UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

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ENCORE ACQUISITION COMPANY

 

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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 Tuesday, April 28, 2009, 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 our independent registered public accounting firm for 2009; and

 

(3) to transact such other business as may properly come before the annual 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 11, 2009.

 

By Order of the Board of Directors,

 

I. Jon Brumley

Chairman

 

Fort Worth, Texas

April 3, 2009

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE STOCKHOLDER MEETING TO BE HELD ON APRIL 28, 2009.

 

This proxy statement, our annual report to stockholders, and other proxy materials are available on the Internet at www.encoreacq.com/2009Proxy.cfm.

 

 

 

 

TABLE OF CONTENTS

 

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

 

PROXY STATEMENT

 

2009 ANNUAL MEETING OF STOCKHOLDERS
April 28, 2009

 

The Board of Directors (the “Board”) of Encore Acquisition Company (“EAC”) 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 Tuesday, April 28, 2009, at 9:00 a.m., Central Time. Stockholders of record as of March 11, 2009, 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, 52,754,036 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 3, 2009.

 

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 annual meeting.

 

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

 

Voting by Telephone.  Stockholders of record may submit proxies by following the telephone voting instructions on their proxy card. Most stockholders who hold shares beneficially in street name may vote by telephone by calling the number specified on the voting instruction card provided by their broker, trustee, or nominee. 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 card and mailing it in the accompanying pre-addressed envelope. Most stockholders who hold shares beneficially in street name may vote by mail by completing, signing, and dating the voting instruction card provided by their broker, trustee, or nominee and mailing it in the accompanying pre-addressed envelope.

 

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 April 27, 2009. 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 annual 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, trustee, or nominee which gives you the right to vote your shares, by attending the annual meeting and voting in person.

 

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.

 

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 for 2009 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 other items of business, including the ratification of the appointment of our independent registered public accounting firm, 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 the election of directors and the ratification of the appointment of our independent registered public accounting firm 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 our 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.

 

The Board recommends that you vote:

 

 

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

 

We have adopted a Code of Business Conduct and Ethics for our 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. 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.

 

Our Code of Business Conduct and Ethics and Corporate Governance Guidelines are available free of charge on the “Corporate Governance” section of our website at www.encoreacq.com. Stockholders may request free printed copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines from the following address:

 

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

 

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 our Chairman of the Board, and Mr. Jon S. Brumley, who is our Chief Executive Officer and President. In making this determination, the Board affirmatively determined that each independent director nominee had no material relationship with EAC (either directly or indirectly as a partner, stockholder, or officer of an organization that has a relationship with EAC), 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. However, the Board 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, except that one director owns bonds issued by EAC in an amount that did not affect the independence determinations.

 

As of the date of this proxy statement, the Board had 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:

 

 

In 2008, the Board held 11 meetings; the Audit Committee held 8 meetings; the Compensation Committee held 3 meetings; and the Nominating and Corporate Governance Committee held 3 meetings. The Nominating and Corporate Governance Committee also met in February 2009 in connection with matters related to the 2009 annual meeting of stockholders.

 

Each director attended at least 75 percent of all Board and applicable committee meetings in 2008. Directors are encouraged to attend annual stockholder meetings. All of our directors attended the 2008 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 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 407(d)(5) of Regulation S-K.

 

The report of the Audit Committee is included in this proxy statement beginning on page 35. The charter of the Audit Committee is available free of charge on the “Corporate Governance” section of our website at www.encoreacq.com. Stockholders may request free printed copies of the Audit Committee charter from our 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 Towers Perrin 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 Towers Perrin with respect to our executive compensation program and has not engaged Towers Perrin for any purpose. Towers Perrin prepares compensation surveys for review by the Compensation Committee in advance of the annual executive officer compensation review. Towers Perrin 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 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 our 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 28. The charter of the Compensation Committee is available free of charge on the “Corporate Governance” section of our website at www.encoreacq.com. Stockholders may request free printed copies of the Compensation Committee charter from our 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 free of charge 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 our address on page 3.

 

Special Stock Award Committee.  The Special Stock Award Committee may exercise all powers and authority of the Board (concurrently with the Compensation Committee) to award restricted shares (or units representing restricted shares) of our common stock, or restricted stock, to eligible employees under our equity-based incentive plan, subject to the following limitations:

 

 

During 2008 and as of the date of this proxy statement, no member of the Compensation Committee is or has been an officer or employee of EAC and no executive officer of EAC served on the compensation committee or board of any entity that employed any member of the Board.

 

The Board has 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:

 

 

The Nominating and Corporate Governance Committee is responsible for reviewing, approving, and ratifying any related person transaction.

 

Identifying Candidates

 

The Nominating and Corporate Governance Committee solicits ideas for potential Board candidates from a number of sources, including members of the Board, stockholders, our executive officers, 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. 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 our address on page 3.

 

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” on page 38.

 

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.

 

Mr. Winne was recommended for nomination to the Board by the Chairman of the Board.

 

Our non-management directors include all directors other than I. Jon Brumley and Jon S. Brumley. Each of the non-management directors is “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.

 

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, to our address on page 3. 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

 

ELECTION OF DIRECTORS

 

There are eight nominees for election to the Board this year. All of the nominees have served as directors since the last annual meeting, except for Mr. Winne, who resigned from the Board on July 10, 2008 and was reappointed to the Board and the Compensation Committee and Nominating and Corporate Governance Committee on August 5, 2008. 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 duly 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 Robert C. Reeves, 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.

 

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.

 

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

 

 

RATIFICATION OF THE APPOINTMENT OF
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2009

 

The Audit Committee of the Board has appointed Ernst & Young LLP as the independent registered public accounting firm to audit our consolidated financial statements and our internal control over financial reporting as of and for the year ending December 31, 2009. During 2008, Ernst & Young LLP served as our independent registered public accounting firm and also provided certain other services. Please read “Principal Accountant Fees and Services” on page 37. 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.

 

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2009 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.

 

The Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2009.

 

The following table sets forth the beneficial ownership of our common stock as of March 11, 2009:

 

 

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

 

 

 

 

Section 16(a) of the Exchange Act requires our directors, executive officers, and holders of more than 10 percent of our common stock to file reports with the SEC regarding their ownership and changes in ownership of our securities. We believe that, during 2008, our directors, executive officers, and 10 percent stockholders complied with all Section 16(a) filing requirements. 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.

 

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

 

 

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 2008. Our named executive officers are our Chief Executive Officer, our Chief Financial Officer, and our three other most highly compensated executive officers for 2008.

 

In establishing executive compensation, we believe that:

 

 

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

 

 

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 “Corporate Governance Principles and Board Matters — 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 of our Chairman of the Board and Chief Executive Officer is approved by the Compensation Committee in executive session. The compensation of our other named executive officers is recommended by our Chairman of the Board and Chief Executive Officer and reviewed and approved by the Compensation Committee.

 

Timing of Decisions

 

The Compensation Committee generally meets each February to establish base salaries for the then-current year, to approve cash bonuses, to 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. The Chairman of the Compensation Committee also met

with members of our management team and representatives of Towers Perrin during 2008 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. The timing of Board and committee meetings is determined by our 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 times to recognize an employee’s promotion, change in responsibility, or specific achievement.

 

Use of Compensation Consultant

 

The Compensation Committee considered advice and information from Towers Perrin in determining the amount and form of compensation for named executive officers and other employees with respect to 2008. This work included establishing an updated comparison group of companies, providing relevant market data, and information on trends in executive officer compensation. Management has not engaged Towers Perrin for any purpose.

 

Elements of Compensation

 

Our executive compensation program consists of the following elements:

 

 

During 2008, these compensation elements were designed to reward corporate and individual performance.

 

 

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 EAC.

 

Peer Group Comparisons

 

With the assistance of Towers Perrin, 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. Our peer group consists of oil and natural gas companies that compete with us for business opportunities and 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 2008, our industry peer group consisted of the following companies:

 

 

The composition of our 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.

 

In general, we target total direct compensation (base salary, annual cash bonus, and long-term equity-based incentives) for executive officers at between the 50th and 75th percentiles of total direct compensation for similar positions in our 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, while maintaining flexibility to pay outside that range, is necessary in order for us to attract, retain, and motivate executive talent in a very competitive energy marketplace.

 

In addition, the Compensation Committee also considered data collected from executive compensation surveys by nationally recognized compensation consultants. The data was for comparable positions at exploration and production companies and for general industry companies with revenues comparable to ours.

 

Performance Objectives

 

Our Performance in 2008.  2008 was a unique year for us and the oil and natural gas industry. Oil and natural gas prices began the year at $99.62 per barrel (“Bbl”) and $7.85 per thousand cubic feet (“Mcf”), respectively, and later rose to record levels in early July 2008 of $145.29 per Bbl and $13.58 per Mcf, respectively, before falling to $44.60 per Bbl and $5.62 per Mcf, respectively, by December 31, 2008. The dramatic rise in oil and natural gas prices resulted in a significant increase in oilfield service costs, which continue to remain elevated.

 

In May 2008, we announced that our Board had authorized our management team to explore a broad range of strategic alternatives to further enhance shareholder value, including, but not limited to, a sale or merger of the company. In connection with the strategic alternatives process, our Board approved retention plans for all of our then-current employees, excluding members of our strategic team, providing for the payment of twelve months of base salary or base rate of pay, as applicable, and providing for the payment of eight months of base salary for members of the strategic team, excluding our Chairman of the Board and Chief Executive Officer, subject to continued employment. Our 2008 results of operations include approximately $14.5 million of pre-tax expense related to the retention plans.

 

Even with the challenges of wildly fluctuating commodity prices, the distractions associated with a strategic alternatives process, and the effects of the worldwide economic recession, we had a very good year in 2008. Our accomplishments during 2008 included, among other things, the following:

 

 

 

For 2008, we recorded a 52 million barrels of oil equivalent (“MMBOE”) negative financial revision to our proved reserves based primarily on the lower prices of oil and natural gas and higher service costs on December 31, 2008 versus December 31, 2007. Revisions due to lower prices and higher operating costs were a negative 21 MMBOE. We also had negative revisions of 31 MMBOE for undeveloped reserves related to high pressure air projects in the Cedar Creek Anticline. The SEC currently requires reserve volumes to be calculated using commodity prices and service costs on December 31. The lower commodity prices and higher service costs at December 31, 2008 had the effect of decreasing the economic life of our oil and natural gas properties and making development of some previously recorded undeveloped reserves uneconomic.

 

2008 Performance Objectives.  For 2008, the Compensation Committee evaluated our financial condition and results of operations, our performance in light of oil and natural gas industry fundamentals, and how effectively management adapted to changing industry conditions and opportunities during the year in preparing itself to capitalize on opportunities in the future. In February 2008, the Compensation Committee established the following six objectives to measure our performance during 2008:

 

 

During 2008, we beat our budgeted production targets by three percent, but exceeded our drilling and development capital expenditure budget. We ended the year with a rate of return on capital invested that was slightly below our target at the budgeted price deck, but above our target based on average NYMEX prices. We were able to achieve our lease operating expense objective, after excluding the impact of retention bonuses, but we were slightly above our objective after considering such costs. Our F&D costs objective was not achieved, but we were able to repurchase $50 million of our common stock and to replace 111 percent of our production (excluding the effects of the reserve write downs).

 

Overall, we had a good year in 2008, but it was not without its challenges.

 

Base Salaries

 

We attempt to provide named executive officers with a base salary that is within range when compared to our 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 each February 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 2008, our named executive officers received the following base salaries (effective March 1, 2008):

 

 

In evaluating the adequacy of the base salaries of our named executive officers for 2009, the Compensation Committee considered the historical and expected future performance of each executive and competitive market data. In general, the Compensation Committee targets base salaries for our named executive officers at between the 50th and 75th percentiles of base salaries for similar positions in our peer group (except for Mr. I. Jon Brumley for whom other companies did not have a comparable position), 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 our peer group and after considering each executive’s individual performance and the challenging economic environment for 2009, the Compensation Committee decided to increase the base salaries of our named executive officers by three percent over 2008, which was the same cost-of-living adjustment provided to substantially all of our employees. These new base salaries were effective as of March 1, 2009.

 

Annual Incentive Compensation

 

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

 

 

We believe that making at least 75 percent 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. 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, the total amount of annual incentive compensation for executives is decreased because of the multiplier effect relating to equity-based compensation.

 

The equity component of annual incentive compensation typically consists of restricted stock with a value equal to twice the executive’s annual cash bonus and stock options with a value equal to the executive’s annual cash bonus. However, the mix of restricted stock and stock options may vary 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 at the time of retirement.

 

Annual Cash Bonuses.  An executive’s annual cash bonus is generally set at a level intended to result in 25 percent of the executive’s total annual incentive compensation being paid in cash. For 2008, the amount of the annual cash bonus was not subject to any maximum or minimum thresholds; instead, it was determined by the Compensation Committee after considering corporate performance, individual performance, and peer group

comparisons. For 2008, the amount of the annual cash bonus was determined by starting with a target bonus equal to the following for each named executive officer (expressed as a percentage of base salary):

 

 

The “target” bonus opportunity was then multiplied by a corporate performance factor of 85 percent for Messrs. J. S. Brumley, I. J. Brumley, and Nivens and 100 percent for Messrs. Reeves and Arms. The 85 percent corporate performance factor for Messrs. J. S. Brumley, I. J. Brumley, and Nivens was considered appropriate in light of the significant reserve write down described above. Messrs. Reeves and Arms had no direct responsibility for our reserves in 2008 and, therefore, did not have their corporate performance factor reduced as a result of the reserve write down.

 

The “target” bonus opportunity was further multiplied by an annual performance factor of 67 percent for each named executive officer, which resulted in a further reduction of the target bonus opportunity. This factor reflected our performance during 2008, which was below desired levels.

 

After applying the above factors to the “target” bonus opportunity and considering such other factors as it deemed appropriate, the Compensation Committee awarded each named executive officer the annual cash bonus set forth in the table below, which is compared to the annual cash bonus awarded in 2007:

 

 

Restricted Stock Awards.  The Compensation Committee generally grants restricted stock with a value equal to twice the executive’s 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 9, 2009 with respect to each named executive officer’s performance in 2008:

 

 

 

 

Restricted stock awards granted to our named executive officers (and certain other members of management) with respect to 2008 have both a time-based vesting component and a performance-based vesting component, as follows:

 

 

 

Restricted stock awards are subject to accelerated vesting in the event of a change in control or termination of employment due to death or disability and to such other terms as are set forth in the award agreement. The Compensation Committee also retains ultimate discretion, based on any factors it deems relevant, to waive or accelerate the time-based and performance-based vesting components of restricted stock awards.

 

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 9, 2009 with respect to each named executive officer’s performance in 2008:

 

 

 

 

Stock options vest in three equal annual installments beginning on the first anniversary of the date of grant, subject to accelerated vesting in the event of a change in control or termination of employment due to death or disability and to such other terms as are set forth in the award agreement. The Compensation Committee also retains ultimate discretion, based on any factors it deems relevant, to waive or accelerate the time-based vesting component of stock option awards.

 

Management Incentive Units.  In May 2007, the board of directors of Encore Energy Partners GP LLC, the general partner of Encore Energy Partners LP (“ENP”), granted management incentive units to its named executive officers, who also serve in the same capacities for us. A management incentive unit is a limited partner interest in ENP that entitles the holder to quarterly distributions to the extent paid to ENP’s our common unitholders and to increasing distributions upon the achievement of 10 percent compounding increases in ENP’s distribution rate to common unitholders. The management incentive units were based on ENP’s performance and designed to align the economic interests of our general partner’s executives with the interests of ENP’s unitholders; that is, annual distribution increases and capital appreciation for management of ENP’s general partner were tied directly to annual distribution increases and capital appreciation for ENP’s public unitholders.

 

On November 14, 2008, the management incentive units became convertible into ENP’s common units, at the option of the holder, at a ratio of one management incentive unit to approximately 3.1186 of ENP’s common units.

During the fourth quarter of 2008, the holders of the management incentive units converted all 550,000 management incentive units into 1,715,205 of ENP’s common units.

 

In addition to approval by the board of directors of Encore Energy Partners GP LLC, the grants of management incentive units were approved by our Board based on the recommendation of the Compensation Committee. In making its decision to approve the grant of management incentive units by the board of directors of Encore Energy Partners GP LLC, our Board and Compensation Committee relied on, among other things, the advice of an independent compensation consultant retained by the Compensation Committee, as well as analyses of equity compensation and ownership by other executives of master limited partnerships.

 

The management incentive units were issued based on the assumption that ENP would not pay the recipients a salary or a cash bonus, or grant them any equity awards under its long-term incentive plan. In February 2008, our named executive officers did not receive any grants of restricted stock or stock options with respect to performance in 2007 because, as named executive officers of ENP’s general partner, they had received the grant of management incentive units in May 2007.

 

Strategic Team Bonus Plan.  In February 2009, the Compensation Committee considered a revised compensation program for 2009 with the intent of creating a production and reserve-driven efficient oil company. The revised program is designed to accomplish the following objectives:

 

 

The revised program will build on the company’s strong entrepreneurial culture by providing employees with clear goals, empowering employees to achieve those goals and holding employees accountable if the goals are not achieved.

 

After considering the revised compensation program, the Compensation Committee approved the Strategic Team Bonus Plan (the “Bonus Plan”) to reward selected executive officers, managers, and certain other key employees for making significant contributions to our success. Awards under the Bonus Plan are based on the achievement of corporate objectives applicable to all covered employees and strategic and individual objectives tailored to each covered employee. For 2009, the Compensation Committee has established the following corporate objectives:

 

 

The actual cash bonus for 2009 will be determined based on the following formula: (1) the individual’s target 2009 bonus opportunity (set forth below), multiplied by (2) the level of achievement of corporate, strategic, and individual objectives as determined by the Compensation Committee in its discretion, (3) a corporate performance factor (between zero percent and 100 percent) determined by the Compensation Committee in its discretion, multiplied by (4) an individual performance factor (between zero percent and 100 percent) determined by the Compensation Committee in its discretion. So long as at least one of the five corporate objectives has been achieved, the Compensation Committee has discretion to award bonuses under the Bonus Plan based on the achievement of all, a portion of, or none of the other performance objectives. The adoption of the Bonus Plan is intended to allow bonuses paid to our named executive officers to meet the requirements for “qualified performance-based compensation,” which is exempt from the $1,000,000 annual deduction limitation set forth in Section 162(m) of the Code. See “— Impact of Tax and Accounting Treatment — Tax Treatment” below for additional discussion.

The following table sets forth the target 2009 bonus opportunity for our named executive officers (expressed as a percentage of each executive’s annual base salary):

 

 

The Bonus Plan also includes a variety of additional corporate performance measures that can reduce or increase 2009 bonuses, provided that aggregate reductions will not decrease the target 2009 bonus opportunity by more than 50 percent or increase the target 2009 bonus opportunity by more than 150 percent.

 

Under the Bonus Plan and subject to the limitations described above, the Compensation Committee retains ultimate discretion, based on any factors it deems relevant, to increase or reduce the amount of, or cancel payment of, any award otherwise payable based on the applicable performance objectives for 2009. The Compensation Committee also retains ultimate discretion, based on any factors it deems relevant, to make bonus awards outside the Bonus Plan.

 

Upon a change in control of our company, the Compensation Committee has discretion to pay out all awards under the Bonus Plan at a level determined in its sole discretion. Upon any termination of employment, a participant’s right to a bonus will be forfeited, except as the Compensation Committee may expressly provide otherwise in its discretion, subject to the attainment of the relevant performance goals for the year.

 

We anticipate that awards under the Bonus Plan for 2009 will be determined and paid in the first quarter of 2010.

 

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 health club membership options. The aggregate value of all perquisites did not exceed $10,000 for any named executive officer during 2008, except for Mr. I. Jon Brumley’s personal use of EAC’s aircraft, which was valued at $26,156.

 

In February 2008, the Compensation Committee approved personal use of EAC’s aircraft for Mr. I. Jon Brumley and Mr. Jon S. Brumley. Both executives are allowed personal use of EAC’s aircraft without charge for up to a maximum of 15 hours per year. For any personal use in excess of 15 hours a year, the executive will be required to reimburse us for variable costs related to such use, such as jet fuel, variable crew costs, flight insurance, landing fees, flight planning fees, and airport taxes. The executive will also be required to pay us an additional amount equal to 10 percent of jet fuel relating to personal use in excess of 15 hours per year.

 

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

 

We have an employee severance protection plan that 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 or our successor 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” beginning on page 32.

 

In February 2005, the Compensation Committee adopted stock ownership guidelines that require each named 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 named executive officer (or other member of management) will be required to retain at least 25 percent 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.

 

Accounting Treatment

 

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.

 

Tax Treatment

 

Incentive Stock Options.  Some of the options issued to our officers under the Plan are intended to constitute “incentive stock options” within the meaning of Section 422 of the Code, while other options granted under the 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). However, upon the 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 incentive stock options is generally more favorable to employees than the tax treatment accorded non-qualified stock options, in that the 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 the time the option is exercised. 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 $1,000,000 a Year.  Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation in excess of $1,000,000 paid to Chief Executive Officer and each of the three other highest paid officers (other than the Chief Financial Officer). 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, stock option, and Bonus Plan 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.

 

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.

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that EAC specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Exchange Act.

 

Compensation Committee of the Board

 

James A. Winne III, Chairman

Martin C. Bowen

Ted Collins, Jr.

 

The following table summarizes the total compensation awarded to, earned by, or paid to our named executive officers for the periods indicated:

 

 

 

 

 

 

Our named executive officers did not receive any grants of plan-based awards in 2008.

 

The following table sets forth information concerning the outstanding equity awards held by each named executive officer as of December 31, 2008.

 

 

 

 

The following table summarizes option exercises and the vesting of restricted stock awards and management incentive units during 2008 for each named executive officer:

 

 

 

 

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

 

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.

 

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 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 awards 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 awards 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 for grants prior to February 2009. Upon termination for any reason other than death, disability, or in connection with a change in control, options granted prior to February 2009 may be exercised to the extent exercisable at termination for a period of three months. All salaried employees who received stock option awards in February 2009, and who will receive them in the future, will continue to vest upon normal retirement as if they were still employed by us.

 

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 immediately 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 remaining term, if less). Upon death, all restricted stock awards vest 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, provided that if the participant remains disabled after 18 months, then the service-based vesting condition shall be deemed satisfied, but such awards shall remain subject to any performance-based vesting conditions.

 

Change in Control

 

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 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 such 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 obligates us to maintain a minimum level of director and officer liability insurance for a period of three years 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 percent or more of the voting securities of EAC unless the party owned 20 percent 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) the approval by EAC’s stockholders of a complete liquidation or dissolution; or (4) the approval by EAC’s stockholders of a reorganization, merger, share exchange, consolidation, or a sale of all or substantially all of EAC’s assets, unless (1) more than 60 percent of the voting securities of the new entity are held by persons who were EAC stockholders immediately prior to the transaction, (2) no person holds more than 40 percent of the new entity, unless such person held 40 percent of the voting securities immediately prior to the transaction, and (3) 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 titles, duties, responsibilities, or compensation level, or the relocation of place of employment.

Potential Payments

 

Change in Control.  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 in connection with a change in control on December 31, 2008:

 

 

 

 

Death, Disability, or Other Termination of Employment.  The following table shows the potential payments to our named executive officers pursuant to the terms of EAC’s restricted stock and option awards, assuming the death, disability or other termination of the employee on December 31, 2008:

 

 

 

 

Officers or employees of us or our affiliates who also serve as directors do not receive additional compensation for their service as a director. Each director is fully indemnified by us for actions associated with being a director to the extent permitted under Delaware law.

 

The following table sets forth a summary of the compensation paid to or earned by non-employee directors in 2008: