United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the Fiscal Year Ended December 31, 2009
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Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 001-32212
Endeavour International Corporation
(Exact name of registrant as specified in its charter)
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Nevada
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88-0448389 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1001 Fannin Street, Suite 1600, Houston, Texas
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77002 |
(Address of principal executive offices)
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(Zip code) |
(713) 307-8700
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class of Stock
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Name of Each Exchange on Which Registered |
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Common Stock - $0.001 par value per share
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NYSE-Amex |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 2 months (or for
such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o | |
Accelerated filer þ | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $154.0 million computed by
reference to the closing sale price of the registrants common stock on the NYSE-Amex on June 30, 2009, the last business day of the registrants
most recently completed second fiscal quarter. Shares of common stock held by executive officers and directors of the registrant are not included
in the computation. However, the registrant has made no determination that such individuals are affiliates within the meaning of Rule 405 of
the Securities Act of 1933.
As of March 12, 2010, 160,247,205 shares of the registrants common stock were outstanding.
Documents Incorporated By Reference:
Portions of the registrants definitive proxy statement relating to the 2010 Annual Meeting of Stockholders, which will be filed within 120 days
of December 31, 2009, are incorporated by reference into Part III of this Form 10-K.
Table of Contents
Quantities of natural gas are expressed in this Annual Report on Form 10-K in terms of
thousand cubic feet (Mcf) and million cubic feet (MMcf). Oil is quantified in terms of barrels
(Bbls) and thousands of barrels (Mbbls). Natural gas is compared to oil in terms of barrels of oil
equivalent (BOE), thousand barrels of oil equivalent (MBOE) or million barrels of oil equivalent
(MMBOE). One barrel of oil is the energy equivalent of six Mcf of natural gas. With respect to
information relating to our working interest in wells or acreage, net oil and gas wells or
acreage is determined by multiplying gross wells or acreage by our working interest therein.
References to number of potential well locations are gross, unless otherwise indicated.
References to GAAP refer to U.S. generally accepted accounting principles.
Endeavour International Corporation
Part I
Item 1. Business
Endeavour International Corporation is an independent oil and gas company engaged in the
exploration, development and acquisition of energy reserves in the U.S. and U.K. Unless the
context otherwise requires, references to Endeavour, we, us or our mean Endeavour
International Corporation and our consolidated subsidiaries.
General
Since commencing operations in 2004, we have built a strong asset base and achieved steady
reserve growth through acquisitions and exploration and development activities. Historically, we
have focused our operations in the North Sea, but have recently expanded our focus to target
unconventional U.S. onshore resource shale plays with shorter production-cycle times and compelling
risk/return profiles. As a result, we have established a strong foundation of producing assets and
undeveloped acreage in both established and emerging U.S. onshore resource plays, including
approximately 66,000 gross (27,000 net) acres within the Haynesville and Marcellus Shale regions,
complemented by our four development assets in the UK North Sea.
Our strategic shift to expand our focus to include U.S. onshore asset development has been achieved
through measured and specific steps taken in 2009. In May 2009, we sold our assets and operations
in the Norwegian sector of the North Sea for $150 million. Proceeds from this sale enabled us to
enter into a joint venture relationship with an established U.S. gas shale operator, providing us
with acreage positions and production in the Haynesville and Marcellus gas shales. We also entered
into additional joint venture agreements with other selected operators, providing exposure to
emerging shale plays in Alabama and Montana.
The primary focus of our U.S. unconventional gas shale development efforts will target reserve and
production growth in the Haynesville and Marcellus Shales. We have approximately 7,250 net acres
with over 200 potential drilling locations in the Northern Louisiana and East Texas Haynesville
Shale, with acreage located in Red River, DeSoto, Bienville and Caddo Parishes in Louisiana and
Harrison and Gregg Counties in Texas. Our Marcellus gas shale acreage is comprised of 19,750 net
acres and over 300 potential drilling locations, with acreage between two of the most active parts
of the play. We also have exploratory plans in emerging shale plays in Alabama and Montana, with
63,000 and 75,000 net acres, respectively. Early well results will determine the pace and scope of
subsequent development initiatives in each of these plays.
In addition to our recent expansion into the onshore U.S. shale plays, we intend to continue to
actively manage our North Sea assets in a manner that maximizes value and enables us to
allocate resources to effectively pursue our strategic objectives. Our North Sea activities and
assets remain a key source of value that can be further developed to increase our overall reserves
and production. Our major development projects Bacchus, Columbus, Cygnus and Rochelle have the
potential to significantly expand our total proved reserves and production levels.
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Endeavour International Corporation
Further
exploration and development efforts will continue on our current and nearby properties, as
appropriate, to best achieve maximum risk-adjusted value for our North Sea assets.
With the recent volatility in commodity prices and concerns over the financial markets, we will
continue to pursue our strategy of exploiting a balanced portfolio of exploration and development
assets through a disciplined approach. We are attempting to balance the capital intensive, long
lead-time nature of our North Sea assets with our recent entry into the onshore U.S. shale plays.
We believe the resource-rich shale plays provide us with less expensive, shorter lead time
opportunities in some of the most active hydrocarbon producing areas in the U.S. We intend to
develop our existing assets in the North Sea, which we expect to enter production beginning in
2011, while simultaneously pursuing the development of our leasehold positions in the Haynesville
and Marcellus Shales.
Strategic Alternatives for North Sea Assets
On March 15, 2010, we announced that our board of directors has approved a review of strategic
alternatives for its North Sea assets. In an effort to unlock the value of our underlying North
Sea assets, we will study a full range of options, including:
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Continuing to execute current operations plan; |
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Entering into a joint venture to accelerate activities in the North Sea; and |
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Selling specific assets or the North Sea entire business. |
We will announce the results of the effort once a course of action is chosen. At the end of this
review process, we may elect to make no changes.
Our Areas of Operation
North Sea
The exploitation of North Sea oil reserves has been ongoing for a number of decades and the
resulting increase in international oil prices made the large investments needed for extraction
attractive. Although production costs are relatively high, the quality of the oil, the political
stability of the region, and the proximity of important markets in Western Europe has made the
North Sea an important oil producing region.
Our development assets in the Bacchus, Columbus, Cygnus and Rochelle fields comprise the primary
component of our UK North Sea portfolio. We currently have development plans under way in each of
these primary fields. When these projects are fully producing, they have the potential to exceed
our current production levels from all other fields. We also hold interests in producing and
non-producing properties in the UK sector of the North Sea. Our producing properties include the
Alba, Bittern, Enoch and Goldeneye fields and recently suspended
production from certain of our fields. We anticipate re-developing these suspended fields, if
commercially advisable and practicable, once additional production commences from the nearby
Rochelle field. We believe our assets in the North Sea possess significant value that can continue
to be harvested or monetized in a manner that maximizes shareholder value.
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Endeavour International Corporation
Primary Development Fields
Rochelle
We hold a 55.6% working interest in and operate our Rochelle field assets. Our interests in the
Rochelle field account for 6.3 MMBOE of our proved reserves at December 31, 2009. The
environmental impact study for the subsea development and pipeline corridor has been completed with
no sensitivities identified.
Moreover, recent seismic studies in the area near our Rochelle field in the North Sea indicate that
the natural gas formation may be larger than we had previously understood. We believe this larger
Rochelle area can be developed using the current infrastructure. We
are planning to drill a well to test the westward expansion of the Rochelle play in 2010. The Rochelle
development is scheduled to achieve first production in 2011. This first production is dependent
on approval of the Field Development Plan from the Department of Energy and Climate Change
(DECC), which is further dependent on receiving acceptable commercial terms from the
infrastructure holders for the off-take solution.
Cygnus
We hold a 12.5% working interest in our Cygnus field assets, which are operated by Gaz de France.
Our interests in the Cygnus field account for 5.7 MMBOE of our proved reserves at December 31,
2009. These proved reserves are associated with the eastern portion of the field. Appraisal
drilling to test two additional fault blocks in the western portion of the field has begun, with
drilling underway of a well in the fourth fault block. A field development plan has been filed,
with production from the eastern portion of the field expected to begin in 2011.
Columbus
We hold a 25% working interest in our Columbus field assets, which are operated by Serica Energy
plc. Our interests in the Columbus field account for 1.8 MMBOE of our proved reserves at December
31, 2009. The host platform has been identified and commercial agreements are under negotiation
with first production expected in 2012.
Bacchus
We hold a 10% working interest in our Bacchus field assets, which are operated by Apache
Corporation. The development of the Bacchus field is expected to be sanctioned in 2010 by the DECC
with first production expected to commence in 2011. The discovery well was drilled in 2005,
followed by a down-dip sidetrack appraisal well that tested the upper part of the reservoir. A
three-well subsea development tie-back to the Forties field is planned.
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Endeavour International Corporation
Producing Fields
We have four producing fields in the U.K. Alba, Bittern, Enoch and Goldeneye. Combined these
fields held 2.5 MMBOE of proved reserves at December 31, 2009. The Goldeneye field represents
nearly all of our current gas production in the U.K.
Our Ivanhoe, Rob Roy, Hamish (collectively, IVRRH), Renee and Rubie fields all produced to a
single floating production facility that has experienced significant increases in operating costs
in recent periods. As a result, production was suspended in the first quarter of 2009 and will
remain suspended until the development activities at Rochelle are operational, which we currently
anticipate to be during 2011. After the start of Rochelle production, we expect to re-develop these
fields if commercially advisable and practicable.
United States
We have made significant recent acquisitions to bolster our holdings in unconventional U.S.
onshore resource shale plays. As of March 16, 2010, our U.S. acreage consisted of approximately
165,000 net acres. We believe that our U.S. acreage provides us with development projects with
shorter timeframes compared to our North Sea assets, and a strong return/risk profile. We
anticipate that development of our U.S. acreage will be less expensive than our North Sea assets
and reduce our overall finding and development costs. In addition, our U.S. acreage covers a broad
spectrum of resource plays, from established and explored areas, such as the Haynesville and
Marcellus Shales, to frontier areas, in Alabama and Montana.
Haynesville Shale
The Haynesville Shale has become one of the most active natural gas plays in the U.S. This area is
defined by a Jurassic shale formation located approximately 1,000 to 1,500 feet below the base of
the Cotton Valley formation at depths ranging from approximately 10,500 feet to 13,000 feet. The
formation is 125 to 250 feet thick and is composed of organic-rich, black shale. It is located
across numerous parishes in Northwest Louisiana, primarily in Caddo, Bossier, Red River, DeSoto,
Webster and Bienville parishes and also in East Texas. Numerous shallower secondary objectives
exist in the Haynesville Shale play area, including the overlying Jurassic Cotton Valley Sandstone
and Bossier Shale intervals.
To facilitate our entrance into the Haynesville Shale, we have entered into a joint venture
relationship with Cohort Energy, a subsidiary of J-W Operating Company (J-W Operaing). J-W
Operating, a privately-held company, is a proven operator that has drilled over 130 horizontal
wells in the Barnett, Haynesville, Marcellus and other shale formations since 2004. In separate
transactions, we have acquired interests in both producing wells and acreage that is prospective
for the Haynesville Shale. We have not acquired any meaningful Haynesville Shale interests outside
of our relationship with Cohort Energy. Both the Haynesville and the Marcellus Shale project wells
(described below) will be operated by J-W Operating, which has substantial experience in the
Haynesville and Marcellus Shales.
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Endeavour International Corporation
In October 2009, we purchased 50% of Cohorts working interest in 24 wells located in five fields
and certain proved undeveloped locations associated with Cohorts proved developed assets in North
Louisiana and East Texas for $15 million in cash. These 24 wells, some of which produce from the
Cotton Valley trend and some of which produce from the Haynesville Shale, are associated with net
proved reserves of approximately 1.6 MMBOE.
In addition to these wells, through our joint venture with Cohort Energy, we hold interests in
approximately 17,700 gross (7,250 net) acres with Haynesville Shale potential. In connection with
this acreage, we have identified over 200 potential drilling locations. Of this acreage,
approximately 13,500 gross (5,800 net) acres are located in the Haynesville Shale core area in
Louisiana with over 150 potential drilling locations.
Our most recent Haynesville well in Red River Parish, Louisiana, the Indigo Minerals 3#1-H,
initially flowed approximately 21 MMcf/d and has produced over 2 Bcf (gross) gas in its first 6
months of production. Currently, we are drilling the Bachelor 3#1-H as a direct offset to the
Indigo Minerals well. We are also drilling the Longview North 1H in Gregg County, Texas as a
horizontal Cotton Valley Sandstone test.
Marcellus Shale
The Marcellus Shale is a Middle Devonian-aged shale that underlies much of Pennsylvania, New York,
Ohio, West Virginia and adjacent states. The Marcellus Shale is an organic-rich shale gas target
which we believe is analogous to the Mississippian Barnett Shale in Texas. Within the past few
years, advances in two technologies, fracture stimulation and horizontal drilling, have produced
promising results in the Marcellus Shale. These developments have resulted in significantly
increased leasing and drilling activity in the area. As with our Haynesville Shale acreage, we
have acquired all of our interests in the Marcellus Shale through a 50/50 joint venture
relationship with Cohort Energy/J-W Operating who will operate the project. We acquired interests
in approximately 48,300 gross (19,750 net) acres prospective for the Marcellus Shale in several
project areas, including portions of Cameron, Elk, Potter, McKean, Jefferson and Clarion counties,
Pennsylvania. In connection with this acreage, we have over 300 potential drilling locations.
Currently, we are planning to complete the Pardee C-9H horizontal well in Cameron County followed
by vertical pilot tests in other selected project areas.
Alabama Gas Shales
Through our joint venture with Hillwood Energy Alabama LP, an affiliate of Hillwood International
Energy, we hold a 50% non-operating interest in approximately 160,000 gross (63,000 net) acres with
exposure to emerging gas shale plays in western Alabama. Hillwood has an extensive and successful
background as a participant and an operator in the Barnett shale play. Our position allows us to
target multiple gas shale intervals. If successful, we believe this acreage could yield in excess
of 400 potential drilling locations. We intend to participate in the drilling of vertical pilot
wells during the first half of 2010, which may be followed by horizontal re-entries. We will
monitor the results of these wells before formulating an appropriate development plan.
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Endeavour International Corporation
Central Montana Oil-prone Shales
Through our joint venture with a private company, we own a 25% non-operating interest in
approximately 300,000 gross (75,000 net) acres in central Montana. In this region, historical
conventional oil production from Cretaceous through Mississippian reservoirs has totaled over 130
MMBoe. Our acreage contains approximately 900 potential drilling locations and has exposure to
both the Mississippian Heath and Devonian Bakken oil-prone source shales. We currently plan to
participate in the drilling of pilot wells during 2010. As with our Alabama acreage, we intend to
monitor the results of these wells before determining further appraisal or development plans.
Reserves
Our proved oil and gas reserves at December 31, 2009, 2008 and 2007 included the following:
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Oil |
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Gas |
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Oil Equivalents |
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(MBbls) |
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(MMcf) |
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(MBOE) |
2009: |
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United Kingdom |
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3,348 |
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78,316 |
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16,401 |
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United States |
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18 |
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10,784 |
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1,815 |
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3,366 |
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89,100 |
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18,216 |
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2008: |
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United Kingdom |
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2,131 |
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27,130 |
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6,653 |
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United States |
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18 |
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690 |
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133 |
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Discontinued operations Norway |
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1,406 |
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4,977 |
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2,236 |
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3,555 |
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32,797 |
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9,022 |
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2007: |
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United Kingdom |
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3,284 |
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11,812 |
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5,252 |
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Discontinued operations Norway |
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2,056 |
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8,434 |
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3,461 |
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5,340 |
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20,246 |
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8,713 |
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Endeavour International Corporation
Our proved developed and undeveloped oil and gas reserves at December 31, 2009, 2008 and 2007
included the following:
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Proved |
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Proved |
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Developed |
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Undeveloped |
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Total Proved |
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Reserves |
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Reserves |
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Reserves |
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(MBOE) |
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(MBOE) |
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(MBOE) |
2009: |
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United Kingdom |
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2,103 |
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14,298 |
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16,401 |
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United States |
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792 |
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1,023 |
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1,815 |
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2,895 |
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15,321 |
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18,216 |
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2008: |
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United Kingdom |
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2,595 |
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4,058 |
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6,653 |
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United States |
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46 |
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87 |
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133 |
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Discontinued
Operations Norway |
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2,122 |
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114 |
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2,236 |
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4,763 |
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4,259 |
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9,022 |
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2007: |
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United Kingdom |
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3,947 |
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1,305 |
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5,252 |
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Discontinued Operations Norway |
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2,752 |
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709 |
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3,461 |
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6,699 |
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2,014 |
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8,713 |
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Preparation of Oil and Gas Reserve Information
We have established internal controls over reserve estimation processes and procedures to
support the accurate and timely preparation and disclosure of reserve estimations in accordance
with SEC and GAAP requirements. These controls include oversight of the reserves estimation
reporting processes by our technical staff, annual external audits of all of our proved reserves by
independent reserve engineers and secured access to reservoir databases and systems. Proved
reserve estimates are prepared by our technical staff and reviewed and approved by our executive team, including our Executive Vice President of Exploration. Reserves are reviewed internally with
senior management quarterly and presented to our Board of Directors in summary form on an annual
basis.
For 2009, our oil and gas reserve estimates were prepared by our internal reservoir engineers and
audited by independent reserve engineers, Netherland, Sewell & Associates, Inc. (NSAI). For 2008
and 2007, our proved oil and gas reserves were estimated by NSAI.
Each year, our internal technical staff use reliable technologies to evaluate all technical data
available on each field including production data, wells logs, pressure data, petrophysical
analysis, fluid properties, seismic data, seismic interpretations and well control along with
offset well data. We estimate the quantity of oil and gas reserves and provide our estimates,
analysis and data to our independent reserve engineers.
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Endeavour International Corporation
For 2008 and 2007, we provided our analysis and data to NSAI for their independent estimates using
the Securities and Exchange Commission, or SEC, definitions of proved reserves. The independent
engineers then performed their own analysis of the same raw data including analysis of all
production data, pressure data, well logs, petrophysical analysis, fluid analysis, seismic data and
mapping based on that seismic data to determine their own reserves in place and ultimately
estimated the quantity of proved oil and gas reserves attributable to a specific property.
Qualification of Reserves Preparers and Auditors
We employ oil and gas technical professionals, including geophysicists, petrophysicists,
geologists, petroleum engineers, and production and reservoir engineers, who have an average of 10
to 35 years of experience in their technical fields. In addition, we engage experienced and
qualified consultants to perform various comprehensive seismic acquisitions, processing,
reprocessing, interpretation, and other related services.
NSAI provides worldwide petroleum property analysis services for energy clients, financial
organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum
engineering services under Texas Board of Professional Engineers Registration No. F-002699. The
technical persons responsible for conducting this audit for NSAI meet the requirements regarding
qualifications, independence, objectivity, and confidentiality set forth in the Standards
Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the
Society of Petroleum Engineers. NSAI opined that the overall proved reserves for the reviewed
properties as estimated by us are, in the aggregate, reasonable, prepared in accordance with
generally accepted petroleum engineering and evaluation principles and conform to the SECs
definition of proved reserves as set forth in Rule 210.4-10(a) of Regulation S-X. NSAI has
informed us that the tests and procedures used during its reserves audit conform to the Standards
Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the
Society of Petroleum Engineers. Paragraph 2.2(f) of the Standards Pertaining to the Estimating and
Auditing of Oil and Gas Reserves Information defines a reserves audit as the process of reviewing
certain of the pertinent facts interpreted and assumptions made that have resulted in an estimate
of reserves prepared by others and the rendering of an opinion about (1) the appropriateness of the
methodologies employed, (2) the adequacy and quality of the data relied upon, (3) the depth and
thoroughness of the reserves estimation process, (4) the classification of reserves appropriate to
the relevant definitions used, and (5) the reasonableness of the estimated reserve quantities. A
reserve audit is not the same as a financial audit and is less rigorous in nature than an
independent reserve report where the independent reserve engineer determines the reserves on his or
her own.
2010 Planned Capital Expenditures
We anticipate spending approximately $90 million during 2010 to fund oil and gas activities in
the U.S. and U.K. The majority of this amount is controllable by Endeavour. Our primary focus
during 2010 in the U.S. will be in the Haynesville area as we believe this acreage contains
near-term production potential. The ongoing U.S. program and expenditures will be tailored based
on early drilling results. During 2010, we also expect to begin the evaluation program of our
other
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Endeavour International Corporation
U.S. assets in the Marcellus area and the two frontier plays in Alabama and Montana. Four U.K.
wells have been or will be drilled in 2010; two Cygnus appraisal wells in the western portion of
the field; the Deacon well that began in 2009 and finished in 2010, and the exploration well west
of the Rochelle development. While this drilling is occurring, we
expect to continue to further our
development programs at our four existing development projects, including ongoing engineering
assessments for future production and commercial off-take solutions. We intend to fund these
development activities through cash on hand, and cash flow generated from operations, as well as
expansion of our credit facilities as needed.
The timing, completion and process of our 2010 capital program is subject to a number of factors,
including availability of capital, drilling results, drilling and production costs, availability of
drilling services and equipment, partner approvals and technical work. Based on these and other
factors, we may increase or decrease our planned capital program or prioritize certain projects
over others.
Company History
Endeavour International Corporation (a Nevada corporation formed in 2000) is an independent
oil and gas company engaged in the acquisition, exploration and development of energy reserves.
In November 2004, we purchased a 76.66% majority interest in OER oil AS (OER), a privately held
Norwegian exploration and production company. In January 2005, we purchased the remaining 23.34%
interest in OER from the minority interest holders.
In May 2006, we announced our largest acquisition to date the purchase of producing properties in
the U.K. (the Talisman Acquisition). On October 31, 2006, we completed this acquisition of all
the outstanding shares of Talisman Expro Limited for $366 million, after purchase price adjustments
and expenses. As a result of the Talisman Acquisition, we acquired interests in eight fields in
the United Kingdom sector of the North Sea and over seven million BOE of proved reserves as of the
closing date.
In the second quarter of 2006, we purchased an eight percent interest in the Enoch Field in the
North Sea for approximately $11.7 million. The field is one of the first discoveries to be
developed along the median line between the United Kingdom and Norway after the ratification of the
U.K./Norway Framework Treaty concerning cross-boundary petroleum cooperation.
While working to complete and integrate these acquisitions, we also moved forward in our drilling
program. During 2004 and 2005, we gained approval in the U.K. and Norway to act as an operator or
licensee in both countries and began participating in the license round process. We continue to
participate in the licensing rounds in the U.K. and Norway. We have also pursued various farm-in
and license transfer opportunities to build acreage and exploration potential and spread the risk
of exploration drilling among multiple prospects. Most notably, we have four significant
development projects ongoing in the U.K. Bacchus, Columbus, Cygnus and Rochelle. In 2008, we
initiated operations in the U.S. and announced our first production there in January 2009.
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Endeavour International Corporation
On May 14, 2009, we completed the divestiture of our Norwegian subsidiary, Endeavour Energy Norge
AS, to VerbundnetzGas AG, a German utility company, for cash consideration of $150 million. We
used the proceeds from this divestiture primarily to pay down our outstanding debt and streamline
our capital structure, acquire new properties in the U.S. and support our ongoing drilling program.
This divestiture allows us to focus our efforts on our acquired positions in our U.S. resource
plays, as wells as develop our significant North Sea assets.
In the fourth quarter of 2009, we purchased producing properties and exploration acreage in the
U.S. We purchased additional exploration acreage in the U.S. in January 2010. This accumulation
of acreage in the U.S. reflects our expansion into resource plays in the U.S.
Geographical Data
We operate in one industry segment, that being oil and gas exploration and production, in two
geographical areas. See Note 21 to our consolidated financial statements in Item 8, Financial
Statements and Supplementary Data for geographic operating segment information, including results
of operations and segment assets.
Competition
We encounter intense competition from other oil and gas companies in all areas of our
operations, including the acquisition of producing properties and undeveloped acreage. Our
competitors include major integrated oil and gas companies, numerous independent oil and gas
companies and individuals. Many of our competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources and have been engaged in the
oil and gas business for a much longer time than our company.
Petroleum and natural gas producers also compete with other suppliers of energy and fuel to
industrial, commercial and individual customers. Competitive conditions may be substantially
affected by various forms of energy legislation and/or regulation considered from time to time by
the governments and/or agencies thereof and other factors out of our control including,
international political conditions, overall levels of supply and demand for oil and gas, and the
markets for synthetic fuels and alternative energy sources.
Significant Customers
Our sales in the U.K. 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 sales in the U.S. are sold through our arrangements with the operators of the
fields, with substantially all of the sales being to Cohort Energy.
Employees
As of March 16, 2010, we have 43 full-time employees. We believe that we maintain good
relationships with our employees, none of whom are covered by a collective bargaining agreement.
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Endeavour International Corporation
Environmental Matters and Regulation
Endeavour was established on a commitment to find and develop energy resources in a manner
that protects the health and safety of people and preserves the quality of the environment.
Adhering to high performance standards in the areas of health, safety and the environment (HSE)
is an integral part of our operations in our efforts to end each day injury and incident free.
North Sea
Our operations in the U.K. portions of the North Sea are subject to numerous U.K. and European
Union laws and regulations relating to environmental matters, health and safety. Environmental
matters are addressed before oil and gas production activities commence and during the exploration
and production activities. Before a U.K. licensing round begins, the DECC will consult with
various public bodies that have responsibility for the environment. Applicants for production
licenses are required to submit a summary of its management systems and how those systems will be
applied to the proposed work program. Additionally, the Offshore Petroleum Production and
Pipelines (Assessment of Environmental Effects) Regulations 1999 require the Secretary of State to
exercise his licensing powers under the U.K. Petroleum Act in such a way to ensure that an
environmental assessment is undertaken and considered before consent is given to certain projects.
United States
With our entry into the U.S. onshore shale plays, our U.S. operations are subject to stringent
federal, state and local laws and regulations relating to environmental protection, as well as
controlling the manner in which various substances, including wastes generated in connection with
oil and gas industry operations, are released into the environment. Compliance with these laws and
regulations require the acquisition of permits authorizing air emissions and wastewater discharge
from operations and can affect the location or size of wells and facilities, limit or prohibit the
extent to which exploration and development may be allowed, and require proper closure of wells and
restoration of properties that are being abandoned. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil or criminal penalties, imposition
of remedial obligations, incurrence of capital costs to comply with governmental standards, and
even injunctions that limit or prohibit exploration and production operations or the disposal of
substances generated in connection with oil and gas industry operation.
We currently lease a number of properties that for many years have been used for the exploration
and production of oil and gas. Although we have utilized operating and disposal practices that
were standard in the industry at the time, hydrocarbons or wastes may have been disposed of or
released on or under the properties operated or leased by us or on or under other locations where
such hydrocarbons or wastes have been taken for recycling or disposal. In addition, many of these
properties have been operated by third parties whose treatment and disposal or release of
hydrocarbons or wastes was not under our control. These properties and the hydrocarbons and
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Endeavour International Corporation
wastes disposed thereon may be subject to laws and regulations imposing joint and several, strict
liability, without regard to fault or the legality of the original conduct, that could require us
to remove or remediate previously disposed wastes or environmental contamination, or to perform
remedial plugging or pit closure to prevent future contamination.
In June 2009, the U.S. House of Representatives passed a bill the American Clean Energy and
Security Act of 2009, also known as the Waxman-Markey cap-and-trade legislation (ACESA) to
control and reduce the emission of greenhouse gases (GHGs), such as carbon dioxide and methane,
that may be contributing to warming of the Earths atmosphere and other climatic changes. The U.S.
Senate is currently considering similar legislation that seeks to reduce emission of GHGs in the
U.S. through the granting of emission allowances which would gradually be decreased over time.
Moreover, more than one-third of the states, either individually or through multi-state
initiatives, already have begun implementing legal measures to reduce emissions of GHGs. Also, on
December 15, 2009, the U.S. Environmental Protection Agency (EPA) published its findings that
emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the
environment. These findings by the EPA allow the agency to proceed with the adoption and
implementation of regulations that would restrict emissions of GHGs under existing provisions of
the federal Clean Air Act. EPA has also proposed regulations that would require a reduction in
emissions of GHGs from motor vehicles, and this regulatory action, if finalized, could also lead to
the imposition of GHG emission limitations in Clean Air Act permits for certain stationary sources.
In addition, on September 22, 2009, the EPA issued a final rule requiring the reporting of GHG
emissions from specified large GHG emission sources in the U.S. beginning in 2011 for emissions
occurring in 2010. Although our facilities were not subject to the EPAs GHG reporting rule adopted
in September 2009, EPA has indicated that it is evaluating whether the rule should be applied to
oil and gas production activities, perhaps on a field-wide basis. While it is not possible at this
time to fully predict how legislation or new regulations that may be adopted in the U.S. to address
GHG emissions would impact our business, any such future laws and regulations could result in
increased compliance costs or additional operating restrictions, and could have an adverse effect
on demand for the oil and natural gas that we produce.
The U.S. Congress is currently considering legislation to amend the federal Safe Drinking Water Act
(SDWA), to subject hydraulic fracturing operations to regulation under the SDWA and to require
the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process.
Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock
formations to stimulate oil and gas production. Sponsors of bills currently pending before the U.S.
Senate and House of Representatives have asserted that chemicals used in the fracturing process
could adversely affect drinking water supplies. Proposed legislation would require, among other
things, the reporting and public disclosure of chemicals used in the fracturing process, which
could make it easier for third parties opposing the hydraulic fracturing process to initiate legal
proceedings against producers. In addition, these bills, if adopted, could establish an additional
level of regulation and permitting of hydraulic fracturing operations at the federal level, which
could lead to operational delays, increased operating costs and additional regulatory burdens that
could make it more difficult for us to perform hydraulic fracturing, which is an important
component of well development. Any impairment of our ability to perform hydraulic fracturing could
have an adverse effect on our ability to produce oil and gas from new wells.
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Endeavour International Corporation
We have made, and will continue to make, expenditures in our effort to comply with environmental
laws and regulations. We believe that we are in substantial compliance with applicable
environmental laws and regulations in effect and that continued compliance with existing
requirements will not have a material adverse impact on us. However, we also believe that it is
reasonably likely that the trend in environmental legislation and regulation will continue toward
stricter standards and, thus, we cannot give any assurance that we will not be adversely affected
in the future.
We have established internal guidelines to be followed in order to comply with environmental laws
and regulations in the U.S. We employ a safety department whose responsibilities include providing
assurance that our operations are carried out in accordance with applicable environmental
guidelines and safety precautions. Although we maintain pollution insurance to cover a portion of
the costs of cleanup operations, public liability and physical damage, there is no assurance that
such insurance will be adequate to cover all such costs or that such insurance will continue to be
available in the future. To date, we believe that compliance with existing requirements of such
governmental bodies has not had a material effect on our operations.
Other Regulation of the Oil and Gas Industry
The oil and gas industry is extensively regulated by numerous federal, state and local authorities.
Legislation affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies,
both federal and state, are authorized by statute to issue rules and regulations binding on the oil
and gas industry and its individual members, some of which carry substantial penalties for failure
to comply. Although the regulatory burden on the oil and gas industry increases our cost of doing
business and, consequently, affects our profitability, these burdens generally do not affect us any
differently or to any greater or lesser extent than they affect other companies in the industry
with similar types, quantities and locations of production.
Legislation continues to be introduced in Congress and development of regulations continues in the
Department of Homeland Security and other agencies concerning the security of industrial
facilities, including oil and gas facilities. Our operations may be subject to such laws and
regulations. Presently, it is not possible to accurately estimate the costs we could incur to
comply with any such facility security laws or regulations, but such expenditures could be
substantial.
Production Regulation
Our operations are subject to various types of regulation at federal, state and local levels.
These types of regulation include requiring permits for the drilling of wells, drilling bonds and
reports concerning operations. Most states, and some counties and municipalities, in which we
operate, also regulate one or more of the following:
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the location of wells; |
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the method of drilling and casing wells; |
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the surface use and restoration of properties upon which wells are drilled; |
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Endeavour International Corporation
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the plugging and abandoning of wells; and |
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notice to surface owners and other third parties. |
The various states regulate the drilling for, and the production of, oil and natural gas, including
imposing severance taxes and requirements for obtaining drilling permits. States also regulate the
method of developing new fields, the spacing and operation of wells and the prevention of waste of
oil and natural gas resources. States may regulate rates of production and may establish maximum
daily production allowable from oil and gas wells based on market demand or resource conservation,
or both. States do not regulate wellhead prices or engage in other similar direct economic
regulation, but there can be no assurance that they will not do so in the future. The effect of
these regulations may be to limit the amounts of oil and natural gas that may be produced from our
wells, and to limit the number of wells or locations we can drill.
Regulation
The exploration, production and sale of oil and gas are extensively regulated by governmental
bodies. Applicable legislation is under constant review for amendment or expansion. Oil and gas
mineral rights may be held by individuals, corporations or governments having jurisdiction over the
area in which such mineral rights are located. As a general rule, parties holding such mineral
rights grant licenses or leases to third parties to facilitate the exploration and development of
these mineral rights. The terms of the leases and licenses are generally established to require
timely development. Notwithstanding the ownership of mineral rights, the government of the
jurisdiction in which mineral rights are located generally retains authority over the manner of
development of those rights.
Title to Properties
We believe that our title to the various interests set forth above is satisfactory and
consistent with generally accepted industry standards, subject to exceptions that would not
materially detract from the value of the interests or materially interfere with their use in our
operations. Individual properties may be subject to burdens such as royalty, overriding royalty
and other outstanding interests customary in the industry. In addition, interests may be subject
to obligations or duties under applicable laws or burdens such as production payments, net profits
interest, liens incident to operating agreements and for current taxes, development obligations
under crude oil and natural gas leases or capital commitments under production sharing contracts or
exploration licenses.
Offices
Our principal executive offices are located at 1001 Fannin Street, Suite 1600, Houston, Texas
77002, and our telephone number is (713) 307-8700. Many of our executive officers are also located
in our offices at 114 St. Martins Lane, London WC2N 4BE England. We also have offices in
Aberdeen, United Kingdom and Denver, Colorado.
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Endeavour International Corporation
Available Information
We file annual and quarterly financial reports, as well as interim updates of a material
nature to investors, with the SEC. The public may read and copy any materials that we file with
the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains a website that contains reports, proxy and information
statements and other information regarding issuers, including Endeavour, that file electronically
with the SEC. The public can obtain any document we file at the SEC web page; http://www.sec.gov.
Our website is available at http://www.endeavourcorp.com. We make available, free of charge, on
our website, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports, as soon as reasonably practicable after providing such
reports to the SEC. Also, our Governance Guidelines, the charters of the Audit Committee, the
Compensation Committee and the Governance and Nominating Committee, and the Code of Conduct and
Code of Ethics for Senior Officers are available on our website and in print to any stockholder who
provides a written request to the Corporate Secretary at 1001 Fannin Street, Suite 1600, Houston,
Texas 77002. Our Code of Conduct applies to all directors, officers and employees, including the
chief executive officer and senior financial officer.
Information contained on or connected to our website is not incorporated by reference into this
Form 10-K and should not be considered part of this report or any other filing that we make with
the SEC.
Financial Information about Segment and Geographical Areas
Our revenues and long-lived assets by geographic area is included in Note 21 to our
consolidated financial statements in Item 8 and incorporated herein by reference.
Average Sales Prices and Production Costs by Geographical Area
Information on average sales prices and production costs by geographic area is included in
Item 7 and incorporated herein by reference.
Item 1A. Risk Factors
Cautionary Statement Concerning Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K are forward-looking statements
intended to qualify for the safe harbors from liability established by the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. These forward-looking statements include statements that express a belief,
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Endeavour International Corporation
expectation, or intention, as well as those that are not statements of historical fact, and may
include projections and estimates concerning the timing and success of specific projects and our
future production, revenues, income and capital spending. Our forward-looking statements are
generally accompanied by words such as estimate, project, predict, believe, expect,
anticipate, potential, plan, goal or other words that convey the uncertainty of future
events or outcomes. We caution you not to rely on them unduly. In particular, this Annual Report
on Form 10-K contains forward-looking statements pertaining to the following:
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our future financial position; |
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our business strategy; |
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budgets; |
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projected costs, savings and plans; |
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objectives of management for future operations; |
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legal strategies; and |
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legal proceedings. |
We have based these forward-looking statements on our current expectations and assumptions about
future events. While our management considers these expectations and assumptions to be reasonable,
they are inherently subject to significant business, economic, competitive, regulatory and other
risks, contingencies and uncertainties, most of which are difficult to predict and many of which
are beyond our control. These risks, contingencies and uncertainties, which may not be exhaustive,
relate to, among other matters, the following:
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discovery, estimation, development and replacement of oil and gas reserves; |
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decreases in proved reserves due to technical or economic factors; |
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drilling of wells and other planned exploitation activities; |
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timing and amount of future production of oil and gas; |
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the volatility of oil and gas prices; |
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availability and terms of capital; |
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operating costs such as lease operating expenses, administrative costs and other
expenses; |
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our future operating or financial results; |
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amount, nature and timing of capital expenditures, including future development costs; |
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cash flow and anticipated liquidity; |
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availability of drilling and production equipment; |
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uncertainties related to drilling and production operations in a new region; |
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business strategy and the availability of acquisition opportunities; and |
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factors not known to us at this time. |
Any of these factors, or a combination of these factors, could materially affect our future
financial condition or results of operations and the ultimate accuracy of the forward-looking
statements. The forward-looking statements are not guarantees of our future performance, and our
actual results and future developments may differ materially from those projected in the
forward-looking statements. In addition, any or all of our forward-looking statements in this
Annual Report on Form 10-K may turn out to be incorrect. They can be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties, including those mentioned
in Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K.
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Endeavour International Corporation
Except as required by law, we undertake no obligation to update publicly or release any revisions
to these forward-looking statements to reflect events or circumstances after the date of this
Annual Report on Form 10-K. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
Risks related to our business
We operate internationally and are subject to political, economic and other uncertainties.
We currently have operations in the U.S., U.K. and the Netherlands. We may expand our operations to
other countries or regions. International operations are subject to political, economic and other
uncertainties, including:
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the risk of war, acts of terrorism, revolution, border disputes, expropriation,
renegotiation or modification of existing contracts, and import, export and transportation
regulations and tariffs; |
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taxation policies, including royalty and tax increases and retroactive tax claims; |
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exchange controls, currency fluctuations and other uncertainties arising out of foreign
government sovereignty over our international operations; |
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laws and policies of the U.S. affecting foreign trade, taxation and investment; and |
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the possibility of being subject to the exclusive jurisdiction of foreign courts in
connection with legal disputes and the possible inability to subject foreign persons to the
jurisdiction of courts in the U.S. |
The exploration, production and sale of oil and gas are extensively regulated by governmental
bodies. Applicable legislation is under constant review for amendment or expansion. These efforts
frequently result in an increase in the regulatory burden on companies in our industry and
consequently an increase in the cost of doing business and decrease in profitability. Numerous
governmental departments and agencies are authorized to, and have, issued rules and regulations
imposing additional burdens on the oil and gas industry that often are costly to comply with and
carry substantial penalties for failure to comply. Production operations are affected by changing
tax and other laws relating to the petroleum industry, by constantly changing administrative
regulations and possible interruptions or termination by government authorities.
Oil and gas mineral rights may be held by individuals, corporations or governments having
jurisdiction over the area in which such mineral rights are located. As a general rule, parties
holding such mineral rights grant licenses or leases to third parties to facilitate the exploration
and development of these mineral rights. The terms of the leases and licenses are generally
established to require timely development. Notwithstanding the ownership of mineral rights, the
government of the jurisdiction in which mineral rights are located generally retains authority over
the manner of development of those rights.
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Endeavour International Corporation
Future economic conditions in the U.S. and key international markets may materially adversely
impact our operating results, which could hinder or prevent us from meeting our future capital
needs.
The U.S. and other world economies are slowly recovering from a recession which began in 2008 and
extended into 2009. Growth has resumed, but is modest. There are likely to be significant
long-term effects resulting from the recession and credit market crisis, including a future global
economic growth rate that is slower than what was experienced in recent years. In addition, more
volatility may occur before a sustainable, yet lower, growth rate is achieved. Global economic
growth drives demand for energy from all sources, including fossil fuels. A lower future economic
growth rate will result in decreased demand growth for our crude oil and natural gas production as
well as lower commodity prices, which will reduce our cash flows from operations and our
profitability and may adversely affect our ability to obtain funding for our projects.
In addition, we may be unable to obtain adequate funding under our current senior bank facility
because (i) our lending counterparties may be unwilling or unable to meet their funding obligations
or (ii) our borrowing base under our current senior bank facility is redetermined at least twice
per year and was reduced twice in 2009 as a result of lower oil or gas prices, declines in
reserves, sales of assets and lending requirements or regulations.
Due to these factors, we cannot be certain that funding will be available if needed, and to the
extent required, on acceptable terms or at all. If funding is not available as needed, or is
available only on unfavorable terms, we may be unable to meet our obligations as they come due, or
we may be unable to implement our capital program, enhance our existing business, complete
acquisitions or otherwise take advantage of business opportunities or respond to competitive
pressures, any of which could have a material adverse effect on our production, revenues and
results of operations.
Oil and gas prices are volatile, and a decline in oil and gas prices would reduce our revenues,
profitability and cash flow and impede our growth.
Our revenues, profitability and cash flow depend substantially upon the prices and demand for oil
and gas. The markets for these commodities are volatile, and even relatively modest drops in
prices can significantly affect our financial results and impede our growth. Oil and gas prices
increased to, and then declined significantly from, historical highs in 2008 and may fluctuate and
decline significantly in the near future. Prices for oil and gas fluctuate in response to
relatively minor changes in the supply and demand for oil and gas, market uncertainty and a variety
of additional factors beyond our control, such as:
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global supply of oil and gas; |
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technological advances affecting oil and gas consumption; |
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global economic conditions; |
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price and availability of alternative fuels;
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Endeavour International Corporation
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actions of the Organization of Petroleum Exporting Countries and other state-controlled
oil companies relating to oil price and production controls; |
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governmental regulations and taxation; |
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political conditions in or affecting other oil-producing and gas-producing countries; |
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the proximity, capacity, cost and availability of pipeline and other transportation
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Lower oil and gas prices may not only decrease our revenues on a per unit basis, but significant or
extended price declines may also reduce the amount of oil and gas that we can produce economically.
A reduction in production could result in a shortfall in expected cash flows and require us to
reduce capital spending or borrow funds to cover any such shortfall. Any of these factors could
negatively impact our ability to replace our production and our future rate of growth.
In addition, we may, from time to time, enter into long-term contracts based upon our reasoned
expectations for commodity price levels. If commodity prices subsequently decrease significantly
for a sustained period, we may be unable to perform our obligations or otherwise breach the
contract and be liable for damages.
Competition for oil and gas properties and prospects is intense and some of our competitors have
larger financial, technical and personnel resources that give them an advantage in evaluating,
obtaining and developing properties and prospects.
We operate in a highly competitive environment for reviewing prospects, acquiring properties,
marketing oil and gas and securing trained personnel. Many of our competitors are major or
independent oil and gas companies that have longer operating histories in our areas of operation
and employ superior financial resources which allow them to obtain substantially greater technical
and personnel resources and which better enable them to acquire and develop the prospects that they
have identified. We also actively compete with other companies when acquiring new licenses or oil
and gas properties. Our relatively small size could adversely affect our ability to obtain new
prospects and opportunities. Specifically, competitors with greater resources than our own have
certain advantages that are particularly important in reviewing prospects and purchasing
properties. Competitors may be able to evaluate, bid for and purchase a greater number of
properties and prospects than our financial or personnel resources permit. Competitors may also be
able to pay more for producing oil and gas properties and exploratory prospects than we are able or
willing to pay. If we are unable to compete successfully in these areas in the future, our future
revenues and growth may be diminished or restricted.
These competitors may also be better able to withstand sustained periods of unsuccessful drilling
or downturns in the economy, including decreases in the price of commodities as experienced in 2008
and 2009. Larger competitors may also be able to absorb the burden of any changes in laws and
regulations more easily than we can, which would also adversely affect our competitive position.
In addition, most of our competitors have been operating for a much longer time and have
demonstrated the ability to operate through industry cycles.
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Endeavour International Corporation
We are dependent on our executive officers and need to attract and retain additional qualified
personnel.
Our future success depends in large part on the service of our executive officers. The loss of
these executives could have a material adverse effect on our business. Although we have employment
agreements with certain of our executive officers, there can be no assurance that we will have the
ability to retain their services. Further, we do not maintain key-person life insurance on any
executive officers.
Our future success also depends upon our ability to attract, assimilate and retain highly qualified
technical and other management personnel who are essential for the identification and development
of our prospects. There can be no assurance that we will be able to attract, integrate and retain
key personnel, and our failure to do so would have a material adverse effect on our business.
Our use of derivative transactions may limit future revenues from price increases and involves the
risk that our counterparties may be unable to satisfy their obligations to us.
To manage our exposure to price or interest rate risk with our production, we routinely enter into
commodity derivative contracts. The goal of these derivative contracts is to limit volatility and
increase the predictability of cash flow. Although the use of derivative contracts limits the
downside risk of price declines, their use also may limit future revenues from price increases. In
addition, derivative contracts may expose us to the risk of financial loss in certain
circumstances, including instances in which our production is less than expected or a sudden,
unexpected event materially impacts oil or gas prices.
Derivative contracts also involve the risk that counterparties, which generally are financial
institutions, may be unable to satisfy their obligations to us. If any of our counterparties were
to default on its obligations to us under the derivative contracts or seek bankruptcy protection it
could have a material adverse effect on our ability to fund our planned activities and could result
in a larger percentage of our future production being subject to commodity price changes. In
addition, in the current economic environment and tight financial markets, the risk of a
counterparty default is heightened and it is possible that fewer counterparties will participate in
future derivative transactions, which could result in greater concentration of our exposure to any
one counterparty or a larger percentage of our future production being subject to commodity price
changes.
Risks related to executing our strategy and operations
To maintain and grow our production and cash flow, we must continue to develop and produce
existing reserves and discover or acquire new oil and gas reserves to develop and produce.
Our future oil and gas production is highly dependent upon our level of success in finding or
acquiring additional reserves. Producing oil and gas reserves are generally characterized by
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Endeavour International Corporation
declining production rates that vary depending on reservoir characteristics and other factors. Our
reserves will decline unless we acquire properties with proved reserves or conduct successful
development and exploration drilling activities. We accomplish this through successful drilling
programs and the acquisition of properties. However, we may be unable to find, develop or acquire
additional reserves or production at an acceptable cost or at all. Acquisition opportunities in
the oil and gas industry are very competitive, which can increase the cost of, or cause us to
refrain from, completing acquisitions.
If we are unable to find, develop or acquire additional reserves to replace our current and future
production, our production rates will decline even if we drill the undeveloped locations that were
included in our estimated proved reserves. Our future oil and gas reserves and production, and
therefore our cash flow and income, are dependent on our success in economically finding or
acquiring new reserves and efficiently developing our existing reserves.
We may be unable to make attractive acquisitions, and any acquisition we complete is subject to
substantial risks that could impact our business.
As part of our growth strategy, we intend to pursue strategic acquisitions of new properties or
businesses that expand our current asset base and potentially offer unexploited reserve potential.
Our growth strategy following the full development of our existing properties could be impeded if
we are unable to acquire additional interests in oil and gas prospects on a profitable basis.
Acquisition opportunities in the oil and gas industry are very competitive, which can increase the
cost of, or cause us to refrain from, completing acquisitions. The success of any acquisition will
depend on a number of factors and involves potential risks, including among other things:
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the inability to estimate accurately the costs to develop the interests in oil and gas
prospects, the recoverable volumes of reserves, rates of future production and future net
cash flows attainable from the reserves; |
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the assumption of unknown liabilities, losses or costs for which we are not indemnified
or for which the indemnity we receive is inadequate; |
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the validity of assumptions about costs, including synergies; |
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the impact on our liquidity or financial leverage of using available cash or debt to
finance acquisitions; |
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the diversion of managements attention from other business concerns; and |
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an inability to hire, train or retain qualified personnel to manage and operate our
growing business and assets. |
All of these factors affect whether an acquisition will ultimately generate cash flows sufficient
to provide a suitable return on investment. Even though we perform a review of the properties we
seek to acquire that we believe is consistent with industry practices, such reviews are often
limited in scope. As a result, among other risks, our initial estimates of reserves may be subject
to revision following an acquisition, which may materially and adversely impact the desired
benefits of the acquisition.
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Endeavour International Corporation
Our expectations for future drilling activities will be realized over several years, making them
susceptible to uncertainties that could materially alter the occurrence or timing.
We have identified drilling locations and prospects for future drilling opportunities, including
development, exploratory and other drilling and enhanced recovery activities. These drilling
locations and prospects represent a significant part of our future drilling plans. Our ability to
drill and develop these locations depends on a number of factors, including the availability of
capital, seasonal conditions, third-party operators, regulatory approvals, negotiation of
agreements with third parties, commodity prices, costs and drilling results. Because of these
uncertainties, we cannot give any assurance as to the timing of these activities or that they will
ultimately result in the realization of proved reserves or meet our expectations for success. As
such, our actual drilling and enhanced recovery activities may materially differ from our current
expectations, which could have a significant adverse effect on our financial condition and results
of operations.
Our drilling projects are based in part on seismic data, which cannot ensure the commercial success
of the project.
Our decisions to purchase, explore, develop and exploit prospects or properties depend in part on
data obtained through geophysical and geological analyses, production data and engineering studies,
the results of which are often uncertain. Even when used and properly interpreted, seismic data
and visualization techniques only assist geoscientists and geologists in identifying subsurface
structures and hydrocarbon indicators. Seismic data do not enable an interpreter to conclusively
determine whether hydrocarbons are present or producible economically. In addition, the use of
seismic and other advanced technologies may require greater predrilling expenditures than other
drilling strategies. Because of these factors, we could incur losses as a result of exploratory
drilling expenditures. Poor results from drilling activities could have a material adverse effect
on our future cash flows, ability to replace reserves and results of operations.
Reserve estimates depend on many assumptions that may turn out to be inaccurate and any material
inaccuracies in the reserve estimates or underlying assumptions of our assets will materially
affect the quantities and present value of those reserves.
Estimating oil and gas reserves is complex and inherently imprecise. It requires interpretation of
the available technical data and making many assumptions about future conditions, including price
and other economic factors. In preparing such estimates, projection of production rates, timing of
development expenditures and available geological, geophysical, production and engineering data are
analyzed. The extent, quality and reliability of these data can vary. This process also requires
economic assumptions about matters such as oil and gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. If our interpretations or assumptions used
in arriving at our reserve estimates prove to be inaccurate, the amount of oil and gas that will
ultimately be recovered may differ materially from the estimated quantities and net present value
of reserves owned by us.
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Endeavour International Corporation
A significant portion of our total estimated net proved reserves at December 31, 2009 were
undeveloped, and those reserves may not ultimately be developed.
At
December 31, 2009, approximately 84 percent of our total estimated net proved reserves were
undeveloped. Recovery of undeveloped reserves requires significant capital expenditures and
successful drilling. Our reserve data assumes that we can and will make these expenditures and
conduct these operations successfully. These assumptions, however, may not prove correct. If we
choose not to spend the capital to develop these reserves or if we are not otherwise able to
successfully develop these reserves we may be required to write-off these reserves. Any such
write-offs of our reserves could reduce our ability to borrow money and could reduce the value of
our securities.
Our offshore operations involve special risks that could increase our cost of operations and
adversely affect our ability to produce oil and gas.
Offshore operations are subject to a variety of operating risks specific to the marine environment,
such as capsizing, collisions and damage or loss from hurricanes or other adverse weather
conditions. These conditions can cause substantial damage to facilities and interrupt production.
As a result, we could incur substantial liabilities that could reduce or eliminate the funds
available for exploration, development or leasehold acquisitions, or result in loss of equipment
and properties. Offshore drilling in the North Sea generally requires more time and more advanced
drilling technologies, involving a higher risk of technological failure and usually higher drilling
costs. Moreover, offshore projects often lack proximity to the physical and oilfield service
infrastructure, necessitating significant capital investment in subsea flow line infrastructure.
Subsea tieback production systems require substantial time and the use of advanced and very
sophisticated installation equipment supported by remotely operated vehicles. These operations may
encounter mechanical difficulties and equipment failures that could result in significant cost
overruns. As a result, a significant amount of time and capital must be invested before we can
market the associated oil or gas, increasing both the financial and operational risk involved with
these operations. Because of the lack and high cost of infrastructure, some offshore reserve
discoveries may never be produced economically.
We have recently commenced exploration, production and development operations in the United States,
and as a result, our ability to successfully achieve our goals is subject to greater risk and
uncertainty.
In 2008, we began to pursue exploration, production and development activities in the U.S.
Moreover, we did not have a significant U.S. presence in our assets and operations until late 2009.
Because we have limited production history in this geographic region and do not have extensive
experience in unconventional resource plays, we are less able to use past operational results to
help predict future results. Our lack of operational experience in the U.S. may result in our not
being able to fully execute our expected drilling programs in this region, and the return on
investment from our United States operations may not be as attractive as expected. We cannot
assure you that our efforts in the U.S. will be successful, or if successful will achieve the
resource potential levels that we currently anticipate or achieve the anticipated economic returns
based on our current financial models.
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Endeavour International Corporation
We will not be the operator of all of the interests we own or acquire, and therefore we may not be
in a position to control the timing of development efforts, the associated costs, or the rate of
production of the reserves in respect of such interests.
A significant number of our interests, including all of our producing fields, are currently
operated by third parties. As a result, we may have limited ability to exercise influence over the
operations of these interests or their associated costs. Dependence on the operator and other
working interest owners for these projects, and limited ability to influence operations and
associated costs could prevent the realization of expected returns on capital in drilling or
acquisition activities. The success and timing of development and exploitation activities on
properties operated by others depend upon a number of factors that will be largely outside our
control, including:
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the operators expertise and financial resources; |
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the timing and amount of their capital expenditures; |
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the rate of production of the reserves; |
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approval of other participants to drill wells and implement other work programs; |
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the availability of suitable drilling rigs, drilling equipment, support vessels,
production and transportation infrastructure and qualified operating personnel; and |
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selection of technology. |
Our inability to control the development efforts, costs and timing on the interests where we are
not the operator could have a material adverse effect on our financial conditions, results of
operations and business prospects.
Actual production could differ significantly from forecasts.
From time to time we provide forecasts of expected quantities of future oil and gas production.
These forecasts are based on a number of estimates, including expectations of production decline
rates from existing wells and the outcome of future drilling activity. Should these estimates
prove inaccurate, actual production could be adversely impacted. Downturns in commodity prices
could make certain drilling activities or production uneconomical, which would also adversely
impact production. In addition, we may adjust estimates of proved reserves to reflect production
history, results of exploration and development, prevailing oil and gas prices and other factors,
many of which are beyond our control.
Our insurance may not protect us against business and operating risks, including an operator of a
prospect in which we participate failing to maintain or obtain adequate insurance.
Oil and gas operations are subject to particular hazards incident to the drilling and production of
oil and gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well
fluids, fires and pollution and other environmental risks. These hazards can cause personal injury
and loss of life, severe damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operations. We maintain insurance for some, but not
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Endeavour International Corporation
all, of the potential risks and liabilities associated with our business. If a significant
accident or other event resulting in damage to our operations, including severe weather, terrorist
acts, war, civil disturbances, pollution or environmental damage, occurs and is not fully covered
by insurance, it could adversely affect our financial condition and results of operations. We do
not currently operate all of our oil and gas properties. In the projects in which we own
non-operating interests, the operator may maintain insurance of various types to cover our
operations with policy limits and retention liability customary in the industry. The occurrence of
a significant adverse event that is not fully covered by insurance could result in the loss of our
total investment in a particular prospect and additional liability for us, which could have a
material adverse effect on our financial condition and results of operations and prospects.
The cost of decommissioning is uncertain.
We expect to incur obligations to abandon and decommission certain structures associated with our
producing properties. To date, the industry has little experience of removing oil and gas
structures from the North Sea. Few of the structures in the North Sea have been removed. Certain
groups have been established to study issues relating to decommissioning and abandonment and how
the costs will be borne. Because experience is limited, we cannot precisely predict the costs of
any future decommissions for which we might become obligated. If actual decommission or abandonment
costs exceed our estimates or reserves to satisfy such obligations, our financial condition,
results of operations and prospects could be materially adversely affected.
Risks related to environmental and other regulations
We are subject to environmental regulations that can have a significant impact on our
operations.
Our operations are subject to a variety of national, state, local and international laws and
regulations governing the discharge of materials into the environment or otherwise relating to
environmental protection. Failure to comply with these laws and regulations can result in the
imposition of substantial fines and penalties as well as potential orders suspending or terminating
our rights to operate. Some environmental laws to which we are subject to provide for strict
liability for pollution damages, rendering a person liable without regard to negligence or fault on
the part of such person. In addition, we may be subject to claims alleging personal injury or
property damage as a result of alleged exposure to hazardous substances such as oil and gas related
products. Aquatic environments in which we operate are often particularly sensitive to
environmental impacts, which may expose us to greater potential liability than that associated with
exploration, development and production at many onshore locations.
Changes in environmental laws and regulations occur frequently, and any changes that result in more
stringent or costly requirements for oil and gas exploration and production activities could
require us, as well as others in our industry, to make significant expenditures to attain and
maintain compliance which could have a corresponding material adverse effect on our competitive
position, financial condition or results of operations. We cannot provide assurance that we will
be able to comply with future laws and regulations to the same extent that we
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Endeavour International Corporation
believe we have in the past. Similarly, we cannot always precisely predict the potential impact of
environmental laws and regulations which may be adopted in the future, including whether any such
laws or regulations would restrict our operations in any area.
Current and future environmental regulations, including restrictions on greenhouse gases due to
concerns about climate change, could reduce the demand for our products. Our business, financial
condition and results of operations could be materially and adversely affected if this were to
occur.
Under certain environmental laws and regulations, we could be subject to liability arising out of
the conduct of operations or conditions caused by others, or for activities that were in compliance
with all applicable laws at the time they were performed. Such liabilities can be significant, and
if imposed could have a material adverse effect on our financial condition or results of
operations.
Governmental regulations to which we are subject could expose us to significant fines and/or
penalties and our cost of compliance with such regulations could be substantial.
Oil and gas exploration, development and production are subject to various types of regulation by
local, state and national agencies. Regulations and laws affecting the oil and gas industry are
comprehensive and under constant review for amendment and expansion. These regulations and laws
carry substantial penalties for failure to comply. The regulatory burden on the oil and gas
industry increases our cost of doing business and, consequently, adversely affects our
profitability. In addition, competitive conditions may be substantially affected by various forms
of energy legislation and/or regulation considered from time to time by the governments and/or
agencies thereof.
Federal legislation and state legislative regulatory initiatives relating to hydraulic fracturing
could result in increased costs and additional operating restrictions or delays as well as
adversely affect our support services.
The U.S. Congress is currently considering two companions bills for the Fracturing Responsibility
and Awareness of Chemicals Act, or FRAC Act. The bills would repeal an exemption in the federal
Safe Drinking Water Act (SWDA) for the underground injection of hydraulic fracturing fluids near
drinking water sources. Hydraulic fracturing is an important and commonly used process for the
completion of natural gas, and to a lesser extent, oil wells in shale formations, and involves the
pressurized injection of water, sand and chemicals into rock formations to stimulate natural gas
production. Sponsors of the FRAC Act have asserted that chemicals used in the fracturing process
could adversely affect drinking water supplies. If enacted, the FRAC Act could result in additional
regulatory burdens such as permitting, construction, financial assurance, monitoring,
recordkeeping, and plugging and abandonment requirements. The FRAC Act also proposes requiring the
disclosure of chemical constituents used in the fracturing process to state or federal regulatory
authorities, who would then make such information publicly available. The availability of this
information could make it easier for third parties opposing the hydraulic fracturing process to
initiate legal proceedings based on allegations that specific chemicals used in the fracturing
process could adversely affect
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Endeavour International Corporation
groundwater. In addition, various state and local governments are considering increased regulatory
oversight of hydraulic fracturing through additional permit requirements, operational restrictions,
and temporary or permanent bans on hydraulic fracturing in certain environmentally sensitive areas
such as watersheds. The adoption of the FRAC Act or any other federal or state laws or regulations
imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could
make it more difficult to complete natural gas wells in shale formations, increase our costs of
compliance and doing business.
Climate change legislation or regulations restricting emissions of greenhouse gases could result
in increased operating costs and reduced demand for the crude oil and natural gas that we produce.
On December 15, 2009, the U.S. Environmental Protection Agency (EPA) published its findings that
emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public
health and the environment because emissions of such gases are, according to the EPA, contributing
to warming of the earths atmosphere and other climatic changes. These findings allow the EPA to
adopt and implement regulations that would restrict emissions of greenhouse gases under existing
provisions of the federal Clean Air Act. Accordingly, the EPA has proposed regulations that would
require a reduction in emissions of greenhouse gases from motor vehicles and could trigger permit
review for greenhouse gas emissions from certain stationary sources. In addition, on October 30,
2009, the EPA published a final rule requiring the reporting of greenhouse gas emissions from
specified large greenhouse gas emission sources in the U.S. beginning in 2011 for emissions
occurring in 2010. Also, on June 26, 2009, the U.S. House of Representatives passed the American
Clean Energy and Security Act of 2009, or ACESA, which would establish an economy-wide
cap-and-trade program to reduce U.S. emissions of greenhouse gases, including carbon dioxide and
methane. ACESA would require a 17% reduction in greenhouse gas emissions from 2005 levels by 2020
and just over an 80% reduction of such emissions by 2050. Under this legislation, the EPA would
issue a capped and steadily declining number of tradable emissions allowances authorizing emissions
of greenhouse gases into the atmosphere. These reductions would be expected to cause the cost of
allowances to escalate significantly over time. The net effect of ACESA will be to impose
increasing costs on the combustion of carbon-based fuels such as oil, refined petroleum products,
and natural gas. The U.S. Senate has begun work on its own legislation for restricting domestic
greenhouse gas emissions and the Obama Administration has indicated its support for legislation to
reduce greenhouse gas emissions through an emission allowance system. At the state level, more than
one-third of the states, either individually or through multi-state regional initiatives, already
have begun implementing legal measures to reduce emissions of greenhouse gases. The adoption and
implementation of any regulations imposing reporting obligations on, or limiting emissions of
greenhouse gases from, our equipment and operations could require us to incur costs to reduce
emissions of greenhouse gases associated with our operations or could adversely affect demand for
the crude oil and natural gas that we produce. Finally, it should be noted that some scientists
have concluded that increasing concentrations of greenhouse gases in the Earths atmosphere may
produce climate changes that have significant physical effects, such as increased frequency and
severity of storms, droughts, and floods and other climatic events; if any such effects were to
occur, they could have an adverse effect on our assets and operations.
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Endeavour International Corporation
The adoption of derivatives legislation by the U.S. Congress could have an adverse impact on our
ability to hedge risks associated with our business.
The U.S. Congress is currently considering legislation to impose restrictions on certain
transactions involving derivatives, which could affect the use of derivatives in hedging
transactions. ACESA contains provisions that would prohibit private energy commodity derivative
and hedging transactions. ACESA would expand the power of the Commodity Futures Trading Commission,
or CFTC, to regulate derivative transactions related to energy commodities, including oil and
natural gas, and to mandate clearance of such derivative contracts through registered derivative
clearing organizations. Under ACESA, the CFTCs expanded authority over energy derivatives would
terminate upon the adoption of general legislation covering derivative regulatory reform. The CFTC
is considering whether to set limits on trading and positions in commodities with finite supply,
particularly energy commodities, such as crude oil, natural gas and other energy products. The
CFTC also is evaluating whether position limits should be applied consistently across all markets
and participants. Separately, the House of Representatives adopted financial regulatory reform
legislation on December 11, 2009, that among other things would impose comprehensive regulation on
the over-the-counter (OTC) derivatives marketplace. This legislation would subject swap dealers
and major swap participants to substantial supervision and regulation, including capital
standards, margin requirements, business conduct standards, recordkeeping and reporting
requirements. It also would require central clearing for transactions entered into between swap
dealers or major swap participants, and would provide the CFTC with authority to impose position
limits in the OTC derivatives markets. A major swap participant generally would be someone other
than a dealer who maintains a substantial net position in outstanding swaps, excluding swaps used
for commercial hedging or for reducing or mitigating commercial risk, or whose positions create
substantial net counterparty exposure that could have serious adverse effects on the financial
stability of the U.S. banking system or financial markets. Although it is not possible at this
time to predict whether or when Congress may act on derivatives legislation or how any climate
change bill approved by the Senate would be reconciled with ACESA, any laws or regulations that may
be adopted that subject us to additional capital or margin requirements relating to, or to
additional restrictions on, our trading and commodity positions could have an adverse effect on our
ability to hedge risks associated with our business or on the cost of our hedging activity.
Certain federal income tax deductions currently available with respect to oil and natural gas
exploration and development may be eliminated as a result of future legislation.
President Obamas Proposed Fiscal Year 2010 Budget includes proposed legislation that would, if
enacted into law, make significant changes to U.S. tax laws, including the elimination of certain
key U.S. federal income tax incentives currently available to oil and gas exploration and
production companies. These changes include, but are not limited to, (i) the repeal of the
percentage depletion allowance for oil and gas properties, (ii) the elimination of current
deductions for intangible drilling costs, (iii) the elimination of the deduction for certain
domestic production activities, and (iv) an extension of the amortization period for certain
geological and geophysical expenditures. It is unclear whether any such changes will be enacted or
how soon any such changes could become effective. The passage of any legislation as a result of
these
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Endeavour International Corporation
proposals or any other similar changes in U.S. federal income tax laws could eliminate or otherwise
limit certain tax deductions that are currently available with respect to oil and natural gas
exploration and development, and any such change could negatively impact our financial condition
and results of operations.
Risks related to access to capital and financing
Our development and exploration operations, including our recent North Sea discoveries,
require substantial capital, and we may be unable to obtain needed capital or financing on
satisfactory terms, which could lead to a loss of properties and a decline in our oil and gas
reserves.
The oil and gas industry is capital intensive. We make and expect to continue to make substantial
capital expenditures in our business and operations for the exploration, development, production
and acquisition of oil and gas reserves, including expenditures relating to the development of our
discoveries in the North Sea and our acreage position in the Haynesville Shale and other U.S.
plays. We intend to finance our future capital expenditures primarily with cash flow from
operations and borrowings under our senior bank facility. Our cash flow from operations and access
to capital is subject to a number of variables, including:
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our proved reserves; |
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the level of natural gas and crude oil we are able to produce from existing wells; |
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the prices at which natural gas and crude oil are sold; and |
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our ability to acquire, locate and produce new reserves. |
If our revenues decrease as a result of lower oil and gas prices, operating difficulties, declines
in reserves or for any other reason, we may have limited ability to obtain the capital necessary to
sustain our operations at current levels or to further develop and exploit our current properties,
or for exploratory activity. In order to fund our capital expenditures, we may need to seek
additional financing. Our credit agreements contain covenants restricting our ability to incur
additional indebtedness without the consent of the lenders. Our lenders may withhold this consent
in their sole discretion. In addition, if our borrowing base is redetermined resulting in a lower
borrowing base under our senior bank facility, we may be unable to obtain financing otherwise
available under our senior bank facility.
Furthermore, we may not be able to obtain debt or equity financing on terms favorable to us, or at
all. In particular, the cost of raising money in the debt and equity capital markets has increased
substantially while the availability of funds from those markets generally has diminished
significantly. Also, as a result of concerns about the stability of financial markets generally
and the solvency of counterparties specifically, the cost of obtaining money from the credit
markets generally has increased as many lenders and institutional investors have increased interest
rates, enacted tighter lending standards, refused to refinance existing debt at maturity on terms
that are similar to existing debt, and reduced, or in some cases ceased, to provide funding to
borrowers. The failure to obtain additional financing could result in a curtailment of our
operations relating to exploration and development of our prospects, which in turn could lead to
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a possible loss of properties and a decline in our natural gas, crude oil and natural gas liquids
reserves.
Our debt level could negatively impact our financial condition, results of operations and business
prospects.
As of December 31, 2009, we had $231.2 million in outstanding indebtedness. Our level of
indebtedness could have important consequences on our operations, including
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making it more difficult for us to satisfy our obligations under our indentures or the
terms of our other debt instruments and increasing the risk that we may default on our debt
obligations; |
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requiring us to dedicate a substantial portion of our cash flow from operating
activities to required payments on debt, thereby reducing the availability of cash flow for
working capital, capital expenditures and other general business activities; |
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limiting our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions and other general business activities; |
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decreasing our ability to withstand a downturn in our business or the economy
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placing us at a competitive disadvantage against other less leveraged competitors. |
We may not have sufficient funds to repay our outstanding debt. If we are unable to repay our debt
out of cash on hand, we could attempt to refinance such debt, sell assets or repay such debt with
the proceeds from an equity offering. In addition, we cannot assure you that we will be able to
generate sufficient cash flow from operating activities to pay the interest on our debt or that
future borrowings, equity financings or proceeds from the sale of assets will be available to repay
or refinance such debt. Factors that will affect our ability to raise cash through an offering of
our capital stock, a refinancing of our debt or a sale of assets include financial market
conditions, our market value, our reserve levels and our operating performance at the time of such
offering or other financing. We cannot assure you that any such offering, refinancing or sale of
assets can be successfully completed. The inability to repay or refinance our debt, could have a
material adverse effect on our operations and negatively impact our capital program.
A change of control may adversely affect our liquidity and require refinancing of certain debt
instruments.
At December 31, 2009, we had $231.2 million outstanding under our debt agreements. Upon specified
change of control events, each lender under our debt agreements may cancel the facility and declare
outstanding loans, plus accrued and unpaid interest, outstanding letters of credit and other
outstanding fees, if any, due and payable. We cannot assure you we would have sufficient financial
resources to purchase the notes for cash or repay the lenders under our Debt Agreements upon the
occurrence of a change of control. If a change of control occurs, we may be required to refinance
our indebtedness. There can be no assurance that we would be able to refinance our indebtedness
or, if a refinancing were to occur, that the refinancing would be on terms favorable to us.
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If we are unable to fulfill commitments under any of our oil and gas interests, we will lose our
interest, and our entire investment, in such interest.
Our ability to retain oil and gas interests will depend on our ability to fulfill the commitments
made with respect to each interest. We cannot assure you that we or the other participants in the
projects will have the financial ability to fund these potential commitments. If we are unable to
fulfill commitments under any of our interests, we will lose our interest, and our entire
investment, in such interest.
Risks relating to our common stock
The trading price of our common stock may be volatile.
Smaller capitalized companies like ours often experience substantial fluctuations in the trading
price of their securities. The trading price of our common stock has fluctuated significantly and
in the future may be subject to similar fluctuations. The trading price may be affected by a
number of factors, including those set forth elsewhere herein, as well as our operating results,
financial condition, announcements or drilling activities, general conditions in the oil and gas
exploration and development industry, and other events or factors, some of which may be unrelated
to our performance or prospects or to conditions in the industry as a whole.
If we, our existing stockholders or holders of our securities that are convertible into shares of
our common stock sell additional shares of our common stock, the market price of our common stock
could significantly decline.
The market price of our common stock could decline as a result of sales of a large number of shares
of common stock in the public market or the perception that such sales could occur. These sales,
or the possibility that these sales may occur, might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
As of March 12, 2010, we had approximately 160.2 million shares of common stock outstanding. Of
those shares, approximately 5.0 million shares are restricted shares subject to vesting periods of
up to three years. The remainder of these shares is freely tradable.
In addition, approximately 2.8 million shares are issuable upon the exercise of presently
outstanding stock options under our employee incentive plans and 0.9 million shares are issuable
upon the exercise of presently outstanding options and warrants outside our employee incentive
plans. Also 16.2 million shares are issuable upon the conversion of our convertible senior notes
due 2012 and 48.8 million shares are issuable upon conversion of our Series C Preferred Stock,
based upon the conversion price of $1.25, and 21.5 million shares are issuable upon conversion of
our 11.5% convertible bonds, based on a conversion price of $2.36.
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Endeavour International Corporation
Provisions in our articles of incorporation, bylaws and the Nevada Revised Statutes may discourage
a change of control.
Certain provisions of our amended and restated articles of incorporation and amended and restated
bylaws and the Nevada Revised Statutes (NRS) could delay or make more difficult a change of
control transaction or other business combination that may be beneficial to stockholders. These
provisions include, but are not limited to, the ability of our board of directors to issue a series
of preferred stock, classification of our board of directors into three classes and limiting the
ability of our stockholders to call a special meeting.
We are subject to the Combinations With Interested Stockholders Statute and the Control Share
Acquisition Statute of the NRS. The Combinations Statute provides that specified persons who,
together with affiliates and associates, own, or within three years did own, 10% or more of the
outstanding voting stock of a corporation cannot engage in specified business combinations with the
corporation for a period of three years after the date on which the person became an interested
stockholder, unless the combination or the transaction by which the person first became an
interested stockholder is approved by the corporations board of directors before the person first
became an interested stockholder.
The Control Share Acquisition Statute provides that persons who acquire a controlling interest as
defined by the statute, in a company may only be given full voting rights in their shares if such
rights are conferred by the stockholders of the company at an annual or special meeting. However,
any stockholder that does not vote in favor of granting such voting rights is entitled to demand
that the company pay fair value for their shares if the acquiring person has acquired at least a
majority of all of the voting power of the company. As such, persons acquiring a controlling
interest may not be able to vote their shares.
Risks related to potential impairments
Lower oil and gas prices and other factors resulted in a ceiling test write-down and may in
the future result in additional ceiling test write-downs or other impairments.
We capitalize the costs to acquire, find and develop our oil and gas properties under the full cost
accounting method. The net capitalized costs of our oil and gas properties may not exceed the
present value of estimated future net cash flows from proved reserves, using period-end oil and gas
prices and a 10% discount factor, plus the lower of cost or fair market value for unproved
properties. If net capitalized costs of our oil and gas properties exceed this limit, we must
charge the amount of the excess to earnings. This is called a ceiling test write-down. Although
a ceiling test write-down does not impact cash flow from operating activities, it does reduce net
income and our shareholders equity. Once recorded, a ceiling test write-down is not reversible at
a later date even if oil and gas prices increase.
We review the net capitalized costs of our properties quarterly, based on prices in effect
(excluding the effect of our hedging contracts that are not designated for hedge accounting) as of
the end of each quarter or as of the time of reporting our results. The net capitalized costs of
oil and gas properties are computed on a country-by-country basis. Therefore, while our properties
32
Endeavour International Corporation
in one country may be subject to a write-down, our properties in other countries could be
unaffected. We also assess investments in unproved properties periodically to determine whether
impairment has occurred.
The risk that we will be required to further write down the carrying value of our oil and gas
properties increases when oil and gas prices are low or volatile. In addition, write-downs may
occur if we experience substantial downward adjustments to our estimated proved reserves or our
unproved property values, or if estimated future development costs increase. We may experience
further ceiling test write-downs or other impairments in the future. In addition, any future
ceiling test cushion would be subject to fluctuation as a result of acquisition or divestiture
activity.
Our financial results could be adversely affected by goodwill impairments.
As a result of mergers, acquisitions and dispositions, at December 31, 2009 we had $211.9 million
of goodwill on our balance sheet. Goodwill is not amortized, but instead must be tested at least
annually for impairment by applying a fair-value-based test. Goodwill is deemed impaired to the
extent that its carrying amount exceeds the fair value of the reporting unit. Although our latest
tests indicate that no goodwill impairment is currently required, future deterioration in market
conditions could lead to goodwill impairments that could have a substantial negative effect on our
profitability.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Drilling Statistics
A well is considered productive for purposes of the following table if it justifies the
installation of permanent equipment for the production of oil or gas. The information contained in
the table should not be considered indicative of future performance, nor should it be assumed that
there is necessarily any correlation between the number of productive wells drilled, quantities of
reserves found or economic value. The following table shows the results of the oil and gas wells
in which we participated, drilled and tested during 2009, 2008 and 2007:
33
Endeavour International Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive Wells |
|
Dry Holes |
|
In Progress Wells |
|
|
|
Gross |
|
Net |
|
Gross |
|
Net |
|
Gross |
|
Net |
|
Exploration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
3.00 |
|
|
|
0.82 |
|
|
|
2.00 |
|
|
|
0.52 |
|
|
|
1.00 |
|
|
|
0.10 |
|
United States |
|
|
3.00 |
|
|
|
1.32 |
|
|
|
1.00 |
|
|
|
0.22 |
|
|
|
3.00 |
|
|
|
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.00 |
|
|
|
0.68 |
|
United States |
|
|
1.00 |
|
|
|
0.20 |
|
|
|
|
|
|
|
|
|
|
|
1.00 |
|
|
|
0.10 |
|
Discontinued Operations Norway |
|
|
5.00 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
2.00 |
|
|
|
0.50 |
|
|
|
3.00 |
|
|
|
0.75 |
|
|
|
|
|
|
|
|
|
Discontinued Operations Norway |
|
|
2.00 |
|
|
|
0.05 |
|
|
|
1.00 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
2.00 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
1.00 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.00 |
|
|
|
0.02 |
|
Discontinued Operations Norway |
|
|
3.00 |
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
1.00 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations Norway |
|
|
3.00 |
|
|
|
0.13 |
|
|
|
1.00 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
We do not own any drilling rigs, and all of our drilling activities are conducted by
independent drilling contractors.
34
Endeavour International Corporation
Productive Well Summary
At December 31, 2009, our productive wells included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
Gas |
|
|
|
Gross |
|
Net |
|
Gross |
|
Net |
|
United Kingdom |
|
|
32.00 |
|
|
|
0.79 |
|
|
|
2.00 |
|
|
|
0.14 |
|
United States |
|
|
2.00 |
|
|
|
1.12 |
|
|
|
25.00 |
|
|
|
7.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
34.00 |
|
|
|
1.91 |
|
|
|
27.00 |
|
|
|
7.30 |
|
|
Acreage
The following table sets forth certain information regarding our developed and undeveloped
acreage as of December 31, 2009, in the areas indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed |
|
Undeveloped |
|
|
|
Gross |
|
Net |
|
Gross |
|
Net |
|
United Kingdom |
|
|
31,790 |
|
|
|
8,108 |
|
|
|
325,610 |
|
|
|
86,566 |
|
United States |
|
|
39,360 |
|
|
|
11,690 |
|
|
|
427,518 |
|
|
|
102,342 |
|
Ireland |
|
|
|
|
|
|
|
|
|
|
172,797 |
|
|
|
34,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
71,150 |
|
|
|
19,798 |
|
|
|
925,925 |
|
|
|
223,467 |
|
|
As of December 31, 2009, we had approximately 34,559, 28,473 and no net acres that are
scheduled to expire by December 31, 2010, 2011 and 2012, respectively, if we take no action to
continue the term of the underlying license through operational or administrative actions. We
currently have plans to continue the terms of various licenses through operational or
administrative actions and do not expect a significant portion of our net acreage position to
expire before such actions occur.
Sales Volumes and Prices
Information regarding our annual average sales volumes, sales prices and average production
costs is contained in Item 7 of this Form 10-K. Additional detail of production costs is contained
in Note 24 to our consolidated financial statements under Item 8 of this Form 10-K.
Reserves
Our estimates of proved reserves, proved developed reserves and proved undeveloped reserves at
December 31, 2009, 2008 and 2007 and changes in proved reserves during the last three years
35
Endeavour International Corporation
are contained in Note 24 Note to our consolidated financial statements under Item 8 of this Form
10-K.
Item 3. Legal Proceedings
We are a party to various lawsuits, claims, and proceedings from time to time in the ordinary
course of business. These proceedings are subject to uncertainties inherent in any litigation, and
the outcome of these matters is inherently difficult to predict with any certainty. We believe
that the amount of any potential loss associated with these proceedings would not be material to
our consolidated financial position; however, in the event of an unfavorable outcome, the potential
loss could have an adverse effect on our results of operations and cash flow in the reporting
periods in which any such actions are resolved.
Part II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock currently trades on the NYSE-Amex, formerly the American Stock Exchange,
under the symbol END and on the London Stock Exchange under the symbol ENDV. The following
table sets forth the range of high and low prices per share of our common stock for each of the
calendar quarters identified below as reported by the NYSE-Amex. These quotations represent
inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual
transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
High |
|
Low |
|
High |
|
Low |
|
First Quarter |
|
$ |
1.03 |
|
|
$ |
0.46 |
|
|
$ |
1.46 |
|
|
$ |
1.13 |
|
Second Quarter |
|
|
2.21 |
|
|
|
0.83 |
|
|
|
2.56 |
|
|
|
1.20 |
|
Third Quarter |
|
|
1.50 |
|
|
|
1.02 |
|
|
|
2.30 |
|
|
|
1.01 |
|
Fourth Quarter |
|
|
1.30 |
|
|
|
0.82 |
|
|
|
1.45 |
|
|
|
0.33 |
|
|
Holders
As of March 12, 2010, the number of holders of record of our common stock was 222. We believe
that there are a number of additional beneficial owners of our common stock who hold such shares in
street name.
36
Endeavour International Corporation
Dividends
We have not paid any cash dividends on our common stock to date, and have no intention of
declaring or paying any cash dividends on our common stock in the foreseeable future. Our Series B
Preferred Stock is subject to a cumulative 8% dividend. Unless the full amount of the foregoing
dividends accrued for the Series B Preferred Stock is paid in full, we cannot declare or pay any
dividend on our common stock. In addition, our senior bank facility contains restrictions on the
payment of dividends to the holders of our common stock. The declaration and payment of dividends
is subject to the discretion of our Board of Directors and to certain limitations imposed under
Nevada corporate laws. The timing, amount and form of dividends, if any, will depend on, among
other things, our results of operations, financial condition, cash requirements and other factors
deemed relevant by our Board of Directors.
In 2006, we issued the Series C Preferred Stock. Dividends on the Series C Preferred Stock are:
|
|
|
cumulative; |
|
|
|
|
compounded quarterly based on the original issue price; |
|
|
|
|
payable in cash or common stock; and |
|
|
|
|
payable to the preferred stock investors prior to payment of any other dividend on any
other shares of our capital stock. |
In November 2009, we amended the terms of the Series C Preferred Stock in connection with a partial
redemption. In connection with this transaction, the Series C Preferred Stock dividend rates were
changed from 8.5% or 8.92% when payable in cash or common stock, respectively, to 4.5% or 4.92%,
respectively. The Series C Preferred Stock continues to participate in any dividends paid on our
common stock. We paid the Series C Preferred Stock dividends in common stock until the fourth
quarter of 2007. Thereafter, we have paid the Series C Preferred Stock dividends in cash.
Item 6. Selected Financial Data
The following table sets forth some of our historical consolidated financial data. 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.
The following data should be read in conjunction with Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations and the Consolidated Financial Statements and
Notes thereto included in Item 8. Financial Statements and Supplementary Data. The selected
consolidated financial data provided below are not necessarily indicative of our future results of
operations or financial performance.
37
Endeavour International Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Financial Data(1) |
|
|
Year Ended December 31, |
(Amounts in thousands, except per share data) |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
Summary Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
62,293 |
|
|
$ |
170,781 |
|
|
$ |
135,876 |
|
|
$ |
24,881 |
|
|
$ |
|
|
Operating Profit (Loss) |
|
|
(50,398 |
) |
|
|
18,236 |
|
|
|
23,778 |
|
|
|
(11,516 |
) |
|
|
(43,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) to
Common Shareholders |
|
|
(62,206 |
) |
|
|
45,681 |
|
|
|
(60,315 |
) |
|
|
(8,829 |
) |
|
|
(31,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
(0.84 |
) |
|
$ |
0.12 |
|
|
$ |
(0.50 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.50 |
) |
Discontinued Operations |
|
|
0.36 |
|
|
|
0.24 |
|
|
|
0.01 |
|
|
|
(0.02 |
) |
|
|
0.08 |
|
|
Total |
|
$ |
(0.48 |
) |
|
$ |
0.36 |
|
|
$ |
(0.49 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Common Share Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
$ |
(0.84 |
) |
|
$ |
0.15 |
|
|
$ |
(0.50 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.50 |
) |
Discontinued Operations |
|
|
0.36 |
|
|
|
0.17 |
|
|
|
0.01 |
|
|
|
(0.02 |
) |
|
|
0.08 |
|
|
Total |
|
$ |
(0.48 |
) |
|
$ |
0.32 |
|
|
$ |
(0.49 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital |
|
$ |
24,885 |
|
|
$ |
22,902 |
|
|
$ |
37,198 |
|
|
$ |
47,431 |
|
|
$ |
49,638 |
|
Total Assets |
|
|
538,879 |
|
|
|
737,470 |
|
|
|
747,623 |
|
|
|
774,470 |
|
|
|
186,966 |
|
Debt |
|
|
223,385 |
|
|
|
227,855 |
|
|
|
266,250 |
|
|
|
306,250 |
|
|
|
81,250 |
|
Convertible Preferred Stock |
|
|
59,058 |
|
|
|
125,000 |
|
|
|
125,000 |
|
|
|
125,000 |
|
|
|
|
|
Equity |
|
|
60,133 |
|
|
|
117,971 |
|
|
|
70,149 |
|
|
|
116,828 |
|
|
|
40,344 |
|
|
|
|
|
(1) |
|
Includes the following: |
|
|
|
acquisition of producing properties and exploration acreage in the U.S. in 2009; |
|
|
|
|
acquisition of Talisman Expro Limited in November 2006; |
|
|
|
|
acquisition of working interests in the Enoch and Bacchus prospects in 2006; |
|
|
|
|
disposition of Thailand assets in 2005; |
|
|
|
|
acquisition of Norwegian assets in November 2004 and January 2005; |
|
|
|
|
disposition of non-core assets in 2004; |
|
|
|
|
acquisition of NSNV, Inc. in 2004; and |
|
|
|
|
unrealized gains (losses) on derivatives of $(55.6) million, $76.7 million, $(89.1)
million and $34.5 million in 2009, 2008, 2007 and 2006, respectively. |
Information regarding each of these transactions is included in the notes to the Consolidated
Financial Statements included elsewhere in this report.
38
Endeavour International Corporation
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Managements Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this Annual Report on Form 10-K contain forward-looking statements that involve
risks and uncertainties. All forward-looking statements included in this Annual Report on Form
10-K are based on information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of factors, including those
set forth in the section captioned Risk Factors in Item 1A and elsewhere in this Annual Report on
Form 10-K. The following should be read in conjunction with the audited financial statements and
the notes thereto included in Item 8. Financial Statements and Supplementary Data. The
following discussion also includes non-GAAP financial measures, which may not be comparable to
similarly titled measures presented by other companies. Accordingly, we strongly encourage
investors to review our financial statements in their entirety and not rely on any single financial
measure.
Overview
We are an international oil and gas exploration and production company focused on the
acquisition, exploration and development of energy reserves. Historically, we have focused our
operations in the North Sea, but have recently expanded our focus to target unconventional U.S.
onshore resource shale plays with shorter production-cycle times and compelling risk/return
profiles.
On May 14, 2009, we completed the sale 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 $47.0 million, after the allocation of $68 million of goodwill
to the assets sold. Proceeds from this sale enabled us to enter into a joint venture relationship
with an established U.S. shale operator, providing us with acreage positions and production in the
Haynesville and Marcellus Shales. We also entered into additional joint venture agreements with
other selected operators, providing exposure to emerging shale plays in Alabama and Montana.
Our North Sea activities and assets represented the majority of our activity in 2007 and 2008,.
Our major development projects Bacchus, Columbus, Cygnus and Rochelle have continued to move
toward development with appraisal wells drilled at Cygnus and Rochelle in early 2009. Further
appraisal drilling is planned for 2010 at Cygnus.
Our realized price per BOE, before derivatives, decreased from $71.70 per BOE in 2008 to $64.15 per
BOE in 2009 largely as a result of lower gas prices in the U.K. Our realized price per BOE, before
derivatives, increased 25% from 2007 to 2008 largely as a result of oil prices climbing to record
levels in the summer of 2008 and gas prices in our markets improving. This substantial increase in
prices in the first half of 2008 helped revenue grow from $135.9 million in
39
Endeavour International Corporation
2007 to $170.8 million
in 2008. At December 31, 2009, we held $27.3 million in cash and another $2.9 million in
restricted cash.
Even with the substantial growth in revenues, net income can be significantly affected by various
non-cash items, such as unrealized gains and losses on our commodity derivatives, currency impact
of long-term liabilities and deferred taxes. Cash flow provided by (used in) operations was $55.7
million in 2009 versus $133.2 million in 2008 and $128.5 million in 2007. Discretionary cash flow
was $71.4 million in 2009 compared to $120.8 million in 2008 and $113.0 million in 2007.
Net loss to common stockholders was $62.2 million for 2009, representing $(0.48) per diluted share
and reflecting significant unrealized losses on the mark-to-market of commodity derivatives and a
non-cash preferred stock dividend upon the valuation of the redemption and modification of a
portion of our preferred stock. Net income to common stockholders was $45.7 million for 2008, or
$0.32 per diluted share. Net loss to common stockholders for 2007 was $60.3 million, or $0.49 per
share, reflecting the significant unrealized loss on the mark-to-market of commodity derivatives.
Net income as adjusted for 2009 would have been $41.1 million without the effect of impairments,
derivative transactions and currency impacts of deferred taxes. Net income as adjusted for 2008
would have been $16.5 million, as compared to net loss as adjusted of $0.3 million in 2007.
Given the significant impact that non-cash items may have on our net income, we use various
measures in addition to net income, including non-financial performance indicators and non-GAAP
measures as key metrics to manage our business. These key metrics demonstrate the companys
ability to maintain or grow production levels and reserves, internally fund capital expenditures
and service debt as well as provide comparisons to other oil and gas exploration and production
companies. These measures include, among others, debt and cash balances, production levels, oil
and gas reserves, drilling results, discretionary cash flow, adjusted earnings before interest,
taxes, depreciation, depletion and amortization (Adjusted EBITDA) and adjusted net income.
For definitions of Adjusted EBITDA and Discretionary Cash Flow, and a reconciliation of Adjusted
EBITDA to net income as adjusted, please see Reconciliation of Non-GAAP Accounting Measures.
Results of Operations
Our revenues have increased significantly since 2006 primarily due to the following:
|
|
|
Our Enoch field began first production in mid 2007 and each of 2009 and 2008 reflect a
full years contribution of this asset. |
|
|
|
|
U.S. production reflects the results of our successful drilling of the Garwood well at
the end of 2008 and the purchase of producing assets in October 2009.
|
40
Endeavour International Corporation
|
|
|
In the first quarter of 2009, we suspended production at the IVRRH, Renee and Rubie
fields due to high operating costs. |
|
|
|
|
Natural production declines at certain of our fields have not been offset by infield
drilling resulting in production decreases at certain fields, particularly in 2009 at our
largest gas field Goldeneye. |
|
|
|
|
There was an increase in gas production from our discontinued operations at the end of
2007 with the completion of a gas project at Njord in the fourth quarter of 2007. |
The following table shows our annual average sales volumes, sales prices and average production
costs.
41
Endeavour International Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Sales volume (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Oil and condensate sales (Mbbls): |
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
690 |
|
|
|
1,032 |
|
|
|
1,274 |
|
United States |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
694 |
|
|
|
1,032 |
|
|
|
1,274 |
|
Discontinued operations Norway |
|
|
310 |
|
|
|
726 |
|
|
|
519 |
|
|
Total |
|
|
1,004 |
|
|
|
1,758 |
|
|
|
1,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sales (MMcf): |
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
3,743 |
|
|
|
6,532 |
|
|
|
8,556 |
|
United States |
|
|
320 |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
4,063 |
|
|
|
6,532 |
|
|
|
8,556 |
|
Discontinued operations Norway |
|
|
686 |
|
|
|
2,322 |
|
|
|
328 |
|
|
Total |
|
|
4,749 |
|
|
|
8,854 |
|
|
|
8,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil equivalent sales (MBOE) |
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
1,314 |
|
|
|
2,121 |
|
|
|
2,700 |
|
United States |
|
|
58 |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
1,372 |
|
|
|
2,121 |
|
|
|
2,700 |
|
Discontinued operations Norway |
|
|
425 |
|
|
|
1,113 |
|
|
|
574 |
|
|
Total |
|
|
1,797 |
|
|
|
3,234 |
|
|
|
3,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BOE per day |
|
|
4,923 |
|
|
|
8,835 |
|
|
|
8,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical production volume (BOE per day): |
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
3,669 |
|
|
|
5,804 |
|
|
|
7,660 |
|
United States |
|
|
162 |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
3,831 |
|
|
|
5,804 |
|
|
|
7,660 |
|
Discontinued operations Norway |
|
|
1,156 |
|
|
|
3,033 |
|
|
|
1,608 |
|
|
Total |
|
|
4,987 |
|
|
|
8,837 |
|
|
|
9,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Prices (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Oil and condensate price ($ per Bbl): |
|
|
|
|
|
|
|
|
|
|
|
|
Before commodity derivatives |
|
$ |
52.15 |
|
|
$ |
90.53 |
|
|
$ |
67.11 |
|
Effect of commodity derivatives |
|
|
22.51 |
|
|
|
(14.50 |
) |
|
|
(2.13 |
) |
|
Realized prices including commodity derivatives |
|
$ |
74.66 |
|
|
$ |
76.03 |
|
|
$ |
64.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas price ($ per Mcf): |
|
|
|
|
|
|
|
|
|
|
|
|
Before commodity derivatives |
|
$ |
5.77 |
|
|
$ |
11.44 |
|
|
$ |
6.27 |
|
Effect of commodity derivatives |
|
|
2.69 |
|
|
|
(0.35 |
) |
|
|
1.79 |
|
|
Realized prices including commodity derivatives |
|
$ |
8.46 |
|
|
$ |
11.09 |
|
|
$ |
8.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent oil price ($ per BOE): |
|
|
|
|
|
|
|
|
|
|
|
|
Before commodity derivatives |
|
$ |
44.44 |
|
|
$ |
80.54 |
|
|
$ |
53.78 |
|
Effect of commodity derivatives |
|
|
19.71 |
|
|
|
(8.84 |
) |
|
|
3.68 |
|
|
Realized prices including commodity derivatives |
|
$ |
64.15 |
|
|
$ |
71.70 |
|
|
$ |
57.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Costs ($ per BOE) |
|
$ |
12.97 |
|
|
$ |
14.40 |
|
|
$ |
12.56 |
|
|
42
Endeavour International Corporation
|
(1) |
|
We record oil revenues on the sales method, i.e. when delivery has occurred. Actual
production may differ based on the timing of tanker liftings. We use the entitlements
method to account for sales of gas production. |
|
|
(2) |
|
The average sales prices reflect both our continuing and discontinued operations and
include realized gains and losses for derivative contracts we utilize to manage price risk
related to our future cash flows. |
|
|
(3) |
|
Operating costs reflect both our continuing and discontinued operations and are costs
incurred to operate and maintain our wells and related equipment and include cost of labor,
well service and repair, location maintenance, power and fuel, transportation, cost of
product and production related general and administrative costs. |
Our revenues and cash flows from operating activities are very sensitive to changes in the prices
we receive for the oil and natural gas we produce. Our production is sold at prevailing market
prices which may be volatile and subject to numerous factors which are outside of our control.
Further, the current tightly balanced supply and demand market allows a small variation in supply
or demand to significantly impact the market prices for these commodities.
The markets in which we sell our oil and natural gas also materially impact our revenues and cash
flows. Oil trades on a worldwide market and consequently, price movements for all types and grades
of crude oil generally trend in the same direction and within a relatively narrow price range.
However, natural gas prices vary among geographic areas as the prices received are largely impacted
by local supply and demand conditions as the global transportation infrastructure for natural gas
is still developing. As such, the oil we produce and sell is typically in line with global prices,
whereas our natural gas is to a large extent impacted by regional supply and demand issues and to a
lesser extent by global fuel prices, including oil and coal. Specifically, we sell a majority of
our gas into the U.K. market, which is very sensitive to and impacted by tighter European gas
supplies and gas deliveries from Russia. Therefore, the price for natural gas in the U.K. market is
typically higher than the price for natural gas in other geographic regions and markets, including
the U.S.
We utilize various oil and gas derivative instruments to achieve a more predictable cash flow by
reducing our exposure to price fluctuations. Hedge accounting has not been elected for these
instruments resulting in the application of mark-to-market accounting effectively pulling forward
into current periods the non-cash gains and losses from commodity price fluctuations relating to
all future delivery periods. The derivative instruments cover a portion of our production through
2011. The significant volatility in commodity prices and the multi-year nature of the derivative
instruments leads to large fluctuations in the fair market value of the derivative instruments at
the end of each year. This non-cash change in the fair market value are recorded in unrealized
gains (losses) on derivatives in the income statement. The realized prices above show the effect
of the cash settlements for our derivative instruments each year. We expect to continue to have
fluctuations in net earnings for the change in the fair market value each period as commodity
prices fluctuate based on all remaining unsettled contracts. See Note 18 to the consolidated
financial statements for additional information on these derivatives.
43
Endeavour International Corporation
Operating Expenses
For 2009, operating expenses decreased to $17.8 million as compared to $32.3 million for 2008.
Operating costs per BOE decreased to $12.97 per BOE for 2009 from $14.40 per BOE for 2008. In
general, the changes in operating costs reflect the increase in fuel costs in 2008 at a
non-operated facility which gathered the production from the IVRRH, Renee and Rubie and then the
absence of those costs when we suspended production from those fields in 2009.
DD&A and Impairment of Oil and Gas Properties
Decreased depreciation, depletion and amortization (DD&A) expense from 2008 to 2009 reflects
the impact of a decrease in production and the lower DD&A rates as a result of impairments in oil
and gas properties in 2008 and earlier 2009. Decreased DD&A expense from 2007 to 2008 reflects the
impact of a decrease in production from 2007 to 2008 partially offset by an increase in the DD&A
rate.
In 2009, we recorded $43.9 million in impairment of oil and gas properties, pre-tax, through the
application of the full cost ceiling test. At December 31, 2009, the prices used to determine the
estimates of future cash inflows were $60.40 per Bbl for oil and $4.96 per Mcf for gas.
In 2008, we recorded $37.0 million in impairment of oil and gas properties, pre-tax, through the
application of the full cost ceiling test at year-end. The prices used to determine the impairment
were $36.55 per barrel for oil and $8.70 per Mcf for gas. While our commodity derivatives had a
fair value of $31.0 million at December 31, 2008, these derivatives were not included in the
calculation of the full cost ceiling test as the derivatives are not accounted for as cash flow
hedges.
General and Administrative (G&A) Expenses
Our have only slightly increased since 2007 as we have been able to absorb a significant
amount of our expanded operations without a corresponding increase in the number of employees. The
increase in G&A expenses to $17.0 million for 2009 is a result of an increase in employee
compensation and consulting fees associated with the additional staff to pursue our expanding
development projects in the U.K. Much of this increase in staff costs was offset by recoveries
from our partner on the development project we operate, Rochelle. Non-cash stock-based
compensation decreased as a result of the final vesting of grants given in prior years, current
year forfeitures and declining fair values on each years grants. Components of G&A expenses for
these periods are as follows:
44
Endeavour International Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Compensation |
|
$ |
14,659 |
|
|
$ |
11,203 |
|
|
$ |
10,181 |
|
Consulting, legal and accounting fees |
|
|
5,118 |
|
|
|
4,679 |
|
|
|
5,045 |
|
Occupancy costs |
|
|
982 |
|
|
|
1,130 |
|
|
|
994 |
|
Other expenses |
|
|
1,364 |
|
|
|
4,004 |
|
|
|
2,352 |
|
|
Total gross cash G&A expenses |
|
|
22,123 |
|
|
|
21,016 |
|
|
|
18,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation |
|
|
2,612 |
|
|
|
2,928 |
|
|
|
4,487 |
|
|
Gross G&A expenses |
|
|
24,735 |
|
|
|
23,944 |
|
|
|
23,059 |
|
Less: capitalized G & A expenses |
|
|
(7,769 |
) |
|
|
(8,012 |
) |
|
|
(7,206 |
) |
|
Net G&A expenses |
|
$ |
16,966 |
|
|
$ |
15,932 |
|
|
$ |
15,853 |
|
|
Interest Expense and Other
The decrease in interest expense from $23.0 million in 2008 to $16.6 million in 2009 reflects
the partial repayment of outstanding balances under our senior bank facility with a portion of the
proceeds from the sale of our Norwegian operations. Interest expense increased to $23.0 million in
2008 primarily as a result of $4.3 million in expenses, including $2.1 million in cash, related to
the early repayment of the second lien term loan.
Income Taxes
The following summarizes the components of tax expense (benefit):
45
Endeavour International Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
Operations |
|
|
(Amounts in thousands) |
|
U.K. |
|
U.S. |
|
Other |
|
Operations |
|
Norway |
|
Total |
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes |
|
$ |
(52,041 |
) |
|
$ |
(31,167 |
) |
|
$ |
(11,479 |
) |
|
$ |
(94,687 |
) |
|
$ |
51,963 |
|
|
$ |
(42,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax (benefit) expense |
|
|
(5,739 |
) |
|
|
40 |
|
|
|
(26 |
) |
|
|
(5,725 |
) |
|
|
(603 |
) |
|
|
(6,328 |
) |
Deferred tax (benefit) expense |
|
|
(20,260 |
) |
|
|
(20 |
) |
|
|
(35 |
) |
|
|
(20,315 |
) |
|
|
4,791 |
|
|
|
(15,524 |
) |
Foreign currency losses on
deferred tax liabilities |
|
|
18,882 |
|
|
|
|
|
|
|
|
|
|
|
18,882 |
|
|
|
1,241 |
|
|
|
20,123 |
|
|
Total tax (benefit) expense |
|
|
(7,117 |
) |
|
|
20 |
|
|
|
(61 |
) |
|
|
(7,158 |
) |
|
|
5,429 |
|
|
|
(1,729 |
) |
|
Net income (loss) after taxes |
|
$ |
(44,924 |
) |
|
$ |
(31,187 |
) |
|
$ |
(11,418 |
) |
|
$ |
(87,529 |
) |
|
$ |
46,534 |
|
|
$ |
(40,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
Our income tax expense during the periods indicated relates primarily to our operations in the
U.K. and our discontinued operations in Norway. Income taxes decreased in 2009 to a benefit of
$7.2 million reflecting the decrease in revenues and the weakening of the U.S. dollar versus the
U.K. pound. Income tax expense in 2008 represents the significant increase in revenues as a result
of higher realized prices, the strengthening of the U.S. dollar versus the U.K. pound and the shift
in anticipated capital expenditures from late 2008 to early 2009. During 2007, we incurred taxes
in all of the jurisdictions in which we do business, except for the U.S.
At December 31, 2009, we had net operating loss carryforwards of $77.6 million in the U.S.
In 2009, 2008 and 2007, we have not recorded any income tax benefits in the U.S. as there was no
assurance that we could generate any U.S. taxable earnings, resulting in a full valuation allowance
of deferred tax assets generated.
46
Endeavour International Corporation
Capital Program
We spent $88.6 million, $88.5 million and $87.9 million on our oil and gas capital program,
excluding acquisitions, in 2009, 2008 and 2007, respectively. We spent $16.5 million in 2009 and
$15 million to $20 million in both 2008 and 2007 on development activities at our producing
properties. The remaining costs were spent on exploration and appraisal activities, including
$11.4 million and $5.5 million in 2009 and 2008, respectively, related to our new operations in the
U.S. Expenditures for 2009 also included $32.2 million for our acquisitions, primarily located in
the U.S.
2009 Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(Amounts in thousands) |
|
2009 |
|
2008 |
|
Cash |
|
$ |
27,287 |
|
|
$ |
31,421 |
|
Restricted Cash, related to rig commitments |
|
$ |
2,879 |
|
|
$ |
20,739 |
|
Debt, including current maturities |
|
$ |
(223,385 |
) |
|
$ |
(227,855 |
) |
|
Debt, net of Cash |
|
$ |
(193,219 |
) |
|
$ |
(175,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
Net cash provided by operating activities |
|
$ |
55,711 |
|
|
$ |
133,180 |
|
|
Net cash provided by (used in) investing activities |
|
$ |
31,120 |
|
|
$ |
(64,851 |
) |
|
Net cash used in financing activities |
|
$ |
(97,700 |
) |
|
$ |
(46,613 |
) |
|
Our primary sources of financial resources and liquidity are internally generated cash flows
from operations and access to the credit and capital markets, to the extent available. During
2009, we principally relied on cash flow from operations and proceeds from our sale of Norwegian
assets to fund our capital needs and repay a portion of outstanding debt and preferred stock.
Going forward, we believe the combination of our available cash on hand, cash flow from operations
and our ability to control capital expenditures will allow us to manage our business effectively
while enabling us to further our strategic objectives.
Operating, Investing and Financing Activities include the net cash flows from our discontinued
operations. For the years ended December 31, 2009, 2008, and 2007, our discontinued operations had
net cash flows provided by (used in) operating activities of approximately $9.0 million, $38.8
million and $26.3 million, respectively. These net cash flows were substantially offset by net
cash used by investing activities of approximately $9.0 million, $34.7 million and $25.5 million
during 2009, 2008, and 2007, respectively.
Cash flow from operations decreased to $55.7 million for 2009 from $133.2 million for 2008
primarily due to lower realized commodity prices and lower sales volumes, particularly the
reduction in gas sales as a result of production declines at Goldeneye.
47
Endeavour International Corporation
In addition to cash flows from operations, we have utilized issuances of debt and equity securities
to enhance our liquidity and support the execution of our strategic objectives. Significant
issuances and repayments of debt and equity, as well as the uses of the net proceeds, in 2009,
2008, and 2007 were as follows:
|
|
|
repaid the outstanding balance of the second lien term loan in the first quarter of
2008; |
|
|
|
|
issued $40 million of the 11.5% convertible bonds in the first quarter of 2008; |
|
|
|
|
repaid $63.0 million of net debt in 2009; and |
|
|
|
|
repaid $75 million of the Series C Convertible Preferred Stock in the fourth quarter of
2009 with $25 million in cash and a $50 million note payable. |
On November 17, 2009, we redeemed 60% of the outstanding shares of Series C Preferred Stock, for
face value of $75 million, and amended the terms of the remaining shares of Series C Preferred
Stock. The redemption price consisted of a $25 million cash payment and the issuance of $50
million Subordinated Notes.
The redemption and modification of the Series C Preferred Stock required the modified Series C
Preferred Stock to be recorded at fair market value at the redemption date. As there was not a
market observable price for the Series C Preferred Stock, we utilized a valuation approach to
estimate the price that would be paid to transfer the Series C Preferred Stock in an orderly
transaction between market participants. The fair value of the modified Series C Preferred Stock
was greater than the carrying value by $11.5 million. This excess of fair value over carrying
value was recorded as a non-cash charge to preferred stock dividends and increased the carrying
value of the Series C Preferred Stock. As holders convert the Series C Preferred Stock, the $11.5
million non-cash charge will be transferred to equity on a ratio of shares converted to shares of
Series C Preferred Stock outstanding.
In the November 2009 amendment, we amended terms of the Series C Preferred Stock to reduce the
annual dividend rate to 4.5% (from 8.5%), adjust the conversion price to $1.25 per share (from
$2.50) and remove certain anti-dilution provisions.
See Note 9 to the Consolidated Financial Statements for additional discussion of our debt.
Our future revenues and cash flows from operating activities will continue to be sensitive to
changes in prices received for our products. Our production is sold at prevailing market prices
which fluctuate in response to many factors that are outside of our control. Given the current
tightly balanced supply-demand market, small variations in either supply or demand, or both, can
have dramatic effects on prices we receive for our oil and natural gas production. While the
market price received for oil and natural gas varies among geographic areas, oil trades in a
worldwide market, whereas natural gas, which is still developing a global transportation system, is
more subject to local supply and demand conditions. Consequently, price movements for all types
and grades of crude oil generally move in the same direction.
Natural gas prices in the North Sea have been influenced by fuel prices around the world, including
crude oil and coal. These prices are also impacted by European gas supplies,
48
Endeavour International Corporation
particularly
deliveries from Russian gas supplies. In addition, regional supply and demand issues affect gas
prices. The majority of our natural gas is sold in the U.K. market. Market prices for both oil
and natural gas were at high levels throughout much of 2007 and 2008. North Sea gas prices
declined in the first quarter of 2007 but recovered in the second half of the year and remained
strong during 2008 and 2009.
Our cash flows will be significantly impacted by the amount of hydrocarbons we produce, the price
we obtain for our produced commodities and taxes paid on operations. Oil prices continue to be
impacted by supply and demand on a worldwide basis, while natural gas prices are more impacted by
regional economic and weather patterns. Although oil and gas prices have remained volatile, the
full impact on our cash flows will be partially mitigated by our balance of gas to oil production
and our commodity derivative positions. As of December 31, 2009, our outstanding commodity
derivatives covered 30% to 45% of expected 2010 production.
Recent Financing Arrangements
In February 2010, we issued 23.5 million shares of common stock in a private placement for
aggregate net proceeds of $20.5 million. We also entered $25 million junior lending facility, with
a maturity date of February 5, 2011, and interest at LIBOR plus 8%. Upon entering the new junior
lending facility, we borrowed $15 million against the facility. The net proceeds from the private
placement and the borrowing under the junior facility will be used to partially fund our 2010
capital budget.
Non-GAAP Measures
Net income can be significantly affected by various non-cash items, such as unrealized gains
and losses on our commodity derivatives, currency impact of long-term liabilities and deferred
taxes. Given the significant impact that non-cash items may have on our net income, we use various
measures in addition to net income, including non-financial performance indicators and non-GAAP
measures as key metrics to manage our business. These key metrics demonstrate the companys
ability to maintain or grow production levels and reserves, internally fund capital expenditures
and service debt as well as provide comparisons to other oil and gas exploration and production
companies. These measures include, among others, debt and cash balances, production levels, oil
and gas reserves, drilling results, discretionary cash flow, adjusted earnings before interest,
taxes, depreciation, depletion and amortization (Adjusted EBITDA) and adjusted net income.
Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow are internal,
supplemental measures of our performance that are not required by, or presented in accordance with,
GAAP. We use these non-GAAP measures as internal measures of performance and to aid in our
budgeting and forecasting processes. We view these non-GAAP measures, and we believe that others
in the oil and gas industry view these, or similar, non-GAAP measures, as commonly used analytic
indicators to compare performance among companies. We further believe that these non-GAAP measures
are frequently used by securities analysts, investors, and other interested parties in the
evaluation of issuers, many of which present these measures when reporting their results. We
believe these non-GAAP measures provide useful information to both
49
Endeavour International Corporation
management and investors to gain
an overall understanding of our current financial performance and provide investors with financial
measures that most closely align to our internal measurement processes. Since the application of
mark-to-market accounting has the effect of pulling forward into current periods non-cash gains and
losses related to commodity derivatives relating to future delivery periods, analysis of results of
operations from one period to another can be difficult. We believe that excluding these unrealized
non-cash gains and losses related to commodity derivatives and currency exchange changes provides a
more meaningful representation of our economic performance in the reporting period and is therefore
useful to us, investors, analysts and others in facilitating the analysis of our results of
operations from one period to another. These measures should not be considered as measures of
financial performance under GAAP, and the items excluded from these measures are significant
components in understanding and assessing financial performance.
These non-GAAP measures should not be considered in isolation or as an alternative to net income,
operating income or any other performance measures derived in accordance with GAAP or as
alternatives to cash flows generated by operating, investing or financing activities as a measure
of our liquidity. Because Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash
Flow are not measurements determined in accordance with GAAP and thus susceptible to varying
calculations, Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow as
presented may not be comparable to other similarly titled measures of other companies.
Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow have limitations as an
analytical tool, and you should not consider these measures in isolation, or as a substitute for
analysis of our financial statement data presented in the consolidated financial statements as
reported under GAAP. For example, Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary
Cash Flow may not reflect:
|
|
|
our cash expenditures, or future requirements, for capital expenditures or contractual
commitments; |
|
|
|
|
changes in, or cash requirements for, our working capital needs; |
|
|
|
|
unrealized gains (losses) on derivatives; |
|
|
|
|
non-cash foreign currency gains (losses); |
|
|
|
|
our interest expense, or the cash requirements necessary to service interest and
principal payments on our debts; |
|
|
|
|
our preferred stock dividend requirements; and |
|
|
|
|
depreciation, depletion and amortization. |
Because of these limitations, Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash
Flow should not be considered as measures of cash available to us to invest in the growth of our
business. We compensate for these limitations by relying primarily on our GAAP results and by
using Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow only
supplementally.
50
Endeavour International Corporation
As required under Regulation G of the Securities Exchange Act of 1934, provided below are
reconciliations of net income (loss) to the following non-GAAP financial measures: Net Income
(Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Net income (loss) |
|
$ |
(40,995 |
) |
|
$ |
56,490 |
|
|
$ |
(49,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
38,701 |
|
|
|
81,734 |
|
|
|
76,850 |
|
Impairment of oil and gas properties |
|
|
43,929 |
|
|
|
36,970 |
|
|
|
|
|
Deferred tax expense (benefit) |
|
|
4,599 |
|
|
|
17,682 |
|
|
|
(12,925 |
) |
Gain on asset sales |
|
|
(47,308 |
) |
|
|
|
|
|
|
|
|
Unrealized (gain) loss on derivatives |
|
|
55,598 |
|
|
|
(76,666 |
) |
|
|
89,132 |
|
Other |
|
|
16,835 |
|
|
|
4,597 |
|
|
|
8,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discretionary Cash Flow (1) |
|
$ |
71,359 |
|
|
$ |
120,807 |
|
|
$ |
112,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(40,995 |
) |
|
$ |
56,490 |
|
|
$ |
(49,077 |
) |
Impairment of oil and gas properties (net of tax) (2) |
|
|
28,263 |
|
|
|
18,485 |
|
|
|
|
|
Unrealized (gain) loss on derivatives (net of tax) (3) |
|
|
33,702 |
|
|
|
(37,743 |
) |
|
|
44,566 |
|
Currency impact on deferred taxes |
|
|
20,123 |
|
|
|
(20,709 |
) |
|
|
4,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income as Adjusted |
|
$ |
41,093 |
|
|
$ |
16,523 |
|
|
$ |
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(40,995 |
) |
|
$ |
56,490 |
|
|
$ |
(49,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on derivatives |
|
|
55,598 |
|
|
|
(76,666 |
) |
|
|
89,132 |
|
Net interest expense |
|
|
16,420 |
|
|
|
21,301 |
|
|
|
16,430 |
|
Depreciation, depletion and amortization |
|
|
38,701 |
|
|
|
81,734 |
|
|
|
76,850 |
|
Impairment of oil and gas properties |
|
|
43,929 |
|
|
|
36,970 |
|
|
|
|
|
Income tax expense (benefit) |
|
|
(1,729 |
) |
|
|
56,729 |
|
|
|
(9,180 |
) |
Gain on asset sales |
|
|
(47,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
64,616 |
|
|
$ |
176,558 |
|
|
$ |
124,155 |
|
|
|
|
|
(1) |
|
Discretionary cash flow is equal to cash flow from operating activities
before the changes in operating assets and liabilities. |
|
(2) |
|
Net of tax benefits of $ (15,666) and $ (18,485) for 2009 and 2008,
respectively. |
|
(3) |
|
Net of tax expense (benefit) of $ (21,896), $38,923 and (44,566),
respectively. |
51
Endeavour International Corporation
Outlook
2010 Planned Capital Expenditures
We anticipate spending approximately $90 million during 2010 to fund oil and gas activities in
the U.S. and U.K. The majority of this amount is controllable by Endeavour. Our primary focus
during 2010 in the U.S. will be in the Haynesville area as we believe this acreage contains
near-term production potential. The ongoing U.S. program and expenditures will be tailored based
on early drilling results. During 2010, we also expect to begin the evaluation program of our
other U.S. assets in the Marcellus area and the two frontier plays in Alabama and Montana. Four
U.K. wells have been or will be drilled in 2010; two Cygnus appraisal wells in the western portion
of the field; the Deacon well that began in 2009 and finished in 2010, and the exploration well
west of the Rochelle development. While this drilling is occurring, we expect to continue further
our development programs at our four existing development projects, including ongoing engineering
assessments for future production and commercial off-take solutions. We intend to fund these
development activities through cash on hand, and cash flow generated from operations, as well as
expansion of our credit facilities as needed.
The timing, completion and process of our 2010 capital program is subject to a number of factors,
including availability of capital, drilling results, drilling and production costs, availability of
drilling services and equipment, partner approvals and technical work. Based on these and other
factors, we may increase or decrease our planned capital program or prioritize certain projects
over others.
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Average Production (A) |
|
|
|
|
|
|
|
|
|
|
|
|
Daily Production (BOE per day) |
|
|
4,500 |
|
|
to |
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Differentials (B) |
|
|
|
|
|
|
|
|
|
|
|
|
Oil ($/Bbl) |
|
$ |
(5.00 |
) |
|
to |
|
$ |
(6.00 |
) |
Gas ($Mcf) |
|
$ |
(0.50 |
) |
|
to |
|
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Percentage of Total |
|
|
55 |
% |
|
to |
|
|
60 |
% |
Lease Operating Expense ($ per barrel) |
|
$ |
8.00 |
|
|
to |
|
$ |
10.00 |
|
|
|
|
(A) |
|
Actual results may differ materially from these estimates. |
|
(B) |
|
For purposes of the estimates, assumptions of price differentials are based on
location, quality and other factors, excluding the effects of derivative financial
instruments. Gas price differentials are stated as premiums (discounts) from Henry Hub
pricing, and oil price differentials are stated as premiums (discounts) from West Texas
Intermediate pricing. |
Liquidity and Financial Resources
Our primary sources of financial resources and liquidity are internally generated cash flows
from operations and access to the credit and capital markets, to the extent available. We believe
the
52
Endeavour International Corporation
combination of our available cash on hand, cash flow from operations and our ability to control
capital expenditures will allow us to manage our business effectively while enabling us to further
our strategic objectives.
Our cash flows will be significantly impacted by the amount of hydrocarbons we produce, the price
we obtain for our produced commodities and taxes paid on operations. Oil prices continue to be
impacted by supply and demand on a worldwide basis, while natural gas prices are more impacted by
regional economic and weather patterns. Although oil and gas prices have remained volatile, the
full impact on our cash flows will be partially mitigated by our balance of gas to oil production
and our commodity derivative positions. As of December 31, 2009, our outstanding commodity
derivatives covered 30% to 45% of expected 2010 production.
Our income tax expense relates primarily to our operations in the UK (statutory income tax rate of
50%). We are currently not able to record income tax benefits on our U.S. loss as there is no
assurance that we can generate any U.S. taxable earnings. As operations expand in the U.S., we
will be able to record income tax benefits in the U.S., however we do not anticipate paying current
federal income taxes in the U.S. for quite some time.
In February 2010, we issued 23.5 million shares of common stock for an aggregate net proceeds of
$20.5 million. We also entered into a $25 million junior lending facility, with a maturity date of
February 5, 2011, and interest at LIBOR plus 8%. Upon entering the new junior lending facility, we
borrowed $15 million against the facility. The net proceeds from these transactions will be used
to partially fund our 2010 capital budget.
At December 31, 2009, we had $49.9 million outstanding under our senior bank facility. The senior
bank facility has a current borrowing base capacity of $50 million, which is secured by our oil and
gas assets. In February 2010, the maturity date of the senior bank facility was changed to January
31, 2011. We also have $50.1 million of Subordinated Notes that amortize over four years
commencing in March 2011.
With the
Junior Facility and Senior Bank Facility, we will have $65 million in debt due in the
first quarter of 2011, based on outstanding balances at February 28, 2010. During 2010, we plan to
utilize our existing U.K. oil and gas assets, as well as our growing U.S. reserve base, as a basis
for refinancing and expansion of our credit facilities. We are currently in discussions with
several parties concerning this process. We strive to synchronize our capital expenditures with
our cash flow. However, we believe our existing U.K. reserves, including probable reserves, are of
significant value and together with our U.S. assets can be used as support for increased financial
resources when necessary to fund our on-going activities or refinance indebtedness. We continually
monitor the capital markets to evaluate the most appropriate actions to fund our activities.
On March 15, 2010, we announced that our board of directors has approved a review of strategic
alternatives for its North Sea assets. In an effort to unlock the value of our underlying North
Sea assets, we will study a full range of options, including:
|
|
|
Continuing to execute current operations plan; |
53
Endeavour International Corporation
|
|
|
Entering into a joint venture to accelerate activities in the North Sea; and |
|
|
|
Selling specific assets or the North Sea entire business. |
We will announce the results of the effort once a course of action is chosen. At the end of this
review process, we may elect to make no changes.
Disclosures about Contractual Obligations and Commercial Commitments
The following table sets forth our obligations and commitments to make future payments under
its lease agreements and other long-term obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period |
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
than 1 |
|
1-3 |
|
3-5 |
|
After 5 |
(Amounts in thousands) |
|
Total |
|
Year |
|
Years |
|
Years |
|
Years |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
231,152 |
|
|
$ |
|
|
|
$ |
161,192 |
|
|
$ |
69,960 |
|
|
$ |
|
|
Interest (1) |
|
|
56,962 |
|
|
|
11,323 |
|
|
|
13,728 |
|
|
|
31,911 |
|
|
|
|
|
Asset retirement obligations |
|
|
47,362 |
|
|
|
3,249 |
|
|
|
51 |
|
|
|
|
|
|
|
44,062 |
|
Operating leases for office
leases and equipment |
|
|
1,073 |
|
|
|
638 |
|
|
|
393 |
|
|
|
42 |
|
|
|
|
|
Rig commitments (2) |
|
|
17,055 |
|
|
|
17,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
$ |
353,604 |
|
|
$ |
32,265 |
|
|
$ |
175,364 |
|
|
$ |
101,913 |
|
|
$ |
44,062 |
|
|
|
|
|
(1) |
|
Assumes a 1.5% LIBOR rate. In addition, interest on our 11.5% convertible debt and $50
million note is added to the outstanding principal balance each quarter and reflected as due
upon maturity. |
|
(2) |
|
As is common in the oil and gas industry, we operate in many instances through joint ventures
under joint operating or similar agreements. Typically, the operator under a joint operating
agreement enters into contracts, such as rig commitment contracts, for the benefit of all
joint venture partners. Through the joint operating agreement, the non-operators reimburse,
and in some cases advance, the funds necessary to meet the contractual obligations entered
into by the operator. These obligations are typically shared on a working interest basis.
The joint operating agreement provides remedies to the operator in the event that the
non-operator does not satisfy its share of the contractual obligations. Occasionally, the
operator is permitted by the joint operating agreement to enter into lease obligations and
other contractual commitments that are then passed on to the non-operating joint interest
owners as lease operating expenses, frequently without any identification as to the long-term
nature of any commitments underlying such expenses. Once the timing for rig delivery and the
specific well to be drilled are determined, this obligation will be shared with the other
working interest owners. |
Off-Balance Sheet Arrangements
At December 31, 2010, we did not have any off-balance sheet arrangements.
54
Endeavour International Corporation
Rig Commitments
Our rig commitments represent one commitment for 46 days of a rig in the U.K. We are
currently considering the timing of rig deliverability and completion of the commitment.
Critical Accounting Policies and 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 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.
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. In addition,
alternatives may exist among various accounting methods. In such cases, the choice of accounting
method may also have a significant impact on reported amounts.
Our critical accounting policies are as follows:
Full Cost Accounting
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 the average, first-day-of-the-month price during the
12-month period before the end of the year for 2009 and the year-end price for 2008 and 2007,
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
55
Endeavour International Corporation
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 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 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.
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.
56
Endeavour International Corporation
Business Combinations
Assets and liabilities acquired through a business combination are recorded at estimated fair
value. We use all available information to make these fair value determinations, including
information commonly considered by our engineers in valuing individual oil and gas properties and
sales prices for similar assets. Estimated deferred taxes are based on available information
concerning the tax basis of the acquired companys assets and liabilities and carryforwards at the
merger date.
Any excess of the acquisition cost of the acquired business over the fair value amounts assigned to
assets and liabilities is recorded as goodwill. Any excess of the amounts assigned to assets and
liabilities over the acquisition of the acquired business is recorded as a gain on acquisition on
the income statement. The amount of goodwill recorded in any particular business combination can
vary significantly depending upon the fair values attributed to assets acquired and liabilities
assumed relative to the total acquisition cost.
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 of NSNV, Inc.
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.
At December 31, 2009, we had $211.9 million of goodwill recorded related to past business
combinations. This goodwill is not amortized, but is required to be assessed for impairment
annually, or more often as facts and circumstances warrant. The first step of that process is to
compare the fair value of the reporting unit to which goodwill has been assigned to the carrying
amount of the associated net assets and goodwill. The reporting units used to evaluate and measure
goodwill for impairment are determined from the manner in which the business is managed. We have
determined we have a single reporting unit. Goodwill is tested annually at year end. Although we
cannot predict when or if goodwill will be impaired, impairment charges may occur if we are unable
to replace the value of our depleting asset base or if other adverse events (for example, lower
sustained oil and gas prices) reduce the fair value of the reporting unit.
We completed our 2009 annual goodwill impairment test with no impairment indicated as the estimated
fair value of our reporting unit was substantially greater than its book value. We considered our
market capitalization based on average stock prices for 20 days before December 31, 2009.
57
Endeavour International Corporation
A lower fair value estimate in the future could result in impairment. Examples of factors that
could cause a lower fair value estimate could be sustained declines in prices, increases in costs,
and changes in discount rate assumptions due to market conditions.
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 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 collectability of the
revenue is probable.
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 embedded derivatives related to our debt
instruments and convertible preferred stock.
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
58
Endeavour International Corporation
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 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.
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.
Stock-Based Compensation Arrangements
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 to
non-employees using the Black-Scholes Method.
It is our policy to use authorized but unissued shares of stock when stock options are exercised.
At December 31,2009, we had approximately 7.0 million additional shares available for issuance
pursuant to our existing stock incentive plan.
59
Endeavour International Corporation
Fair Value
We estimate fair value for the measurement of derivatives, long-lived assets during certain
impairment tests, reporting units for goodwill impairment testing, the initial measurement of an
asset retirement obligation and the initial measurement of our Series C Preferred Stock upon its
redemption and modification. When we are required to measure fair value, and there is not a market
observable price for the asset or liability, or a market observable price for a similar asset or
liability, we generally utilize an income valuation approach. This approach utilizes managements
best assumptions regarding expectations of projected cash flows, and discounts the expected cash
flows using a commensurate risk adjusted discount rate. Such evaluations involve a significant
amount of judgment since the results are based on expected future events or conditions, such as
sales prices; estimates of future oil and gas production; development and operating costs and the
timing thereof; economic and regulatory climates and other factors. Our estimates of future net
cash flows are inherently imprecise because they reflect managements expectation of future
conditions that are often outside of managements control. However, assumptions used reflect a
market participants view of long-term prices, costs and other factors, and are consistent with
assumptions used in our business plans and investment decisions.
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Foreign Exchange Risk
The international scope of our business operations exposes us to the risk of fluctuations in
foreign currency markets. As a result, we are subject to foreign currency exchange rate risk due
to effects that foreign exchange rate movements have on our costs and on the cash flows that we
receive from foreign operations. Our oil revenues are received in U.S. dollars while gas revenues
in the U.K. are received in pounds sterling. Capital expenditures, payroll and operating expenses
may be denominated in U.S. dollars or pounds sterling. We operate a centralized currency
management operation to take advantage of potential opportunities to naturally offset exposures
against each other. To date, we have addressed our foreign currency exchange rate risks
principally by maintaining our liquid assets in interest-bearing accounts, until payments in
foreign currency are required. We have not reduced this risk by hedging to date as the timing
expenditures in pounds sterling has been predictable and we have been able to match revenues
received in pounds sterling and foreign currency purchases to minimize our exposure to foreign
currency exchange rate risk.
Commodity Price Risk
We produce and sell crude oil and natural gas. Realized pricing is primarily driven by the
prevailing worldwide price for crude oil and regional gas spot market prices which have been
volatile and unpredictable for several years. As a result, our financial results can be
significantly impacted as these commodity prices fluctuate widely in response to changing market
forces. We
60
Endeavour International Corporation
may engage in oil and gas hedging activities to realize commodity prices which we consider
favorable.
At December 31, 2009, we had the following commodity derivative instruments outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011 |
|
Total |
|
Oil: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price Swaps (Mbbl) |
|
|
533 |
|
|
|
487 |
|
|
|
1,020 |
|
Weighted Average Price ($/Barrel) |
|
$ |
68.39 |
|
|
$ |
66.01 |
|
|
$ |
67.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Price Swaps (MMcf) |
|
|
1,032 |
|
|
|
627 |
|
|
|
1,659 |
|
Weighted Average Price ($/Mcf) |
|
$ |
8.68 |
|
|
$ |
8.32 |
|
|
$ |
8.54 |
|
|
|
|
(1) |
|
Gas derivative contracts are designated in therms and have been converted to
Mcf at a rate of 10 therm to 1 Mcf. The exchange rate at December 31, 2009 was $1.62 to
£1.00. |
At December 31, 2009 and 2008, the prices used to determine the estimates of future cash
inflows were $60.40 and $36.55 per barrel, respectively, for oil and $4.96 and $8.70 per Mcf,
respectively, for gas. The fair value of our commodity derivatives was $12.8 million at December
31, 2009.
Interest Rate Risk
We are exposed to changes in interest rates. Changes in interest rates affect the interest
earned on cash and cash equivalents and the interest rate paid on certain borrowings under debt. A
250 point change in basis points on LIBOR would not result in a material change in our annual
interest expense, given our floating rate debt at December 31, 2009.
61
Endeavour International Corporation
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Endeavour International Corporation:
We have audited the accompanying consolidated balance sheets of Endeavour International Corporation
and subsidiaries as of December 31, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
As 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. Also as discussed in note 2 to the consolidated
financial statements, effective December 31, 2009, the Company has changed it reserve estimates and
related disclosures as a result of adopting new oil and gas reserve estimation and disclosure
requirements.
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, 2009, 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 16, 2010 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/S/ KPMG LLP
Houston, Texas
March 16, 2010
62
Endeavour International Corporation
Consolidated Balance Sheets
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
27,287 |
|
|
$ |
31,421 |
|
Restricted cash |
|
|
2,879 |
|
|
|
20,739 |
|
Accounts receivable |
|
|
14,800 |
|
|
|
22,325 |
|
Prepaid expenses and other current assets |
|
|
10,118 |
|
|
|
42,194 |
|
Current assets of discontinued operations |
|
|
|
|
|
|
16,726 |
|
|
Total Current Assets |
|
|
55,084 |
|
|
|
133,405 |
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net |
|
|
266,587 |
|
|
|
232,346 |
|
Goodwill |
|
|
211,886 |
|
|
|
213,949 |
|
Other Assets |
|
|
5,322 |
|
|
|
9,165 |
|
Long Term Assets of Discontinued Operations |
|
|
|
|
|
|
148,605 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
538,879 |
|
|
$ |
737,470 |
|
|
See accompanying notes to condensed consolidated financial statements.
63
Endeavour International Corporation
Consolidated Balance Sheets
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
12,401 |
|
|
$ |
38,630 |
|
Current maturities of debt |
|
|
|
|
|
|
13,000 |
|
Accrued expenses and other |
|
|
17,798 |
|
|
|
36,642 |
|
Current liabilities of discontinued operations |
|
|
|
|
|
|
22,231 |
|
|
Total Current Liabilities |
|
|
30,199 |
|
|
|
110,503 |
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
223,385 |
|
|
|
214,855 |
|
Deferred Taxes |
|
|
80,692 |
|
|
|
67,299 |
|
Other Liabilities |
|
|
85,412 |
|
|
|
55,791 |
|
Long-term Liabilities of Discontinued Operations |
|
|
|
|
|
|
46,051 |
|
|
Total Liabilities |
|
|
419,688 |
|
|
|
494,499 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Convertible Preferred Stock: |
|
|
|
|
|
|
|
|
Face value (liquidation preference) |
|
|
50,000 |
|
|
|
125,000 |
|
Net non-cash premiums under fair value accounting on redemption |
|
|
9,058 |
|
|
|
|
|
|
Total Series C Convertible Preferred Stock |
|
|
59,058 |
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Series B preferred stock (Liquidation preference: $3,115
and $2,983 at 2009 and 2008, respectively) |
|
|
|
|
|
|
|
|
Common stock; shares issued and outstanding - 131,618
and 128,572 shares at 2009 and 2008, respectively |
|
|
132 |
|
|
|
129 |
|
Additional paid-in capital |
|
|
247,707 |
|
|
|
244,471 |
|
Treasury stock, at cost (498 and 327 shares at 2009
and 2008), respectively |
|
|
(587 |
) |
|
|
(450 |
) |
Accumulated other comprehensive loss |
|
|
|
|
|
|
(1,266 |
) |
Accumulated deficit |
|
|
(187,119 |
) |
|
|
(124,913 |
) |
|
Total Stockholders Equity |
|
|
60,133 |
|
|
|
117,971 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
538,879 |
|
|
$ |
737,470 |
|
|
See accompanying notes to condensed consolidated financial statements.
64
Endeavour International Corporation
Consolidated Statement of Operations
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Revenues |
|
$ |
62,293 |
|
|
$ |
170,781 |
|
|
$ |
135,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
17,776 |
|
|
|
32,317 |
|
|
|
27,263 |
|
Depreciation,
depletion and amortization |
|
|
34,020 |
|
|
|
67,326 |
|
|
|
68,982 |
|
Impairment of oil and gas properties |
|
|
43,929 |
|
|
|
36,970 |
|
|
|
|
|
General and administrative |
|
|
16,966 |
|
|
|
15,932 |
|
|
|
15,853 |
|
|
Total Expenses |
|
|
112,691 |
|
|
|
152,545 |
|
|
|
112,098 |
|
|
Income (Loss) From Operations |
|
|
(50,398 |
) |
|
|
18,236 |
|
|
|
23,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) |
|
|
35,422 |
|
|
|
(28,578 |
) |
|
|
12,048 |
|
Unrealized gains (losses) |
|
|
(55,598 |
) |
|
|
76,666 |
|
|
|
(89,132 |
) |
Interest expense |
|
|
(16,630 |
) |
|
|
(22,975 |
) |
|
|
(19,282 |
) |
Interest income and other |
|
|
(7,483 |
) |
|
|
6,626 |
|
|
|
235 |
|
|
Total Other Income (Expense) |
|
|
(44,289 |
) |
|
|
31,739 |
|
|
|
(96,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
(94,687 |
) |
|
|
49,975 |
|
|
|
(72,353 |
) |
Income Tax Expense (Benefit) |
|
|
(7,158 |
) |
|
|
24,116 |
|
|
|
(22,208 |
) |
|
Income (Loss) from Continuing Operations |
|
|
(87,529 |
) |
|
|
25,859 |
|
|
|
(50,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(774 |
) |
|
|
30,631 |
|
|
|
1,068 |
|
Gain on sale |
|
|
47,308 |
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations |
|
|
46,534 |
|
|
|
30,631 |
|
|
|
1,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
(40,995 |
) |
|
|
56,490 |
|
|
|
(49,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
9,757 |
|
|
|
10,809 |
|
|
|
11,238 |
|
Non-cash charge under fair value accounting upon redemption |
|
|
11,454 |
|
|
|
|
|
|
|
|
|
|
Total Preferred Stock Dividends |
|
|
21,211 |
|
|
|
10,809 |
|
|
|
11,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) to Common Stockholders |
|
$ |
(62,206 |
) |
|
$ |
45,681 |
|
|
$ |
(60,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.84 |
) |
|
$ |
0.12 |
|
|
$ |
(0.50 |
) |
Discontinued operations |
|
|
0.36 |
|
|
|
0.24 |
|
|
|
0.01 |
|
|
Total |
|
$ |
(0.48 |
) |
|
$ |
0.36 |
|
|
$ |
(0.49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income (Loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.84 |
) |
|
$ |
0.15 |
|
|
$ |
(0.50 |
) |
Discontinued operations |
|
|
0.36 |
|
|
|
0.17 |
|
|
|
0.01 |
|
|
Total |
|
$ |
(0.48 |
) |
|
$ |
0.32 |
|
|
$ |
(0.49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
130,291 |
|
|
|
128,312 |
|
|
|
123,118 |
|
|
Diluted |
|
|
130,291 |
|
|
|
178,312 |
|
|
|
123,118 |
|
|
See accompanying notes to condensed consolidated financial statements.
65
Endeavour International Corporation
Consolidated Statement of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(40,995 |
) |
|
$ |
56,490 |
|
|
$ |
(49,077 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
38,701 |
|
|
|
81,734 |
|
|
|
76,850 |
|
Impairment of oil and gas properties |
|
|
43,929 |
|
|
|
36,970 |
|
|
|
|
|
Deferred tax expense (benefit) |
|
|
4,599 |
|
|
|
17,682 |
|
|
|
(12,925 |
) |
Unrealized (gains) losses on derivatives |
|
|
55,598 |
|
|
|
(76,666 |
) |
|
|
89,132 |
|
Gain on sale of Norwegian operations |
|
|
(47,308 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
16,835 |
|
|
|
4,597 |
|
|
|
8,994 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in receivables |
|
|
3,978 |
|
|
|
9,795 |
|
|
|
30,127 |
|
(Increase) decrease in other current assets |
|
|
7,489 |
|
|
|
(3,745 |
) |
|
|
(984 |
) |
Increase (decrease) in liabilities |
|
|
(27,115 |
) |
|
|
6,323 |
|
|
|
(13,611 |
) |
|
Net Cash Provided by Operating Activities |
|
|
55,711 |
|
|
|
133,180 |
|
|
|
128,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(131,393 |
) |
|
|
(66,370 |
) |
|
|
(88,007 |
) |
Proceeds from sales, net of cash |
|
|
144,653 |
|
|
|
259 |
|
|
|
|
|
(Increase) decrease in restricted cash |
|
|
17,860 |
|
|
|
1,260 |
|
|
|
(20,133 |
) |
|
|
Net Cash Provided by (Used in) Investing Activities |
|
|
31,120 |
|
|
|
(64,851 |
) |
|
|
(108,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of borrowings |
|
|
(64,458 |
) |
|
|
(120,000 |
) |
|
|
(47,000 |
) |
Borrowings under debt agreements |
|
|
1,400 |
|
|
|
88,000 |
|
|
|
7,000 |
|
Redemption of preferred stock |
|
|
(25,000 |
) |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(9,625 |
) |
|
|
(10,625 |
) |
|
|
(2,656 |
) |
Financing costs paid |
|
|
|
|
|
|
(3,538 |
) |
|
|
(263 |
) |
Other financing |
|
|
(17 |
) |
|
|
(450 |
) |
|
|
(821 |
) |
|
Net Cash Used in Financing Activities |
|
|
(97,700 |
) |
|
|
(46,613 |
) |
|
|
(43,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(10,869 |
) |
|
|
21,716 |
|
|
|
(23,374 |
) |
Cash and Cash Equivalents, Beginning of Period |
|
|
38,156 |
|
|
|
16,440 |
|
|
|
39,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period |
|
$ |
27,287 |
|
|
$ |
38,156 |
|
|
$ |
16,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
27,287 |
|
|
$ |
31,421 |
|
|
$ |
13,810 |
|
Discontinued operations |
|
|
|
|
|
|
6,735 |
|
|
|
2,630 |
|
|
Total |
|
$ |
27,287 |
|
|
$ |
38,156 |
|
|
$ |
16,440 |
|
|
See accompanying notes to condensed consolidated financial statements.
66
Endeavour International Corporation
Consolidated Statement of Stockholders Equity
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Other |
|
|
|
|
|
Total |
|
Total |
|
|
Common |
|
Treasury |
|
Paid-In |
|
Comprehensive |
|
Accumulated |
|
Stockholders |
|
Comprehensive |
|
|
Stock |
|
Stock |
|
Capital |
|
Loss |
|
Deficit |
|
Equity |
|
Income (Loss) |
|
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 loss (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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,490 |
|
|
|
56,490 |
|
|
|
56,490 |
|
Other comprehensive loss (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 |
|
|
See accompanying notes to condensed consolidated financial statements.
67
Endeavour International Corporation
Consolidated Statement of Stockholders Equity
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Other |
|
|
|
|
|
Total |
|
Total |
|
|
Common |
|
Treasury |
|
Paid-In |
|
Comprehensive |
|
Accumulated |
|
Stockholders |
|
Comprehensive |
|
|
Stock |
|
Stock |
|
Capital |
|
Loss |
|
Deficit |
|
Equity |
|
Income (Loss) |
|
Balance, December 31, 2008 |
|
$ |
128 |
|
|
$ |
(450 |
) |
|
$ |
244,471 |
|
|
$ |
(1,266 |
) |
|
$ |
(124,913 |
) |
|
$ |
117,970 |
|
|
$ |
56,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,211 |
) |
|
|
(21,211 |
) |
|
|
|
|
Amortization of deferred
compensation |
|
|
|
|
|
|
|
|
|
|
3,163 |
|
|
|
|
|
|
|
|
|
|
|
3,163 |
|
|
|
|
|
Treasury stock repurchase |
|
|
|
|
|
|
(137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137 |
) |
|
|
|
|
Other |
|
|
4 |
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,995 |
) |
|
|
(40,995 |
) |
|
|
(40,995 |
) |
Other comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative
instruments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,194 |
|
|
|
|
|
|
|
1,194 |
|
|
|
1,194 |
|
Unrealized gain (loss) on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
72 |
|
|
|
72 |
|
|
Balance, December 31, 2009 |
|
$ |
132 |
|
|
$ |
(587 |
) |
|
$ |
247,707 |
|
|
$ |
|
|
|
$ |
(187,119 |
) |
|
$ |
60,133 |
|
|
$ |
(39,729 |
) |
|
See accompanying notes to condensed consolidated financial statements.
68
Endeavour International Corporation
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.
69
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Restricted Cash
Restricted cash includes amounts held in escrow for drilling rig commitments and for purchase
price of the acquisition of properties from Hillwood Energy. The escrow for the Hillwood Energy
properties was release upon closing of the acquisition in January 2010. The remaining reserved
amounts in escrow will be released as payments are made for this drilling activity.
Inventories
Materials and supplies and oil inventories are valued at the lower of cost or market value
(net realizable value).
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 the average, first-day-of-the-month price
during the 12-month period before the end of the year for 2009 and the year-end price for 2008 and
2007, 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,
70
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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 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.
71
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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.
Business Combinations
Assets and liabilities acquired through a business combination are recorded at estimated fair
value. We use all available information to make these fair value determinations, including
information commonly considered by our engineers in valuing individual oil and gas properties and
sales prices for similar assets. Estimated deferred taxes are based on available information
concerning the tax basis of the acquired companys assets and liabilities and carryforwards at the
merger date.
Any excess of the acquisition cost of the acquired business over the fair value amounts assigned to
assets and liabilities is recorded as goodwill. Any excess of the amounts assigned to assets and
liabilities over the acquisition of the acquired business is recorded as a gain on acquisition on
the income statement. The amount of goodwill recorded in any particular business combination can
vary significantly depending upon the fair values attributed to assets acquired and liabilities
assumed relative to the total acquisition cost.
Goodwill and Intangible Assets
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 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
72
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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 collectability of the
revenue is probable.
Significant Customers
Our sales in the U.K. 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 sales in the U.S. are sold through our arrangements with the operators of the
fields, with substantially all of the sales being to Cohort Energy.
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 embedded derivatives related to our debt
instruments and convertible preferred stock.
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
73
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
unrealized gain or loss. At December 31, 2009, we have no outstanding derivatives that are
accounted for as a hedge.
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 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. At December 31, 2009 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
74
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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.
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.
75
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
It is our policy to use authorized but unissued shares of stock when stock options are exercised.
At December 31, 2009, we had approximately 7.0 million additional shares available for issuance
pursuant to our existing stock incentive plan.
Adoption of New Accounting Standards
On January 1, 2008, we adopted the following new standards without material effects on our
results of operations or financial position:
|
|
|
Fair value option Guidance allowing 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. |
|
|
|
Fair value measurement and disclosure Framework for measuring fair value and expanded
disclosures about such measurements. The new standards do not require new fair value
measurements, rather, the provisions apply when fair value measurements are performed under
other accounting pronouncements. |
On January 1, 2009, we adopted the following new standards without material effects on our results
of operations or financial position:
|
|
|
Business combinations Guidance related to the measurement of identifiable assets
acquired, liabilities assumed and disclosure of information related to business
combinations and their effect. |
|
|
|
Noncontrolling interests Guidance for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. Specifically, this standard requires the
recognition of a noncontrolling interest (minority interest) as a component of consolidated
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. |
|
|
|
Expanded disclosures of derivatives Expanded and detailed financial statement
disclosures for 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. |
|
|
|
Convertible debt Guidance for convertible debt that may be settled in part or in
whole in cash upon conversion requiring issuers of this form of debt to account for its
debt and equity components separately. The new guidance also expands the definition of
mandatorily redeemable convertible preferred shares that should be classified as
liabilities. |
|
|
|
Share-based payments Guidance for instruments that are granted in share-based payment
transactions to treat unvested share-based payment awards with non-forfeitable rights to
dividend or dividend equivalents as a separate class of securities in calculating earnings
per share (EPS). The impact of the adoption of this standard on our weighted |
76
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
average shares outstanding and EPS was not material, therefore, we have not restated prior
periods. |
|
|
|
Fair value Framework for measuring fair value and expanded disclosures about fair
value measurements. New fair value measurements are not required; rather, the provisions
apply when fair value measurements are performed under other accounting pronouncements. |
On June 30, 2009, we adopted the following new standard that did not have a material effect on our
results of operations or financial position:
|
|
|
Subsequent Events Standards of accounting for and disclosure of events that occur
after the balance sheet date but before the financial statements are issued. |
On December 31, 2009, we adopted the following new standard:
|
|
|
Oil and gas modernization Revised oil and gas reserve estimation and disclosure
requirements. The accounting standards update revised the definition of proved oil and gas
reserves to require that the average, first-day-of-the-month price during the 12-month
period before the end of the year rather than the year-end price, must be used when
estimating whether reserve quantities are economical to produce and when calculating the
aggregate amount of (and changes in) future cash inflows related to the standardized
measure of discounted future net cash flows. |
Note 3 Discontinued Operations
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 $47.0 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:
77
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
6,735 |
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
4,559 |
|
|
|
|
|
Prepaid expenses and other |
|
|
|
|
|
|
5,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
16,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment, net |
|
|
|
|
|
|
80,611 |
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
67,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
148,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
(3,717 |
) |
|
|
|
|
Accrued expenses and other |
|
|
|
|
|
|
(18,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(22,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
|
|
|
|
(36,828 |
) |
|
|
|
|
Asset retirement obligation |
|
|
|
|
|
|
(9,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(46,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets and Liabilities |
|
$ |
|
|
|
$ |
97,049 |
|
|
|
|
|
|
78
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Sales |
|
$ |
17,550 |
|
|
$ |
89,660 |
|
|
$ |
40,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Taxes |
|
$ |
4,654 |
|
|
$ |
63,244 |
|
|
$ |
14,096 |
|
Income Tax Expense |
|
|
(5,428 |
) |
|
|
(32,613 |
) |
|
|
(13,028 |
) |
|
Income (Loss) from Operations |
|
|
(774 |
) |
|
|
30,631 |
|
|
|
1,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale |
|
|
47,308 |
|
|
|
|
|
|
|
|
|
|
Net Income from Discontinued Operations |
|
$ |
46,534 |
|
|
$ |
30,631 |
|
|
$ |
1,068 |
|
|
Note 4 Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
Fair market value of commodity derivatives current |
|
$ |
2,890 |
|
|
$ |
31,649 |
|
Prepaid insurance |
|
|
1,506 |
|
|
|
1,322 |
|
Inventory |
|
|
4,450 |
|
|
|
5,109 |
|
Other |
|
|
1,272 |
|
|
|
4,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,118 |
|
|
$ |
42,194 |
|
|
79
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 5 Property and Equipment
Property and equipment included the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
Oil and gas properties under the full cost method: |
|
|
|
|
|
|
|
|
Subject to amortization |
|
$ |
275,278 |
|
|
$ |
239,024 |
|
Not subject to amortization: |
|
|
|
|
|
|
|
|
Acquired in 2009 |
|
|
51,797 |
|
|
|
|
|
Acquired in 2008 |
|
|
32,970 |
|
|
|
37,288 |
|
Acquired in 2007 |
|
|
10,235 |
|
|
|
14,746 |
|
Acquired prior to 2007 |
|
|
59,551 |
|
|
|
82,522 |
|
|
|
|
|
429,831 |
|
|
|
373,580 |
|
|
|
|
|
|
|
|
|
|
Other oil and gas assets |
|
|
|
|
|
|
4,875 |
|
|
|
|
|
|
|
|
|
|
Computers, furniture and fixtures |
|
|
3,560 |
|
|
|
3,236 |
|
|
Total property and equipment |
|
|
433,391 |
|
|
|
381,691 |
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation, depletion and amortization |
|
|
(166,804 |
) |
|
|
(149,345 |
) |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
266,587 |
|
|
$ |
232,346 |
|
|
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 plans 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 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 including the Bacchus, Columbus, Cygnus and Rochelle
projects.
The following is a summary of our oil and gas properties not subject to amortization as of December
31, 2009:
80
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Incurred in the Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Prior to 2007 |
|
Total |
|
Acquisition costs |
|
$ |
10,662 |
|
|
$ |
807 |
|
|
$ |
|
|
|
$ |
30,292 |
|
|
$ |
41,761 |
|
Exploration costs |
|
|
38,158 |
|
|
|
28,528 |
|
|
|
9,260 |
|
|
|
29,261 |
|
|
|
105,207 |
|
Capitalized interest |
|
|
2,977 |
|
|
|
3,635 |
|
|
|
975 |
|
|
|
|
|
|
|
7,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and gas properties not
subject to amortization |
|
$ |
51,797 |
|
|
$ |
32,970 |
|
|
$ |
10,235 |
|
|
$ |
59,553 |
|
|
$ |
154,555 |
|
|
During 2009, 2008 and 2007, we capitalized $7.8 million, $8.0 million and $7.2 million,
respectively, in certain directly related employee costs. During 2009, 2008 and 2007, we
capitalized $3.1 million, $4.0 million and $6.4 million, respectively, in interest.
Note
6 Goodwill
In connection with the several acquisitions, we recorded goodwill for the excess of the
purchase price over the value assigned to individual assets acquired and liabilities assumed. With
the 2009 settlement of a liability for a metering mis-measurement liability at a purchased field,
the goodwill was reduced by $2.1 million. The following is a reconciliation of the changes in
goodwill for the year ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
Balance at beginning of year |
|
$ |
281,943 |
|
|
$ |
283,324 |
|
Allocation of goodwill to discontinued operations sold |
|
|
(67,994 |
) |
|
|
|
|
Adjustments |
|
|
(2,063 |
) |
|
|
(1,381 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
211,886 |
|
|
$ |
281,943 |
|
|
81
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note
7 Other Assets
Other long-term assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Intangible
assets workforce in place: |
|
|
|
|
|
|
|
|
Gross |
|
$ |
4,800 |
|
|
$ |
4,800 |
|
Accumulated amortization |
|
|
(3,919 |
) |
|
|
(3,363 |
) |
|
|
|
|
881 |
|
|
|
1,437 |
|
|
|
|
|
|
|
|
|
|
Debt issuance costs |
|
|
3,875 |
|
|
|
5,714 |
|
Fair market value of long-term portion of commodity derivatives |
|
|
318 |
|
|
|
1,702 |
|
Other |
|
|
248 |
|
|
|
312 |
|
|
|
|
|
$ |
5,322 |
|
|
$ |
9,165 |
|
|
Intangible assets represent the purchase price allocated to the assembled workforce as a
result of an acquisition and is being amortized over its estimated life using the straight-line
method. Estimated amortization expense is $0.6 million and $0.3 million in 2010 and 2011,
respectively.
Debt issuance costs are amortized over the life of the related debt obligation.
Note
8 Accrued Expenses
We had the following accrued expenses outstanding:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
2008 |
|
Derivative liability |
|
$ |
6,817 |
|
|
$ |
1,193 |
|
Foreign taxes payable |
|
|
1,926 |
|
|
|
6,655 |
|
Deferred foreign taxes payable |
|
|
|
|
|
|
15,825 |
|
Accrued interest |
|
|
2,432 |
|
|
|
30 |
|
Preferred dividends |
|
|
1,143 |
|
|
|
1,011 |
|
Accrued compensation |
|
|
4,311 |
|
|
|
2,135 |
|
Crude oil imbalance |
|
|
|
|
|
|
8,954 |
|
Other |
|
|
1,169 |
|
|
|
839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,798 |
|
|
$ |
36,642 |
|
|
82
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note
9 Debt Obligations
Our debt consisted of the following at the indicated dates:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
Senior notes, 6% fixed rate, due 2012 |
|
$ |
81,250 |
|
|
$ |
81,250 |
|
Senior bank facility, variable rate, due 2011 |
|
|
49,942 |
|
|
|
113,000 |
|
Convertible bonds, 11.5%, due 2014 |
|
|
49,838 |
|
|
|
44,496 |
|
Subordinated notes, 12.5%, due 2014 |
|
|
50,122 |
|
|
|
|
|
|
|
|
|
231,152 |
|
|
|
238,746 |
|
Less: debt discount |
|
|
(7,767 |
) |
|
|
(10,891 |
) |
Less: current maturities |
|
|
|
|
|
|
(13,000 |
) |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
223,385 |
|
|
$ |
214,855 |
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit outstanding for abandonment liabilities |
|
$ |
33,388 |
|
|
$ |
30,115 |
|
|
Principal maturities of debt at December 31, 2009 are as follows:
|
|
|
|
|
2010 |
|
$ |
|
|
2011 |
|
|
69,942 |
|
2012 |
|
|
91,250 |
|
2013 |
|
|
10,000 |
|
2014 |
|
|
59,960 |
|
Thereafter |
|
|
|
|
|
The fair value of our debt obligations was $219 million and $191 million at December 31, 2009
and 2008, respectively. The fair values of long-term debt were determined based upon quotes
obtained from banks 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 as this
instrument bears interest at a market rate.
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 of common stock per $1,000 principal amount of notes,
83
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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
We have a $225 million senior bank facility, which is 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, 2009, the borrowing base capacity was $50
million, which was fully drawn at year-end. The senior bank facility also provides for issuances
of letters of credit of up to an aggregate $60 million. As of December 31, 2009, we have $33.4
million of outstanding letters of credit related to abandonment liabilities on certain of our oil
and gas properties.
Indebtedness under the facility is secured by cross guarantees from all of our subsidiaries, share
pledges from all of our subsidiaries and floating charges over the operating assets held in the
United Kingdom. Our borrowings under the senior bank facility bear interest at LIBOR plus 1.3% for
the first $46.1 million of availability, and LIBOR plus 1.7% for up to an additional $3.9 million
of availability.
The senior bank facility contains customary covenants, which limit our ability to incur
indebtedness, pledge our assets and dispose of our assets. 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
1.5:1 for the initial tranche, and 1.3:1 for the second tranche; and |
|
|
|
|
a minimum loan life NPV to loans outstanding coverage ratio of 1.3:1 for the initial
tranche, and 1.2:1 for the second tranche. |
The final maturity is the earlier of January 31, 2011 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.
84
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
The borrowing base is subject to redetermination every six months (on April 1 and October 1), and
we are 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 are currently undergoing the redetermination
process based on our reserve report as of December 31, 2009, which will be effective as of April 1,
2010. We cannot estimate the level of the borrowing base capacity that will be in effect as of
April 1, 2010.
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 were used to repay a portion of our outstanding indebtedness. The Convertible
Bonds bear interest at a rate of 11.5% per annum, compounded quarterly. Interest is compounded
quarterly and added to the outstanding principal balance each quarter. The bonds are convertible
into shares of our common stock at an initial conversion price of $2.36 per $1,000 of principal,
which represents a conversion rate of approximately 424 shares of our common stock 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 of the issuance of the Convertible Bonds, the holders have the right to
cause us 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, 2009, the combined fair market value of these derivatives is
$26.9 million, reflecting a $12.3 million increase during 2009 that was recorded in unrealized
gains (losses) on derivatives.
85
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Subordinated Notes
On November 17, 2009, we entered into Stock Redemption Agreements with each of the holders of
our outstanding shares of Series C convertible preferred stock (Series C Preferred Stock) whereby
we redeemed 60% of the outstanding shares of Series C Preferred Stock, for face value of $75
million, and amended the terms of the remaining shares of Series C Preferred Stock. The redemption
price consisted of a $25 million cash payment and the issuance of $50 million Subordinated Notes.
The Subordinated Notes bear interest at an annual rate of 10%, plus 2% capitalized to the
outstanding principal amount. We will pay interest, in cash, on the unpaid principal amount of the
Subordinated Notes quarterly on March 31, June 30, September 30 and December 31 of each year
commencing on December 31, 2009. The Subordinated Notes are payable over four years commencing in
March 2011, but may be prepaid at any time at face value. The Subordinated Notes are unsecured and
subordinated to our outstanding obligations under our senior bank facility and rank on parity with
our other existing debt obligations.
Note
10 Other Liabilities
Other liabilities included the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
Asset retirement obligations |
|
$ |
47,362 |
|
|
$ |
38,776 |
|
Long-term derivative liabilities |
|
|
38,050 |
|
|
|
17,015 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Liabilities |
|
$ |
85,412 |
|
|
$ |
55,791 |
|
|
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, 2009 and 2008:
86
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
2009 |
|
2008 |
|
Carrying amount of asset retirement obligations as of beginning of
period |
|
$ |
38,776 |
|
|
$ |
30,790 |
|
Increase (decrease) due to revised estimates of asset retirement
obligations |
|
|
7,762 |
|
|
|
13,840 |
|
Accretion expense |
|
|
4,117 |
|
|
|
2,795 |
|
Impact of foreign currency exchange rate changes |
|
|
4,280 |
|
|
|
(8,649 |
) |
Payment of asset retirement obligation |
|
|
(7,325 |
) |
|
|
|
|
Sale of assets |
|
|
(248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of asset retirement obligations as of end of period |
|
$ |
47,362 |
|
|
$ |
38,776 |
|
|
Note
11 Equity
The activity in shares of our common and preferred stock during 2009, 2008 and 2007 included
the following:
87
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year |
|
|
128,572 |
|
|
|
127,006 |
|
|
|
118,577 |
|
Issuance of common stock to pay preferred dividends |
|
|
|
|
|
|
|
|
|
|
6,403 |
|
Exercise of stock options |
|
|
164 |
|
|
|
|
|
|
|
|
|
Issuance of stock based compensation |
|
|
2,882 |
|
|
|
1,566 |
|
|
|
2,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year |
|
|
131,618 |
|
|
|
128,572 |
|
|
|
127,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
Redemptions |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
Issuance of preferred stock |
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year |
|
|
50 |
|
|
|
125 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year |
|
|
(327 |
) |
|
|
|
|
|
|
|
|
Purchase of treasury shares for stock vesting |
|
|
(171 |
) |
|
|
(327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year |
|
|
(498 |
) |
|
|
(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 our 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 our 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 common
stock at an exercise price of $1.14 per share upon commencement of employment of two executive
officers.
88
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Convertible Preferred Stock
The Series C Preferred Stock ranks senior to any of our other existing or future shares of
capital stock. Dividends are cumulative and 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. The Series C Preferred
Stock also participates on an as-converted basis with respect to any dividends paid on the common
stock.
We initially agreed to pay a cumulative dividend on the Series C 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. On November 17, 2009, we redeemed
60% of the outstanding shares of Series C Preferred Stock, for face value of $75 million, and
amended the terms of the remaining shares of Series C Preferred Stock. The redemption price
consisted of a $25 million cash payment and the issuance of $50 million Subordinated Notes.
The redemption and modification of the Series C Preferred Stock required the modified Series C
Preferred Stock to be recorded at fair market value at the redemption date. The fair value of the
modified Series C Preferred Stock was greater than the carrying value by $11.5 million. This
excess of fair value over carrying value was recorded as a non-cash charge to preferred stock
dividends and increased the carrying value of the Series C Preferred Stock. As holders convert the
Series C Preferred Stock, the $11.5 million non-cash charge will be transferred to equity on a
ratio of shares converted to shares of Series C Preferred Stock outstanding.
In addition, the modification of the Series C Preferred Stock, we also recorded an embedded
derivative are associated with the change in control features of the Series C Preferred Stock of
$2.4 million. This embedded derivative was recorded in other liabilities and reduced the premium
on the Series C Preferred Stock at the date of issuance. At December 31, 2009, the fair market
value of this derivative was $1.9 million, reflecting a $0.5 million gain during 2009 that was
recorded in unrealized gains (losses) on derivatives.
Prior to the November 2009 amendment, the Series C Preferred Stock was 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.
In the November 2009 amendment, we amended terms of the Series C Preferred Stock to reduce the
annual dividend rate to 4.5% (from 8.5%), adjust the conversion price to $1.25 per share (from
$2.50) and remove certain anti-dilution provisions.
89
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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 Series C
Preferred Stock: (i) such common stock is listed on the NYSE AMEX, 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 holders
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 Series C 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 Series C Preferred Stock, we may redeem
all of the Series C 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 Series C
Preferred Stock for redemption, the holders thereof will have the right to convert their shares
into a newly issued 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.
90
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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
12 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:
91
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
Operations - |
|
|
(Amounts in thousands) |
|
U.K. |
|
U.S. |
|
Other |
|
Operations |
|
Norway |
|
Total |
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes |
|
$ |
(52,041 |
) |
|
$ |
(31,167 |
) |
|
$ |
(11,479 |
) |
|
$ |
(94,687 |
) |
|
$ |
51,963 |
|
|
$ |
(42,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax (benefit) expense |
|
|
(5,739 |
) |
|
|
40 |
|
|
|
(26 |
) |
|
|
(5,725 |
) |
|
|
(603 |
) |
|
|
(6,328 |
) |
Deferred tax (benefit) expense |
|
|
(20,260 |
) |
|
|
(20 |
) |
|
|
(35 |
) |
|
|
(20,315 |
) |
|
|
4,791 |
|
|
|
(15,524 |
) |
Foreign currency losses on
deferred tax liabilities |
|
|
18,882 |
|
|
|
|
|
|
|
|
|
|
|
18,882 |
|
|
|
1,241 |
|
|
|
20,123 |
|
|
Total tax (benefit) expense |
|
|
(7,117 |
) |
|
|
20 |
|
|
|
(61 |
) |
|
|
(7,158 |
) |
|
|
5,429 |
|
|
|
(1,729 |
) |
|
Net income (loss) after taxes |
|
$ |
(44,924 |
) |
|
$ |
(31,187 |
) |
|
$ |
(11,418 |
) |
|
$ |
(87,529 |
) |
|
$ |
46,534 |
|
|
$ |
(40,995 |
) |
|
|
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 |
) |
|
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%.
92
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Federal income tax expense (benefit) at statutory rate |
|
$ |
(33,141 |
) |
|
$ |
17,491 |
|
|
$ |
(25,323 |
) |
Taxation of foreign operations |
|
|
1,572 |
|
|
|
12,464 |
|
|
|
(1,790 |
) |
Change in
valuation allowance US |
|
|
10,464 |
|
|
|
4,150 |
|
|
|
3,515 |
|
Foreign tax
benefit from foreign currency tax law change |
|
|
(5,400 |
) |
|
|
|
|
|
|
|
|
Foreign currency (gain)/loss on deferred taxes |
|
|
18,882 |
|
|
|
(10,028 |
) |
|
|
1,327 |
|
Other |
|
|
465 |
|
|
|
39 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense, continuing operations |
|
|
(7,158 |
) |
|
|
24,116 |
|
|
|
(22,208 |
) |
Discontinued operations Norway |
|
|
5,429 |
|
|
|
32,613 |
|
|
|
13,207 |
|
|
Total Income Tax Expense |
|
$ |
(1,729 |
) |
|
$ |
56,729 |
|
|
$ |
(9,001 |
) |
|
Effective Income Tax Rate |
|
|
8 |
% |
|
|
45 |
% |
|
|
(32 |
)% |
|
During 2009, 2008 and 2007, we incurred taxes in all of the jurisdictions that we do business
in except for the U.S. In 2009, 2008 and 2007, we had a loss before taxes of $31.2 million, $8.3
million and $6.9 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:
93
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
6,236 |
|
|
$ |
5,771 |
|
Unrealized loss on derivative instruments |
|
|
16,560 |
|
|
|
4,506 |
|
Asset retirement obligation |
|
|
7,026 |
|
|
|
5,244 |
|
Net operating loss and capital loss carryforward |
|
|
34,635 |
|
|
|
21,633 |
|
Other |
|
|
621 |
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
65,078 |
|
|
|
37,775 |
|
Less valuation allowance |
|
|
(38,771 |
) |
|
|
(23,701 |
) |
|
Total deferred tax assets after valuation allowance |
|
|
26,307 |
|
|
|
14,074 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
(97,111 |
) |
|
|
(67,810 |
) |
Unrealized gain on derivative instruments |
|
|
|
|
|
|
(23,628 |
) |
Petroleum revenue tax, net of tax benefit |
|
|
(1,264 |
) |
|
|
(1,642 |
) |
Debt discount |
|
|
(2,330 |
) |
|
|
(3,267 |
) |
Other |
|
|
(6,294 |
) |
|
|
(850 |
) |
|
Total deferred tax liabilities |
|
|
(106,999 |
) |
|
|
(97,197 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(80,692 |
) |
|
$ |
(83,123 |
) |
|
At December 31, 2009, we had the following carryforwards available to reduce future income
taxes:
|
|
|
|
|
|
|
|
|
|
|
Years of |
|
Carryforward |
Types of Carryforward |
|
Expiration |
|
Amounts |
|
U.S. Net operating loss |
|
|
2022 2029 |
|
|
$ |
77,630 |
|
U.K. Corporate tax net operating loss |
|
Indefinite |
|
|
24,570 |
|
With the exception of $77.6 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.
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 $38.8 million, $23.7 million and $19.7 million as of December 31, 2009,
2008 and 2007, respectively. During 2009, the valuation allowance in the U.S. increased $10.5
million due to net operating losses and increased $4.6 million in other jurisdictions. During
2008, the valuation allowance in the U.S. increased $2.9 million due to net operating losses and
94
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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.
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 and 2007, however, we do not believe such limitations will significantly impact our
ability to utilize the NOL. The timing of NOL utilization will be determined by our future net
income.
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.
As of December 31, 2009, we believe that no current tax positions that have resulted in
unrecognized tax benefits will significantly increase or decrease within the next year.
As of December 31, 2009, we had unremitted earnings in our foreign subsidiaries. If these
unremitted earnings had been dividend to the U.S., the U.S. NOLs not subject to the limitations
mentioned above would be fully available to offset any incremental U.S. federal income tax.
Further, the foreign tax credits associated with the unremitted earnings would be sufficient to
offset any incremental U.S. tax liabilities associated with the dividend.
Note
13 Stock-Based Compensation Arrangements
We grant restricted stock and stock options to employees and directors as incentive
compensation. The restricted stock and options generally vest over three years. The vesting of
these shares and options is dependent upon the continued service of the grantees with Endeavour.
Upon the occurrence of a change in control, each outstanding share of restricted stock and stock
option will immediately vest.
Non-cash stock-based compensation is recorded in general and administrative (G&A) expenses or
capitalized G&A as follows:
95
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
G & A Expenses |
|
$ |
705 |
|
|
$ |
723 |
|
|
$ |
2,786 |
|
|
$ |
2,641 |
|
Capitalized G & A |
|
|
227 |
|
|
|
299 |
|
|
|
573 |
|
|
|
901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash
stock-based
compensation |
|
$ |
932 |
|
|
$ |
1,022 |
|
|
$ |
3,359 |
|
|
$ |
3,542 |
|
|
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 2007, 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.
After 2007, 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 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 following summarizes the weighted average of the assumptions used in the method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Risk-free rate |
|
|
1.5 |
% |
|
|
3.1 |
% |
|
|
4.4 |
% |
Expected years until exercise |
|
|
4.25 |
|
|
|
4.00 |
|
|
|
4.00 |
|
Expected stock volatility |
|
|
56 |
% |
|
|
46 |
% |
|
|
45 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
96
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
At December 31, 2009, total compensation cost related to nonvested awards not yet recognized
was approximately $2.3 million and is expected to be recognized over a weighted average period of
less than two years. For the year ended December 31, 2009, we included approximately $0.6 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 |
|
|
|
|
Number of |
|
Average |
|
Average |
|
|
|
|
Shares |
|
Exercise |
|
Contractual |
|
Aggregate |
|
|
Underlying |
|
Price per |
|
Life in |
|
Intrinsic |
|
|
Options |
|
Share |
|
Years |
|
Value |
|
Balance outstanding January 1, 2009 |
|
|
4,807 |
|
|
$ |
2.35 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,181 |
|
|
|
0.54 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(164 |
) |
|
|
0.81 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(680 |
) |
|
|
3.39 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(932 |
) |
|
|
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding December
31, 2009 |
|
|
4,212 |
|
|
$ |
1.87 |
|
|
|
6.2 |
|
|
$ |
665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently exercisable December
31, 2009 |
|
|
2,124 |
|
|
$ |
2.79 |
|
|
|
4.1 |
|
|
$ |
42 |
|
|
The weighted average grant-date fair value of options granted during 2009, 2008 and 2007 was
$0.25, $0.50 and $0.40, respectively.
Of options granted during 2009, 2008 and 2007, 1.2 million, 1.2 million and 0.1 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.
Information relating to stock options outstanding at December 31, 2009 is summarized as follows:
97
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $1.00 |
|
|
1,329 |
|
|
|
9.00 |
|
|
$ |
0.58 |
|
|
|
123 |
|
|
$ |
0.74 |
|
$1.00 $2.00 |
|
|
1,597 |
|
|
|
7.84 |
|
|
|
1.48 |
|
|
|
741 |
|
|
|
1.54 |
|
$2.00 $3.00 |
|
|
265 |
|
|
|
3.88 |
|
|
|
2.44 |
|
|
|
238 |
|
|
|
2.48 |
|
$3.00 $4.00 |
|
|
386 |
|
|
|
0.86 |
|
|
|
3.57 |
|
|
|
386 |
|
|
|
3.57 |
|
Greater than $4.00 |
|
|
635 |
|
|
|
0.79 |
|
|
|
4.28 |
|
|
|
635 |
|
|
|
4.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,212 |
|
|
|
6.25 |
|
|
$ |
1.87 |
|
|
|
2,123 |
|
|
$ |
2.79 |
|
|
The weighted average grant-date fair value of options granted for the year ended December 31,
2009 was $0.25 per option.
Restricted Stock
At December 31, 2009, our employees and directors held 3,420,703 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, 2009 and the changes during the year ended
December 31, 2009 are presented below:
98
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
Date Fair |
|
|
Number of |
|
Value per |
|
|
Shares |
|
Share |
|
Balance outstanding January 1, 2009 |
|
|
3,966 |
|
|
$ |
1.88 |
|
Granted |
|
|
2,545 |
|
|
|
0.72 |
|
Vested |
|
|
(2,917 |
) |
|
|
1.92 |
|
Forfeited |
|
|
(174 |
) |
|
|
1.46 |
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding December 31, 2009 |
|
|
3,420 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
Total grant date fair value of shares vesting during the period |
|
$ |
5,594 |
|
|
|
|
|
|
Note
14 Earnings per Share
Basic income (loss) per common share is computed by dividing net income (loss) to common
stockholders by the weighted average number of common shares outstanding for the period. Diluted
income (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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
Net income (loss) to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(62,206 |
) |
|
$ |
45,681 |
|
|
$ |
(60,315 |
) |
|
|
|
|
Add Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends |
|
|
|
|
|
|
10,625 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(62,206 |
) |
|
$ |
56,306 |
|
|
$ |
(60,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common
Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
130,291 |
|
|
|
128,312 |
|
|
|
123,118 |
|
|
|
|
|
Add Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
130,291 |
|
|
|
178,312 |
|
|
|
123,118 |
|
|
|
|
|
|
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:
99
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Options and stock-based compensation |
|
|
1,910 |
|
|
|
2 |
|
|
|
|
|
Convertible debt |
|
|
37,303 |
|
|
|
32,725 |
|
|
|
16,185 |
|
Convertible preferred stock |
|
|
40,000 |
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares potentially issuable |
|
|
79,213 |
|
|
|
32,727 |
|
|
|
66,185 |
|
|
Note
15 Comprehensive Income (Loss)
The following summarizes the components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Net income (loss) |
|
$ |
(40,995 |
) |
|
$ |
56,490 |
|
|
$ |
(49,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) |
|
|
|
|
|
|
428 |
|
|
|
(852 |
) |
Reclassification adjustment for gain (loss) realized in
net income (loss) above |
|
|
1,194 |
|
|
|
(770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss |
|
|
|
|
|
|
(1 |
) |
|
|
(71 |
) |
Reclassification adjustment for loss realized in net
income (loss) above |
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact on comprehensive income (loss) |
|
|
1,266 |
|
|
|
(343 |
) |
|
|
(923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(39,729 |
) |
|
$ |
56,147 |
|
|
$ |
(50,000 |
) |
|
The components of accumulated other comprehensive income (loss) are:
100
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
Related to derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(1,194 |
) |
|
$ |
(852 |
) |
|
$ |
|
|
|
|
|
|
Change during the year |
|
|
1,194 |
|
|
|
(342 |
) |
|
|
(852 |
) |
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
(1,194 |
) |
|
|
(852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(72 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
|
Change during the year |
|
|
72 |
|
|
|
(1 |
) |
|
|
(71 |
) |
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
(72 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
|
|
|
$ |
(1,266 |
) |
|
$ |
(923 |
) |
|
|
|
|
|
Note
16 Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Fair |
|
Carrying |
|
|
|
|
|
Carrying |
|
|
Value |
|
Value |
|
Fair Value |
|
Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
3,208 |
|
|
$ |
3,208 |
|
|
$ |
33,351 |
|
|
$ |
33,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
219,959 |
|
|
|
223,385 |
|
|
|
190,681 |
|
|
|
214,855 |
|
Derivative instruments |
|
|
(44,866 |
) |
|
|
(44,866 |
) |
|
|
(18,208 |
) |
|
|
(18,208 |
) |
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.
101
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note
17 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, 2009:
102
Endeavour International Corporation
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 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value |
|
Oil and gas derivative contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas swaps |
|
$ |
|
|
|
$ |
(12,816 |
) |
|
$ |
|
|
|
$ |
(12,816 |
) |
Embedded derivatives |
|
|
|
|
|
|
|
|
|
|
(28,843 |
) |
|
|
(28,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
$ |
|
|
|
$ |
(12,816 |
) |
|
$ |
(28,843 |
) |
|
$ |
(41,659 |
) |
|
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 were all observable market data and these instruments have been classified as Level 2.
Although we utilized 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 U.K. gas options. We based the
inputs to the option models for our U.K. gas collars on observable market data in other markets to
verify the reasonableness of the counterparty quotes. These U.K. gas collars are classified as
Level 3. There are no outstanding oil or gas collars at December 31, 2009.
The following is a reconciliation of changes in fair value of net derivative assets and liabilities
classified as Level 3:
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
2009 |
|
Balance at beginning of period |
|
$ |
(12,057 |
) |
Total gains or losses (realized/unrealized) |
|
|
|
|
Included in earnings |
|
|
(14,390 |
) |
Purchases, issuance and settlements |
|
|
(2,396 |
) |
|
Balance at end of period |
|
$ |
(28,843 |
) |
|
|
|
|
|
|
Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at
December 31, 2009 |
|
$ |
(9,713 |
) |
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis in our
consolidated balance sheets. The following methods and assumptions were used to estimate the fair
values:
103
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Goodwill Goodwill is tested annually at year end for impairment. The first step of that process
is to compare the fair value of the reporting unit to which goodwill has been assigned to the
carrying amount of the associated net assets and goodwill. Significant Level 3 inputs may be used
in the determination of the fair value of the reporting unit, including present values of expected
cash flows from operations.
When we are required to measure fair value, and there is not a market observable price for the
asset or liability, or a market observable price for a similar asset or liability, we generally
utilize an income valuation approach. This approach utilizes managements best assumptions
regarding expectations of projected cash flows, and discounts the expected cash flows using a
commensurate risk adjusted discount rate. Such evaluations involve a significant amount of
judgment since the results are based on expected future events or conditions, such as sales prices;
estimates of future oil and gas production; development and operating costs and the timing thereof;
economic and regulatory climates and other factors. Our estimates of future net cash flows are
inherently imprecise because they reflect managements expectation of future conditions that are
often outside of managements control. However, assumptions used reflect a market participants
view of long-term prices, costs and other factors, and are consistent with assumptions used in our
business plans and investment decisions.
Note
18 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:
104
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
Derivatives not designated as hedges: |
|
|
|
|
|
|
|
|
Oil and gas commodity derivatives: |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
2,890 |
|
|
$ |
31,649 |
|
Other assets long term |
|
|
318 |
|
|
|
1,702 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Accrued expenses and other |
|
|
(6,817 |
) |
|
|
|
|
Other liabilities long-term |
|
|
(9,207 |
) |
|
|
(2,375 |
) |
|
|
|
$ |
(12,816 |
) |
|
$ |
30,976 |
|
|
|
|
|
|
|
|
|
|
Embedded derivatives related to debt instrument: |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Other liabilities long-term |
|
|
(28,843 |
) |
|
|
(14,640 |
) |
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedge: |
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accrued expenses and other |
|
|
|
|
|
|
(1,334 |
) |
|
If all counterparties failed to perform, our maximum loss would be $3.2 million as of December
31, 2009.
The effect of the derivatives not designated as hedges on our results of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Derivatives not designated as hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas commodity derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) |
|
$ |
35,422 |
|
|
$ |
(28,578 |
) |
|
$ |
12,048 |
|
Unrealized gains (losses) |
|
|
(43,791 |
) |
|
|
77,846 |
|
|
|
(89,132 |
) |
|
|
|
|
(8,369 |
) |
|
|
49,268 |
|
|
|
(77,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives related to debt instrument |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) |
|
$ |
(11,807 |
) |
|
$ |
(1,180 |
) |
|
$ |
|
|
|
The effect of derivatives designated as cash flow hedges on our results of operations and
other comprehensive income was as follows:
105
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Location of |
|
|
|
|
|
|
|
|
Reclassification |
|
|
|
|
|
|
|
|
into Income |
|
2009 |
|
2008 |
|
2007 |
|
Interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss recognized in other
comprehensive
income, net of tax |
|
|
|
|
|
$ |
|
|
|
$ |
428 |
|
|
$ |
(852 |
) |
(Gain) loss reclassified from
accumulated other
comprehensive
income into income |
|
Interest expense |
|
|
1,194 |
|
|
|
(770 |
) |
|
|
|
|
|
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, 2009, our outstanding commodity derivatives covered approximately 1,020 Mbbl of
oil and 1,659 MMcf of gas cumulative through 2011 and consist of fixed price swaps 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 paid a fixed rate of 5.05% and received three-month LIBOR through November 2009.
Note
19 Supplementary Cash Flow Disclosures
Cash paid during the period for interest and income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Interest paid |
|
$ |
7,074 |
|
|
$ |
15,966 |
|
|
$ |
22,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
4,738 |
|
|
$ |
20,088 |
|
|
$ |
7,662 |
|
|
Non-Cash Investing and Financing Transactions
As discussed in Note 9, we redeemed 60% of the outstanding shares of Series C Preferred Stock,
for face value of $75 million with a $25 million cash payment and the issuance of $50 million
Subordinated Notes.
106
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
We recorded $11.4 million in preferred stock dividends in 2009 for a non-cash valuation under fair
value accounting relating to the redemption and modification of our Series C Preferred Stock.
Prior to the fourth quarter of 2007, we paid outstanding dividends on the Series C Preferred Stock
through the issuance of common stock.
In 2009 and 2008, we recorded $5.3 million and $4.5 million, respectively, in non-cash interest
expense that was added to the principal balance of the 11.5% convertible notes.
Note
20 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 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.
Operating Leases
We have leases for office space and equipment with lease payments of $0.6 million, $0.2
million and $0.2 million for the years ended December 31, 2010, 2011 and 2012, respectively.
Rig Commitments
Our rig commitments represent one commitment for 46 days of a rig in the U.K. We are
currently considering the timing of rig deliverability and completion of the commitment.
Participation Agreement
In April 2009, we executed an agreement with Caza Petroleum Inc., a subsidiary of Caza Oil and
Gas, Inc., (Caza) to participate in a jointly established exploration and development program
covering Cazas onshore acreage position and opportunity portfolio in the United States. We have
the option but not the obligation to participate in the acquisition, exploration and appraisal
activities of selected assets. Caza provides economic and engineering analysis on projects
submitted for our selection. We receive 75% of Cazas interest in exchange for $250,000 per
107
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
month and payment of our share of all external costs on any projects we select. We have elected to
terminate the agreement effective April 2010.
Contingencies
Hess Limited, the operator of the facility supporting production from the Ivanhoe, Rob Roy,
and Hamish fields (collectively, IVRRH), had advised us that there had been a mis-measurement of
the volumes of oil produced from the IVRRH fields. As of December 31, 2009, the estimated
liability from this mis-measurement was extinguished. As the settlement of the mis-measurement
liability is covered under the purchase agreement for these assets, the decrease in our net
liability was recorded as a decrease to goodwill during the third quarter of 2009.
Note
21 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
Long- |
|
|
|
|
|
Long |
|
|
|
|
|
Long |
|
|
|
|
|
|
lived |
|
|
|
|
|
lived |
|
|
|
|
|
lived |
|
|
Revenue |
|
Assets |
|
Revenue |
|
Assets |
|
Revenue |
|
Assets |
|
|
|
United States |
|
$ |
1,627 |
|
|
$ |
46,172 |
|
|
$ |
|
|
|
$ |
12,125 |
|
|
$ |
|
|
|
$ |
6,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
60,666 |
|
|
|
436,016 |
|
|
|
170,782 |
|
|
|
441,195 |
|
|
|
135,876 |
|
|
|
488,377 |
|
Other |
|
|
|
|
|
|
1,607 |
|
|
|
|
|
|
|
2,140 |
|
|
|
|
|
|
|
4,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
62,293 |
|
|
|
483,795 |
|
|
|
170,782 |
|
|
|
455,460 |
|
|
|
135,876 |
|
|
|
499,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
Norway |
|
|
17,550 |
|
|
|
|
|
|
|
89,660 |
|
|
|
148,605 |
|
|
|
40,188 |
|
|
|
129,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79,843 |
|
|
$ |
483,795 |
|
|
$ |
260,442 |
|
|
$ |
604,065 |
|
|
$ |
176,064 |
|
|
$ |
629,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International |
|
$ |
78,216 |
|
|
$ |
437,623 |
|
|
$ |
260,442 |
|
|
$ |
583,943 |
|
|
$ |
176,064 |
|
|
$ |
622,456 |
|
|
108
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 22 Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
Third |
|
Fourth |
|
|
First Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
2009 |
Revenues from continuing operations |
|
$ |
16,338 |
|
|
$ |
18,082 |
|
|
$ |
7,759 |
|
|
$ |
20,113 |
|
Operating expenses from continuing operations |
|
|
50,743 |
|
|
|
17,614 |
|
|
|
13,613 |
|
|
|
30,722 |
|
Operating profit (loss) from continuing operations |
|
|
(34,405 |
) |
|
|
468 |
|
|
|
(5,854 |
) |
|
|
(10,609 |
) |
Net income (loss) to common stockholders |
|
|
(19,532 |
) |
|
|
7,124 |
|
|
|
(7,179 |
) |
|
|
(42,618 |
) |
Net loss
from continuing operations per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.15 |
) |
|
|
(0.31 |
) |
|
|
(0.06 |
) |
|
|
(0.33 |
) |
Diluted |
|
|
(0.15 |
) |
|
|
(0.31 |
) |
|
|
(0.06 |
) |
|
|
(0.33 |
) |
Net income (loss)
from discontinued operations per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) 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 |
|
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 |
|
Diluted |
|
|
(0.15 |
) |
|
|
0.04 |
|
|
|
0.07 |
|
|
|
0.05 |
|
109
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note
23 Subsequent Events
Asset Acquisitions
On January 6, 2010, we acquired significant positions in several U.S. resource plays. We
funded the initial cash contributions for these new joint ventures from existing cash reserves.
We entered into a participation agreement with Cohort Energy Company (a subsidiary of J-W Operating
Company) and acquired 50 percent of Cohorts interests in certain acreage in North Louisiana/East
Texas and Western Pennsylvania, primarily in the Haynesville and Marcellus gas shale plays. Our
initial investment is $15 million cash and we will pay a share of Cohorts drilling and completion
expenditures as wells are drilled over the next few years.
We also acquired 50 percent of Hillwood Energy Alabama LPs position in Hillwoods unproven, but
highly prospective new multi-target gas shale play in Alabama with an initial net investment of
approximately $8.0 million.
Series C Convertible Preferred Stock
On January 29, 2010, we and the holders of our outstanding Series C Convertible Preferred
Stock corrected a technical oversight in the Subscription and Registration Rights Agreement of our
Series C Convertible Preferred Stock. The amendment aligns the number of common shares reserved
for the potential conversion of the Series C Convertible Preferred Stock to the terms of the Series
C Convertible Preferred Stock after our partial redemption in November 2009. On March 10, 2010, we
also amended in the Certificate of Designation for the Series C Convertible Preferred Stock and the
$50 million Note issued to the holders of the Series C Convertible Preferred Stock for technical
changes. These technical changes align certain definitions and provisions relating to potential
repurchases of securities by Endeavour.
In February and March 2010, a combined 2,100 shares of our Series C Convertible Preferred Stock
were converted into 1.8 million shares of our common stock.
Common Stock Issuance
On February 4, 2010, we entered into and closed a private placement of common stock pursuant
to a Common Stock Purchase Agreement primarily with existing stockholders and certain directors and
with certain other third-party investors to sell 23.5 million shares of our common stock, par value
$0.001 per share, for aggregate net cash consideration of approximately $20.5 million. The
purchase price per Share was $0.90, the closing price of our shares on the NYSE Amex on February 3,
2010. We intend to use the net proceeds from the Private Placement to partially fund our 2010
capital budget.
110
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
The Private Placement was made in reliance upon an exemption from the registration requirements of
the Securities Act of 1933, pursuant to Section 4(2) thereof.
Junior Facility
On February 5, 2010, we announced the closing of a $25 million lending facility between us,
our subsidiaries and Bank of Scotland PLC (the Junior Facility), with a maturity date of February
5, 2011, and interest at LIBOR plus 8%. Upon entering the Junior Facility, we borrowed $15 million
against the facility. Our indebtedness under the Junior Facility remains secured by cross
guarantees from our subsidiaries and a second ranking interest in the security package provided
under our senior bank facility. Outstanding amounts under the Junior Facility may be prepaid.
The Junior Facility contains customary covenants, similar to those in our senior bank facility,
which limit our ability to incur indebtedness, create certain liens; dispose of our assets and,
make dividend payments or other distributions with respect to equity securities. The Junior
Facility also includes mandatory prepayment terms for the amount of net proceeds received upon a
capital raise of more than $50 million or the sale of an asset. The Junior Facility also contains
a covenant to maintain a minimum fair market value of proved plus probable reserves to consolidated
secured debt ratio of 2:1.
Senior Bank Facility
On February 5, 2010, we also amended our senior bank facility. Previously, the final maturity
date of the Senior Bank Facility was the earlier of October 31, 2011 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 amendment brings the maturity date of the senior
bank facility into alignment with the originally expected reserve tail date and maturity of the
Junior Facility by changing the final maturity date to the earlier of January 31, 2011 or the
reserve tail date.
2011 Debt Maturities
With the
Junior Facility and Senior Bank Facility, we will have $65 million in debt due in the
first quarter of 2011, based on outstanding balances at February 28, 2010. We plan to utilize our
existing U.K. oil and gas assets, as well as our growing U.S. reserve base, as a basis for
refinancing and expansion of our credit facilities. We are currently in discussions with several
parties concerning this process. We strive to synchronize our capital expenditures with our cash
flow. However, we believe our existing U.K. reserves, including probable reserves, are of
significant value and together with our U.S. assets can be used as support for increased financial
resources when necessary to fund our on-going activities. We continually monitor the capital
markets to evaluate the most appropriate actions in our capital market activities.
111
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Strategic Alternatives for North Sea Assets
On March 15, 2010, we announced that our board of directors has approved a review of strategic
alternatives for its North Sea assets. In an effort to unlock the value of our underlying North
Sea assets, we will study a full range of options, including:
|
|
|
Continuing to execute current operations plan; |
|
|
|
|
Entering into a joint venture to accelerate activities in the North Sea; and |
|
|
|
|
Selling specific assets or the North Sea entire business. |
We will announce the results of the effort once a course of action is chosen. At the end of this
review process, we may elect to make no changes.
112
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Note 24 Supplemental Oil and Gas Disclosures (Unaudited)
Capitalized
Costs Relating to Oil and Gas Producing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Discontinued |
|
|
|
|
United |
|
United |
|
|
|
|
|
Continuing |
|
Operations |
|
|
|
|
Kingdom |
|
States |
|
Other |
|
Operations |
|
Norway (1) |
|
Total |
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved |
|
$ |
266,893 |
|
|
$ |
8,385 |
|
|
$ |
|
|
|
$ |
275,278 |
|
|
$ |
|
|
|
$ |
275,278 |
|
Unproved |
|
|
125,996 |
|
|
|
26,817 |
|
|
|
1,740 |
|
|
|
154,553 |
|
|
|
|
|
|
|
154,553 |
|
|
Total capitalized costs |
|
|
392,889 |
|
|
|
35,202 |
|
|
|
1,740 |
|
|
|
429,831 |
|
|
|
|
|
|
|
429,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation,
depletion and
amortization |
|
|
(164,703 |
) |
|
|
(810 |
) |
|
|
|
|
|
|
(165,513 |
) |
|
|
|
|
|
|
(165,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net capitalized costs |
|
$ |
228,186 |
|
|
$ |
34,392 |
|
|
$ |
1,740 |
|
|
$ |
264,318 |
|
|
$ |
|
|
|
$ |
264,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
113
Endeavour International Corporation
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 |
|
United |
|
|
|
|
|
Continuing |
|
Operations |
|
|
|
|
Kingdom |
|
States |
|
Other |
|
Operations |
|
Norway (1) |
|
Total |
|
Year Ended December
31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved |
|
$ |
7,589 |
|
|
$ |
8,999 |
|
|
$ |
|
|
|
$ |
16,588 |
|
|
$ |
|
|
|
$ |
16,588 |
|
Proved |
|
|
1,450 |
|
|
|
14,091 |
|
|
|
23 |
|
|
|
15,564 |
|
|
|
|
|
|
|
15,564 |
|
Exploration costs |
|
|
49,937 |
|
|
|
17,757 |
|
|
|
(382 |
) |
|
|
67,312 |
|
|
|
4,776 |
|
|
|
72,088 |
|
Development costs |
|
|
11,443 |
|
|
|
|
|
|
|
|
|
|
|
11,443 |
|
|
|
5,067 |
|
|
|
16,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs incurred |
|
$ |
70,419 |
|
|
$ |
40,847 |
|
|
$ |
(359 |
) |
|
$ |
110,907 |
|
|
$ |
9,843 |
|
|
$ |
120,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved |
|
|
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 |
|
|
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 |
|
|
114
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Results of Operations for Oil and Gas Producing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Discontinued |
|
|
|
|
United |
|
United |
|
Continuing |
|
Operations - |
|
|
|
|
Kingdom |
|
States |
|
Operations |
|
Norway (1) |
|
Total |
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
60,666 |
|
|
$ |
1,627 |
|
|
$ |
62,293 |
|
|
$ |
17,550 |
|
|
$ |
79,843 |
|
Production expenses |
|
|
16,911 |
|
|
|
865 |
|
|
|
17,776 |
|
|
|
5,536 |
|
|
|
23,312 |
|
DD&A |
|
|
31,915 |
|
|
|
817 |
|
|
|
32,732 |
|
|
|
4,595 |
|
|
|
37,327 |
|
Impairment of oil and
gas properties |
|
|
31,332 |
|
|
|
12,597 |
|
|
|
43,929 |
|
|
|
|
|
|
|
43,929 |
|
Income tax expense |
|
|
(9,746 |
) |
|
|
(4,428 |
) |
|
|
(14,174 |
) |
|
|
5,787 |
|
|
|
(8,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of activities |
|
$ |
(9,746 |
) |
|
$ |
(8,224 |
) |
|
$ |
(17,970 |
) |
|
$ |
1,632 |
|
|
$ |
(16,338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
(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
115
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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.
During 2009, our oil and gas reserves were audited by independent reserve engineers. Our oil and
gas reserves were prepared by independent reserve engineers at December 31, 2008 and 2007.
In the fourth quarter of 2009, we adopted revised oil and gas reserve estimation and disclosure
requirements. The primary impact of the new disclosures is to conform the definition of proved
reserves to the SEC Modernization of Oil and Gas Reporting rules, which were issued by the SEC at
the end of 2008. The accounting standards update revised the definition of proved oil and gas
reserves to require that the average, first-day-of-the-month price during the 12-month period
before the end of the year rather than the year-end price, must be used when estimating whether
reserve quantities are economical to produce. This same 12-month average price is also used in
calculating the aggregate amount of (and changes in) future cash inflows related to the
standardized measure of discounted future net cash flows. The rules also allow for the use of
reliable technology to estimate proved oil and gas reserves if those technologies have been
demonstrated to result in reliable conclusions about reserve volumes. The unaudited supplemental
information on oil and gas exploration and production activities for 2009 has been presented in
accordance with the new reserve estimation and disclosure rules, which may not be applied
retrospectively. The 2008, 2007 and 2006 data are presented in accordance with FASB oil and gas
disclosure requirements effective during those periods.
116
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Discontinued |
|
|
|
|
United |
|
United |
|
Continuing |
|
Operations - |
|
|
|
|
Kingdom |
|
States |
|
Operations |
|
Norway (1) |
|
Total |
|
Proved Oil Reserves (MBbls): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at January 1, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production |
|
|
(690 |
) |
|
|
(4 |
) |
|
|
(694 |
) |
|
|
(310 |
) |
|
|
(1,004 |
) |
Purchases of reserves |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Sales of reserves in place |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,107 |
) |
|
|
(1,107 |
) |
Extensions and discoveries |
|
|
1,209 |
|
|
|
3 |
|
|
|
1,212 |
|
|
|
|
|
|
|
1,212 |
|
Revisions of previous estimates |
|
|
698 |
|
|
|
(1 |
) |
|
|
697 |
|
|
|
11 |
|
|
|
708 |
|
|
Proved reserves at December 31, 2009 |
|
|
3,348 |
|
|
|
18 |
|
|
|
3,366 |
|
|
|
|
|
|
|
3,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Oil Reserves (MBbls): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
At December 31, 2009 |
|
|
1,381 |
|
|
|
8 |
|
|
|
1,389 |
|
|
|
|
|
|
|
1,389 |
|
|
117
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Discontinued |
|
|
|
|
United |
|
United |
|
Continuing |
|
Operations - |
|
|
|
|
Kingdom |
|
States |
|
Operations |
|
Norway (1) |
|
Total |
|
Proved Gas Reserves (MMcf): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at January 1, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production |
|
|
(3,743 |
) |
|
|
(320 |
) |
|
|
(4,063 |
) |
|
|
(686 |
) |
|
|
(4,749 |
) |
Purchases of reserves |
|
|
|
|
|
|
10,037 |
|
|
|
10,037 |
|
|
|
|
|
|
|
10,037 |
|
Sales of reserves in place |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,241 |
) |
|
|
(4,241 |
) |
Extensions and discoveries |
|
|
52,895 |
|
|
|
6 |
|
|
|
52,901 |
|
|
|
|
|
|
|
52,901 |
|
Revisions of previous estimates |
|
|
2,034 |
|
|
|
371 |
|
|
|
2,405 |
|
|
|
(50 |
) |
|
|
2,355 |
|
|
Proved reserves at December 31, 2009 |
|
|
78,316 |
|
|
|
10,784 |
|
|
|
89,100 |
|
|
|
|
|
|
|
89,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Gas Reserves (MMcf): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
At December 31, 2009 |
|
|
4,329 |
|
|
|
4,707 |
|
|
|
9,036 |
|
|
|
|
|
|
|
9,036 |
|
|
118
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Discontinued |
|
|
|
|
United |
|
United |
|
Continuing |
|
Operations - |
|
|
|
|
Kingdom |
|
States |
|
Operations |
|
Norway |
|
Total |
|
Proved Reserves (MBOE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at January 1, 2007 |
|
|
7,428 |
|
|
|
|
|
|
|
7,428 |
|
|
|
2,465 |
|
|
|
9,893 |
|
Extensions and discoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643 |
|
|
|
643 |
|
Production |
|
|
(2,700 |
) |
|
|
|
|
|
|
(2,700 |
) |
|
|
(574 |
) |
|
|
(3,274 |
) |
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 |
|
Production |
|
|
(1,314 |
) |
|
|
(57 |
) |
|
|
(1,371 |
) |
|
|
(424 |
) |
|
|
(1,795 |
) |
Extensions and discoveries |
|
|
10,025 |
|
|
|
4 |
|
|
|
10,029 |
|
|
|
|
|
|
|
10,029 |
|
Purchae of Reserves |
|
|
|
|
|
|
1,675 |
|
|
|
1,675 |
|
|
|
|
|
|
|
1,675 |
|
Sales of Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,815 |
) |
|
|
(1,815 |
) |
Revisions of previous estimates |
|
|
1,037 |
|
|
|
60 |
|
|
|
1,097 |
|
|
|
3 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at December 31, 2009 |
|
|
16,401 |
|
|
|
1,815 |
|
|
|
18,216 |
|
|
|
|
|
|
|
18,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Reserves (MBOE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
At December 31, 2009 |
|
|
2,103 |
|
|
|
792 |
|
|
|
2,895 |
|
|
|
|
|
|
|
2,895 |
|
|
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, 2009 and 2008, the prices used to determine the estimates of future cash inflows were
$60.40 and $36.55 per barrel, respectively, for oil and $4.96 and $8.70 per Mcf, respectively, for
gas. Estimated future cash inflows are reduced by estimated future
119
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
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.
120
Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)
Standardized Measure of Discounted Future Net Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued |
|
|
|
|
|
|
|
|
United |
|
United |
|
Continuing |
|
Operations - |
|
|
|
|
|
|
|
|
Kingdom |
|
States |
|
Operations |
|
Norway |
|
Total |
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash inflows |
|
$ |
424,007 |
|
|
$ |
36,799 |
|
|
$ |
460,806 |
|
|
$ |
|
|
|
$ |
460,806 |
|
|
|
|
|
Future production costs |
|
|
(89,696 |
) |
|
|
(9,893 |
) |
|
|
(99,589 |
) |
|
|
|
|
|
|
(99,589 |
) |
|
|
|
|
Future development costs |
|
|
(274,456 |
) |
|
|
(12,602 |
) |
|
|
(287,058 |
) |
|
|
|
|
|
|
(287,058 |
) |
|
|
|
|
Future income tax expense |
|
|
(17,433 |
) |
|
|
|
|
|
|
(17,433 |
) |
|
|
|
|
|
|
(17,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future net cash flows
(undiscounted) |
|
|
42,422 |
|
|
|
14,304 |
|
|
|
56,726 |
|
|
|
|
|
|
|
56,726 |
|
|
|
|
|
Annual discount of 10%
for estimated timing |
|
|
(6,770 |
) |
|
|
7,798 |
|
|
|
1,028 |
|
|
|
|
|
|
|
1,028 |
|
|
|
|
|
|
Standardized measure of
future net cash flows |
|
$ |
49,192 |
|
|
$ |
6,506 |
|
|
$ |
55,698 |
|
|
$ |
|
|
|
$ |
55,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
121
Endeavour International Corporation
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, |
|
|
2009 |
|
2008 |
|
2007 |
|
Standardized measure, beginning of period |
|
$ |
49,662 |
|
|
$ |
191,920 |
|
|
$ |
145,541 |
|
Net changes in prices and production costs |
|
|
(30,155 |
) |
|
|
(144,547 |
) |
|
|
199,343 |
|
Future development costs incurred |
|
|
16,511 |
|
|
|
8,912 |
|
|
|
21,625 |
|
Net changes in estimated future development costs |
|
|
(81,864 |
) |
|
|
(105,784 |
) |
|
|
(48,873 |
) |
Revisions of previous quantity estimates |
|
|
22,318 |
|
|
|
(19,381 |
) |
|
|
79,636 |
|
Extensions and discoveries |
|
|
128,090 |
|
|
|
127,182 |
|
|
|
35,345 |
|
Accretion of discount |
|
|
8,139 |
|
|
|
39,734 |
|
|
|
24,078 |
|
Changes in income taxes, net |
|
|
(1,054 |
) |
|
|
163,445 |
|
|
|
(135,233 |
) |
Sale of oil and gas produced, net of production costs |
|
|
(56,531 |
) |
|
|
(213,865 |
) |
|
|
(135,020 |
) |
Purchased reserves |
|
|
8,827 |
|
|
|
|
|
|
|
|
|
Sales of reserves in place |
|
|
(11,514 |
) |
|
|
|
|
|
|
|
|
Change in production, timing and other |
|
|
3,269 |
|
|
|
2,046 |
|
|
|
5,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized measure, end of period |
|
$ |
55,698 |
|
|
$ |
49,662 |
|
|
$ |
191,920 |
|
|
122
Endeavour International Corporation
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief
executive officer, chief financial officer and chief accounting officer, we evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
Annual Report on Form 10-K, December 31, 2009. Based on that evaluation, our chief executive
officer, chief financial officer and chief accounting officer concluded that our disclosure
controls and procedures are effective to ensure that information we are required to disclose in our
reports filed or submitted under the Securities Exchange Act of 1934, as amended, is accumulated
and communicated to management as appropriate to allow timely decisions regarding required
disclosures.
Managements Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended. Our internal controls were designed to provide reasonable
assurance as to the reliability of our financial reporting and the preparation and presentation of
the consolidated financial statements for external purposes in accordance with accounting
principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not detect or
prevent misstatements. Projections of any evaluation of the effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2009. In making this assessment, our management used the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on our assessment, our internal control over financial reporting
was effective as of December 31, 2009.
123
Endeavour International Corporation
KPMG LLP, an independent registered public accounting firm, audited managements assessment of the
effectiveness of the Companys internal control over financial reporting as of December 31, 2009
and issued their attestation report set forth in this Item 9A.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarterly
period ended December 31, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Endeavour International Corporation:
We have audited Endeavour International Corporations internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Endeavour
International Corporations management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
124
Endeavour International Corporation
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Endeavour International Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Endeavour International Corporation and
subsidiaries as of December 31, 2009 and 2008, 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, 2009, and our report dated March 16, 2010 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Houston, Texas
March 16, 2010
125
Endeavour International Corporation
Item 9B. Other Information
On March 10, 2010, we amended the Certificate of Designation for the Series C Convertible
Preferred Stock and the $50 million Note issued to the holders of the Series C Convertible
Preferred Stock to correct technical oversights. The technical changes align certain definitions
and provisions relating to potential repurchases of securities by Endeavour.
Item 10. Directors, Executive Officers and Corporate Governance of the Registrant
Our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, when filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by
reference into this annual report on Form 10-K pursuant to General Instruction G(3) of Form 10-K
and will provide the information required under Part III, Item 10.
Our Code of Business Conduct and the Code of Ethics for Senior Officers can be found on our
internet located at www.endeavourcorp.com. Any stockholder may request a printed copy of these
codes by submitting a written request to our Corporate Secretary.
Item 11. Executive Compensation
Our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, when filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by
reference into this annual report on Form 10-K pursuant to General Instruction G(3) of Form 10-K
and will provide the information required under Part III, Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
Our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, when filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by
reference into this annual report on Form 10-K pursuant to General Instruction G(3) of Form 10-K
and will provide the information required under Part III, Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, when filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by
126
Endeavour International Corporation
reference into this annual report on Form 10-K pursuant to General Instruction G(3) of Form 10-K
and will provide the information required under Part III, Item 13.
Item 14. Principal Accounting Fees and Services
Our Definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, when filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by
reference into this annual report on Form 10-K pursuant to General Instruction G(3) of Form 10-K
and will provide the information required under Part III, Item 14.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) and (2) Financial Statements and Financial Statement Schedules.
See our consolidated financial statements included in Item 8 herein.
(a) (3) Exhibits.
See Index of Exhibits herein which lists the documents filed as exhibits with this Annual Report
on Form 10-K.
(b) Exhibits.
See Index of Exhibits herein which lists the documents filed as exhibits with this Annual Report
on Form 10-K.
127
Endeavour International Corporation
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
Endeavour International Corporation
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By:
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/s/ J. Michael Kirksey
J. Michael Kirksey
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Executive Vice President and Chief Financial Officer |
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Date: March 16, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
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Signature |
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Title |
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Date |
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/s/ William L. Transier
William L. Transier
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Chief Executive
Officer, President and
Director (Principal
Executive Officer)
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March 16, 2010 |
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/s/ J. Michael Kirksey
J. Michael Kirksey
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Chief Financial Officer
(Principal Financial
Officer)
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March 16, 2010 |
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/s/ Robert L. Thompson
Robert L. Thompson
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Chief Accounting
Officer (Principal
Accounting Officer)
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March 16, 2010 |
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/s/ Thomas D. Clark
Thomas D. Clark
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Director
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March 16, 2010 |
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/s/ John B. Connally III
John B. Connally III
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Director
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March 16, 2010 |
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/s/ Sheldon R. Erikson
Sheldon Erikson
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Director
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March 16, 2010 |
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/s/ Charles Hue Williams
Charles Hue Williams
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Director
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March 16, 2010 |
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/s/ Leiv R. Nergaard
Leiv L. Nergaard
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Director
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March 16, 2010 |
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/s/ Nancy K. Quinn
Nancy K. Quinn
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Director
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March 16, 2010 |
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/s/ John N. Seitz
John N. Seitz
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Director
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March 16, 2010 |
128
Endeavour International Corporation
Exhibit Index
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Exhibit |
|
Description |
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** 2.1
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Purchase and Sale and Participation Agreement by and between Endeavour
and Hillwood Energy Alabama LP. Schedules and Exhibits are omitted
pursuant to Section 601(b)(2) of Regulation S-K. Endeavour agrees to
furnish supplementally a copy of any omitted Schedule to the SEC upon
request. (Incorporated by reference to Exhibit 2.1 of our Current
Report on Form 8-K (Commission File No. 001-32212) filed on January
19, 2010). |
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** 2.2
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Purchase and Sale Agreement between Endeavour and Cohort Energy
Company. Schedules and Exhibits are omitted pursuant to Section
601(b)(2) of Regulation S-K. Endeavour agrees to furnish
supplementally a copy of any omitted Schedule to the SEC upon request.
(Incorporated by reference to Exhibit 2.1 of our Current Report on
Form 8-K (Commission File No. 001-32212) filed on January 19, 2010). |
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3.1(a)
|
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Amended and Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3.2 of our Quarterly Report on Form 10-Q
(Commission File No. 001-32212) for the quarter ended June 30, 2004). |
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3.1(b)
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Certificate of Amendment dated June 1, 2006 (Incorporated by reference
to Exhibit 4.2 of our Registration Statement on Form S-3 (Commission
File No. 333-139304) filed on December 13, 2006). |
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3.2(a)
|
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Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.4
to our Current Report on Form 8-K (Commission File No. 001-32212)
filed on November 6, 2006). |
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3.2(b)
|
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Amendment to Amended and Restated By-laws dated December 12, 2007 by
Endeavour International Corporation (Incorporated by reference to
Exhibit 3.1 to our Current Report on Form 8-K (Commission File No.
001-32212) filed on December 13, 2007). |
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3.3
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Amended and Restated Certificate of Designation of Series B Preferred
Stock filed February 26, 2004 (Incorporated by reference to Exhibit
3.3 of our Quarterly Report on Form 10-Q (Commission File No.
001-32212) for the quarter ended June 30, 2004). |
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3.4
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Specimen of Common Stock Certificate (Incorporated by reference to
Exhibit 3.7 of our Quarterly Report on Form 10-Q (Commission File No.
001-32212) for the quarter ended June 30, 2004). |
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3.5
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Certificate of Designation of Series A Preferred Stock of Endeavour
International Corporation (Incorporated by reference to Exhibit 3.1 to
our Current Report on Form 8-K (Commission File No. 001-32212) filed
on November 6, 2006). |
129
Endeavour International Corporation
Exhibit Index
|
|
|
Exhibit |
|
Description |
|
|
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3.6(a)
|
|
Certificate of Designation of Series C Preferred Stock of Endeavour
International Corporation, (Incorporated by reference to Exhibit 3.2
to our Current Report on Form 8-K (Commission File No. 001-32212)
filed on November 6, 2006). |
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3.6(b)
|
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Amendment to Certificate of Designation of Series C Preferred Stock of
Endeavour International Corporation, dated November 17, 2009
(Incorporated by reference to Exhibit 3.1 to our Current Report on
Form 8-K (Commission File No. 001-32212) filed on November 23, 2009). |
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*3.6(c)
|
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Amendment to Certificate of Designation of Series C Preferred Stock of
Endeavour International Corporation, dated March 10, 2010. |
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3.7
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Certificate of Designation of Series D Preferred Stock of Endeavour
International Corporation (Incorporated by reference to Exhibit 3.3 to
our Current Report on Form 8-K (Commission File No. 001-32212) filed
on November 6, 2006). |
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4.1 (a)
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Warrants to Purchase Common Stock issued to Trident Growth Fund, LP
dated July 29, 2003 (warrant # 2003-3) (Incorporated by reference to
Exhibit 4.7 of our Annual Report on Form 10-KSB (Commission File No.
000-33439) for the year ended December 31, 2003). |
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4.1 (b)
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First Amendment to Warrants to Purchase Common Stock dated February
26, 2004 (warrant # 2003-3) (Incorporated by reference to Exhibit 4.7
of our Annual Report on Form 10-KSB (Commission File No. 000-33439)
for the year ended December 31, 2003). |
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4.2
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Warrant to Purchase 25,000 Shares of Common Stock issued to Trident
Growth Fund, L.P. (Incorporated by reference to Exhibit 10.11 of our
Annual Report on Form 10-KSB (Commission File No. 000-33439) for the
Year Ended December 31, 2002). |
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4.3
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Indenture, dated as of January 20, 2005, between Endeavour
International Corporation and Wells Fargo Bank, National Association,
as Trustee, relating to the 6.00% Convertible Senior Notes due 2012
(Incorporated by reference to our Exhibit 4.1 to our Current Report on
Form 8-K (Commission File No. 001-32212) filed on January 24, 2005). |
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4.4
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Registration Rights Agreement dated January 24, 2008 by and between
Endeavour International Corporation and Smedvig QIF Plc (Incorporated
by reference to Exhibit 4.2 to our Current Report on Form 8-K
(Commission File No. 001-32212) filed on January 24, 2008). |
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4.5
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Trust Deed dated January 24, 2008 by and among Endeavour International
Corporation, Endeavour Energy Luxembourg S.a.r.l. and BNY Corporate
Trustee Services Limited, as trustee (Incorporated by reference to
Exhibit 4.1 to our Current Report on Form 8-K (Commission File No.
001-32212) filed on January 24, 2008). |
130
Endeavour International Corporation
Exhibit Index
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|
|
Exhibit |
|
Description |
|
|
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4.6
|
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Common Stock Purchase Warrant dated February 26, 2004 issued to
Sanders Morris Harris Inc. in connection with the private placement of
25,000,000 shares of Endeavours common stock. (Incorporated by
reference to Exhibit 10.24 of our Annual Report on Form 10-KSB
(Commission File No. 000-33439) for the year ended December 31, 2003). |
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10.1
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2004 Incentive Plan, effective February 26, 2004 (Incorporated by
reference to Exhibit 10.36 of our Annual Report on Form 10-KSB
(Commission File No. 000-33439) for the year ended December 31, 2003). |
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10.2
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2007 Incentive Plan (Incorporated by reference to Exhibit 10.1 to our
Quarterly Report (Commission file No. 001-32212) for the quarter ended
June 30, 2007). |
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10.3
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Second Amended and Restated Employment Agreement by and between
William L. Transier and the Company (Incorporated by reference to
Exhibit 10.4 to our Annual Report on Form 10-K (Commission File No.
001-32212) for the year ended December 31, 2008). |
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10.4
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Employment Offer Letter to Carl Grenz, dated August 15, 2008
(Incorporated by reference to Exhibit 10.1 of our Quarterly Report on
Form 10-Q (Commission File No. 001-32212) for the quarter ended
September 30, 2008). |
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10.5
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Form of Change in Control on Termination of Benefits Agreement
(Incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K (Commission File No. 000-32212) filed on February 15, 2008). |
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10.6
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Form of Amended Change in Control Termination Benefits Agreement
between the Company and Kirksey, Grenz, Williams and Stover,
individually (Incorporated by reference to Exhibit 10.8 of our Annual
Report on Form 10-K for the year ended December 31, 2008). |
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*10.7
|
|
Change in Control and Termination Benefits Agreement dated January 11,
2010, by and between Endeavour International Corporation and James
Joseph Emme. |
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10.8
|
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Form of Restricted Stock Award Agreement. (Incorporated by reference
to Exhibit 10.39 of our Annual Report on Form 10-KSB (Commission File
No. 000-33439) for the year ended December 31, 2003). |
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10.9
|
|
Form of Nonstatutory Stock Option Agreement between Endeavour
International Corporation and William L. Transier, John N. Seitz,
Michael D. Cochran, Bruce H. Stover, H. Don Teague and Robert L.
Thompson, individually (Incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K (Commission File No. 001-32212) filed
on January 5, 2005.) |
131
Endeavour International Corporation
Exhibit Index
|
|
|
Exhibit |
|
Description |
|
|
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10.10
|
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Form of Stock Grant Agreement between Endeavour International
Corporation and William L. Transier, John N. Seitz, Bruce H. Stover
and Robert L. Thompson, individually (Incorporated by reference to
Exhibit 10.4 to our Current Report on Form 8-K (Commission File No.
001-32212) filed on January 5, 2005). |
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10.11(a)
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Subscription and Registration Rights Agreement, dated October 19,
2006, by and among Endeavour International Corporation and the
Investors party thereto (Incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K (Commission File No. 001-32212) filed
on October 25, 2006). |
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10.11(b)
|
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Amendment No. 1 to Subscription and Registration Rights Agreement,
January 29, 2010, by and among Endeavour International Corporation and
the Investors party thereto (Incorporated by reference to Exhibit 10.1
to our Current Report on Form 8-K (Commission File No. 001-32212)
filed on February 1, 2010). |
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**10.12
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Final Participation Agreement between Endeavour and Cohort Energy
Company (Incorporated by reference to Exhibit 10.2 to our Current
Report on Form 8-K (Commission File No. 001-32212) filed on January
19, 2010). |
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10.13(a)
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$225,000,000 Secured Revolving Loan and Letter of Credit Facility
Agreement (Incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K (Commission File No. 001-32212) filed on November
6, 2006). |
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10.13(b)
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Waiver and consent to $225,000,000 Secured Revolving Loan and Letter
of Credit Facility Agreement (Incorporated by reference to Exhibit
4.8(b) to our Annual Report on Form 10-K (Commission File No.
001-32212) for the year ended December 31, 2006). |
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*10.13(c)
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Waiver and consent to $225,000,000 Secured Revolving Loan and Letter
of Credit Facility Agreement, dated as of February 5, 2010. |
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10.14(a)
|
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Second Lien Credit and Guarantee Agreement (Incorporated by reference
to Exhibit 10.2 to our Current Report on Form 8-K/A (Commission File
No. 001-32212) filed on November 7, 2006). |
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10.14(b)
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Amendment to Second Lien Credit and Guarantee Agreement (Incorporated
by reference to Exhibit 4.9(b) to our Annual Report on Form 10-K
(Commission File No. 001-32212) for the year ended December 31, 2006). |
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10.15(a)
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Junior Facility Agreement dated January 22, 2008 by and among
Endeavour International Holding B.V., as borrower, Endeavour
International Corporation and certain of its affiliates party thereto,
as guarantors, BNP Paribas and Bank of Scotland Plc, as the mandated
lead arrangers and original lenders, and BNP Paribas, as agent and
security trustee (Incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K (Commission File No. 001-32212) filed on January 28, 2008). |
132
Endeavour International Corporation
Exhibit Index
|
|
|
Exhibit |
|
Description |
|
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*10.15(b)
|
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Amendment to Junior Facility Agreement dated February 5, 2010 by and
among Endeavour International Holding B.V., as borrower, Endeavour
International Corporation and certain of its affiliates party thereto,
as guarantors, BNP Paribas and Bank of Scotland Plc, as the mandated
lead arrangers and original lenders, and BNP Paribas, as agent and
security trustee. |
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10.16
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Restricted Stock Award Agreement between Endeavour International
Corporation and J. Michael Kirksey dated September 26, 2007
(Incorporated by reference to Exhibit 10.31 to our Annual Report on
Form 10-K (Commission File No. 001-32212) for the year ended December
31, 2007). |
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10.17
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Restricted Stock Award Agreement between Endeavour International
Corporation and John G. Williams dated October 1, 2007 (Incorporated
by reference to Exhibit 10.32 to our Annual Report on Form 10-K
(Commission File No. 001-32212) for the year ended December 31, 2007). |
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10.18
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Stock Option Agreement between Endeavour International Corporation and
J. Michael Kirksey dated September 26, 2007 (Incorporated by reference
to Exhibit 10.33 to our Annual Report on Form 10-K (Commission File
No. 001-32212) for the year ended December 31, 2007). |
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10.19
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Stock Option Agreement between Endeavour International Corporation and
John G. Williams dated October 1, 2007 (Incorporated by reference to
Exhibit 10.34 to our Annual Report on Form 10-K (Commission File No.
001-32212) for the year ended December 31, 2007). |
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10.20
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Stock Option Agreement between Endeavour International Corporation and
Carl D. Grenz dated November 3, 2008 (Incorporated by reference to
Exhibit 10.22 to our Annual Report on Form 10-K (Commission File No.
001-32212) for the year ended December 31, 2008). |
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10.21
|
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Stock Option Agreement between Endeavour International Corporation and
Carl D. Grenz dated November 3, 2008 (Incorporated by reference to
Exhibit 10.23 to our Annual Report on Form 10-K (Commission File No.
001-32212) for the year ended December 31, 2008). |
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10.22
|
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Restricted Stock Award Agreement between Endeavour International
Corporation and Carl D. Grenz dated November 3, 2008 (Incorporated by
reference to Exhibit 10.24 to our Annual Report on Form 10-K
(Commission File No. 001-32212) for the year ended December 31, 2008). |
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10.23
|
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Restricted Stock Award Agreement between Endeavour International
Corporation and Carl D. Grenz dated November 3, 2008 (Incorporated by
reference to Exhibit 10.25 to our Annual Report on Form 10-K
(Commission File No. 001-32212) for the year ended December 31, 2008). |
133
Endeavour International Corporation
Exhibit Index
|
|
|
Exhibit |
|
Description |
|
|
|
10.24
|
|
Agreement for the Sale and Purchase of the Endeavour Energy Norge AS
dated April 2, 2009 (Incorporated by reference to Exhibit 4.1 of our
Quarterly Report on Form 10-Q (Commission File No. 001-32212) for the
quarter ended March 31, 2009). |
|
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|
10.25
|
|
Form of Stock Redemption Agreement dated November 17, 2009 by and
among Endeavour International Corporation and the holders of its
Series C Preferred Stock (Incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K (Commission File No. 001-32212) filed
on November 23, 2009). |
|
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|
10.26(a)
|
|
Form of Note Agreement dated November 17, 2009 by and among Endeavour
International Corporation and the holders of its Series C Preferred
Stock (Incorporated by reference to Exhibit 10.2 to our Current Report
on Form 8-K (Commission File No. 001-32212) filed on November 23,
2009). |
|
|
|
*10.26(b)
|
|
Amendment to Note Agreement dated November 17, 2009 by and among
Endeavour International Corporation and the holders of its Series C
Preferred Stock, dated March 10, 2010. |
|
|
|
10.27
|
|
Common Stock Purchase Agreement, dated as of February 4, 2010, by and
between Endeavour International Corporation and the purchasers named
therein ((Incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K (Commission File No. 001-32212) filed on February
5, 2010). |
|
|
|
10.28
|
|
Registration Rights Agreement, dated as of February 4, 2010, by and
between Endeavour International Corporation and the purchasers named
therein (Incorporated by reference to Exhibit 10.2 to our Current
Report on Form 8-K (Commission File No. 001-32212) filed on February
5, 2010). |
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*12.1
|
|
Computation of Ratios of Earnings to Fixed Charges. |
|
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*12.2
|
|
Computation of Ratios of Earnings to Fixed Charges and Preference
Securities Dividends. |
|
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*21.1
|
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List of Subsidiaries. |
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*23.1
|
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Consent of Independent Registered Public Accounting Firm KPMG LLP. |
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*23.2
|
|
Consent of Independent Reserve Engineers Netherland, Sewell &
Associates, Inc. |
|
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|
*31.1
|
|
Certification of William L. Transier, Chief Executive Officer,
pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934,
as amended. |
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|
*31.2
|
|
Certification of J. Michael Kirksey, Chief Financial Officer, pursuant
to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as
amended. |
|
|
|
32.1
|
|
Certification of William L. Transier, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
134
Endeavour International Corporation
Exhibit Index
|
|
|
Exhibit |
|
Description |
|
|
|
32.2
|
|
Certification of J. Michael Kirksey, Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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|
|
99.1
|
|
Report of Netherland, Sewell & Associates, Inc., Independent Petroleum
Engineers and Geologists. |
|
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* |
|
Filed herewith. |
|
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|
Furnished herewith. |
|
|
|
Identifies management contracts and compensatory plans or arrangements. |
|
** |
|
Portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act
of 1934, and the omitted material has been separately filed with the
Securities and Exchange Commission. |
135