Note 24 – Commitments and Contingencies

General

The oil and gas industry is subject to regulation by federal, state and local authorities. In particular, oil and gas production operations and economics are affected by environmental protection statutes, tax statutes and other laws and regulations relating to the petroleum industry. We believe we are in compliance with all federal, state and local laws, regulations applicable to Endeavour and its properties and operations, the violation of which would have a material adverse effect on us or our financial condition.

Commitments Related to Asset Retirement Obligations

We have entered into decommissioning security agreements related to abandonment liabilities for certain of our oil and gas properties. Under these agreements, we are required to post security from time to time in the form of letters of credit, cash or other agreed-upon consideration. Prior to entry into the LC Issuance Agreement on September 30, 2014 (see below), the commitments under these agreements were not recorded as liabilities, and fees and expenses related to these agreements were included in “Letter of credit fees” in other expenses on our Consolidated Statements of Operations.

Decommissioning Security Agreements

LC Issuance Agreement

On September 30, 2014, in conjunction with the Amended Term Loan Facility, the Company entered into an LC Issuance Agreement (the “LC Issuance Agreement”), pursuant to which Credit Suisse agreed to issue letters of credit for Endeavour UK’s account in the amount of approximately $100.2 million as of December 31, 2014.

The letters of credit secure decommissioning obligations in connection with certain of Endeavour’s U.K. Continental Shelf petroleum production. The Company has collateralized its obligations under the LC Issuance Agreement and all letters of credit issued thereunder by posting cash collateral, which has been funded with the proceeds from the Amended Term Loan Facility.

The posted cash collateral balance of $100.2 million related to the LC Issuance Agreement as of December 31, 2014 is reflected as “Restricted cash, long-term portion” in our condensed consolidated balance sheets. The liability related to the posted cash collateral is included as part of the $440 million Amended Term Loan Facility long-term debt obligation. The LC Issuance Agreement was entered into to replace the Combined Procurement Agreement.

As of December 31, 2014, we do not expect to begin decommissioning activities for the Alba field for many years. The timing of decommissioning activities will be determined by the ultimate life of the reservoir, which is not expected to occur until 2029 or later.

Combined Procurement Agreement

On January 24, 2014, we entered into a letter of credit procurement agreement (the “Combined Procurement Agreement”) with an unaffiliated third party (“Payee”), where we agreed to reimburse the Payee for any expense incurred by it in connection with the posting of cash collateral to secure letters of credit issued for our account in the amount of approximately £78 million (approximately $130 million as of January 24, 2014, subsequently reduced as discussed below). The letters of credit secured decommissioning obligations in connection with certain of our U.K. licenses. The Combined Procurement Agreement was entered into to replace the LOC Procurement Agreement (see below) and a previous agreement related to the Alba field.

Due to a change in the U.K. tax treatment for decommissioning, we amended our Decommissioning Securities Agreement for the Alba field. The new tax law, which allows companies to treat decommissioning on an after-tax basis (including PRT), enabled us to reduce our current letter of credit amount. Prior to entry into the LC Issuance Agreement, we had approximately $90 million in outstanding letters of credit securing decommissioning obligations under the Combined Procurement Agreement.

Under the Combined Procurement Agreement, we paid a quarterly fee computed at a rate of LIBOR plus 7.00% per year (provided that LIBOR shall equal at least 1.25% per year) on the aggregate balance of posted cash collateral.

Concurrent with our entry into the LC Issuance Agreement on September 30, 2014, the Combined Procurement Agreement was terminated, and we paid all outstanding interest and fees of $1.9 million and $2.4 million, respectively.

Procurement Agreement

On January 9, 2013, we entered into a LOC Procurement Agreement (the “Procurement Agreement”) with an unaffiliated third party entity, which matures on July 9, 2014. The Procurement Agreement was entered into in connection with the unaffiliated third party’s entry into a credit support arrangement with a providing bank. Pursuant to this credit support arrangement, the third party pledged cash, contributed by one of our shareholders, to secure letters of credit in the amount of $33.0 million. The letters of credit secure decommissioning obligations in connection with certain of our U.K. license agreements.

Under the Procurement Agreement, we agreed to:

reimburse the third party in the event that the letters of credit are drawn and the pledged cash must be paid to the letter of credit provider;

pay a quarterly fee computed at a rate of 9% per year on the outstanding amount of each letter of credit, along with an initial fee equal to 1% on the initial outstanding amount of each letter of credit;

pay a fee of 2% on the outstanding amount of each letter of credit upon termination; and

pay a fee of 0.65% per year on the aggregate balance of any outstanding letters of credit.

The Procurement Agreement contains customary representations, warranties and non-financial covenants. We also issued warrants to purchase a total of 1,000,000 shares of our common stock at an exercise price of $7.31 per share to the investor. The warrants expire on January 9, 2018 and are subject to customary anti-dilution provisions.

Concurrent with our entry into the Procurement Agreement, we terminated the IVRRH Reimbursement Agreement dated May 23, 2012, which secured letters of credit. Upon termination of the IVRRH Reimbursement Agreement, we paid all outstanding and accrued fees totaling approximately $3.8 million.

Concurrent with our entry into the Combined Procurement Agreement on January 24, 2014, the Procurement Agreement was terminated, and we paid all outstanding and accrued fees totaling approximately $0.2 million.

Reimbursement Agreements

During the second quarter of 2012, we entered into two reimbursement agreements related to abandonment liabilities for certain of our U.K. oil and gas properties. Under these agreements, unaffiliated third parties pledged cash to secure letters of credit covering certain of our abandonment liabilities and we agreed to reimburse the pledged cash in the event that the letters of credit are drawn and pledged cash is utilized to satisfy the commitment. We have no cash collateral associated with the reimbursement agreements and the commitments under the reimbursement agreements are not recorded as liabilities. The associated abandonment obligations are recorded in other long-term liabilities as part of our asset retirement obligations. Fees and expenses related to the reimbursement agreements are included in other expenses on our condensed consolidated statement of operations.

The first reimbursement agreement covered approximately $33 million and was related to our decommissioning obligations at the IVRRH, Renee and Rubie (collectively “IVRRH”) fields (“IVRRH Reimbursement Agreement”) where we are currently paying certain asset retirement costs. In connection with this reimbursement agreement, we issued warrants to purchase two million shares of our common stock, with an exercise price of $10.50 per share, to the investors. With the execution of the Procurement Agreement, on January 10, 2013, we terminated the IVRRH Reimbursement Agreement and paid all outstanding and accrued fees totaling approximately $3.8 million.

The second reimbursement agreement covered approximately $120 million related to our decommissioning obligations for the Alba field (the “Alba Reimbursement Agreement”) and matures on June 30, 2014. We paid a fee of 13% per year, payable quarterly, computed based on the outstanding amount of each letter of credit. Our obligations under the Alba Reimbursement Agreement were secured on a pari passu basis with our obligations under the Revolving Credit Facility by a first lien on substantially all of our assets. As of December 31, 2014, we do not expect to begin decommissioning activities for the Alba field for many years. The timing of decommissioning activities will be determined by the ultimate life of the reservoir, which is not expected to occur until 2029 or later.

With the execution of the Combined Procurement Agreement, on January 24, 2014, we terminated the Alba Reimbursement and paid all outstanding and accrued fees totaling approximately $122.0 million.

Terminated Acquisition of Marcellus Assets

On July 17, 2011, we entered into agreements with SM Energy Company and certain other sellers named therein (“SM Energy”) for the purchase of oil and gas leases, producing properties, geophysical data, a pipeline and related assets in the Marcellus shale play in Pennsylvania for aggregate consideration of approximately $110 million (the “SM Purchase Agreements”). We terminated the agreements on December 14, 2011, based on our conclusion that (i) the title defects we identified, after analyzing SM Energy’s responses to the notice of defects and valuation of the defects; and (ii) the condition of the pipeline was not in compliance with applicable regulatory standards.

SM Energy filed a lawsuit against us in Texas state court on December 20, 2011 alleging that we breached the SM Purchase Agreements by terminating them and refusing to close on the transactions.

On April 16, 2014, we reached an agreement with SM Energy to settle and dismiss the litigation. In accordance with the settlement agreement, we:

forfeited our $6 million deposit;

paid SM Energy $5 million;

will pay an additional $4.5 million in three graduated payments, beginning in April 2015; and

issued warrants to purchase 2.1 million shares of our common stock with exercise price of $5.29 per share.

As a result of this settlement, we recorded $19 million in total settlement expense during the first quarter of 2014.

Claim by William Transier

We maintained an employment agreement with Mr. Transier that provided for certain severance benefits. Mr. Transier resigned from his positions as Chief Executive Officer and President effective December 1, 2014. Mr. Transier filed a claim with the United States Bankruptcy Court for the District of Delaware on December 16, 2014 in the amount of approximately $6.2 million.

Mr. Transier has asserted that, per his employment agreement, he is entitled to a pro-rata portion of his annual target bonus for the year in which his termination occurred which equates to approximately $0.7 million. Additionally he asserts that his contract requires the payment on termination of employment during the contract term (i) at the Company’s election other than as a result of the executive’s misconduct or disability or (ii) at the executive’s election following a “corporate change” or a breach of the employment agreement by us or other “good reason.” Citing “corporate change” and “good reason,” Mr. Transier’s severance claim of approximately $5.5 million is calculated as follows:

(i)

three times the sum of the executive’s most recent annual salary and deemed bonus (the average bonus paid during the most recent two years);

(ii)

all unvested employee restricted stock awards, performance shares and cash performance awards would vest upon any such termination; and

(iii)

three years of continued coverage for accident and group health insurance benefits substantially similar to those he received immediately prior to the date of termination.

We have not accrued any portion of the severance claim as a pre-petition liability as of December 31, 2014.

Legal Proceedings

Refer to Note 3 for information concerning the Bankruptcy Cases.

Operating Leases

At December 31, 2014, we have leases for office space and equipment with lease payments as follows:



2015	$	1,018
2016		785
2017		255
2018		—
Thereafter		—