, 2009				2008				2007				2006
		(unaudited)												(unaudited)
Consolidated Balance Sheets Data (In thousands):
Working capital		$	58,273			$	71,740			$	4,609			$	3,145
Total assets			557,447				577,366				515,622				116,484
Long-term debt			185,000				150,000				47,500				—
Partners’/Owner’s equity			333,556				392,626				412,295				107,832

(a)		In March 2007, we acquired certain oil and natural gas properties and related assets in the Elk Basin in Wyoming and Montana. The operating results of these properties are included with ours from the date of acquisition forward.
(b)		In conjunction with our Elk Basin acquisition in March 2007, we acquired a crude oil pipeline and a natural gas pipeline. Prior to March 2007, we had no marketing activities and, therefore, we had no marketing revenues and expenses.
(c)		As a result of becoming a publicly traded entity in September 2007, we incur additional expenses such as fees associated with annual and quarterly reports to unitholders, tax returns, Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, incremental insurance costs, and accounting and legal services. In addition, Encore Operating receives a fee based on our production for performing all of our administrative services, and receives reimbursement of actual third-party expenses incurred on our behalf.
(d)		In conjunction with our Elk Basin acquisition in March 2007, EAC contributed floor contracts to us and we have subsequently purchased additional derivative contracts based on our hedging strategy. Prior to March 2007, we had no derivative contracts and, therefore, no derivative fair value gains or losses.
(e)		In conjunction with our Elk Basin acquisition in March 2007, we entered into two credit agreements. Prior to March 2007, we had no indebtedness and, therefore, no interest expense.
(f)		Prior to the closing of our initial public offering in September 2007, EAC and its affiliates owned all of our general and limited partner interests, with the exception of management incentive units owned by certain executive officers of our general partner. Accordingly, earnings per unit is not calculated for periods prior to our initial public offering.

		As of December 31,
		2008				2007				2006
Proved Reserves:
Oil (MBbls)			16,856				21,590				4,263
Natural gas (MMcf)			64,760				69,111				65,088
Combined (MBOE)			27,649				33,108				15,111

		Three Months Ended
		March 31,								Year Ended December 31,(a)
		2009				2008				2008				2007				2006
		(unaudited)								(unaudited)
Total Production Volumes:
Oil (MBbls)			395				430				1,671				1,454				311
Natural gas (MMcf)			1,109				1,133				4,910				4,466				4,517
Combined (MBOE)			580				619				2,490				2,198				1,064
Average Realized Prices:
Oil ($/Bbl)		$	37.23			$	87.38			$	89.27			$	59.38			$	60.96
Natural gas ($/Mcf)			3.41				7.75				8.54				6.74				6.72
Combined ($/BOE)			31.88				74.92				76.78				52.96				46.37
Average Expenses per BOE:
Lease operating		$	12.52			$	9.83			$	11.59			$	9.87			$	6.63
Production, ad valorem, and severance taxes			3.84				7.92				7.72				5.45				3.82
Depletion, depreciation, and amortization			17.91				15.36				15.77				15.42				6.41
Exploration			0.04				0.05				0.08				0.06				0.02
General and administrative			3.51				4.93				5.13				5.78				2.06
Derivative fair value loss (gain)			(18.81	)			25.17				(38.91	)			11.97				—
Other operating expense			1.24				0.63				0.60				0.57				0.64
Marketing loss (gain)			(0.07	)			(0.75	)			0.06				(0.87	)			—

(a)		In March 2007, we acquired certain oil and natural gas properties and related assets in the Elk Basin in Wyoming and Montana. The operating results of these properties are included with ours from the date of acquisition forward.

 

An investment in our common units involves risks. Before investing in our common units, you should carefully consider each of the following risks and all of the information about risks included in “Item 1A. Risk Factors” and elsewhere in our 2008 Annual Report on Form 10-K, as well as the other documents incorporated by reference in this prospectus supplement, together with the other information contained in this prospectus supplement, the accompanying prospectus and any free writing prospectus prepared by or on behalf of us. If any of the risks actually were to occur, our business, financial condition, results of operations, cash flow and future prospects could be materially and adversely affected. In that case, we may be unable to pay distributions on our common units, the trading price of our common units could decline and you could lose all or part of your investment.

 

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider all of the information provided elsewhere in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference in this prospectus supplement before investing in our securities.

 

We may not be able to consummate the Rockies and Permian Basin Acquisition, which could adversely affect our business operations.

 

The purchase agreement related to the Rockies and Permian Basin Acquisition contains customary and other closing conditions, which may not be satisfied or waived. If we are unable to consummate the Rockies and Permian Basin Acquisition, we would not realize the expected benefits of the proposed acquisition, including, without limitation, our expected distribution increase. In addition, we will have incurred, and will remain liable for, transaction costs, including legal, accounting, financial advisory and other costs relating to the Rockies and Permian Basin Acquisition whether or not it is consummated. The occurrence of any of these events individually or in combination could have a material adverse effect on our business, financial condition and results of operations. The closing of this offering is not contingent upon the closing of the Rockies and Permian Basin Acquisition.

 

Any acquisitions we complete, including the Rockies and Permian Basin Acquisition, are subject to substantial risks that could adversely affect our financial condition and results of operations and reduce our ability to make distributions to unitholders.

 

Even if we complete acquisitions that we believe will increase pro forma available cash per unit, these acquisitions may nevertheless result in a decrease in pro forma available cash per unit. Any acquisition involves potential risks, including, among other things:

 

 

 

Our decision to acquire a property depends in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses and seismic and other information, the results of which are often inconclusive and subject to various interpretations.

 

Also, our reviews of acquired properties are inherently incomplete because it generally is not feasible to perform an in-depth review of the individual properties involved in each acquisition given time constraints imposed by sellers. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to fully assess their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken.

 

We will be required to increase the borrowing base under our revolving credit facility in order to fund a portion of the purchase price of the Rockies and Permian Basin Acquisition. If we are unable to increase the borrowing base, we may be unable to consummate the Rockies and Permian Basin Acquisition.

 

Upon completion of this offering and the application of the net proceeds therefrom to fund a portion of the purchase price of the Rockies and Permian Basin Acquisition, we expect that the remaining $77.8 million of the purchase price will be funded with borrowings under our revolving credit facility. Our revolving credit facility limits the amounts we can borrow to a borrowing base amount, determined by the lenders in their sole discretion. As of June 29, 2009, the borrowing base under our revolving credit facility was $240 million and we had $195 million of outstanding borrowings.

 

In connection with the Rockies and Permian Basin Acquisition, we have requested an increase in the borrowing base under our revolving credit facility of up to $375 million. If we are unable to increase the borrowing base under our revolving credit facility, we may be unable to consummate the Rockies and Permian Basin Acquisition. In addition, if the borrowing base is redetermined at an amount less than the amount we have requested, we may be required to fully utilize our revolving credit facility or may be unable to consummate the Rockies and Permian Basin Acquisition.

 

We will receive net proceeds from this offering of approximately $112.2 million, after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters exercise their option to purchase additional common units in full, the net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $129.1 million. We plan to use all of the net proceeds from this offering to fund a portion of the purchase price for the Rockies and Permian Basin Acquisition. Please read “Summary — Recent Developments” for a description of the Rockies and Permian Basin Acquisition. Pending the use of the proceeds as described above, we may use some or all of the net proceeds for general partnership purposes, which may include repayments of outstanding borrowings under our revolving credit facility.

 

We expect to fund the remaining portion of the purchase price for the Rockies and Permian Basin Acquisition with borrowings under our revolving credit facility.

 

The underwriters may, from time to time, engage in transactions with and perform services for us and our affiliates in the ordinary course of their business.

 

The closing of this offering is not contingent upon the closing of the Rockies and Permian Basin Acquisition. Accordingly, if you decide to purchase our common units, you should be willing to do so whether or not we complete the Rockies and Permian Basin Acquisition. If we do not complete the Rockies and Permian Basin Acquisition, we will use the net proceeds from this offering for general partnership purposes, which may include repayments of outstanding borrowings under our revolving credit facility.

 

The following table shows our capitalization as of March 31, 2009:

 

 

You should read this information in conjunction with “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1. Financial Statements” contained in our Quarterly Report on Form 10-Q for the three months ended March 31, 2009, which we incorporate by reference in this prospectus supplement.

 

 

 

 

Our common units are listed on the New York Stock Exchange under the symbol “ENP.” As of June 29, 2009, there were 35,837,610 common units outstanding, which were held by 11 holders of record. We estimate that there are approximately 6,000 beneficial owners of our common units.

 

The following table sets forth, for the periods indicated, the high and low sales prices per common unit, as reported on the New York Stock Exchange, and the amount of the cash distributions declared per common unit:

 

 

 

 

The tax consequences to you of an investment in our common units will depend in part on your own tax circumstances. For a discussion of the principal federal income tax considerations associated with our operations and the purchase, ownership and disposition of common units, please read “Material Tax Consequences” beginning on page 54 of the accompanying prospectus. You are urged to consult your own tax advisor about the federal, state, foreign and local tax consequences particular to your circumstances.

 

We estimate that if you purchase a common unit in this offering and hold the common unit through the record date for the distribution with respect to the quarter ending December 31, 2012, you will be allocated, on a cumulative basis, an amount of federal taxable income for the taxable years 2009 through 2012 that will be less than 20 percent of the amount of cash distributed to you with respect to that period. This estimate is based upon many assumptions regarding our business, assets and operations, including assumptions with respect to capital expenditures, cash flows and anticipated cash distributions. This estimate and our assumptions are subject to, among other things, numerous business, economic, regulatory, competitive and political uncertainties beyond our control. Further, this estimate is based on current tax law and tax reporting positions that we have adopted and with which the Internal Revenue Service might disagree. Accordingly, we cannot assure you that this estimate will be correct. The actual percentage of distributions that will constitute taxable income could be higher or lower than our estimate, and any differences could materially affect the value of the common units. For example, the percentage of taxable income relative to our distributions could be higher, and perhaps substantially higher, than our estimate with respect to the period described above if:

 

 

Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC and Wachovia Capital Markets, LLC are acting as joint book-running managers of this offering. Under the terms of an underwriting agreement, which we will file as an exhibit to a Current Report on Form 8-K and incorporate by reference into this prospectus supplement and the accompanying prospectus, each of the underwriters named below has severally agreed to purchase from us the respective number of common units shown opposite its name below:

 

 

The underwriting agreement provides that the underwriters’ obligations to purchase the common units depend on the satisfaction of the conditions contained in the underwriting agreement, including:

 

 

Commissions and Expenses

 

The following table summarizes the underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional common units. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to purchase the common units from us.

 

 

Barclays Capital Inc., on behalf of the underwriters, has advised us that the underwriters propose to offer the common units directly to the public at the public offering price on the cover of this prospectus supplement and to selected dealers, which may include affiliates of the underwriters, at such offering price less a selling concession not in excess of $0.3432 per common unit. After the offering, Barclays Capital Inc. may change the offering price and other selling terms.

 

The expenses of the offering that are payable by us are estimated to be $350,000 (excluding underwriting discounts and commissions).

Option to Purchase Additional Common Units

 

We have granted to the underwriters an option exercisable for 30 days after the date of this prospectus supplement to purchase, from time to time, in whole or in part, up to an aggregate of 1,230,000 additional common units at the public offering price less the underwriting discounts and commissions. This option may be exercised if the underwriters sell more than 8,200,000 common units in connection with this offering. To the extent the option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional common units based on the underwriter’s percentage underwriting commitment in the offering as indicated in the table at the beginning of this Underwriting section.

 

Lock-Up Agreements

 

We, our subsidiaries, our general partner and its affiliates, including EAC and the executive officers and directors of our general partner, have agreed that, without the prior written consent of Barclays Capital Inc., we and they will not, directly or indirectly: (1) offer for sale, sell, pledge or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any common units or securities convertible into or exercisable or exchangeable for common units or any of our other securities, other than certain permitted transfers and issuances; (2) sell or grant any options, rights or warrants with respect to any common units or securities convertible into or exercisable or exchangeable for common units; (3) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of common units; (4) file or cause to be filed a registration statement, including any amendment thereto, with respect to the registration of any of our common units or any securities convertible into or exercisable or exchangeable for our common units; or (5) publicly disclose the intention to do any of the foregoing, in each case for a period of 45 days after the date of this prospectus supplement.

 

The restrictions described above do not apply to:

 

 

Barclays Capital Inc., in its sole discretion, may release the common units and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. When determining whether or not to release the common units and other securities from lock-up agreements, Barclays Capital Inc. will consider, among other factors, the holder’s reasons for requesting the release, the number of common units or other securities for which the release is being requested and market conditions at the time.

 

Indemnification

 

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments that the underwriters may be required to make for these liabilities.

 

Stabilization, Short Positions and Penalty Bids

 

The underwriters may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the

price of the common units, in accordance with Regulation M under the Securities Exchange Act of 1934, as amended.

 

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common units or preventing or retarding a decline in the market price of our common units. As a result, the price of our common units may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

 

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common units. In addition, neither we nor the underwriters make any representation that any underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

 

Electronic Distribution

 

A prospectus supplement in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the online services, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of common units for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations.

 

Other than the prospectus supplement in electronic format, the information on any underwriter’s or selling group member’s website and any information contained in any other website maintained by an underwriter or selling group member is not part of the prospectus supplement or the registration statement of which the prospectus supplement forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as an underwriter or selling group member and should not be relied upon by investors.

New York Stock Exchange

 

Our common units are listed on the New York Stock Exchange under the symbol “ENP.”

 

Eligible Holders

 

Our partnership agreement requires that all common unitholders be Eligible Holders. As used herein, an Eligible Holder is a person or entity qualified to hold an interest in oil and natural gas leases on federal lands. As of the date hereof, Eligible Holder means:

 

 

For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may be acquired and held by aliens only through stock ownership, holding or control in a corporation organized under the laws of the United States or of any state thereof.

 

Relationships

 

Certain of the underwriters and their related entities have engaged, and may in the future engage, in commercial and investment banking transactions with us in the ordinary course of their business. In addition, some of the underwriters have engaged in, and may in the future engage in, transactions with us and EAC and perform services for us and EAC in the ordinary course of their business. Affiliates of certain underwriters are lenders under our and EAC’s credit facilities. These underwriters and their related entities have received, and expect to receive, customary compensation and expense reimbursement for these commercial and investment banking transactions. In addition, Barclays Capital Inc. has served as a financial advisor and rendered a fairness opinion to EAC’s Board of Directors in connection with the Rockies and Permian Basin Acquisition and received compensation for these services.

 

FINRA Conduct Rules

 

Because the Financial Industry Regulatory Authority, or FINRA, formerly known as the National Association of Securities Dealers, Inc., or the NASD, views the common units offered hereby as interests in a direct participation program, the offering is being made in compliance with Rule 2810 of the Conduct Rules of the NASD (which are part of the FINRA rules). Investor suitability with respect to the common units should be judged similarly to the suitability with respect to other securities that are listed for trading on a national securities exchange. As described in “Use of Proceeds,” we intend to use the net proceeds from this offering to fund a portion of the purchase price for the Rockies and Permian Basin Acquisition. Pending the use of proceeds, or if we do not complete the Rockies and Permian Basin Acquisition, we may use some or all of the net proceeds for general partnership purposes, which may include using more than 10 percent of the net proceeds from this offering to reduce indebtedness owed by us to affiliates of certain underwriters under our revolving credit facility. Accordingly, this offering is being conducted in compliance with the applicable requirements of FINRA Rule 5110 and Rule 2720 of the NASD Conduct Rules. Because a bona fide independent market exists for our common units, FINRA does not require that we use a qualified independent underwriter for this offering.

LEGAL MATTERS

 

Baker Botts L.L.P., Houston, Texas, will pass upon the validity of the common units offered hereby and various other legal matters in connection with the offering on our behalf. Andrews Kurth LLP, Houston, Texas, will pass upon certain legal matters in connection with the offering on behalf of the underwriters.

EXPERTS

 

Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements and the consolidated balance sheets of Encore Energy Partners GP LLC included in our Current Report on Form 8-K filed with the SEC on May 7, 2009, and the effectiveness of our internal control over financial reporting as of December 31, 2008 included in our Annual Report on Form 10-K for the year ended December 31, 2008, as set forth in their reports, which are incorporated by reference in this prospectus supplement. Our financial statements are incorporated by reference in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

 

Certain information with respect to the oil and natural gas reserves associated with our oil and natural gas properties as of December 31, 2008 is derived from the report dated January 19, 2009 of Miller and Lents, Ltd., independent petroleum engineers, and has been included in this prospectus supplement upon the authority of said firm as experts with respect to matters covered by such reports and in giving such report.

 

The SEC allows us to “incorporate by reference” the information we have filed with the SEC. This means that we can disclose important information to you without actually including the specific information in this prospectus supplement by referring you to other documents filed separately with the SEC. These other documents contain important information about us, our financial condition and results of operations. The information incorporated by reference is an important part of this prospectus supplement. Our future filings with the SEC will automatically update and may replace information in this prospectus supplement, the accompanying prospectus and other information previously filed with the SEC.

 

We are incorporating by reference into this prospectus supplement the documents listed below and any subsequent filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (File no. 001-33676) (excluding information deemed to be furnished and not filed with the SEC) until all the securities are sold:

 

 

You may obtain any of the documents incorporated by reference in this prospectus supplement or the accompanying prospectus from the SEC through the SEC’s web site at www.sec.gov . You also may request a copy of any document incorporated by reference in this prospectus supplement or the accompanying prospectus (including exhibits to those documents specifically incorporated by reference in this document), at no cost, by visiting our web site at www.encoreenp.com , or by writing or calling us at the following address:

 

Encore Energy Partners LP

777 Main Street, Suite 1400

Fort Worth, Texas 76102

Attention: Robert C. Reeves

Telephone: (817) 877-9955

Any statement contained in a document incorporated or considered to be incorporated by reference in this prospectus supplement shall be considered to be modified or superseded for purposes of this prospectus supplement to the extent that a statement contained in this prospectus supplement or in any subsequently filed document that is or is considered to be incorporated by reference modifies or supersedes that statement. Any statement that is modified or superseded shall not, except as so modified or superseded, constitute a part of this prospectus supplement.

FORWARD-LOOKING STATEMENTS

 

This prospectus supplement, the accompanying prospectus and the documents incorporated by reference that are not historical facts (including statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) contain forward-looking statements, which give our current expectations or forecasts of future events. In addition, we may from time to time make other oral or written statements that are also forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “may,” “will,” “could,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “predict,” “potential,” “pursue,” “target,” “continue” and other words and terms of similar meaning. In particular, forward-looking statements included in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference relate to, among other things, the following:

 

 

You are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this prospectus supplement, the accompanying prospectus or the documents we have incorporated by reference. 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 “Risk Factors” beginning on page S-11 of this prospectus supplement and beginning on page 2 of the accompanying prospectus, elsewhere in this prospectus supplement and in our other filings with the SEC. If one or more of these risks or uncertainties materialize (or the consequences of such a development changes), or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. 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.

PROSPECTUS

 

$1,000,000,000

 

 

Encore Energy Partners LP

Common Units

 

Encore Energy Partners LP

Encore Energy Partners Finance Corporation

Debt Securities

 

The following securities may be offered under this prospectus:

 

 

Encore Energy Partners Finance Corporation may act as co-issuer of the debt securities, and certain direct or indirect subsidiaries of Encore Energy Partners LP may guarantee the debt securities.

 

We may offer and sell these securities to or through one or more underwriters, dealers or agents, or directly to purchasers, on a continuous or delayed basis. This prospectus describes only the general terms of these securities and the general manner in which we will offer the securities. The specific terms of any securities will be included in a supplement to this prospectus. The prospectus supplement will describe the specific manner in which we will offer the securities and also may add, update or change information contained in this prospectus.

 

Our common units are listed on the New York Stock Exchange under the symbol “ENP.”

 

Investing in our securities involves risk. Please read “Risk Factors” beginning on page 2.

 

 

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

The date of this prospectus is November 25, 2008.

 

You should rely only on the information we have provided or incorporated by reference in this prospectus. We have not authorized any person to provide you with additional or different information. You should not assume that the information in this prospectus is accurate as of any date other than the date on the cover page of this prospectus or that any information we have incorporated by reference is accurate as of any date other than the date of the documents incorporated by reference. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

TABLE OF CONTENTS

 

 

This prospectus is part of a registration statement on Form S-3 that we have filed with the Securities and Exchange Commission using a “shelf” registration process. Under this shelf registration process, we may sell, in one or more offerings, up to $1,000,000,000 in total aggregate offering price of securities described in this prospectus. This prospectus provides you with a general description of us and the securities offered under this prospectus.

 

Each time we sell securities under this prospectus, we will provide a prospectus supplement that will contain specific information about the terms of that offering and the securities being offered. The prospectus supplement also may add to, update or change information contained or incorporated by reference in this prospectus. If there is any inconsistency between the information in this prospectus and any prospectus supplement, you should rely on the information in the prospectus supplement. You should read carefully this prospectus, any prospectus supplement and the additional information described below under the headings “Where You Can Find More Information” and “Incorporation by Reference.”

 

As used in this prospectus, “we,” “us” and “our” and similar terms mean Encore Energy Partners LP and its subsidiaries, unless the context indicates otherwise. References to “our general partner” refer to Encore Energy Partners GP LLC, our general partner. References to “EAC” refer to Encore Acquisition Company, the ultimate parent company of our general partner, and its subsidiaries. References to “Encore Operating” refer to Encore Operating, L.P., a wholly owned subsidiary of EAC.

 

We are a growth-oriented Delaware limited partnership formed in February 2007 by EAC to acquire, exploit and develop oil and natural gas properties and to acquire, own and operate related assets. Our primary business objective is to make quarterly cash distributions to our unitholders at our current distribution rate and, over time, increase our quarterly cash distributions. Our assets consist primarily of producing and non-producing oil and natural gas properties in the Big Horn Basin of Wyoming and Montana, the Permian Basin of West Texas and the Williston Basin of North Dakota.

 

We own 100% of Encore Energy Partners Finance Corporation. Encore Energy Partners Finance Corporation was organized for the purpose of co-issuing our debt securities and has no material assets or liabilities, other than as co-issuer of our debt securities. Its activities will be limited to co-issuing our debt securities and engaging in activities incidental thereto.

 

Encore Energy Partners Operating LLC and Encore Clear Fork Pipeline LLC may fully, unconditionally, jointly and severally guarantee any series of debt securities of Encore Energy Partners LP and Encore Energy Partners Finance Corporation offered by this prospectus, as set forth in a related prospectus supplement. As used in this prospectus, the term “Subsidiary Guarantors” means the subsidiaries that unconditionally guarantee any such series of debt securities.

 

Our principal executive offices are located at 777 Main Street, Suite 1400, Fort Worth, Texas, 76102, and our telephone number is (817) 877-9955.

 

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider each of the following risks and all of the information provided elsewhere in this prospectus, the accompanying prospectus supplement and the documents we incorporate by reference before investing in our securities.

 

If any of the following risks actually were to occur, our business, financial condition, results of operations or cash flow could be affected materially and adversely. In that case, we may be unable to pay distributions on our common units or interest on, or the principal of, any debt securities, the trading price of our common units could decline and you could lose all or part of your investment.

 

Risks Related to Our Business

 

We may not have sufficient cash flow from operations to pay quarterly distributions on our common units following establishment of cash reserves and payment of fees and expenses, including reimbursement of expenses to our general partner and Encore Operating.

 

We may not have sufficient available cash each quarter to pay quarterly distributions. Under the terms of our partnership agreement, the amount of cash otherwise available for distribution is reduced by our operating expenses and the amount of any cash reserves that our general partner establishes to provide for future operations, capital expenditures, acquisitions of oil and natural gas properties, debt service requirements and cash distributions to our unitholders.

 

The amount of cash we actually generate depends upon numerous factors related to our business that may be beyond our control, including, among other things, the risks described in this section. In addition, the actual amount of cash that we have available for distribution depends on other factors, including:

 

 

Our oil and natural gas reserves naturally decline, and we will be unable to sustain distributions at the current level without making accretive acquisitions or substantial capital expenditures that maintain or grow our asset base.

 

Our future oil and natural gas reserves, production volumes, cash flow and ability to make distributions depend on our success in developing and exploiting our current reserves efficiently and finding or acquiring additional recoverable reserves economically. We may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs, which would adversely affect our business, financial condition and results of operations and reduce cash available for distribution.

Because our oil and natural gas properties are a depleting asset, we need to make substantial capital expenditures to maintain and grow our asset base, which reduce our cash available for distribution. Because the timing and amount of these capital expenditures fluctuate each quarter, we expect to reserve substantial amounts of cash each quarter to finance these expenditures over time. We may use the reserved cash to reduce indebtedness until we make the capital expenditures. Over a longer period of time, if we do not set aside sufficient cash reserves or make sufficient expenditures to maintain our asset base, we will be unable to pay distributions at the current level from cash generated from operations and would therefore expect to reduce our distributions.

 

If our reserves decrease and we do not reduce our distribution, then a portion of the distribution may be considered a return of part of our unitholders’ investment in us as opposed to a return on investment. Also, if we do not make sufficient growth capital expenditures, we will be unable to expand our business operations and will therefore be unable to raise the level of future distributions.

 

To fund our substantial capital expenditures, we will use cash generated from our operations, additional borrowings or the issuance of additional equity or debt securities or some combination thereof, which would limit our ability to pay distributions at the then-current distribution rate.

 

The use of cash generated from operations to fund capital expenditures reduces cash available for distribution to our unitholders. Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for necessary future capital expenditures could have a material adverse effect on our business, results of operations, financial condition and ability to pay distributions. Even if we are successful in obtaining the necessary funds, the terms of such financings could limit our ability to pay distributions to our unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional partnership interests may result in significant unitholder dilution, thereby increasing the aggregate amount of cash required to maintain the then-current distribution rate, which could limit our ability to pay distributions at the then-current distribution rate.

 

We may not make cash distributions during periods when we record net income.

 

The amount of cash we have available for distribution depends primarily on our cash flow, including cash from financial reserves, working capital or other borrowings, and not solely on profitability, which is affected by non-cash items. As a result, we may make cash distributions during periods when we record a net loss and may not make cash distributions during periods when we record net income.

 

Oil and natural gas prices are very volatile. A decline in commodity prices will cause a decline in our cash flow from operations, which may force us to reduce our distributions or cease paying distributions altogether.

 

The oil and natural gas markets are very volatile, and we cannot accurately predict future oil and natural gas prices. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:

 

 

 

The recent worldwide financial and credit crisis has reduced the availability of liquidity and credit to fund the continuation and expansion of industrial business operations worldwide. The shortage of liquidity and credit combined with recent substantial losses in worldwide equity markets could lead to an extended worldwide economic recession. A slowdown in economic activity caused by a recession would likely reduce worldwide demand for energy and result in lower oil and natural gas prices. Oil prices declined from record levels in early July 2008 of over $140 per Bbl to below $70 per Bbl in early November 2008, while natural gas prices have declined from over $13 per Mcf to below $7 per Mcf over the same period. In addition, the forecasted prices for the remainder of 2008 and for 2009 have also declined.

 

Our revenue, profitability and cash flow depend upon the prices of and demand for oil and natural gas, and a drop in prices can significantly affect our financial results and impede our growth. In particular, declines in commodity prices will:

 

 

If we raise our distribution levels in response to increased cash flow during periods of relatively high commodity prices, we may not be able to sustain those distribution levels during subsequent periods of lower commodity prices.

 

An increase in the differential between benchmark prices of oil and natural gas and the wellhead price we receive could significantly reduce our cash available for distribution and adversely affect our financial condition.

 

The prices that we receive for our oil and natural gas production sometimes trade at a discount to the relevant benchmark prices, such as NYMEX, that are used for calculating commodity derivative settlements. The difference between the benchmark price and the price we receive is called a differential. We cannot accurately predict oil and natural gas differentials. For example, the oil production from our Elk Basin assets has historically been sold at a higher discount to NYMEX as compared to our Permian Basin assets due to production increases from competing Canadian and Rocky Mountain producers, in conjunction with limited refining and pipeline capacity from the Rocky Mountain area, and corresponding deep pricing discounts by regional refiners. Increases in the differential between the benchmark price for oil and natural gas and the wellhead price we receive could significantly reduce our cash available for distribution and adversely affect our financial condition.

Future price declines may result in a write-down of our asset carrying values, which could have a material adverse effect on our results of operations and limit our ability to borrow and make distributions.

 

Declines in oil and natural gas prices may result in our having to make substantial downward adjustments to our estimated reserves. If this occurs, or if our estimates of development costs increase, production data factors change or development results deteriorate, accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. If we incur such impairment charges in the future, it could have a material adverse effect on our results of operations in the period incurred and on our ability to borrow funds under our revolving credit facility, which in turn may adversely affect our ability to make cash distributions to our unitholders.

 

Our commodity derivative contract activities could result in financial losses or could reduce our income and cash flows, which may adversely affect our ability to pay distributions to our unitholders.

 

To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in the prices of oil and natural gas, we may enter into derivative arrangements for a significant portion of our forecasted oil and natural gas production that could result in commodity derivative losses. The extent of our commodity price exposure is related largely to the effectiveness and scope of our derivative activities, as well as to the ability of counterparties under our commodity derivative contracts to satisfy their obligations to us. For example, the derivative instruments we utilize are based on posted market prices, which may differ significantly from the actual prices we realize on our production.

 

Our actual future production may be significantly higher or lower than we estimate at the time we enter into derivative transactions for such period. If the actual amount is higher than we estimate, we will have greater commodity price exposure than we intended. If the actual amount is lower than the notional amount of our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from the sale of the underlying physical commodity, resulting in a substantial diminution of our liquidity. As a result of these factors, our derivative activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows. In addition, our derivative activities are subject to the following risks:

 

 

Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

 

It is not possible to measure underground accumulations of oil or natural gas in an exact way. Oil and natural gas reserve engineering requires subjective estimates of underground accumulations of oil and natural gas and assumptions concerning future oil and natural gas prices, production levels and operating and development costs. In estimating our oil and natural gas reserves, we and our independent reserve engineers make certain assumptions that may prove to be incorrect, including assumptions relating to oil and natural gas prices, future production levels, capital expenditures, operating and development costs, the effects of regulation and availability of funds. If these assumptions prove to be incorrect, our estimates of reserves, the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery and our estimates of the future net cash flows from our reserves could change significantly.

 

Our standardized measure is calculated using prices and costs in effect as of the date of estimation, less future development, production, abandonment and income tax expenses, and discounted at 10% per annum to

reflect the timing of future net revenue in accordance with the rules and regulations of the SEC. Over time, we may make material changes to reserve estimates to take into account changes in our assumptions and the results of actual development and production.

 

The reserve estimates we make for fields that do not have a lengthy production history are less reliable than estimates for fields with lengthy production histories. A lack of production history may contribute to inaccuracy in our estimates of proved reserves, future production rates and the timing of development expenditures.

 

The standardized measure of our estimated proved reserves is not necessarily the same as the current market value of our estimated proved oil and natural gas reserves. We base the estimated discounted future net cash flows from our estimated proved reserves on prices and costs in effect on the day of estimate.

 

The timing of both our production and our incurrence of expenses in connection with the development, production and abandonment of oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows in compliance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 69, “ Disclosures about Oil and Gas Producing Activities ,” may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general.

 

Developing and producing oil and natural gas are costly and high-risk activities with many uncertainties that could adversely affect our financial condition or results of operations and, as a result, our ability to pay distributions to our unitholders.

 

The cost of developing, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a well. In addition, the cost of developing, completing and operating a well may not fall as fast as the prices that we receive for our production, resulting in higher operating and capital costs as a percentage of oil and natural gas revenues. For instance, oil and natural gas prices declined from record levels in early July 2008 of over $140 per Bbl and $13 per Mcf, respectively, to below $70 per Bbl and $7 per Mcf, respectively, in early November 2008. Notwithstanding this rapid decrease in commodity prices, the cost of developing, completing and operating our wells has remained relatively unchanged. Our efforts will be uneconomical if we drill dry holes or wells that are productive but do not produce as much oil and natural gas as we had estimated. Furthermore, our development and producing operations may be curtailed, delayed or canceled as a result of other factors, including:

 

 

 

If any of these factors were to occur with respect to a particular field, we could lose all or a part of our investment in the field, or we could fail to realize the expected benefits from the field, either of which could materially and adversely affect our revenue and profitability.

 

Secondary and tertiary recovery techniques may not be successful, which could adversely affect our financial condition or results of operations and, as a result, our ability to pay distributions to our unitholders.

 

Approximately 65% of our production and 65% of our reserves as of December 31, 2007 rely on secondary and tertiary recovery techniques, which include waterfloods and injecting natural gases into producing formations to enhance hydrocarbon recovery. If production response is less than forecast for a particular project, then the project may be uneconomic or generate less cash flow and reserves than we had estimated prior to investing capital. Risks associated with secondary and tertiary recovery techniques include, but are not limited to, the following:

 

 

If any of these risks occur, it could adversely affect our financial condition or results of operations and, as a result, our ability to pay distributions to our unitholders.

 

Shortages of rigs, equipment and crews could delay our operations and reduce our cash available for distribution.

 

Higher oil and natural gas prices generally increase the demand for rigs, equipment and crews and can lead to shortages of, and increasing costs for, development equipment, services and personnel. Shortages of, or increasing costs for, experienced development crews and oil field equipment and services could restrict our ability to drill the wells and conduct the operations that we currently have planned. Any delay in the development of new wells or a significant increase in development costs could reduce our revenues.

 

If we do not make acquisitions on economically acceptable terms, our future growth and ability to pay or increase distributions will be limited.

 

Our ability to grow and to increase distributions to unitholders depends in part on our ability to make acquisitions that result in an increase in pro forma available cash per unit. We may be unable to make such acquisitions because we are:

 

 

If we are unable to acquire properties containing proved reserves, our total proved reserves will decline as a result of our production, and we will be limited in our ability to increase or possibly even to maintain our current level of cash distributions.

 

Any acquisitions we complete are subject to substantial risks that could reduce our ability to make distributions to unitholders.

 

Even if we complete acquisitions that we believe will increase available cash per unit, these acquisitions may nevertheless result in a decrease in available cash per unit. Any acquisition involves potential risks, including, among other things:

 

 

Our decision to acquire a property depends in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses and seismic and other information, the results of which are often inconclusive and subject to various interpretations.

 

Also, our reviews of acquired properties are inherently incomplete because it generally is not feasible to perform an in-depth review of the individual properties involved in each acquisition given time constraints imposed by sellers. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken.

 

Due to our lack of asset and geographic diversification, adverse developments in our operating areas would reduce our ability to make distributions to our unitholders.

 

We only own oil and natural gas properties and related assets. All of our assets are located in Wyoming, Montana, North Dakota and Texas. Due to our lack of diversification in asset type and location, an adverse development in the oil and natural gas business in these geographic areas would have a significantly greater impact on our results of operations and cash available for distribution to our unitholders than if we maintained more diverse assets and locations.

We depend on three customers for a substantial amount of our sales. If these customers reduce the volumes of oil and natural gas they purchase from us, our revenues and cash available for distribution will decline to the extent we are not able to find new customers for our production.

 

For 2007, Marathon Oil Corporation, Chevron Corporation and ConocoPhillips accounted for approximately 32%, 15% and 15% of our total sales of production, respectively. If these customers were to reduce the production purchased from us, our revenue and cash available for distribution will decline to the extent we are not able to find new customers for our production.

 

We may be unable to compete effectively with larger companies, which may adversely affect our ability to generate sufficient revenue to allow us to pay distributions to our unitholders.

 

The oil and natural gas industry is intensely competitive with respect to acquiring prospects and productive properties, marketing oil and natural gas and securing equipment and trained personnel, and we compete with other companies that have greater resources. Many of our competitors are major and larger independent oil and natural gas companies, and possess and employ financial and technical resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our resources permit. Our ability to acquire additional properties and to discover reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Many of our larger competitors not only drill for and produce oil and natural gas but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for oil and natural gas properties and evaluate, bid for and purchase a greater number of properties than our resources permit. In addition, there is substantial competition for investment capital in the oil and natural gas industry. These larger companies may have a greater ability to continue development activities during periods of low oil and natural gas prices and to absorb the burden of present and future federal, state, local and other laws and regulations. Our inability to compete effectively with larger companies could have a material adverse impact on our business activities, financial condition and results of operations.

 

We may incur substantial additional debt to enable us to pay our quarterly distributions, which may negatively affect our ability to execute our business plan and pay future distributions.

 

We may be unable to pay a distribution at the current distribution rate or a future distribution rate without borrowing under our revolving credit facility. When we borrow to pay distributions, we are distributing more cash than we are generating from our operations on a current basis. This means that we are using a portion of our borrowing capacity under our revolving credit facility to pay distributions rather than to maintain or expand our operations. If we use borrowings under our revolving credit facility to pay distributions for an extended period of time rather than toward funding capital expenditures and other matters relating to our operations, we may be unable to support or grow our business. Such a curtailment of our business activities, combined with our payment of principal and interest on our future indebtedness to pay these distributions, will reduce our cash available for distribution on our units and will have a material adverse effect on our business, financial condition and results of operations. If we borrow to pay distributions during periods of low commodity prices and commodity prices remain low, we may have to reduce our distribution in order to avoid excessive leverage.

 

Our future debt levels may limit our flexibility to obtain additional financing and pursue other business opportunities.

 

As of September 30, 2008, we had $140 million of outstanding borrowings under our revolving credit facility. We have the ability to incur additional debt under our revolving credit facility, subject to borrowing base limitations. Our future indebtedness could have important consequences to us, including:

 

 

 

Our ability to service our indebtedness depends upon, among other things, our future financial and operating performance, which is affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying business activities, acquisitions, investments and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms or at all.

 

Our revolving credit facility has substantial restrictions and financial covenants that may restrict our business and financing activities and our ability to pay distributions.

 

The operating and financial restrictions and covenants in our revolving credit facility and any future financing agreements may restrict our ability to finance future operations or capital needs or to engage, expand or pursue our business activities or to pay distributions.

 

Our ability to comply with the restrictions and covenants in our revolving credit facility in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our revolving credit facility, a significant portion of our indebtedness may become immediately due and payable, our ability to make distributions may be inhibited, and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, our obligations under our revolving credit facility are secured by substantially all of our assets, and if we are unable to repay our indebtedness under our revolving credit facility, the lenders could seek to foreclose on our assets.

 

Our revolving credit facility limits the amounts we can borrow to a borrowing base amount, determined by the lenders in their sole discretion. Outstanding borrowings in excess of the borrowing base will be required to be repaid immediately, or we will be required to pledge other oil and natural gas properties as additional collateral.

 

Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.

 

There are a variety of operating risks inherent in our wells, gathering systems, pipelines and other facilities, such as leaks, explosions, mechanical problems and natural disasters, all of which could cause substantial financial losses. Any of these or other similar occurrences could result in the disruption of our operations, substantial repair costs, personal injury or loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial revenue losses. The location of our wells, gathering systems, pipelines and other facilities near populated areas, including residential areas, commercial business centers and industrial sites, could significantly increase the level of damages resulting from these risks.

 

We are not fully insured against all risks, including development and completion risks that are generally not recoverable from third parties or insurance. In addition, pollution and environmental risks generally are not fully insurable. Additionally, we may elect not to obtain insurance if we believe that the cost of available

insurance is excessive relative to the perceived risks presented. Losses could, therefore, occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. Moreover, insurance may not be available in the future at commercially reasonable costs and on commercially reasonable terms. Changes in the insurance markets due to terrorist attacks and hurricanes have made it more difficult for us to obtain certain types of coverage. We may not be able to obtain the levels or types of insurance we would otherwise have obtained prior to these market changes, and our insurance may contain large deductibles or fail to cover certain hazards or cover all potential losses. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our unitholders.

 

Our business depends in part on gathering and transportation facilities owned by others. Any limitation in the availability of those facilities could interfere with our ability to market our oil and natural gas production and could harm our business.

 

The marketability of our oil and natural gas production depends in part on the availability, proximity and capacity of pipelines, oil and natural gas gathering systems and processing facilities. The amount of oil and natural gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we are provided only with limited, if any, notice as to when these circumstances will arise and their duration. Any significant curtailment in gathering system or pipeline capacity could reduce our ability to market our oil and natural gas production and harm our business.

 

We have limited control over the activities on properties we do not operate.

 

Other companies operated approximately 24% of our properties (measured by total reserves) and approximately 65% of our wells as of December 31, 2007. We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs.

 

We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations.

 

Our oil and natural gas exploration and production operations are subject to complex and stringent laws and regulations. Environmental and other governmental laws and regulations have increased the costs to plan, design, drill, install, operate and abandon oil and natural gas wells and related pipeline and processing facilities. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations.

 

Our business is subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration for, and production of, oil and natural gas. Failure to comply with such laws and regulations, as interpreted and enforced, could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to unitholders.

Our operations expose us to significant costs and liabilities with respect to environmental and operational safety matters.

 

We may incur significant costs and liabilities as a result of environmental and safety requirements applicable to our oil and natural gas activities. In addition, we often indemnify sellers of oil and natural gas properties for environmental liabilities they or their predecessors may have created. These costs and liabilities could arise under a wide range of federal, state and local environmental and safety laws and regulations, including regulations and enforcement policies, which have become increasingly strict over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs, liens and, to a lesser extent, issuance of injunctions to limit or cease operations. In addition, claims for damages to persons or property may result from environmental and other impacts of our operations.

 

Strict, joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. New laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. If we are not able to recover the resulting costs through insurance or increased revenues, our profitability and our ability to make distributions to unitholders could be adversely affected.

 

The amount of cash distributions that we will be able to distribute to unitholders will be reduced by the costs associated with being a public company, other general and administrative expenses and reserves that our general partner believes prudent to maintain for the proper conduct of our business and for future distributions.

 

Before we can pay distributions to our unitholders, we must first pay or reserve cash for our expenses, including capital expenditures, the costs of being a public company and other operating expenses, and we may reserve cash for future distributions during periods of lower cash flows. The amount of cash we have available for distribution to our unitholders will be affected by our level of reserves and expenses, including the costs associated with being a public company.

 

Risks Related to Our Common Units

 

Our general partner and its affiliates own a controlling interest in us and may have conflicts of interest with us and limited fiduciary duties to us, which may permit them to favor their own interests to the detriment of unitholders.

 

As of September 30, 2008, EAC and its affiliates owned approximately 66.7% of our outstanding common units and controlled our general partner, which controls us. The directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to EAC. Furthermore, certain directors and officers of our general partner are directors and officers of affiliates of our general partner, including EAC. Conflicts of interest may arise between EAC and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These potential conflicts include, among others, the following situations:

 

 

 

EAC is not limited in its ability to compete with us, which could limit our ability to acquire additional assets or businesses.

 

Our partnership agreement does not prohibit EAC from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, EAC may acquire, develop or dispose of additional oil and natural gas properties or other assets in the future, without any obligation to offer us the opportunity to purchase or develop any of those assets. EAC is an established participant in the oil and natural gas industry and has significantly greater resources and experience than we have, which factors may make it more difficult for us to compete with EAC with respect to commercial activities as well as for acquisition candidates. As a result, competition from EAC could adversely impact our results of operations and cash available for distribution.

EAC, as the owner of our general partner, has the power to appoint and remove our directors and management.

 

Since an affiliate of EAC owns our general partner, it has the ability to elect all the members of the board of directors of our general partner. Our general partner has control over all decisions related to our operations. Since EAC and its affiliates also owned approximately 66.7% of our outstanding common units as of September 30, 2008, the public unitholders do not have the ability to influence any operating decisions and are not able to prevent us from entering into most transactions. Furthermore, the goals and objectives of EAC and our general partner relating to us may not be consistent with those of a majority of our public unitholders.

 

We do not have any employees and rely solely on officers of our general partner and employees of EAC. Failure of such officers and employees to devote sufficient attention to the management and operation of our business may adversely affect our financial results and our ability to make distributions to our unitholders.

 

None of the officers of our general partner are employees of our general partner, and we do not have any employees. We have entered into an administrative services agreement with Encore Operating pursuant to which Encore Operating performs administrative services for us. Affiliates of our general partner and Encore Operating conduct businesses and activities of their own in which we have no economic interest, including businesses and activities relating to EAC. If these separate activities are significantly greater than our activities, there could be material competition for the time and effort of the officers and employees who provide services to our general partner, EAC and their affiliates. If the officers of our general partner and the employees of EAC and their affiliates do not devote sufficient attention to the management and operation of our business, our financial results may suffer and our ability to make distributions to our unitholders may be reduced.

 

Our partnership agreement limits our general partner’s fiduciary duties to unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Our partnership agreement contains provisions that reduce the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty laws. For example, our partnership agreement:

 

 

 

Our unitholders are bound by the provisions in our partnership agreement, including the provisions discussed above.

 

Unitholders have limited voting rights and are not entitled to elect our general partner or its directors.

 

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders do not elect our general partner or its board of directors. The board of directors of our general partner is chosen by EAC. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they have little ability to remove our general partner. As a result of these limitations, the price at which our common units trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

 

Even if unitholders are dissatisfied, they cannot remove our general partner without its consent.

 

The unitholders are unable to remove our general partner without its consent because our general partner and its affiliates own sufficient units to be able to prevent its removal. The vote of the holders of at least 66 2 / 3 % of all outstanding units voting together as a single class is required to remove the general partner. As of September 30, 2008, EAC and its affiliates owned approximately 66.7% of our outstanding common units.

 

Control of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, our partnership agreement does not restrict the ability of EAC, the owner of our general partner, from transferring all or a portion of its ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices and thereby influence the decisions made by the board of directors and officers.

 

We may issue additional units, including units that are senior to our common units, without unitholder approval.

 

Our partnership agreement does not limit the number of additional partner interests that we may issue. In addition, we may issue an unlimited number of units that are senior to our common units in right of distribution, liquidation and voting. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

 

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units, other than our general partner and its affiliates, which may limit the ability of significant unitholders to influence the manner or direction of management.

 

Our partnership agreement restricts unitholders’ voting rights by providing that any common units held by a person, entity or group that owns 20% or more of any class of common units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such common units with the prior approval of the board of directors of our general partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting unitholders’ ability to influence the manner or direction of management.

 

Affiliates of our general partner may sell common units in the public markets, which sales could have an adverse impact on the trading price of our common units.

 

As of September 30, 2008, EAC and its affiliates held 20,924,055 of our common units. The sale of these units in the public markets could have an adverse impact on the price of our common units.

 

Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 80% of our common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of our common units held by unaffiliated persons at a price not less than their then-current market price. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return on their investment. Unitholders also may incur a tax liability upon a sale of their common units. As of September 30, 2008, EAC and its affiliates owned approximately 66.7% of our outstanding common units.

 

Unitholder liability may not be limited if a court finds that unitholder action constitutes control of our business.

 

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. A unitholder could be liable for our obligations as if it was a general partner if:

 

 

Unitholders may have liability to repay distributions.

 

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or Delaware Act, we may not make a distribution to unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. A purchaser of common units who

becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to such purchaser of common units at the time it became a limited partner and for unknown obligations if the liabilities could be determined from our partnership agreement.

 

Unitholders who are not Eligible Holders will not be entitled to receive distributions on or allocations of income or loss on their common units and their common units will be subject to redemption.

 

In order to comply with U.S. laws with respect to the ownership of interests in oil and natural gas leases on federal lands, we have adopted certain requirements regarding those investors who may own our common units. As used herein, an Eligible Holder means a person or entity qualified to hold an interest in oil and natural gas leases on federal lands. As of the date hereof, Eligible Holder means:

 

 

For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may be acquired and held by aliens only through stock ownership, holding or control in a corporation organized under the laws of the United States or of any state thereof. Unitholders who are not persons or entities who meet the requirements to be an Eligible Holder will not receive distributions or allocations of income and loss on their common units and they run the risk of having their common units redeemed by us at the lower of their purchase price cost or the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.

 

An increase in interest rates may cause the market price of our common units to decline.

 

Like all equity investments, an investment in our common units is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partnership interests. Reduced demand for our common units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common units to decline.

 

Tax Risks to Common Unitholders

 

In addition to reading the following risk factors, prospective unitholders should read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of our common units.

 

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of additional entity-level taxation by individual states. If the IRS were to treat us as a corporation or if we were to become subject to a material amount of additional entity-level taxation for state tax purposes, then our cash available for distribution to unitholders would be substantially reduced.

 

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our income at the corporate tax rate, which is currently a maximum of 35% and would likely pay state income tax at varying rates. Distributions to unitholders would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to unitholders would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

 

Current law may change, so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. In addition, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. For example, we are subject to an entity-level tax, the Texas margin tax, at an effective rate of up to 0.7% on the portion of our income that is apportioned to Texas beginning with tax reports due on or after January 1, 2008. Imposition of such a tax on us by Texas or any other state will reduce the cash available for distribution to unitholders.

 

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, members of Congress are considering substantive changes to the existing federal income tax laws that affect certain publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be applied retroactively. Although the currently proposed legislation would not appear to affect our tax treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

 

We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

 

We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

 

If the IRS contests any of the federal income tax positions we take, the market for our common units may be adversely affected, and the costs of any contest will reduce our cash available for distribution to unitholders.

 

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, the costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

Unitholders may be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

 

Because our unitholders are treated as partners to whom we allocate taxable income which could be different in amount than the cash we distribute, unitholders are required to pay any federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, even if they receive no cash distributions from us. Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income.

 

Tax gain or loss on the disposition of our common units could be more or less than expected.

 

If unitholders sell their common units, they will recognize a gain or loss equal to the difference between the amount realized and their tax basis in those common units. Prior distributions to unitholders in excess of the total net taxable income they were allocated for a common unit, which decreased their tax basis in that common unit, will, in effect, become taxable income to unitholders if the common unit is sold at a price greater than their tax basis in that common unit, even if the price they receive is less than their original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income. In addition, if unitholders sell their common units, they may incur a tax liability in excess of the amount of cash they receive from the sale.

 

Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

 

Investment in common units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and other retirement plans, and non-United States persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-United States persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-United States persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income.

 

A unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of those units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

 

Because a unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of the loaned units, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Our tax counsel has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to cover a short sale of common units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

 

We will treat each purchaser of common units as having the same tax benefits without regard to the common units purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units.

 

Because we cannot match transferors and transferees of common units, we will adopt depletion, depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. Our counsel is unable to opine as to the validity of such filing positions. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to unitholders. It also could affect the

timing of these tax benefits or the amount of gain from unitholders’ sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to unitholder tax returns.

 

Unitholders likely will be subject to state and local taxes and return filing requirements as a result of investing in our common units.

 

In addition to federal income taxes, unitholders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property. Unitholders likely will be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. We own property and conduct business in Montana, North Dakota, Texas and Wyoming. Of those states, Texas and Wyoming do not currently impose a state income tax on individuals. We may own property or conduct business in other states or foreign countries in the future. It is the unitholders’ responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state and local tax consequences of an investment in our common units.

 

The sale or exchange of 50% or more of our capital and profits interests within a twelve-month period will result in the termination of our partnership for federal income tax purposes.

 

We will be considered to have terminated for tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and unitholders receiving two schedule K-1s) for one fiscal year and require a unitholder who uses a different taxable year than us to include more than twelve moths of our taxable income or loss in his taxable income for the year of our termination.

 

We may adopt certain valuation methodologies that may result in a shift of income, gain, loss and deduction between the holders of the management incentive units and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of our common units.

 

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and the holders of the management incentive units. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the holders of the management incentive units, which may be unfavorable to such unitholders. Moreover, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between the holders of the management incentive units and certain of our unitholders.

 

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

 

Risks Related to Debt Securities

 

We have a holding company structure in which our subsidiaries conduct our operations and own our operating assets.

 

We have a holding company structure, and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than the ownership interests in our subsidiaries. As a result, our ability to make required payments on the debt securities, including interest payments, depends on the performance of our subsidiaries and their ability to distribute funds to us. The ability of our subsidiaries to

make distributions to us may be restricted by, among other things, credit facilities and applicable state partnership laws and other laws and regulations. Pursuant to the credit facilities, we may be required to establish cash reserves for the future payment of principal and interest on the amounts outstanding under the credit facilities. If we are unable to obtain the funds necessary to pay the principal amount of the debt securities at maturity, or to repurchase the debt securities upon an event of mandatory repurchase, we may be required to adopt one or more alternatives, such as a refinancing of the debt securities. We cannot assure you that we would be able to refinance the debt securities.

 

If we issue unsecured debt securities, your right to receive payments on the debt securities will be unsecured and will be effectively subordinated to our existing and future secured indebtedness and to indebtedness of any of our subsidiaries who do not guarantee the debt securities.

 

Any unsecured debt securities, including any guarantees, issued by us, Encore Energy Partners Finance Corporation or any Subsidiary Guarantors will be effectively subordinated to the claims of our secured creditors. In the event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of our business or that of Encore Energy Partners Finance Corporation or any Subsidiary Guarantor, their secured creditors would generally have the right to be paid in full before any distribution is made to the holders of the unsecured debt securities. Furthermore, if any of our subsidiaries do not guarantee the unsecured securities, these debt securities will be effectively subordinated to the claims of all creditors, including trade creditors and tort claimants, of those subsidiaries. In the event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of a subsidiary that is not a guarantor, creditors of that subsidiary would generally have the right to be paid in full before any distribution is made to the issuers of the unsecured debt securities or the holders of the unsecured debt securities.

 

We do not have the same flexibility as other types of organizations to accumulate cash, which may limit cash available to service the debt securities or to repay them at maturity.

 

Unlike a corporation, our partnership agreement requires us to distribute on a quarterly basis, 100% of our available cash to our unitholders of record on the applicable record date. Available cash is generally all of our cash and cash equivalents on hand at the end of each quarter, less the amount of cash reserves established by our general partner to:

 

 

Our partnership agreement gives our general partner wide latitude to establish reserves for future capital expenditures and operational needs prior to determining the amount of cash available for distribution.

 

We distribute available cash to our unitholders and our general partner in accordance with their ownership percentages. In distributing available cash, we assume that the holders of management incentive units own the equivalent number of common units into which such units are convertible on the date of distribution, provided that distributions payable to the holders of management incentive units are subject to a maximum limit equal to 5.1% of all distributions to our unitholders at the time of any such distribution. If the 5.1% maximum limit on aggregate distributions to the holders of our management incentive units is reached, then any available cash that would have been distributed to such holders will be available for distribution to our unitholders.

 

Depending on the timing and amount of our cash distributions to unitholders and because we are not required to accumulate cash for the purpose of meeting obligations to holders of any debt securities, such distributions could significantly reduce the cash available to us in subsequent periods to make payments on any debt securities.

 

Statements included in this prospectus and in the documents that we incorporate by reference that are not historical facts (including statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements. In addition, we may from time to time make other oral or written statements that are also forward-looking statements.

 

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

 

 

These forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

 

Important factors that could cause our actual results of operations or our actual financial condition to differ are described under “Risk Factors” beginning on page 2 of this prospectus.

USE OF PROCEEDS

 

Unless we specify otherwise in any prospectus supplement, we will use the net proceeds we receive from the sale of securities covered by this prospectus for general partnership purposes, which may include, among other things:

 

 

The actual application of proceeds from the sale of any particular offering of securities using this prospectus will be described in the applicable prospectus supplement relating to such offering. The precise amount and timing of the application of these proceeds will depend upon our funding requirements and the availability and cost of other funds.

RATIO OF EARNINGS TO FIXED CHARGES

 

The table below sets forth the ratio of earnings to fixed charges for us for each of the periods indicated:

 

 

 

 

We have computed the ratios of earnings to fixed charges by dividing earnings by fixed charges. For this purpose, “earnings” consist of income before income taxes plus fixed charges exclusive of capitalized interest. “Fixed charges” consist of interest, whether expensed or capitalized, amortization of capitalized expenses relating to indebtedness and an estimate of the portion of annual rental expense on operating leases that represents the interest factor.

DESCRIPTION OF DEBT SECURITIES

 

Encore Energy Partners LP and Encore Energy Partners Finance Corporation may issue senior debt securities and subordinated debt securities. The issuers will issue senior debt securities under an indenture among them, the Subsidiary Guarantors, if any, and a trustee that we will name in the related prospectus supplement. We refer to this indenture as the senior indenture. The issuers may also issue subordinated debt securities under an indenture to be entered into among them, the Subsidiary Guarantors, if any, and the trustee. We refer to this indenture as the subordinated indenture. We refer to the senior indenture and the subordinated indenture collectively as the indentures. The debt securities will be governed by the provisions of the related indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939.

 

We have summarized material provisions of the indentures, the debt securities and the guarantees below. This summary is not complete. We have filed the forms of senior and subordinated indentures with the SEC as exhibits to the registration statement of which this prospectus forms a part, and you should read the indentures for provisions that may be important to you.

 

Unless the context otherwise requires, references in this section to “we,” “us,” “our” and “the issuers” mean Encore Energy Partners LP and Encore Energy Partners Finance Corporation, and references in this prospectus to an “indenture” refer to the particular indenture under which we issue a series of debt securities.

 

Provisions Applicable to Each Indenture

 

General.   Any series of debt securities:

 

 

The indentures do not limit the amount of debt securities that may be issued under any indenture and do not limit the amount of other indebtedness or securities that we may issue. We may issue debt securities under the indentures from time to time in one or more series, each in an amount authorized prior to issuance.

 

No indenture contains any covenants or other provisions designed to protect holders of the debt securities in the event we participate in a highly leveraged transaction or upon a change of control. The indentures also do not contain provisions that give holders the right to require us to repurchase their securities in the event of

a decline in our credit ratings for any reason, including as a result of a takeover, recapitalization or similar restructuring or otherwise.

 

Terms.   We will prepare a prospectus supplement and either a supplemental indenture, or authorizing resolutions of the board of directors of our general partner, accompanied by an officers’ certificate, relating to any series of debt securities that we offer, which will include specific terms relating to some or all of the following:

 

 

This description of debt securities will be deemed modified, amended or supplemented by any description of any series of debt securities set forth in a prospectus supplement related to that series.

 

We may sell the debt securities at a discount, which may be substantial, below their stated principal amount. These debt securities may bear no interest or interest at a rate that at the time of issuance is below market rates. If we sell these debt securities, we will describe in the prospectus supplement any material United States federal income tax consequences and other special considerations.

The Subsidiary Guarantees.   The Subsidiary Guarantors may fully, unconditionally, jointly and severally guarantee on an unsecured basis all series of debt securities of the issuers. In the event of any such guarantee, each Subsidiary Guarantor will execute a notation of guarantee as further evidence of their guarantee. The term “Subsidiary Guarantors” means Encore Energy Partners Operating LLC and Encore Clear Fork Pipeline LLC. The applicable prospectus supplement will describe the terms of any guarantee by the Subsidiary Guarantors.

 

If a series of senior debt securities is so guaranteed, the Subsidiary Guarantors’ guarantee of the senior debt securities will be the Subsidiary Guarantors’ unsecured and unsubordinated general obligation and will rank on a parity with all of the Subsidiary Guarantors’ other unsecured and unsubordinated indebtedness. If a series of subordinated debt securities is so guaranteed, the Subsidiary Guarantors’ guarantee of the subordinated debt securities will be the Subsidiary Guarantors’ unsecured general obligation and will be subordinated to all of the Subsidiary Guarantors’ other unsecured and unsubordinated indebtedness.

 

The obligations of each Subsidiary Guarantor under its guarantee of the debt securities will be limited to the maximum amount that will not result in the obligations of the Subsidiary Guarantor under the guarantee constituting a fraudulent conveyance or fraudulent transfer under federal or state law, after giving effect to:

 

 

The guarantee of any Subsidiary Guarantor may be released under certain circumstances. If we exercise our legal or covenant defeasance option with respect to debt securities of a particular series as described below in “— Defeasance,” then any Subsidiary Guarantor will be released with respect to that series. Further, if no default has occurred and is continuing under the indentures, and to the extent not otherwise prohibited by the indentures, a Subsidiary Guarantor will be unconditionally released and discharged from the guarantee:

 

 

Consolidation, Merger and Sale of Assets.   The indentures generally permit a consolidation or merger involving the issuers or the Subsidiary Guarantors. They also permit the issuers or the Subsidiary Guarantors, as applicable, to lease, assign, transfer or dispose of all or substantially all of their assets. Each of the issuers and the Subsidiary Guarantors has agreed, however, that it will not consolidate with or merge into any entity (other than one of the issuers or a Subsidiary Guarantor, as applicable) or lease, assign, transfer or dispose of all or substantially all of its assets to any entity (other than one of the issuers or a Subsidiary Guarantor, as applicable) unless:

 

 

Upon any such consolidation, merger or asset lease, assignment, transfer or other disposition involving the issuers or the Subsidiary Guarantors, the resulting entity or transferee will be substituted for the issuers or

the Subsidiary Guarantors, as applicable, under the applicable indenture and debt securities. In the case of an asset transfer or other disposition other than a lease, the issuers or the Subsidiary Guarantors, as applicable, will be released from the applicable indenture.

 

Events of Default.   Unless we inform you otherwise in the applicable prospectus supplement, the following are events of default with respect to a series of debt securities:

 

 

 

 

A default under one series of debt securities will not necessarily be a default under another series. The trustee may withhold notice to the holders of the debt securities of any default or event of default (except in any payment on the debt securities) if the trustee considers it in the interest of the holders of the debt securities to do so.

 

If an event of default for any series of debt securities occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the outstanding debt securities of the series affected by the default (or, in some cases, 25% in principal amount of all debt securities issued under the applicable indenture that are affected, voting as one class) may declare the principal of and all accrued and unpaid interest on those debt securities to be immediately due and payable. If an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs, the principal of and interest on all the debt securities issued under the applicable indenture will become immediately due and payable without any action on the part of the trustee or any holder. The holders of a majority in principal amount of the outstanding debt securities of the series affected by the default (or, in some cases, of all debt securities issued under the applicable indenture that are affected, voting as one class) may in some cases rescind this accelerated payment requirement.

 

A holder of a debt security of any series issued under each indenture may pursue any remedy under that indenture only if:

 

 

 

This provision does not, however, affect the right of a holder of a debt security to sue for enforcement of any overdue payment.

 

In most cases, holders of a majority in principal amount of the outstanding debt securities of a series (or of all debt securities issued under the applicable indenture that are affected, voting as one class) may direct the time, method and place of:

 

 

The issuers are required to file each year with the trustee a written statement as to its compliance with the covenants contained in the applicable indenture.

 

Modification and Waiver.   Each indenture may be amended or supplemented if the holders of a majority in principal amount of the outstanding debt securities of all series issued under that indenture that are affected by the amendment or supplement (acting as one class) consent to it. Without the consent of the holder of each debt security affected, however, no modification may:

 

 

Each indenture may be amended or supplemented or any provision of that indenture may be waived without the consent of any holders of debt securities issued under that indenture:

 

 

 

The holders of a majority in principal amount of the outstanding debt securities of any series (or, in some cases, of all debt securities issued under the applicable indenture that are affected, voting as one class) may waive any existing or past default or event of default with respect to those debt securities. Those holders may not, however, waive any default or event of default in any payment on any debt security or compliance with a provision that cannot be amended or supplemented without the consent of each holder affected.

 

Defeasance.   When we use the term defeasance, we mean discharge from some or all of our obligations under the indentures. If any combination of funds or government securities are deposited with the trustee under an indenture sufficient to make payments on the debt securities of a series issued under that indenture on the dates those payments are due and payable, then, at our option, either of the following will occur:

 

 

If a series of debt securities is defeased, the holders of the debt securities of the series affected will not be entitled to the benefits of the applicable indenture, except for obligations to register the transfer or exchange of debt securities, replace stolen, lost or mutilated debt securities or maintain paying agencies and hold moneys for payment in trust. In the case of covenant defeasance, our obligation to pay principal, premium and interest on the debt securities and, if applicable, guarantees of the payments will also survive.

 

Unless we inform you otherwise in the prospectus supplement, we will be required to deliver to the trustee an opinion of counsel that the deposit and related defeasance would not cause the holders of the debt securities to recognize income, gain or loss for U.S. federal income tax purposes. If we elect legal defeasance, that opinion of counsel must be based upon a ruling from the U.S. Internal Revenue Service or a change in law to that effect.

 

No Personal Liability of General Partner.   Encore Energy Partners GP LLC, our general partner, and its directors, officers, members, employees and unitholders, in such capacity, will not be liable for the obligations of the issuers or any Subsidiary Guarantor under the debt securities, the indentures or the guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. By accepting a debt security, each holder of that debt security will have agreed to this provision and waived and released any such liability on the part of Encore Energy Partners GP LLC and its directors, officers, members, employees and unitholders. This waiver and release are part of the consideration for our issuance of the debt securities. It is the view of the SEC that a waiver of liabilities under the federal securities laws is against public policy and unenforceable.

Governing Law.   New York law will govern the indentures and the debt securities.

 

Trustee.   We may appoint a separate trustee for any series of debt securities. We use the term “trustee” to refer to the trustee appointed with respect to any such series of debt securities. We may maintain banking and other commercial relationships with the trustee and its affiliates in the ordinary course of business, and the trustee may own debt securities.

 

Form, Exchange, Registration and Transfer.   The debt securities will be issued in registered form, without interest coupons. There will be no service charge for any registration of transfer or exchange of the debt securities. However, payment of any transfer tax or similar governmental charge payable for that registration may be required.

 

Debt securities of any series will be exchangeable for other debt securities of the same series, the same total principal amount and the same terms but in different authorized denominations in accordance with the applicable indenture. Holders may present debt securities for registration of transfer at the office of the security registrar or any transfer agent we designate. The security registrar or transfer agent will effect the transfer or exchange if its requirements and the requirements of the applicable indenture are met.

 

The trustee will be appointed as security registrar for the debt securities. If a prospectus supplement refers to any transfer agents we initially designate, we may at any time rescind that designation or approve a change in the location through which any transfer agent acts. We are required to maintain an office or agency for transfers and exchanges in each place of payment. We may at any time designate additional transfer agents for any series of debt securities.

 

In the case of any redemption, we will not be required to register the transfer or exchange of:

 

 

Payment and Paying Agents.   Unless we inform you otherwise in a prospectus supplement, payments on the debt securities will be made in U.S. dollars at the office of the trustee and any paying agent. At our option, however, payments may be made by wire transfer for global debt securities or by check mailed to the address of the person entitled to the payment as it appears in the security register. Unless we inform you otherwise in a prospectus supplement, interest payments may be made to the person in whose name the debt security is registered at the close of business on the record date for the interest payment.

 

Unless we inform you otherwise in a prospectus supplement, the trustee under the applicable indenture will be designated as the paying agent for payments on debt securities issued under that indenture. We may at any time designate additional paying agents or rescind the designation of any paying agent or approve a change in the office through which any paying agent acts.

 

If the principal of or any premium or interest on debt securities of a series is payable on a day that is not a business day, the payment will be made on the following business day. For these purposes, unless we inform you otherwise in a prospectus supplement, a “business day” is any day that is not a Saturday, a Sunday or a day on which banking institutions in New York, New York or a place of payment on the debt securities of that series is authorized or obligated by law, regulation or executive order to remain closed.

 

Subject to the requirements of any applicable abandoned property laws, the trustee and paying agent will pay to us upon written request any money held by them for payments on the debt securities that remains unclaimed for two years after the date upon which that payment has become due. After payment to us, holders entitled to the money must look to us for payment. In that case, all liability of the trustee or paying agent with respect to that money will cease.

 

Book-Entry Debt Securities.   The debt securities of a series may be issued in the form of one or more global debt securities that would be deposited with a depositary or its nominee identified in the prospectus supplement. Global debt securities may be issued in either temporary or permanent form. We will describe in

the prospectus supplement the terms of any depositary arrangement and the rights and limitations of owners of beneficial interests in any global debt security.

 

Provisions Applicable Solely to the Subordinated Indenture

 

Debt securities of a series may be subordinated to the issuers’ “Senior Indebtedness,” which is defined generally to include any obligation created or assumed by the issuers (or, if the series is guaranteed, any Subsidiary Guarantors) for the repayment of borrowed money, any purchase money obligation created or assumed by the issuer, and any guarantee therefor, whether outstanding or hereafter issued, unless, by the terms of the instrument creating or evidencing such obligation, it is provided that such obligation is subordinate or not superior in right of payment to the debt securities (or, if the series is guaranteed, the guarantee of any Subsidiary Guarantor), or to other obligations which are pari passu with or subordinated to the debt securities (or, if the series is guaranteed, the guarantee of any Subsidiary Guarantor). Subordinated debt securities will be subordinated in right of payment, to the extent and in the manner set forth in the subordinated indenture and the prospectus supplement relating to such series, to the prior payment of all of our indebtedness and that of any Subsidiary Guarantor that is designated as “Senior Indebtedness” with respect to the series.

 

The holders of Senior Indebtedness of the issuers or, if applicable, a Subsidiary Guarantor, will receive payment in full of the Senior Indebtedness before holders of subordinated debt securities will receive any payment of principal, premium or interest with respect to the subordinated debt securities upon any payment or distribution of our assets or, if applicable to any series of outstanding debt securities, the Subsidiary Guarantors’ assets, to creditors:

 

 

Until the Senior Indebtedness is paid in full, any distribution to which holders of subordinated debt securities would otherwise be entitled will be made to the holders of Senior Indebtedness, except that the holders of subordinated debt securities may receive units representing limited partner interests and any debt securities that are subordinated to Senior Indebtedness to at least the same extent as the subordinated debt securities.

 

If the issuers do not pay any principal, premium or interest with respect to Senior Indebtedness within any applicable grace period (including at maturity), or any other default on Senior Indebtedness occurs and the maturity of the Senior Indebtedness is accelerated in accordance with its terms, the issuers may not:

 

 

unless, in either case,

 

 

Generally, “Designated Senior Indebtedness” will include:

 

 

During the continuance of any default, other than a default described in the immediately preceding paragraph, that may cause the maturity of any Designated Senior Indebtedness to be accelerated immediately without further notice, other than any notice required to effect such acceleration, or the expiration of any applicable grace periods, the issuers may not pay the subordinated debt securities for a period called the “Payment Blockage Period.” A Payment Blockage Period will commence on the receipt by the issuers and the trustee of written notice of the default, called a “Blockage Notice,” from the representative of any Designated Senior Indebtedness specifying an election to effect a Payment Blockage Period and will end 179 days thereafter.

 

The Payment Blockage Period may be terminated before its expiration:

 

 

Unless the holders of the Designated Senior Indebtedness have accelerated the maturity of the Designated Senior Indebtedness, we may resume payments on the subordinated debt securities after the expiration of the Payment Blockage Period.

 

Generally, not more than one Blockage Notice may be given in any period of 360 consecutive days. The total number of days during which any one or more Payment Blockage Periods are in effect, however, may not exceed an aggregate of 179 days during any period of 360 consecutive days.

 

After all Senior Indebtedness is paid in full and until the subordinated debt securities are paid in full, holders of the subordinated debt securities will be subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness.

 

As a result of the subordination provisions described above, in the event of insolvency, the holders of Senior Indebtedness, as well as certain of our general creditors, may recover more, ratably, than the holders of the subordinated debt securities.

DESCRIPTION OF COMMON UNITS

 

General

 

Our common units represent limited partner interests in us that entitle the holders thereof to participate in our cash distributions and to exercise the rights or privileges available to limited partners under our partnership agreement. For a description of the relative rights and preferences of holders of units and to partnership distributions, please read “Cash Distribution Policy.” For a general discussion of the expected federal income tax consequences of owning and disposing of common units, please read “Material Tax Consequences.” For a description of the rights and privileges of limited partners under our partnership agreement, including voting rights, please read “Our Partnership Agreement.”

 

Our common units are listed for trading on the New York Stock Exchange under the symbol “ENP.”

Transfer of Common Units

 

By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the common units transferred when such transfer and admission is reflected in our books and records. Each transferee:

 

 

As of the date hereof, an Eligible Holder means:

 

 

For the avoidance of doubt, onshore mineral leases or any direct or indirect interest therein may be acquired and held by aliens only through stock ownership, holding or control in a corporation organized under the laws of the United States or of any state thereof.

 

A transferee will become a substituted limited partner of our partnership for the transferred common units automatically upon the recording of the transfer on our books and records. Our general partner will cause any transfers to be recorded on our books and records no less frequently than quarterly.

 

We may, at our discretion, treat the nominee holder of a common unit as the absolute owner. In that case, the beneficial holder’s rights are limited solely to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.

 

Common units are securities and are transferable according to the laws governing transfers of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred common units.

 

Until a common unit has been transferred on our books, we and the transfer agent may treat the record holder of the unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common units is American Stock Transfer & Trust Company.

 

Conflicts of Interest

 

Conflicts of interest exist and may arise in the future as a result of the relationships between our general partner and its affiliates (including EAC) on the one hand, and us and our limited partners, on the other hand. The directors and officers of Encore Energy Partners GP LLC have fiduciary duties to manage our general partner in a manner beneficial to its owners. At the same time, our general partner has a fiduciary duty to manage our partnership in a manner beneficial to us and our unitholders. The board of directors or the conflicts committee of the board of directors of our general partner will resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

 

Whenever a conflict arises between our general partner or its affiliates, on the one hand, and us or any other partner, on the other hand, our general partner will resolve that conflict. Our partnership agreement contains provisions that modify and limit our general partner’s fiduciary duties to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions taken that, without those limitations, might constitute breaches of fiduciary duty.

 

Our general partner is responsible for identifying any such conflict of interest and our general partner may choose to resolve the conflict of interest by any one of the methods described in the following sentence. Our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our unitholders if the resolution of the conflict is:

 

 

As required by our partnership agreement, the board of directors of our general partner maintains a conflicts committee, comprised of at least two independent directors. Our general partner may, but is not required to, seek approval from the conflicts committee of a resolution of a conflict of interest with our general partner or affiliates. If our general partner seeks approval from the conflicts committee, the conflicts committee will determine if the resolution of a conflict of interest with our general partner or its affiliates is fair and reasonable to us. Any matters approved by the conflicts committee in good faith will be conclusively deemed to be fair and reasonable to us, approved by all of our partners and not a breach by our general partner of any duties it may owe us or our unitholders. If a matter is submitted to the conflicts committee and the conflicts committee does not approve the matter, we will not proceed with the matter unless and until the matter has been modified in such a manner that the conflicts committee determines is fair and reasonable to us. If our general partner does not seek approval from the conflicts committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third or fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, our general partner or the conflicts committee may consider any factors it determines in good faith to consider when resolving a conflict. When our partnership agreement requires someone to act in good faith, it requires that person to reasonably believe that he or she is acting in the best interests of the partnership.

Conflicts of interest could arise in the situations described below, among others:

 

EAC is not limited in its ability to compete with us, which could cause conflicts of interest and limit our ability to acquire additional assets or businesses which, in turn, could adversely affect our results of operations and cash available for distribution to our unitholders.

 

Our partnership agreement does not prohibit EAC from owning assets or engaging in businesses that compete directly or indirectly with us. For example, EAC owns other oil and natural gas properties in Wyoming, Montana, North Dakota, Texas and other states. In addition, EAC may acquire, develop or dispose of oil and natural gas properties or other assets in the future, without any obligation to offer us the opportunity to purchase or develop any of those assets. EAC is an established participant in the oil and natural gas industry and has significantly greater resources and experience than we have, which may make it more difficult for us to compete with EAC with respect to commercial activities as well as for acquisition candidates. As a result, competition from EAC could adversely impact our results of operations and cash available for distribution.

 

In addition, under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to the general partner or its affiliates (including EAC) and no such person who acquires knowledge of a potential transaction, agreement, arrangement or other matter that may be an opportunity for our partnership will have any duty to communicate or offer such opportunity to us. Furthermore, neither the general partner nor any of its affiliates (including EAC) will be liable to us, to any of our limited partners or to any other person for breach of any fiduciary or other duty by reason of the fact that such person pursues or acquires for itself, directs such opportunity to another person or does not communicate such opportunity or information to us; provided such person does not engage in such business or activity as a result of or using confidential or proprietary information provided by us or on our behalf to such person.

 

Neither our partnership agreement nor any other agreement requires EAC to pursue a business strategy that favors us or uses our assets or dictates what markets to pursue or grow. EAC’s directors have a fiduciary duty to make these decisions in the best interests of the owners of EAC, which may be contrary to our interests.

 

Because the officers and certain of the directors of our general partner are also officers and/or directors of EAC, such officers and directors have fiduciary duties to EAC that may cause them to pursue business strategies that disproportionately benefit EAC or which otherwise are not in our best interests.

 

Our general partner is allowed to take into account the interests of parties other than us, such as EAC, in resolving conflicts of interest.

 

Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of its limited call right, its voting rights with respect to the units it owns, its registration rights and its determination whether or not to consent to any merger or consolidation of the partnership.

 

We do not have any employees and rely on the employees of our general partner and its affiliates.

 

All of the executive management personnel of our general partner are employees of EAC and devote a portion of their time to our business and affairs. We also use a significant number of employees of EAC to operate our business and provide us with general and administrative services. Affiliates of our general partner and EAC also conduct businesses and activities of their own in which we have no economic interest. If these separate activities are significantly greater than our activities, there could be material competition for the time and effort of the officers and employees who provide services to EAC. Employees of EAC (including the persons who are executive officers of our general partner) devote such portion of their time as may be

reasonable and necessary for the operation of our business. The executive officers of our general partner devote significantly less than a majority of their time to our business.

 

Our partnership agreement limits our general partner’s fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Although our general partner has a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to its owner, EAC. Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty laws. For example, our partnership agreement:

 

 

 

 

If you purchase any common units, you agree to become bound by the provisions in our partnership agreement, including the provisions discussed above.

 

Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.

 

Under our partnership agreement, our general partner has full power and authority to do all things, other than those items that require unitholder approval or with respect to which our general partner has sought

conflicts committee approval, on such terms as it determines to be necessary or appropriate to conduct our business including, but not limited to, the following:

 

 

Our partnership agreement provides that our general partner must act in “good faith” when making decisions on our behalf and our partnership agreement further provides that in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is in our best interests. Please read “Our Partnership Agreement — Voting Rights” for information regarding matters that require unitholder approval.

 

Our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuances of additional partnership securities and the creation, reduction or increase of reserves, each of which can affect the amount of cash that is distributed to our unitholders.

 

The amount of cash that is available for distribution to unitholders is affected by decisions of our general partner regarding such matters as:

 

 

Our partnership agreement provides that we and our subsidiaries may borrow funds from our general partner and its affiliates. Our general partner and its affiliates may not borrow funds from us, our operating company or its operating subsidiaries.

 

Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf.

 

Our partnership agreement allows our general partner to determine, in good faith, any amounts to pay itself or its affiliates for any services rendered to us. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Similarly, agreements, contracts or arrangements between us and our general partner and its affiliates will not be required to be negotiated on an arm’s-length basis, although, in some circumstances, our general partner may determine that the conflicts committee of our general partner may make a determination on our behalf with respect to one or more of these types of situations.

 

Our general partner will determine, in good faith, the terms of any of these transactions entered into after the sale of the common units offered in this offering.

 

Our general partner and its affiliates will have no obligation to permit us to use any facilities or assets of our general partner or its affiliates, except as may be provided in contracts entered into specifically dealing with that use. Our general partner or its affiliates are not obligated to enter into any contracts of this kind.

 

We have entered into an administrative services agreement with Encore Operating pursuant to which Encore Operating performs administrative services for us. Under the administrative services agreement, Encore Operating receives an administrative fee of $1.88 per BOE of our production for such services and reimbursement of actual third-party expenses incurred on our behalf. Encore Operating has substantial discretion in determining which third-party expenses to incur on our behalf.

 

Our general partner intends to limit its liability regarding our obligations.

 

Our general partner intends to limit its liability under contractual arrangements so that the other party has recourse only to our assets and not against our general partner or its assets. The partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability.

 

Our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of our common units.

 

Our general partner may exercise its right to call and purchase common units as provided in our partnership agreement or assign this right to one of its affiliates or to us. Our general partner is not bound by fiduciary duty restrictions in determining whether to exercise this right. As a result, a common unitholder may have his common units purchased from him at an undesirable time or price. Please read “Our Partnership Agreement — Limited Call Right.”

 

Common unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.

 

Any agreements between us, on the one hand, and our general partner and its affiliates, on the other, will not grant to the unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.

Contracts between us, on the one hand, and our general partner and its affiliates, on the other, will not be the result of arm’s-length negotiations.

 

Our partnership agreement allows our general partner to determine, in good faith, any amounts to pay itself or its affiliates for any services rendered to us. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Neither our partnership agreement nor any other agreement, contract and arrangement between us, on the one hand, and our general partner and its affiliates, on the other, are or will be the result of arm’s-length negotiations.

 

Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

 

The attorneys, independent accountants and others who have performed services for us regarding this offering have been retained by our general partner. Attorneys, independent accountants and others who perform services for us are selected by our general partner or the conflicts committee and may perform services for our general partner and its affiliates. We may retain separate counsel for ourselves or the holders of common units in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the holders of common units, on the other, depending on the nature of the conflict. We do not intend to do so in most cases.

 

Fiduciary Duties

 

Our general partner is accountable to us and our unitholders as a fiduciary. Fiduciary duties owed to unitholders by our general partner are prescribed by law and the partnership agreement. The Delaware Act provides that Delaware limited partnerships may, in their partnership agreements, modify, restrict or expand the fiduciary duties otherwise owed by a general partner to limited partners and the partnership.

 

Our partnership agreement contains various provisions modifying and restricting the fiduciary duties that might otherwise be owed by our general partner. We have adopted these restrictions to allow our general partner or its affiliates to engage in transactions with us that would otherwise be prohibited by state-law fiduciary duty standards and to take into account the interests of other parties in addition to our interests when resolving conflicts of interest. We believe this is appropriate and necessary because our general partner’s board of directors has fiduciary duties to manage our general partner in a manner beneficial to its owners, as well as to you. Without these modifications, the general partner’s ability to make decisions involving conflicts of interest would be restricted. The modifications to the fiduciary standards enable the general partner to take into consideration all parties involved in the proposed action, so long as the resolution is fair and reasonable to us. These modifications also enable our general partner to attract and retain experienced and capable directors. These modifications are detrimental to our common unitholders because they restrict the remedies available to unitholders for actions that, without those limitations, might constitute breaches of fiduciary duty, as described below, and permit our general partner to take into account the interests of third parties in addition to our interests when resolving conflicts of interest.

 

The following is a summary of the material restrictions of the fiduciary duties owed by our general partner to the limited partners:

 

 

 

By purchasing our common units, each common unitholder automatically agrees to be bound by the provisions in the partnership agreement, including the provisions discussed above. This is in accordance with the policy of the Delaware Act favoring the principle of freedom of contract and the enforceability of partnership agreements. The failure of a limited partner or assignee to sign a partnership agreement does not render the partnership agreement unenforceable against that person.

 

We must indemnify our general partner and its officers, directors, managers and certain other specified persons, to the fullest extent permitted by law, against liabilities, costs and expenses incurred by our general partner or these other persons. We must provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith or engaged in fraud or willful misconduct. We must also provide this indemnification for criminal proceedings unless our general partner or these other persons acted with knowledge that their conduct was unlawful. Thus, our general partner could be indemnified for its negligent acts if it meets the requirements set forth above. To the extent these provisions purport to include indemnification for liabilities arising under the Securities Act, in the opinion of the SEC, such indemnification is contrary to public policy and, therefore, unenforceable. Please read “Our Partnership Agreement — Indemnification.”

 

The following is a summary of the material provisions of our partnership agreement, which is included as an exhibit to the registration statement of which this prospectus constitutes a part.

 

We summarize the following provisions of our partnership agreement elsewhere in this prospectus: