Attached files
file | filename |
---|---|
EX-2.2 - EX-2.2 - ENDEAVOUR INTERNATIONAL CORP | h83989exv2w2.htm |
EX-2.1 - EX-2.1 - ENDEAVOUR INTERNATIONAL CORP | h83989exv2w1.htm |
EX-32.1 - EX-32.1 - ENDEAVOUR INTERNATIONAL CORP | h83989exv32w1.htm |
EX-32.2 - EX-32.2 - ENDEAVOUR INTERNATIONAL CORP | h83989exv32w2.htm |
EX-31.1 - EX-31.1 - ENDEAVOUR INTERNATIONAL CORP | h83989exv31w1.htm |
EX-31.2 - EX-31.2 - ENDEAVOUR INTERNATIONAL CORP | h83989exv31w2.htm |
EX-10.1 - EX-10.1 - ENDEAVOUR INTERNATIONAL CORP | h83989exv10w1.htm |
EX-10.3 - EX-10.3 - ENDEAVOUR INTERNATIONAL CORP | h83989exv10w3.htm |
EX-10.2 - EX-10.2 - ENDEAVOUR INTERNATIONAL CORP | h83989exv10w2.htm |
Table of Contents
United States
Securities and Exchange Commission
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 |
For the Quarterly Period Ended June 30, 2011
or
o | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
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 | (I.R.S. Employer Identification No.) | |
or organization) |
1001 Fannin Street, Suite 1600, Houston, Texas 77002
(Address of principal executive offices) (Zip code)
(Address of principal executive offices) (Zip code)
(713) 307-8700
(Registrants telephone number, including area code)
(Registrants 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). þ 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 | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). oYes þ No
As of July 31, 2011, 37.6 million shares of the registrants common stock were outstanding.
Index
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.
Table of Contents
Part I: Financial Information
Item 1: | Financial Statements |
Endeavour International Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 10,229 | $ | 99,267 | ||||
Restricted cash (released to general use in July 2011) |
33,123 | 31,776 | ||||||
Accounts receivable |
9,755 | 8,068 | ||||||
Prepaid expenses and other current assets |
13,021 | 8,718 | ||||||
Total Current Assets |
66,128 | 147,829 | ||||||
Property and Equipment, Net ($241,036 and $161,430 not subject
to amortization at 2011 and 2010, respectively) |
499,493 | 364,677 | ||||||
Goodwill |
211,886 | 211,886 | ||||||
Other Assets |
19,570 | 25,895 | ||||||
Total Assets |
$ | 797,077 | $ | 750,287 | ||||
See accompanying notes to condensed consolidated financial statements.
1
Table of Contents
Endeavour International Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands)
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 59,652 | $ | 32,442 | ||||
Current maturities of debt |
16,600 | 21,600 | ||||||
Accrued expenses and other |
20,495 | 22,642 | ||||||
Total Current Liabilities |
96,747 | 76,684 | ||||||
Long-Term Debt |
244,438 | 323,706 | ||||||
Deferred Taxes |
93,911 | 77,200 | ||||||
Other Liabilities |
57,559 | 64,927 | ||||||
Total Liabilities |
492,655 | 542,517 | ||||||
Commitments and Contingencies |
||||||||
Series C Convertible Preferred Stock |
||||||||
Face value (liquidation preference) |
41,000 | 45,000 | ||||||
Net non-cash premiums under fair value accounting on redemption |
7,428 | 8,152 | ||||||
Total Series C Convertible Preferred Stock |
48,428 | 53,152 | ||||||
Stockholders Equity: |
||||||||
Series B preferred stock Liquidation preference: $3,351
and $3,273 at 2011 and 2010, respectively) |
| | ||||||
Common stock; shares issued and outstanding 37,127
and 24,784 shares at 2011 and 2010, respectively |
37 | 25 | ||||||
Additional paid-in capital |
413,470 | 287,995 | ||||||
Treasury stock, at cost 72 and 72 shares at 2011
and 2010, respectively |
(587 | ) | (587 | ) | ||||
Accumulated deficit |
(156,926 | ) | (132,815 | ) | ||||
Total Stockholders Equity |
255,994 | 154,618 | ||||||
Total Liabilities and Stockholders Equity |
$ | 797,077 | $ | 750,287 | ||||
See accompanying notes to condensed consolidated financial statements.
2
Table of Contents
Endeavour International Corporation
Condensed Consolidated Statement of Operations
(Unaudited)
(Amounts in thousands, except per share data)
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 19,053 | $ | 21,532 | $ | 33,157 | $ | 35,253 | ||||||||
Cost of Operations: |
||||||||||||||||
Operating expenses |
6,352 | 3,465 | 11,392 | 6,286 | ||||||||||||
Depreciation, depletion and amortization |
7,004 | 7,912 | 13,326 | 13,593 | ||||||||||||
Impairment of oil and gas properties |
| | | 7,692 | ||||||||||||
General and administrative |
4,948 | 4,205 | 9,662 | 8,636 | ||||||||||||
Total Expenses |
18,304 | 15,582 | 34,380 | 36,207 | ||||||||||||
Income (Loss) From Operations |
749 | 5,950 | (1,223 | ) | (954 | ) | ||||||||||
Other Income (Expense): |
||||||||||||||||
Derivatives: |
||||||||||||||||
Realized losses |
| (1,332 | ) | | (1,100 | ) | ||||||||||
Unrealized gains (losses) |
(6,448 | ) | 6,108 | (1,984 | ) | 5,036 | ||||||||||
Interest expense |
(7,831 | ) | (5,623 | ) | (20,354 | ) | (11,259 | ) | ||||||||
Interest income and other |
(48 | ) | 586 | (186 | ) | 3,609 | ||||||||||
Total Other Expense |
(14,327 | ) | (261 | ) | (22,524 | ) | (3,714 | ) | ||||||||
Income (Loss) Before Income Taxes |
(13,578 | ) | 5,689 | (23,747 | ) | (4,668 | ) | |||||||||
Income Tax Expense (Benefit) |
2,026 | 5,084 | (687 | ) | 9,917 | |||||||||||
Net Income (Loss) |
(15,604 | ) | 605 | (23,060 | ) | (14,585 | ) | |||||||||
Preferred Stock Dividends |
506 | 547 | 1,052 | 1,136 | ||||||||||||
Net Income (Loss) to Common Stockholders |
$ | (16,110 | ) | $ | 58 | $ | (24,112 | ) | $ | (15,721 | ) | |||||
Net Loss per Common Share Basic and Diluted |
$ | (0.42 | ) | $ | | $ | (0.74 | ) | $ | (0.71 | ) | |||||
Weighted Average Number of Common Shares Outstanding: |
||||||||||||||||
Basic and Diluted |
38,612 | 23,145 | 32,714 | 22,259 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
Endeavour International Corporation
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(Amounts in thousands)
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (23,060 | ) | $ | (14,585 | ) | ||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
||||||||
Depreciation, depletion and amortization |
13,326 | 13,593 | ||||||
Impairment of oil and gas properties |
| 7,692 | ||||||
Deferred tax expense (benefit) |
(875 | ) | 8,445 | |||||
Unrealized (gains) losses on derivatives |
1,984 | (5,036 | ) | |||||
Amortization of non-cash compensation |
1,792 | 1,998 | ||||||
Amortization of loan costs and discount |
6,560 | 3,313 | ||||||
Non-cash interest expense |
5,928 | 3,409 | ||||||
Other |
2,789 | (3,565 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
(Increase) decrease in receivables |
(1,687 | ) | 6,027 | |||||
Increase in other current assets |
(9,376 | ) | (1,738 | ) | ||||
Increase (decrease) in liabilities |
(21,248 | ) | 4,900 | |||||
Net Cash Provided by (Used in) Operating Activities |
(23,867 | ) | 24,453 | |||||
Cash Flows From Investing Activities: |
||||||||
Capital expenditures |
(66,727 | ) | (41,392 | ) | ||||
Acquisitions |
(22,240 | ) | (33,047 | ) | ||||
(Increase) decrease in restricted cash |
(1,347 | ) | 2,878 | |||||
Net Cash Used in Investing Activities |
(90,314 | ) | (71,561 | ) | ||||
Cash Flows From Financing Activities: |
||||||||
Repayments of borrowings |
(92,050 | ) | (9,317 | ) | ||||
Borrowings under debt agreements |
| 25,000 | ||||||
Proceeds from issuance of common stock |
118,444 | 20,011 | ||||||
Dividends paid |
(973 | ) | (1,057 | ) | ||||
Other financing |
(278 | ) | (1,223 | ) | ||||
Net Cash Provided by Financing Activities |
25,143 | 33,414 | ||||||
Net Decrease in Cash and Cash Equivalents |
(89,038 | ) | (13,694 | ) | ||||
Cash and Cash Equivalents, Beginning of Period |
99,267 | 27,287 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 10,229 | $ | 13,593 | ||||
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
(Unaudited)
(Amounts in tables 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 10K for the year ended December 31, 2010.
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, estimates of 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. |
Income (Loss) 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 would be dilutive.
5
Table of Contents
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
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:
June 30, | ||||||||
2011 | 2010 | |||||||
Warrants, options and stock-based compensation |
141 | 104 | ||||||
Convertible debt |
3,576 | 5,505 | ||||||
Convertible preferred stock |
4,686 | 5,143 | ||||||
8,403 | 10,752 | |||||||
New Accounting Developments
On January 1, 2010, we adopted the following new standards without material effects on our
results of operations or financial position:
| 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; and | ||
| Fair Value New, expanded disclosures are required for recurring or nonrecurring fair-value measurements and the reconciliation of specific fair value measurements. |
In May 2011, the Financial Accounting Standards Board (FASB) issued a new accounting standard on
fair value measurements that clarifies the application of existing guidance and disclosure
requirements, changes certain fair value measurement principles and requires additional disclosures
about fair value measurements. The standard is effective for interim and annual periods beginning
after December 15, 2011. Early adoption is not permitted. We do not expect the adoption of this
accounting guidance to have a material impact on our consolidated financial statements and related
disclosures.
In June 2011, the Financial Accounting Standards Board issued guidance impacting the presentation
of comprehensive income. The guidance eliminates the current option to report components of other
comprehensive income in the statement of changes in equity or in a footnote to the financial
statements. The guidance is intended to provide a more consistent method of presenting non-owner
transactions that affect an entitys equity. The guidance is effective for interim and annual
periods beginning on or after December 15, 2011. We do not expect adoption of the comprehensive
income presentation to have an impact on our financial position or results of operations.
6
Table of Contents
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Note 2 Property and Equipment
Property and equipment included the following at the dates indicated below:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Oil and gas properties under the full cost method: |
||||||||
Subject to amortization |
$ | 455,001 | $ | 389,575 | ||||
Not subject to amortization: |
||||||||
Acquired in 2011 |
89,902 | | ||||||
Acquired in 2010 |
63,555 | 67,612 | ||||||
Acquired in 2009 |
29,204 | 31,134 | ||||||
Acquired prior to 2009 |
58,375 | 62,684 | ||||||
696,037 | 551,005 | |||||||
Computers, furniture and fixtures |
4,620 | 4,222 | ||||||
Total property and equipment |
700,657 | 555,227 | ||||||
Accumulated depreciation, depletion and amortization |
(201,164 | ) | (190,550 | ) | ||||
Net property and equipment |
$ | 499,493 | $ | 364,677 | ||||
The costs not subject to amortization relate to unproved properties and properties being made
ready to be placed into 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 $4.1
million and $1.2 million in interest related to exploration activities for the quarters ended June
30, 2011 and 2010, respectively. For the six months ending June 30, 2011 and 2010, we capitalized
$5.9 million and $1.9 million, respectively, in interest related to exploration.
For the second quarter of 2011, we did not have an impairment of oil and gas properties, pre-tax,
through the application of the full cost ceiling test at the end of the quarter. The prices used
in the application of the full cost ceiling test were $90.27 per barrel for oil and $4.24 per Mcf
for gas for our U.S. properties, and $95.90 per barrel for oil and $8.26 per Mcf for gas for our
U.K. properties.
Assets Acquisition
On February 23, 2011, we closed our acquisition of an additional 20% working interest in the
Bacchus field for approximately $9.2 million in cash payable at closing and approximately $6.2
million in cash payable at the earlier of three months after first oil is produced or the end of
2011. In addition, we paid capital costs incurred by the seller of $9.4 million. Following the
acquisition, we hold an aggregate 30% working interest.
7
Table of Contents
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Pending Acquisition
In July 2011, we entered into purchase and sale agreements to acquire certain leasehold and
producing interests in the Marcellus shale in north central Pennsylvania, as well as a pipeline and
related facilities for aggregate consideration of $110 million. The transaction is expected to
close by the fourth quarter of 2011. Additional discussion of this acquisition can be found in
Note 11 Subsequent Events.
Note 3 Debt Obligations
Our debt consisted of the following at the dates indicated:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Senior notes, 6% fixed rate, due 2012 |
$ | | $ | 81,250 | ||||
Convertible bonds, 11.5%, due 2016 |
59,077 | 55,821 | ||||||
Subordinated notes, 12.0%, due 2014 |
41,620 | 51,132 | ||||||
Senior term loan, 15%, due 2013 |
163,011 | 161,371 | ||||||
263,708 | 349,574 | |||||||
Less: debt discount |
(2,670 | ) | (4,268 | ) | ||||
Less: current maturities |
(16,600 | ) | (21,600 | ) | ||||
Long-term debt |
$ | 244,438 | $ | 323,706 | ||||
Standby letters of credit outstanding for abandonment liabilities |
$ | 33,166 | $ | 31,726 | ||||
Our outstanding credit facilities contain certain financial ratio covenants. We were in
compliance with all financial and restrictive covenants of our debt obligations as of June 30, 2011
and December 31, 2010.
The fair value of our outstanding debt obligations was $270 million and $361 million at June 30,
2011 and December 31, 2010, respectively. The fair values of long-term debt were determined based
upon external market quotes for our Senior Notes and discounted cash flows for other debt.
6% Senior Notes
On April 20, 2011, we redeemed all $81.25 million of our outstanding 6% Senior Notes due 2012
with a portion of the proceeds from our common stock offering completed in March 2011.
8
Table of Contents
Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
The redemption was made at a price of 100% of the Senior Notes principal amount, plus accrued
and unpaid interest to the redemption date.
11.5% Convertible Bonds
On March 11, 2011, we entered into an amendment to the Trust Deed with Smedvig QIF PLC related
to our 11.5% Convertible Bonds due 2014. The amendment provides for:
| the amendment of the maturity date of the 11.5% Convertible Bonds from January 24, 2014 to January 24, 2016; | ||
| the amendment of the date upon which the holders of the 11.5% Convertible Bonds may first exercise a put right, and the occurrence of the conversion price reset if such put right is not exercised, from January 24, 2012 to January 24, 2016; and | ||
| a reduction in the interest rate payable from 11.5% to 7.5% on and after March 31, 2014. |
We recorded a loss of $0.8 million in other expenses related to this amendment, representing the
difference between the fair value of the debt and the book value of the debt at March 11, 2011.
Senior Term Loan
On February 6, 2011, we amended our Senior Term Loan due 2013 to increase the security
reserved for potential letters of credit from $25 million to $35 million. In July 2011, we secured
new letters of credit that allowed us to release the $33 million of restricted cash that served as
collateral for previous letters of credit.
The Amendment of our 11.5% Convertible Bonds and the redemption of all $81.25 million of our
outstanding 6% Senior Notes satisfied the two conditions precedent to extend the maturity date of
the Senior Term Loan to August 16, 2013
In July 2011, we amended our Senior Term Loan to provide for an increase of $75 million in the
borrowings available under the Senior Term Loan. In connection with the increase, we drew down the
full additional amounts available and our quarterly scheduled amortization payments on the Senior
Term Loan will increase from $400,000 to $587,500. See Note 11 Subsequent Events for additional
discussion of these transactions.
5.5% Convertible Senior Notes
In July 2011, we issued $135 million aggregate principal amount of our 5.5% Convertible Senior
Notes due 2016. Interest on these notes will be payable semiannually at a rate of 5.5% per annum.
The 5.5% Convertible Senior Notes are convertible into shares of our common stock at an initial
conversion rate of 54.019 shares (equivalent to $18.51 per share) of common stock per $1,000
principal amount of the notes. See Note 11 Subsequent Events for additional discussion of this
transaction.
9
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Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Note 4 Asset Retirement Obligations
Our asset retirement obligations relate to obligations for the future plugging and abandonment
of oil and gas properties. The following table provides a rollforward of our asset retirement
obligations for the six months ended June 30, 2011 and 2010:
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Carrying amount of asset retirement obligations as of beginning of
period |
$ | 42,997 | $ | 47,362 | ||||
Accretion expense (included in DD&A expense) |
2,434 | 2,245 | ||||||
Impact of foreign currency exchange rate changes |
1,871 | (3,640 | ) | |||||
Payment of asset retirement obligations |
(10,680 | ) | (567 | ) | ||||
Reduction in asset retirement obligations |
| (1,812 | ) | |||||
Carrying amount of asset retirement obligations as of end of period |
36,622 | 43,588 | ||||||
Less: Current portion |
(6,677 | ) | (4,849 | ) | ||||
Long-term asset retirement obligations |
$ | 29,945 | $ | 38,739 | ||||
Note 5 Equity Transactions
New York Stock Exchange Listing of Common Stock
On March 15, 2011, we completed the transfer of the primary listing for our common stock from
the NYSE Amex to the New York Stock Exchange under the symbol END.
Common Stock Offering
On March 30, 2011, we completed an underwritten public offering of 11.5 million shares of
common stock at a price of $11.00 per common share ($10.34 per common share, net of underwriting
discounts) for net proceeds of $118.4 million. On April 20, 2011, we used a portion of the
offering proceeds to redeem all $81.25 million of our outstanding 6% Senior Notes. We intend to
use the remaining offering proceeds for general corporate purposes.
Series C Convertible Preferred Stock
On April 12, 2011, a holder of a portion of our Series C Convertible Preferred Stock converted
4,000 preferred shares into 457,142 shares of our common stock.
10
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Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Note 6 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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
G & A Expenses |
$ | 634 | $ | 615 | $ | 1,277 | $ | 1,498 | ||||||||
Capitalized G & A |
283 | 230 | 515 | 500 | ||||||||||||
Total non-cash
stock-based
compensation |
$ | 917 | $ | 845 | $ | 1,792 | $ | 1,998 | ||||||||
At June 30, 2011, total compensation cost related to awards not yet recognized was
approximately $6.7 million and is expected to be recognized over a weighted average period of less
than three years.
Stock Options
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model. We have not granted any stock options during 2010 or the first six months of
2011. Information relating to 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, 2011 |
464 | $ | 10.04 | |||||||||||||
Exercised |
(56 | ) | 6.80 | |||||||||||||
Forfeited |
(21 | ) | 12.95 | |||||||||||||
Expired |
(48 | ) | 24.16 | |||||||||||||
Balance outstanding June 30, 2011 |
339 | $ | 8.37 | 6.5 | $ | 2,293 | ||||||||||
Currently exercisable June 30, 2011 |
297 | $ | 8.98 | 6.4 | $ | 1,829 | ||||||||||
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Restricted Stock
Restricted stock awards are valued based on the closing price of our common stock on the
measurement date, which is typically the date of grant. Status of the restricted shares as of June
30, 2011 and the changes during the six months ended June 30, 2011 are presented below:
Weighted | ||||||||
Average Grant | ||||||||
Date Fair | ||||||||
Number of | Value per | |||||||
Shares | Share | |||||||
Balance outstanding January 1, 2011 |
816 | $ | 7.39 | |||||
Granted |
374 | 13.65 | ||||||
Vested |
(299 | ) | 7.38 | |||||
Forfeited |
(44 | ) | 7.51 | |||||
Balance outstanding June 30, 2011 |
847 | $ | 10.15 | |||||
Total grant date fair value of shares vesting during the period |
$ | 3,995 | ||||||
Note 7 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
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, 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. |
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
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 June 30, 2011 and December 31, 2010:
Quoted Market Prices | Significant Other | Significant | ||||||||||||||
in Active Markets | Observable Inputs | Unobservable Inputs | Total | |||||||||||||
Level 1 | Level 2 | Level - 3 | Fair Value | |||||||||||||
As of June 30, 2011: |
||||||||||||||||
Oil and gas derivative contracts: |
||||||||||||||||
Oil and gas puts |
$ | | $ | 694 | $ | 161 | $ | 855 | ||||||||
Embedded derivatives |
| | (27,090 | ) | (27,090 | ) | ||||||||||
Total derivative liabilities |
$ | | $ | 694 | $ | (26,929 | ) | $ | (26,235 | ) | ||||||
As of December 31, 2010: |
||||||||||||||||
Oil and gas derivative contracts: |
||||||||||||||||
Oil and gas puts |
$ | | $ | 1,213 | $ | 792 | $ | 2,005 | ||||||||
Embedded derivatives |
| | (27,495 | ) | (27,495 | ) | ||||||||||
Total derivative liabilities |
$ | | $ | 1,213 | $ | (26,703 | ) | $ | (25,490 | ) | ||||||
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
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:
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Six Months Ended June 30, 2011: |
||||
Balance at beginning of period |
$ | (26,703 | ) | |
Realized and unrealized gains (losses) included in earnings |
(226 | ) | ||
Balance at end of period |
$ | (26,929 | ) | |
Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at June 30, 2011: |
$ | (226 | ) | |
Six Months Ended June 30, 2010: |
||||
Balance at beginning of period |
$ | (12,057 | ) | |
Realized and unrealized gains (losses) included in earnings |
(6,515 | ) | ||
Balance at end of period |
$ | (18,572 | ) | |
Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at June 30, 2010 : |
$ | (5,618 | ) | |
Note 8 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, or 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.
The fair market value of these derivative instruments is included in our balance sheet as follows
for the periods indicated:
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Derivatives not designated as hedges: |
||||||||
Oil and gas commodity derivatives: |
||||||||
Assets: |
||||||||
Prepaid expenses and other current assets |
$ | 487 | $ | 709 | ||||
Other assets long term |
368 | 1,296 | ||||||
$ | 855 | $ | 2,005 | |||||
Embedded derivatives related to debt and equity instruments: |
||||||||
Assets: |
||||||||
Other assets long-term |
$ | | $ | 315 | ||||
Liabilities: |
||||||||
Other liabilities long-term |
$ | (27,090 | ) | $ | (27,810 | ) |
If all counterparties failed to perform, our maximum loss would have been $0.9 million as of
June 30, 2011.
The effect of the derivatives not designated as hedges on our results of operations was as follows
for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Derivatives not designated as hedges: |
||||||||||||||||
Oil and gas commodity derivatives |
||||||||||||||||
Realized gains (losses) |
$ | | $ | (1,332 | ) | $ | | $ | (1,100 | ) | ||||||
Unrealized gains (losses) |
(378 | ) | 4,553 | (2,389 | ) | 4,758 | ||||||||||
(378 | ) | 3,221 | (2,389 | ) | 3,658 | |||||||||||
Embedded derivatives related to debt
and equity instruments |
||||||||||||||||
Unrealized gains (losses) |
$ | (6,070 | ) | $ | 1,555 | $ | 405 | $ | 278 | |||||||
Under our Senior Term Loan, we are required to maintain commodity derivatives to manage our
cash flows from operations. As of June 30, 2011, our outstanding commodity derivatives covered
approximately 238 Mbbls of oil and 1,137 MMcf of natural gas cumulative through 2012 and consisted
of six natural gas and twelve oil option contracts with three major counterparties.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Note 9 Supplemental Cash Flow Information
Cash paid during the period for interest and income taxes was as follows:
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Interest paid |
$ | 15,923 | $ | 6,007 | ||||
Income taxes paid (refunded) |
$ | 5,786 | $ | (10 | ) | |||
Note
10 Commitments and Contingencies
We have previously disclosed a potential commitment on a drilling rig in our North Sea operations
relating to a dispute with the rig operator. On June 6, 2011, we entered into a settlement
agreement with the rig operator whereby the parties were mutually released from all future claims.
We incurred costs of $14 million related to the settlement, which were included in capital
expenditures.
Note 11 Subsequent Events
In July 2011, we amended our Senior Term Loan to provide for an increase of $75 million in the
borrowings available under the Senior Term Loan. In connection with the increase, we drew down the
full additional amounts available and our quarterly scheduled amortization payments on the Senior
Term Loan will increase from $400,000 to $587,500. The other primary provisions of the amendment
include:
| consent and approval by the lenders of the issuance of the 5.5% Convertible Senior Notes and certain conforming amendments with respect to the issuance of those notes, including an increase in the basket available for the issuance of junior debt from $100 million to $135 million; | ||
| an amendment to the negative pledge provision to allow us to provide up to $10 million of cash margin to secure hedging obligations and; | ||
| an extension by one additional quarters to the scheduled step up in the minimum secured debt coverage ratio. |
In July 2011, we entered into purchase and sale agreements with SM Energy Company and certain other
minority owners to acquire the leasehold and producing interests held by SM Energy and its partners
in the Marcellus shale in north central Pennsylvania, as well as a pipeline and related facilities
in McKean and Potter Counties, Pennsylvania, for aggregate consideration of $110 million. The
transaction is expected to close by the fourth quarter of 2011 and will be
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in tables in thousands, except per unit data)
financed utilizing the proceeds from the issuance of the 5.5% Convertible Senior Notes, as
discussed below.
In July 2011, we issued $135 million aggregate principal amount of our 5.5% Convertible Senior
Notes. Interest is payable semi-annually. The 5.5% Convertible Senior Notes are convertible into
shares of our common stock at an initial conversion rate of 54.019 shares (equivalent to $18.51 per
share) of common stock per $1,000 principal amount of the notes. We intend to use substantially
all of the net proceeds of this offering to fund our pending acquisition of acreage and related
midstream assets in the Marcellus shale play. Any remainder, or the full net proceeds if we are
unable to complete the Marcellus acquisition, will be used for general corporate purposes.
In July 2011, a tax increase was enacted by the U.K. government that will raise the existing
supplementary charge on profits from North Sea oil and gas production from 20% to 32%, effective
March 24, 2011. This supplementary charge is in addition to the existing corporation tax rate of
30%. As we do not currently anticipate paying corporate or supplementary tax in the U.K. for the
next several years, we expect the tax increase to have little effect on our cash flow from
operations during that time period. We have estimated that as a result of this enacted tax
increase we will record a one-time increase in deferred tax liabilities of approximately $25
million during the third quarter of 2011, with a corresponding increase in deferred tax expense.
In July 2011, we entered into a letter of credit facility agreement (the LC Agreement) with
Commonwealth Bank of Australia (CBA), pursuant to which CBA issued letters of credit to us in the
amount of £20.6 million (approximately $35 million as of July 25, 2011). Concurrent with the
issuance of the letters of credit, the restrictions on £20.6 million of our restricted cash were
removed and the cash returned for general corporate purposes. The letters of credit secure
decommissioning obligations in connection with certain of our United Kingdom Continental Shelf
Petroleum Production Licences. The LC Agreement provides that we must pay a quarterly fee computed
at a rate of 4.5% per year on the outstanding amount of each letter of credit issued under the LC
Agreement. The LC Agreement contains similar financial covenants and other covenants as the credit
agreement governing our Senior Term Loan. The CBA letters of credit have initial expiration dates
of not later than October 31, 2012, and are renewable at our option through the expiration of the
LC Agreement on October 31, 2013.
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Item 2: Managements 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 independent oil and gas company engaged in the production, exploration, development
and acquisition of crude oil and natural gas in the U.S. and the North Sea. Our strategy is to
expand and exploit our balanced portfolio of exploration and development assets using conventional
and unconventional technologies in basins that have historically generated and produced substantial
quantities of oil and gas and that we believe will yield commercial quantities of reserves through
improved drilling and completion technologies. Finding, developing and producing oil and gas
reserves in the North Sea require both significant capital and time. Recognizing this, we have
sought to balance our North Sea assets, which have large potential reserves but long
production-cycles, with a portfolio of assets in the U.S. that have lower costs and shorter
production-cycles. We also seek to achieve a balance of oil and gas reserves in our portfolio of
assets, believing that both commodities present attractive opportunities for capital returns in the
future.
Our North Sea activities and assets remain a key source of value that we are actively developing to
increase our overall reserves and production. Our major development projects in the U.K. sector of
the North Sea Bacchus, Greater Rochelle, and Columbus have the potential to significantly
expand our total proved reserves and production levels. These projects are in various stages of
development, with Bacchus currently expected to commence oil production in the fourth quarter of
2011. Additionally, we expect that production from our two-phase development of the Greater
Rochelle area will commence with first production from East Rochelle in the second half of 2012 and
from West Rochelle shortly thereafter. Finally, our Columbus development project could commence
production as early as 2013. We intend to continue actively managing our North Sea assets in a
manner that maximizes value and enables us to allocate resources to effectively pursue our growth
strategy.
Currently, our primary focus in the U.S. is unconventional gas developments targeting reserve and
production growth in the Haynesville area, including the Louisiana Haynesville Shale and East Texas
Cotton Valley Sands, and the Marcellus Shale play in Pennsylvania. In the Haynesville area, we
have approximately 7,500 net acres with acreage located in Red River, DeSoto, Bienville and Caddo
Parishes in Louisiana and in Harrison and Gregg Counties in Texas. Our Marcellus acreage is
comprised of approximately 18,600 net acres in Pennsylvania
located between two of the most active parts of the Marcellus play. We also have exploratory plans
in emerging gas and oil plays in Alabama and Montana where early well results will determine the
pace and scope of our subsequent exploration and development initiatives.
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We are expanding upon our foundation of producing assets and undeveloped acreage in both
established and emerging U.S. onshore resource plays, including the development of our leasehold
positions in the Haynesville and Marcellus areas, while continuing to develop our existing assets
in the North Sea. Specifically, we have continued to focus on achieving initial production from
the Bacchus oil field in the North Sea. We believe that the following will support us in executing
our core business strategies.
| In July 2011, we secured new letters of credit that allowed us to release the $33 million of restricted cash into operations that served as collateral for previous letters of credit. | ||
| In July 2011, we entered into purchase and sale agreements with SM Energy Company and certain other minority owners to acquire the leasehold and producing interests held by SM Energy and its partners in the Marcellus shale in north central Pennsylvania, as well as a pipeline and related facilities, for aggregate consideration of $110 million. | ||
| In July 2011, we issued $135 million aggregate principal amount of our 5.5% Convertible Senior Notes and intend to use substantially all of the net proceeds of this offering to fund our pending acquisition of acreage and related midstream assets in the Marcellus shale play. | ||
| In July 2011, we entered into an amendment to our Senior Term Loan providing for an increase of $75 million in the amounts available under the Senior Term Loan. The proceeds will be used for general corporate purposes. | ||
| In April 2011, we redeemed all $81.25 million of our outstanding 6% Senior Notes with a portion of the proceeds from our common stock offering completed in March 2011. | ||
| In March 2011, we closed a public offering of 11.5 million shares of our common stock offering for net proceeds of $118.4 million. | ||
| In March 2011, we completed the transfer of the primary listing for our common stock from the NYSE Amex to the New York Stock Exchange. | ||
| In March 2011, we entered into an Amendment to the Trust Deed dated as of January 24, 2008 with Smedvig QIF PLC and the other parties thereto related to our 11.5% Convertible Bonds. The amendment provides for an extension of the maturity date of the 11.5% Convertible Bonds; extends the date on which holders may exercise a put right, and the occurrence of price reset if not exercised; and a reduction in the interest rate payable after March 31, 2014 to 7.5%. | ||
| In February 2011, the Department of Energy and Climate Change (the DECC) approved the Rochelle FDP for Block 15/27 in East Rochelle. In April 2011, we announced the agreement of the commercial terms for the processing and transportation of East Rochelle production on the Scott Platform in the Central North Sea. As the operator, we plan to award contracts and commence immediate construction of the production facilities. First production from East Rochelle is planned for the second half of 2012. | ||
| In February 2011, we finalized our acquisition of an additional 20% working interest in the Bacchus development for approximately $9.2 million in cash payable at closing and approximately $6.2 million in cash payable at the earlier of three months after first production or the last business day of 2011. In addition, we paid capital costs previously incurred by the seller of $9.4 million. Following the acquisition, we now hold an aggregate working interest of 30%. |
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| In February 2011, we amended our Senior Term Loan to increase the security reserved for potential letters of credit from $25 million to $35 million. In July 2011, we secured new letters of credit that allowed us to release the $33 million of restricted cash that served as collateral for previous letters of credit. |
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
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 six months ended June 30, 2011 was $24.1 million, or $0.74
per share, compared to $15.7 million, or $0.71 per share, for the same period in 2010. The change
in the net loss to common shareholders for these periods is primarily due to decreases in
unrealized gains on derivative instruments and revenue and increased operating and interest
expenses, partially offset by the absence of an impairment of oil and gas properties and decreased
tax expense.
Net income (loss) to common shareholders for the second quarter June 30, 2011 decreased to ($16.1)
million compared to $0.1 million for the same period in 2010 primarily due to decreases in
unrealized gains on derivative instruments and revenue and increased operating and interest
expenses, partially offset by decreased tax expense.
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, and currency impact of long-term liabilities. Net loss as adjusted for the six months
ended June 30, 2011 would have been $22.3 million without the effect of derivative transactions and
impairment of oil and gas properties as compared to net loss as adjusted of $9.7 million for the
same period in 2010. Net loss as adjusted for the second quarter June 30, 2011 would have been
$9.3 million without the effect of derivative transactions as compared to net loss as adjusted of
$3.3 million for the same period in 2010.
Adjusted EBITDA decreased to $11.7 million for the six months ended June 30, 2011 from $22.8
million for the same period in 2010, primarily due to decreased revenue related to the loss of
production after the shut-in of our Goldeneye field and increased operating and other expenses.
Adjusted EBITDA decreased to $7.6 million for the second quarter June 30, 2011 from $13.1 million
for the same period in 2010 due to similar reasons as the six month decline. For definitions of
Net Income (Loss) as Adjusted and Adjusted EBITDA, and a reconciliation of each to the nearest
comparable GAAP measure, please see Reconciliation of Non-GAAP Measures.
Our cash flows used by operating activities decreased to $(23.9) million for the six months ended
June 30, 2011 as compared to cash flows provided by operating activities of $24.5 million for the
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same period in 2010, primarily due to a loss of revenue from decreased production, increased
interest expense related to our 2010 debt issuances and increased operating expenses.
Revenue and Sales Volume
Our revenues decreased from $35.3 million in the six months ended June 30, 2010 to $33.2
million in the same period of 2011 primarily as a result of the shutdown of our U.K. Goldeneye
field and lower averaged realized natural gas prices, partially offset by increased U.S. gas sales
volumes and higher oil prices. The change in our average realized natural gas prices is the result
of a combination of factors. Our expanded operations in the U.S. along with the shutdown of
Goldeneye have led to U.S. sales becoming the majority of our total gas sales. The U.S. gas market
is heavily impacted by the increased supply from shale drilling. The significant increase of
supply of natural gas from shale drilling on the U.S. gas markets and the significant shift in our
gas sales from the U.K. to the U.S. resulted in the decrease in our average realized gas prices.
The following table shows our average sales volumes and realized 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 2011 or 2010.
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Sales volume (1) |
||||||||||||||||
Oil and condensate sales (Mbbls): |
||||||||||||||||
United Kingdom |
125 | 188 | 225 | 301 | ||||||||||||
United States |
1 | 1 | 2 | 3 | ||||||||||||
Total |
126 | 189 | 227 | 304 | ||||||||||||
Gas sales (MMcf): |
||||||||||||||||
United Kingdom |
34 | 979 | 78 | 1,745 | ||||||||||||
United States |
1,012 | 441 | 1,976 | 721 | ||||||||||||
Total |
1,046 | 1,420 | 2,054 | 2,466 | ||||||||||||
Oil equivalent sales (MBOE) |
||||||||||||||||
United Kingdom |
131 | 351 | 238 | 592 | ||||||||||||
United States |
169 | 75 | 332 | 123 | ||||||||||||
Total |
300 | 426 | 570 | 715 | ||||||||||||
Total BOE per day |
3,295 | 4,684 | 3,149 | 3,951 | ||||||||||||
Physical production volume (BOE per day) (1): |
||||||||||||||||
United Kingdom |
1,316 | 3,279 | 1,311 | 3,199 | ||||||||||||
United States |
1,888 | 824 | 1,887 | 680 | ||||||||||||
Total |
3,204 | 4,103 | 3,198 | 3,879 | ||||||||||||
Realized Prices (2) |
||||||||||||||||
Oil and condensate price ($ per Bbl): |
||||||||||||||||
Before commodity derivatives |
$ | 117.34 | $ | 76.80 | $ | 109.03 | $ | 74.33 | ||||||||
Effect of commodity derivatives |
| (8.50 | ) | | (8.83 | ) | ||||||||||
Realized prices including
commodity derivatives |
$ | 117.34 | $ | 68.30 | $ | 109.03 | $ | 65.50 | ||||||||
Gas price ($ per Mcf): |
||||||||||||||||
Before commodity derivatives |
$ | 4.13 | $ | 4.91 | $ | 4.07 | $ | 5.13 | ||||||||
Effect of commodity derivatives |
| 0.20 | | 0.64 | ||||||||||||
Realized prices including
commodity derivatives |
$ | 4.13 | $ | 5.11 | $ | 4.07 | $ | 5.77 | ||||||||
Equivalent oil price ($ per BOE): |
||||||||||||||||
Before commodity derivatives |
$ | 63.54 | $ | 50.51 | $ | 58.18 | $ | 49.30 | ||||||||
Effect of commodity derivatives |
| (3.12 | ) | | (1.54 | ) | ||||||||||
Realized prices including
commodity derivatives |
$ | 63.54 | $ | 47.39 | $ | 58.18 | $ | 47.76 | ||||||||
(1) | We record oil revenues using 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. |
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(2) | The average sales prices include gains and losses for derivative contracts we utilize to manage price risk related to our future cash flows. |
We have taken important steps to balance our asset portfolio in several dimensions: U.S. versus
U.K. properties; oil versus natural gas; and short-term versus long-term realizations. We have
constructed our asset portfolio in this manner in an attempt to mitigate the risks of
over-emphasizing any one of these variables. Specifically, we believe that the resource-rich plays
in the U.S., with less capital-intensive and shorter production-cycles relative to our North Sea
development projects, will provide a stable platform for the successful execution of our strategy
by helping to provide cash flows from operations as we develop our longer-term, more
capital-intensive North Sea development projects
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 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. With the recent
increase in our U.S. operations and the shut-in of the Goldeneye field, the majority of our gas
sales are in the U.S. The U.S. gas market is heavily impacted by the increased supply from shale
drilling, which has served to depress natural gas prices relative to the U.K. market.
For the second quarter of 2011 and 2010, we had sales volume of 3,295 BOE per day and 4,684 BOE per
day, respectively. Our physical daily production was approximately 3,204 BOE and 4,103 BOE for the
second quarter of 2011 and 2010, respectively. The decrease in sales volume is primarily
attributable to the shut down of our Goldeneye field, partially offset by an increase in sales
volumes from our U.S. assets. Sales from our U.S. assets have increased as we have continued our
drilling program since our initial acquisitions of these assets in late 2009.
In 2010, the Goldeneye field represented nearly all of our gas production in the U.K. The field
was shut-in in early December 2010 due to flow assurance issues resulting from increased water
production. During the first quarter of 2011, the field operator performed flow trials to study
pipeline hydraulic performance which showed that production from the Goldeneye field was no longer
economically sustainable. The operator is currently evaluating options to use the Goldeneye
reservoir for carbon dioxide storage, which may reduce our abandonment obligations for the field.
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Expenses
For the second quarter of 2011, operating expenses increased to $6.4 million as compared to $3.5
million for the same period in 2010. For the six months ended June 30, 2011, operating expenses
increased to $11.4 million as compared to $6.3 million for the same period in 2010. The increase
in operating expense from 2010 to 2011 is primarily related to increased workover expense and
increases in transportation expense and production taxes as a result of increased U.S. sales
volumes. Operating costs per BOE increased from $8.13 per BOE for the second quarter of 2010 to
$21.18 per BOE for the same period in 2011. Operating costs per BOE increased from $8.79 per BOE
for the six months ended June 30, 2010, to $19.99 per BOE for the six months ended June 30, 2011.
The significant increases in operating costs per BOE are due to the impact of both the increases in
the dollar levels of operating expenses and the decreased volumes discussed above.
Depreciation, depletion and amortization (DD&A) expense decreased to $7.0 million from $7.9
million for the second quarter of 2011 and 2010, respectively, as a result of the decreased sales
volumes discussed previously. DD&A also decreased to $13.3 million from $13.6 million for the six
months ended June 30, 2011 and 2010, respectively, also as a result of the decreased sales volumes
discussed previously.
For the second quarter of 2011, the prices used in the full cost ceiling test for our U.S.
properties were $90.27 per barrel for oil and $4.24 per Mcf for gas. For the second quarter of
2011, the prices used in the full cost ceiling test for our U.K. properties were $95.90 per barrel
for oil and $8.26 per Mcf for gas. We have not recorded any impairment during 2011. The risk that
we will be required to record impairments of our oil and gas properties, through the application of
the full cost ceiling test in subsequent periods, increases when oil and gas prices are low or
volatile.
General and administrative (G&A) expenses increased slightly to $4.9 million during the second
quarter of 2011 as compared to $4.2 million for the corresponding period in 2010. G&A expenses
increased to $9.7 million during the six months ended June 30, 2011 as compared to $8.6 million for
the corresponding period in 2010. These increases primarily resulted from higher compensation
expense and other costs. Components of G&A expenses for these periods are as follows:
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Compensation |
$ | 4,829 | $ | 4,166 | $ | 9,867 | $ | 8,409 | ||||||||
Consulting, legal and accounting fees |
1,437 | 1,548 | 3,158 | 3,075 | ||||||||||||
Occupancy costs |
385 | 273 | 750 | 522 | ||||||||||||
Other expenses |
1,211 | 1,081 | 1,715 | 1,254 | ||||||||||||
Total gross cash G&A expenses |
7,862 | 7,068 | 15,490 | 13,260 | ||||||||||||
Non-cash stock-based compensation |
917 | 845 | 1,792 | 1,998 | ||||||||||||
Gross G&A expenses |
8,779 | 7,913 | 17,282 | 15,258 | ||||||||||||
Less: capitalized G & A expenses |
(3,831 | ) | (3,708 | ) | (7,620 | ) | (6,622 | ) | ||||||||
Net G&A expenses |
$ | 4,948 | $ | 4,205 | $ | 9,662 | $ | 8,636 | ||||||||
Interest expense increased by $2.2 million to $7.8 million for the second quarter of 2011 as compared to
$5.6 million for the corresponding period in 2010. Interest expense increased
by $9.1 million to $20.4 million for the six months
ended June 30, 2011 as compared to $11.3 million for the corresponding period
in 2010. These increases were primarily due to increased interest costs related to the Senior Term
Loan, partially offset by the corresponding absence of interest in 2011 from our previously
existing senior and junior debt which were repaid concurrently with the issuance of the Senior Term
Loan. For the six months ended June 30, 2011 and 2010, we had non-cash interest expense, including
amortization of loan costs and discount, of $12.5 million and $6.7 million, respectively.
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Income Taxes
The following summarizes the components of tax expense (benefit):
UK | U.S. | Other | Total | |||||||||||||
Six Months Ended June 30, 2011: |
||||||||||||||||
Net loss before taxes |
$ | (1,723 | ) | $ | (17,195 | ) | $ | (4,829 | ) | $ | (23,747 | ) | ||||
Current tax expense |
184 | 4 | | 188 | ||||||||||||
Deferred tax benefit |
(875 | ) | | | (875 | ) | ||||||||||
Income tax expense (benefit) |
(691 | ) | 4 | | (687 | ) | ||||||||||
Net loss |
$ | (1,032 | ) | $ | (17,199 | ) | $ | (4,829 | ) | $ | (23,060 | ) | ||||
Six Months Ended June 30, 2010: |
||||||||||||||||
Net income (loss) before taxes |
$ | 13,654 | $ | (18,370 | ) | $ | 48 | $ | (4,668 | ) | ||||||
Current tax expense |
1,472 | | | 1,472 | ||||||||||||
Deferred tax expense (benefit) |
8,591 | | (146 | ) | 8,445 | |||||||||||
Income tax expense (benefit) |
10,063 | | (146 | ) | 9,917 | |||||||||||
Net income (loss) |
$ | 3,591 | $ | (18,370 | ) | $ | 194 | $ | (14,585 | ) | ||||||
The change in income tax expense (benefit) from $9.9 million to $(0.7) million for the six
months ended June 30, 2010 and 2011, respectively, is primarily the result of decreased income
relating to our U.K. operations. Our U.K. income decreased primarily due to lower sales volumes
which generated lower revenues, partially offset by increased realized commodity prices.
In 2011 and 2010, 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.
2011 U.K. Tax Increase
In July 2011, a tax increase was enacted by the U.K. government that will raise the existing
supplementary charge on profits from North Sea oil and gas production from 20% to 32%, effective
March 24, 2011. This supplementary charge is in addition to the existing corporation tax rate of
30%. As we do not currently anticipate paying corporate or supplementary tax in the U.K. for the
next several years, we expect the tax increase to have little effect on our cash flow from
operations during that time period. We have estimated that as a result of this enacted tax
increase we will record a one time increase in deferred tax liabilities of approximately $25
million during the third quarter of 2011, with a corresponding increase in deferred tax expense.
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
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business and measure our results of operations. 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 and Adjusted EBITDA 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.
Because Net Income (Loss) as Adjusted and Adjusted EBITDA 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 and Adjusted EBITDA 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 and Adjusted EBITDA.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | (15,604 | ) | $ | 605 | $ | (23,060 | ) | $ | (14,585 | ) | |||||
Impairment of oil and gas properties (net of
tax) (1) |
| | | 7,692 | ||||||||||||
Unrealized (gain) loss on derivatives (net of
tax) (2) |
6,259 | (3,832 | ) | 790 | (2,657 | ) | ||||||||||
Currency impact on deferred taxes |
| (87 | ) | | (146 | ) | ||||||||||
Net Loss as Adjusted |
$ | (9,345 | ) | $ | (3,314 | ) | $ | (22,270 | ) | $ | (9,696 | ) | ||||
Net income (loss) |
$ | (15,604 | ) | $ | 605 | $ | (23,060 | ) | $ | (14,585 | ) | |||||
Unrealized (gain) loss on derivatives |
6,448 | (6,108 | ) | 1,984 | (5,036 | ) | ||||||||||
Net interest expense |
7,732 | 5,605 | 20,150 | 11,237 | ||||||||||||
Depreciation, depletion and amortization |
7,004 | 7,912 | 13,326 | 13,593 | ||||||||||||
Impairment of oil and gas properties |
| | | 7,692 | ||||||||||||
Income tax expense (benefit) |
2,026 | 5,084 | (687 | ) | 9,917 | |||||||||||
Adjusted EBITDA |
$ | 7,606 | $ | 13,098 | $ | 11,713 | $ | 22,818 | ||||||||
(1) | Net of tax benefits of none. | |
(2) | Net of tax (benefit) expense of $189 and $(2,277) and $1,195 and $(2,379), respectively. |
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Liquidity and Capital Resources
The following table summarizes our net cash flows from operating, investing and financing
activities for the periods indicated. For additional details regarding the components of our
primary cash flow amounts, see the Condensed Consolidated Statements of Cash Flows under Item 1 of
this report.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Net cash provided by (used in) operating activities |
$ | (23,867 | ) | $ | 24,453 | |||
Net cash used in investing activities |
$ | (90,314 | ) | $ | (71,561 | ) | ||
Net cash provided by financing activities |
$ | 25,143 | $ | 33,414 | ||||
The net cash flows provided by operating activities are primarily impacted by the earnings
from our business activities. The cash flows used by operating activities decreased to $ (23.9)
million for the six months ended June 30, 2011 as compared to $24.5 million provided by operating
activities for the six months ended June 30, 2010 primarily due to increased interest expense
related to our 2010 debt issuances, increased operating expenses and decreased revenue from lower
sales volumes.
The cash provided by or used in investing activities represents expenditures for capital projects,
including our acquisition of an additional 20% working interest in the Bacchus field in the North
Sea. For the six months ended June 30, 2011, cash used in investing activities was $90.3 million
as opposed to $71.6 in the corresponding period of the prior year.
The cash provided by financing activities consists of borrowings, payments of preferred dividends,
payment of financing costs, and proceeds from the issuance of common stock. In March 2011, we closed a public offering of 11.5 million shares of our common stock for net
proceeds of $118.4 million. In April 2011, we used a portion of the net proceeds from this
offering to redeem all $81.25 million of our 6% Senior Notes.
In March 2011, we entered into an Amendment to the Trust Deed with Smedvig QIF PLC related to our
11.5% Convertible Bonds. The Amendment provides for:
| the amendment of the maturity date of the 11.5% Convertible Bonds from January 24, 2014 to January 24, 2016; | ||
| the amendment of the date upon which the holders of the 11.5% Convertible Bonds may first exercise a put right, and the occurrence of the conversion price reset if such put right is not exercised, from January 24, 2012 to January 24, 2016; and | ||
| a reduction in the interest rate payable from 11.5% to 7.5% on and after March 31, 2014. |
The Amendment of our 11.5% Convertible Bonds and the redemption of all $81.25 million of our
outstanding 6% Senior Notes satisfied the two conditions precedent to extend the maturity date of
the Senior Term Loan to be August 16, 2013.
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At January 1, 2011, restricted cash represented amounts held in escrow as collateral for lines of
credit associated with abandonment liabilities related to our U.K. properties. In February 2011,
we amended our Senior Term Loan to increase the security reserved for potential letters of credit
from $25 million to $35 million. In July 2011, we secured new letters of credit that allowed us to
release the $33 million of restricted cash into operations that served as collateral for previous
letters of credit.
Capital Program
We anticipate spending approximately $150 million during 2011 to fund our oil and gas
activities in the U.S. and U.K., with approximately 60% of those expenditures anticipated to be
focused on our U.K. assets. These capital budget numbers do not include $14 million of costs
incurred in the settlement of the rig contract dispute in June 2011, which is included in our U.K.
capital expenditures. As of June 30, 2011, we had spent $66.7 million in capital expenditures. We
also spent an additional $22.2 million on acquisitions, primarily related to our purchase of an
additional 20% working interest in the Bacchus field. We expect to spend an additional $110
million for our recently announced Marcellus acquisition. See Note 11 Subsequent Events.
In the U.K., our activity during 2011 will be primarily concentrated on the Bacchus and Greater
Rochelle development projects. At the Bacchus project, we plan to drill three production wells and
install the infrastructure to allow first production to begin in the fourth quarter of 2011. At
the Greater Rochelle project, our focus will be completing engineering and procuring long lead-time
equipment to prepare Greater Rochelle for a 2012 first production date from the East Rochelle area.
We also intend to begin actual construction of the subsea infrastructure and modifications to the
Scott platform to prepare it for production from the Greater Rochelle area.
Additionally, we expect to continue to further our development program at our Columbus project,
including ongoing engineering assessments for future production and commercial off-take solutions.
In 2011, we also expect to drill an appraisal well in the Tudor Rose prospect, Block 14/30a, to
evaluate an oil discovery that was drilled in 1983. We have a 20% working interest in the
prospect.
Our primary focus during the remainder of 2011 in the U.S. will be completing the pending Marcellus acquisition and in the Haynesville, Cotton Valley and Marcellus
areas 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 and U.S. gas prices in 2011.
During 2011, we expect to further evaluate our two existing frontier plays in Alabama and Montana
through the drilling of additional test wells. Specifically, we plan to test a successful
horizontal re-entry in Alabama and drill four vertical pilot wells in Montana by the end of 2011.
We intend to fund our capital expenditures through cash on hand and cash flow generated from
operations and borrowings under our Senior Term Loan, which was recently amended to increase
the borrowing under the facility by $75 million. See Note 11, Subsequent Events to our
consolidated financial statements. The majority of our cash on hand has been generated through
borrowings under our Senior Term Loan, proceeds from the sale of our Cygnus reserves and our
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recent
debt and equity offerings. In addition, we intend to use substantially all of the net proceeds of
our recently completed 5.5% Convertible Senior Notes to fund our pending Marcellus acquisition.
The timing, completion and progress of our 2011 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.
United Kingdom Activity
Activity in the U.K. during 2011 continues to focus on three primary development projects
Bacchus, Columbus, and Greater Rochelle. In October 2010, we completed the sale of our Cygnus
asset for cash consideration of $110 million and utilized the proceeds to accelerate our
development projects.
On February 23, 2011, we closed our acquisition of an additional 20% working interest in the
Bacchus development for approximately $9.2 million in cash payable at closing and approximately
$6.2 million in cash payable at the earlier of three months after first oil is produced or the end
of 2011. In addition, we paid capital costs incurred by the seller of $9.4 million. Following the
acquisition, we hold an aggregate 30% working interest. The field development plan (FDP) to drill
for the Bacchus field calls for a subsea development with three wells to be drilled and linked to
production facilities at the nearby Forties field. The rig to drill each of the three planned
development wells has been moved to the drilling location and commenced operations in July 2011.
We are currently drilling our initial development well and expect to commence production early in
the fourth quarter of 2011, and follow with two additional development wells thereafter.
The Greater Rochelle area is comprised of three blocks in the North Sea, including our interests in
blocks 15/27 and 15/26c. We refer to these blocks as our East Rochelle field and our West Rochelle
field, respectively. In July 2011, the unitization of the Greater Rochelle area was completed
resulting in a single set of interest across the field for the interest owners. After the
unitization, our working interest in the Greater Rochelle area is now 44%, as compared to a 55.6%
working interest in East Rochelle, a 50% working interest in West Rochelle and no working interest
in the third block of the Greater Rochelle area. In addition, we retain operatorship of the field.
In February 2011, the DECC approved the Rochelle FDP for Block 15/27 in East Rochelle. In April
2011, we announced agreement of the commercial terms for the processing and transportation of East
Rochelle production on the Scott Platform in the Central North Sea. We plan to award contracts and
commence immediate construction of the production facilities. First production from East Rochelle
is planned for the second half of 2012.
Columbus is a gas/condensate field in the Central Graben region of the North Sea in which we hold a
25% working interest. During 2010, we, along with our partners in Columbus, agreed to study an
option of producing the field using a new bridge-linked platform connected to the
Lomand Platform. We filed an updated FDP in June 2011 with project sanction by the DECC
anticipated later in the year. We believe that first production from this field could occur as
early as 2013.
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United States Drilling
We believe that our U.S. acreage provides us with development projects with shorter timeframes to
first production at lower costs than our North Sea assets. In addition, our U.S. acreage covers a
broad spectrum of resource plays, from established areas, such as Haynesville, Cotton Valley and
Marcellus, to emerging plays in Alabama and Montana.
Our strategy for our U.S. operations has been to employ a measured approach that seeks to balance
U.S. natural gas prices with drilling costs. We believe this approach in the U.S. should provide
flexibility to adjust our drilling activity in accordance with current and future commodity prices
and our operating results, while still allowing our U.S. production to grow and provide near-term
return on capital to balance our longer production-cycle U.K. projects.
We currently have positions in four U.S. shale resource plays. Our drilling activity during 2011
has increased as we begin to pursue the potential of our recent acquisitions. In the Haynesville
area, we have had drilling activity in the Woodardville, Jamestown, Bull Bayou, Metcalf and Grand
Cane fields in Louisiana, and the Willow Springs field in East Texas. During 2010, 12 Haynesville
area wells were drilled on our acreage, all of which were successful. We currently have a one rig
program operating in the Haynesville area, and since the beginning of 2011, six Haynesville area
wells have been drilled and completed on our acreage, all of which are now on production. In
addition, we have six wells in progress, one is drilling and the remainder are in various stages of
completion. We are targeting drilling a total of 15 Haynesville area wells in 2011.
In the Marcellus area, we successfully drilled and cased two horizontal wells in the Daniel Field
in Cameron County during 2011. These wells are expected to be completed later this year. In
parallel, we are working on expanding pipeline infrastructure, including options to connect with
one of three major pipelines in Cameron County. We have obtained rights-of-way, and are currently
in the process of obtaining permits and conducting a habitat study. Upon completion of these items,
we expect to begin construction of a gathering line to tie our production to an existing pipeline.
Pending Acquisition
In July 2011, we entered into purchase and sale agreements with SM Energy Company and certain other
minority owners to acquire the leasehold and producing interests held by SM Energy and its partners
in the Marcellus shale in north-central Pennsylvania, as well as a pipeline and related facilities
in McKean and Potter Counties, Pennsylvania, for aggregate consideration of $110 million. The
transaction provides us with significant production and reserve potential on acreage that is
adjacent to our existing Marcellus acreage and is readily available for development.
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The assets include the following:
| Approximately 50,000 net acres of leasehold with 100 percent operated working interests in McKean and Potter counties; | ||
| Current production from three existing wells of approximately three to four million cubic feet of natural gas per day, including the Potato Creek #3H well that initially flowed 11 million cubic feet of gas per day and is expected to recover in excess of 4 billion cubic feet of gas; | ||
| 100 percent ownership of Potato Creek LLC, which owns a midstream gathering system and related facilities in southern McKean County, including a 10-mile 16 trunkline connected and flowing to Tennessee Gas Pipelines 24 mainline; and | ||
| Proprietary and fully processed 3-D seismic survey covering the entire Potato Creek lease block. |
Following the completion of the transaction, our leasehold interests in the Marcellus Shale will
total approximately 93,000 gross (68,000 net) acres. A new 7-year lease will be issued at closing
on the key 21,000 net acre Potato Creek block that requires only five wells to be drilled in the
first three years. Minimal capital is required over the next three years to hold all acreage in
McKean County, including the key Potato Creek leasehold. The transaction is expected to close by
the fourth quarter of 2011.
2011 Outlook and Liquidity
At the end of 2010, we expected to spend approximately $150 million on our 2011 oil and gas
capital program and that our available cash at that time and our cash flow from operations would be
sufficient to fund our capital expenditure program for the upcoming year. Those expectations
included cash flow assumptions based on a mid-year
production start for our Bacchus development, additional production from our U.S. drilling
operations and some continued level of production at our Goldeneye field. We anticipated that our
production would increase in the
latter half of the year as Bacchus and U.S. production
ramped up.
Our capital expenditure estimates for 2011 continue to follow our original expectation of $150
million for the year,
however,
due to the following factors,
we may not experience the production increases
in the second half of the year at the levels
we originally anticipated. The
delay in production increases is due to the three items that we expected to have the most impact on
our 2011 production: Bacchus timing, U.S. drilling program results and the status of the Goldeneye
field.
| The operator at Bacchus has experienced delays in moving the drilling rig to the location. Drilling, began in August 2011 and production is now anticipated from the first well during the fourth quarter. The second and third wells will subsequently be tied into production, without needing to move the rig. | ||
| In the U.S., we have had drilling success and continue to tie in new wells but due to infrastructure issues, have not increased production at the rate that we had originally expected. We are working with the operators to increase access to major pipelines, expand pipeline infrastructure or other alternatives to market production. | ||
| As discussed earlier, the Goldeneye field ceased production during the first quarter of 2011. |
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We announced a potential high-yield debt offering in June. When global economic worries
created instability in the high-yield debt market, we chose to
exercise financial discipline and
avoid issuing
debt at that time. However, but we remain optimistic
that the market will regain its stability and be available to us should we decide to access it at a
later date.
As we pushed our U.K. and U.S. capital programs forward, we reviewed opportunities to add resources
that matched our strategic plan at reasonable rates of return for our shareholders. In July 2011,
we finalized an opportunity to add to our position in the Marcellus area
by acquiring property that
had undeveloped
acreage, the ability to increase our production and reserves over
the next several years and
a relatively new gathering pipeline in the area that connected to a major pipeline. We
secure financing for this pending acquisition by issuing
$135 million of 5.5%
Convertible
Senior Notes, at a time when the market value of our common stock was near its high for
the previous 12 months.
Given the anticipated closing of the pending Marcellus acquisition in the fourth quarter and the
requirement that only five wells be drilled in the first three years, we do not anticipate a
significant change in our estimated 2011 capital expenditures upon closing the acquisition. We
expect to incorporate the capital requirements of the new position into our existing capital plans.
Going forward into next year, we expect a shift of capital expenditures from the Haynesville area
to the Marcellus area.
Our
primary sources of financial resources and liquidity are cash on
hand, internally generated cash flows from operations and access to
the credit and capital markets, to the extent necessary. In July 2011,
and in addition to our issuance of the 5.5% Convertible Senior Notes,
we also entered into
an amendment to our Senior Term Loan providing for an increase of $75 million in the amounts
available under the Senior Term Loan and immediately drew down the $75 million. The proceeds
from the increased borrowings from our Senior Term Loan
will
be used for general corporate purposes, including funding a portion of our 2011 capital program and
potential repayment of other outstanding indebtedness.
If we do not complete the pending Marcellus acquisition, the net
proceeds from our issuance of the 5.5% Convertible Senior Notes will
also be used for general corporate purposes, including the potential
repayment of certain of our outstanding indebtedness.
The following table sets forth our capitalization, cash equivalents and restricted cash at June 30,
2011 on:
| an actual basis; and | ||
| an as adjusted basis to give effect to our issuance of 5.5% Convertible Senior Notes and our incremental borrowings under the amendment to the Senior Term Loan. |
After
giving effect to these transactions, we would have had
$245 million in available cash as of June 30, 2011.
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As of June 30, 2011 | ||||||||
Actuals | As Adjusted (1) | |||||||
Cash, cash equivalents and restricted cash |
$ | 43,352 | $ | 244,464 | ||||
11.5% convertible bonds due 2016 |
$ | 56,407 | $ | 56,407 | ||||
12% subordinated notes due 2014 |
41,620 | 41,620 | ||||||
15% senior term loan due 2013 |
163,011 | 238,011 | ||||||
5.5% convertible senior notes due 2016 |
| 135,000 | ||||||
Total debt |
261,038 | 471,038 | ||||||
Series C convertible preferred stock |
48,428 | 48,428 | ||||||
Total equity |
255,994 | 255,994 | ||||||
Total capitalization |
$ | 565,460 | $ | 775,460 | ||||
(1) | The adjustments do not include the use of proceeds for our pending Marcellus acquisition for $110 million. |
In
addition to the factors identified above in this section, our cash
flows will also be significantly impacted by the amount of oil and gas we produce and the
price we obtain for our produced commodities. While we still expect our 2011 production to be
greater than our 2010 production, that increase will not occur evenly throughout the year.
Instead, the anticipated production increase is expected to occur in the fourth quarter. We expect
our production in 2011 will grow from current levels as Bacchus achieves first production, new
wells in our U.S. drilling program continue to add production and the pending Marcellus acquisition
is closed. Each of these operational activities will have an impact on our 2011 production as
follows:
| Initial production date of the Bacchus field We expect to drill our initial development well and commence production early in the fourth quarter of 2011 and follow with two additional development wells thereafter. The precise initial production date, rate of production and how long it may take for Bacchus to reach full production are key variables to our overall 2011 production levels. | ||
| U.S. drilling program results Since the beginning of 2011, we have completed and begun producing from six wells. We currently have eleven wells in progress; with three of those wells drilling and the remainder awaiting or in the process of completion. | ||
| Increased Marcellus production The acreage in our Marcellus acquisition includes three currently producing wells. These wells produced an aggregate of approximately 4 MMcf/d during the six months ended June 30, 2011. The acreage is situated in close proximity to our existing Marcellus acreage. |
Oil prices continue to be impacted by supply and demand on a worldwide basis. 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.
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Disclosures About Contractual Obligations and Commercial Commitments
The following table sets forth our obligations and commitments to make future payments under
our lease agreements and other long-term obligations as of June 30, 2011:
(Amounts in thousands) | Payments due by Period | |||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | ||||||||||||||||
Long-term debt |
||||||||||||||||||||
Principal |
$ | 263,708 | $ | 16,600 | $ | 181,411 | $ | 65,697 | $ | | ||||||||||
Interest (1) |
96,252 | 29,188 | 33,456 | 33,608 | | |||||||||||||||
Asset retirement obligations |
36,622 | 6,677 | 11,347 | 1,467 | 17,131 | |||||||||||||||
Operating leases for office
leases and equipment |
2,545 | 597 | 961 | 658 | 329 | |||||||||||||||
Total Contractual Obligations |
$ | 399,127 | $ | 53,062 | $ | 227,175 | $ | 101,430 | $ | 17,460 | ||||||||||
Cautionary Statement for Forward-Looking Statements
Certain statements and information in this Quarterly Report on Form 10-Q may constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. The words believe, expect, anticipate, plan, intend, foresee, should, would,
could or other similar expressions are intended to identify forward-looking statements, which are
generally not historical in nature. These forward-looking statements are based on our current
expectations and beliefs concerning future developments and their potential effect on us. While
management believes that these forward-looking statements are reasonable as and when made, there
can be no assurance that future developments affecting us will be those that we anticipate. All
comments concerning our expectations for future revenues and operating results are based on our
forecasts for our existing operations and do not include the potential impact of any future
acquisitions. In particular, this report contains forward-looking statement pertaining to the
following:
| our future financial position; | ||
| our business strategy; | ||
| pending acquisitions; | ||
| budgets; | ||
| projected costs, savings and plans; | ||
| objectives of management for future operations; | ||
| legal strategies; and | ||
| legal proceedings. |
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Our forward-looking statements involve significant risks and uncertainties (some of which are
beyond our control) and assumptions that could cause actual results to differ materially from our
historical experience and our present expectations or projections. Important factors that could
cause actual results to differ materially from those in the forward-looking statements include, but
are not limited to, those summarized below:
| discovery, estimation, development and replacement of oil and gas reserves; | ||
| decreases in proved reserves due to technical or economic factors; | ||
| drilling of wells and other planned exploitation activities; | ||
| timing and amount of future production of oil and gas; | ||
| the volatility of oil and gas prices; | ||
| availability and terms of capital; | ||
| operating costs such as lease operating expenses, administrative costs and other expenses; | ||
| our future operating or financial results; | ||
| amount, nature and timing of capital expenditures, including future development costs; | ||
| cash flow and anticipated liquidity; | ||
| availability of drilling and production equipment; | ||
| uncertainties related to drilling and production operations in a new region; | ||
| cost and access to natural gas gathering, treatment and pipeline facilities; | ||
| business strategy and the availability of acquisition opportunities; and | ||
| 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
Quarterly Report on Form 10-Q 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 our Annual Report on Form 10-K for the year ended December 31, 2010. 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 report. These cautionary
statements qualify all forward-looking statements attributable to us or persons acting on our
behalf.
Item 3: | Quantitative and Qualitative Disclosures about Market 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 that 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 may engage in oil and gas hedging activities to realize commodity prices which we
consider
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favorable. For additional information regarding our derivative instruments, see Note 8 to
the Condensed Consolidated Financial Statements.
At June 30, 2011, we had the following commodity derivative instruments outstanding:
2011 | 2012 | Total | ||||||||||
Oil: |
||||||||||||
Fixed Price Puts (Mbbl) Brent |
138 | 100 | 238 | |||||||||
Weighted Average Price ($/Barrel) |
$ | 95.08 | $ | 90.74 | $ | 93.25 | ||||||
Gas: (1) |
||||||||||||
Fixed Price Puts (MMcf) Heren National Balancing Point |
590 | 548 | 1,138 | |||||||||
Weighted Average Price ($/Mcf) |
$ | 7.80 | $ | 8.55 | $ | 8.16 |
(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 June 30, 2011 was $1.61 to £1.00. |
Item 4: | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, our management carried out an evaluation,
with the participation of our chief executive officer (the CEO) and chief financial officer (the
CFO), of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as
amended). Based on that evaluation, the CEO and CFO concluded:
(i) that our disclosure controls and procedures are designed 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 (a) recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and (b) is accumulated and communicated to
our management, including the CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure; and
(ii) that our disclosure controls and procedures were effective as of June 30, 2011.
Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting (as defined in
Rules 13a-15(f), and 15d-15(f) under the Securities Exchange act of 1934, as amended), during the
last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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Part II. Other Information
Item 1A: | Risk Factors |
In addition to the factors discussed below and elsewhere in this report, including the
financial statements and related notes, you should consider carefully the risks and uncertainties
described below and in our Annual Report on Form 10-K for the year ended December 31, 2010 under
Item 1A Risk Factors, which could materially adversely affect our business, financial condition
and results of operations. While these are the risks and uncertainties we believe are most
important, you should know that they are not the only risks or uncertainties facing us or that may
adversely affect our business. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also could impair our business operations and financial
condition. If any of these risks or uncertainties were to occur, our business, financial condition
or results of operation could be adversely affected.
Recently Proposed Rules Regulating Air Emissions from Oil and Gas Operations Could Cause Us to
Incur Increased Capital Expenditures and Operating Costs
On July 28, 2011, the Environmental Protection Agency (EPA) proposed rules that would establish
new air emission controls for oil and natural gas production and natural gas processing operations.
Specifically, the EPAs proposed rule package includes New Source Performance Standards to address
emissions of sulfur dioxide and volatile organic compounds (VOCs) and a separate set of emission
standards to address hazardous air pollutants frequently associated with oil and natural gas
production and processing activities. The EPAs proposal would require the reduction of VOC
emissions from oil and natural gas production facilities by mandating the
use of green completions for hydraulic fracturing, which requires the operator to recover rather
than vent the gas and natural gas liquids that come to the surface during completion of the
fracturing process. The proposed rules also would establish specific requirements regarding
emissions from compressors, dehydrators, storage tanks, and other production equipment. In
addition, the rules would establish new leak detection requirements for natural gas processing
plants. The EPA will receive public comment and hold hearings regarding the proposed rules and
must take final action on them by February 28, 2012. If finalized, these rules could require a
number of modifications to our operations, including the installation of new equipment. Compliance
with such rules could result in significant costs, including increased capital expenditures and
operating costs, and could adversely impact our business.
Item 6: | Exhibits |
The exhibits marked with the asterisk symbol (*) are filed or furnished (in the case of
Exhibits 32.1 and 32.2) with this Form 10-Q. Portions of the exhibits marked with the dagger
symbol () 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.
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2.1 *
|
Purchase and Sale Agreement, dated as of July 17, 2011, by and among Endeavour Operating Corporation, SM Energy Company, Potato Creek LLC, Open Flow Gas Supply Corporation and SJ Exploration LLC. | |
2.2 *
|
Membership Interest Purchase Agreement, dated as of July 17, 2011, by and among Endeavour Operating Corporation, SM Energy Company, and Potato Creek LLC. | |
3.1(a)
|
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). | |
3.1(b)
|
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). | |
3.1(c)
|
Certificate of Amendment dated June 1, 2010 (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on June 3, 2010). | |
3.1(d)
|
Amendment to Articles of Incorporation, dated November 17, 2010 (Incorporated by reference to Exhibit 3.1(d) of our Annual Report on Form 10-K (Commission File No. 001-32212) for the year ended December 31, 2010). | |
3.2(a)
|
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). | |
3.2(b)
|
Amendment to Amended and Restated Bylaws dated December 12, 2007 (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). | |
4.1
|
Indenture dated as of July 22, 2011 among Endeavour International Corporation, the Guarantors named therein and Well Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on July 22, 2011). | |
10.1 *
|
Second Amendment to Credit Agreement among Endeavour International Corporation, Endeavour Energy UK Limited, various lenders and Cyan Partners, LP dated June 6, 2011. | |
10.2 *
|
Third Amendment to Credit Agreement, U.S. Security Agreement and Subsidiaries Guaranty, dated as of July 15, 2011, by and among Endeavour International Corporation, Endeavour Energy UK Limited, Cyan Partners, LP, as administrative agent, and certain lenders party thereto. | |
10.3 *
|
Letter of Credit Facility Agreement dated as of July 25, 2011 by and between Endeavour International Corporation and Commonwealth Bank of Australia. | |
10.4
|
Employment Agreement, effective as of June 1, 2011, by and between William L. Transier and Endeavour International Corporation (Incorporated by reference to Exhibit 10.1 to our Current on Form 8-K (Commission File No. 001-32212) filed on June 1, 2011). | |
31.1 * |
Certification of William L. Transier, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 *
|
Certification of J. Michael Kirksey, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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. | |
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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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Endeavour International Corporation | ||||
Date: August 8, 2011
|
/s/ J. Michael Kirksey | /s/ Robert L. Thompson | ||
J. Michael Kirksey | Robert L. Thompson | |||
Executive Vice President and | Senior Vice President and | |||
Chief Financial Officer | Chief Accounting Officer | |||
(Principal Financial Officer) | (Principal Accounting Officer) |
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