United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 1-32212

Endeavour International Corporation

(Exact name of registrant as specified in its charter)

Nevada		88-0448389
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

1001 Fannin Street, Suite 1600, Houston, Texas 77002
(Address of principal executive offices) (Zip code)

(Registrant’s telephone number, including area code)

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 during the preceding 12 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 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):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

As of November 4, 2010, 173,553,769 shares of the registrant’s common stock were outstanding.

 

 

Index

Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			3
Condensed Consolidated Statements of Cash Flows			4
Notes to Condensed Consolidated Financial Statements			5
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3: Quantitative and Qualitative Disclosures About Market Risk			40
Item 4: Controls and Procedures			40
Part II. Other Information
Item 1A: Risk Factors			41
Item 6: Exhibits			41
Signatures			43
EX-2.1
EX-10.2
EX-10.3
EX-10.4.A
EX-10.4.B
EX-10.4.C
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Quantities of natural gas are expressed in this report 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 natural 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.

Part I: Financial Information

Item 1:		Financial Statements

Endeavour International Corporation

(Unaudited)

(Amounts in thousands)

		September 30,				December 31,
		2010				2009
Assets
Current Assets:
Cash and cash equivalents		$	16,527			$	27,287
Restricted cash			32,524				2,879
Accounts receivable			9,812				14,800
Prepaid expenses and other current assets			9,558				10,118
Total Current Assets			68,421				55,084
Property and Equipment, Net ($178,142 and $154,553 not subject to amortization at 2010 and 2009, respectively)			334,749				266,587
Assets Held for Sale			21,145				—
Goodwill			211,886				211,886
Other Assets			26,423				5,322
Total Assets		$	662,624			$	538,879

See accompanying notes to condensed consolidated financial statements.

Endeavour International Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands)

		September 30,				December 31,
		2010				2009
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	30,476			$	12,401
Current maturities of debt			16,500				—
Accrued expenses and other			16,850				17,798
Total Current Liabilities			63,826				30,199
Long-Term Debt			314,708				223,385
Deferred Taxes			86,887				80,692
Other Liabilities			72,722				85,412
Total Liabilities			538,143				419,688
Commitments and Contingencies
Series C Convertible Preferred Stock:
Face value (liquidation preference)			45,000				50,000
Net non-cash premiums under fair value accounting on redemption			8,152				9,058
Total Series C Convertible Preferred Stock			53,152				59,058
Stockholders’ Equity:
Series B preferred stock — Liquidation preference: $3,233
Common stock; shares issued and outstanding — 173,238 and 131,618 shares at 2010 and 2009, respectively			173				132
Additional paid-in capital			286,819				247,707
Treasury stock, at cost - 498 and 498 shares at 2010 and 2009, respectively			(587	)			(587	)
Accumulated deficit			(215,076	)			(187,119	)
Total Stockholders’ Equity			71,329				60,133
Total Liabilities and Stockholders’ Equity		$	662,624			$	538,879

See accompanying notes to condensed consolidated financial statements.

Endeavour International Corporation

(Unaudited)

(Amounts in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	19,849			$	7,759			$	55,102			$	42,179
Cost of Operations:
Operating expenses			4,595				3,876				10,881				14,455
Depreciation, depletion and amortization			7,697				5,646				21,290				24,828
Impairment of oil and gas properties			—				—				7,692				30,645
General and administrative			4,237				4,091				12,873				12,041
Total Expenses			16,529				13,613				52,736				81,969
Income (Loss) From Operations			3,320				(5,854	)			2,366				(39,790	)
Other Income (Expense):
Derivatives:
Realized gains (losses)			(452	)			7,530				(1,552	)			28,581
Realized loss on early termination			(10,201	)			—				(10,201	)			—
Unrealized gains (losses)			6,441				(4,360	)			11,477				(38,455	)
Interest expense			(10,474	)			(3,919	)			(21,733	)			(12,054	)
Interest income and other			(2,327	)			1,402				1,281				(6,932	)
Total Other Income (Expense)			(17,013	)			653				(20,728	)			(28,860	)
Loss Before Income Taxes			(13,693	)			(5,201	)			(18,362	)			(68,650	)
Income Tax Expense (Benefit)			(2,001	)			(441	)			7,916				(10,477	)
Loss from Continuing Operations			(11,692	)			(4,760	)			(26,278	)			(58,173	)
Income from Discontinued Operations			—				277				—				46,646
Net Loss			(11,692	)			(4,483	)			(26,278	)			(11,527	)
Preferred Stock Dividends			546				2,696				1,682				8,061
Net Loss to Common Stockholders		$	(12,238	)		$	(7,179	)		$	(27,960	)		$	(19,588	)
Basic and Diluted Net Loss per Common Share:
Continuing operations		$	(0.07	)		$	(0.06	)		$	(0.17	)		$	(0.51	)
Discontinued operations			—				—				—				0.36
Total		$	(0.07	)		$	(0.06	)		$	(0.17	)		$	(0.15	)
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted			167,641				130,109				159,801				129,719

See accompanying notes to condensed consolidated financial statements.

Endeavour International Corporation

(Unaudited)

(Amounts in thousands)

		Nine Months Ended September 30,
		2010				2009
Cash Flows from Operating Activities:
Net loss		$	(26,278	)		$	(11,527	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization			21,290				29,509
Impairment of oil and gas properties			7,692				30,645
Deferred tax expense (benefit)			6,195				(3,269	)
Unrealized (gains) losses on derivatives			(11,477	)			38,455
Gain on sale of Norwegian operations			—				(47,420	)
Amortization of non-cash compensation			2,786				2,232
Amortization of loan costs and discount			6,980				3,682
Non-cash interest expense			5,179				3,949
Other			(1,178	)			3,714
Changes in operating assets and liabilities:
Decrease in receivables			4,988				6,593
(Increase) decrease in other current assets			(2,340	)			5,060
Increase (decrease) in liabilities			17,465				(21,939	)
Net Cash Provided by Operating Activities			31,302				39,684
Cash Flows From Investing Activities:
Capital expenditures			(75,677	)			(88,639	)
Acquisitions			(39,279	)			(4,127	)
Proceeds from sales, net of cash			—				144,765
(Increase) decrease in restricted cash			(29,645	)			20,366
Net Cash Provided by (Used in) Investing Activities			(144,601	)			72,365
Cash Flows From Financing Activities:
Repayments of borrowings			(74,942	)			(64,458	)
Borrowings under debt agreements			175,000				—
Proceeds from issuance of common stock			30,181				—
Dividends paid			(1,563	)			(7,969	)
Financing costs paid			(26,219	)			—
Other financing			82				27
Net Cash Provided by (Used in) Financing Activities			102,539				(72,400	)
Net Increase (Decrease) in Cash and Cash Equivalents			(10,760	)			39,649
Cash and Cash Equivalents, Beginning of Period			27,287				38,156
Cash and Cash Equivalents, End of Period		$	16,527			$	77,805

See accompanying notes to condensed consolidated financial statements.

Endeavour International Corporation

(Amounts in thousands, except per unit data)

Note 1 — General

Endeavour International Corporation (a Nevada corporation) is an independent oil and gas company engaged in the acquisition, exploration and development of energy reserves. As used in these Notes to Condensed 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. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K/A for the year ended December 31, 2009.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with 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, future dismantlement costs, income taxes and litigation. Actual results could materially 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 that it is reasonably possible that the following material estimates affecting the financial statements could change in the coming year:

•

proved oil and gas reserves,

•

expected future cash flow from proved oil and gas properties,

•

future dismantlement and restoration costs,

•

fair values used in purchase accounting, and

•

fair value of derivative instruments.

New Accounting Developments

On January 1, 2010, we adopted the following new standards without material effect on our results of operations or financial position for the three and nine months ended September 30, 2010:

•

Subsequent Events — Amended standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

•

Fair Value — New, expanded disclosures are required for recurring or nonrecurring fair-value measurements and the reconciliation of specific fair value measurements.

Note 2 — 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 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 former Norwegian subsidiary as discontinued operations for all periods presented. The following table details selected financial data for the assets included in the Norway Sale:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Sales		$	—			$	—			$	—			$	17,550
Income before Taxes		$	—			$	—			$	—			$	4,656
Income Tax Expense			—				—				—				(5,430	)
Loss from Operations			—				—				—				(774	)
Gain on sale			—				277				—				47,420
Net Income from Discontinued Operations		$	—			$	277			$	—			$	46,646

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Note 3 — Income Tax Expense (Benefit)

The following summarizes the components of income tax expense (benefit):

		UK				U.S.				Other				Total
Nine Months Ended September 30, 2010:
Net income (loss) before taxes from continuing operations		$	6,249			$	(22,214	)		$	(2,397	)		$	(18,362	)
Current tax expense (benefit)			1,892				—				(171	)			1,721
Deferred tax expense (benefit)			7,174				—				(928	)			6,246
Foreign currency gains on deferred tax liabilities			—				—				(51	)			(51	)
Income tax expense (benefit)			9,066				—				(1,150	)			7,916
Net loss from continuing operations		$	(2,817	)		$	(22,214	)		$	(1,247	)		$	(26,278	)
Nine Months Ended September 30, 2009:
Net loss before taxes from continuing operations		$	(44,641	)		$	(16,149	)		$	(7,860	)		$	(68,650	)
Current tax benefit			(1,176	)			—				—				(1,176	)
Deferred tax benefit			(16,203	)			—				—				(16,203	)
Foreign currency losses on deferred tax liabilities			6,902				—				—				6,902
Income tax expense (benefit)			(10,477	)			—				—				(10,477	)
Net loss from continuing operations		$	(34,164	)		$	(16,149	)		$	(7,860	)		$	(58,173	)

Our income tax expense relates primarily to our operations in the U.K. where the statutory income tax rate is 50%. Certain fields, such as our Alba field, are subject to an additional 25% petroleum revenue tax (“PRT”). This PRT tax represents all of our current tax expense in the U.K. for the nine months ended September 30, 2010. The combined effects of PRT, the statutory tax rate of 50% and the non-deductibility of certain interest charges cause our effective tax rate in the U.K. to vary considerably from period to period.

Until 2009, we did not have revenue from U.S. operations. We have been building net operating loss carryforwards (NOLs) in the U.S. but have not been able to record income tax benefits on our U.S. losses as there has been no assurance that we can generate any U.S. taxable earnings. At September 30, 2010, we have approximately $63.1 million in NOLs that have been offset in full by valuation allowances. As operations expand in the U.S. and we are able to generate U.S. taxable earnings, we expect to record income tax benefits in the U.S. through the recognition of the NOLs and removal of the associated valuation allowance. With the NOLs we have accumulated, we do not anticipate paying current federal income taxes in the U.S. for a number of years.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Note 4 — Property and Equipment

Property and equipment included the following at the dates indicated below:

		September 30,				December 31,
		2010				2009
Oil and gas properties under the full cost method:
Subject to amortization		$	336,876			$	275,278
Not subject to amortization:
Acquired in 2010			61,981				—
Acquired in 2009			29,553				51,797
Acquired in 2008			25,162				32,970
Acquired prior to 2008			61,446				69,786
			515,018				429,831
Computers, furniture and fixtures			3,964				3,560
Total property and equipment			518,982				433,391
Accumulated depreciation, depletion and amortization			(184,233	)			(166,804	)
Net property and equipment		$	334,749			$	266,587

The costs not subject to amortization relate to unproved properties and properties being made ready to be placed in service, which are excluded from amortizable capital costs until it is determined whether or not proved reserves can be assigned to such properties. We capitalized $1.2 million and $0.7 million in interest related to exploration activities for the quarters ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, $3.1 million and $2.4 million, respectively, were capitalized in interest related to exploration.

Impairments

In the first quarter of 2010, we recorded $7.7 million in impairment of our U.S. oil and gas properties, pre-tax, through the application of the full cost ceiling test at the end of the quarter. The impairment was primarily due to the declaration of two wells as dry holes during the first quarter of 2010, the Alligator Bayou well, which was spud in 2008, and a well under our participation agreement with Caza Petroleum Inc. (“Caza”). The prices used to determine the impairment for the U.S. properties were $69.83 per barrel for oil and $4.01 per Mcf for gas. We did not have an impairment of U.K. oil and gas properties, pre-tax, through the application of the full cost ceiling test at the end of the first quarter 2010. The prices used for the U.K. properties were $68.74 per barrel for oil and $4.51 per Mcf for gas in the application of the full cost ceiling test.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

For the second and third quarters of 2010, we did not have an impairment of oil and gas properties, through the application of the full cost ceiling test at the end of either quarter. For the third quarter of 2010, the prices used in the application of the full cost ceiling test were $77.82 per barrel for oil and $4.42 per Mcf for gas for our U.S. properties, and $76.65 per barrel for oil and $5.56 per Mcf for gas for our U.K. properties.

Acquisitions

On January 6, 2010, we acquired positions in several U.S. resource plays as discussed below. We funded the initial cash contributions for these new focus areas from existing cash reserves.

We entered into a participation agreement with Cohort Energy Company (“Cohort”), a subsidiary of J-W Operating Company, and acquired 50 percent of Cohort’s interests in certain acreage in North Louisiana/East Texas and Western Pennsylvania, primarily in the Haynesville and Marcellus gas shale plays. Our initial investment was $15 million in cash, and we will pay a share of Cohort’s drilling and completion expenditures as wells are drilled over the next few years. Under this agreement, we also acquired additional acreage in the Marcellus gas shale play area for approximately $7.5 million during the second quarter of 2010.

We also acquired 50 percent of Hillwood Energy Alabama LP’s (“Hillwood”) position in Hillwood’s exploratory gas shale play in Alabama with an initial net investment of approximately $8.0 million.

Pending Disposition

In the third quarter of 2010, we executed a definitive agreement to sell our interests in the Cygnus asset in the North Sea for $110 million in cash consideration. We allocated $21.1 million of our full cost pool to Cygnus which is presented separately as assets held for sale in the condensed consolidated balance sheet as of September 30, 2010. The allocation was made using the relative fair value of Cygnus and the other properties in the U.K. full cost pool. Assets held for sale were assessed for impairment, and based on this assessment, no impairment was necessary as of September 30, 2010. Additionally, we will not recognize depletion, depreciation and amortization on our long-lived assets while they are classified as held for sale. The sale was completed in October 2010.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Note 5 — Debt Obligations

Our debt consisted of the following at the dates indicated:

		September 30,				December 31,
		2010				2009
Senior notes, 6% fixed rate, due 2012		$	81,250			$	81,250
Senior bank facility, variable rate, due 2011			—				49,942
Convertible bonds, 11.5%, due 2014			54,261				49,838
Subordinated notes, 12.0%, due 2014			50,878				50,122
Senior term loan, 15.0%, due 2013			150,000				—
			336,389				231,152
Less: debt discount			(5,181	)			(7,767	)
Less: current maturities			(16,500	)			—
Long-term debt		$	314,708			$	223,385
Standby letters of credit outstanding for abandonment liabilities		$	32,474			$	33,388

We were in compliance with all financial covenants of our outstanding debt at September 30, 2010 and December 31, 2009.

The fair value of our debt obligations was $328 million and $219 million at September 30, 2010 and December 31, 2009, 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 our other debt. Book value approximates fair value for our senior bank facility as this instrument bears interest at market rates.

Junior Facility

In the first quarter of 2010, we entered into a $25 million junior lending facility between us, our subsidiaries and Bank of Scotland PLC (the “Junior Facility”), with a maturity date of February 5, 2011, and bearing interest at LIBOR plus 8%. We terminated the Junior Facility and repaid the outstanding indebtedness in its entirety on August 16, 2010.

Senior Bank Facility

We had a $225 million senior bank facility (“Senior Bank Facility”), which was subject to a borrowing base limitation with interest of LIBOR plus 1.3%. We terminated the Senior Bank Facility and repaid the outstanding indebtedness in its entirety on August 16, 2010.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Senior Term Loan

On August 16, 2010 we entered into a credit agreement with Cyan Partners, LP (“Cyan”), as administrative agent, and various lenders for a senior, secured term loan in the aggregate amount of $150 million (the “Senior Term Loan”) which may be increased to $160 million in certain circumstances. Subsequent to the September 30, 2010, we increased the borrowings under the Senior Term Loan to an aggregate $160 million and borrowed the additional $10.0 million. No shares of our common stock were issued upon this additional borrowing of 10.0 million.

The Senior Term Loan is a senior obligation of our U.K. subsidiary and guaranteed by Endeavour and all of our material subsidiaries. In addition, substantially all of our assets are pledged as collateral to secure the obligations under the Senior Term Loan. Such collateral may also secure certain hedging obligations and reimbursement obligations in respect of letters of credit that may be issued for our account.

As discussed above, we used $66 million of the proceeds from the loans to repay in full the outstanding borrowings under the Senior Bank Facility and the Junior Facility. Following these repayments, both the Senior Bank Facility and the Junior Facility terminated in accordance with their terms. We expect to use the remaining net proceeds from the Senior Term Loan for general corporate purposes.

The Senior Term Loan obligates us to pay annual cash interest of 12%. In addition, we are obligated to pay an additional 3% in annual interest “in-kind” (“PIK Interest”), through an increase in the outstanding principal amount of the Senior Term Loan. We have the ability to pay the PIK Interest in cash at our option. We paid Cyan certain fees in the aggregate amount of $18 million. Concurrent with the closing of the Senior Term Loan, Cyan purchased nine million shares of our common stock from us. See Note 7 for additional discussion on this purchase of our common stock.

The Senior Term Loan has a three-year term and matures on August 16, 2013, provided that:

•

Endeavour’s 6% Convertible Senior Notes due 2012 have been refinanced or extended and

•

the holder’s conditional redemption right on Endeavour’s 11.5% Guaranteed Convertible Senior Bonds due 2014 has been terminated or extended. Such conditional redemption right exists if our average common stock price, as defined, is below $2.36 per share on January 18, 2012.

If these conditions are not met by October 14, 2011, however, the Senior Term Loan shall mature and will be due in full on this date.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

The Senior Term Loan has quarterly principal prepayments of $375,000 beginning on December 31, 2010. At maturity, the remaining principal balance (including any PIK Interest) is due in full.

The Senior Term Loan is callable by us after one year. Between August 16, 2011 and August 15, 2012, we may voluntarily prepay any portion of or all amounts outstanding under the Senior Term Loan at 103% of principal. For prepayments on or after August 16, 2012, the additional prepayment fee will be 1% of the principal amount of the amount outstanding under the Senior Term Loan.

The Senior Term Loan permits certain asset sales and the incurrence of additional indebtedness, subject to certain conditions and within specified limits. We are obligated to comply with certain financial covenants, including:

•

a specified maximum total leverage ratio (consolidated net indebtedness to consolidated EBITDAX), ranging from 7.85:1.00 at September 30, 2010 to 3.00:1.00 at December 31, 2012 and thereafter;

•

a specified minimum EBITDAX for each four-quarter period, ranging from $45,000,000 for the four-quarter period ending September 30, 2010 to $200,000,000 for the four-quarter period ending June 30, 2013;

•

a minimum Reserve Coverage Ratio, as defined, of not less than 3.00:1.00; and

•

a PDP Coverage Ratio, as defined, of not less than 0.25:1.00 on or prior to September 30, 2011 and not less than 0.50:1.00 after September 30, 2011.

The Senior Term Loan contains various covenants that limit our ability, among other things, to: grant liens; pay dividends; and make investments or loans. We are also obligated to maintain our traditional hedging policies and program. See Note 10 for additional discussion.

The Senior Term Loan also contains customary events of default. If an event of default exists under the Senior Term Loan, the administrative agent has the ability to accelerate the maturity of the loan and exercise other rights and remedies.

Note 6 — Asset Retirement Obligations

Our asset retirement obligations relate to obligations for the future plugging and abandonment of oil and gas properties and are substantially all related to our U.K. assets. The following table provides a rollforward of our asset retirement obligations for the nine months ended September 30, 2010 and 2009:

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

		Nine Months Ended
		September 30,
		2010				2009
Carrying amount of asset retirement obligations as of beginning of period		$	47,362			$	38,776
Accretion expense (included in DD&A expense)			3,444				3,082
Impact of foreign currency exchange rate changes			(1,379	)			3,782
Payment of asset retirement obligation			(3,012	)			(6,620	)
Reduction in asset retirement obligation			(1,812	)			—
Sale of assets			—				(248	)
Carrying amount of asset retirement obligations as of end of period			44,603				38,772
Less: Current portion			(2,588	)			—
Long-term asset retirement obligation		$	42,015			$	38,772

Note 7 — Equity Transactions

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 for 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 the Certificate of Designation for the Series C Convertible Preferred Stock and the $50 million subordinated notes issued to the holders of the Series C Convertible Preferred Stock to make certain technical changes that align certain definitions and provisions relating to potential repurchases of securities by us.

In February and March 2010, a combined 3,375 shares of our Series C Convertible Preferred Stock were converted into 2.7 million shares of our common stock. In April 2010, an additional 1,625 shares of our Series C Convertible Preferred Stock were converted into 1.3 million shares of our common stock.

Common Stock Issuance

On August 16, 2010, in connection with the issuance of the Senior Term Loan, we completed a registered direct offering of common stock pursuant to a Common Stock Purchase Agreement with Cyan to sell 9.0 million shares of our common stock, par value $0.001 per share, for aggregate net cash consideration of approximately $10.1 million, after deducting expenses. The purchase price per share was $1.13, the closing price of our common stock on the NYSE Amex on August 13, 2010. We intend to use the net proceeds from this offering for general corporate purposes.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

On February 4, 2010, we completed a private placement of our common stock pursuant to a Common Stock Purchase Agreement with existing stockholders, certain directors and other third-party investors, thereby selling 23.5 million shares of our common stock, for aggregate net cash consideration of approximately $20.5 million. The purchase price per share was $0.90, the closing price of our common stock on the NYSE Amex on February 3, 2010. The net proceeds from this private placement have been used to partially fund our 2010 capital budget.

Note 8 — Loss Per Share

Basic loss per common share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per share includes the effect of our outstanding stock options, warrants and shares issuable pursuant to convertible debt, convertible preferred stock and certain stock incentive plans under the treasury stock method, if including such instruments would be dilutive.

For each of the periods presented, shares associated with stock options, warrants, convertible debt, convertible preferred stock and certain stock incentive plans were not included because their inclusion would be anti-dilutive.

The common shares potentially issuable arising from these instruments, which were outstanding during the periods presented in the financial statements consisted of:

		September 30,
		2010				2009
Warrants, options and stock-based compensation			703				699
Convertible debt:
Senior notes			16,185				16,185
Convertible bonds			22,992				20,528
Convertible preferred stock			36,000				50,000
			75,880				87,412

Note 9 — Fair Value Measurements

We apply fair value measurements to certain assets and liabilities including 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

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

inputs and minimize the use of unobservable inputs when measuring fair value. 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.

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 September 30, 2010:

		Quoted Market Prices				Significant Other				Significant
		in Active Markets -				Observable Inputs -				Unobservable Inputs				Total
		Level 1				Level 2				Level - 3				Fair Value
September 30, 2010:
Oil and gas derivative contracts:
Oil and gas swaps		$	—			$	—			$	—			$	—
Embedded derivatives			—				—				(30,181	)			(30,181	)
Total derivative liabilities		$	—			$	—			$	(30,181	)		$	(30,181	)
December 31, 2009:
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 derivative contracts were measured based on quotes from our counterparties, all of whom 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

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

derivative contract term. The inputs for the fair value models for our swaps are all observable market data, and as a result these instruments have been classified as Level 2.

The following is a reconciliation of changes in fair value of net derivative assets and liabilities classified as Level 3:

		Nine Months Ended
		September 30,
		2010				2009
Balance at beginning of period		$	(28,843	)		$	(12,057	)
Total gains or losses (realized/unrealized)
Included in earnings			(1,338	)			(9,541	)
Balance at end of period		$	(30,181	)		$	(21,598	)
Changes in unrealized gains (losses) relating to derivatives assets and liabilities		$	(1,338	)		$	(6,663	)

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:

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 are used in the determination of the fair value of the reporting unit, including present values of expected cash flows from operations.

Note 10 — Derivative Instruments

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.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

In conjunction with the repayment of the Senior Bank Facility in August 2010, we terminated all of our outstanding commodity derivative positions for a realized loss of $10.2 million and have no commodity derivatives at September 30, 2010. Under the Senior Term Loan, we are required to re-establish our commodity derivatives program covering specified percentages of our reserves within 90 days of closing the Senior Term Loan. We expect to enter into commodity derivatives during the fourth quarter of 2010.

The fair market value of these derivative instruments is included in our balance sheet as follows for the periods indicated:

		September 30,				December 31,
		2010				2009
Derivatives not designated as hedges:
Oil and gas commodity derivatives:
Assets:
Prepaid expenses and other current assets		$	—			$	2,890
Other assets — long term			—				318
Liabilities:
Accrued expenses and other			—				(6,817	)
Other liabilities — long-term			—				(9,207	)
		$	—			$	(12,816	)
Embedded derivatives related to debt and equity instruments:
Liabilities:
Other liabilities — long-term			(30,181	)			(28,843	)

The effect of the derivatives not designated as hedges on our results of operations was as follows for the periods indicated:

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Derivatives not designated as hedges:
Oil and gas commodity derivatives
Realized gains (losses)		$	(452	)		$	7,530			$	(1,552	)		$	28,581
Realized loss on early termination			(10,201	)			—				(10,201	)			—
Unrealized gains (losses)			8,057				(2,950	)			12,815				(29,645	)
			(2,596	)			4,580				1,062				(1,064	)
Embedded derivatives related to debt and equity instruments
Unrealized gains (losses)		$	(1,616	)		$	(1,410	)		$	(1,338	)		$	8,810

The effect of derivatives designated as cash flow hedges on our results of operations and other comprehensive income was as follows for the periods indicated:

						Three Months Ended								Nine Months Ended
						September 30,								September 30,
		Location of
		Reclassification
		into Income				2010				2009				2010				2009
Interest rate swap
Gain recognized in other comprehensive income, net of tax						$	—			$	(21	)		$	—			$	(94	)
Gain reclassified from accumulated other comprehensive income		Interest
into income		expense					—				418				—				1,176

We held 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.

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).

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Note 11 — Supplemental Cash Flow Information

Cash paid during the period for interest and income taxes was as follows:

		Nine Months Ended
		September 30,
		2010				2009
Interest paid		$	10,313			$	6,191
Income taxes paid (refunded)		$	(172	)		$	4,334

The net cash flows provided by operating activities are primarily impacted by the earnings from our business activities. The cash flows provided by operating activities decreased to $31.3 million for the nine months ended September 30, 2010 as compared to $39.7 million for the nine months ended September 30, 2009.

The cash provided by or used in investing activities represents expenditures for capital projects, acquisition costs and changes to restricted cash.

The cash used in financing activities consists of borrowings and repayments of debt, payments of preferred dividends, payment of financing costs, and proceeds from the issuance of common stock.

Note 12 — Comprehensive Income (Loss)

Excluding net income (loss), our source of comprehensive income (loss) is the net unrealized loss on derivative instruments and marketable securities, which are classified as available-for-sale. The following summarizes the components of comprehensive income (loss):

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net loss		$	(11,692	)		$	(4,483	)		$	(26,278	)		$	(11,527	)
Unrealized gain on interest rate swap derivative instrument, net of tax			—				(21	)			—				(94	)
Reclassification adjustment for gain realized in net loss above			—				418				—				1,176
Net impact on comprehensive income (loss)			—				397				—				1,082
Comprehensive loss		$	(11,692	)		$	(4,086	)		$	(26,278	)		$	(10,445	)

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. Non-cash stock-based compensation is recorded in general and administrative (“G&A”) expenses or capitalized G&A as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
G & A Expenses		$	656			$	506			$	2,474			$	1,436
Capitalized G & A			211				159				711				556
Total non-cash stock-based compensation		$	867			$	665			$	3,185			$	1,992

At September 30, 2010, total compensation cost related to awards not yet recognized was approximately $4.4 million and is expected to be recognized over a weighted average period of less than three years.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Stock Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. 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, 2010			4,212			$	1.87
Exercised			(147	)			0.56
Forfeited			(44	)			1.98
Expired			(643	)			4.14
Balance outstanding — September 30, 2010			3,378			$	1.49				6.6			$	849
Currently exercisable — September 30, 2010			2,305			$	1.82				6.0			$	311

Restricted Stock

The restricted stock awards were valued based on the closing price of our common stock on the measurement date, typically the date of grant. Status of the restricted shares as of September 30, 2010 and the changes during the nine months ended September 30, 2010 are presented below:

						Weighted
						Average Grant
						Date Fair
		Number of				Value per
		Shares				Share
Balance outstanding — January 1, 2010			3,420			$	1.00
Granted			5,074				1.12
Vested			(2,424	)			1.15
Forfeited			(59	)			0.87
Balance outstanding — September 30, 2010			6,011			$	1.04
Total grant date fair value of shares vesting during the period		$	2,791

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Note 14 — Commitments and Contingencies

We have previously disclosed a potential commitment on a drilling rig in our North Sea operations. We are in dispute with the rig operator in relation to this potential commitment and have also raised potential counterclaims. We will defend our position vigorously, but there can be no certainty that we will resolve this matter favorably.

Note 15 — Subsequent Events

Subsequent to September 30, 2010, we closed on the sale of our Cygnus asset, located in the Southern Gas Basin of the United Kingdom, to Bayerngas UK Ltd. for cash consideration of $110 million.

In October 2010, our Board of Directors authorized a one-for-seven share consolidation of our common stock, in the form of a reverse stock split, that is expected to be effective at the opening of trading on November 18, 2010. As a result of the share consolidation, every seven shares of common stock outstanding will automatically be combined into one share of common stock. The Company’s stock will begin trading at the split-adjusted price on November 18, 2010. Holders who would otherwise receive fractional shares will have their shares rounded up to the next whole share. We have not restated any share or per share amounts as a result of this share consolidation within this Quarterly Report.

Common shares issued and outstanding, giving retroactive effect to the share consolidation as of September 30, 2010 and December 31, 2009, would have been 24.7 million and 18.8 million, respectively. Pro forma loss per share, giving retroactive effect to the share consolidation for the three and nine months ended September 30, 2010 and 2009, is as follows:

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
As reported:
Basic and Diluted Net Loss per Common Share:
Continuing operations		$	(0.07	)		$	(0.06	)		$	(0.17	)		$	(0.51	)
Discontinued operations			—				—				—				0.36
Total		$	(0.07	)		$	(0.06	)		$	(0.17	)		$	(0.15	)
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted			167,641				130,109				159,801				129,719
Pro forma:
Basic and Diluted Net per Common Share:
Continuing operations		$	(0.51	)		$	(0.39	)		$	(1.22	)		$	(3.58	)
Discontinued operations			—				—				—				2.52
Total		$	(0.51	)		$	(0.39	)		$	(1.22	)		$	(1.06	)
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted			23,949				18,587				22,829				18,531

Endeavour International Corporation
(Amounts in thousands, except per unit data)

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. 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. Historically, we have focused our operations in the North Sea, but began expanding our focus in 2009 to target unconventional U.S. onshore resource shale plays with shorter production-cycle times and more compelling risk/return profiles. Since the beginning of 2009, we have taken measured and specific steps to achieve this strategic shift while maintaining our strong financial discipline, including:

	•		In October 2010, we completed the previously-announced sale of our North Sea Cygnus asset for $110 million in cash. With this sale, we have concluded the review of strategic alternatives for our North Sea assets.
	•		On August 16, 2010 we entered into the Senior Term Loan with Cyan and various lenders and under which we borrowed $150 million. We used a portion of the loan proceeds to repay all of our outstanding borrowings under the Senior Bank Facility and the Junior Facility. Subsequent to the third quarter of 2010, we borrowed an additional $10 million under the Senior Term Loan. These borrowings will be used for general corporate purposes.
	•		Concurrent with the Senior Term Loan, we sold 9.0 million shares of our common stock to Cyan for gross cash consideration of $10.1 million. See Note 7 for additional discussion.
	•		During the second quarter of 2010, we completed a farm-out with Nexen Petroleum U.K. Limited to test the West Rochelle prospect that lies west of our Rochelle gas development area. Under the terms of the farm-out agreement, we are carried for our share of the drilling costs for the initial West Rochelle well, remain operator of the block and retain a 50 percent interest in the block. This West Rochelle well began drilling in September 2010 and natural gas with an oil rim was encountered in early October 2010. The well has been sidetracked to the north and has encountered hydrocarbons that extend the West Rochelle area.
	•		In February 2010, we sold 23.5 million shares of common stock in a private placement for 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. The net proceeds from the private placement and the Junior Facility have been used to partially fund our 2010 capital budget.

Endeavour International Corporation
(Amounts in thousands, except per unit data)

	•		In January 2010, we acquired 50 percent of Cohort’s interests in certain acreage in North Louisiana/East Texas and Western Pennsylvania, primarily in the Haynesville and Marcellus gas shale plays, for $15 million in cash (the “2010 Cohort Acquisition”). As part of this acquisition, we also acquired additional acreage in the Marcellus gas shale play area for approximately $7.5 million during the second quarter of 2010.
	•		In January 2010, we also acquired 50 percent of Hillwood’s position in Hillwood’s exploratory gas shale play in Alabama with an initial net investment of approximately $8.0 million (the “Hillwood Acquisition”). During the third quarter of 2010, we drilled two vertical pilot wells in this area which will be evaluated for future horizontal re-entries and completion tests.
	•		In the fourth quarter of 2009, we entered into a participation agreement with Cohort providing us with acreage positions and production in the Haynesville and Marcellus gas shales for $15 million in cash.
	•		In the fourth quarter of 2009, we acquired 50 percent of the interests owned by a private company in more than 300,000 gross (75,000 net) acres in central Montana in the highly prospective, but previously untested Heath Shale oil play with an initial net cash investment of $3.75 million.
	•		In the fourth quarter of 2009, we redeemed 60 percent of the outstanding shares of our 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.
	•		In the second quarter of 2009, we sold our Norwegian operations for cash consideration of $150 million, providing us with financial flexibility and strength to continue our U.K. development program and accelerate our expanding U.S. initiative.

With our recent entry into the onshore U.S. shale plays, we are attempting to balance the capital intensive, long lead-time nature of our North Sea assets. 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. In addition, we intend to continue to actively manage our North Sea assets in a manner that maximizes value while enabling us to allocate resources to effectively pursue our strategic objectives. Our North Sea assets remain a key source of value that can be further developed to increase our overall reserves and production. Our primary North Sea development projects – Bacchus, Rochelle, and Columbus – have the potential to significantly expand our total proved reserves and production levels. Further exploration and development efforts will continue on our properties as we seek to improve our risk-adjusted value for our North Sea assets. We continue to believe that our balanced portfolio of exploration and development assets, exploited through a disciplined approach to capital resources, should enable us to realize the full value of our assets and increase shareholder return.

Results of Operations

Revenue, net income and cash flows from operating activities are very sensitive to changes in prices received for our products. With our business policy to utilize various oil and gas derivative instruments to achieve more predictable cash flows by reducing our exposure to price

Endeavour International Corporation
(Amounts in thousands, except per unit data)

fluctuations, our realized commodity prices including the effect of derivatives, particularly for oil, were less volatile than commodity prices before the effect of derivatives.

Net loss to common shareholders for the nine months ended September 30, 2010 was $28.0 million, or $0.17 per share. For the nine months ended September 30, 2009, net loss to common shareholders was $19.6 million, or $0.15 per share. In connection with the August 2010 issuance of the Senior Term Loan, we settled all outstanding commodity derivatives, which covered a portion of production through the end of 2011, and recorded a realized loss of $10.2 million for the third quarter and nine months ended September 30, 2010.

In addition to our operations, our net income can be significantly affected by various non-cash items, such as unrealized gains and losses on our derivatives, impairment of oil and gas properties, currency impact of long-term liabilities and deferred taxes. Net loss as adjusted for the nine months ended September 30, 2010 would have been $25.4 million without the effect of derivative transactions, impairment of oil and gas properties and currency impacts of deferred taxes as compared to net income as adjusted of $28.2 million for the same period in 2009, which includes the gain on the sale of our discontinued operations. For the third quarter of 2010 net loss as adjusted was $14.6 million, compared to $6.4 million for the third quarter in 2009.

For the nine months ended September 30, 2010, discretionary cash flow was $11.2 million as compared to $50.0 million for the same period in 2009. For the third quarter of 2010, discretionary cash flow was $6.1 million as compared to $7.6 million for the same period in 2009. The decline in discretionary cash flow reflects the effects of commodity derivatives, increased interest expense related to additional debt issuances and increased current tax expense, partially offset by lower operating expenses. In addition, our discontinued operations had discretionary cash flow of approximately $10 million for the nine months ended September 30, 2009, which was fully offset by the capital expenditures for these operations. Our oil derivatives in 2009 had a higher average price than our oil derivatives in 2010. This decrease in average price is primarily due to oil collars with a floor of $100.00 per barrel that expired at the end of 2009.

Adjusted EBITDA decreased to $31.0 million for the nine months ended September 30, 2010 from $46.5 million for the same period in 2009, primarily due to the decrease in realized prices after the effects of commodity derivatives discussed above. For the third quarter of 2010, Adjusted EBITDA decreased slightly to $8.2 million as compared to $8.7 million for the same period in 2009. For definitions of Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow, and a reconciliation of each to the nearest comparable GAAP measure, please see “Reconciliation of Non-GAAP Accounting Measures.”

The cash flows provided by operating activities decreased to $31.3 million for the nine months ended September 30, 2010 as compared to $39.7 million for the same period in 2009 primarily due to decreases in realized prices after the effects of commodity derivatives, increased interest expense related to additional debt issuances and increased current tax expense, partially offset by lower operating expenses. In addition, our discontinued operations had discretionary cash flow of approximately $10 million for the nine months ended September 30, 2009, which was fully offset by the capital expenditures for these operations.

Endeavour International Corporation
(Amounts in thousands, except per unit data)

Revenue and Sales Volume

Our revenues have increased from $42.2 million in the nine months ended September 30, 2009 to $55.1 million in the same period of 2010 primarily as a result of substantially increased oil prices and increased sales from our U.S. operations, partially offset by a decrease in natural gas prices. While our overall volumes remained consistent between the periods, our expanded operations in the U.S. have led to an increase in natural gas as a percentage of our total production.

For the third quarter of 2010, revenues increased to $19.8 million as compared to $7.8 million for the same period in 2009, substantially attributable to our expanding U.S. production and operations, increased production in the U.K. as the maintenance downtimes in 2009 did not reoccur and increased commodity prices. Oil prices in the third quarter of 2010 also increased substantially compared to the corresponding period in 2009. However, natural gas prices increased slightly in the third quarter of 2010 compared to the same period in the prior year, reducing the offsetting effect on our revenues of our shift toward natural gas.

The following table shows our average sales volumes and sales prices for our operations for the periods presented. None of our current producing fields represent more than 15 percent of our total proved reserves during 2010 or 2009. However, certain of our non-producing North Sea development assets – the Rochelle, Cygnus and Columbus fields – each represent more than 15 percent of our proved reserves during these years. As these fields do not have any current sales or production, they have not been separately identified in the table below.

Endeavour International Corporation
(Amounts in thousands, except per unit data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Sales volume (1)
Oil and condensate sales (Mbbls):
United Kingdom			127				82				429				494
United States			2				1				5				2
Continuing operations			129				83				434				496
Discontinued operations — Norway			—				—				—				310
Total			129				83				434				806
Gas sales (MMcf):
United Kingdom			869				629				2,614				2,777
United States			978				19				1,699				130
Continuing operations			1,847				648				4,313				2,907
Discontinued operations — Norway			—				—				—				686
Total			1,847				648				4,313				3,593
Oil equivalent sales (MBOE)
United Kingdom			272				187				864				957
United States			165				4				288				23
Continuing operations			437				191				1,152				980
Discontinued operations — Norway			—				—				—				425
Total			437				191				1,152				1,405
Total BOE per day			4,755				2,072				4,222				5,147
Physical production volume (BOE per day) (2):
United Kingdom			2,993				2,777				3,130				3,675
United States			1,995				32				1,117				54
Continuing operations			4,988				2,809				4,247				3,729
Discontinued operations — Norway			—				—				—				1,545
Total			4,988				2,809				4,247				5,274
Realized Prices (3)
Oil and condensate price ($  per Bbl):
Before commodity derivatives		$	75.64			$	61.73			$	74.72			$	47.38
Effect of commodity derivatives			(3.11	)			46.05				(7.12	)			24.47
Realized prices including commodity derivatives		$	72.53			$	107.78			$	67.60			$	71.85
Gas price ($  per Mcf):
Before commodity derivatives		$	5.44			$	4.10			$	5.26			$	5.99
Effect of commodity derivatives			(0.03	)			5.75				0.36				2.46
Realized prices including commodity derivatives		$	5.41			$	9.85			$	5.62			$	8.45
Equivalent oil price ($  per BOE):
Before commodity derivatives		$	45.37			$	40.70			$	47.81			$	42.51
Effect of commodity derivatives			(1.03	)			39.50				(1.35	)			20.34
Realized prices including commodity derivatives		$	44.34			$	80.20			$	46.46			$	62.85

Endeavour International Corporation
(Amounts in thousands, except per unit data)

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 for oil and gas 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 sold at prices 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 significant portion 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.

Sales volumes for our continuing operations increased during the third quarter of 2010 as compared to 2009 with 4,755 BOE per day and 2,072 BOE per day, respectively, as we realized the production gains from our acquisition of U.S. properties at the end of the third quarter of 2009. For the nine months ended September 30, 2010, sales volumes decreased slightly compared to the corresponding period in the prior year. The slight decrease in sales volume is primarily attributable to the absence of sales volumes from our discontinued operations in 2009, fewer oil liftings and maintenance down time in the U.K. particularly during the first quarter, and was partially offset by increased production from our expanding U.S. operations.

The production from our IVRRH, Renee and Rubie fields has been suspended until the development activities at Rochelle are completed which we currently anticipate to begin in early 2012. These fields had a combined sales volume of 244 BOE per day for the first quarter of 2009, the last period during which they were in production. After the start of Rochelle production, we expect to re-develop these fields if commercially advisable and practicable.

During the nine months ended September 30, 2010, we realized $1.6 million in losses on the settlement of commodity derivatives, compared to $28.6 million in gains for the same period in 2009. These realized losses for 2010 do not include $10 million loss paid to extinguish all

Endeavour International Corporation
(Amounts in thousands, except per unit data)

outstanding commodity derivative positions in conjunction with the issuance of our new Senior Term Loan. Under the terms of the Senior Term Loan, we are required to re-establish our commodity derivatives program covering specified percentages of our reserves within 90 days of closing the Senior Term Loan. We expect to enter into commodity derivatives during the fourth quarter of 2010.

Expenses

Operating expenses decreased to $10.9 million for the nine months ended September 30, 2010, as compared to $14.5 million for the same period in 2009. For the nine months ended September 30, 2010, our operating expenses have declined from the corresponding period in 2009 due to the March 2009 suspension of production at the IVRRH and Rubie fields in the U.K., which were our fields with the highest operating costs. For the third quarter of 2010, operating expense increased to $4.6 million as compared to $3.9 million for the same period in 2009, substantially all attributable to our expanding U.S. production and operations.

However, since our U.S. operations have lower operating costs per BOE and U.S. operations have been increasing as a share of our total operations, overall operating costs per BOE actually decreased from $14.75 per BOE for the nine months ended September 30, 2009 to $9.44 per BOE for the nine months ended September 30, 2010. Operating costs per BOE also decreased from $20.33 per BOE for the third quarter of 2009 to $10.50 per BOE for the same period in 2010 due to the absence of expenses from IVRRH and Rubie and the increasing U.S. lower-cost component.

Depreciation, depletion and amortization (“DD&A”) expense increased to $7.7 million for the third quarter of 2010 compared to $5.6 million for the third quarter of 2009, and decreased to $21.3 million from $24.8 million for the nine months ended September 30, 2010 and 2009, respectively, reflecting a decrease in our DD&A rate per BOE after the reserve additions and impairments recorded in 2009.

G&A expenses increased slightly to $4.2 million during the third quarter of 2010 as compared to $4.1 million for the corresponding period in 2009 and $12.9 million during the nine months ended September 30, 2010 as compared to $12.0 million for the corresponding period in 2009. The increase primarily resulted from higher compensation expense due to expanding U.S. operations and increased consulting, accounting, and legal fees that pertain to our expanding U.S. operations and the strategic review of our U.K. assets, substantially offset by increased capitalized G&A expenses. Components of G&A expenses for these periods are as follows:

Endeavour International Corporation
(Amounts in thousands, except per unit data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Compensation		$	4,209			$	3,659			$	12,618			$	10,448
Consulting, legal and accounting fees			1,357				1,537				4,433				3,529
Occupancy costs			315				221				837				717
Other expenses			694				85				1,948				1,062
Total gross cash G&A expenses			6,575				5,502				19,836				15,756
Non-cash stock-based compensation			789				567				2,786				1,680
Gross G&A expenses			7,364				6,069				22,622				17,436
Less: capitalized G & A expenses			(3,127	)			(1,978	)			(9,749	)			(5,395	)
Net G&A expenses		$	4,237			$	4,091			$	12,873			$	12,041

Interest expense increased by $6.6 million to $10.5 million for the third quarter ending September 30, 2010 as compared to $3.9 million for the corresponding period in 2009. Interest expense increased by $9.6 million to $21.7 million for the nine months ended September 30, 2010 as compared to $12.1 million for the corresponding period in 2009. We have had several changes in our outstanding debt obligations since late 2009 that are responsible for these increases in interest expense.

	•		In the fourth quarter of 2009, we issued $50 million of Subordinated Notes in connection with the redemption and modification of our Series C Preferred Stock.
	•		In the first quarter of 2010, we borrowed $25 million under the Junior Facility.
	•		In August 2010, we borrowed $150 million under the Senior Term Loan and repaid all outstanding balances under the Senior Bank Facility and Junior Facility.
	•		In connection with the repayment of the Senior Bank and Junior Facilities, we expensed the remaining deferred financing costs of $1.2 million related to these instruments.

Income Taxes

The following summarizes the components of tax expense (benefit):

Endeavour International Corporation
(Amounts in thousands, except per unit data)

		UK				U.S.				Other				Total
Nine Months Ended September 30, 2010:
Net income (loss) before taxes from continuing operations		$	6,249			$	(22,214	)		$	(2,397	)		$	(18,362	)
Current tax expense (benefit)			1,892				—				(171	)			1,721
Deferred tax expense (benefit)			7,174				—				(928	)			6,246
Foreign currency gains on deferred tax liabilities			—				—				(51	)			(51	)
Income tax expense (benefit)			9,066				—				(1,150	)			7,916
Net loss from continuing operations		$	(2,817	)		$	(22,214	)		$	(1,247	)		$	(26,278	)
Nine Months Ended September 30, 2009:
Net loss before taxes from continuing operations		$	(44,641	)		$	(16,149	)		$	(7,860	)		$	(68,650	)
Current tax benefit			(1,176	)			—				—				(1,176	)
Deferred tax benefit			(16,203	)			—				—				(16,203	)
Foreign currency losses on deferred tax liabilities			6,902				—				—				6,902
Income tax expense (benefit)			(10,477	)			—				—				(10,477	)
Net loss from continuing operations		$	(34,164	)		$	(16,149	)		$	(7,860	)		$	(58,173	)

Our income taxes are substantially all attributable to our U.K. operations. The change in income tax expense (benefit) from $(10.5) million to $7.9 million for the nine months ended September 30, 2009 and 2010, respectively, is primarily due to increased income resulting from decreases in operating expenses, impairments on our oil and gas properties and unrealized gains on derivatives, partially offset by lower realized revenue and losses on settled derivatives.

In 2010 and 2009, we did not record 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.

Reconciliation of 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 and net cash provided by operating activities, including non-financial performance indicators and non-GAAP measures as key metrics to manage our business. These metrics demonstrate our 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. 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 view these non-GAAP measures, and we believe that others in the oil and gas industry, securities analysts, investors, and other interested parties view these, or similar, non-GAAP measures, as commonly used analytic indicators to compare performance among companies in our industry and in the evaluation of issuers.

Endeavour International Corporation
(Amounts in thousands, except per unit data)

Because Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow are not measurements determined in accordance with GAAP and thus are susceptible to varying calculations, our non-GAAP measures as presented may not be comparable to similarly titled measures of other companies. Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow have limitations as analytical tools, 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.

Provided below are reconciliations of net loss to the following non-GAAP financial measures: Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow.

Endeavour International Corporation
(Amounts in thousands, except per unit data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net loss		$	(11,692	)		$	(4,483	)		$	(26,278	)		$	(11,527	)
Depreciation, depletion and amortization			7,697				5,646				21,290				29,509
Impairment of oil and gas properties			—				—				7,692				30,645
Deferred tax expense (benefit)			(2,249	)			327				6,195				(3,269	)
Gain on asset sales			—				(277	)			—				(47,420	)
Unrealized (gain) loss on derivatives			(6,441	)			4,360				(11,477	)			38,455
Realized loss on early termination of derivatives			10,201				—				10,201				—
Other			8,613				2,042				3,566				13,577
Discretionary Cash Flow (1)		$	6,129			$	7,615			$	11,189			$	49,970
Net loss to common shareholders		$	(12,238	)		$	(7,179	)		$	(27,960	)		$	(19,588	)
Impairment of oil and gas properties (net of tax) (2)			—				—				7,692				15,988
Unrealized (gain) loss on derivatives (net of tax) (3)			(2,413	)			2,885				(5,070	)			23,632
Currency impact on deferred taxes			95				(2,106	)			(51	)			8,143
Net Income (Loss) as Adjusted		$	(14,556	)		$	(6,400	)		$	(25,389	)		$	28,175
Net loss		$	(11,692	)		$	(4,483	)		$	(26,278	)		$	(11,527	)
Unrealized (gain) loss on derivatives			(6,441	)			4,360				(11,477	)			38,455
Realized loss on early termination of derivatives			10,201				—				10,201				—
Net interest expense			10,467				3,877				21,704				11,860
Depreciation, depletion and amortization			7,697				5,646				21,290				29,509
Impairment of oil and gas properties			—				—				7,692				30,645
Income tax expense (benefit)			(2,001	)			(441	)			7,916				(5,047	)
Gain on asset sales			—				(277	)			—				(47,420	)
Adjusted EBITDA		$	8,231			$	8,682			$	31,048			$	46,475