10-Q 1 end-20130930x10q.htm 10-Q 715456745236452

 

 

 

 

 

United States

Securities and Exchange Commission

 

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

(Mark One)

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

For the Quarterly Period Ended September 30, 2013

or

[  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _________ to ___________

 

 

 

Commission file number: 001-32212

 

 

 

Endeavour International Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Nevada

 

88-0448389

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

811 Main Street, Suite 2100, Houston, Texas 77002
     (Address of principal executive offices)         (Zip code)

 

 

 

(713) 307-8700

(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   ¨   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   ¨   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 ¨ Accelerated filer  þ    

Non-accelerated filer  ¨  (Do not check if a smaller reporting company)Smaller reporting company  ¨

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    þ    No

 

As of November 6, 2013, 47.2 million shares of the registrant’s 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, which includes natural gas liquids, 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. This is a physical correlation and does not reflect a value or price relationship between the commodities. With respect to information relating to our working interest in wells or acreage, “net” oil and natural gas wells or acreage is determined by multiplying gross wells or acreage by our working interest therein.  References to number of potential well locations are gross, unless otherwise indicated.

 

References to “GAAP” refer to U.S. generally accepted accounting principles.

 

 


 

 

 

Part I:  Financial Information

Item 1:  Financial Statements

Endeavour International Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

60,357 

 

$

59,185 

Accounts receivable

 

24,496 

 

 

46,181 

Prepaid expenses and other current assets

 

48,696 

 

 

20,995 

Total Current Assets

 

133,549 

 

 

126,361 

 

 

 

 

 

 

Property and Equipment, Net ($388,617 and $349,433 not subject to

 

 

 

 

 

amortization at September 30, 2013 and December 31, 2012, respectively)

 

1,078,906 

 

 

1,003,441 

Goodwill

 

259,238 

 

 

262,764 

Other Assets

 

36,396 

 

 

49,906 

 

 

 

 

 

 

Total Assets

$

1,508,089 

 

$

1,442,472 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1

 


 

Table Of Contents

 

Endeavour International Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

44,802 

 

$

60,153 

Current maturities of debt

 

115,163 

 

 

15,713 

Deferred revenue

 

40,691 

 

 

 -

Monetary production payment, current portion

 

19,167 

 

 

 -

Accrued expenses and other

 

54,422 

 

 

90,100 

Total Current Liabilities

 

274,245 

 

 

165,966 

 

 

 

 

 

 

Long-Term Debt

 

752,769 

 

 

843,793 

Deferred Taxes

 

127,658 

 

 

141,887 

Monetary production payment, long-term portion

 

126,667 

 

 

 -

Other Liabilities

 

136,798 

 

 

147,692 

Total Liabilities

 

1,418,137 

 

 

1,299,338 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Series C Convertible Preferred Stock:

 

 

 

 

 

Series C preferred stock - Liquidation preference:  $37,000 and $37,000

 

 

 

 

 

at September 30, 2013 and December 31, 2012, respectively

 

43,703 

 

 

43,703 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Series B preferred stock - Liquidation preference:  $3,706 and $3,588

 

 

 

 

 

at September 30, 2013 and December 31, 2012, respectively

 

 -

 

 

 -

Common stock; shares issued and outstanding – 47,119 and 46,691

 

 

 

 

 

at September 30, 2013 and December 31, 2012, respectively

 

47 

 

 

47 

Additional paid-in capital

 

509,806 

 

 

493,804 

Treasury stock, at cost - 72 and 72 shares at September 30, 2013

 

 

 

 

 

and December 31, 2012, respectively

 

(587)

 

 

(587)

Accumulated deficit

 

(463,017)

 

 

(393,833)

Total Stockholders’ Equity

 

46,249 

 

 

99,431 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

$

1,508,089 

 

$

1,442,472 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2

 


 

 

 

Table Of Contents

 

Endeavour International Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

Revenues

$

36,901 

 

$

83,275 

 

$

220,738 

 

$

121,444 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Operations:

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

16,358 

 

 

23,973 

 

 

71,951 

 

 

34,613 

Depreciation, depletion and amortization

 

18,596 

 

 

23,759 

 

 

93,466 

 

 

42,292 

Impairment of oil and gas properties

 

6,032 

 

 

11,416 

 

 

9,566 

 

 

47,116 

General and administrative

 

3,913 

 

 

5,026 

 

 

14,276 

 

 

15,379 

Total Expenses

 

44,899 

 

 

64,174 

 

 

189,259 

 

 

139,400 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) From Operations

 

(7,998)

 

 

19,101 

 

 

31,479 

 

 

(17,956)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on derivatives

 

855 

 

 

(1,204)

 

 

1,158 

 

 

(2,178)

Interest expense

 

(26,461)

 

 

(18,053)

 

 

(72,346)

 

 

(63,016)

Loss on early extinguishment of debt

 

 -

 

 

 -

 

 

 -

 

 

(21,661)

Letter of credit fees

 

(7,274)

 

 

(9,378)

 

 

(25,782)

 

 

(12,442)

Unrealized foreign currency gains (losses)

 

(10,793)

 

 

(1,448)

 

 

38 

 

 

(4,186)

Other expense

 

(2,544)

 

 

(1,215)

 

 

(4,505)

 

 

(1,758)

Total Other Expense

 

(46,217)

 

 

(31,298)

 

 

(101,437)

 

 

(105,241)

 

 

 

 

 

 

 

 

 

 

 

 

Loss Before Income Taxes

 

(54,215)

 

 

(12,197)

 

 

(69,958)

 

 

(123,197)

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense (Benefit)

 

(14,330)

 

 

21,505 

 

 

(2,141)

 

 

(3,424)

Net Loss

 

(39,885)

 

 

(33,702)

 

 

(67,817)

 

 

(119,773)

Preferred Stock Dividends

 

456 

 

 

456 

 

 

1,367 

 

 

1,367 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss to Common Stockholders

$

(40,341)

 

$

(34,158)

 

$

(69,184)

 

$

(121,140)

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

$

(0.86)

 

$

(0.73)

 

$

(1.47)

 

$

(2.94)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding:

 

 

 

 

 

 

 

 

Basic and Diluted

 

47,092 

 

 

46,555 

 

 

47,082 

 

 

41,163 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3

 


 

 

 

Table Of Contents

 

Endeavour International Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

2013

 

2012

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

$

(67,817)

 

$

(119,773)

Adjustments to reconcile net loss to net cash

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

93,466 

 

 

42,292 

Impairment of oil and gas properties

 

9,566 

 

 

47,116 

Deferred tax benefit

 

(17,262)

 

 

(15,849)

Unrealized (gains) losses on derivatives

 

(1,158)

 

 

2,178 

Amortization of non-cash compensation

 

2,352 

 

 

3,605 

Amortization of loan costs and discount

 

15,330 

 

 

10,536 

Non-cash interest expense

 

5,246 

 

 

7,077 

Loss on early extinguishment of debt

 

 -

 

 

21,661 

Other

 

10,192 

 

 

9,692 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in receivables

 

21,685 

 

 

5,553 

Increase in other current assets

 

(3,226)

 

 

(14,550)

Increase (decrease) in liabilities

 

(13,587)

 

 

1,806 

Net Cash Provided by Operating Activities

 

54,787 

 

 

1,344 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Capital expenditures

 

(176,171)

 

 

(175,597)

Acquisitions, net of cash acquired

 

(2,602)

 

 

(228,437)

Increase in restricted cash

 

 -

 

 

(179)

Net Cash Used in Investing Activities

 

(178,773)

 

 

(404,213)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Repayments of borrowings

 

 -

 

 

(247,065)

Borrowings under debt agreements, net of debt discount

 

 -

 

 

595,000 

Proceeds from issuance of common stock

 

 -

 

 

60,805 

Proceeds from issuance of monetary production payment

 

150,000 

 

 

 -

Repayments of monetary production payment

 

(4,167)

 

 

 -

Dividends paid

 

(1,249)

 

 

(833)

Payments for early extinguishment of debt

 

 -

 

 

(7,248)

Financing costs paid

 

(19,427)

 

 

(28,109)

Other financing

 

 

 

Net Cash Provided by Financing Activities

 

125,158 

 

 

372,555 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

1,172 

 

 

(30,314)

Cash and Cash Equivalents, Beginning of Period

 

59,185 

 

 

106,036 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

$

60,357 

 

$

75,722 

See accompanying notes to condensed consolidated financial statements.

 

4

 


 

 

 

Table Of Contents

 

Endeavour International Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share data)

 

 

See accompanying notes to condensed consolidated financial statements.

 

5

 


 

Table Of Contents

 

Endeavour International Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

 

 

Note 1 – General

 

Description of Business

 

Endeavour International Corporation is an independent oil and gas company engaged in the exploration, development, production and acquisition of energy reserves in the U.S. and the U.K.  Endeavour was incorporated under the laws of the state of Nevada on January 13, 2000.  As used in these Notes to Condensed Consolidated Financial Statements, the terms “Endeavour,” “we,” “us,” “our” and similar terms refer to Endeavour International Corporation and, unless the context indicates otherwise, its consolidated subsidiaries.  The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10–K for the year ended December 31, 2012.

 

2013 Liquidity and Capital Resources

 

Because we are highly leveraged, required capital expenditures, debt service and other long-term obligations will continue to require a significant portion of our cash flow from operations and available cash on hand.  The combination of these debt servicing requirements, capital expenditures and the delay in cash flow resulting from the mechanical issues at Rochelle may cause our cash needs to exceed the cash flow from our current operations.

 

During the remainder of 2013, our primary uses of financial resources are expected to be:

·

our capital expenditures, primarily related to our drilling activities at our Alba and Rochelle fields in the U.K.; and

·

interest payments on existing credit facilities and payments in support of our reimbursement agreements covering our abandonment obligations.

 

We believe we should be able to fund operations, including our capital expenditures and other expenditure requirements for the foreseeable future, based on our projections of funds generated from operations, cash available and existing sources of financing.  Since year-end 2012, we have also completed several transactions to improve our liquidity and extended the maturities of some of our debt and other obligations.  These financing activities were designed to provide us with sufficient liquidity to bring the Rochelle development on line and drill a third well at Bacchus.  The third Bacchus field well began producing during the third quarter 2013, and first production was received from the Rochelle field early in the fourth quarter.  These transactions include:

·

extending or replacing reimbursement agreements covering certain of our abandonment liabilities in the U.K. which would have matured in 2013;

·

entering into forward sale agreements;

·

entering into a monetary production payment; and

·

extending the maturity of the commitments under our revolving credit facility.

 

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

If we are unable to meet any short-term liquidity needs out of cash on hand, we would attempt to refinance debt, sell forward our production, sell assets, issue debt or equity or perform any other alternativesNo assurance can be given however that we could successfully consummate any of these alternatives.

 

 

Note 2 – Summary of Significant Accounting Policies

 

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 accounting principles generally accepted in the United States of America (“US GAAP”) and have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  These accounting principles require management to use estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period.  Management regularly 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; and

·

fair value of derivative instruments.

 

 

Note 3 Business Combinations

 

On December 23, 2011, we entered into a Sale and Purchase Agreement (the “Purchase Agreement”), through our wholly owned subsidiary Endeavour Energy UK Limited (“EEUK”), with ConocoPhillips (U.K.) Limited, ConocoPhillips Petroleum Limited and ConocoPhillips (U.K.) Lambda Limited, subsidiaries of ConocoPhillips (collectively, the “Sellers”), to acquire their interest in three producing U.K. oil fields in the Central North Sea.

 

 

 

7

 


 

Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

On May 31, 2012, we closed the Alba field portion of the acquisition, which consisted of an additional 23.43% interest in the Alba field.  This increased our total working interest in the Alba field to 25.68%.  The Alba Acquisition was closed for aggregate cash consideration of approximately $229.6 million.

 

The acquisition of the additional interest in the Alba field was accounted for using the business combination method.  The following summarizes the allocation of the purchase price for the Alba field acquisition:

 

 

 

 

 

 

 

 

Purchase price

$

255,400 

Purchase price adjustments for estimated after-tax cash flows from the acquired asset and

 

 

interest costs from economic date of January 1, 2011 to closing

 

(25,823)

Total purchase price

$

229,577 

 

 

 

Allocation of purchase price:

 

 

Property and equipment

$

191,507 

Goodwill

 

47,353 

Current assets

 

24,632 

Current liabilities

 

(12,815)

Deferred tax liability

 

(6,999)

Other long-term liabilities

 

(14,101)

Total purchase price

$

229,577 

 

Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from assets acquired that could not be individually identified and separately recognized. 

 

The purchase price allocation is based on an assessment of the fair value of the assets acquired and liabilities assumed in the Alba field acquisition.  The assessments of the fair values of oil and gas properties acquired were based on projections of expected future net cash flows, discounted to present value. 

 

The following table sets forth unaudited pro forma condensed combined financial and operating data which are presented to give effect to the Alba acquisition as if it had occurred on January 1, 2012.  The information does not purport to be indicative of actual results, if any of these transactions had been in effect for the periods indicated, or future results.

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2012

 

September 30, 2012

 

 

 

 

 

Revenues

$

83,275 

$

193,960 

Net income (loss) to common shareholders

$

(34,158)

$

(88,337)

Net income (loss) per share - basic and diluted

$

(0.73)

$

(2.15)

 

For the three months ended September 30, 2013, the Alba field did not generate any revenue due to the lack of tanker liftings.  For the three months ended September 30, 2013, the Alba field had a loss from operation of $(18.7) million.  Revenues and loss from operations associated with the acquired interest in the Alba field for the nine months ended September 30, 2013 were $116.2 million and $(3.7) million, respectively.  Revenues and income from operations associated with the acquired interest in the Alba field for the period from May 31, 2012 through September 30, 2012 were $62.1 million and $0.6 million, respectively.

 

After substantial effort and extensions, we and the Sellers were unable to reach the agreement required to transfer the interests in the two remaining U.K. oil fields under the Purchase Agreement (MacCulloch and Nicol) due to failure to agree on certain commercial terms related to the future timing and amount of collateral required to be posted for future decommissioning costs.

 

As a result of the parties being unable to reach agreement to enable the additional transfers to occur, the Purchase Agreement terminated in accordance with its terms on December 14, 2012.  As previously disclosed, we paid a $10 million deposit in connection with the acquisition of the interests in the two remaining fields, which ConocoPhillips retained. 

 

 

 

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

Note 4 –  Property and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2013

 

 

2012

Oil and gas properties under the full cost method:

 

 

 

 

 

Subject to amortization

$

1,028,380 

 

$

915,801 

Not subject to amortization:

 

 

 

 

 

Incurred in 2013

 

68,193 

 

 

 -

Incurred in 2012

 

142,218 

 

 

141,837 

Incurred in 2011

 

99,183 

 

 

107,510 

Incurred prior to 2011

 

79,023 

 

 

100,086 

 

 

1,416,997 

 

 

1,265,234 

Computers, furniture and fixtures

 

8,733 

 

 

8,863 

Total property and equipment

 

1,425,730 

 

 

1,274,097 

 

 

 

 

 

 

Accumulated depreciation, depletion and amortization

 

(346,824)

 

 

(270,656)

 

 

 

 

 

 

Net property and equipment

$

1,078,906 

 

$

1,003,441 

 

The costs not subject to amortization include: 

·

values assigned to unproved reserves acquired,

·

exploration costs such as drilling costs for projects awaiting approved development plans or the determination of whether or not proved reserves can be assigned, and

·

other seismic and geological and geophysical costs.

 

These costs are transferred to the amortization base when it is determined whether or not proved reserves can be assigned to such properties.  This analysis is dependent upon well performance, results of infield drilling, approval of development plans, drilling results and development of identified projects and periodic assessment of reserves.  We expect acquisition costs excluded from amortization to be transferred to the amortization base over the next five years due to a combination of well performance and results of infield drilling relating to currently producing assets and the drilling and development of identified projects, such as the Rochelle field.  We expect exploration costs not subject to amortization to be transferred to the amortization base over the next three years as development plans are completed and production commences on existing discoveries.  Because of the nature of offshore oil and gas activities, development activities, including sanctioning and regulatory approvals, may take a significant amount of time to implement.  Even though our expectation is that costs not subject to amortization are to be transferred to the amortization base over the next three years, it is not uncommon for the cycle times to be longer.

 

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

For the three months ended September 30, 2013 and 2012, we capitalized $7.5 million and $8.3 million, respectively, in interest related to exploration and development. For the nine months ended September 30, 2013 and 2012, we capitalized $21.2 million and $20.1 million, respectively, in interest related to exploration and development, primarily related to our U.K. activities. For the three months ended September 30, 2013 and 2012, we capitalized $3.1 million and $4.9 million, respectively, in certain directly related employee costs.  For the nine months ended September 30, 2013 and 2012, we capitalized $10.0 million, and $14.7 million, respectively, in certain directly related employee costs. 

 

For the three months ended September 30, 2013, we recorded a pre-tax impairment of $6.0 million for our U.S. oil and gas properties after the application of the full cost ceiling test.  For the nine months ended September 30, 2013, we recorded a pre-tax impairment of $9.6 million related to our U.S. oil and gas properties.  The primary reason for the U.S. impairment was the evaluation of assets not subject to amortization which we no longer intend to pursue and accordingly are included in the full cost pool.  The prices used for our U.S. impairment analysis were $95.06 per barrel for oil and $3.61 per Mcf for gas.  We did not have an impairment of U.K. oil and gas properties through the application of the full cost ceiling test at the end of the third quarter of 2013, which utilized prices of $108.67 per barrel for oil and $10.51 per Mcf for gas.

 

For the  third quarter of 2012, we recorded a pre-tax impairment of $11.4 million related to our U.S. oil and gas properties through the application of the full cost ceiling test at the end of the quarter.  For the nine months ended September 30, 2012,  we recorded a pre-tax impairment of $47.1 million related to our U.S. oil and gas properties.  The impairment was primarily due to the decline in U.S. gas prices.  The prices used to determine the impairment for our U.S. properties were $94.84 per barrel for oil and $2.78 per Mcf for gas. We did not have an impairment of U.K. oil and gas properties through the application of the full cost ceiling test at the end of the third quarter of 2012, which utilized prices of $110.17 per barrel for oil and $8.65 per Mcf for gas.

 

 

Note 5 – Deferred Revenue

 

For certain of our U.K. fields, we sell production on a monthly basis; however, the production remains in the field’s storage tanks.  The inventory associated with these sales remains on our balance sheet and the revenue is deferred until the production is shipped out of our storage tanks.

 

In February and September 2013, we entered into forward sale agreements with one of our established purchasers for payments of approximately $22.5 million each.  This effectively hedged a portion of production from our U.K. North Sea assets by locking in pricing for in excess of 200,000 barrels of oil, over a six month delivery periodPayment for these agreements was received in March and September 2013.  The first forward sale commitment was fulfilled in

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

June 2013.  The forward sale liabilities are included in deferred revenue until the purchaser takes possession of the inventory from the field’s storage tanks.

 

 

Note 6 – Debt Obligations

 

At September 30, 2013, we had $880.4 million in outstanding debt.  Our debt consisted of the following at September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2013

 

 

2012

 

 

 

 

 

 

Senior notes, 12% fixed rate, due 2018

$

554,000 

 

$

554,000 

Convertible senior notes, 5.5% fixed rate, due 2016

 

135,000 

 

 

135,000 

Revolving credit facility, 13% fixed rate, due 2014

 

115,163 

 

 

115,163 

Convertible bonds, 11.5% until March 31, 2014 and 7.5% thereafter, due 2016

76,245 

 

 

70,029 

 

 

880,408 

 

 

874,192 

Less:  debt discount, net of premium

 

(12,476)

 

 

(14,686)

Less:  current maturities

 

(115,163)

 

 

(15,713)

 

 

 

 

 

 

Long-term debt

$

752,769 

 

$

843,793 

 

Senior Notes

 

On February 23, 2012, we completed the private placement of $350 million aggregate principal amount of 12% first priority notes due 2018 (the “First Priority Notes”) and $150 million aggregate principal amount of 12% second priority notes due 2018 (the “Second Priority Notes,” and, together with the First Priority Notes, the “2018 Notes”), with an aggregate $20 million discount.  We also paid approximately $21 million in other financing costs related to the 2018 Notes.

 

On October 15, 2012, we completed the private placement of $54 million aggregate principal amount of additional First Priority Notes.

 

5.5% Convertible Senior Notes

 

In July 2011, we issued $135 million aggregate principal amount of our 5.5% Convertible Senior Notes due July 15, 2016.  Interest on these notes is payable semi-annually 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, subject to certain anti-dilution adjustments.

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

 

Revolving Credit Facility

 

During 2012, we entered into a Credit Agreement (the “Revolving Credit Facility”), with Cyan Partners, LP (“Cyan”), as administrative agent.  As of September 30, 2013 and December 31, 2012, we had utilized $115.2 million under the Revolving Credit Facility.    Borrowings under the Revolving Credit Facility bear interest at a rate of 13% per year.

 

In the first half of 2013, we entered into amendments to the Revolving Credit Facility whereby (i) the lenders consented to the Production Payment Transaction (discussed in Note 7) and (ii) extended the maturity of the commitments under the under the Revolving Credit Facility was extended from October 12, 2013 to June 30, 2014.

 

11.5% Convertible Bonds

 

Our 11.5% Convertible Bonds bear interest at a rate of 11.5% per annum until March 31, 2014 and 7.5% thereafter.  Interest is compounded quarterly and added to the outstanding principal balance each quarter.  The bonds are convertible into shares of our common stock at an initial conversion price of $16.52 per $1,000 of principal, which represents a conversion rate of approximately 61 shares of our common stock per $1,000 of principal.

 

Fair Value

 

The fair value of our outstanding debt obligations was $857.2 million and $870 million at September 30, 2013 and December 31, 2012, respectively.  The fair values of long-term debt were determined based upon external market quotes for our Senior Notes and an income approach for other debt, using a credit adjusted discount rate at the reporting date, and classified as Level 3 in the fair value hierarchy.

 

 

Note 7 – Income Taxes 

 

Our U.S. operations are taxed at a statutory rate of 35%.  However, we currently do not record tax benefits due to losses in the U.S. as there is no assurance that we will generate any U.S. taxable earnings, resulting in a full valuation allowance of all deferred tax assets generated.

 

Our income tax expense relates primarily to our operations in the U.K. which are taxed at a statutory rate of 62% plus an additional Petroleum Revenue Tax on our Alba field.  The current tax expense (benefit) is related to Petroleum Revenue Tax on our Alba field. 

 

 

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

Note 8 – Long-Term Liabilities

 

Monetary Production Payment

 

Our monetary production payment liability, net of repayments, consisted of the following at September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2013

 

 

2012

 

 

 

 

 

 

Monetary production payment

$

145,834 

 

$

 -

 

 

 

 

 

 

Less:  current portion

 

(19,167)

 

 

 -

 

 

 

 

 

 

Long-term monetary production payment

$

126,667 

 

$

 -

 

During the first quarter of 2013, our wholly-owned subsidiary, EEUK, entered into an agreement for (i) $125 million providing for a monetary production payment (the “Production Payment”) over the proceeds of sale from a portion of EEUK’s entitlement to production from its interests in the Alba and Bacchus fields located in the U.K. sector of the North Sea and (ii) the issuance of warrants (discussed below).  Repayment of the production payment will come solely from the proceeds from the sale of production from EEUK’s entitlement from the Alba and Bacchus fields.

 

In August 2013, we entered into an amendment to the Production Payment agreement.  The amendment provided for the sale of an additional Production Payment for an incremental purchase price of $25 million, with an implied cost of 8.75%, thereby increasing the total amount outstanding to $150 million.  Pursuant to the new amendment, our obligations will cease upon the earlier of the repayment of amounts outstanding or production from the Alba and Bacchus licences permanently ceasing.  If repayment is made on the existing amortization schedule, we would pay approximately $175 million by 2015, including implied interest.

 

Our obligations under the Production Payment are secured by first priority liens over our interests in the licences and joint operating agreements relating to the Alba and Bacchus fields and the accounts into which proceeds from the sale of production from such fields are paid.  Our obligations are also secured by second priority liens over certain of our other licences, joint operating agreements and assets.

 

In connection with the Production Payment, we issued warrants to purchase a total of 3,440,000 shares of our common stock at an exercise price of $3.014 per share, expiring on April 30, 2018, and warrants to purchase a total of 560,000 shares of our common stock at an exercise price of

 

 

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Table Of Contents

 

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

$3.685 per share, expiring on May 21, 2018.  We have incurred $24.4 million in costs related to the issuance of the Production Payment, including $7.6 million related to the fair market value of the warrants issued.

 

Both warrant agreements are subject to customary anti-dilution provisions and include a cashless exercise provision entitling the investors to surrender a portion of the underlying common stock that has a value equal to the aggregate exercise price in lieu of paying cash upon exercise of a warrant.

 

Other Liabilities

 

At September 30, 2013 and December 31, 2012, our other liabilities included the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2013

 

 

2012

 

 

 

 

 

 

Asset retirement obligations

$

130,110 

 

$

139,821 

Long-term derivative liabilities

 

6,244 

 

 

7,402 

Other

 

444 

 

 

469 

 

 

 

 

 

 

Total Other Liabilities

$

136,798 

 

$

147,692 

 

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 nine months ended September 30, 2013 and 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2013

 

 

2012

Carrying amount of asset retirement obligations as of beginning of period

$

176,076 

 

$

47,258 

Accretion expense (included in DD&A expense)

 

17,298 

 

 

5,614 

Impact of foreign currency exchange rate changes

 

(207)

 

 

2,950 

Payment of asset retirement obligations

 

(22,779)

 

 

(7,838)

Liabilities incurred and assumed

 

(4,333)

 

 

17,263 

Carrying amount of asset retirement obligations, as of end of period

 

166,055 

 

 

65,247 

Less:  Current portion of asset retirement obligations

 

(35,945)

 

 

(8,051)

Long-term asset retirement obligations

$

130,110 

 

$

57,196 

 

 

 

 

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

 

Note 9Stock-Based Compensation Arrangements

 

We grant restricted stock and stock options to employees and directors as incentive compensation.  The restricted stock and options generally vest over three years.  Non-cash stock-based compensation is recorded in general and administrative (“G&A”) expenses or capitalized G&A as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

G & A Expenses

$

720 

 

$

1,347 

 

$

2,438 

 

$

3,605 

Capitalized G & A

 

744 

 

 

411 

 

 

2,234 

 

 

1,267 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-cash stock-based compensation

$

1,464 

 

$

1,758 

 

$

4,672 

 

$

4,872 

 

At September 30, 2013,  total compensation cost related to awards not yet recognized was approximately $8.0 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 did not grant any stock options during 2012 or 2013.  Information relating to outstanding 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, 2013

188 

$

6.72 

 

 

 

 

Forfeited

(1)

 

6.62 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - September 30, 2013

187 

$

6.72 

 

4.7

$

98 

Currently exercisable - September 30, 2013

187 

$

6.72 

 

4.7

$

98 

 

 

 

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Endeavour International Corporation

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.  The status of the restricted shares granted as of September 30, 2013 and the changes during the nine months ended September 30, 2013 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Average Grant

 

 

 

 

 

Date Fair

 

 

Number of

 

 

Value per

 

 

Shares

 

 

Share

Balance outstanding - January 1, 2013

 

754 

 

$

10.11 

Granted

 

562 

 

 

5.23 

Vested

 

(358)

 

 

10.06 

Forfeited

 

(134)

 

 

7.33 

 

 

 

 

 

 

Balance outstanding - September 30, 2013

 

824 

 

$

7.32 

 

 

 

 

 

 

Total grant date fair value of shares vesting during the period

$

3,599 

 

 

 

 

Performance-Based Share Awards

 

Certain of our executive officers were granted a target number of performance shares under individual Performance Unit Award Agreements.  The performance shares will be earned as the relative total shareholder return ranking is measured among a designated peer group at the end of a three-year performance period.  Payouts will be based on a predetermined schedule at the end of the performance period. The shares issued may range from 0% to 200% of the number of Performance Units specified in the agreements. The fair value of each performance-based award is estimated on the date of grant using a Monte Carlo simulation model. 

 

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

The status of the performance-based share awards as of September 30, 2013 and the changes during the nine months ended September 30, 2013 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Date Fair

 

 

Number of

 

 

 

Value per

 

 

Shares

 

 

 

Share

Balance outstanding - January 1, 2013

 

357 

 

 

$

16.72 

Granted

 

562 

 

 

 

7.41 

Forfeited

 

(16)

 

 

 

10.56 

 

 

 

 

 

 

 

Balance outstanding - September 30, 2013

 

903 

 

 

$

11.04 

 

 

 

 

 

Note 10 – Loss Per Share

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

September 30,

 

2013

 

 

2012

 

 

 

 

 

Warrants, options and stock-based compensation

8,148 

 

 

2,895 

Convertible debt

11,908 

 

 

11,414 

Convertible preferred stock

4,229 

 

 

4,229 

 

24,285 

 

 

18,538 

 

 

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

 

 

Note 11Related Party Transactions

 

The Founding Partner and Chief Investment Officer of Cyan, Ashok Nayyar, became a member of our Board of Directors in September 2012.  As of September 30, 2013 and December 31, 2012, we had utilized the full capacity of $115.2 million under the Revolving Credit Facility.   In connection with the amendments to the Revolving Credit Facility during 2013, we agreed to pay a fee of $1.25 million to Cyan.  Mr. Nayyar resigned from our Board of Directors in March 2013.

 

 

Note 12 – Fair Value Measurements

 

We measure the fair value of financial assets and liabilities on a recurring basis, defining fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The fair value is based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations.  This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of our own nonperformance risk on our liabilities.  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.

 

We apply fair value measurements to certain assets and liabilities including commodity derivative instruments 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.

 

 

 

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Endeavour International Corporation

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 financial instruments by pricing levels as of September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Market Prices

 

Significant Other

 

Significant

 

 

 

 

in Active Markets -

 

Observable Inputs -

 

Unobservable Inputs

Total

 

Level 1

 

Level 2

 

Level - 3

Fair Value

Embedded derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2013

 

$

 -

 

 

$

 -

 

 

$

(6,244)

 

$

(6,244)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2012

 

$

 -

 

 

$

 -

 

 

$

(7,402)

 

$

(7,402)

 

We use a derivative valuation model to derive the value of our embedded derivatives.  Key inputs into this valuation model are our current stock price, risk-free interest rates, the stock volatility and our implied credit spread. The first two aforementioned inputs are based on observable market data and are considered Level 2 inputs while the last two aforementioned inputs are unobservable and thus require management’s judgment and are considered Level 3 inputs.  A decrease or increase in the implied credit spread of 5% would increase or decrease, respectively, the liability by approximately $0.9 million.  A similar 5% decrease or increase in the stock volatility has an inverse effect to the change in the liability and would result in an approximately $0.7 million decrease or increase, respectively. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

 

2013

 

2012

Balance at beginning of period

$

(7,402)

$

(15,858)

Realized and unrealized gains included in earnings

 

1,158 

 

1,036 

Balance at end of period

$

(6,244)

$

(14,822)

 

 

 

 

 

Changes in unrealized gains relating to derivatives assets and liabilities

 

 

 

 

still held at the end of the period

$

1,158 

$

1,036 

 

 

 

 

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

Note 13 – Derivative Instruments

 

We had embedded derivatives related to debt and equity instruments at September 30, 2013.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2013

 

 

2012

Derivatives not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

Other liabilities - long-term

$

(6,244)

 

$

(7,402)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

Derivatives not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on oil and gas commodity derivatives

$

 -

 

$

(1,515)

 

$

 -

 

$

(3,420)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on embedded derivatives

 

 

 

 

 

 

 

 

 

 

 

related to debt and equity instruments

$

855 

 

$

311 

 

$

1,158 

 

$

1,242 

 

 

 

 

Note 14 – Supplemental Cash Flow Information

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2013

 

 

2012

 

 

 

 

 

 

Interest paid

$

88,027 

 

$

62,150 

 

 

 

 

 

 

Income taxes paid

$

28,736 

 

$

2,405 

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

 

 

 

 

Note 15 – Commitments and Contingencies

 

Commitments Related to Asset Retirement Obligations

 

We have several 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 these agreements and the commitments under the 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 these agreements are included in “Letter of credit fees” in other expenses on our condensed consolidated statement of operations.

 

Decommissioning Security Agreements

 

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.  This Procurement Agreement replaced the IVRRH Reimbursement Agreement discussed below.

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

 

Reimbursement Agreements

During 2012, we entered into reimbursement agreements related to abandonment liabilities for certain of our U.K. oil and gas properties. 

 

One of the reimbursement agreements (the “IVRRH Reimbursement Agreement”) covered approximately $33 million and was related to our decommissioning obligations at the Ivanhoe, Rob Roy, Hamish (collectively, “IVRRH”), Renee and Rubie fields where we are currently paying certain asset retirement costsIn connection 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 covers approximately $120 million related to our decommissioning obligations for the Alba field (the “Alba Reimbursement Agreement”).  We pay a fee of 13% per year, payable quarterly, computed based on the outstanding amount of each letter of credit.  In addition, our obligations under the reimbursement agreement are 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 September 30, 2013, 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 performance and life of the reservoir,  which is not expected to occur until 2029 or later.

 

On March 5, 2013, we amended the Alba Reimbursement Agreement to (i) allow us to enter the Production Payment Transaction (defined below), (ii) extend the maturity of the obligations under the Alba Reimbursement Agreement from December 31, 2013 to June 30, 2014, and (iii) the parties agreed to take the steps necessary to extend the letter of credit issued pursuant to the Alba Reimbursement Agreement from December 31, 2013 to December 31, 2014.

 

Terminated Acquisition of Marcellus Assets

 

On July 17, 2011, we entered into agreements with SM Energy Company (“SM Energy”) named therein 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, exceeded the contractual threshold of 15% of the purchase price for the applicable asset group ($85 million); and (ii) the condition of the pipeline was not in compliance with applicable regulatory standards, which would constitute a material violation of a representation and warranty contained in the applicable SM Purchase Agreement.

 

SM Energy filed a lawsuit against us in Texas state court on December 20, 2011 alleging that we

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

breached the SM Purchase Agreements by terminating them and refusing to close on the transactions.  Specifically, SM Energy has alleged, among other things, that most of our asserted title defects are without merit and, in any event, would not exceed 15% of the applicable purchase price.  SM Energy seeks the award of unspecified actual damages, including costs and reasonable attorney’s fees, and specific performance.  On January 17, 2012, we filed an answer and counterclaim denying the allegations and seeking the return of our $6 million deposit, which we believe we are entitled to recover pursuant to the terms of the SM Purchase Agreements, and for the damages that we suffered as a result of SM Energy’s misrepresentations.  We intend to contest this case vigorously.  The lawsuit was scheduled to go to trial in November 2013 but has now been delayed as the presiding judge has been appointed to a higher court.  It is not known when a new trial date will be established.

 

 

Note 16 – Guarantor Subsidiaries

 

Certain of our wholly-owned domestic subsidiaries have, jointly and severally, fully and unconditionally guaranteed the Senior Notes.  Pursuant to Securities and Exchange Commission (“SEC”) regulations, we have presented in columnar format the condensed consolidating financial information for Endeavour International Corporation, the guarantor subsidiaries on a combined basis, and all non-guarantor subsidiaries on a combined basis.

 

The subsidiary guarantees are unsecured obligations of each subsidiary guarantor and rank equally in right of payment with all senior indebtedness of that subsidiary guarantor and senior in right of payment to all subordinated indebtedness of that subsidiary guarantor.  The subsidiary guarantees are effectively subordinated to any secured indebtedness of the subsidiary guarantor with respect to the assets securing the indebtedness.  In addition, the subsidiary guarantees may be released in certain customary circumstances, including (i) the sale of all or substantially all of the properties or assets or a guarantor, (ii) the sale of the capital stock of a guarantor, (iii) the designation of a guarantor as an “Unrestricted Subsidiary,” (iv) upon legal defeasance of the Senior Notes or satisfaction and discharge of the indentures governing the Senior Notes, (v) upon the liquidation or dissolution of the guarantor or (vi) if the guarantor ceases to guarantee other of our indebtedness and ceases to be a material subsidiary, each of which is subject to important limitations in the indentures governing the Senior Notes.

 

 

 

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Amounts in tables in thousands, except per unit data)

 

Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2013

 

Endeavour International Corporation

Combined Guarantor Subsidiaries

Combined Non-Guarantor Subsidiaries

Eliminations

Consolidated

Cash and cash equivalents

$

 -

$

3,584 

$

56,773 

$

 -

$

60,357 

Accounts receivable

 

 -

 

1,936 

 

22,560 

 

 -

 

24,496 

Current receivables due from affiliates

 

854,025 

 

5,530 

 

47,597 

 

(907,152)

 

 -

Prepaid expenses and other

 

 -

 

404 

 

48,292 

 

 -

 

48,696 

Current Assets

 

854,025 

 

11,454 

 

175,222 

 

(907,152)

 

133,549 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 -

 

91,871 

 

987,035 

 

 -

 

1,078,906 

Goodwill

 

 -

 

 -

 

259,238 

 

 -

 

259,238 

Long-term receivables due from affiliates

 

 -

 

599,000 

 

 -

 

(599,000)

 

 -

Investments in subsidiaries

 

57,662 

 

120,058 

 

 -