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| END > SEC Filings for END > Form 10-Q on 8-Aug-2012 | All Recent SEC Filings |
8-Aug-2012
Quarterly Report
The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. The following discussion also includes non-GAAP financial measures, which may not be comparable to similarly titled measures presented by other companies. Accordingly, we strongly encourage investors to review our financial statements in their entirety and not rely on any single financial measure.
Strategy
We are an independent oil and gas company engaged in the production, exploration, development and acquisition of crude oil and natural gas in the central U.K. North Sea and U.S. onshore. Our strategy is to build a balanced portfolio across multiple dimensions by:
• Pursuing low risk exploration and development activities in the central U.K. North Sea.
• Balancing the longer cycle times and layer up-front development costs of the U.K. North Sea with onshore North America activities in areas known to have proven petroleum systems. Although active in proven onshore unconventional plays in Haynesville and Marcellus, we are pursuing new and evolving plays. This in an evolving area for us.
• Focusing on both oil and natural gas by not picking one commodity over the other, but investing capital where we believe we can achieve acceptable returns.
• Constantly analyzing our portfolio of assets to determine whether continued investment, exploitation or monetization is the best method for capturing return on invested capital.
• Allocating resources among producing properties, development projects and potential acquisitions to maximize value and effectively pursue our strategy.
• Utilizing conventional and unconventional technologies in basins that have historically generated and produced substantial quantities of oil and gas and that we believe will yield commercial quantities of oil and gas reserves through improved drilling, completion and operating technologies.
We remain committed and on-track with our strategy to build a sustainable producing asset base that generates cash flow in excess of its annual capital and operating expense requirements. We continue to view our producing assets as the foundation for organic growth through our development projects and other growth activities in our core areas in the central U.K. North Sea and onshore North America.
2012 Overview
We began the year with three primary goals to further our strategy. Throughout the first six months of 2012, we have reached several milestones toward these goals. We expect to maintain our focus and concentration on these goals through the remainder of the year.
Endeavour International Corporation
Goals Objectives Performance Results
Bacchus Development - Commence production - The first Bacchus
in a timely and development well
cost-effective manner. achieved production
during the second
- Increase exposure to quarter.
oil.
- Our physical
production from Bacchus
was approximately
85,000 BOE for the
second quarter of 2012.
- The second
development well began
production on July 29,
2012.
COP Acquisition - Complete the COP - Alba Field portion
Acquisition. of the COP Acquisition
closed on May 31, 2012.
- Increase current
production levels and - Physical
cash flows. production from our
additional Alba
interest was
approximately 180,000
BOE for the month ended
June 30, 2012.
- We are working to
close on the remaining
interests in the COP
Acquisition.
Rochelle Development - Commence production - The Rochelle
in a timely and development continues
cost-effective manner. on schedule for first
production in the
fourth quarter of 2012.
- The contracted
drilling rig arrived in
July 2012 and commenced
operations to drill the
first of two planned
production wells.
- The required
modifications to the
Scott Platform are
expected to be
substantially complete
during the third
quarter.
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Reaching these milestones required financing activity during the first six months of 2012 as further discussed in "Liquidity and Capital Resources, including:
• Senior Note Offering: On February 23, 2012, we closed the private placement of $500 million aggregate principal amount of the 2018 Notes. We used the net proceeds from the 2018 Notes to fund the Alba field portion of the COP Acquisition, to repay all amounts outstanding under our Senior Term Loan, and for general corporate purposes.
• Equity Offering: On June 13, 2012, we completed an underwritten public offering of 8.6 shares of our common stock at a price of $7.50 per common share ($7.13 per common share, net of underwriting discounts) for net proceeds of $61.3 million. We intend to use the offering proceeds for our development projects.
• Revolving Credit Facility: On April 12, 2012, we entered into a $100 million Revolving Credit Facility, with Cyan Partners, LP, as administrative agent. We intend to use proceeds from the $100 million borrowings under the Revolving Credit Facility for general corporate purposes.
Results of Operations
Net loss to common stockholders for the six months ended June 30, 2012 was $87.0 million, or $2.26 per share, compared to $24.1 million, or $0.74 per share, for the same period in 2011. The change in the net loss to common stockholders for these periods is primarily due to impairments of oil and gas properties and increased interest expenses, partially offset by increased revenues as our sales volumes increased and increased deferred tax benefits.
Net loss to common stockholders for the second quarter of 2012 increased to $51.3 million compared to $16.1 million for the same period in 2011 primarily due to impairments of oil and gas properties and increased interest expenses, partially offset by increased revenues as our sales volumes increased and increased deferred tax benefits.
In addition to our operations, our net income can be significantly affected by various non-cash items, such as unrealized gains and losses on our derivatives, impairment of oil and gas properties, and foreign currency impact of long-term liabilities. Excluding these non-cash items, Net Loss as Adjusted for the six months ended June 30, 2012 was $50.6 million compared to Net Loss as Adjusted of $22.3 million for the same period in 2011. Net Loss as Adjusted for the second quarter 2012 was $35.2 million as compared to Net Loss as Adjusted of $9.3 million for the same period in 2011. The increase in Net Loss as Adjusted is primarily due to increased interest expenses, partially offset by increased revenues.
Adjusted EBITDA decreased to $10.7 million for the six months ended June 30, 2012 from $11.7 million for the same period in 2011. The decrease in Adjusted EBITDA was due to expenses related to our reimbursement agreements covering certain of our abandonment liabilities and foreign currency impact of long-term liabilities, partially offset by increased revenue from the initial production at Bacchus.
Adjusted EBITDA increased to $8.4 million for the second quarter of 2012 from $7.6 million for the same period in 2011 due to increased revenue from the initial production at Bacchus and foreign currency gain on long-term liabilities, partially offset by expenses related to our reimbursement agreements covering certain of our abandonment liabilities. For definitions of Net Income (Loss) as Adjusted and Adjusted EBITDA, and a reconciliation of each to the nearest comparable GAAP measure, please see "Reconciliation of Non-GAAP Measures."
Our cash flows used in operating activities increased to $28.1 million for the six months ended June 30, 2012 as compared to cash flows used in operating activities of $23.9 million for the same period in 2011. The change was primarily due to increased interest expense related to our outstanding indebtedness, partially offset by increased revenue from the initial production at Bacchus.
Revenue and Sales Volume
Our physical daily production was approximately 6,437 BOE and 3,204 BOE for the second quarter of 2012 and 2011, respectively, and 5,205 BOE and 3,198 BOE for the six months ended June 30, 2012 and 2011, respectively, reflecting the impact of the initial production from Bacchus, our increased interest in Alba and increased U.S. gas production.
We record oil revenues using the sales method, i.e. when delivery has occurred. While certain of our U.K. oil fields produce into pipelines and thereby allow us to record revenue each month, the remaining fields, including the Alba field, are dependent upon tanker liftings to deliver oil production to the buyers. The May 31, 2012 closing of the Alba field portion of the COP Acquisition did not allow sufficient time for our production at the field to satisfy a full tanker lifting. While our physical production for acquired interest in the Alba field was approximately 180,000 BOE for the month ended June 30, 2012, we will not record revenue for any of the production associated with our incremental additional interest until the third quarter. Our first tanker lifting for our newly acquired interest in Alba occurred during the first week of July 2012. The July lifting covered approximately 545,000 barrels, including a one-time catch-up of Alba production for periods prior to closing, and placed us in an overlift position at the end of July. During the remainder of July and August 2012, our Alba production is expected to replenish inventory and eliminate our overlift position, thereby providing no further liftings for the period. Due to scheduled maintenance, we anticipate that liftings at Alba will be lower for the remainder of 2012, but more frequent, averaging 150,000 to 200,000 barrels per month for September through December. Beginning in January 2013, we anticipate a tanker lifting for our Alba production approximately every six weeks covering 220,000 to 260,000 barrels. While we anticipate Alba production to remain steady, revenue will accordingly fluctuate in connection with the frequency and volume of tanker liftings, which are factors not entirely within our control.
For the second quarter of 2012 and 2011, we had sales volume of 4,677 BOE per day and 3,295 BOE per day, respectively. For the six months ended June 30, 2012 and 2011, we had sales volume of 4,426 BOE per day and 3,149 BOE per day, respectively. The increases in sales volume are primarily attributable to the initial production from Bacchus and an increase in U.S. gas sales volumes.
Our revenues increased from $33.2 million during the six months ended June 30, 2011 to $38.2 million in the same period of 2012. Our revenues increased from $19.1 million during second quarter of 2011 to $23.0 million in the same period of 2012. These increases are primarily as a result of increased U.S. gas sales volumes and initial production from Bacchus, partially offset by lower commodity prices in both the U.S. and U.K. As discussed above, we recorded no revenue during the second quarter of 2012 related to our newly acquired interest in the Alba field.
The following table shows our average sales volumes and realized sales prices for our operations for the periods presented.
Endeavour International Corporation
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Sales volume (1)
Oil and condensate sales (Mbbls):
United Kingdom 191 125 286 225
United States 1 1 2 2
Total 192 126 288 227
Gas sales (MMcf):
United Kingdom 30 34 51 78
United States 1,375 1,012 3,052 1,976
Total 1,405 1,046 3,103 2,054
Oil equivalent sales (MBOE)
United Kingdom 196 131 295 238
United States 230 169 510 332
Total 426 300 805 570
Total BOE per day 4,677 3,295 4,426 3,149
Physical production volume (BOE per day) (1)
United Kingdom 3,910 1,316 2,401 1,311
United States 2,527 1,888 2,804 1,887
Total 6,437 3,204 5,205 3,198
Realized Price, before and after derivatives
Oil and condensate price ($ per Bbl) $ 104.46 $ 117.34 $ 108.67 $ 109.03
Gas price ($ per Mcf) $ 2.14 $ 4.13 $ 2.20 $ 4.07
Equivalent oil price ($ per BOE) $ 54.05 $ 63.54 $ 47.39 $ 58.18
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(1) We record oil revenues using the sales method, i.e. when delivery has occurred. Physical production may differ based on the timing of tanker liftings for international sales. We use the entitlements method to account for sales of gas production.
Our revenues, net income and cash flows from operating activities are very sensitive to changes in the prices we receive for our products. Our production is sold at prevailing market prices, which may be volatile and subject to numerous factors which are outside of our control. It is our business policy to utilize various oil and gas derivative instruments to achieve more predictable cash flows by reducing our exposure to price fluctuations. Further, the current tightly-balanced supply and demand market allows a small variation in supply or demand to significantly impact the market prices for these commodities.
The markets in which we sell our oil and natural gas also materially impact our revenues and cash flows. Oil trades on a worldwide market, and, consequently, price movements for all types and grades of crude oil generally trend in the same direction and within a relatively narrow price range. However, natural gas prices vary among geographic areas as the prices received are
largely impacted by local supply and demand conditions as the global transportation infrastructure for natural gas is still developing. As such, the oil we produce and sell is typically sold at prices in line with global prices, whereas our natural gas is to a large extent impacted by regional supply and demand issues and to a lesser extent by global fuel prices, including oil and coal. The majority of our gas sales occur in the U.S. where the gas market is heavily impacted by the increased supply from shale drilling, which has served to significantly depress natural gas prices relative to the U.K. market.
Expenses
For the second quarter of 2012, operating expenses decreased to $5.7 million as compared to $6.4 million for the same period in 2011. For the six months ended June 30, 2012, operating expenses decreased to $10.6 million as compared to $11.4 million for the same period in 2011. The decrease in operating expense from 2011 to 2012 was primarily related to the impact of higher workover expenses during 2011. Operating costs per BOE decreased from $21.18 per BOE for the second quarter of 2011 to $13.49 per BOE for the same period in 2012. Operating costs per BOE decreased from $19.99 per BOE for the six months ended June 30, 2011, to $13.21 per BOE for the six months ended June 30, 2012.
Depreciation, depletion and amortization ("DD&A") expense increased to $10.6 million from $7.0 million for the second quarter of 2012 and 2011, respectively. DD&A expense also increased to $18.5 million from $13.3 million for the six months ended June 30, 2012 and 2011, respectively. These increases were primarily a result of the increased sales volumes discussed previously and additional accretion expense related to the abandonment liabilities assumed upon the closing of the Alba portion of the COP acquisition.
For the second quarter of 2012, the prices used in the full cost ceiling test for our U.S. properties were $95.54 per barrel for oil and $3.13 per Mcf for gas. We recorded an impairment of $20.0 during the second quarter of 2012 for our U.S. properties. For the second quarter of 2012, the prices used in the full cost ceiling test for our U.K. properties were $112.40 per barrel for oil and $8.68 per Mcf for gas. We have not recorded any impairment during 2012 related to our U.K. properties. The risk that we will be required to record additional impairments of our oil and gas properties, through the application of the full cost ceiling test in subsequent periods, increases when oil and gas prices are low or volatile. If U.S. gas prices continue to face the adverse effects of high gas supply or other factors, we may experience further ceiling test write-downs or other impairments in the future.
General and administrative ("G&A") expenses increased slightly to $5.0 million during the second quarter of 2012 as compared to $4.9 million for the corresponding period in 2011. G&A expenses increased to $10.4 million during the six months ended June 30, 2012 as compared to $9.7 million for the corresponding period in 2011. These increases primarily resulted from consulting expense and travel cost related to our U.K. acquisition, occupancy fees and other costs. Components of G&A expenses for these periods are as follows:
Endeavour International Corporation
Three Months Ended Six Months Ended
June 30, June 30,
(Amounts in thousands) 2012 2011 2012 2011
Compensation $ 5,308 $ 4,829 $ 10,506 $ 9,867
Consulting, legal and accounting fees 2,331 1,437 4,105 3,158
Occupancy costs 622 385 1,004 750
Other expenses 73 1,211 764 1,715
Total gross cash G&A expenses 8,334 7,862 16,379 15,490
Non-cash stock-based compensation 1,556 917 3,114 1,792
Gross G&A expenses 9,890 8,779 19,493 17,282
Less: capitalized G & A expenses (4,860 ) (3,831 ) (9,140 ) (7,620 )
Net G&A expenses $ 5,030 $ 4,948 $ 10,353 $ 9,662
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Interest expense increased by $17.5 million to $25.3 million for the second quarter of 2012 as compared to $7.8 million for the corresponding period in 2011. Interest expense increased by $25.0 million to $45.0 million for the six months ended June 30, 2012 as compared to $20.0 million for the corresponding period in 2011. For the six months ended June 30, 2012 and 2011, we had non-cash interest expense, including amortization of loan costs and discount, of $12.5 million and $12.1 million, respectively. As discussed in "Liquidity and Capital Resources," we have completed several financing transactions during 2012 and 2011 that have had a significant impact on our interest expense. Interest expense has increased with the issuance of the Revolving Credit Facility in April 2012, 2018 Notes in February 2012 and the 5.5% Convertible Senior Notes in July 2011. This increase has been partially offset by our repayment of the 6% Convertible Notes April 2011 and the Senior Term Loan in May 2012. As part of the repayment of the Senior Term Loan, we paid an early termination fee of approximately $7 million and wrote off of the remaining deferred financing costs related to the Senior Term Loan of $15 million. In addition, we capitalized a greater portion of interest during 2012 as a result of our increased development activity at Bacchus and Rochelle. The components of interest expense are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Amounts in thousands) 2012 2011 2012 2011
Interest expense on debt outstanding at
June 30, 2012 $ 21,699 $ 3,270 $ 32,647 $ 6,016
Interest expense on retired debt 6,240 6,420 16,856 13,695
Amortization of loan costs and discount 3,642 2,241 7,311 6,157
Gross interest expense 31,581 11,931 56,814 25,868
Less: capitalized interest (6,326 ) (4,100 ) (11,851 ) (5,916 )
Net interest expense $ 25,255 $ 7,831 $ 44,963 $ 19,952
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Endeavour International Corporation
Income Taxes
The following summarizes the components of tax expense (benefit):
(amounts in thousands) U.K. U.S. Other Total
Six Months Ended June 30, 2012:
Net loss before taxes $ (52,449 ) $ (56,462 ) $ (2,089 ) $ (111,000 )
Current tax benefit (920 ) - - (920 )
Deferred tax benefit (24,009 ) - - (24,009 )
Income tax benefit (24,929 ) - - (24,929 )
Net loss $ (27,520 ) $ (56,462 ) $ (2,089 ) $ (86,071 )
Six Months Ended June 30, 2011:
Net loss before taxes $ (1,723 ) $ (17,195 ) $ (4,829 ) $ (23,747 )
Current tax expense 184 4 - 188
Deferred tax benefit (875 ) - - (875 )
Income tax expense (benefit) (691 ) 4 - (687 )
Net loss $ (1,032 ) $ (17,199 ) $ (4,829 ) $ (23,060 )
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The change in income tax expense (benefit) from $(0.7) million to $(24.9) million for the six months ended June 30, 2011 and 2012, respectively, was primarily the result of increased losses in the U.K. due to increased interest expense from $8.6 million to $52.8 million in 2011 and 2012, respectively. The current tax expense (benefit) in both 2012 and 2011 is related to Petroleum Revenue Tax on our Alba field in the U.K.
In 2012 and 2011, we did not record any income tax benefits in the U.S. as there was no assurance that we could generate any U.S. taxable earnings, resulting in a full valuation allowance against the deferred tax assets generated.
Reconciliation of Non-GAAP Measures
Net income can be significantly affected by various non-cash items, such as unrealized gains and losses on our commodity derivatives, currency impact of long-term liabilities and deferred taxes. Given the significant impact that non-cash items may have on our net income, we use various measures in addition to net income and net cash provided by operating activities, including non-financial performance indicators and non-GAAP measures as key metrics to manage our business and measure our results of operations. These metrics demonstrate our ability to maintain or grow production levels and reserves, internally fund capital expenditures and service debt as well as provide comparisons to other oil and gas exploration and production companies. Net Loss as Adjusted and Adjusted EBITDA are internal, supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. We . . .
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