Attached files
file | filename |
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8-K - FORM 8-K - ENDEAVOUR INTERNATIONAL CORP | h69239e8vk.htm |
EX-23.1 - EX-23.1 - ENDEAVOUR INTERNATIONAL CORP | h69239exv23w1.htm |
EX-99.1 - EX-99.1 - ENDEAVOUR INTERNATIONAL CORP | h69239exv99w1.htm |
EX-99.2 - EX-99.2 - ENDEAVOUR INTERNATIONAL CORP | h69239exv99w2.htm |
Exhibit 99.3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Endeavour International Corporation:
Endeavour International Corporation:
We have audited the accompanying consolidated balance sheets of Endeavour International Corporation
and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders equity and comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Endeavour International Corporation and subsidiaries
as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2007, the
Company changed its accounting for uncertain tax positions. As also discussed in Note 2 to the
consolidated financial statements, effective January 1, 2008, the Company changed its method of
accounting and disclosures for fair value measurements and fair value reporting of financial assets
and liabilities.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Endeavour International Corporations internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 13, 2009 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Houston, Texas
March 13, 2009, except for the effects of discontinued operations, as discussed in Note 23, which is as of January 8, 2010.
Houston, Texas
March 13, 2009, except for the effects of discontinued operations, as discussed in Note 23, which is as of January 8, 2010.
1
Endeavour International Corporation
Consolidated Balance Sheets
(Amounts in thousands)
Consolidated Balance Sheets
(Amounts in thousands)
December 31, | ||||||||
2008 | 2007 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 31,421 | $ | 13,810 | ||||
Restricted cash, related to rig commitments |
20,739 | 22,000 | ||||||
Accounts receivable |
22,325 | 26,708 | ||||||
Prepaid expenses and other current assets |
42,194 | 41,874 | ||||||
Current assets of discontinued operations |
16,726 | 13,855 | ||||||
Total Current Assets |
133,405 | 118,247 | ||||||
Property and Equipment, Net |
232,346 | 273,324 | ||||||
Goodwill |
213,949 | 215,330 | ||||||
Other Assets |
9,165 | 11,029 | ||||||
Long Term Assets of Discontinued Operations |
148,605 | 129,693 | ||||||
Total Assets |
$ | 737,470 | $ | 747,623 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 38,630 | $ | 25,484 | ||||
Current maturities of debt |
13,000 | | ||||||
Accrued expenses and other |
36,642 | 40,843 | ||||||
Current liabilities of Discontinued Operations |
22,231 | 14,722 | ||||||
Total Current Liabilities |
110,503 | 81,049 | ||||||
Long-Term Debt |
214,855 | 266,250 | ||||||
Deferred Taxes |
67,299 | 101,554 | ||||||
Other Liabilities |
55,791 | 61,991 | ||||||
Long-term Liabilities of Discontinued Operations |
46,051 | 41,630 | ||||||
Total Liabilities |
494,499 | 552,474 | ||||||
Commitments and Contingencies |
||||||||
Series C Convertible Preferred Stock (Liquidation
preference: $125,000) |
125,000 | 125,000 | ||||||
Stockholders Equity: |
||||||||
Series B Preferred stock (Liquidation preference: $2,957) |
| | ||||||
Common stock; shares issued and outstanding 128,572 at
2008 and 127,006 at 2007 |
129 | 127 | ||||||
Additional paid-in capital |
244,471 | 241,539 | ||||||
Treasury stock |
(450 | ) | | |||||
Accumulated other comprehensive loss |
(1,266 | ) | (923 | ) | ||||
Accumulated deficit |
(124,913 | ) | (170,594 | ) | ||||
Total Stockholders Equity |
117,971 | 70,149 | ||||||
Total Liabilities and Stockholders Equity |
$ | 737,470 | $ | 747,623 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Endeavour International Corporation
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
For the Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Revenues |
$ | 170,781 | $ | 135,876 | $ | 24,881 | ||||||
Expenses: |
||||||||||||
Operating expenses |
32,317 | 27,263 | 4,477 | |||||||||
Depreciation, depletion and amortization |
67,326 | 68,982 | 13,831 | |||||||||
Impairment of oil and gas properties |
36,970 | | 849 | |||||||||
General and administrative |
15,932 | 15,853 | 17,240 | |||||||||
Total expenses |
152,545 | 112,098 | 36,397 | |||||||||
Operating Profit (Loss) |
18,236 | 23,778 | (11,516 | ) | ||||||||
Other Income (Expense): |
||||||||||||
Derivatives: |
||||||||||||
Unrealized gain (loss) |
76,666 | (89,132 | ) | 34,531 | ||||||||
Realized gain (loss) |
(28,578 | ) | 12,048 | | ||||||||
Interest expense |
(22,975 | ) | (19,282 | ) | (8,571 | ) | ||||||
Unrealized foreign currency exchange gain (loss) |
5,569 | (139 | ) | (598 | ) | |||||||
Other |
1,057 | 374 | (4,021 | ) | ||||||||
Total Other Income (Expense) |
31,739 | (96,131 | ) | 21,341 | ||||||||
Income (Loss) Before Income Taxes |
49,975 | (72,353 | ) | 9,825 | ||||||||
Income Tax (Benefit) Expense |
24,116 | (22,208 | ) | 14,870 | ||||||||
Income (Loss) from Continuing Operations |
25,859 | (50,145 | ) | (5,045 | ) | |||||||
Income (loss) from Discontinued Operations, net of
tax |
30,631 | 1,068 | (1,793 | ) | ||||||||
Net Income (Loss) |
56,490 | (49,077 | ) | (6,838 | ) | |||||||
Preferred Stock Dividends |
10,809 | 11,238 | 1,991 | |||||||||
Net Income (Loss) to Common Stockholders |
$ | 45,681 | $ | (60,315 | ) | $ | (8,829 | ) | ||||
Basic Net Income (Loss) Per Common Share: |
||||||||||||
Continuing operations |
$ | 0.12 | $ | (0.50 | ) | $ | (0.08 | ) | ||||
Discontinued operations |
0.24 | 0.01 | (0.02 | ) | ||||||||
Total |
$ | 0.36 | $ | (0.49 | ) | $ | (0.10 | ) | ||||
Diluted Net Income (Loss) per Common Share: |
||||||||||||
Continuing operations |
$ | 0.15 | $ | (0.50 | ) | $ | (0.08 | ) | ||||
Discontinued operations |
$ | 0.17 | 0.01 | (0.02 | ) | |||||||
Total |
$ | 0.32 | $ | (0.49 | ) | $ | (0.10 | ) | ||||
Weighted Average Number of Common Shares Outstanding: |
||||||||||||
Basic |
128,312 | 123,118 | 86,636 | |||||||||
Diluted |
178,312 | 123,118 | 86,636 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Endeavour International Corporation
Consolidated Statements of Cash Flows
(Amounts in thousands)
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income (loss) |
$ | 56,490 | $ | (49,077 | ) | $ | (6,838 | ) | ||||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||||||
Depreciation, depletion and amortization |
81,734 | 76,850 | 20,164 | |||||||||
Impairment of oil and gas properties |
36,970 | | 849 | |||||||||
Deferred tax expense (benefit) |
17,682 | (12,925 | ) | 13,038 | ||||||||
Unrealized (gain) loss on derivative instruments |
(76,666 | ) | 89,132 | (34,531 | ) | |||||||
Amortization of non-cash compensation |
3,226 | 4,968 | 11,573 | |||||||||
Foreign currency exchange (gain) loss on non-operating
liabilities |
(10,508 | ) | 1,078 | 1,012 | ||||||||
Non-cash interest charges and other |
11,879 | 2,948 | 5,396 | |||||||||
Changes in assets and liabilities: |
||||||||||||
(Increase) Decrease in receivables |
9,795 | 30,127 | (32,165 | ) | ||||||||
(Increase) Decrease in prepaid expenses and other |
(3,745 | ) | (984 | ) | (9,749 | ) | ||||||
Increase (Decrease) in current liabilities |
6,323 | (13,611 | ) | 17,151 | ||||||||
Net Cash Provided by (Used in) Operating Activities |
133,180 | 128,506 | (14,100 | ) | ||||||||
Cash Flows From Investing Activities: |
||||||||||||
Capital expenditures |
(66,370 | ) | (88,007 | ) | (55,496 | ) | ||||||
Acquisitions, net of cash acquired |
| | (376,915 | ) | ||||||||
(Increase) decrease in restricted cash and other investing activities |
1,519 | (20,133 | ) | 5,293 | ||||||||
Net Cash Used in Investing Activities |
(64,851 | ) | (108,140 | ) | (427,118 | ) | ||||||
Cash Flows From Financing Activities: |
||||||||||||
Repayment of borrowings |
(120,000 | ) | (47,000 | ) | | |||||||
Proceeds from borrowings |
88,000 | 7,000 | 225,000 | |||||||||
Payment of preferred dividends |
(10,625 | ) | (2,656 | ) | | |||||||
Financing costs paid |
(3,538 | ) | (263 | ) | (9,565 | ) | ||||||
Proceeds from common stock, net of issuance costs |
| | 83,967 | |||||||||
Proceeds from preferred stock, net of issuance costs |
| | 100,657 | |||||||||
Other financing activities |
(450 | ) | (821 | ) | 3,310 | |||||||
Net Cash Provided by (Used in) Financing Activities |
(46,613 | ) | (43,740 | ) | 403,369 | |||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
21,716 | (23,374 | ) | (37,849 | ) | |||||||
Effect of Foreign Currency Changes on Cash |
| | 1,536 | |||||||||
Cash and Cash Equivalents, Beginning of Period |
16,440 | 39,814 | 76,127 | |||||||||
Cash and Cash Equivalents, End of Period |
$ | 38,156 | $ | 16,440 | $ | 39,814 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Endeavour International Corporation
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
(Amounts in thousands)
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
(Amounts in thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Other | Total | Total | ||||||||||||||||||||||||||||||
Common | Treasury | Additional | Deferred | Comprehensive | Accumulated | Stockholders | Comprehensive | |||||||||||||||||||||||||
Stock | Stock | Paid-In Capital | Compensation | Loss | Deficit | Equity | Income (Loss) | |||||||||||||||||||||||||
Balance, December 31, 2005 |
$ | 75 | $ | | $ | 155,734 | $ | (9,437 | ) | $ | (4,578 | ) | $ | (101,450 | ) | $ | 40,344 | |||||||||||||||
Adoption of stock-based compensation accounting
standards |
| (9,110 | ) | 9,437 | | | 327 | |||||||||||||||||||||||||
Issuance of common stock as deferred compensation |
2 | | 473 | | | | 475 | |||||||||||||||||||||||||
Exercise of warrants and options |
2 | 3,308 | | | | 3,310 | ||||||||||||||||||||||||||
Other issuances of common stock |
40 | | 89,353 | | | | 89,393 | |||||||||||||||||||||||||
Amortization of deferred compensation |
| 11,573 | | | | 11,573 | ||||||||||||||||||||||||||
Expenses related to Convertible Preferred Stock
offering |
| | (24,343 | ) | | | | (24,343 | ) | |||||||||||||||||||||||
Preferred stock dividend |
| | | | | (1,991 | ) | (1,991 | ) | |||||||||||||||||||||||
Comprehensive Loss: |
| |||||||||||||||||||||||||||||||
Net Loss |
| | | | | (6,838 | ) | (6,838 | ) | $ | (6,838 | ) | ||||||||||||||||||||
Other comprehensive income (net of tax): |
| |||||||||||||||||||||||||||||||
Unrealized loss on derivative instruments,
net of tax |
| | | | 3,690 | | 3,690 | 3,690 | ||||||||||||||||||||||||
Unrealized gain (loss) on available-for-
sale securities |
| | | | 888 | | 888 | 888 | ||||||||||||||||||||||||
Balance, December 31, 2006 |
$ | 119 | $ | | $ | 226,988 | $ | | $ | | $ | (110,279 | ) | $ | 116,828 | $ | (2,260 | ) | ||||||||||||||
Balance, December 31, 2006 |
$ | 119 | $ | | $ | 226,988 | $ | | $ | | $ | (110,279 | ) | $ | 116,828 | |||||||||||||||||
Preferred stock dividend |
6 | | 10,509 | | | (11,238 | ) | (723 | ) | |||||||||||||||||||||||
Amortization of deferred compensation |
| | 4,975 | | | | 4,975 | |||||||||||||||||||||||||
Other |
2 | | (933 | ) | | | | (931 | ) | |||||||||||||||||||||||
Comprehensive Loss: |
||||||||||||||||||||||||||||||||
Net Loss |
| | | | | (49,077 | ) | (49,077 | ) | $ | (49,077 | ) | ||||||||||||||||||||
Other comprehensive income (net of tax): |
||||||||||||||||||||||||||||||||
Unrealized loss on derivative instruments,
net of tax |
| | | | (852 | ) | | (852 | ) | (852 | ) | |||||||||||||||||||||
Unrealized gain (loss) on available-for-
sale securities |
| | | | (71 | ) | | (71 | ) | (71 | ) | |||||||||||||||||||||
Balance, December 31, 2007 |
$ | 127 | $ | | $ | 241,539 | $ | | $ | (923 | ) | $ | (170,594 | ) | $ | 70,149 | $ | (50,000 | ) | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Endeavour International Corporation
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
(Amounts in thousands)
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
(Amounts in thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Other | Total | Total | ||||||||||||||||||||||||||||||
Common | Treasury | Additional | Deferred | Comprehensive | Accumulated | Stockholders | Comprehensive | |||||||||||||||||||||||||
Stock | Stock | Paid-In Capital | Compensation | Loss | Deficit | Equity | Income (Loss) | |||||||||||||||||||||||||
Balance, December 31, 2007 |
$ | 127 | $ | | $ | 241,539 | $ | | $ | (923 | ) | $ | (170,594 | ) | $ | 70,149 | ||||||||||||||||
Preferred stock dividend |
| | | | | (10,809 | ) | (10,809 | ) | |||||||||||||||||||||||
Amortization of deferred compensation |
| | 3,226 | | | 3,226 | ||||||||||||||||||||||||||
Treasury stock repurchase |
| (450 | ) | | | | | (450 | ) | |||||||||||||||||||||||
Other |
1 | | (294 | ) | | (293 | ) | |||||||||||||||||||||||||
Comprehensive Loss: |
||||||||||||||||||||||||||||||||
Net Income |
| | | | 56,490 | 56,490 | $ | 56,490 | ||||||||||||||||||||||||
Other comprehensive income (net of tax): |
||||||||||||||||||||||||||||||||
Unrealized loss on derivative instruments,
net of tax |
| | | | (342 | ) | | (342 | ) | (342 | ) | |||||||||||||||||||||
Unrealized gain (loss) on available-for-
sale securities |
| | | | (1 | ) | | (1 | ) | |||||||||||||||||||||||
Balance, December 31, 2008 |
$ | 128 | $ | (450 | ) | $ | 244,471 | $ | | $ | (1,266 | ) | $ | (124,913 | ) | $ | 117,970 | $ | 56,148 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 1 Description of Business
Endeavour International Corporation was incorporated under the laws of the state of Nevada on
January 13, 2000. As used in these Notes to Consolidated Financial Statements, the terms
Endeavour, we, us, our and similar terms refer to Endeavour International Corporation and,
unless the context indicates otherwise, its consolidated subsidiaries.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared on the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of America (US
GAAP) and have been presented on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. These accounting
principles require management to use estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities as of the date of the financial statements, and revenues and
expenses during the reporting period. Management reviews its estimates, including those related to
the determination of proved reserves, estimates of future dismantlement costs, income taxes and
litigation. Actual results could differ from those estimates. In the opinion of management, all
normal recurring adjustments considered necessary for a fair presentation have been included in
these financial statements. Certain amounts for prior periods have been reclassified to conform to
the current presentation.
Management believes it is reasonably possible that the following material estimates affecting the
financial statements could change in the coming year: (1) estimates of proved oil and gas reserves,
(2) estimates as to the expected future cash flow from proved oil and gas properties, (3) estimates
of future dismantlement and restoration costs, (4) estimates of fair values used in purchase
accounting and (5) estimates of the fair value of derivative instruments.
Principles of Consolidation
The accompanying consolidated financial statements include all of the accounts of Endeavour
and our consolidated subsidiaries. All significant intercompany accounts and transactions have
been eliminated. Investments in entities over which we have significant influence, but not
control, are carried at cost adjusted for equity in earnings or (losses) and distributions
received.
Cash and Cash Equivalents
We consider all highly liquid instruments with an original maturity of 90 days or less at the
time of purchase to be cash equivalents.
Inventories
Materials and supplies and oil inventories are valued at the lower of cost or market value
(net realizable value).
1
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Full Cost Accounting for Oil and Gas Operations
Under the full cost method, all acquisition, exploration and development costs, including
certain directly related employee costs and a portion of interest expense, incurred for the purpose
of finding oil and gas are capitalized and accumulated in pools on a country-by-country basis.
Capitalized costs include the cost of drilling and equipping productive wells, including the
estimated costs of dismantling and abandoning these assets, dry hole costs, lease acquisition
costs, seismic and other geological and geophysical costs, delay rentals and costs related to such
activities. Employee costs associated with production and other operating activities and general
corporate activities are expensed in the period incurred.
Capitalized costs are limited on a country-by-country basis (the ceiling test). The ceiling test
limitation is calculated as the sum of the present value of future net cash flows related to
estimated production of proved reserves, using end-of-the-current-period prices including the
effect of derivative instruments that qualify as cash flow hedges, discounted at 10%, plus the
lower of cost or estimated fair value of unproved properties, all net of expected income tax
effects. Under the ceiling test, if the capitalized cost of the full cost pool, net of deferred
taxes, exceeds the ceiling limitation, the excess is charged as an impairment expense.
We utilize a single cost center for each country where we have operations for amortization
purposes. Any conveyances of properties are treated as adjustments to the cost of oil and gas
properties with no gain or loss recognized unless the operations are suspended in the entire cost
center or the conveyance is significant in nature.
Unproved property costs include the costs associated with unevaluated properties and properties
under development and are not initially included in the full cost amortization base (where proved
reserves exist) until the project is evaluated. These costs include unproved leasehold acreage,
seismic data, wells and production facilities in progress and wells pending determination, together
with interest costs capitalized for these projects. Seismic data costs are associated with specific
unevaluated properties where the seismic data is acquired for the purpose of evaluating acreage or
trends covered by a leasehold interest owned by us. Significant unproved properties are assessed
periodically for possible impairment or reduction in value. If a reduction in value has occurred,
these property costs are considered impaired and are transferred to the related full cost pool.
Geological and geophysical costs included in unproved properties are transferred to the full cost
amortization base along with the associated leasehold costs on a specific project basis. Costs
associated with wells in progress and wells pending determination are transferred to the
amortization base once a determination is made whether or not proved reserves can be assigned to
the property. Costs of dry holes are transferred to the amortization base immediately upon
determination that the well is unsuccessful. Unproved properties whose acquisition costs are not
individually significant are aggregated, the portion of such costs estimated to be ultimately
nonproductive, based on experience, are amortized to the full cost pool over an average holding
period.
In countries where the existence of proved reserves has not yet been determined, unevaluated
property costs remain capitalized in unproved property cost centers until proved reserves have been
established, exploration activities cease or impairment and reduction in value occurs. If
exploration activities result in the establishment of a proved reserve base, amounts in the
unproved property cost center are reclassified as proved properties and become subject to
amortization and the application of the ceiling test. When it is determined that the value of
unproved property costs have been permanently diminished (in part or in
2
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
whole) based on the impairment evaluation and future exploration plans, the unproved property cost
centers related to the area of interest are impaired, and accumulated costs charged against
earnings.
Other Property and Equipment
Other oil and gas assets, computer equipment and furniture and fixtures are recorded at cost,
less accumulated depreciation. The assets are depreciated using the straight-line method over
their estimated useful lives of two to five years.
Capitalized Interest
We capitalize interest on expenditures for significant exploration and development projects
while activities are in progress to bring the assets to their intended use. Capitalized interest
is calculated by multiplying our weighted-average interest rate on debt by the amount of qualifying
costs and is limited to gross interest expense. As costs are transferred to the full cost pool,
the associated capitalized interest is also transferred to the full cost pool.
Marketable Securities
The marketable securities reflected in these financial statements are deemed by management to
be available-for-sale and, accordingly, are reported at fair value, with unrealized gains and
losses reported in other comprehensive income and reflected as a separate component within the
Statement of Stockholders Equity unless we determine that an other-than-temporary impairment has
occurred. Realized gains and losses on securities available-for-sale are included in other
income/expense and, when applicable, are reported as a reclassification adjustment, net of tax, in
other comprehensive income. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
At December 31, 2006, we determined that our investment in equity securities were subject to an
other-than-temporary impairment. Therefore, we recorded an impairment of $1.8 million for 2006 as
we impaired the value of the equity securities to the fair market value of the securities, based on
the quoted market price of the securities at December 31, 2006.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair value of the
assets acquired and liabilities assumed in an acquisition. Intangible assets represent the
purchase price allocation to the assembled workforce as a result of the acquisition in 2004. We
assess the carrying amount of goodwill and other indefinite-lived intangible assets by testing the
asset for impairment annually at year-end, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test requires allocating goodwill and
all other assets and liabilities to reporting units. The fair value of each reporting unit is
determined and compared to the book value of the reporting unit. An impairment loss is recognized
to the extent that the carrying amount exceeds the assets fair value.
Dismantlement, Restoration and Environmental Costs
We recognize liabilities for asset retirement obligations associated with tangible long-lived
assets, such as producing well sites, offshore production platforms, and natural gas processing
plants, with a
3
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
corresponding increase in the related long-lived asset. The asset retirement cost is depreciated
along with the property and equipment in the full cost pool. The asset retirement obligation is
recorded at fair value and accretion expense, recognized over the life of the property, increases
the liability to its expected settlement value. If the fair value of the estimated asset
retirement obligation changes, an adjustment is recorded for both the asset retirement obligation
and the asset retirement cost.
Revenue Recognition
We use the entitlements method to account for sales of gas production. We may receive more or
less than our entitled share of production. Under the entitlements method, if we receive more than
our entitled share of production, the imbalance is treated as a liability at the market price at
the time the imbalance occurred. If we receive less than our entitled share, the imbalance is
recorded as an asset at the lower of the current market price or the market price at the time the
imbalance occurred. Oil revenues are recognized when production is sold to a purchaser at a fixed
or determinable price, when delivery has occurred, title has transferred and collectibility of the
revenue is probable.
Significant Customers
Our oil sales are to a limited number of customers, each of which accounts for more than 10%
of revenue: Chevron North Sea Ltd; Shell U.K. Limited, and Esso Exploration and Production. Our
gas and natural gas liquids sales are to StatoilHydro, Shell UK Limited and Esso Exploration and
Production UK Limited.
Derivative Instruments and Hedging Activities
From time to time, we may utilize derivative financial instruments to hedge cash flows from
operations or to hedge the fair value of financial instruments. We may use derivative financial
instruments with respect to a portion of our oil and gas production or a portion of our variable
rate debt to achieve a more predictable cash flow by reducing our exposure to price fluctuations.
These transactions are likely to be swaps, collars or options and to be entered into with major
financial institutions or commodities trading institutions. Derivative financial instruments are
intended to reduce our exposure to declines in the market prices of crude oil and natural gas that
we produce and sell, to increases in interest rates and to manage cash flows in support of our
annual capital expenditure budget. We also have two embedded derivatives related to our debt
instruments.
We record all derivatives at fair market value in our Consolidated Balance Sheets at the end of
each period. The accounting for the fair market value, and the changes from period to period,
depends on the intended use of the derivative and the resulting designation. This evaluation is
determined at each derivatives inception and begins with the decision to account for the
derivative as a hedge, if applicable. The accounting for changes in the fair value of a derivative
instrument that is not accounted for as a hedge is included in other (income) expense as an
unrealized gain or loss. Where we intend to account for a derivative as a hedge, we document, at
its inception, the hedging relationship, the risk management objective and the strategy for
undertaking the hedge. The documentation includes the identification of the hedging instrument,
the hedged item or transaction, the nature of the risk being hedged, and the method that will be
used to assess effectiveness of derivative instruments that receive hedge accounting treatment.
Changes in fair value to hedge instruments, to the extent the hedge is effective, are recognized in
other comprehensive income until the forecasted transaction occurs. Hedge effectiveness is
assessed at least
4
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
quarterly based on total changes in the derivatives fair value. Any ineffective portion of the
derivative instruments change in fair value is recognized immediately in other (income) expense.
We discontinue hedge accounting prospectively when (1) we determine that the derivative is no
longer effective in offsetting changes in the fair value or cash flows of a hedged item (including
hedged items such as firm commitments or forecasted transactions); (2) the derivative expires; (3)
it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment
no longer meets the definition of a firm commitment; or (5) management determines that designating
the derivative as a hedging instrument is no longer appropriate.
Concentrations of Credit and Market Risk
Financial instruments that potentially subject us to concentrations of credit risk consist
principally of cash deposits at financial institutions. At various times during the year, we may
exceed the federally insured limits. To mitigate this risk, we place our cash deposits only with
high credit quality institutions. Management believes the risk of loss is minimal.
Derivative financial instruments that hedge the price of oil and gas, interest rates or currency
exposure will be generally executed with major financial or commodities trading institutions which
expose us to market and credit risks, and may at times be concentrated with certain counterparties
or groups of counterparties. Although notional amounts are used to express the volume of these
contracts, the amounts potentially subject to credit risk, in the event of non-performance by the
counterparties, are substantially smaller. We review the credit ratings of our counterparties to
derivative contracts (who are all lenders under our senior bank facility) on a regular basis and to
date we have not experienced any non-performance by any of our counterparties, currently BNP
Paribas S.A. and J. Aron & Company, a subsidiary of Goldman Sachs International. At December 31,
2008, our derivative instruments do not require either side to maintain collateral or margin
accounts.
As an independent oil and gas producer, our revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and gas, which are dependent upon numerous
factors beyond our control, such as economic, political and regulatory developments and competition
from other sources of energy. The energy markets have historically been very volatile, and there
can be no assurance that oil and gas prices will not be subject to wide fluctuations in the future.
A substantial or extended decline in oil and gas prices could have a material adverse effect on our
financial position, results of operations, cash flows and our access to capital and on the
quantities of oil and gas reserves that may be economically produced.
Foreign Currency Translation
The U.S. dollar is the functional currency for all of our existing operations, as a majority
of all revenue and financing transactions in these operations are denominated in U.S. dollars. For
foreign operations with the U.S. dollar as the functional currency, monetary assets and liabilities
are remeasured into U.S. dollars at the exchange rate on the balance sheet date. Nonmonetary
assets and liabilities are translated into U.S. dollars at historical exchange rates. Income and
expense items are translated at exchange rates prevailing during each period. Adjustments are
recognized currently as a component of foreign currency gain or loss and deferred income taxes. To
the extent that business transactions are not denominated in U.S. dollars, we are exposed to
foreign currency exchange rate risk.
5
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Income Taxes
We use the liability method of accounting for income taxes under which deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of
the provision for income taxes in the period that includes the enactment date. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not
that some portion of, or all of, the deferred tax assets will not be realized.
Share-Based Payments
We recognize all share-based payments to employees, including grants of employee stock
options, based on their fair values. The share-based compensation cost is measured at the grant
date, based on the calculated fair value of the award, and is recognized as general and
administrative expense over the employees requisite service period (generally the vesting period
of the equity award). We apply the fair value method in accounting for stock option grants using
the Black-Scholes Method.
It is our policy to use authorized but unissued shares of stock when stock options are exercised.
At December 31, 2008, we had approximately 7.7 million additional shares available for issuance
pursuant to our existing stock incentive plan.
Adoption of Accounting for Uncertainty in Income Taxes
In July 2006, the Financial Accounting Standards Board issued a new interpretation that seeks
to reduce the diversity in practice associated with certain aspects of measurement and recognition
in accounting for income taxes. This new interpretation also provides guidance on classification,
derecognition, interest, penalties and accounting in interim periods and also requires expanded
disclosure with respect to the uncertainty in income taxes. The interpretation was effective for us
as of January 1, 2007. Our adoption of this standard on January 1, 2007 did not have a material
effect on our financial statements. We recognize interest and/or penalties related to income tax
matters in income tax expense.
Adoption of Fair Value Standards
On January 1, 2008, we applied the new standard that permits entities to choose to measure
many financial instruments and certain other items at fair value. This standard expanded the use
of fair value measurement and applied to entities that elect the fair value option. The adoption
of this pronouncement did not have a material impact on our financial position or results of
operations.
On January 1, 2008, we applied the new standards which defined fair value, established a framework
for measuring fair value in generally accepted accounting principles and expanded disclosures about
fair value measurements. The new standards does not require new fair value measurements, rather,
its provisions apply when fair value measurements are performed under other accounting
pronouncements.
In February 2008, the standard was deferred for one year as it applies to nonfinancial assets and
liabilities that are recognized or disclosed at fair value on a nonrecurring basis (e.g. those
measured at fair value in a
6
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
business combination and goodwill impairment). We are reviewing the potential impact, if any, of
this new guidance.
Recent Accounting Pronouncements
In December 2007, the FASB issued enhanced guidance related to the measurement of identifiable
assets acquired, liabilities assumed and disclosure of information related to business combinations
and their effect. The standard applies prospectively to business combinations in 2009 and is not
subject to early adoption. We are currently evaluating the potential impact of this new guidance
on business combinations and related valuations.
In December 2007, the FASB issued a new standard for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition
of a noncontrolling interest (minority interest) as a component of consolidated equity. This is a
change from the current practice to present noncontrolling interests in liabilities or between
liabilities and stockholders equity. Similarly, the new standard requires consolidated net income
and comprehensive income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interests. The standard is effective prospectively with respect
to transactions involving noncontrolling financial interests that occur on or after January 1,
2009. We are currently evaluating the potential impact, if any, of this new guidance.
In March 2008, the FASB issued a new standard that requires entities to present expanded and
detailed financial statement disclosures for their derivatives and hedged financial instruments.
This standard applies to all derivatives and non-derivative instruments designated and qualifying
as hedges, including bifurcated derivative instruments and related hedged items. The new standard
is effective for interim periods and fiscal years beginning after November 15, 2008. We do not
expect the adoption of this pronouncement to have a material impact on our financial position or
results of operations.
In May 2008, the FASB posted a new staff position that applies to convertible debt that may be
settled in part or in whole in cash upon conversion. The new staff position requires required
issuers of this form of debt to account for its debt and equity components separately. The new
position also expands the definition of convertible preferred shares of an entitys stock that are
mandatorily redeemable financial instruments classified as liabilities. The new FASB staff
position is effective for financial statements issued for fiscal years after December 15, 2008 and
interim period within those fiscal years. It must be applied retroactively to all presented
periods. We are currently evaluating the potential impact, if any, of this new guidance.
In June 2008, the FASB issued a new staff position that addresses whether instruments that are
granted in share-based payment transactions are participating securities prior to vesting; and
therefore are required to be included in the earnings allocation in the calculation of earnings per
share (EPS) under the two-class method as described in a prior FASB standard. The new staff
position requires entities to treat unvested share-based payment awards with non-forfeitable rights
to dividend or dividend equivalents as a separate class of securities in calculating EPS. The new
staff position is effective for fiscal years beginning after December 15, 2008. We are currently
evaluating the potential impact, if any, of this new guidance.
7
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 3 Earnings per Share
Basic loss per common share is computed by dividing net loss to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted loss per share
includes the effect of our outstanding stock options, warrants and shares issuable pursuant to
convertible debt, convertible preferred stock and certain stock incentive plans under the treasury
stock method, if including such instruments is dilutive.
December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Net income (loss) to common stockholders |
||||||||||||
Basic |
$ | 45,681 | $ | (60,315 | ) | $ | (8,829 | ) | ||||
Add Effect of: |
||||||||||||
Preferred dividends |
10,625 | | | |||||||||
Diluted |
$ | 56,306 | $ | (60,315 | ) | $ | (8,829 | ) | ||||
Weighted Average Number of Common
Shares Outstanding: |
||||||||||||
Basic |
128,312 | 123,118 | 86,636 | |||||||||
Add Effect of: |
||||||||||||
| | |||||||||||
Preferred stock |
50,000 | | | |||||||||
Diluted |
178,312 | 123,118 | 86,636 | |||||||||
For each of the periods presented, shares associated with stock options, warrants, convertible
debt, convertible preferred stock and certain stock incentive plans are not included because their
inclusion would be antidilutive (i.e., reduce the net loss per share). The common shares
potentially issuable arising from these instruments, which were outstanding during the periods
presented in the financial statements, consisted of:
December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Options and stock-based compensation |
2 | | 626 | |||||||||
Warrants |
| | 219 | |||||||||
Convertible debt |
32,725 | 16,185 | 16,185 | |||||||||
Convertible preferred stock |
| 50,000 | 8,356 | |||||||||
Common shares potentially issuable |
32,727 | 66,185 | 25,386 | |||||||||
Note 4 Acquisitions and Dispositions
Acquisition of Talisman Expro Limited
On November 1, 2006, we completed the acquisition of all of the outstanding shares of Talisman
Expro Limited for US $366 million, after purchase price adjustments and expenses (the Talisman
8
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Acquisition). As a result of the Talisman Acquisition, we acquired interests in eight fields in
the United Kingdom sector of the North Sea.
The following is an allocation of the purchase price of the Talisman Acquisition:
Purchase price |
$ | 359,594 | ||
Legal, accounting and other direct expenses |
6,051 | |||
Total purchase price |
$ | 365,645 | ||
Allocation of purchase price: |
||||
Current assets |
$ | 30,373 | ||
Property and equipment |
209,534 | |||
Goodwill |
254,147 | |||
Current liabilities |
(14,345 | ) | ||
Deferred tax liability |
(89,175 | ) | ||
Other long-term liabilities |
(24,889 | ) | ||
$ | 365,645 | |||
The purchase price allocation is based on an assessment of the fair value of the assets
acquired and liabilities assumed in the Talisman Acquisition. The assessment of the fair values of
oil and gas properties acquired was based on projections of expected future net cash flows,
discounted to present value. Other assets and liabilities were recorded at their historical book
values which we believe represent the best current estimate of fair value.
The following is a reconciliation of the changes in goodwill for the year ended December 31, 2008
and 2007:
December 31, | ||||||||
2008 | 2007 | |||||||
Balance at beginning of year |
$ | 283,324 | $ | 291,752 | ||||
Acquisition |
1,225 | (8,428 | ) | |||||
Balance at end of year |
$ | 284,549 | $ | 283,324 | ||||
$68.0
million in goodwill has been allocated to our discontinued
operations. See Footnote 23.
Purchase of Interest in Enoch Field
During the second quarter of 2006, we invested $12 million for the purchase of an eight
percent interest in the Enoch Field located in Block 16/13a in the North Sea.
9
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 5 Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
December 31, | ||||||||
2008 | 2007 | |||||||
Current deferred tax asset |
$ | | $ | 30,167 | ||||
Fair market value of commodity derivatives current |
31,649 | 4,018 | ||||||
Prepaid insurance |
1,322 | 1,255 | ||||||
Inventory |
5,109 | 1,426 | ||||||
Current tax receivable |
| 4,083 | ||||||
Other |
4,114 | 925 | ||||||
$ | 42,194 | $ | 41,874 | |||||
Note 6 Property and Equipment
Property and equipment included the following:
December 31, | ||||||||
2008 | 2007 | |||||||
Oil and gas properties under the full cost method: |
||||||||
Subject to amortization |
$ | 239,024 | $ | 244,906 | ||||
Not subject to amortization: |
||||||||
Acquired in 2008 |
37,288 | | ||||||
Acquired in 2007 |
14,746 | 23,366 | ||||||
Acquired in 2006 |
70,368 | 90,177 | ||||||
Acquired prior to 2006 |
12,154 | 16,013 | ||||||
373,580 | 374,462 | |||||||
Other oil and gas activities |
4,875 | 4,875 | ||||||
Computers, furniture and fixtures |
3,236 | 2,027 | ||||||
Total property and equipment |
381,691 | 381,364 | ||||||
Accumulated depreciation, depletion and amortization |
(149,345 | ) | (108,040 | ) | ||||
Net property and equipment |
$ | 232,346 | $ | 273,324 | ||||
The majority of costs not subject to amortization relate to values assigned to unproved
reserves acquired. The remainder of costs not subject to amortization relate to exploration costs
such as drilling costs for projects awaiting approved development plan or the determination of
whether or not proved reserves can be assigned and other seismic and geological and geophysical
costs. These costs are transferred to the amortization base when it is determined whether or not
proved reserves can be assigned to such properties. This analysis is dependent upon well
performance, results of infield drilling, approval of development plans, drilling results and
development of identified projects and periodic assessment of reserves. We expect acquisition
costs excluded from amortization to be transferred to the amortization base over the next five
years due to a combination of well performance and results of infield drilling
10
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
relating to currently producing assets and the drilling and development of identified projects
acquired, such as the Rochelle field. We expect exploration costs not subject to amortization to
be transferred to the amortization base over the next three years as development plans are
completed and production commences on existing discoveries such as the Columbus, Cygnus and
Rochelle projects.
The following is a summary of our oil and gas properties not subject to amortization as of December
31, 2008:
Costs Incurred in the Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | Prior to 2006 | Total | ||||||||||||||||
Acquisition costs |
$ | 803 | $ | | $ | 48,816 | $ | | $ | 49,619 | ||||||||||
Exploration costs |
32,645 | 11,319 | 21,552 | 12,152 | 77,668 | |||||||||||||||
Capitalized interest |
3,840 | 3,427 | | | 7,267 | |||||||||||||||
Total oil and gas
properties not
subject to
amortization |
$ | 37,288 | $ | 14,746 | $ | 70,368 | $ | 12,152 | $ | 134,554 | ||||||||||
During 2008, 2007 and 2006, we capitalized $8.0 million, $7.2 million and $9.3 million,
respectively, in certain directly related employee costs. During 2008, 2007 and 2006, we
capitalized $4.0 million, $6.4 million and $0.5 million, respectively, in interest.
Note 7 Other Assets
Other long-term assets consisted of the following at December 31:
2008 | 2007 | |||||||
Intangible assets workforce in place: |
||||||||
Gross |
$ | 4,800 | $ | 4,800 | ||||
Accumulated amortization |
(3,363 | ) | (2,806 | ) | ||||
1,437 | 1,994 | |||||||
Debt issuance costs |
5,714 | 6,857 | ||||||
Fair market value of long-term portion of commodity derivatives |
1,702 | 1,957 | ||||||
Other |
312 | 221 | ||||||
$ | 9,165 | $ | 11,029 | |||||
Intangible assets represent the purchase price allocated to the assembled workforce as a
result an acquisition. During 2006, one of our co-chief executive officers became chairman of the
board, president and chief executive officer. Concurrently, our other co-chief executive officer
became vice chairman of the board and ceased being our employee although he continued in a
consultancy role during 2007. As a result, we assessed the carrying amount of the intangible asset
related to our workforce-in-place and determined an impairment of $1.2 million, included in DD&A
expense, was necessary. The remaining value of the intangible asset is being amortized over its
estimated life of six years using the straight-line method. Estimated amortization expense is $0.6
million for each year through December 31, 2010.
Debt issuance costs are amortized over the life of the related debt obligation.
11
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 8 Accrued Expenses
We had the following accrued expenses outstanding:
December 31, | ||||||||
2008 | 2007 | |||||||
Derivative liability |
$ | 1,193 | $ | 22,495 | ||||
Foreign taxes payable |
6,655 | 5,249 | ||||||
Deferred foreign taxes payable |
15,825 | | ||||||
Accrued interest |
30 | 4,751 | ||||||
Preferred dividends |
1,011 | 828 | ||||||
Accrued compensation |
2,135 | 754 | ||||||
Crude oil imbalance |
8,954 | | ||||||
Other |
839 | 6,766 | ||||||
$ | 36,642 | $ | 40,843 | |||||
Note 9 Debt and Notes Payable
Our debt and notes payable consisted of the following:
December 31, | ||||||||
2008 | 2007 | |||||||
Senior notes, 6% fixed rate, due 2012 |
$ | 81,250 | $ | 81,250 | ||||
Senior bank facility, variable rate, due 2011 |
113,000 | 110,000 | ||||||
Convertible bonds, due 2014 |
44,496 | | ||||||
Second lien term loan, variable rate, due 2011 |
| 75,000 | ||||||
238,746 | 266,250 | |||||||
Less: debt discount |
(10,891 | ) | | |||||
Less: current maturities |
(13,000 | ) | | |||||
Long-term debt |
$ | 214,855 | $ | 266,250 | ||||
Principal maturities of debt at December 31, 2008 are as follows:
2009 |
$ | 13,000 | ||
2010 |
| |||
2011 |
100,000 | |||
2012 |
125,746 | |||
2013 |
| |||
Thereafter |
| |||
6% Senior notes, due 2012
During 2005, we issued in a private offering $81.25 million aggregate principal amount of
convertible senior notes due 2012. The notes bear interest at a rate of 6.00% per annum, payable
in January and July. The notes are convertible into shares of our common stock at an initial
conversion rate of 199.2032 shares
12
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
of common stock per $1,000 principal amount of notes, subject to adjustment, which represents an
initial conversion price of approximately $5.02 per share. In connection with the issuance of
these notes, we paid $3.6 million in financing and other costs. Upon specified change of control
events, each holder of those notes may require us to purchase all or a portion of the holders
notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any,
up to but excluding the date of purchase.
Senior bank facility
As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we
entered into a $225 million senior bank facility, subject to a borrowing base limitation. The
borrowing base is subject to redetermination every six months with an independent reserve report
required every 12 months. At December 31, 2008, the borrowing base capacity was $126 million, of
which $113 million was outstanding. The senior bank facility also provides for issuances of
letters of credit of up to an aggregate $60 million. While all letters of credit issued under the
senior bank facility will reduce the total amount available for drawing under the senior bank
facility, letters of credit issued to secure abandonment liabilities in respect of borrowing base
assets will not reduce the amount available under the borrowing base. As of December 31, 2008, we
have $30.1 million of outstanding letters of credit related to abandonment liabilities on certain
of our oil and gas properties.
Indebtedness under the facility will be secured by cross guarantees from all of our subsidiaries,
share pledges from all of our subsidiaries, floating charges over the operating assets held in the
United Kingdom and a receivables pledge in Norway. Our borrowings under the senior bank facility
will bear interest at LIBOR plus 1.3% for the first $112 million of availability, and LIBOR plus
1.7% for up to an additional $14 million of availability.
The senior bank facility contains customary covenants, which limit our ability to incur
indebtedness, pledge our assets, dispose of our assets and make exploration and appraisal
expenditures. In addition, the senior bank facility contains various financial and technical
covenants, including:
| a maximum consolidated debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 3.0:1; |
| a minimum current assets to current liabilities ratio of 1.1:1; |
| a minimum debt coverage ratio of 1.2:1 for the initial tranche and 1.15:1 for the second tranche; |
| a minimum field life net present value (NPV) to loans outstanding coverage ratio of 1.4:1 for the period through March 31, 2009 and 1.5:1 thereafter for the initial tranche, and 1.25:1 for the period through March 31, 2009 and 1.3:1 thereafter for the second tranche; and |
| a minimum loan life NPV to loans outstanding coverage ratio of 1.2:1 for the period through March 31, 2009 and 1.3:1 thereafter for the initial tranche, and 1.15:1 for the period through March 31, 2009 and 1.2:1 thereafter for the second tranche. |
The final maturity is the earlier of five years or the reserve tail date, being the date when the
remaining borrowing base reserves are projected to be 20% or less of the initially approved
borrowing base reserves. The senior bank facility is subject to mandatory prepayment in the event
of a change of control of any obligor under the senior bank facility agreement. It is prepayable
at our option at any time without penalty.
At December 31, 2008, we had $113 million outstanding under our senior bank facility. The senior
bank facility has a current borrowing base capacity of $126 million, which is secured by our oil
and gas assets.
The borrowing base is subject to redetermination every six months (on April 1 and October 1), and
we are
13
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
required to provide our lenders with an independent reserve report every 12 months. Based
on our reserve report at December 31 and June 30 each year, commodity prices set by our lenders and
terms set forth in the credit agreement, the maximum capacity of our borrowing base is set, and any
amounts outstanding over the redetermined borrowing base must be repaid within 45 days of the
redetermination date. The senior bank facility is also subject to maximum commitment levels by the
participating lenders that change over time.
We have reflected $13 million in current maturities of long-term debt at December 31, 2008 due to
the borrowing base capacity and maximum commitment levels. The next scheduled redetermination of
our borrowing base will occur on April 1, 2009. We are currently undergoing the redetermination
process based on our reserve report as of December 31, 2008. We cannot estimate the level of the
borrowing base capacity that will be in effect as of April 1, 2009 although we do expect the
borrowing base capacity to decrease given the decline in commodity prices during 2008.
Second lien term loan
As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we
entered into a $75 million second lien term loan. In January 2008, we terminated our obligations
under this loan and repaid all of our outstanding indebtedness, including accrued interest and
related fees.
Convertible Bonds
In January 2008, we issued 11.5% Convertible Bonds due 2014 (the Convertible Bonds) for
gross proceeds of $40 million pursuant to a private offering to a sophisticated investor in Norway.
The net proceeds from the issuance of the Convertible Bonds was used to repay a portion of our
outstanding indebtedness. The $40 million Convertible Bonds bear interest at a rate of 11.5% per
annum, compounded quarterly, and are unconditionally guaranteed by us on a senior unsecured basis.
Interest is compounded quarterly and added to the outstanding principal balance each quarter.
Interest is not payable in cash, but is instead payable in kind upon maturity of the bonds. The
bonds are convertible into shares of our common stock at an initial conversion price of $2.36 per
$1,000 of principal. The conversion price will be adjusted in accordance with the terms of the
bonds upon occurrence of certain events, including payment of common stock dividends, common stock
splits or issuance of common stock at a price below the then current market price.
Upon the fourth anniversary, the holders have the right to redeem the Convertible Bonds if the
weighted average closing price of our common stock for the preceding 30 days is less than the
conversion price, as adjusted. If the holders do not exercise this right, the right will lapse and
the conversion price will be reset to the then current market price of our common stock if such
price is lower than the conversion price, as adjusted.
If we undergo a change of control as defined, the holders of the bonds have the right, subject to
certain conditions, to redeem the bonds and accrued interest. The bonds may become immediately due
upon the occurrence of certain events of default, as defined.
Two derivatives are associated with the conversion and change in control features of the
Convertible Bonds. At December 31, 2008, the combined fair market value of these derivatives is
$14.6 million, reflecting a $0.7 million decrease during 2008 that was recorded in unrealized gains
(losses) on derivatives.
14
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 10 Income Taxes
The loss before income taxes and the components of the income tax expense recognized on the
Consolidated Statement of Income are as follows:
Total | Discontinued | |||||||||||||||||||||||
Continuing | Operations - | |||||||||||||||||||||||
UK | U.S. | Other | Operations | Norway | Total | |||||||||||||||||||
Year Ended December 31, 2008 |
||||||||||||||||||||||||
Net income (loss)
before taxes |
$ | 66,129 | $ | (11,969 | ) | $ | (4,185 | ) | $ | 49,975 | $ | 63,244 | $ | 113,219 | ||||||||||
Current tax expense |
11,158 | | 10 | 11,168 | 27,879 | 39,047 | ||||||||||||||||||
Deferred tax expense |
22,673 | | 303 | 22,976 | 15,415 | 38,391 | ||||||||||||||||||
Foreign currency
gains on deferred tax liabilities |
(10,028 | ) | | (10,028 | ) | (10,681 | ) | (20,709 | ) | |||||||||||||||
Total tax expense |
23,803 | | 313 | 24,116 | 32,613 | 56,729 | ||||||||||||||||||
Net income (loss)
after taxes |
$ | 42,326 | $ | (11,969 | ) | $ | (4,498 | ) | $ | 25,859 | $ | 30,631 | $ | 56,490 | ||||||||||
Year Ended December 31, 2007 |
||||||||||||||||||||||||
Net income (loss)
before taxes |
$ | (68,704 | ) | $ | (10,233 | ) | $ | 6,584 | $ | (72,353 | ) | $ | 14,095 | $ | (58,258 | ) | ||||||||
Current tax
(benefit) expense |
2,898 | (3 | ) | 289 | 3,184 | 562 | 3,746 | |||||||||||||||||
Deferred tax
(benefit) expense |
(27,430 | ) | | 711 | (26,719 | ) | 8,951 | (17,768 | ) | |||||||||||||||
Foreign currency
losses on deferred
tax liabilities |
1,327 | | | 1,327 | 3,514 | 4,841 | ||||||||||||||||||
Total tax (benefit)
expense |
(23,205 | ) | (3 | ) | 1,000 | (22,208 | ) | 13,027 | (9,181 | ) | ||||||||||||||
Net income (loss)
after taxes |
$ | (45,499 | ) | $ | (10,230 | ) | $ | 5,584 | $ | (50,145 | ) | $ | 1,068 | $ | (49,077 | ) | ||||||||
15
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Total | Discontinued | |||||||||||||||||||||||
Continuing | Operations - | |||||||||||||||||||||||
UK | U.S. | Other | Operations | Norway | Total | |||||||||||||||||||
Year Ended December 31, 2006 |
||||||||||||||||||||||||
Net income (loss)
before taxes |
$ | 33,275 | $ | (23,463 | ) | $ | 13 | $ | 9,825 | $ | 7,250 | $ | 17,075 | |||||||||||
Current tax
(benefit) expense |
1,837 | (45 | ) | 69 | 1,861 | 9,014 | 10,875 | |||||||||||||||||
Deferred tax
(benefit) expense |
10,105 | | | 10,105 | (1,840 | ) | 8,265 | |||||||||||||||||
Foreign currency
losses on deferred
tax liabilities |
2,904 | | | 2,904 | 1,869 | 4,773 | ||||||||||||||||||
Total tax (benefit)
expense |
14,846 | (45 | ) | 69 | 14,870 | 9,043 | 23,913 | |||||||||||||||||
Net income (loss)
after taxes |
$ | 18,429 | $ | (23,418 | ) | $ | (56 | ) | $ | (5,045 | ) | $ | (1,793 | ) | $ | (6,838 | ) | |||||||
The following table presents the principal reasons for the difference between our effective
tax rates and the United States federal statutory income tax rate of 35%.
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Federal income tax expense (benefit) at
statutory rate |
$ | 17,491 | $ | (25,323 | ) | $ | 3,439 | |||||
Taxation of foreign operations |
12,464 | (1,790 | ) | 6,292 | ||||||||
Change in valuation allowance US |
4,150 | 3,515 | 8,286 | |||||||||
Change in valuation allowance UK |
| | (6,013 | ) | ||||||||
Foreign currency (gain)/loss on deferred taxes |
(10,028 | ) | 1,328 | 2,904 | ||||||||
Other |
39 | 62 | (38 | ) | ||||||||
Income Tax Expense, continuing operations |
$ | 24,116 | $ | (22,208 | ) | $ | 14,870 | |||||
Discontinued operations - Norway |
32,613 | 13,027 | 9,043 | |||||||||
Total Income Tax Expense |
56,729 | (9,181 | ) | 23,913 | ||||||||
Effective Income Tax Rate |
45 | % | (32 | )% | 117 | % | ||||||
During 2008, 2007 and 2006, we incurred taxes in all of the jurisdictions that we do business
in except for the U.S. In 2008, 2007 and 2006, we had a loss before taxes of $8.3 million, $6.9
million and $20.6 million, respectively, in the U.S. and we did not record any income tax benefits
as there was no assurance that we could generate any U.S. taxable earnings, and therefore recorded
a valuation allowance of the full amount of deferred tax asset generated.
Deferred income taxes result from the net tax effects of temporary timing differences between the
carrying amounts of assets and liabilities reflected on the financial statements and the amounts
recognized for income tax purposes. The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities are as follows at December 31:
16
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
2008 | 2007 | |||||||
Deferred tax asset: |
||||||||
Deferred compensation |
$ | 5,771 | $ | 6,834 | ||||
Unrealized loss on derivative instruments |
4,506 | 27,292 | ||||||
Asset retirement obligation |
5,244 | 13,808 | ||||||
Net operating loss and capital loss carryforward |
21,633 | 37,820 | ||||||
Other |
621 | 1,767 | ||||||
Total deferred tax assets |
37,775 | 87,521 | ||||||
Less valuation allowance |
(23,701 | ) | (19,697 | ) | ||||
Total deferred tax assets after valuation allowance |
14,074 | 67,824 | ||||||
Deferred tax liability: |
||||||||
Property, plant and equipment |
(67,810 | ) | (133,367 | ) | ||||
Unrealized gain on derivative instruments |
(23,628 | ) | | |||||
Petroleum revenue tax, net of tax benefit |
(1,642 | ) | (5,133 | ) | ||||
Debt discount |
(3,267 | ) | | |||||
Other |
(850 | ) | (711 | ) | ||||
Total deferred tax liabilities |
(97,197 | ) | (139,211 | ) | ||||
Net deferred tax liability |
$ | (83,123 | ) | $ | (71,387 | ) | ||
During 2006, we recognized a deferred tax liability of approximately $98 million due to the
excess of book over tax basis of the assets acquired in the Enoch and Talisman acquisitions.
At December 31, 2008, we had the following carryforwards available to reduce future income taxes:
Years of | Carryforward | |||||||
Types of Carryforward | Expiration | Amounts | ||||||
Continuing Operations - U.S. Net operating loss |
2022 - 2028 | $ | 61,613 | |||||
Discontinued Operations - Norway Uplift |
Indefinite | $ | 2,700 | |||||
With the exception of $61.6 million of net operating loss carryforward attributable to our
U.S. operations for which a valuation allowance has been established, the remaining carryforward
amounts shown above have been recognized for financial statement reporting purposes to reduce
deferred tax liability.
For U.S. federal income tax purposes, certain limitations are imposed on an entitys ability to
utilize its NOLs in future periods if a change of control, as defined for federal income tax
purposes, has taken place. In general terms, the limitation on utilization of NOLs and other tax
attributes during any one year is determined by the value of an acquired entity at the date of the
change of control multiplied by the then-existing long-term, tax-exempt interest rate. The manner
of determining an acquired entitys value has not yet been addressed by the Internal Revenue
Service. We have determined that, for federal income tax purposes, a change of control occurred
during 2004. However, we do not believe such limitations will significantly impact our ability to
utilize the NOL; rather our ability to generate future taxable income will have such an impact.
Recognition of the benefits of the deferred tax assets will require that we generate future taxable
income. There can be no assurance that we will generate any earnings or any specific level of
earnings in future years. Therefore, we have established a valuation allowance for deferred tax
assets of approximately $23.7 million, $19.7 million and $17.3 million of December 31, 2008, 2007
and 2006, respectively.
17
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
During 2008, the valuation allowance in the U.S. increased $2.9 million due to net operating losses
and increased $1.1 million for net operating losses in other jurisdictions. During 2007, the
valuation allowance in the U.S. increased $2.4 million due to net operating losses and adjustments.
During 2006, the valuation allowance decreased $6.0 million when our UK operations commenced and
decreased an additional $11.1 million as a result of the deferred tax liabilities established in
the purchase of Enoch and Talisman. The valuation allowance also increased $7.3 due to net
operating losses in the U.S.
Effective January 1, 2007, we adopted the new guidance on uncertainty in income taxes. We
determined there was no cumulative effect on our financial statements relating to this adoption.
At December 2007, we provided for a liability of $1.7 million for unrecognized tax benefits
relating to various U.K. matters. The statute of limitations for assessing tax for these benefits
expired during 2008, thus allowing the full recognition of these benefits. The benefit was
recorded as a reduction to goodwill.
The following represents a reconciliation of the changes in our unrecognized tax benefits, included
in Accrued Expenses and Other on the balance sheet, for the year ended December 31, 2008:
Balance at January 1, 2008 |
$ | 1,727 | ||
Increase (Decrease) in unrecognized tax benefits from current period tax positions |
(1,727 | ) | ||
Balance at December 31, 2008 |
$ | | ||
As of December 31, 2008, we believe that no current tax positions that have resulted in
unrecognized tax benefits will significantly increase or decrease within the next year.
Note 11 Other Liabilities
Other liabilities included the following:
December 31, | ||||||||
2008 | 2007 | |||||||
Asset retirement obligations |
$ | 38,776 | $ | 30,790 | ||||
Long-term derivative liabilities |
17,015 | 31,201 | ||||||
$ | 55,791 | $ | 61,991 | |||||
Our asset retirement obligations relate to obligation of the plugging and abandonment of oil
and gas properties. The asset retirement obligation is recorded at fair value and accretion
expense, recognized over the life of the property, increases the liability to its expected
settlement value. If the fair value of the estimated asset retirement obligation changes, an
adjustment is recorded for both the asset retirement obligation and the asset retirement cost. The
following table provides a rollforward of the asset retirement obligations for the year ended
December 31, 2008 and 2007:
18
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
December 31, | ||||||||
2008 | 2007 | |||||||
Carrying amount of asset retirement obligations as of beginning of year |
$ | 30,790 | $ | 26,284 | ||||
Increase (decrease) due to revised estimates of asset retirement obligations |
13,840 | 1,621 | ||||||
Accretion expense |
2,795 | 2,764 | ||||||
Impact of foreign currency exchange rate changes |
(8,649 | ) | 121 | |||||
Carrying amount of asset retirement obligations as of end of year |
$ | 38,776 | $ | 30,790 | ||||
Note 12 Equity
The activity in shares of our common and preferred stock during 2008, 2007 and 2006 included
the following:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Common Stock: |
||||||||||||
Outstanding at the beginning of the year |
127,006 | 118,577 | 75,489 | |||||||||
Issuance of common stock in the offering |
| | 39,257 | |||||||||
Issuance of common stock to pay preferred dividends |
| 6,403 | | |||||||||
Exercise of warrants and stock options |
| | 1,655 | |||||||||
Other issuances |
1,566 | 2,026 | 2,176 | |||||||||
Outstanding at the end of the year |
128,572 | 127,006 | 118,577 | |||||||||
Series B Preferred Stock: |
||||||||||||
Outstanding at the end of the year |
20 | 20 | 20 | |||||||||
Convertible Preferred Stock: |
||||||||||||
Outstanding at the beginning of the year |
125 | 125 | | |||||||||
Issuances of preferred stock |
| | 125 | |||||||||
Outstanding at the end of the year |
125 | 125 | 125 | |||||||||
Treasury Stock: |
||||||||||||
Outstanding at the beginning of the year |
| | | |||||||||
Purchase of Treasury shares for stock vesting |
(327 | ) | | | ||||||||
Outstanding at the end of the year |
(327 | ) | | | ||||||||
Common Stock
The Common Stock is $0.001 par value common stock, 300,000,000 shares authorized.
In 2008, we issued inducement grants of 300,000 shares of Endeavour restricted common stock, and
options to purchase 250,000 shares of our common stock at an exercise price of $0.75 per share upon
commencement of employment of one executive officer. In 2007, we issued inducement grants of
800,000 shares of Endeavour restricted common stock, options to purchase 400,000 shares of our
common stock at an exercise price of $2.00 per share and options to purchase 200,000 shares of our
19
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
common stock at an exercise price of $1.14 per share upon commencement of employment of two
executive officers.
As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we issued
37.8 million shares of common stock at $2.35 per share. After expenses, proceeds from the offering
were $84 million.
Convertible Preferred Stock
As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we
issued $125 million of Series A Convertible Preferred Stock to a group of private institutional
investors. In December 2006, our stockholders approved the conversion of the Series A Convertible
Preferred Stock into the Series C Convertible Preferred Stock (the Convertible Preferred Stock).
The Series A Convertible Preferred Stock and the Series C Convertible Preferred Stock are
substantially similar in terms, except that the Series C Convertible Preferred Stock includes a
full-ratchet antidilution protection provision, which would result in a favorable adjustment (in
the number of shares of common stock issuable on conversion and the conversion price) for the
holders of Convertible Preferred Stock in the event we were to issue shares of common stock at a
price below the conversion price. The Convertible Preferred Stock ranks senior to any of our other
existing or future shares of capital stock.
The Convertible Preferred Stock is fully convertible into common stock at any time at the option of
the preferred stock investors, at (i) a conversion price of $2.50 (the Conversion Price) and (ii)
in an amount of common stock equal to the quotient of the liquidation preference of $1,000 per
share plus accrued but unpaid dividends (the Liquidation Preference) divided by the Conversion
Price.
Dividends are payable in cash, or common stock if we are unable to pay such dividends in cash, and
any dividends will be paid to the preferred stock investors prior to payment of any other dividend
on any other shares of our capital stock. We will pay a cumulative dividend on the Convertible
Preferred Stock equal to 8.5% per annum of the original issue price (compounded quarterly) if paid
in cash and 8.92% per annum of the original issue price (compounded quarterly) if paid in stock
(the Original Dividend Rate). The Convertible Preferred Stock also participates on an
as-converted basis with respect to any dividends paid on the common stock.
Issuance of dividends in the form of common stock are subject to the following equity conditions
(the Equity Conditions), which are waivable by two-thirds of the holders of the Convertible
Preferred Stock: (i) such common stock is listed on the NYSE Alternext US LLC, the New York Stock
Exchange or the Nasdaq Stock Market, and not subject to any trading suspension; (ii) we are not
then subject to any bankruptcy event; and (iii) such common stock will be immediately re-saleable
by the preferred stock investors pursuant to an effective registration statement and otherwise in
compliance with all applicable laws. If we have not maintained the effectiveness of the
registration statement pursuant to the Registration rights section below, then the dividend rate on
the Convertible Preferred Stock will be increased by the product of 2.5% (if the dividend is paid
in cash) or 2.63% (if the dividend is paid in stock) times the number of quarters (or portions
thereof) in which the failure occurs or we fail to cure such failure.
After the fourth anniversary of the initial issuance of the Convertible Preferred Stock, we may
redeem all of the Convertible Preferred Stock in exchange for a cash payment to the preferred stock
investors of an amount equal to 102% of the sum of the Liquidation Preference. If we call the
Convertible Preferred Stock for redemption, the holders thereof will have the right to convert
their shares into a newly issued
20
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
preferred stock identical in all respects to the Convertible Preferred Stock except that such newly
issued preferred stock will not bear a dividend (the Alternate Preferred Stock). We may not
redeem the Convertible Preferred Stock if the Equity Conditions are not then satisfied with respect
to the common stock into which the Alternate Preferred Stock is convertible.
Upon the tenth anniversary of the initial issuance of the Convertible Preferred Stock, we must
redeem all of the Convertible Preferred Stock for an amount equal to the Liquidation Preference
plus accrued and unpaid dividends payable by us in cash or common stock at our election. Issuance
by us of common stock for such redemption is subject to the Equity Conditions and to the market
value of the outstanding shares of common stock immediately prior to such redemption equaling at
least $500 million.
In the event of a change of control of Endeavour, we will be required to offer to redeem all of the
Convertible Preferred Stock for the greater of: (i) the amount equal to which such holder would be
entitled to receive had the holder converted such Convertible Preferred Stock into common stock;
(ii) 115% of the sum of the Liquidation Preference plus accrued and unpaid dividends; and (iii) the
amount resulting in an internal rate of return to such holder of 15% from the date of issuance of
such Convertible Preferred Stock through the date that Endeavour pays the redemption price for such
shares.
Series B Preferred Stock
In September 2002, we authorized and designated 500,000 shares of Preferred Stock, as Series B
Preferred Stock par value $.001 per share.
The Series B Preferred Stock is to pay dividends of 8% of the original issuing price per share per
annum, which are cumulative prior to any dividends on the common stock and on parity with the
payment of any dividend or other distribution on any other series of preferred stock that has
similar characteristics. The holders of each share of Series B Preferred Stock are entitled to be
paid out of available funds prior to any distributions to holders of common stock in the amount of
$100.00 per outstanding share plus all accrued dividends. We may, upon approval of our Board,
redeem all or a portion of the outstanding shares of Series B preferred stock at a cost of the
liquidation preference and all accrued and unpaid dividends.
Note 13 Stock-Based Compensation Arrangements
We grant restricted stock and stock options, including notional restricted stock and options,
to employees and directors as incentive compensation. The notional restricted stock and options
may be settled in cash or stock upon vesting, at our option, however it has been our practice to
settle in stock. The restricted stock and options generally vest over three years and the options
have a five to ten year expiration. The vesting of these shares and options is dependent upon the
continued service of the grantees to Endeavour. Upon the occurrence of a change in control, each
share of restricted stock and stock option outstanding on the date on which the change in control
occurs will immediately become vested.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model. For the years 2007 and 2006, expected volatility is based on an average of
our peer companies where there is a lack of relevant Endeavour volatility information for the
length of the expected term and the expected term is the average of the vesting date and the
expiration of the option. For 2008, expected volatility is based on historical Endeavour
volatility for the length of the expected term, which was determined by historical data. We use
historical data to estimate option exercises and employee terminations within the valuation model.
The risk-free rate for periods within the contractual
21
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
life of the option is based on the U.S. treasury yield curve in effect at the time of grant. We do
not include an estimated dividend yield since we have not paid dividends on our common stock
historically.
The estimated fair value of each option granted was calculated using the Black-Scholes model. The
following summarizes the weighted average of the assumptions used in the method.
2008 | 2007 | 2006 | ||||||||||
Risk free rate |
3.1 | % | 4.4 | % | 4.4 | % | ||||||
Expected years until exercise |
4 | 4 | 4 | |||||||||
Expected stock volatility |
46 | % | 45 | % | 38 | % | ||||||
Dividend yield |
| | | |||||||||
At December 31, 2008, total compensation cost related to nonvested awards not yet recognized
was approximately $4.1 million and is expected to be recognized over a weighted average period of
less than two years. For the year ended December 31, 2008, we included approximately $0.8 million
of stock-based compensation in capitalized G&A in property and equipment.
Stock Options
Information relating to stock options, including notional stock options, is summarized as
follows:
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Contractual | Aggregate | ||||||||||||||
Number of | Price per | Life in | Intrinsic | |||||||||||||
Shares | Share | Years | Value | |||||||||||||
Balance outstanding December 31, 2007 |
5,367 | $ | 2.92 | |||||||||||||
Granted |
1,455 | 1.21 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
406 | 3.07 | ||||||||||||||
Expired |
1,610 | 3.04 | ||||||||||||||
Balance outstanding December 31, 2008 |
4,807 | 2.35 | 3.47 | $ | 10 | |||||||||||
Currently exercisable December 31, 2008 |
2,454 | 2.92 | 0.97 | $ | | |||||||||||
The weighted average grant-date fair value of options granted during 2008, 2007 and 2006 was
$0.50, $0.40 and $1.20, respectively.
Of options granted during 2008, 2007 and 2006, 1.2 million, 0.1 million and 1.0 million options,
respectively, were granted pursuant to incentive plans which have been approved by our
stockholders. All other stock options have been granted pursuant to stock option plans that were
not subject to stockholder approval.
22
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Information relating to stock options outstanding at December 31, 2008 is summarized as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||
Average | Average | Average | ||||||||||||||||||
Number of | Remaining | Exercise | Exercise | |||||||||||||||||
Range of Exercise | Options | Contractual | Price Per | Number | Price Per | |||||||||||||||
Prices | Outstanding | Life | Share | Exercisable | Share | |||||||||||||||
Less than $3.00 |
3,426 | 4.3 | $ | 1.66 | 1,444 | $ | 1.99 | |||||||||||||
$3.00 - $3.99 |
582 | 1.7 | $ | 3.58 | 211 | $ | 3.69 | |||||||||||||
Greater than $4.00 |
799 | 1.1 | $ | 4.41 | 799 | $ | 4.41 | |||||||||||||
4,807 | 3.5 | $ | 2.35 | 2,454 | $ | 2.60 | ||||||||||||||
Restricted Stock
At December 31, 2008, our employees and directors held 4.0 million restricted shares of our
common stock that vest over the service period of up to three years. The restricted stock awards
were valued based on the closing price of our common stock on the measurement date, typically the
date of grant, and compensation expense is recorded on a straight-line basis over the restricted
share vesting period.
Status of the restricted shares as of December 31, 2008 and the changes during the year ended
December 31, 2008 are presented below:
Weighted | ||||||||
Average Grant | ||||||||
Number of | Date Fair Value | |||||||
Shares | per Share | |||||||
Balance outstanding December 31, 2007 |
4,539 | $ | 2.70 | |||||
Granted |
2,259 | $ | 1.22 | |||||
Vested |
(1,892 | ) | $ | 2.42 | ||||
Forfeited |
(940 | ) | $ | 3.16 | ||||
Balance outstanding December 31, 2008 |
3,966 | $ | 1.88 | |||||
Total fair value of shares vesting during the period |
$ | 3,835 | ||||||
Note 14 Financial Instruments
December 31, 2008 | December 31, 2007 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Fair Value | Value | Fair Value | Value | |||||||||||||
Assets: |
||||||||||||||||
Derivative instruments |
$ | 33,351 | $ | 33,351 | $ | 5,975 | $ | 5,975 | ||||||||
Liabilities: |
||||||||||||||||
Long-term debt |
190,681 | 214,855 | 253,250 | 266,250 | ||||||||||||
Derivative instruments |
(18,208 | ) | (18,208 | ) | (53,696 | ) | (53,696 | ) |
23
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
The carrying amounts reflected in the consolidated balance sheets for cash and equivalents,
short-term receivables and short-term payables approximate their fair value due to the short
maturity of the instruments. The fair values of commodity derivative instruments interest rate
swaps and were determined based upon quotes obtained from brokers. The fair values of long-term
debt were determined based upon quotes obtained from brokers for our senior notes, discounted cash
flows for our 11.5% convertible debt and book value for other debt. Book value approximates fair
value for our senior bank facility and second lien term loan as these instruments bear interest at
a market rate.
Note 15 Fair Value Measurements
Effective January 1, 2008, we adopted the new guidance for fair value measurements of
financial assets and liabilities measured on a recurring basis. This new standard defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. It also clarifies that
fair value should be based on assumptions that market participants would use when pricing an asset
or liability, including assumptions about risk and the risks inherent in valuation techniques and
the inputs to valuations. This includes not only the credit standing of counterparties involved
and the impact of credit enhancements but also the impact of our own nonperformance risk on our
liabilities. According to this new standard, fair value measurements are classified and disclosed
in one of the following categories:
Level 1:
|
Fair value is based on actively-quoted market prices, if available. | |
Level 2:
|
In the absence of actively-quoted market prices, we seek price information from external sources, including broker quotes and industry publications. Substantially all of these inputs are observable in the marketplace during the entire term of the instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace. | |
Level 3:
|
If valuations require inputs that are both significant to the fair value measurement and less observable from objective sources, we must estimate prices based on available historical and near-term future price information and certain statistical methods that reflect our market assumptions. |
We apply fair value measurements to certain assets and liabilities including commodity and interest
rate derivative instruments, marketable securities and embedded derivatives relating to conversion
and change in control features in certain of our debt instruments. We seek to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Financial assets and liabilities are classified based on the lowest level of input that is
significant to the fair value measurement. The following table summarizes the valuation of our
investments and financial instruments by pricing levels as of December 31, 2008:
24
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Quoted Market Prices | Significant Other | Significant | ||||||||||||||
in Active Markets | Observable Inputs - | Unobservable Inputs | Total Fair | |||||||||||||
Level 1 | Level 2 | - Level 3 | Value | |||||||||||||
Oil and gas derivative contracts: |
||||||||||||||||
Oil and gas swaps |
$ | | $ | 9,855 | $ | | $ | 9,855 | ||||||||
Oil and gas collars |
| 18,538 | 2,583 | 21,121 | ||||||||||||
Interest rate swaps |
| (1,334 | ) | | (1,334 | ) | ||||||||||
Embedded derivatives |
| | (14,640 | ) | (14,640 | ) | ||||||||||
Total derivative liabilities |
$ | | $ | 27,059 | $ | (12,057 | ) | $ | 15,002 | |||||||
Our commodity and interest rate derivative contracts were measured based on quotes from our
counterparties, which are major financial institutions or commodities trading institutions. Such
quotes have been derived using models that consider various inputs including current market and
contractual prices for the underlying instruments, quoted forward prices for natural gas and crude
oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as
the derivative contract term. The inputs for the fair value models for our swaps and Brent oil
collars are all observable market data and these instruments have been classified as Level 2.
Although we utilize the same option pricing models to assess the reasonableness of the fair values
of our gas collars, an active futures market does not exist for our UK gas options. We base the
inputs to the option models for our UK gas collars on observable market data in other markets to
verify the reasonableness of the counterparty quotes. These UK gas collars are classified as Level
3.
The following is a reconciliation of changes in fair value of net derivative assets and liabilities
classified as Level 3:
Twelve Months Ended | ||||
December 31, 2008 | ||||
Balance at beginning of period |
$ | | ||
Total gains or losses (realized/unrealized): |
||||
Included in earnings |
4,614 | |||
Purchases, issuance and settlements (net) |
(13,460 | ) | ||
Transfers in and/or out of Level 3 (net) |
(3,211 | ) | ||
Balance at end of period |
$ | (12,057 | ) | |
Changes in unrealized gains (losses) relating to
derivative assets and liabilities still held at
December 31, 2008 |
$ | 6,078 | ||
Note 16 Derivative Instruments
As discussed in Note 2 Accounting Policies, we have oil and gas commodity derivatives,
interest rate derivatives and embedded derivatives related to debt instruments. The fair market
value of these derivative instruments is included in our balance sheet as follows:
25
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
December 31, | ||||||||
2008 | 2007 | |||||||
Derivatives not designated as hedges: |
||||||||
Oil and gas commodity derivatives: |
||||||||
Assets: |
||||||||
Prepaid expenses and other current assets |
$ | 31,649 | $ | 4,018 | ||||
Other assets long-term |
1,702 | 1,957 | ||||||
Liabilities: |
||||||||
Accrued expenses and other |
| (22,210 | ) | |||||
Other liabilities long-term |
(2,375 | ) | (30,635 | ) | ||||
$ | 30,976 | $ | (46,870 | ) | ||||
Embedded derivatives related to debt instrument |
||||||||
Liabilities: |
||||||||
Other liabilities long-term |
(14,640 | ) | | |||||
Derivatives designated as cash flow hedge: |
||||||||
Interest rate swap |
||||||||
Liabilities: |
||||||||
Accrued expenses and other |
1,334 | | ||||||
Other liabilities long-term |
| 567 | ||||||
If all counterparties failed to perform, our maximum loss would be $33.4 million as of
December 31, 2008.
The effect of the derivatives not designated as hedges on our results of operations was as follows:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Derivatives not designated as hedges: |
||||||||||||
Oil and gas commodity derivatives |
||||||||||||
Realized gains (losses) on derivative instruments |
$ | (28,578 | ) | $ | 12,048 | $ | | |||||
Unrealized gains (losses) on derivative instruments |
77,846 | (89,132 | ) | 34,531 | ||||||||
49,268 | (77,084 | ) | 34,531 | |||||||||
Embedded derivatives related to debt instrument |
||||||||||||
Unrealized gains (losses) on derivative instruments |
(1,180 | ) | | | ||||||||
The effect of derivatives designated as cash flow hedges on our results of operations and
other comprehensive income was as follows:
26
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Location of | ||||||||||||||||
Reclassification | ||||||||||||||||
into Income | 2008 | 2007 | 2006 | |||||||||||||
Interest rate swap |
||||||||||||||||
Gain (loss) recognized in
other comprehensive income |
$ | 428 | $ | (927 | ) | $ | | |||||||||
Gain (loss) reclassified
from accumulated other
comprehensive income into
income |
Interest expense | (770 | ) | 75 | | |||||||||||
Oil and gas commodity derivatives |
||||||||||||||||
Gain (loss) recognized in
other comprehensive income |
| | (1,012 | ) | ||||||||||||
Gain (loss) reclassified
from accumulated other
comprehensive income into
income |
Income from continuing operations |
| | 4,702 | ||||||||||||
We did not exclude any component of the hedging instruments gain or loss when assessing
effectiveness. The ineffective portion of the hedges is not material for the periods presented and
is included in other income (expense).
As of December 31, 2008, our outstanding commodity derivatives covered approximately 2,150 Mbbl and
4,450 MMcf cumulative through 2011 and consist of a combination of fixed price swaps and collars.
These include four oil and two gas swaps with J. Aron (Goldman) and three oil and five gas collars
with BNP Paribas.
During 2007, we entered into an interest rate swap with BNP Paribas for a notional amount of $37.5
million whereby we pay a fixed rate of 5.05% and receive three-month LIBOR through November 2009.
Note 17 Comprehensive Income (Loss)
The following summarizes the components of comprehensive loss:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Net loss |
$ | 56,490 | $ | (49,077 | ) | $ | (6,838 | ) | ||||
Related to derivative instruments: |
||||||||||||
Unrealized loss |
428 | (852 | ) | (1,012 | ) | |||||||
Reclassification adjustment
for loss realized in net loss
above |
(770 | ) | | 4,702 | ||||||||
Related to marketable securities: |
||||||||||||
Unrealized loss |
(1 | ) | (71 | ) | (887 | ) | ||||||
Reclassification adjustment
for loss realized in net loss
above |
| | 1,775 | |||||||||
Unrealized gain (loss), net |
(343 | ) | (923 | ) | 4,578 | |||||||
Comprehensive loss |
$ | 56,147 | $ | (50,000 | ) | $ | (2,260 | ) | ||||
27
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
The components of accumulated other comprehensive income are:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Related to derivative instruments: |
||||||||||||
Balance at beginning of year |
$ | (852 | ) | $ | | $ | (3,690 | ) | ||||
Change during the year |
(342 | ) | (852 | ) | 3,690 | |||||||
Balance at end of year |
(1,194 | ) | (852 | ) | | |||||||
Related to marketable securities: |
||||||||||||
Balance at beginning of year |
(71 | ) | | (888 | ) | |||||||
Change during the year |
(1 | ) | (71 | ) | 888 | |||||||
Balance at end of year |
(72 | ) | (71 | ) | | |||||||
Accumulated comprehensive loss |
$ | (1,266 | ) | $ | (923 | ) | $ | | ||||
Note 18 Supplementary Cash Flow Disclosures
Cash paid during the period for interest and income taxes was as follows:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Interest paid |
$ | 15,966 | $ | 22,164 | $ | 5,895 | ||||||
Income taxes paid |
$ | 20,088 | $ | 7,662 | $ | 7,064 | ||||||
Non-Cash Investing and Financing Transactions
During the first quarter of 2006, we issued 1.5 million shares of our common stock in
connection with the settlement of litigation.
We recorded $10.8 million, $11.2 million and $2.0 million in preferred stock dividends in 2008,
2007 and 2006, respectively. Prior to the fourth quarter of 2007, we paid outstanding dividends on
the Convertible Preferred Stock through the issuance of common stock.
In 2008, we recorded $4.5 million in non-cash interest expense that was added to the principal
balance of the 11.5% convertible notes.
Note 19 Commitments and Contingencies
General
The oil and gas industry is subject to regulation by federal, state and local authorities. In
particular, oil and gas production operations and economics are affected by environmental
protection statutes, tax
28
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
statutes and other laws and regulations relating to the petroleum industry. We believe we are in
compliance with all federal, state and local laws, regulations applicable to Endeavour and its
properties and operations, the violation of which would have a material adverse effect on us or our
financial condition.
Rig Commitments
Our rig commitments reflect two commitments for the use of drilling rigs in our North Sea
operations. Our continuing operations include one commitment for the drilling rig that commenced
drilling at the Rochelle field in December 2008. We have $21 million in escrow toward this
commitment, included in Restricted cash on our Condensed Consolidated Balance Sheet. The
reserved amounts in escrow will be released as payments are made for this drilling activity.
Our discontinued operations include a commitment for a semi-submersible rig in Norway through a
consortium with several other operators in the Norwegian Continental Shelf. The contract committed
us to 100 days (for two wells) for drilling services for $38 million. We estimated the rig to be
initially delivered in the third quarter of 2009 and again in 2010.
Contingencies
In November 2006, we purchased various oil and gas properties, including the Ivanhoe, Rob Roy,
Hamish (collectively, IVRRH), Renee and Rubie fields. Hess Limited, the operator of the facility
supporting production from the IVRRH fields, has advised us that there has been a mis-measurement
of the volumes of oil produced from the IVRRH fields. At December 31, 2008, the estimate of our
liability from this mis-measurement was at $4.1 million.
Operating Leases
We have leases for office space and equipment with lease payments of $0.6 million, $1.2 million
and $1.2 million for the years ended December 31, 2008, 2009 and 2010, respectively.
Note 20 Segment and Geographic Information
We have determined we have one reportable operating segment being the acquisition, exploration
and development of oil and gas properties. Our operations are conducted in geographic areas as
follows:
29
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
2008 | 2007 | 2006 | ||||||||||||||||||||||
Long-lived | Long-lived | Long-lived | ||||||||||||||||||||||
Revenue | Assets | Revenue | Assets | Revenue | Assets | |||||||||||||||||||
United States |
$ | | $ | 12,125 | $ | | $ | 6,920 | $ | | $ | 33,120 | ||||||||||||
United Kingdom |
170,781 | 478,623 | 135,876 | 527,810 | 24,881 | 537,936 | ||||||||||||||||||
Other |
| 2,140 | | 4,386 | | 1,889 | ||||||||||||||||||
Continuing
Operations |
170,781 | 492,888 | 135,876 | 539,116 | 24,881 | 572,945 | ||||||||||||||||||
Discontinued
operations Norway |
89,660 | 108,921 | 40,188 | 90,260 | 29,250 | 72,957 | ||||||||||||||||||
Total International |
260,441 | 589,684 | 176,064 | 622,456 | 54,131 | 612,782 | ||||||||||||||||||
Total |
$ | 260,441 | $ | 601,809 | $ | 176,064 | $ | 629,376 | $ | 54,131 | $ | 645,902 | ||||||||||||
Note 21 Quarterly Financial Data (Unaudited)
Second | Third | Fourth | ||||||||||||||
First Quarter | Quarter | Quarter | Quarter | |||||||||||||
2008 | ||||||||||||||||
Revenues from continuing operations |
$ | 45,809 | $ | 55,343 | $ | 44,160 | $ | 25,469 | ||||||||
Operating expenses from continuing operations |
29,944 | 32,528 | 26,074 | 63,999 | ||||||||||||
Operating profit from continuing operations |
15,865 | 22,815 | 18,086 | (38,530 | ) | |||||||||||
Net income (loss) to common stockholders |
(19,487 | ) | (66,733 | ) | 75,487 | 56,414 | ||||||||||
Net income (loss)from continuing operations
per common share basic |
(0.15 | ) | (0.56 | ) | 0.48 | 0.35 | ||||||||||
Net income (loss) from continuing operations
per common share diluted |
(0.15 | ) | (0.56 | ) | 0.29 | 0.24 | ||||||||||
Net income (loss)from discontinued
operations per common share basic |
(0.15 | ) | 0.04 | 0.11 | 0.09 | |||||||||||
Net income (loss) from discontinued
operations per common share diluted |
(0.15 | ) | 0.04 | 0.07 | 0.05 | |||||||||||
2007 |
||||||||||||||||
Revenues from continuing operations |
$ | 35,025 | $ | 22,808 | $ | 36,417 | $ | 41,626 | ||||||||
Operating expenses from continuing operations |
29,056 | 23,924 | 29,228 | 29,890 | ||||||||||||
Operating loss from continuing operations |
5,969 | (1,117 | ) | 7,189 | 11,737 | |||||||||||
Net income (loss) to common stockholders |
(5,987 | ) | (13,048 | ) | (11,681 | ) | (29,599 | ) | ||||||||
Net income (loss) from continuing operations
per common share basic and diluted |
(0.05 | ) | (0.11 | ) | (0.08 | ) | (0.25 | ) | ||||||||
Net income (loss) from discontinued
operations per common share basic and
diluted |
(0.00 | ) | (0.00 | ) | (0.01 | ) | (0.02 | ) | ||||||||
30
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 22 Supplemental Oil and Gas Disclosures Unaudited
Capitalized Costs Relating to Oil and Gas Producing Activities | ||||||||||||||||||||||||
Discontinued | ||||||||||||||||||||||||
United | United | Total Continuing | Operations | |||||||||||||||||||||
Kingdom | States | Other | Operations | Norway (1) | Total | |||||||||||||||||||
December 31, 2008: |
||||||||||||||||||||||||
Proved |
$ | 232,730 | $ | 629 | $ | 9 | $ | 233,368 | $ | 65,522 | $ | 298,890 | ||||||||||||
Unproved |
131,688 | 5,876 | 2,132 | 139,696 | 48,714 | 188,410 | ||||||||||||||||||
Total capitalized costs |
364,418 | 6,505 | 2,141 | 373,064 | 114,236 | 487,300 | ||||||||||||||||||
Accumulated
depreciation,
depletion and
amortization |
(142,686 | ) | | | (142,686 | ) | (33,914 | ) | (176,600 | ) | ||||||||||||||
Net capitalized costs |
$ | 221,732 | $ | 6,505 | $ | 2,141 | $ | 230,378 | $ | 80,322 | $ | 310,700 | ||||||||||||
December 31, 2007: |
||||||||||||||||||||||||
Proved |
$ | 216,572 | $ | | $ | | $ | 216,572 | $ | 53,729 | $ | 270,301 | ||||||||||||
Unproved |
154,948 | | 2,176 | 157,124 | 28,869 | 185,993 | ||||||||||||||||||
Total capitalized costs |
371,520 | | 2,176 | 373,696 | 82,598 | 456,294 | ||||||||||||||||||
Accumulated
depreciation,
depletion and
amortization |
(102,386 | ) | | | (102,386 | ) | (20,461 | ) | (122,847 | ) | ||||||||||||||
Net capitalized costs |
$ | 269,134 | $ | | $ | 2,176 | $ | 271,310 | $ | 62,137 | $ | 333,447 | ||||||||||||
31
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities | ||||||||||||||||||||||||
Total | Discontinued | |||||||||||||||||||||||
United | Continuing | Operations | ||||||||||||||||||||||
Kingdom | United States | Other | Operations | Norway (1) | Total | |||||||||||||||||||
Year Ended December 31, 2008: |
||||||||||||||||||||||||
Acquisition costs: |
||||||||||||||||||||||||
Proved |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Unproved |
1,178 | 971 | 27 | 2,176 | | 2,176 | ||||||||||||||||||
Exploration costs |
34,641 | 5,515 | (62 | ) | 40,094 | 22,796 | 62,890 | |||||||||||||||||
Development costs |
16,752 | 19 | | 16,771 | 8,808 | 25,579 | ||||||||||||||||||
Total costs incurred |
$ | 52,571 | $ | 6,505 | $ | (35 | ) | $ | 59,041 | $ | 31,604 | $ | 90,645 | |||||||||||
Year Ended December 31, 2007: |
||||||||||||||||||||||||
Acquisition costs: |
||||||||||||||||||||||||
Proved |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Unproved |
774 | | 18 | 792 | | 792 | ||||||||||||||||||
Exploration costs |
54,916 | | 268 | 55,184 | 10,392 | 65,576 | ||||||||||||||||||
Development costs |
7,562 | | | 7,562 | 14,063 | 21,625 | ||||||||||||||||||
Total costs incurred |
$ | 63,252 | $ | | $ | 286 | $ | 63,538 | $ | 24,455 | $ | 87,993 | ||||||||||||
Year Ended December 31, 2006: |
||||||||||||||||||||||||
Acquisition costs: |
||||||||||||||||||||||||
Proved |
$ | 139,456 | $ | | $ | | $ | 139,456 | $ | | $ | 139,456 | ||||||||||||
Unproved |
81,715 | | | 81,715 | | 81,715 | ||||||||||||||||||
Exploration costs |
35,002 | | 295 | 35,297 | 5,089 | 40,386 | ||||||||||||||||||
Development costs |
8,960 | | | 8,960 | 7,235 | 16,195 | ||||||||||||||||||
Total costs incurred |
$ | 265,133 | $ | | $ | 295 | $ | 265,428 | $ | 12,324 | $ | 277,752 | ||||||||||||
32
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Results of Operations for Oil and Gas Producing Activities | ||||||||||||||||||||
Discontinued | ||||||||||||||||||||
United | Total Continuing | Operations - | ||||||||||||||||||
Kingdom | United States | Operations | Norway (1) | Total | ||||||||||||||||
Year Ended December 31, 2008: |
||||||||||||||||||||
Revenues |
$ | 170,781 | $ | | $ | 170,781 | $ | 89,660 | $ | 260,441 | ||||||||||
Production expenses |
31,489 | 828 | 32,317 | 14,259 | 46,576 | |||||||||||||||
DD&A |
65,764 | | 65,764 | 14,078 | 79,842 | |||||||||||||||
Impairment of oil and gas properties |
36,970 | | 36,970 | | 36,970 | |||||||||||||||
Income tax expense |
18,279 | (290 | ) | 17,989 | 47,832 | 65,821 | ||||||||||||||
Results of activities |
$ | 18,279 | $ | (538 | ) | $ | 17,741 | $ | 13,491 | $ | 31,232 | |||||||||
Year Ended December 31, 2007: |
||||||||||||||||||||
Revenues |
$ | 135,876 | $ | | $ | 135,876 | $ | 40,188 | $ | 176,064 | ||||||||||
Production expenses |
27,263 | | 27,263 | 13,781 | 41,044 | |||||||||||||||
DD&A |
67,338 | | 67,338 | 7,722 | 75,060 | |||||||||||||||
Income tax expense |
20,638 | | 20,638 | 14,574 | 35,212 | |||||||||||||||
Results of activities |
$ | 20,637 | $ | | $ | 20,637 | $ | 4,111 | $ | 24,748 | ||||||||||
Year Ended December 31, 2006: |
||||||||||||||||||||
Revenues |
$ | 24,881 | $ | | $ | 24,881 | $ | 29,250 | $ | 54,131 | ||||||||||
Production expenses |
4,477 | | 4,477 | 11,091 | 15,568 | |||||||||||||||
DD&A |
10,292 | | 10,292 | 6,217 | 16,509 | |||||||||||||||
Impairment of oil and gas properties |
849 | | 849 | | 849 | |||||||||||||||
Income tax expense |
4,631 | | 4,631 | 9,315 | 13,946 | |||||||||||||||
Results of activities |
$ | 4,632 | $ | | $ | 4,632 | $ | 2,627 | $ | 7,259 | ||||||||||
(1) | We completed the divestiture of our Norwegian subsidiary on May 14, 2009. The results of operations and financial position of this subsidiary are classified as discontinued operations for all periods presented. |
Oil and Gas Reserves
Proved reserves are estimated quantities of oil, gas and natural gas liquids that geological
and engineering data demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved developed reserves are
proved reserves that can reasonably be expected to be recovered through existing wells with
existing equipment and operating methods. The reserve volumes presented are estimates only and
should not be construed as being exact quantities. These reserves may or may not be recovered and
may increase or decrease as a result of our future operations and changes in economic conditions.
Our oil and gas reserves were prepared by independent reserve engineers at December 31, 2008, 2007
and 2006.
In December 2008, the U.S. Securities and Exchange Commission adopted revisions to oil and natural
gas reserve reporting requirements, including the definition of proved reserves, pricing used to
determine economic producibility and voluntary disclosure of probable and possible reserves. These
revisions would be effective for the company at year-end 2009, unless the timing is subsequently
amended. We are
33
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
evaluating these new rules and cannot predict how the new rules will affect our
future reporting of oil and natural gas reserves.
Total | Discontinued | |||||||||||||||||||
United | United | Continuing | Operations - | |||||||||||||||||
Kingdom | States | Operations | Norway (1) | Total | ||||||||||||||||
Proved Oil Reserves (MBbls): |
||||||||||||||||||||
Proved reserves at January 1, 2006 |
| | | 1,164 | 1,164 | |||||||||||||||
Purchase of proved reserves, in place |
4,593 | | 4,593 | | 4,593 | |||||||||||||||
Production |
(210 | ) | | (210 | ) | (508 | ) | (718 | ) | |||||||||||
Revisions of previous estimates |
183 | | 183 | 530 | 713 | |||||||||||||||
Proved reserves at December 31, 2006 |
4,566 | | 4,566 | 1,186 | 5,752 | |||||||||||||||
Production |
(1,274 | ) | | (1,274 | ) | (519 | ) | (1,793 | ) | |||||||||||
Extensions and discoveries |
| | | 340 | 340 | |||||||||||||||
Revisions of previous estimates |
(8 | ) | | (8 | ) | 1,049 | 1,041 | |||||||||||||
Proved reserves at December 31, 2007 |
3,284 | | 3,284 | 2,056 | 5,340 | |||||||||||||||
Production |
(1,032 | ) | | (1,032 | ) | (726 | ) | (1,758 | ) | |||||||||||
Extensions and discoveries |
522 | 18 | 540 | 121 | 661 | |||||||||||||||
Revisions of previous estimates |
(643 | ) | | (643 | ) | (45 | ) | (688 | ) | |||||||||||
Proved reserves at December 31, 2008 |
2,131 | 18 | 2,149 | 1,406 | 3,555 | |||||||||||||||
Proved Developed Oil Reserves (MBbls): |
||||||||||||||||||||
At December 31, 2006 |
3,400 | | 3,400 | 737 | 4,137 | |||||||||||||||
At December 31, 2007 |
2,544 | | 2,544 | 1,650 | 4,194 | |||||||||||||||
At December 31, 2008 |
1,468 | 7 | 1,475 | 1,302 | 2,777 | |||||||||||||||
Total | Discontinued | |||||||||||||||||||
United | Continuing | Operations - | ||||||||||||||||||
Kingdom | United States | Operations | Norway (1) | Total | ||||||||||||||||
Proved Gas Reserves (MMcf): |
||||||||||||||||||||
Proved reserves at January 1, 2006 |
| | | 6,297 | 6,297 | |||||||||||||||
Purchase of proved reserves, in place |
14,574 | | 14,574 | | 14,574 | |||||||||||||||
Production |
(1,539 | ) | | (1,539 | ) | (203 | ) | (1,742 | ) | |||||||||||
Revisions of previous estimates |
4,137 | | 4,137 | 1,579 | 5,716 | |||||||||||||||
Proved reserves at December 31, 2006 |
17,172 | | 17,172 | 7,673 | 24,845 | |||||||||||||||
Production |
(8,556 | ) | | (8,556 | ) | (328 | ) | (8,884 | ) | |||||||||||
Extensions and discoveries |
| | | 1,821 | 1,821 | |||||||||||||||
Revisions of previous estimates |
3,196 | | 3,196 | (732 | ) | 2,464 | ||||||||||||||
Proved reserves at December 31, 2007 |
11,812 | | 11,812 | 8,434 | 20,246 |
34
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Total | Discontinued | |||||||||||||||||||
United | Continuing | Operations - | ||||||||||||||||||
Kingdom | United States | Operations | Norway (1) | Total | ||||||||||||||||
Production |
(6,532 | ) | | (6,532 | ) | (2,322 | ) | (8,854 | ) | |||||||||||
Extensions and discoveries |
20,370 | 690 | 21,060 | 52 | 21,112 | |||||||||||||||
Revisions of previous estimates |
1,480 | | 1,480 | (1,187 | ) | 293 | ||||||||||||||
Proved reserves at December 31, 2008 |
27,130 | 690 | 27,820 | 4,977 | 32,797 | |||||||||||||||
Proved Developed Gas Reserves (MMcf): |
||||||||||||||||||||
At December 31, 2006 |
13,184 | | 13,184 | 13,184 | ||||||||||||||||
At December 31, 2007 |
8,416 | | 8,416 | 6,614 | 15,030 | |||||||||||||||
At December 31, 2008 |
6,761 | 234 | 6,995 | 4,917 | 11,912 | |||||||||||||||
Total | Discontinued | |||||||||||||||||||
United | Continuing | Operations - | ||||||||||||||||||
Kingdom | United States | Operations | Norway (1) | Total | ||||||||||||||||
Proved Reserves (MBOE): |
||||||||||||||||||||
Proved reserves at January 1, 2006 |
| | | 2,214 | 2,214 | |||||||||||||||
Purchase of proved reserves, in place |
7,022 | | 7,022 | | 7,022 | |||||||||||||||
Production |
(466 | ) | | (466 | ) | (542 | ) | (1,008 | ) | |||||||||||
Revisions of previous estimates |
872 | | 872 | 793 | 1,665 | |||||||||||||||
Proved reserves at December 31, 2006 |
7,428 | | 7,428 | 2,465 | 9,893 | |||||||||||||||
Production |
(2,700 | ) | | (2,700 | ) | (574 | ) | (3,274 | ) | |||||||||||
Extensions and discoveries |
| | | 643 | 643 | |||||||||||||||
Revisions of previous estimates |
524 | | 524 | 927 | 1,451 | |||||||||||||||
Proved reserves at December 31, 2007 |
5,252 | | 5,252 | 3,461 | 8,713 | |||||||||||||||
Production |
(2,121 | ) | | (2,121 | ) | (1,113 | ) | (3,234 | ) | |||||||||||
Extensions and discoveries |
3,917 | 133 | 4,050 | 130 | 4,180 | |||||||||||||||
Revisions of previous estimates |
(395 | ) | | (395 | )) | (242 | ) | (637 | ) | |||||||||||
Proved reserves at December 31, 2008 |
6,653 | 133 | 6,786 | 2,236 | 9,022 | |||||||||||||||
Proved Developed Reserves (MBOE): |
||||||||||||||||||||
At December 31, 2006 |
5,597 | | 5,597 | 737 | 6,334 | |||||||||||||||
At December 31, 2007 |
3,947 | | 3,947 | 2,752 | 6,699 | |||||||||||||||
At December 31, 2008 |
2,595 | 46 | 2,641 | 2,122 | 4,763 | |||||||||||||||
(1) | We completed the divestiture of our Norwegian subsidiary on May 14, 2009. The results of operations and financial position of this subsidiary are classified as discontinued operations for all periods presented. |
35
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
During the year ended December 31, 2006, we purchased 7,022 MBOE in the Enoch field and Talisman
Acquisitions.
Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows and future production and development costs are determined by applying
year-end prices and costs to the estimated quantities of oil and gas to be produced. Estimated
future income taxes are computed using current statutory income tax rates for where production
occurs. The resulting future net cash flows are reduced to present value amounts by applying a 10%
annual discount factor.
Estimates of future cash inflows are based on prices at year-end. Oil, gas and condensate prices
are escalated only for fixed and determinable amounts under provisions in some contracts. At
December 31, 2008 and 2007, the prices used to determine the estimates of future cash inflows were
$36.55 and $96.02 per barrel, respectively, for oil and $8.70 and $10.03 per Mcf, respectively, for
gas. Estimated future cash inflows are reduced by estimated future development, production,
abandonment and dismantlement costs based on year-end cost levels, assuming continuation of
existing economic conditions, and by estimated future income tax expense. Income tax expense, both
U.S. and foreign, is calculated by applying the existing statutory tax rates, including any known
future changes, to the pretax net cash flows giving effect to any permanent differences and reduced
by the applicable tax basis. The effect of tax credits is considered in determining the income tax
expense.
The standardized measure of discounted future net cash flows is not intended to present the fair
market value of our oil and gas reserves. An estimate of fair value would also take into account,
among other things, the recovery of reserves in excess of proved reserves, anticipated future
changes in prices and costs, an allowance for return on investment and the risks inherent in
reserve estimates.
Under the full cost method of accounting, a noncash charge to earnings related to the carrying
value of our oil and gas properties on a country-by-country basis may be required when prices are
low. Whether we will be required to take such a charge depends on the prices for crude oil and
natural gas at the end of any quarter, as well as the effect of both capital expenditures and
changes to proved reserves during that quarter. Given the volatility of natural gas and oil
prices, it is reasonably possible that our estimate of discounted future net cash flows from proved
oil and gas reserves will change in the near term. If a noncash charge were required, it would
reduce earnings for the period and result in lower DD&A expense in future periods.
36
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Standardized Measure of Discounted Future Net Cash Flows | ||||||||||||||||||||
Discontinued | ||||||||||||||||||||
United | Continuing | Operations - | ||||||||||||||||||
Kingdom | United States | Operations | Norway | Total | ||||||||||||||||
December 31, 2008: |
||||||||||||||||||||
Future cash inflows |
$ | 306,021 | $ | 4,599 | $ | 310,620 | $ | 88,039 | $ | 398,659 | ||||||||||
Future production costs |
(71,242 | ) | (1,005 | ) | (72,247 | ) | (25,157 | ) | (97,404 | ) | ||||||||||
Future development costs |
(157,984 | ) | (2,100 | ) | (160,084 | ) | (25,579 | ) | (185,663 | ) | ||||||||||
Future income tax expense |
(33,977 | ) | | (33,977 | ) | (17,036 | ) | (51,013 | ) | |||||||||||
Future net cash flows (undiscounted) |
42,818 | 1,494 | 44,312 | 20,267 | 64,579 | |||||||||||||||
Annual discount of 10% for estimated timing |
12,548 | 563 | 13,111 | 1,806 | 14,917 | |||||||||||||||
Standardized measure of future net cash flows |
$ | 30,270 | $ | 931 | $ | 31,201 | $ | 18,461 | $ | 49,662 | ||||||||||
December 31, 2007: |
||||||||||||||||||||
Future cash inflows |
$ | 423,911 | $ | | $ | 423,911 | $ | 256,455 | $ | 680,366 | ||||||||||
Future production costs |
(99,544 | ) | | (99,544 | ) | (55,968 | ) | (155,512 | ) | |||||||||||
Future development costs |
(62,119 | ) | | (62,119 | ) | (26,672 | ) | (88,791 | ) | |||||||||||
Future income tax expense |
(109,399 | ) | | (109,399 | ) | (125,013 | ) | (234,412 | ) | |||||||||||
Future net cash flows (undiscounted) |
152,849 | | 152,849 | 48,802 | 201,651 | |||||||||||||||
Annual discount of 10% for estimated timing |
1,328 | | 1,328 | 8,403 | 9,731 | |||||||||||||||
Standardized measure of future net cash flows |
$ | 151,521 | $ | | $ | 151,521 | $ | 40,399 | $ | 191,920 | ||||||||||
37
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Principal Sources of Change in the Standardized Measure of Discounted Future Net Cash Flows |
||||||||||||
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Standardized measure, beginning of period |
$ | 191,920 | $ | 145,541 | $ | 18,525 | ||||||
Net changes in prices and production costs |
(144,547 | ) | 199,343 | (25,622 | ) | |||||||
Future development costs incurred |
8,912 | 21,625 | 16,195 | |||||||||
Net changes in estimated future development costs |
(105,784 | ) | (48,873 | ) | (20,371 | ) | ||||||
Revisions of previous quantity estimates |
(19,381 | ) | 79,636 | 47,154 | ||||||||
Extensions and discoveries |
127,182 | 35,345 | | |||||||||
Accretion of discount |
39,734 | 24,078 | 6,037 | |||||||||
Changes in income taxes, net |
163,445 | (135,233 | ) | 20,393 | ||||||||
Sale of oil and gas produced, net of production costs |
(213,865 | ) | (135,020 | ) | (38,592 | ) | ||||||
Purchased reserves |
| | 101,533 | |||||||||
Change in production, timing and other |
2,046 | 5,478 | 20,289 | |||||||||
Standardized measure, end of period |
$ | 49,662 | $ | 191,920 | $ | 145,541 | ||||||
Note
23 Subsequent Event, Discontinued Operations and Adjustments
to Consolidated Financial Statements
On May 14, 2009, we completed the divestiture of our Norwegian subsidiary, Endeavour Energy
Norge AS, to Verbundnetz Gas AG for cash consideration of $150 million (the Norway Sale). We
recognized a gain upon closing the Norway Sale of $47 million, after the allocation of $68 million
of goodwill to the assets sold.
As a result of the Norway Sale, we have classified the results of operations and financial position
of our Norwegian subsidiary as discontinued operations for all periods presented. The following
table details selected financial data for the assets included in the Norway Sale:
38
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
December 31, 2008 | December 31, 2007 | |||||||
Current Assets: |
||||||||
Cash |
$ | 6,735 | $ | 2,630 | ||||
Accounts receivable |
4,559 | 6,583 | ||||||
Prepaid expenses and other |
5,432 | 4,642 | ||||||
16,726 | 13,855 | |||||||
Long-term Assets: |
||||||||
Property, plant and equipment, net |
80,611 | 61,699 | ||||||
Goodwill |
67,994 | 67,994 | ||||||
148,605 | 129,693 | |||||||
Current Liabilities: |
||||||||
Accounts payable |
(3,717 | ) | (5,553 | ) | ||||
Accrued expenses and other |
(18,514 | ) | (9,169 | ) | ||||
(22,231 | ) | (14,722 | ) | |||||
Long-term Liabilities: |
||||||||
Deferred tax liability |
(36,828 | ) | (33,998 | ) | ||||
Asset retirement obligation |
(9,223 | ) | (7,632 | ) | ||||
(46,051 | ) | (41,630 | ) | |||||
Net Assets and Liabilities |
$ | 97,049 | $ | 87,196 | ||||
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 89,660 | $ | 40,188 | $ | 29,250 | ||||||
Income before Taxes |
$ | 63,244 | $ | 14,095 | $ | 7,250 | ||||||
Income Tax Expense |
32,613 | 13,027 | 9,043 | |||||||||
Net Income (Loss) from Discontinued Operations |
$ | 30,631 | $ | 1,068 | $ | (1,793 | ) | |||||
39