UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Exchange Act of 1934 (Amendment No.  )

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ENCORE ACQUISITION COMPANY
777 Main Street
Suite 1400
Fort Worth, Texas 76102

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To the Stockholders of Encore Acquisition Company:

 

Notice is hereby given that the Annual Meeting of Stockholders of Encore Acquisition Company will be held at The Ashton Hotel, Winfree Ballroom, 610 Main Street, Fort Worth, Texas 76102, on Thursday, May 3, 2007, at 9:00 a.m., Central Time. The annual meeting is being held for the following purposes:

 

(1) to elect eight directors;

 

(2) to ratify the appointment of the independent registered public accounting firm for the year ending December 31, 2007; and

 

(3) to transact such other business as may properly come before the meeting.

 

These proposals are described in the accompanying proxy materials. You will be able to vote at the annual meeting only if you were a stockholder of record at the close of business on March 15, 2007.

 

By Order of the Board of Directors,

 

 

Philip D. Devlin

Corporate Secretary

 

Fort Worth, Texas

April 5, 2007

 

 

 

 

ENCORE ACQUISITION COMPANY
777 Main Street
Suite 1400
Fort Worth, Texas 76102

PROXY STATEMENT

2007 ANNUAL MEETING OF STOCKHOLDERS
May 3, 2007

 

The Board of Directors (the “Board”) of Encore Acquisition Company (“Encore”) is providing these proxy materials in connection with our annual meeting of stockholders that will be held at The Ashton Hotel, Winfree Ballroom, 610 Main Street, Fort Worth, Texas 76102, on Thursday, May 3, 2007, at 9:00 a.m., Central Time. Stockholders of record as of March 15, 2007, which is the record date established for the annual meeting by the Board, are entitled and requested to vote on the items of business described in this proxy statement. Each stockholder of record is entitled to one vote for each share registered in the stockholder’s name. As of the record date, 54,179,572 shares of our common stock were entitled to be voted at the annual meeting.

 

This proxy statement and the accompanying notice of annual meeting and proxy will first be sent or given to stockholders on or about April 5, 2007.

 

Voting Procedures

 

You may vote your shares in person at the annual meeting, by Internet, by telephone or by mail.

 

Voting in Person.  Shares held in your name as the stockholder of record may be voted in person at the annual meeting. If your shares are held in the name of a broker, trustee or another nominee (“street name”), you may vote the shares in person at the annual meeting only if you obtain a legal proxy from the broker, trustee or nominee that holds your shares giving you the right to vote the shares. Even if you plan to attend the annual meeting, we recommend that you also submit your proxy or voting instructions as described below so that your vote will be counted if you later decide not to attend the meeting.

 

Voting by Internet.  Stockholders of record with Internet access may submit proxies by following the “Vote by Internet” instructions on their proxy cards. Most stockholders who hold shares beneficially in street name may vote by accessing the website specified on the voting instruction cards provided by their brokers, trustee or nominees. Please check the voting instruction card for Internet voting availability.

 

Voting by Telephone.  Stockholders of record may submit proxies by following the “Vote by Phone” instructions on their proxy cards. Most stockholders who hold shares beneficially in street name may vote by phone by calling the number specified on the voting instruction cards provided by their brokers, trustee or nominees. Please check the voting instruction card for telephone voting availability.

 

Voting by Mail.  Stockholders of record may submit proxies by completing, signing and dating their proxy cards and mailing them in the accompanying pre-addressed envelopes. Stockholders who hold shares beneficially in street name may vote by mail by completing, signing and dating the voting instruction cards provided and mailing them in the accompanying pre-addressed envelopes.

 

Changing Your Vote

 

You may change your vote at any time prior to the vote at the annual meeting, except that votes submitted through the Internet or telephone must be received by 11:59 p.m., Eastern Time, on May 2, 2007. If you are the stockholder of record, you may change your vote by granting a new proxy bearing a later date (which automatically revokes the earlier proxy), by providing a written notice of revocation to our Corporate Secretary prior to your shares being voted, or by attending the annual meeting and voting in person. Attendance at the meeting will not cause your previously granted proxy to be revoked unless you specifically so request. For shares you hold beneficially in street name, you may change your vote by submitting new voting instructions to your broker, trustee or nominee, or, if you have obtained a legal proxy from your broker or nominee giving you the right to vote your shares, by attending the meeting and voting in person.

 

Quorum and Adjournments

 

The presence, in person or by proxy, of the holders of a majority of the votes eligible to be cast at the annual meeting is necessary to constitute a quorum at the annual meeting. Both abstentions and broker non-votes (described below) are counted for the purpose of determining the presence of a quorum. If a quorum is not present, the stockholders entitled to vote who are present in person or by proxy at the annual meeting have the power to adjourn the annual meeting from time to time, without notice other than an announcement at the annual meeting, until a quorum is present. At any adjourned annual meeting at which a quorum is present, any business may be transacted that might have been transacted at the annual meeting as originally notified.

 

Required Vote; Effect of Broker Non-Votes and Abstentions

 

The nominees for election as directors at the annual meeting who receive the highest number of “FOR” votes will be elected as directors. This is called plurality voting. The ratification of the appointment of our independent registered public accounting firm requires the affirmative vote of a majority of the votes cast at the annual meeting.

 

Our Corporate Governance Guidelines require any nominee for director who receives a greater number of votes “WITHHELD” from his election than votes “FOR” such election to promptly tender his resignation from the Board following certification of the stockholder vote. The Nominating and Corporate Governance Committee shall consider the resignation and recommend to the Board whether to accept it. The Board’s decision to accept or reject the resignation will be made within 90 days of the certification of the stockholder vote.

 

In the election of directors, you may vote “FOR” all or some of the nominees or your vote may be “WITHHELD” with respect to one or more of the nominees. For the other items of business, you may vote “FOR,” “AGAINST” or “ABSTAIN.” If you elect to “ABSTAIN,” the abstention has the same effect as a vote “AGAINST.” If you provide specific instructions with regard to certain items, your shares will be voted as you instruct on such items. If you sign your proxy card or voting instruction card without giving specific instructions, your shares will be voted in accordance with the recommendations of the Board set forth below under “Board Recommendation.”

 

Brokers holding shares must vote according to specific instructions they receive from the beneficial owners of those shares. If specific instructions are not received, brokers may generally vote the shares in their discretion. However, the New York Stock Exchange (the “NYSE”) precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. Under the rules of the NYSE, brokers will have discretion to vote on all items scheduled to be presented at the annual meeting.

 

A broker non-vote has the effect of a negative vote when a majority of the issued and outstanding shares is required for approval of a particular proposal and has no effect when a majority of the shares present in person or by proxy and entitled to vote or a plurality or majority of the votes cast is required for approval. Since directors are elected by a plurality and the ratification of the appointment of the independent registered public accounting firm requires the affirmative vote of a majority of the votes cast, broker non-votes will not affect the outcome of voting on those proposals.

 

Because abstentions are considered votes “cast” on a proposal, abstentions will have the same effect as votes against the ratification of the appointment of our independent registered public accounting firm.

 

Board Recommendation

 

The Board recommends that you vote:

 

 

Voting on Other Matters

 

If any other business properly comes before the stockholders for a vote at the meeting, your shares will be voted in accordance with the discretion of the proxy holders: I. Jon Brumley, Jon S. Brumley and Philip D. Devlin. The Board knows of no matters, other than those described above, to be presented for consideration at the annual meeting.

 

CORPORATE GOVERNANCE PRINCIPLES AND BOARD MATTERS

 

We have adopted a Code of Business Conduct and Ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees. We have also adopted Corporate Governance Guidelines, which, in conjunction with our certificate of incorporation, bylaws and Board committee charters, form the framework for our governance. Our Code of Business Conduct and Ethics and Corporate Governance Guidelines are available on the “Corporate Governance” section of our website at www.encoreacq.com. We will post on our website any amendments to the Code of Business Conduct and Ethics or waivers of the Code of Business Conduct and Ethics for directors and executive officers.

 

Stockholders may request free printed copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines from:

 

Encore Acquisition Company
Attention: Corporate Secretary
777 Main Street, Suite 1400
Fort Worth, Texas 76102
(817) 877-9955

 

Director Independence

 

The Board has determined that each director nominee is independent, as defined for purposes of the listing standards of the NYSE, other than Mr. I. Jon Brumley, who is Chairman of the Board, and Mr. Jon S. Brumley, who is Chief Executive Officer and President. In making this determination, the Board affirmatively determined that each independent director or nominee had no material relationship with Encore (either directly or as a partner, shareholder or officer of an organization that has a relationship with Encore), and that none of the express disqualifications contained in the NYSE rules applied to any of them.

 

As contemplated by NYSE rules, the Board has adopted categorical standards to assist it in making independence determinations, under which relationships that fall within the categorical standards are not required to be disclosed in the proxy statement and their impact on independence need not be separately discussed. The Board, however, considers all material relationships with each director in making its independence determinations. A relationship falls within the categorical standards if it:

 

 

 

 

None of the independent director nominees had relationships relevant to an independence determination that were outside the scope of the Board’s categorical standards.

 

Board Structure and Committee Composition

 

As of the date of this proxy statement, the Board has eight directors and the following four committees: (1) Audit, (2) Compensation, (3) Nominating and Corporate Governance and (4) Special Stock Award. The following table sets forth the membership on each committee:

 

Composition of Board Committees

 

 

The Audit Committee held eight meetings in 2006; the Compensation Committee held three meetings and acted by unanimous written consent on one occasion in 2006; and the Nominating and Corporate Governance Committee held two meetings in 2006. The Nominating and Corporate Governance Committee met in February 2007 in connection with matters related to the 2007 annual meeting.

 

The Board held eight meetings in 2006. Each director attended at least 75% of all Board and applicable committee meetings in 2006. Directors are encouraged to attend annual stockholder meetings. All of our directors attended the 2006 annual meeting of stockholders.

 

Audit Committee.  The Audit Committee’s purpose is, among other things, to assist the Board in overseeing:

 

 

The Board has determined that all three members of the Audit Committee are independent under the listing standards of the NYSE and the rules of the Securities and Exchange Commission (the “SEC”). In addition, the Board has determined that Mr. Gardner is an “audit committee financial expert” as such term is defined in Item 401(h) of Regulation S-K under the Exchange Act.

 

The report of the Audit Committee is included in this proxy statement beginning on page 32. The charter of the Audit Committee is available on the “Corporate Governance” section of our website at www.encoreacq.com. A free printed copy also is available to any stockholder who requests it from the address on page 3.

 

Compensation Committee.  The Compensation Committee’s functions include the following:

 

 

 

The Board has determined that all members of the Compensation Committee are independent under the listing standards of the NYSE.

 

The Compensation Committee has retained the Hay Group as an independent consultant with respect to executive compensation matters. The consultant reports to and acts at the direction of the Compensation Committee. Our management does not direct or oversee the activities of the Hay Group with respect to our executive compensation program and has not engaged the Hay Group for any other matter. The Hay Group prepares compensation surveys for review by the Compensation Committee in advance of the annual executive officer compensation review each February. The Hay Group works with our human resources function to compare compensation paid to our executive officers with compensation paid for comparable positions at companies included in the surveys. The Hay Group and our human resources function also compile annual compensation data for each executive officer.

 

The compensation payable to our Chairman of the Board and Chief Executive Officer is reviewed and approved by the Compensation Committee in executive session. The compensation payable to our other executive officers is recommended by the Chairman of the Board and Chief Executive Officer and reviewed and approved by the Compensation Committee.

 

The report of the Compensation Committee is included in this proxy statement on page 26. The charter of the Compensation Committee is available on the “Corporate Governance” section of our website at www.encoreacq.com. A free printed copy also is available to any stockholder who requests it from the address on page 3.

 

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee’s functions include the following:

 

 

The Board has determined that both members of the Nominating and Corporate Governance Committee are independent under the listing standards of the NYSE.

 

The charter of the Nominating and Corporate Governance Committee is available on the “Corporate Governance” section of our website at www.encoreacq.com. A free printed copy also is available to any stockholder who requests it from the address on page 3.

 

Special Stock Award Committee.  The Board established a Special Stock Award Committee in February 2007 and appointed Jon S. Brumley as its sole member. The Special Stock Award Committee may exercise all powers and authority of the Board (concurrently with the Compensation Committee of the Board) to award restricted shares (or

units representing restricted shares) of our common stock, or restricted stock, to eligible employees under the 2000 Incentive Stock Plan, subject to the following limitations:

 

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation Committee during 2006 or as of the date of this proxy statement is or has been an officer or employee of Encore and no executive officer of Encore served on the compensation committee or board of any company that employed any member of Encore’s Compensation Committee or Board.

 

Policies and Procedures for Approval of Related Person Transactions

 

In February 2007, the Board formally adopted a policy with respect to related person transactions to document procedures pursuant to which such transactions are reviewed, approved or ratified. The policy applies to any transaction in which (1) Encore is a participant, (2) any related person has a direct or indirect material interest and (3) the amount involved exceeds $120,000, but excludes any transaction that does not require disclosure under Item 404(a) of Regulation S-K. The Nominating and Corporate Governance Committee, with assistance from our General Counsel, is responsible for reviewing, approving and ratifying any related person transaction.

 

Selection of Nominees for the Board

 

Identifying Candidates

 

The Nominating and Corporate Governance Committee solicits ideas for potential Board candidates from a number of sources, including members of the Board, our executive officers, individuals personally known to the members of the Board and research. The Nominating and Corporate Governance Committee also has sole authority to select and compensate a third-party executive search firm to help identify candidates, if it deems advisable. In addition, the Nominating and Corporate Governance Committee will consider candidates for the Board submitted by stockholders. Any stockholder submission should include the candidate’s name and qualifications for Board membership and should be directed to:

 

Encore Acquisition Company
Attention: Corporate Secretary
777 Main Street, Suite 1400
Fort Worth, Texas 76102

 

Although the Nominating and Corporate Governance Committee does not require the stockholder to submit any particular information regarding the qualifications of the stockholder’s candidate, the level of consideration that the Nominating and Corporate Governance Committee will give to the stockholder’s candidate will be commensurate with the quality and quantity of information about the candidate that the nominating stockholder makes available to the committee. The Nominating and Corporate Governance Committee will consider all candidates identified through the processes described above, and will evaluate each of them on the same basis.

 

In addition, our bylaws permit stockholders to nominate directors for election at an annual meeting of stockholders whether or not such nominee is submitted to and evaluated by the Nominating and Corporate Governance Committee. To nominate a director using this process, the stockholder must follow the procedures described under “Stockholder Proposals” below.

 

Evaluating Candidates

 

Each director candidate must meet certain minimum qualifications, including:

 

 

In addition, the Nominating and Corporate Governance Committee considers other qualities that it may deem to be desirable from time to time, such as the extent to which the candidate contributes to the diversity of the Board — with diversity being construed broadly to include a variety of perspectives, opinions, experiences and backgrounds. The Nominating and Corporate Governance Committee may also consider the ability of the candidate to work with the then-existing interpersonal dynamics of the Board and his or her ability to contribute to the collaborative culture among Board members.

 

Based on this initial evaluation, the Chairman of the Nominating and Corporate Governance Committee may interview the candidate, and if warranted, recommend that one or more members of the committee, other members of the Board and executives, as appropriate, interview the candidate in person or by telephone. After completing this evaluation and interview process, the committee will make a recommendation to the full Board as to the persons who should be nominated by the Board, and the Board will determine the nominees after considering the recommendation of the Nominating and Corporate Governance Committee.

 

Executive Sessions

 

Our non-management directors include all directors other than I. Jon Brumley and Jon S. Brumley. Each of the non-management directors is also “independent” under the listing standards of the NYSE. The non-management directors meet in executive session without management participation at least three times per year. These meetings are chaired on a rotating basis by the chairmen of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.

 

Stockholder Communications

 

Individuals may communicate with the entire Board or with our non-management directors. Any such communication should be sent via letter addressed to the member or members of the Board to whom the communication is directed, in care of our Corporate Secretary, Encore Acquisition Company, 777 Main Street, Suite 1400, Fort Worth, Texas 76102. All such communications, other than unsolicited commercial solicitations or communications, will be forwarded to the appropriate director or directors for review.

 

PROPOSALS TO BE VOTED ON

 

PROPOSAL NO. 1

 

ELECTION OF DIRECTORS

 

There are eight nominees for election to our Board this year. All of the nominees have served as directors since the last annual meeting. Information regarding the business experience of each nominee is provided below. Each director is elected annually to serve until the next annual meeting or until his successor is elected.

 

If you sign your proxy or voting instruction card but do not give instructions with respect to voting for directors, your shares will be voted for the eight persons recommended by the Board. If you wish to give specific instructions with respect to voting for directors, you may do so by indicating your instructions on your proxy or voting instruction card.

 

All of the nominees have indicated that they will be available to serve as directors. In the event that any nominee should become unavailable, however, the proxy holders, I. Jon Brumley, Jon S. Brumley and Philip D. Devlin, will vote for a nominee or nominees designated by the Board, unless the Board chooses to reduce the number of directors serving on the Board.

 

Required Vote

 

The eight nominees for director who receive the highest number of “FOR” votes cast in person or by proxy at the annual meeting will be elected as directors. Our Corporate Governance Guidelines require any nominee for director who receives a greater number of votes “WITHHELD” from his election than votes “FOR” such election to promptly tender his resignation from the Board following certification of the stockholder vote. The Nominating and Corporate Governance Committee shall consider the resignation and recommend to the Board whether to accept it. The Board’s decision to accept or reject the resignation will be made within 90 days of the certification of the stockholder vote.

 

Board Recommendation

 

The Board recommends a vote FOR the election of each of the following nominees:

 

 

PROPOSAL NO. 2

 

RATIFICATION OF THE APPOINTMENT OF

THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board has appointed Ernst & Young LLP as the independent registered public accounting firm to audit our consolidated financial statements as of and for the year ending December 31, 2007 and our internal control over financial reporting for the same period. During 2006, Ernst & Young LLP served as our independent registered public accounting firm and also provided certain tax and other audit-related services. Please read “Principal Accountant Fees and Services” on page 34. Representatives of Ernst & Young LLP are expected to attend the annual meeting, where they will be available to respond to appropriate questions and, if they desire, to make a statement.

 

Required Vote

 

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2007 requires the affirmative vote of a majority of the votes cast on the proposal at the annual meeting. If the appointment is not ratified, the Board will consider whether it should select another independent registered public accounting firm.

 

Board Recommendation

 

Our Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2007.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information as of March 15, 2007, regarding the ownership of our common stock by:

 

 

Unless otherwise noted, the persons named below have sole voting and investment power with respect to such shares.

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC reports regarding their ownership and changes in ownership of our securities. We believe that, during 2006, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements, except that one Form 4 was filed late by Mr. Nivens. In making these statements, we have relied upon examination of the copies of Forms 3 and 4, and amendments thereto, provided to us and the written representations of our directors and executive officers.

 

EXECUTIVE OFFICERS

 

Our executive officers serve at the discretion of the Board. Information regarding the business experience of each of our executive officers is provided below.

 

 

Please read page 8 for information regarding Mr. I. Jon Brumley’s business experience.

 

Jon S. Brumley, age 36, Chief Executive Officer and President

 

Please read page 8 for information regarding Mr. Jon S. Brumley’s business experience.

 

Robert C. Reeves, age 37, Senior Vice President, Chief Financial Officer and Treasurer

 

Mr. Reeves has served as Senior Vice President, Chief Financial Officer and Treasurer since November 2006. From November 2006 until January 2007, Mr. Reeves also served as our Corporate Secretary. Mr. Reeves served as our Senior Vice President, Chief Accounting Officer, Controller and Assistant Corporate Secretary from November 2005 until November 2006. He served as our Vice President, Controller and Assistant Corporate Secretary from August 2000 until October 2005. He served as our Assistant Controller from April 1999 until August 2000. Prior to joining Encore, Mr. Reeves was Assistant Controller for Bristol Resources Corporation from 1998 until 1999. Prior to 1998, Mr. Reeves served as Assistant Controller for Hugoton Energy Corporation. Mr. Reeves received his Bachelor of Science degree in Accounting from the University of Kansas. He is a Certified Public Accountant.

 

 

Mr. Nivens has been Senior Vice President and Chief Operating Officer since November 2006. From November 2005 until November 2006, Mr. Nivens served as our Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary. Mr. Nivens served as our Vice President of Corporate Strategy and Treasurer from June 2005 until October 2005. From April 2002 to June 2005, Mr. Nivens served as engineering manager and in other engineering positions. Prior to joining Encore, he worked as a reservoir engineer for Prize Energy from 1999 to 2002. From 1990 to 1999, Mr. Nivens worked in the corporate planning group at Union Pacific Resources and also served as a reservoir engineer. In addition, he worked as a reservoir engineer for Compass Bank in 1999. Mr. Nivens received a Bachelor of Science in Petroleum Engineering from Texas Tech University and a Masters of Business Administration from Southern Methodist University.

 

Philip D. Devlin, age 62, Senior Vice President, General Counsel and Corporate Secretary

 

Mr. Devlin has served as Senior Vice President, General Counsel and Corporate Secretary since January 2007. From March 1997 until January 2007, Mr. Devlin served as Vice President, General Counsel and Secretary of National Energy Group, Inc. From October 1994 through February 1997, he served as President and Chief Executive Officer of Sunrise Energy Services, Inc. From September 1984 through October 1994, he served as Executive Vice President, General Counsel and Secretary of Sunrise Energy Services, Inc. He is licensed by the State Bar of Texas, admitted to practice before the Supreme Court of the United States and is a past president and director of the Natural Gas and Electric Power Association of North Texas. Mr. Devlin earned a Bachelor of Arts degree and a Master of Arts degree from the University of California, and a Juris Doctor degree with honors from California Western School of Law, San Diego, California.

 

John W. Arms, age 39, Senior Vice President — Acquisitions

 

Mr. Arms has served as Senior Vice President — Acquisitions since February 2007. Mr. Arms served as Vice President of Business Development from September 2001 until February 2007. From November 1998 until September 2001, Mr. Arms served in various petroleum engineering positions for Encore. Prior to joining Encore in November 1998, Mr. Arms was a Senior Reservoir Engineer for Union Pacific Resources and an Engineer at XTO Energy, Inc. Mr. Arms received a Bachelor of Science in Petroleum Engineering from the Colorado School of Mines.

 

Thomas H. Olle, age 52, Vice President — Mid-Continent Region

 

Mr. Olle has served as Vice President — Mid-Continent Region since November 2006. From February 2005 until November 2006, Mr. Olle was Senior Vice President — Asset Management. Mr. Olle served as Senior Vice President, Asset Management of the Cedar Creek Anticline from April 2003 to February 2005. Mr. Olle joined Encore in March 2002 as Vice President of Engineering. Prior to joining Encore, Mr. Olle served as Senior Engineering Advisor of Burlington Resources, Inc. (an independent oil and gas company) from September 1999 to March 2002. From July 1986 to September 1999, he served as a Regional Engineer of Burlington Resources. Mr. Olle received a Bachelor of Science degree with Highest Honors in Mechanical Engineering from the University of Texas at Austin.

 

Kevin Treadway, age 41, Vice President — Land

 

Mr. Treadway has served as Vice President — Land since April 2003. From 2002 until April 2003, Mr. Treadway was Land Manager. Mr. Treadway joined Encore in 2000 as a staff landman. Prior to joining Encore, Mr. Treadway served as a Landman at Coho Resources. Mr. Treadway received a Bachelor of Science degree in Petroleum Land Management from the University of Southwestern Louisiana.

 

Andy R. Lowe, age 55, Vice President — Marketing

 

Mr. Lowe has served as Vice President — Marketing since February 2007. From May 2006 until February 2007, Mr. Lowe was Director of Marketing. Prior to joining Encore, Mr. Lowe was Vice President — Marketing for Vintage Petroleum, Inc. from December 1997 until December 2005. Mr. Lowe served as General Manager —

Marketing for Vintage Petroleum, Inc. from 1992 until December 1997. Mr. Lowe served as president of Quasar Energy, Inc. from 1990 until 1992, and Manager — Marketing, as well as various other management capacities, for Maxus Energy Corporation, formerly Diamond Shamrock Exploration Company, from 1983 until 1990. Mr. Lowe received a Bachelor of Science degree in Education from Texas Tech University.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis is intended to provide investors with an understanding of our compensation policies and decisions regarding our named executive officers for 2006. Our named executive officers are our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers for 2006.

 

Executive Compensation Philosophy

 

In establishing executive compensation, we believe that:

 

 

Purpose of the Executive Compensation Program

 

Our executive compensation program has been designed to accomplish the following long-term objectives:

 

 

Role of the Compensation Committee

 

Responsibilities and Authority

 

The Compensation Committee has overall responsibility for the compensation of our named executive officers. The specific duties and responsibilities of the Compensation Committee are described above under “Board Structure and Committee Composition — Compensation Committee” and in the charter of the Compensation Committee, which is available on the “Corporate Governance” section of our website at www.encoreacq.com.

 

The compensation payable to our Chairman of the Board and Chief Executive Officer is reviewed and approved by the Compensation Committee in executive session. The compensation payable to our other named executive officers is recommended by the Chairman of the Board and Chief Executive Officer and reviewed and approved by the Compensation Committee.

Timing of Decisions

 

The Compensation Committee meets each February to establish base salaries for the then-current year, to approve cash bonuses and award equity-based compensation in respect of corporate and executive performance during the preceding year and to review and, as appropriate, make changes to our executive compensation program. At this meeting, the Compensation Committee establishes the performance goals and objectives for the then-current year. The Compensation Committee also meets at other times during the year and acts by written consent when necessary and appropriate. During 2006, the Compensation Committee met three times and acted by written consent on one occasion. The Chairman of the Compensation Committee also met with members of our management team and representatives of Hay Group on several occasions to discuss our executive compensation policies and programs.

 

The February meeting of the Compensation Committee is typically set at least a year in advance to coincide with the regularly scheduled Board meeting in February. The timing of Board and committee meetings is determined by the Chairman of the Board in consultation with the other Board and committee members. We do not time the release of material non-public information for the purpose of affecting the values of executive compensation. At the time of making equity-based compensation decisions, the Compensation Committee is aware of the earnings results and takes them into account, but it does not adjust the size of grants to reflect possible market reaction. Generally, grants of equity-based compensation are made at the February meeting of the Compensation Committee, although specific grants may be made at other regular meetings to recognize the promotion of an employee, a change in responsibility or a specific achievement.

 

Use of Compensation Consultant

 

In considering compensation with respect to 2006, the Compensation Committee considered advice and information from Hay Group in determining the amount and form of compensation for named executive officers and other employees. This work included establishing an updated comparison group of companies, providing relevant market data and alternatives to consider for named executive officer compensation. Management has not engaged Hay Group for any other purpose.

 

Compensation Program

 

Elements of Compensation

 

Our executive compensation program consists of the following elements:

 

 

As described in more detail below, these elements are designed to reward corporate and individual performance.

 

 

The following table sets forth percentage of base salary and annual incentive compensation in relation to the total direct compensation for 2006:

 

 

 

 

When determining compensation adjustments and awards, in addition to considering peer group comparisons and the satisfaction of performance objectives as described below, the Compensation Committee also considers internal pay equity within Encore.

 

Peer Group Comparisons

 

The Compensation Committee evaluates the executive compensation programs and practices for our executive officers against an industry peer group in order to achieve a competitive level of compensation. The peer group consists of oil and gas companies that compete with us both for business opportunities and for executive talent. The Compensation Committee compares the companies’ executive compensation programs as a whole, and also compares the pay of individual executives if the jobs are sufficiently similar to make a comparison meaningful. The Compensation Committee uses the peer group data to ensure that named executive officer compensation as a whole is appropriately competitive, given our performance.

 

For 2006, the industry peer group consisted of the following companies:

 

 

The composition of the peer group is subject to change from time to time based on a review by the Compensation Committee to reflect, among other things, best practices in executive compensation, changes in our

business or the business of other companies and changes in the competitive marketplace resulting from mergers and acquisitions or other activity.

 

Overall, we target total direct compensation (base salary, annual cash bonus and long-term incentives in the form of restricted stock and stock options) for executive officers at between the 50th and 75th percentiles of total direct compensation for similar positions in the peer group, although actual total compensation may be lower than the 50th percentile or higher than the 75th percentile based on corporate performance, individual performance and experience and other factors. We believe that targeting total direct compensation at between the 50th and 75th percentiles is necessary in order for us to attract, retain and motivate executive talent in a very competitive energy marketplace.

 

Performance Objectives

 

The Compensation Committee evaluates our financial condition and results of operations, our performance in light of oil and natural gas industry fundamentals and how effectively management adapts to changing industry conditions and opportunities during the year in preparing itself to capitalize on opportunities in the future. In addition, in February 2006, the Compensation Committee established the following five objectives to measure our performance during 2006:

 

 

During 2006, we were able to achieve the reserve replacement objective, but did not achieve the production, rate of return or efficiency ratio objectives. We also believed that we achieved the F&D cost objective but were unable to verify the achievement as of February 12, 2007, the date of the Compensation Committee meeting, due to incomplete information from companies in our peer group. We have subsequently been able to determine that we achieved the F&D cost objective for 2006. We had a challenging year in 2006 due to a variety of factors, including the following:

 

 

 

 

To some degree, our past success was a reason for our disappointing results in 2006. Our inventory of drilling projects was riskier than we expected but, more importantly, costs escalated at a rate much faster than we anticipated. We did not have sufficient operations in certain areas to guarantee quality rig availability. In other words, we did not have the market strength in some areas to demand the most efficient rigs with the appropriate level

of responsiveness. To enhance our inventory, we entered into a joint development agreement with ExxonMobil, farmed-in drilling locations from majors and independents in New Mexico and evaluated a large property acquisition in December of 2006 that we were successful in purchasing.

 

2006 was also a year of many positive accomplishments, including, among others, the following:

 

 

In addition, we spent considerable effort in the fourth quarter of 2006 evaluating the purchase of oil and natural gas properties in the Big Horn Basin of Wyoming and in the Williston Basin of Montana and North Dakota. In January 2007, our efforts were rewarded when we entered into agreements to acquire the Big Horn Basin assets and the Williston Basin assets from Anadarko Petroleum Corporation. These properties bring new reserves, steady production and additional upsides to our portfolio and are an excellent strategic fit for our company.

 

We also spent considerable effort in the fourth quarter of 2006 evaluating whether certain of the Big Horn Basin properties would be appropriate candidates for inclusion in a master limited partnership subsidiary (an “MLP”) that would offer common units to the public. After completing our analysis and being the successful bidder for the Big Horn Basin properties, we announced in January 2007 that we intend to move forward with the MLP and to use proceeds to reduce debt. Any sale of common units would be registered under the Securities Act of 1933, and such common units would only be offered and sold by means of a prospectus. This proxy statement does not constitute an offer to sell or the solicitation of any offer to buy any securities, and there will not be any sale of any such securities in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of such state.

 

We realigned our executive team at the end of 2006 to take better advantage of certain skills of key executives. We moved Ben Nivens from Chief Financial Officer back into operations and placed him over all of our regions. We also realigned our drilling operations and some of the regional responsibilities of certain members of our technical staff. We promoted Bob Reeves to Chief Financial Officer from Senior Vice President, Chief Accounting Officer and Controller.

 

We have also created an intense accountability system that is real-time and focuses on lease operating expense, capital accountability, and reserve efficiency.

 

In light of the 2006 results, we decided to return to our core abilities and emphasize secondary and tertiary oil operations in our core areas of expertise in the Rockies and Permian Basin. We are currently evaluating the divestiture of certain oil and natural gas properties in the Mid-Continent, which we expect to complete late in the second quarter of 2007, and will use the proceeds to pay down debt.

 

Our realignment efforts and ideas were initiated during the fourth quarter of 2006 and first quarter of 2007. We believe that the purchase of the Big Horn Basin and the Williston Basin properties, the divestiture of certain Mid-Continent properties and the creation of the MLP will have positive effects on our operations and financial condition in 2007 and forward. We believe that the realignment of people, assets and direction will put us back on track in 2007.

 

Base Salaries

 

We provide named executive officers with a base salary that is commensurate with the peer group. The base salary for each named executive officer reflects his position, responsibilities and contributions relative to other executives and applicable peer group data provided by an outside consultant. Salaries are typically reviewed in February of each year as part of our performance and compensation review process, as well as at other times to recognize a promotion or change in job responsibilities or market positioning.

 

During 2006, our named executive officers received the following base salaries:

 

 

 

 

In evaluating the base salaries of our named executive officers, the Compensation Committee considered the historical and expected future performance of each such executive and competitive market data. In general, the Compensation Committee targets base salaries for our executive officers at between the 50th and 75th percentiles of base salaries for similar positions in the peer group, although base salaries may be lower than the 50th percentile or higher than the 75th percentile based on individual performance and experience, corporate performance and other factors. Based on a review of base salaries for the peer group and after considering the individual performance of each executive, the Compensation Committee increased the base salaries of our named executive officers as follows (effective as of March 1, 2007):

 

 

 

 

Annual Incentive Compensation

 

General

 

In general, an executive’s annual incentive compensation consists of the following:

 

 

We believe that making 75% of an executive’s annual incentive compensation contingent on long-term stock price performance more closely aligns the executive’s interests with those of our stockholders.

 

Although the equity component of annual incentive compensation typically consists of 50% restricted stock and 25% stock options, the mix of restricted stock and stock options may vary, however, depending on the individual circumstances of the named executive officer. For example, named executive officers that are at or near retirement age may be awarded restricted stock instead of stock options because restricted stock continues to vest after retirement, subject to the achievement of performance and time-based vesting conditions that were applicable prior to retirement.

 

Annual Cash Bonuses

 

An executive’s annual cash bonus is set at a level intended to result in 25% of the executive’s total annual incentive compensation being paid in cash. The amount of the annual cash bonus is not subject to any maximum or minimum thresholds; instead, annual cash bonus is determined by the Compensation Committee on an annual basis after considering corporate performance, individual performance and peer group comparisons. In general, 50% of an executive’s annual cash bonus is based on corporate performance and 50% of an executive’s annual cash bonus is based on individual performance.

 

We had a challenging year in 2006, and despite many positive accomplishments, we did not satisfy several of the performance objectives established by the Compensation Committee. As a result, annual cash bonuses were lower than would be expected during a year when we achieved our stated objectives or otherwise exceeded expectations. In setting total incentive compensation, the Compensation Committee typically establishes the amount of the annual cash bonus. The long-term equity component is then determined based on a formula where the total long-term incentive compensation will be as follows: a restricted stock grant equal to two times the annual cash bonus and a stock option grant equal to one times the annual cash bonus. Because we had a difficult year in 2006 and did not satisfy some of our performance objectives, the cash bonus was less than it would have been otherwise and, because of the multiplier effect of the long-term incentive compensation element to annual cash bonus, the equity component of annual incentive compensation was also less in proportion.

 

The following table sets forth the amount of each named executive officer’s annual cash bonus for 2006 and 2005 and the change in 2006 as compared to 2005:

 

 

 

 

Stock Option Awards and Restricted Stock Awards

 

The Compensation Committee makes stock option and restricted stock grants in amounts intended to result in approximately 75% of the executive’s total annual incentive compensation being equity based. The Compensation Committee believes that making approximately 75% of an executive’s compensation contingent on long-term stock price performance more closely aligns the executive’s interests with those of our stockholders. Like cash bonuses, stock options and restricted stock awards reflect progress toward our corporate goals and individual performance. However, when the annual cash bonus is not as large, for key executives the total amount of annual incentive compensation is decreased because of the multiplier effect relating to equity-based compensation.

 

Stock Options.  The Compensation Committee generally grants stock options with a value equal to the value of the annual cash bonus. The following table sets forth stock option grants on February 12, 2007 with respect to each named executive officer’s performance in 2006:

 

 

 

 

 

Stock options vest in three equal annual installments beginning on the first anniversary of the date of grant, subject to earlier vesting on a change in control or the termination of an employee’s employment due to death or disability and to such other terms as are set forth in the award agreement.

 

Due to Mr. I. Jon Brumley’s age, his equity-based compensation is entirely in restricted stock and does not include stock options.

 

Restricted Stock Awards.  The Compensation Committee generally grants restricted stock with a value equal to twice the value of the annual cash bonus. The Compensation Committee believes that restricted stock provides a more immediate benefit for purposes of attracting, retaining and motivating employees in an intensely competitive environment for executive talent.

 

The following table sets forth awards of restricted stock on February 12, 2007 with respect to each named executive officer’s performance in 2006:

 

 

 

 

Restricted stock awards granted to the our executive officers (and certain other members of management) with respect to 2006 have both a time-based vesting component and a performance-based vesting component, as follows:

 

 

 

 

If as of December 31, 2008, we have not achieved one of the performance-based conditions set forth above, then all shares of restricted stock subject to those awards will be immediately forfeited.

 

Restricted stock awards may also vest earlier in the event of a change in control or the termination of an employee’s employment due to death or disability.

 

Perquisites and Other Benefits

 

Perquisites

 

Our named executive officers generally do not receive benefits that are not available to all employees. For example, we provide all employees with a health club membership. Other than Mr. I. Jon Brumley’s use of our aircraft as described below, the aggregate value of all perquisites did not exceed $10,000 for any named executive officer during 2006.

 

The Compensation Committee has considered and approved Mr. I. Jon Brumley’s personal use of our aircraft for travel to and from Houston, Texas in connection with medical treatments for Mr. Brumley’s wife at MD Anderson Cancer Center. The aggregate incremental cost for personal use of our aircraft by Mr. and Mrs. Brumley was $50,521 in 2006.

 

Other Benefits

 

We seek to provide benefit plans, such as medical, life and disability insurance, in line with market conditions. Executive officers are eligible for the same benefit plans provided to other exempt employees, including insurance plans and supplemental plans chosen and paid for by employees who wish additional coverage. We do not have any special insurance plans for executive officers.

 

Post-Employment Benefits

 

On February 11, 2003, the Board adopted the Employee Severance Protection Plan, which provides all full-time employees with severance payments and benefits upon certain terminations of employment occurring from 90 days prior to until two years following a Change-in-Control (as defined in the plan). If during such time period, a named executive officer is involuntarily terminated by us other than for cause or he resigns for Good Reason (as defined in the plan), the officer will receive the following:

 

 

For more information regarding the Employee Severance Protection Plan, including potential payments, please read “Potential Payments Upon Termination or Change-in-Control — Change-in-Control” on page 30.

 

Stock Ownership Guidelines

 

In February 2005, the Compensation Committee adopted stock ownership guidelines that require each executive officer (and certain other members of management) to own shares of our common stock with a value at least equal to such person’s base salary. Until this guideline is achieved, the executive officer (or other member of management) will be required to retain at least 25% of his or her restricted stock for a period of two years after vesting. Our stock ownership guidelines are designed to increase executives’ equity stakes in us and to align executives’ interests more closely with those of our stockholders.

 

Impact of Tax and Accounting Treatment

 

Accounting Treatment

 

Effective January 1, 2006, we adopted SFAS 123R, which requires that companies recognize in their financial statements the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards. We utilize a standard option pricing model (i.e., Black-Scholes) to estimate the grant date fair value of stock options to be recorded in the financial statements over the applicable service period as required by SFAS 123R.

 

Tax Treatment

 

Incentive Stock Options

 

Some of the options issued to our officers under our stock option plan are intended to constitute “incentive stock options” within the meaning of Section 422 of the Code of 1986, as amended (the “Code”), while other options granted under our stock option plan are non-qualified stock options. Under rules applicable to U.S. corporations such as us, no deduction is available to the employer corporation upon the grant or exercise of an incentive stock option (although a deduction may be available if the employee sells the shares so purchased before the applicable holding period — generally one year from the date of exercise — expires), whereas, upon exercise of a non-qualified stock option, the employer corporation is entitled to a deduction in an amount equal to the income recognized by the employee. The tax treatment of stock options qualifying as incentive stock options is generally more favorable to employees than the tax treatment accorded non-qualified stock options, in that gain on the difference between the fair market value of our stock and the exercise price is not taxed until ultimate disposition of our shares rather than at exercise. This gain is permanently excluded from social security and Medicare taxes and, if the applicable holding period is met, this gain will be taxed at more favorable capital gains rates.

 

Corporate Tax Deduction on Compensation in Excess of $1 Million a Year

 

Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to the Chief Executive Officer or any of the four other most highly compensated officers. Performance-based compensation arrangements may qualify for an exemption from the deduction limit if they satisfy various requirements under Section 162(m). Although we consider the impact of this rule when developing and implementing our executive compensation program, we believe that it is important to preserve flexibility in designing compensation programs. Accordingly, we have not adopted a policy that all compensation must qualify as deductible under Section 162(m). While our performance-based restricted stock and stock option awards are intended to meet the requirements for “qualified performance-based compensation” (as defined in the Code), amounts paid under our other compensation programs may not qualify for this exemption.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of the Board has reviewed and discussed with our management the Compensation Discussion and Analysis included in this proxy statement. Based on that review and discussion, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

 

Compensation Committee of the Board

 

James A. Winne III, Chairman

Martin C. Bowen

Ted Collins, Jr.

 

Summary Compensation Table

 

The following table summarizes the total compensation awarded to, earned by, or paid to our named executive officers with respect to 2006:

 

 

 

 

These amounts reflect Encore’s recognized compensation expense for these awards under SFAS 123R, and do not correspond to the actual value that may be realized by the named executive officers.

 

 

Grants of Plan-Based Awards for 2006

 

The following table contains information with respect to the grant of plan-based awards to the named executive officers in 2006.

 

 

 

 

 

Restricted stock awards granted to the our executive officers (and certain other members of management) during 2006 have both a time-based vesting component and a performance-based vesting component, as follows:

 

 

 

If as of December 31, 2007, we had not achieved one of the performance-based conditions set forth above, then all shares of restricted stock subject to those awards would have been immediately forfeited. On February 13, 2007,

the Compensation Committee determined that we had satisfied at least one of the performance-based conditions with respect to the restricted stock awards granted during 2006 and, therefore, such awards are now subject only to the time-based vesting component.

 

Restricted stock awards may also vest earlier in the event of a change in control or the termination of an employee’s employment due to death or disability.

 

Outstanding Equity Awards at Year-End 2006

 

The following table sets forth information concerning the outstanding equity awards made to each named executive officer as of December 31, 2006.

 

 

 

 

 

Option Exercises and Stock Vested

 

The following table sets forth the number of shares acquired upon exercise of stock options and vesting of and restricted stock awards, and the value realized upon exercise or vesting of such awards, for each of our named executive officers in 2006.

 

 

 

 

Pension Benefits

 

We do not maintain any plans that provide for payments or other benefits at, following or in connection with retirement.

 

Non-Qualified Deferred Compensation

 

We do not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified under the Code.

 

Potential Payments Upon Termination or Change-in-Control

 

Cash Severance

 

Except as described below under “Change-in-Control,” our employees do not receive any cash severance payments in connection with a termination of employment. In the past, we have paid certain named executive

officers a cash severance on a case-by-case basis in exchange for a release and agreement to certain post-employment covenants.

 

Stock Options and Restricted Stock Awards

 

All salaried employees who receive stock options or restricted stock are subject to the same terms and conditions in the event of a termination or change in control.

 

Termination other than upon Normal Retirement, Change-in-Control, Death or Disability

 

Upon termination other than upon normal retirement, Change-in-Control, death or disability, options may be exercised to the extent exercisable at termination for a period of three months and any unvested restricted stock is forfeited.

 

Termination upon Normal Retirement

 

All salaried employees who receive restricted stock continue to vest upon normal retirement as if they were still employed by us. There are no special provisions related to retirement under our stock option agreements. Upon termination for any reason other than death, disability or in connection with a Change-in-Control, options may be exercised to the extent exercisable at termination for a period of three months.

 

Termination upon Change-in-Control

 

Upon a Change-in-Control (as described below under “Change-in-Control”), unless otherwise determined by the Compensation Committee, all options and restricted stock awards will vest and become exercisable and all transfer restrictions and vesting requirements on options and restricted stock awards will lapse. In such event, all awards will be cashed out based on the highest price per share paid in connection with the Change-in-Control transaction.

 

Termination upon Death or Disability

 

Upon death or disability, all stock options become fully exercisable and remain exercisable for two years (or the full term, if less). Upon death, all restricted stock awards become vested as to service-based vesting conditions but remain subject to the performance-based vesting conditions. Upon disability, all restricted stock awards continue to vest as if the participant remained employed for 18 months, but remain subject to the performance-based vesting conditions.

 

Change-in-Control

 

On February 11, 2003, the Board adopted the Employee Severance Protection Plan, which provides our employees with severance payments and benefits upon certain terminations of employment occurring from 90 days prior to until two years following a Change-in-Control (as described below). Our plan is considered a “double-trigger” plan that requires not only a Change-in-Control but also a termination of employment. If during the applicable time period, a named executive officer is involuntarily terminated by us or our successor other than for cause or he resigns for Good Reason (as described below), the officer will receive the following:

 

 

The Employee Severance Protection Plan also obligates us to maintain minimum level of director and officer liability insurance for a period of 36 months following the date any officer is entitled to benefits under the plan.

 

Generally, a Change-in-Control occurs upon (1) the acquisition by a party of 40% or more of the voting securities of Encore unless the party owned 20% prior to February 11, 2003; (2) a majority of the Board no longer

consists of persons who were Board members on February 11, 2002 or persons appointed to the Board by those members (“Incumbent Directors”); (3) approval by Encore’s stockholders of a complete liquidation or dissolution; or (4) approval by Encore’s stockholders of a reorganization, merger, share exchange, consolidation or a sale of all or substantially all of Encore’s assets, unless (a) more than 60% of the voting securities of the new entity are held by persons who were Encore stockholders immediately prior to the transaction, (b) no person holds more than 40% of the new entity, unless such person held 40% of the voting securities immediately prior to the transaction and (c) a majority of the board of the new entity are Incumbent Directors. A resignation for Good Reason occurs when an officer resigns as a result of a reduction in his titles, duties, responsibilities, compensation level or the relocation of his place of employment.

 

The following table shows the potential payments to our named executive officers under the Employee Severance Protection Plan, assuming that the employee was involuntarily terminated or resigned for Good Reason on December 31, 2006:

 

 

 

 

DIRECTOR COMPENSATION

 

The following table sets forth a summary of the compensation paid to non-employee directors in 2006: