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| END > SEC Filings for END > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-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 shale gas plays in Haynesville and Marcellus, we are pursuing new and evolving plays with oil or liquids-rich potential.
• 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 nine 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, which are set forth below.
Endeavour International Corporation
Goals Objectives Performance Results
Bacchus Development • Commence production in a • The first Bacchus
timely and cost-effective development well achieved
manner. production during the second
quarter.
• Increase exposure to oil.
• The second development well
began production on July 29,
2012.
COP Acquisition • Complete the COP • Alba Field portion of the
Acquisition. COP Acquisition closed on May
31, 2012.
• Increase current production
levels and cash flows. • We are working to close on
the remaining interests in the
COP Acquisition.
Rochelle Development • Commence production in a • During the third quarter of
timely and cost-effective 2012, drilling began on the
manner. first of two planned
development wells.
• Subsea infrastructure
installation has been
substantially completed.
• We expect the Rochelle
development to achieve first
production in January 2013.
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Our financing activities during the first nine months of 2012, as further discussed in "Liquidity and Capital Resources, included:
• Senior Note Offering: On October 15, 2012 we completed our private placement offering of an additional $54 million aggregate principal amount of our 12% first priority notes due 2018, priced at 109% of par. An initial private placement of $500 million aggregate principal amount of our first and second priority 2018 Notes closed on February 23, 2012. The new first priority notes and those first priority notes initially issued in February 2012 are treated as a single class of debt securities under the same indenture. We utilized a portion of the proceeds from the October 2012 offering to retire our outstanding 12% Senior Subordinated notes due 2014. We will use the remainder of the net proceeds to finance a portion of the construction, improvement and other capital costs related to our U.S. and U.K. properties.
• Equity Offering: On June 13, 2012, we completed an underwritten public offering of 8.6 million 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. On September 27, 2012, we, along with our existing lenders, further amended the existing Revolving Credit Facility and increased the amount available for borrowing to $125 million. On September 28, 2012, we borrowed an additional $15 million under the Credit Facility. We intend to use proceeds from the Revolving Credit Facility borrowings for general corporate purposes.
Results of Operations
Net loss to common stockholders for the nine months ended September 30, 2012 was $121.1 million, or $2.94 per share, compared to $87.9 million, or $2.52 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, increased interest expenses, expenses related to our reimbursement agreements covering certain of our abandonment liabilities and losses on early extinguishment of debt, partially offset by increased revenues related to our Bacchus and Alba fields, increased unrealized losses on derivatives and reduction of deferred tax expenses.
Net loss to common stockholders for the third quarter of 2012 decreased to $34.2 million compared to $63.8 million for the same period in 2011 primarily due to increased revenues from our sales volumes related to our Bacchus and Alba fields and a reduction in impairments of oil and gas properties, partially offset by increased interest expenses, increased unrealized losses on derivatives and expenses related to our reimbursement agreements covering certain of our abandonment liabilities.
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 nine months ended September 30, 2012 was $46.4 million compared to net loss as adjusted of $44.0 million for the same period in 2011. Net Loss as Adjusted for the third quarter 2012 was $13.6 million as compared to Net Loss as Adjusted of $22.1 million for the same period in 2011. The increase in net loss as adjusted is primarily due to increased interest expense and expenses related to our reimbursement agreements covering certain of our abandonment liabilities, partially offset by increased revenues, increased operating expenses and tax benefits. These impacts on net loss as adjusted were primarily attributable to increased sales volumes at Bacchus and the purchase of our additional interest in the Alba field.
Adjusted EBITDA increased to $65.3 million for the nine months ended September 30, 2012 from $14.1 million for the same period in 2011. The increase in Adjusted EBITDA was due to increased revenue from the initial production at Bacchus and our additional interest in Alba, partially offset by expenses related to our reimbursement agreements covering certain of our abandonment liabilities.
Adjusted EBITDA increased to $51.6 million for the third quarter of 2012 from $2.4 million for the same period in 2011 due to increased revenue from the initial production at Bacchus and our additional interest in Alba, partially offset by foreign currency losses on long-term liabilities and 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 provided by operating activities increased to $1.3 million for the nine months ended September 30, 2012 as compared to cash flows used in operating activities of $28.6 million for the same period in 2011. The change was primarily due to increased revenue from the initial production at Bacchus and our additional interest in Alba, partially offset by increased interest expense related to our outstanding indebtedness.
Revenue and Sales Volume
Our physical daily production was approximately 10,724 BOE and 3,274 BOE for the third quarter of 2012 and 2011, respectively, and 7,059 BOE and 3,188 BOE for the nine months ended September 30, 2012 and 2011, respectively, reflecting the impact of the initial production from Bacchus, and our increased interest in Alba.
For the third quarter of 2012 and 2011, we had sales volume of 11,006 BOE per day and 2,972 BOE per day, respectively. For the nine months ended September 30, 2012 and 2011, we had sales volume of 6,635 BOE per day and 3,089 BOE per day, respectively. The increases in sales volume are primarily attributable to the initial production from Bacchus and our increased interest in Alba.
Our revenues increased from $43.5 million during the nine months ended September 30, 2011 to $121.4 million in the same period of 2012. Our revenues increased from $10.3 million during third quarter of 2011 to $83.3 million in the same period of 2012. These increases are primarily as a result of the initial production from Bacchus and our increased interest in Alba, partially offset by lower commodity prices in both the U.S. and U.K.
Endeavour International Corporation
The following table shows our average sales volumes and realized sales prices
for our operations for the periods presented.
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Sales volume (1)
Oil and condensate sales (Mbbls):
United Kingdom 812 49 1,099 274
United States 1 3 2 5
Total 813 52 1,101 279
Gas sales (MMcf):
United Kingdom 19 - 69 78
United States 1,182 1,329 4,234 3,305
Total 1,201 1,329 4,303 3,383
Oil equivalent sales (MBOE)
United Kingdom 815 49 1,110 287
United States 198 225 708 556
Total 1,013 274 1,818 843
Total BOE per day 11,006 2,972 6,635 3,089
Physical production volume (BOE per day) (1)
United Kingdom 8,573 838 4,474 1,152
United States 2,151 2,436 2,585 2,036
Total 10,724 3,274 7,059 3,188
Realized Price, before and after derivatives
Oil and condensate price ($ per Bbl) $ 99.31 $ 106.57 $ 101.76 $ 108.57
Gas price ($ per Mcf) $ 2.16 $ 3.59 $ 2.19 $ 3.88
Equivalent oil price ($ per BOE) $ 82.24 $ 37.68 $ 66.80 $ 51.53
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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 third quarter of 2012, operating expenses increased to $24.0 million as compared to $3.5 million for the same period in 2011. For the nine months ended September 30, 2012, operating expenses increased to $34.6 million as compared to $14.9 million for the same period in 2011. The increase in operating expense from 2011 to 2012 was primarily related to our U.K. operations regarding initial production at Bacchus, the additional interest in Alba and operating expenses of approximately $9.7 million for the third quarter of 2012 and nine months ended September 30, 2012 related to the initial purchase price value allocation of inventory at Alba at acquisition date. Operating costs per BOE increased from $12.79 per BOE for the third quarter of 2011 to $23.68 per BOE for the same period in 2012. Operating costs per BOE increased from $17.65 per BOE for the nine months ended September 30, 2011, to $19.04 per BOE for the nine months ended September 30, 2012. The effect of the $9.7 million in operating expenses related to the initial purchase price value allocation of inventory at Alba at the acquisition date was an additional $6.99 per BOE for the third quarter of 2012 and an additional $3.89 per BOE for the nine months ended September 30, 2012.
Depreciation, depletion and amortization ("DD&A") expense increased to $23.8 million from $5.4 million for the third quarter of 2012 and 2011, respectively. DD&A expense also increased to $42.3 million from $18.7 million for the nine months ended September 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 third quarter of 2012, the prices used in the full cost ceiling test for our U.S. properties were $94.84 per barrel for oil and $2.78 per Mcf for gas. We recorded an impairment of $11.4 million during the third quarter of 2012 for our U.S. properties. For the third quarter of 2012, the prices used in the full cost ceiling test for our U.K. properties were $110.17 per barrel for oil and $8.65 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 third quarter of 2012 as compared to $4.9 million for the corresponding period in 2011. G&A expenses increased to $15.4 million during the nine months ended September 30, 2012 as compared to $14.5 million for the corresponding period in 2011. Components of G&A expenses for these periods are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands) 2012 2011 2012 2011
Compensation $ 4,814 $ 5,034 $ 15,320 $ 14,901
Consulting, legal and accounting fees 2,211 1,833 6,316 4,991
Occupancy costs 584 516 1,588 1,265
Other expenses 159 2 923 1,717
Total gross cash G&A expenses 7,768 7,385 24,147 22,874
Non-cash stock-based compensation 1,758 940 4,872 2,733
Gross G&A expenses 9,526 8,325 29,019 25,607
Less: capitalized G & A expenses (4,500 ) (3,462 ) (13,640 ) (11,082 )
Net G&A expenses $ 5,026 $ 4,863 $ 15,379 $ 14,525
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Interest expense increased by $5.8 million to $18.1 million for the third quarter of 2012 as compared to $12.3 million for the corresponding period in 2011. Interest expense increased by $30.4 million to $63.0 million for the nine months ended September 30, 2012 as compared to $32.6 million for the corresponding period in 2011. For the nine months ended September 30, 2012 and 2011, we had non-cash interest expense, including amortization of loan costs and discount, of $17.6 million and $18.5 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 and subsequent borrowings from the April 2012 Revolving Credit Facility, the 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. 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 Nine Months Ended
September 30, September 30,
(Amounts in thousands) 2012 2011 2012 2011
Interest expense on debt outstanding at
September 30, 2012 $ 23,095 $ 4,755 $ 55,742 $ 11,172
Interest expense on retired debt - 8,499 16,856 22,194
Amortization of loan costs and discount 3,225 2,993 10,536 9,151
Gross interest expense 26,320 16,247 83,134 42,517
Less: capitalized interest (8,267 ) (3,994 ) (20,118 ) (9,910 )
Net interest expense $ 18,053 $ 12,253 $ 63,016 $ 32,607
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As part of the repayment of the Senior Term Loan, we paid an early termination fee of approximately $7 million and wrote off the remaining deferred financing costs related to the Senior Term Loan of $15 million.
Other income (expense) increased to $(2.7) million during the third quarter of 2012 as compared to $0.6 million for the corresponding period in 2011. Other income (expense) increased to $(5.9) million during the nine months ended September 30, 2012 as compared to $0.8 million for the corresponding period in 2011. The changes in other income (expense) are primarily attributable to the effects of foreign currency fluctuations on our abandonment liabilities.
Income Taxes The following summarizes the components of tax expense (benefit): (amounts in thousands) U.K. U.S. Other Total Nine Months Ended September 30, 2012: Net loss before taxes $ (43,070 ) $ (75,274 ) $ (4,853 ) $ (123,197 ) Current tax expense 12,425 - - 12,425 Deferred tax expense related to U.K. tax rate change 8,393 - - 8,393 Deferred tax benefit (24,242 ) - - (24,242 ) Income tax benefit (3,424 ) - - (3,424 ) Net loss $ (39,646 ) $ (75,274 ) $ (4,853 ) $ (119,773 ) Nine Months Ended September 30, 2011: Net income (loss) before taxes $ (7,094 ) $ (55,966 ) $ 8,530 $ (54,530 ) Current tax expense 8,764 4 - 8,768 Deferred tax expense related to U.K. tax rate change 25,387 - - 25,387 Deferred tax benefit (2,335 ) - - (2,335 ) Income tax expense 31,816 4 - 31,820 Net income (loss) $ (38,910 ) $ (55,970 ) $ 8,530 $ (86,350 ) |
During 2011, $25.4 million of the tax expense was attributable to the increase in the supplemental corporate tax rate due to a tax law change, enacted by the U.K. government, in July 2011, that raised the existing supplementary charge on profits from North Sea oil and gas production from 20% to 32%.
During July 2012, the U.K. government enacted legislation (retroactive to March 2012) to restrict decommissioning expenditures to 20% for supplemental corporate tax, in addition to the U.K. corporate tax of 30%, resulting in total tax relief available for decommissioning at 50%. The increase in tax expense as a result of this enactment is $8.4 million.
The change in income tax expense (benefit) from $31.8 million to $(3.4) million for the nine months ended September 30, 2011 and 2012, respectively, was primarily the result of the tax legislative changes in 2011 and 2012 as described previously, as well as increased losses in the U.K. due to increased interest expense from $15.7 million to $43.0 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 . . .
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