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EX-31.1 - EX-31.1 - ENDEAVOUR INTERNATIONAL CORPc412-20150630xex311.htm
EX-32.2 - EX-32.2 - ENDEAVOUR INTERNATIONAL CORPc412-20150630xex322.htm
EX-31.2 - EX-31.2 - ENDEAVOUR INTERNATIONAL CORPc412-20150630xex312.htm
EX-32.1 - EX-32.1 - ENDEAVOUR INTERNATIONAL CORPc412-20150630xex321.htm
EX-31.4 - EX-31.4 - ENDEAVOUR INTERNATIONAL CORPc412-20150630ex31400af4c.htm
EX-32.3 - EX-32.3 - ENDEAVOUR INTERNATIONAL CORPc412-20150630ex3238c890e.htm
EX-32.4 - EX-32.4 - ENDEAVOUR INTERNATIONAL CORPc412-20150630ex324d811f5.htm
EX-31.3 - EX-31.3 - ENDEAVOUR INTERNATIONAL CORPc412-20150630ex31325794f.htm

 

 

 

 

 

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 June 30, 2015

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.   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).    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     

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        No

 

As of August 1, 2015,  52.8 million shares of the registrant’s common stock were outstanding.

 

 


 

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.

 

 


 

Table Of Contents

 

Part I:  Financial Information

Item 1:  Financial Statements

 

Endeavour International Corporation

(Debtor-in-Possession)

Condensed Consolidated Balance Sheets

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

48,514 

 

$

81,850 

Accounts receivable

 

52,868 

 

 

35,507 

Prepaid expenses and other current assets

 

26,425 

 

 

47,397 

Total Current Assets

 

127,807 

 

 

164,754 

 

 

 

 

 

 

Property and Equipment, Net (None and $10,784 not subject to

 

 

 

 

 

amortization at June 30, 2015 and December 31, 2014, respectively)

 

229,781 

 

 

469,509 

Restricted Cash, Long-Term Portion

 

101,110 

 

 

100,241 

Other Assets

 

71 

 

 

72 

 

 

 

 

 

 

Total Assets

$

458,769 

 

$

734,576 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

1

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

(unaudited)

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

$

34,809 

 

$

27,364 

Current maturities of debt

 

434,112 

 

 

432,181 

Deferred revenue

 

40 

 

 

14,157 

Asset retirement obligations, current portion

 

18,338 

 

 

40,547 

Accrued expenses and other

 

10,990 

 

 

15,196 

Total Current Liabilities

 

498,289 

 

 

529,445 

 

 

 

 

 

 

Deferred Taxes

 

34,480 

 

 

56,670 

Other Liabilities

 

41,531 

 

 

66,077 

Total Liabilities Not Subject to Compromise

 

574,300 

 

 

652,192 

Liabilities Subject to Compromise

 

840,992 

 

 

841,044 

Total Liabilities

 

1,415,292 

 

 

1,493,236 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Series C Convertible Preferred Stock:

 

 

 

 

 

Series C preferred stock - Liquidation preference:  $14,800 and $14,800

 

 

 

 

 

at June 30, 2015 and December 31, 2014, respectively

 

17,481 

 

 

17,481 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Series B preferred stock - Liquidation preference:  $1,971 and $1,971

 

 

 

 

 

at June 30, 2015 and December 31, 2014, respectively

 

 -

 

 

 -

Common stock; shares issued and outstanding – 52,828 and 52,900

 

 

 

 

 

at June 30, 2015 and December 31, 2014, respectively

 

53 

 

 

53 

Additional paid-in capital

 

557,536 

 

 

557,111 

Treasury stock, at cost - 72 and 72 shares at June 30, 2015

 

 

 

 

 

and December 31, 2014, respectively

 

(587)

 

 

(587)

Accumulated deficit

 

(1,531,006)

 

 

(1,332,718)

Total Stockholders’ Equity (Deficit)

 

(974,004)

 

 

(776,141)

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

$

458,769 

 

$

734,576 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

2

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

Revenues

$

71,818 

 

$

44,857 

 

$

136,147 

 

$

139,021 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Operations:

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

37,130 

 

 

6,847 

 

 

61,276 

 

 

34,017 

Depreciation, depletion and amortization

 

54,592 

 

 

32,251 

 

 

111,153 

 

 

77,220 

Impairment of oil and gas properties

 

42,932 

 

 

 -

 

 

133,019 

 

 

-

Insurance proceeds

 

(2,046)

 

 

 -

 

 

(10,472)

 

 

 -

General and administrative

 

4,190 

 

 

5,240 

 

 

6,762 

 

 

10,089 

Total Expenses

 

136,798 

 

 

44,338 

 

 

301,738 

 

 

121,326 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) From Operations

 

(64,980)

 

 

519 

 

 

(165,591)

 

 

17,695 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

    Unrealized gains on derivatives

 

 -

 

 

2,010 

 

 

 -

 

 

4,669 

    Interest expense

 

(14,366)

 

 

(31,431)

 

 

(28,717)

 

 

(62,908)

    Letter of credit fees

 

(62)

 

 

(2,270)

 

 

(120)

 

 

(6,059)

    Financing and transaction costs

 

(4,388)

 

 

(1,425)

 

 

(5,413)

 

 

(3,241)

    Loss on early extinguishment of financing agreements

 

 -

 

 

 -

 

 

 -

 

 

(3,543)

    Litigation settlement expense

 

 -

 

 

 -

 

 

 -

 

 

(19,034)

    Reorganization items

 

(6,535)

 

 

 -

 

 

(13,401)

 

 

 -

    Unrealized gain (loss) on foreign currency exchange

 

1,919 

 

 

(4,511)

 

 

1,922 

 

 

(5,784)

    Other income (expense)

 

(715)

 

 

23 

 

 

(609)

 

 

(182)

Total Other Expense

 

(24,147)

 

 

(37,604)

 

 

(46,338)

 

 

(96,082)

 

 

 

 

 

 

 

 

 

 

 

 

Loss Before Income Taxes

 

(89,127)

 

 

(37,085)

 

 

(211,929)

 

 

(78,387)

 

 

 

 

 

 

 

 

 

 

 

 

Petroleum Revenue Tax Expense (Benefit)

 

(1,500)

 

 

2,243 

 

 

(13,641)

 

 

3,968 

Corporate Tax Benefit

 

 -

 

 

(2,655)

 

 

 -

 

 

(811)

Total Tax Expense (Benefit)

 

(1,500)

 

 

(412)

 

 

(13,641)

 

 

3,157 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

(87,627)

 

 

(36,673)

 

 

(198,288)

 

 

(81,544)

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock Dividends

 

 -

 

 

456 

 

 

 -

 

 

911 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss to Common Stockholders

$

(87,627)

 

$

(37,129)

 

$

(198,288)

 

$

(82,455)

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

$

(1.66)

 

$

(0.72)

 

$

(3.76)

 

$

(1.63)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding:

 

 

 

 

 

 

 

 

Basic and Diluted

 

52,762 

 

 

51,580 

 

 

52,763 

 

 

50,591 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

2015

 

2014

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

$

(198,288)

 

$

(81,544)

Adjustments to reconcile net loss to net cash

 

 

 

 

 

provided by (used in) operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

111,153 

 

 

77,220 

Impairment of oil and gas properties

 

133,019 

 

 

-

Deferred tax benefit

 

(12,999)

 

 

(7,951)

Unrealized gains on derivatives

 

 -

 

 

(4,669)

Amortization of non-cash compensation

 

307 

 

 

2,123 

Amortization of loan costs and discount

 

4,357 

 

 

13,376 

Non-cash interest expense

 

 -

 

 

3,812 

Loss on early extinguishment of financing agreements

 

 -

 

 

6,856 

Non-cash litigation settlement expense

 

 -

 

 

14,034 

Other

 

(345)

 

 

6,605 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in receivables

 

(17,361)

 

 

20,702 

Decrease (increase) in other current assets

 

9,353 

 

 

(12,887)

Increase (decrease) in liabilities

 

(41,334)

 

 

22,253 

Net Cash Provided by (Used in) Operating Activities

 

(12,138)

 

 

59,930 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Capital expenditures

 

(20,329)

 

 

(39,302)

Proceeds from sale of oil and gas interests

 

 -

 

 

1,352 

Proceeds from insurance settlement

 

 -

 

 

12,606 

Increase in restricted cash

 

(869)

 

 

(2,521)

Net Cash Used in Investing Activities

 

(21,198)

 

 

(27,865)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Repayments of borrowings

 

 -

 

 

(115,699)

Borrowings under debt agreements, net of debt discount

 

 -

 

 

140,625 

Proceeds from issuance of common stock

 

 -

 

 

12,336 

Repayments of Monetary Production Payments

 

 -

 

 

(10,833)

Financing costs paid

 

 -

 

 

(9,193)

Other financing

 

 -

 

 

(834)

Net Cash Provided by Financing Activities

 

 -

 

 

16,402 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(33,336)

 

 

48,467 

Cash and Cash Equivalents, Beginning of Period

 

81,850 

 

 

34,742 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

$

48,514 

 

$

83,209 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

4

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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: 

 

·

the termination of the Restructuring Support Agreement (“RSA”) on April 29, 2015 (see Note 3 - Voluntary Reorganization Under Chapter 11);

·

the potential breach of our leverage covenant under our Amended Term Loan Facility applicable to our U.K. subsidiary in or about the fourth quarter of 2015 (see Note 3 – Voluntary Reorganization Under Chapter 11 and Note 8 – Debt Obligations); and

 

 

5

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

·

entry into the APA and Settlement Agreement on August 3, 2015 (see Note 3 - Voluntary Reorganization Under Chapter 11).

 

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.

 

 

 

6

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

·

estimates of proved oil and gas reserves;

·

estimates as to the expected future cash flow from proved oil and gas properties; and

·

estimates of future dismantlement and restoration costs.

 

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 operationsThe 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.

 

 

 

7

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

 

8

 


 

Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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 millionUltimate 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:

 

·

sell all of the stock of EOC’s wholly-owned subsidiary, Endeavour International Holding B.V. (“EIHBV”); and

·

sell an intercompany note (issued to EOC by Endeavour Energy U.K Limited (“EEUK”), a subsidiary of EIHBV (the “Intercompany Note”).

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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:

 

·

the allocation of proceeds from the sale of EOC’s and ECC’s U.S. oil and gas assets;

·

ownership of Newco;

·

voting rights and shareholder arrangements concerning Newco; and

·

certain amendments to the Amended Term Loan Facility, including changes to certain covenant ratios and maturity date (the “EEUK Amendment Documents”).

 

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:

 

·

the execution of definitive documents regarding the governance of Newco and the EEUK Amendment Documents;

·

the occurrence of the closing under the APA; and

·

approval by the Bankruptcy Court of the Settlement Agreement and the transactions contemplated thereby.

 

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:

 

·

the APA and the transactions contemplated thereby;

·

the Settlement Agreement and the transactions contemplated thereby;

·

dismissal of the Debtors’ Chapter 11 cases following the sale of substantially all of the Debtors’ assets, the dissolution of the Debtors and, in the case of EIC, its dissolution without the need to obtain stockholder approval.

 

 

 

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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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.

 

 

 

 

 

 

 

 

 

Condensed Combined Balance Sheet

As of June 30, 2015

 

 

Assets:

 

 

Current Assets

$

26,394 

Property and Equipment, Net (None not subject to amortization)

 

13,269 

Long-Term Receivables Due from Affiliates (1)

 

663,801 

Investments in Subsidiaries

 

295,816 

Other Assets

 

Total Assets

$

999,289 

 

 

 

Liabilities Not Subject to Compromise:

 

 

Accrued expenses and other

$

12,580 

Current Liabilities Due to Affiliates

 

105,486 

Other

 

626 

Liabilities Subject to Compromise (2)

 

840,992 

Series C Convertible Preferred Stock - Liquidation Preference: $14,800

 

17,481 

Stockholders' Equity (3)

 

22,124 

Total Liabilities and Stockholders’ Equity

$

999,289 

(1)

It is expected that upon consummation of the APA and Settlement Agreement, the Intercompany Note, which is approximately $500 million as of June 30, 2015, will be sold to Newco.

(2)

See Note 5 – Liabilities Subject to Compromise.

(3)

It is expected that upon consummation of the APA and Settlement Agreement, all common stock of the Debtors will be cancelled. 

 

 

 

 

 

 

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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Condensed Combined Statement of Operations

Six Months Ended June 30, 2015

 

 

Revenues

$

3,396 

Cost of Operations

 

32,821 

Loss from Operations

$

(29,425)

 

 

 

Other Income (Expense):

 

 

Interest income

$

30,000 

Financing and transaction costs

 

(41)

Reorganization items (4)

 

(13,401)

Other expense

 

(8)

Total Other Income

$

16,550 

 

 

 

Net Loss

$

(12,875)

(4)

See Note 5 – Liabilities Subject to Compromise for additional discussion of Reorganization items.

 

 

 

 

 

 

 

 

Condensed Combined Cash Flow

Six Months Ended June 30, 2015

 

 

 

Net cash provided by (used in):

 

 

Operating

$

23,449 

Investing

 

(7,519)

Financing

 

(29,579)

Net decrease in cash and cash equivalents

$

(13,649)

 

 

 

Cash and Cash Equivalents, Beginning of Period

$

32,066 

 

 

 

Cash and Cash Equivalents, End of Period

$

18,417 

 

 

 

 

 

 

 

 

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

 

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

 

 

 

 

 

 

 

Accounts Payable

$

6,027 

Debt

 

790,246 

Accrued Interest and Dividends

 

44,719 

Total Liabilities Subject to Compromise

$

840,992 

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Note 6 –  Property and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

Oil and Gas Properties Under the Full Cost Method:

 

 

 

 

 

    Subject to Amortization

$

864,911 

 

$

989,758 

    Not Subject to Amortization:

 

 

 

 

 

    Incurred in 2015

 

 -

 

 

 -

    Incurred in 2014

 

 -

 

 

945 

    Incurred in 2013

 

 -

 

 

774 

    Incurred prior to 2013

 

 -

 

 

9,065 

 

 

864,911 

 

 

1,000,542 

Computers, Furniture and Fixtures

 

8,733 

 

 

8,733 

Total Property and Equipment

 

873,644 

 

 

1,009,275 

 

 

 

 

 

 

Accumulated Depreciation, Depletion and Amortization

 

(643,863)

 

 

(539,766)

 

 

 

 

 

 

Net Property and Equipment

$

229,781 

 

$

469,509 

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

Liabilities Subject to Compromise: (1)(2)

 

 

 

 

 

    Senior Notes, 12% Fixed Rate, Due 2018

$

554,000 

 

$

554,000 

    Convertible Senior Notes, 5.5% Fixed Rate, Due 2016

 

135,000 

 

 

135,000 

    Convertible Bonds, 11.5% Until March 31, 2014 and 7.5% Thereafter,
         due 2016

 

83,746 

 

 

83,746 

    Convertible Senior Notes, 6.5% Fixed Rate, Due 2017

 

17,500 

 

 

17,500 

Total Liabilities Subject to Compromise

 

790,246 

 

 

790,246 

 

 

 

 

 

 

Liabilities Not Subject to Compromise:

 

 

 

 

 

    Amended Term Loan Facility, Variable Rate, Due 2017

 

440,000 

 

 

440,000 

 

 

 

 

 

 

Total Debt Obligations

 

1,230,246 

 

 

1,230,246 

 

 

 

 

 

 

Less:  Debt Discount

 

(5,888)

 

 

(7,819)

Less:  Liabilities Subject to Compromise

 

(790,246)

 

 

(790,246)

Less:  Current Maturities

 

(434,112)

 

 

(432,181)

Long-Term Debt

$

 -

 

$

 -

(1)

For discussion of the expected impact of our filing under Chapter 11 of the Bankruptcy Code on our debt obligations, including entry by the Debtors into the APA and Settlement Agreements, see Note 3 – Voluntary Reorganization Under Chapter 11.

(2)

As a result of our filing under Chapter 11 of the Bankruptcy Code, we are in default of the debt covenants related to the Senior Notes, 5.5% Convertible Senior Notes, 7.5% Convertible Bonds and 6.5% Convertible Senior Notes.  All outstanding balances related to these obligations have been reclassified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheets.

 

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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Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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, 2017The 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:

 

·

a  maximum leverage ratio of 2.75:1.00 beginning with the fiscal quarter ending December 31, 2014; and

·

a minimum asset coverage ratio of 1.0 to 1.0 as of June 30 and December 31 of each year.

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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:

 

·

a decrease in the Supplementary Charge rate from 32% to 20%, which is retroactive to January 1, 2015;

·

a decrease in the PRT rate from 50% to 35%, beginning on January 1, 2016; and

·

introduction of an Investment Allowance which is generated by qualifying expenditures incurred from the commencement date of April 1, 2015.  Such expenditures are translated into the investment allowance by applying 62.5% to the expenditures and deducting from adjusted ring fence profits which are subject to the Supplementary Charge.  The Investment Allowance replaced all existing field allowances.

 

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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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Note 10Other Long-Term Liabilities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

Asset Retirement Obligations

$

41,399 

 

$

65,935 

Other

 

132 

 

 

142 

Total Other Liabilities

$

41,531 

 

$

66,077 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

Six Months Ended

 

 

June 30,

June 30,

 

 

2015

2014

Carrying amount of asset retirement obligations as of
    the beginning of the period

$

106,482 
170,429 

Accretion expense (included in DD&A expense)

 

7,056 
12,598 

Impact of foreign currency exchange rate changes

 

(369)
5,673 

Payment of asset retirement obligations

 

(26,302)
(20,601)

Revision of prior estimates(1)

 

(27,130)

 -

Liabilities incurred and assumed

 

 -

3,265 

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

 

59,737 
171,364 

Less:  Current portion of asset retirement obligations

 

(18,338)
(49,823)

Long-term asset retirement obligations

$

41,399 
121,541 

(1)

The revision of prior estimates during the six months ended June 30, 2015 is primarily attributable to lower rig costs, improved efficiencies for the abandonment work to be performed and exchange rate fluctuations.

 

 

 

 

 

 

 

 

 

 

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Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Note 11Equity 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 12Stock- 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

2015

 

2014

 

2015

 

2014

G&A Expenses

$

317 

 

$

1,234 

 

$

307 

 

$

1,387 

Capitalized G&A

 

147 

 

 

377 

 

 

118 

 

 

1,358 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-cash stock-based compensation

$

464 

 

$

1,611 

 

$

425 

 

$

2,745 

 

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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Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Stock Options

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Weighted

 

Weighted

 

 

 

Shares

 

Average

 

Average

 

Aggregate

 

Underlying

 

Exercise Price

 

Contractual

 

Intrinsic

 

Options

 

per Share

 

Life in Years

 

Value

Balance outstanding - January 1, 2015

107 

$

7.76 

 

 

 

 

Expired

(87)

 

8.21 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding - June 30, 2015

20 

$

5.83 

 

3.2 

$

 -

Currently exercisable - June 30, 2015

20 

$

5.83 

 

3.2 

$

 -

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Average Grant

 

 

Number of

 

 

Date Fair Value

 

 

Shares

 

 

per Share

Balance outstanding - January 1, 2015

 

740 

 

$

4.93 

Vested

 

(285)

 

 

5.81 

Forfeited

 

(32)

 

 

5.56 

 

 

 

 

 

 

Balance outstanding - June 30, 2015

 

423 

 

$

4.32 

 

 

 

 

 

 

Total grant date fair value of shares vesting during the period

$

44.4 

 

 

 

 

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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Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Average Grant

 

 

Number of

 

 

Date Fair Value

 

 

Shares

 

 

per Share

Balance outstanding - January 1, 2015

 

424 

 

$

8.05 

Forfeited

 

(26)

 

 

7.91 

 

 

 

 

 

 

Balance outstanding - June 30, 2015

 

398 

 

$

8.05 

 

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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Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

 

 

 

 

 

 

 

 

June 30,

 

2015

 

2014

Warrants, options and stock-based compensation

10,218 

 

10,167 

Convertible debt

16,117 

 

16,024 

Convertible preferred stock

1,691 

 

4,229 

 

28,026 

 

30,420 

 

 

 

 

 

 

 

 

 

Note 14 – Supplemental Cash Flow Information

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

Interest paid

$

24,334 

 

$

47,814 

 

 

 

 

 

 

Income taxes paid (refunded), all related to PRT

$

18,041 

 

$

(14,002)

 

 

 

 

 

 

Reorganization items paid

$

12,828 

 

$

 -

 

 

 

 

 

 

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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Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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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Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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:

 

·

forfeited our $6 million deposit;

·

paid SM Energy $5 million;

·

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

·

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

 

As a result of this settlement, we recorded $19.0 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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Table Of Contents

 

Endeavour International Corporation

(Debtor-in-Possession)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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: