Grasslands around the world are experiencing increased woody encroachment while drought frequency and severity is expected to increase with climate change. These processes will result in changes in the local carbon, water, and energy balances. Two closely located eddy covariance towers on native prairie sites in Kansas with differing burn regimes provided a unique opportunity to investigate those changes with minimal confounding climate factors. Daytime turbulent fluxes were analyzed throughout the growing season during two wet years (2008, 2009) and one drought year (2011). The site experiencing more woody encroachment (K4B) was a greater carbon sink every year, especially in 2011, when the annually burned site (KON) became a negligible sink and potential source of carbon. K4B also had greater seasonal water use efficiency (WUE) at all times except during drought and when burned. Evidence of water loss from deeper, stored sources was shown at K4B through cumulative evaporative loss that exceeded precipitation during drought conditions. Changes in the nature of the turbulent fluxes were also investigated through deviations from similarity theory, quadrant analysis, and wavelet decomposition. Wavelet analysis determined the size of eddies primarily involved in net exchange, showing differences between sites across small to medium scales (average diameter of 4.0–108 m). Increased surface heterogeneity and roughness with woody encroachment was seen through smaller eddy size of maximum transport and slightly weakened applicability of similarity theory at K4B. Eddy size decreased over the course of the growing season, in a strikingly inverse relation to grass leaf area index, likely corresponding to greater canopy height and roughness. Variance of the correlation between carbon and water, indicative of more variable plant productivity, is much greater across all scales in 2011 at KON only. Overall, results indicate woody encroachment increases resilience to drought. Though carbon sequestration remains stronger at the woody encroachment site, it comes at the cost of far increased water loss, including from deeper groundwater resources, which could prove detrimental in combination with predicted climate change.