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Index

 

 

Quantities of natural gas are expressed in this Quarterly Report on Form 10-Q in terms of thousand cubic feet (“mcf”), million cubic feet (“mmcf”) or million British thermal units (“mmbtu”).  We have assumed one mmbtu is equal to one mmcf.  Oil, which includes natural gas liquids, is quantified in terms of barrels (“bbls”) and thousands of barrels (“mbbls”).  Natural gas and oil are compared in terms of barrels of oil equivalent (“boe”) thousand barrels of oil equivalent (“mboe”) and million barrels of oil equivalent (“mmboe”) or thousand cubic feet equivalent (“mcfe”) and million cubic feet equivalent (“mmcfe”).  Daily volumes are expressed as barrels of oil equivalent per day (“boed”), millions of barrels of oil equivalent per day (“mmboed”) or million cubic feet per day (“mmcfd”).  One barrel of oil is the approximate 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 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.

 

 

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See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

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See accompanying notes to condensed consolidated financial statements.

 

 

 

 

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See accompanying notes to condensed consolidated financial statements.

 

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See accompanying notes to condensed consolidated financial statements.

 

 

 

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Note 1 – General

 

Description of Business

 

Endeavour International Corporation (“EIC”) is an independent oil and gas company engaged in the exploration, development, production and acquisition of energy reserves in the U.S. and 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,” “Company,” “we,” “us,” “our” and similar terms refer to EIC 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, 2014.

 

Bankruptcy Cases

 

On October 10, 2014, (the “Petition Date”), Endeavour and certain of its wholly owned U.S. subsidiaries - Endeavour Operating Corporation (“EOC”), Endeavour Colorado Corporation (“ECC”), Endeavour Energy New Ventures Inc., and END Management Company - and one of its foreign subsidiaries - Endeavour Energy Luxembourg S.à.r.l. (collectively, the “Debtors”) - filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).  The Chapter 11 cases are being jointly administered by the Bankruptcy Court as Case No. 14-12308 (the “Bankruptcy Cases”).  See Note 3 – Voluntary Reorganization Under Chapter 11 for a discussion of the Bankruptcy Cases.

 

Going Concern

 

Our accompanying condensed consolidated financial statements were prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve month period following the date of these condensed consolidated financial statements.  However, there is substantial doubt about our ability to continue as a going concern as a result of our Bankruptcy Cases and other matters described herein, including: 

 

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During the pendency of the Bankruptcy Cases, we expect that our primary sources of liquidity will continue to be cash on hand and cash flows from operations.  In addition, the negative covenants under the Amended Term Loan Facility restrict us from obtaining additional capital, including limits on intercompany transfers.

 

Our ability to continue as a going concern is dependent on many factors, including, among other things: (i) the cost, duration and outcome of the Bankruptcy Cases; (ii) our ability to maintain adequate cash on hand and generate cash from operations; (iii) our ability to maintain compliance with debt covenant requirements of the Amended Term Loan Facility; and (iv) our ability to achieve profitability following a restructuring.  The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if our actions to address these factors are not successful.

 

 

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 (“U.S. 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.  The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result from the outcome of this uncertainty.  See Note 1 – General – Going Concern.

 

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.

 

U.S. GAAP requires management to use estimates, judgments and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported herein.  While management regularly reviews its estimates, actual results could differ from those estimates.

 

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Management believes that it is reasonably possible that the following material estimates affecting the financial statements could change in the current year:

 

 

Discontinued Operations

 

On January 1, 2015, the Company adopted the Financial Accounting Standards Board’s  (“FASB”) updated guidance on reporting discontinued operations and disclosures of disposals of components of an entity.  The update amended the requirements for reporting discontinued operations, including the criteria for which discontinued operations are reported and additional disclosures about discontinued operations.  The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.    

 

Recent Accounting Pronouncements

 

In March 2015, the FASB issued an update to the accounting standards to simplify the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.  The guidance is effective for interim periods and annual period beginning after December 15, 2015; however early adoption is permitted.  We are currently evaluating the effect that adopting this guidance will have on our financial position, results of operations or cash flows.

 

In May 2014, the FASB issued a new standard on revenue recognition.  The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In July 2015, the FASB finalized the delay of the effective date by one year, making the new standard effective for interim periods and annual period beginning after December 15, 2017.  This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption; however, entities that are reporting under U.S. GAAP are not permitted to adopt the standard earlier than the original effective date for public entities (that is, no earlier than 2018 for calendar year-end entities).  We are currently evaluating the effect that adopting this guidance will have on our financial position, results of operations or cash flows.

 

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Note 3 –  Voluntary Reorganization Under Chapter 11

 

Background

 

On September 2, 2014, the Company announced that it had decided not to pay approximately $33.5 million in interest due on September 2, 2014 on its 12% First Priority Notes due March 2018 (“First Priority Notes”), 12% Second Priority Notes due June 2018 (“Second Priority Notes”) and 6.5% Convertible Senior Notes due November 2017 (“6.5% Convertible Senior Notes”).

 

On October 10, 2014, the Company announced that it reached agreements with holders of more than two-thirds of its First Priority Notes, Second Priority Notes and 7.5% Convertible Bonds and its 6.5% Convertible Senior Notes and 5.5% Convertible Senior Notes (collectively, “Consenting Debt Holders”), in the form of a consensual Restructuring Support Agreement (“RSA”) that, if implemented as proposed, would significantly reduce the Company’s outstanding debt (see Note 8 – Debt Obligations).  The RSA contemplated that the recapitalization of the Company would occur pursuant to a pre-arranged plan of reorganization.  On the Petition Date, the Debtors filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.  Since the Petition Date, the Debtors have operated their business as “debtors-in-possession" pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code, which will allow the Company to continue operations and carry on the business in the ordinary course of business during the reorganization proceedings.  Each Debtor will remain in possession of its assets and properties, and its business and affairs will continue to be managed by its directors and officers, subject in each case to the supervision of the Bankruptcy Court.

 

On the Petition Date, the Company sought, and thereafter obtained, authority to take a broad range of actions, including, among others, authority to pay royalty interests and joint interest billings, certain employee obligations and pre-Petition contractor claims and taxes.  Additionally, other orders were obtained, including adequate assurance of payment to utility companies as well as continued use of cash management systems.

 

None of the Company’s subsidiaries incorporated in the U.K. has filed under Chapter 11.  Such non-filing subsidiaries are referred to herein as “non-Debtors.”

 

Termination of RSA and Sale of U.S. and U.K. Assets

 

On April 29, 2015, the Debtors terminated the RSA and filed a notice with the Bankruptcy Court to withdraw its proposed plan of reorganization that had been filed to implement the terms of the RSA (the “Plan”).  We determined that as a result of the decline in commodity prices, the Plan was not feasible and, accordingly, did not continue to seek its confirmation.  Even if the Plan were to be confirmed, if oil and gas prices remain at their depressed levels, we could breach our

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leverage covenant under our Amended Term Loan Facility applicable to our U.K. subsidiary in or about the fourth quarter of 2015, which would result in a default under the terms of the Amended Term Loan Facility.

 

On April 29, 2015, in light of the foregoing, the Company also filed with the Bankruptcy Court a motion to, among other things, approve the sale of substantially all of the Company’s U.S. assets and, in connection with such sale, establish bidding procedures and an auction.

 

On June 1, 2015, the Company announced the launch of a marketing process in the U.K. for the sale of all or substantially all of our North Sea oil and gas assets.

 

Claim by Related Party

 

We maintained an employment agreement with Mr. William 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.  Ultimate resolution of Mr. Transier’s claims has not been determined by the Bankruptcy Court.

 

Subsequent Event

 

On August 3, 2015, EIC and EOC entered into an asset purchase agreement (the “APA”) with certain of the holders of our First Priority Notes and the collateral agent for the holders of such notes (the “Agent”).  Under the APA, EOC will:

 

 

The purchaser will be a newly formed entity (“Newco”) which will be owned by the holders of our First Priority Notes and the lenders under our Amended Term Loan Facility.    The purchase price for EIHBV and the Intercompany Note will be a credit bid of $1 and $1 in cash.  The Agent holds a perfected first priority lien on the Intercompany Note and 65% of the stock of EIHBV.  The closing of the APA is conditioned upon approval of the transactions by the Bankruptcy Court, the occurrence of the closing under the Settlement Agreement (defined below) and other customary conditions to closing.

 

Under the APA, 53% of the net cash proceeds from the sale of our oil and gas assets owned by EOC, which would otherwise be paid to holders of the First Priority Notes, will be used to fund

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the administrative costs and expenses of the Bankruptcy Cases and any expenses incurred in connection with the subsequent dissolution of the Debtors.  To the extent such asset sale proceeds are insufficient to satisfy these expenses and the closing occurs under the APA,  EEUK will fund the expenses up to an agreed-upon maximum amount.

 

On August 3, 2015, EIC, EOC and ECC also entered into a settlement agreement (the “Settlement Agreement”) with holders of our First Priority Notes who are parties to the APA and certain lenders under the Amended Term Loan Facility, relating, among other things, to:

 

 

Additionally, pursuant to the Settlement Agreement, EIC, EOC and ECC have agreed to restrictions on certain intercompany cash transfers.  The closing of the Settlement Agreement is conditioned upon:

 

 

There can be no assurance that transactions contemplated by the APA and Settlement Agreement will be consummated.  If we are unable to consummate the APA and Settlement Agreement, we may be compelled into liquidation of our U.K. operations through an administration proceeding in the U.K.  In addition, we are continuing our efforts to sell the assets of the Debtors to be followed by the dismissal of their Chapter 11 cases and their dissolution.

 

On August 3, 2015, the Debtors filed with the Bankruptcy Court a motion to, among other things, request entry of an order by the Bankruptcy Court approving:

 

 

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In connection with such events, it is expected that all common stock of the Debtors and all obligations related to the First Priority Notes, Second Priority Notes, 7.5% Convertible Bonds, 6.5% Convertible Senior Notes and 5.5% Convertible Senior Notes would be cancelled.

 

 

Note 4 – Debtors Condensed Combined Financial Statements

 

Condensed combined financial statements of the Debtors are set forth below.  The Condensed Combined Financial Statements exclude the financial statements of the non-Debtors.  Transactions and balances of receivables and payables between Debtors are eliminated in consolidation.  However, the Condensed Combined Balance Sheet includes receivables from related non-Debtors and payables to related non-Debtors.  Actual settlement of these related party receivables and payables is, by historical practice, made on a net basis or through an equity contribution.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 5 –  Liabilities Subject to Compromise

 

Liabilities Subject to Compromise represents liabilities incurred prior to the Petition Date which may be affected by the Chapter 11 process.  These amounts represent the Debtors’ allowed claims and their best estimate of claims expected to be allowed which will be resolved as part of the bankruptcy proceedings.

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Liabilities Subject to Compromise consists of the following as of June 30, 2015:

 

 

 

Interest Expense

 

The Debtors have discontinued recording interest expense on unsecured or under-secured liabilities subject to compromise on the Petition Date.  Contractual interest not accrued during the six months ended June 30, 2015 was approximately $42.6 million.

 

Reorganization Items

 

Reorganization items represent the direct and incremental costs of being in bankruptcy, such as professional fees, pre-petition liability claim adjustments and losses related to terminated contracts that are probable and can be estimated.  Reorganization fees for the six months ended June 30, 2015 related solely to professional fees.

 

 

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Note 6 –  Property and Equipment

 

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

 

 

 

As of December 31, 2014, our properties not subject to amortization balance of $10.8 million related to unevaluated well costs in the Marcellus.  These costs were transferred to the amortization base during the second quarter of 2015 when a determination of proved reserves could be assigned to such properties.  As of December 31, 2014 and June 30, 2015 we had no unevaluated costs in the U.K.

 

For the three months ended June 30, 2015 and 2014, we capitalized none and $2.4 million, respectively, in interest related to exploration and development, primarily related to our U.K. activities.  For the six months ended June 30, 2015 and 2014, we capitalized none and $5.0 million, respectively, in interest.

 

For the three months ended June 30, 2015 and 2014, we capitalized $1.3 million and $2.9 million, respectively, in certain directly related employee costs.  For the six months ended June 30, 2015 and 2014, we capitalized $3.7 million and $6.0 million, respectively, in certain directly related employee costs.

 

 

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Oil and Gas Impairments

 

During the second quarter of 2015, we recorded $42.9 million in impairment of oil and gas properties, pre-tax, through the application of the full cost ceiling test.  The primary reason for the impairment was the precipitous fall in oil and gas prices which began during the fourth quarter of 2014 and have yet to recover.  The pricing used for the U.K. for the second quarter of 2015 was $75.98 per barrel for oil and $7.44 per mcf for gas.  The pricing used for the U.S. for the second quarter of 2015 was $71.68 per barrel for oil and $3.39 per mcf for gas.  Should oil and gas prices remain depressed for the remainder of 2015, further impairments of our oil and gas properties are likely to be recorded throughout 2015.

 

We did not have an impairment of U.S. oil and gas properties through the application of the full cost ceiling test for the second quarter of 2014, which utilized prices of $100.27 per barrel for oil and $4.09 per mcf for gas. Additionally, we did not have an impairment of U.K. oil and gas properties through the application of the full cost ceiling test for the second quarter of 2014, which utilized prices of $108.64 per barrel for oil and $9.65 per mcf for gas.

 

Insurance Settlements

 

During the second quarter of 2015, we settled our insurance claim to recover certain loss of production income and property settlement claims related to the Alba water injection pipeline for a total of $29.2 million, including $13.0 million during the fourth quarter of 2014, $8.4 million during the first quarter of 2015 and $7.8 million during the second quarter of 2015.  Insurance proceeds have been recorded as a reduction in capital expenditures or an offsetting amount to operating expenses, depending on the nature of the cost recovery.

 

 

Note 7 – 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.

 

At June 30, 2015, our deferred revenue was entirely attributable to our Alba field.  Delivery of the production is expected to occur during the fourth quarter of 2015.

 

 

 

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Note 8 – Debt Obligations

 

At  June 30, 2015, we had $1,230.2 million in outstanding debt.  Our debt consisted of the following at June 30, 2015 and December 31, 2014:

 

 

 

Liabilities Not Subject to Compromise

 

Amended Term Loan Facility

 

On September 30, 2014, two wholly-owned subsidiaries, EIHBV and End Finco LLC (“Finco” and collectively, “Borrowers”) entered into an amended and restated credit agreement (the “Amended Credit Agreement”) replacing our previous $125 million senior secured first lien term loan facility originally entered into on January 24, 2014 (the “Term Loan Facility”).  EIHBV and

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Finco are non-Debtors, and as such, the Amended Credit Agreement is not subject to the Bankruptcy Cases.  Pursuant to the Amended Credit Agreement, the lenders advanced approximately $440 million in aggregate principal amount of term loans to the Borrowers (“Amended Term Loan Facility”). 

 

The Amended Term Loan Facility bears interest quarterly at a rate of LIBOR plus 10.00% per year (with a LIBOR floor of 1% per year) and matures on January 2, 2017.  The loans under the Amended Term Loan Facility were issued with original issue discount of 2.0%.  Borrowings under the Amended Term Loan Facility are guaranteed by the Company and certain of its current and future subsidiaries, including Endeavour Operating Corporation and Endeavour Energy UK Limited (“Endeavour UK”), subject to certain exceptions.  The Amended Term Loan Facility is secured by the same assets that previously secured the Company’s Term Loan Facility other than cash and cash equivalents in the United States.

 

The Amended Credit Agreement contains covenants and provisions with respect to events of default,  including restrictions on the Company’s and its subsidiaries’ abilities to: (i) pay distributions or repurchase or redeem the Company’s capital stock or subordinated debt; (ii) make certain investments; (iii) incur additional indebtedness; (iv) create or incur certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions from the Company’s subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) allow EIHBV or any of its subsidiaries to make dividends, payments or other distributions of any kind to the Debtors, other than pursuant to specific limited amounts and for specified purposes.

 

The Amended Credit Agreement contains customary events of default, subject to certain exceptions.  In particular, the following events do not constitute events of default under the Amended Credit Agreement: (a) payment defaults or other defaults to the Company’s existing notes or to certain intercompany indebtedness or (b) a bankruptcy filing by the Company or its domestic subsidiaries and one foreign subsidiary.

 

In addition, the Amended Credit Agreement contains various financial covenants as defined in the agreement, including:

 

 

If oil and gas prices remain at their depressed levels, we could breach our leverage covenant under our Amended Term Loan Facility in or about the fourth quarter of 2015, which would result in a default under the terms of the Amended Term Loan Facility.  Based on this

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determination, we have classified the outstanding balance of the Amended Term Loan Facility as a current liability in the line item “Current maturities of debt” and the related remaining deferred financing costs as a current asset in our Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014.

 

Refer to Note 3 – Voluntary Reorganization Under Chapter 11 – Subsequent Event regarding the EEUK Amendment Documents.

 

Liabilities Subject to Compromise

 

Senior Notes

 

In February 2012, we closed the private placement of $350 million aggregate principal amount of 12% First Priority Notes due 2018 and $150 million aggregate principal amount of 12% Second Priority Notes due 2018 (collectively, the “2018 Notes”).  In October 2012, we completed a private placement of an additional $54 million aggregate principal amount of 12% First Priority Notes due 2018.

 

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.

 

7.5% Convertible Bonds

 

In July 2008, we issued 7.5% Convertible Bonds which bore interest at a rate of 11.5% per annum until March 31, 2014, and at a rate of 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.

 

6.5% Convertible Senior Notes

 

On February 28, 2014, we entered into a securities purchase agreement (the “Securities Purchase Agreement”).  We issued $30 million of securities during the first quarter of 2014, comprised of 2.9 million shares of our common stock; warrants to purchase 0.7 million shares of our common

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stock at an exercise price of $5.292 per share, expiring on February 28, 2019; and $17.5 million in aggregate principal amount of our 6.5% Convertible Senior Notes.

 

Interest on the 6.5% Convertible Senior Notes is payable quarterly and matures the earlier of (i) December 1, 2017 or (ii) 92 days prior to the maturity date of our outstanding 5.5% Convertible Senior Notes or our 7.5% Convertible Bonds, if still outstanding on that date.

The 6.5% Convertible Senior Notes are convertible at any time at an initial rate of 214.5002 shares of our common stock per $1,000 principal amount of 6.5% Convertible Notes (equivalent to an initial conversion price of approximately $4.662 per share of our common stock).

 

Fair Value

 

The fair value of our outstanding debt obligations was $447.4 million and $446.1 million at June 30, 2015 and December 31, 2014, respectively.  The fair value of our Amended Term Loan Facility was determined based upon a discounted cash flow model.  As a result, all fair value measures related to our debt are considered Level 3.

 

 

Note 9 – 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.

 

For years prior to January 1, 2015, our U.K. operations were taxed at a statutory rate of 62% (composed of a Ring Fence Corporation Tax rate of 30% and Supplementary Charge rate of 32%).  In March 2015, the Supplementary Charge rate decreased to 20%, which was retroactive to January 1, 2015, so that for 2015 the statutory rate is 50%.  However, we currently do not record tax benefits due to losses in the U.K. relating to Ring Fence Corporation Tax and Supplemental Charge as there is no assurance that we will generate any U.K. taxable earnings.  As a result, we have a full valuation allowance on the deferred tax assets generated relating to these taxes.

 

In addition, certain of our U.K. fields are subject to a Petroleum Revenue Tax (“PRT”) rate of 50%.  Our current tax expense is related to PRT on the Alba field, our only producing field subject to PRT.  In March 2015, tax legislation was enacted that will decrease the PRT rate from 50% to 35% for years beginning on January 1, 2016.

 

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UK Finance Act 2015

 

On March 26, 2015, the Finance Act 2015 received Royal Assent and was enacted by the U.K. government.  The Finance Act 2015 implemented several changes affecting our U.K. activities, including:

 

 

As a result of this enacted legislation, the Company recorded an $11.4 million deferred tax expense related to the decrease in the Supplementary Charge rate change during the first quarter of 2015, offset by an equal reduction in the U.K. valuation allowance which resulted in a zero net charge to the Condensed Consolidated Statements of Operations for the six months ended June 30, 2015.

 

The Company recorded a deferred PRT tax benefit of $7.9 million during the first quarter of 2015 related to the enacted decrease in the PRT rate for the deferred tax liabilities that will reverse subsequent to the January 1, 2016 effective date.

 

Furthermore, the Company recorded deferred tax expenses of $5.6 million during the second quarter of 2015 related to the enactment of the Investment Allowance and recognition of the remaining field allowances.  These charges were offset by an equal reduction in the U.K. valuation allowance which resulted in a zero net charge to the Condensed Consolidated Statements of Operations for the six months ended June 30, 2015.

 

 

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Note 10 – Other Long-Term Liabilities

 

At June 30, 2015 and December 31, 2014, our other liabilities included the following:

 

 

 

Asset Retirement Obligations

 

Our asset retirement obligations relate to our obligation for the plugging and abandonment of oil and gas properties.  The asset retirement obligations are recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value.  If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded for both the asset retirement obligation and the asset retirement cost.  The following table provides a rollforward of our asset retirement obligations for the six months ended June 30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

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Note 11 – Equity Transactions

 

In February 2014, we entered into the Securities Purchase Agreement whereby we issued 2.9 million shares of our common stock and warrants to purchase 0.7 million shares of our common stock for a total of $12.5 million in cash.  The warrants have an exercise price of $5.292 per share and expire on February 28, 2019 and are subject to customary anti-dilution provisions.

 

For discussion of the potential impact of our filing under Chapter 11 of the Bankruptcy Code on our equity, see Note 3 – Voluntary Reorganization Under Chapter 11.

 

 

 

 

Note 12 – 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.  We have not granted any restricted stock or stock options during 2015. 

 

Non-cash stock-based compensation is recorded in general and administrative (“G&A”) expenses or capitalized G&A for the three and six months ended June 30, 2015 and 2014 as follows:

 

 

 

 

At June 30, 2015, total compensation cost related to awards not yet recognized was approximately $2.9 million and is expected to be recognized over a weighted average period of less than two years.

 

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Stock Options

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Information relating to outstanding stock options is summarized as follows:

 

 

 

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 outstanding as of June 30, 2015 is presented below:

 

 

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

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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.   We have not granted any performance-based share awards during 2015

 

The status of the performance-based share awards as of June 30, 2015 is presented below:

 

 

 

For discussion of the expected impact of our filing under Chapter 11 of the Bankruptcy Code on our equity, see Note 3 – Voluntary Reorganization Under Chapter 11.

 

 

 

 

Note 13 – 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

Note 14 – Supplemental Cash Flow Information

 

Cash paid (refunded) during the period for interest, income taxes and reorganization items was as follows:

 

 

 

 

 

 

 

 

 

 

Note 15 – Commitments and Contingencies

 

Commitments Related to Asset Retirement Obligations

 

We have entered into decommissioning security agreements related to abandonment liabilities for certain of our U.K. 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 Condensed Consolidated Statements of Operations.

 

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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 £63.1 million as of June 30, 2015, of which £42.5 million, £11.9 million and £8.7 million and relate to decommissioning obligations at Alba, IVRRH and Renee and Rubie, respectively.

 

The letters of credit secure decommissioning obligations in connection with certain of Endeavour’s  U.K. Continental Shelf petroleum production.  The Company 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 $101.1 million related to the LC Issuance Agreement as of June 30, 2015 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.

 

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.  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 previous procurement agreements.

 

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.

 

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Terminated Acquisition of Marcellus Assets

 

SM Energy Company “SM Energy” filed a lawsuit against us in Texas state court on December 20, 2011 alleging that we breached an agreement for the purchase of oil and gas leases, producing properties, geophysical data, a pipeline and related assets in the Marcellus shale play in Pennsylvania by terminating it 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:

 

 

As a result of this settlement, we recorded $19.0 million in total settlement expense during the first quarter of 2014.

 

Legal Proceedings

 

Refer to Note 1 — General for information concerning the Bankruptcy Cases.

 

 

Note 16 – Guarantor Subsidiaries

 

Certain of our wholly-owned domestic subsidiaries have, jointly and severally, fully and unconditionally guaranteed the 2018 Notes.  Pursuant to Securities and Exchange Commission (“SEC”) regulations, we have presented in columnar format the condensed consolidating financial information for EIC, 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 2018 Notes or satisfaction and discharge of the indentures governing the 2018 Notes, (v) upon

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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 2018 Notes.    Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the following tables:

 

 

 

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Note 17 – Subsequent Events

 

Refer to Note 3 – Voluntary Reorganization Under Chapter 11 for further information.