1398664--2/26/2009--Encore_Energy_Partners

related topics

{tax, income, asset}

{debt, indebtedness, cash}

{gas, price, oil}

{stock, price, operating}

{operation, natural, condition}

{loss, insurance, financial}

{cost, regulation, environmental}

{operation, international, foreign}

{interest, director, officer}

{control, financial, internal}

{regulation, change, law}

{condition, economic, financial}

To fund our capital expenditures, we must 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. We 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 could cause a decline in our liquidity and cash flows from operations, which may force us to reduce our distributions or cease paying distributions altogether. 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 and results of operations. 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. 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. Furthermore, in the future our commodity derivative contract positions may not adequately protect us from changes in commodity prices. The counterparties to our derivative contracts may not be able to perform their obligations to us, which could materially affect our cash flows and results of operations. 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. 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. 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. Shortages of rigs, equipment, and crews could delay our operations and reduce our cash available for distribution. If we do not make acquisitions, our future growth, and ability to pay or increase distributions could be limited. Any acquisitions we complete 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. 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 depend on certain customers for a substantial portion 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. Competition in the oil and natural gas industry is intense, and 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. 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. Our debt levels may limit our flexibility to obtain additional financing and pursue other business opportunities. We are unable to predict the impact of the recent downturn in the credit markets and the resulting costs or constraints in obtaining financing on our business and financial results. Our revolving credit facility has substantial restrictions and financial covenants that may restrict our business and financing activities and our ability to pay distributions. Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured. 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. We have limited control over the activities on properties we do not operate. 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 operations expose us to significant costs and liabilities with respect to environmental and operational safety matters. Risks Inherent in an Investment in Us 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. EAC is not limited in its ability to compete with us, which could limit our ability to acquire additional assets or businesses. EAC, as the owner of our general partner, has the power to appoint and remove our directors and management. 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. 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. Unitholders have limited voting rights and are not entitled to elect our general partner or its directors. Even if unitholders are dissatisfied, they cannot remove our general partner without its consent. Control of our general partner may be transferred to a third party without unitholder consent. We may issue additional units, including units that are senior to the common units, without unitholder approval. Our partnership agreement restricts the voting rights of unitholders owning 20 percent 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. 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 the 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. Unitholder liability may not be limited if a court finds that unitholder action constitutes control of our business. Unitholders may have liability to repay distributions. 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. An increase in interest rates may cause the market price of our common units to decline. Tax Risks to Common Unitholders 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 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. 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. 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. Unitholders may be required to pay taxes on their share of our income even if they do not receive any cash distributions from us. Tax gain or loss on the disposition of our common units could be more or less than expected. Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them. 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. 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 the common units. Unitholders likely will be subject to state and local taxes and return filing requirements as a result of investing in our common units.

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1398664--2/26/2009--Encore_Energy_Partners_LP