Endeavour International 10-Q 2009 Q2 Quarterly report

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2009

or

o Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                     to                     

Commission file number: 1-32212

Endeavour International Corporation

(Exact name of registrant as specified in its charter)

Nevada	88-0448389
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)

1001 Fannin Street, Suite 1600, Houston, Texas 77002
(Address of principal executive offices)      (Zip code)

(713) 307-8700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.þ Yeso 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).o Yeso 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 filero Accelerated filerþ Non-accelerated filero
(Do not check if a smaller reporting company) Smaller reporting companyo

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

As of August 3, 2009, 130,523,848 shares of the registrant’s common stock were outstanding.

Endeavour International Corporation

Index

Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations	3
Condensed Consolidated Statements of Cash Flows	4
Notes to Condensed Consolidated Financial Statements	5
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3: Quantitative and Qualitative Disclosures About Market Risk	30
Item 4: Controls and Procedures	31
Part II. Other Information
Item 1A: Risk Factors	32
Item 4: Submission of Matters to a Vote of Security Holders	32
Item 6: Exhibits	32
Signatures	33
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Quantities of natural gas are expressed in this report in terms of thousand cubic feet (Mcf) and million cubic feet (MMcf). Oil is quantified in terms of barrels (Bbls) and thousands of barrels (Mbbls). Natural gas is compared to oil in terms of barrels of oil equivalent (BOE), thousand barrels of oil equivalent (MBOE) or million barrels of oil equivalent (MMBOE). One barrel of oil is the energy equivalent of six Mcf of natural gas. 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.

Part I: Financial Information

Item 1: Financial Statements

Endeavour International Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands)

	June 30, 2009		December 31, 2008
Assets
Current Assets:
Cash and cash equivalents	$	101,602	$	31,421
Restricted cash		2,147		20,739
Accounts receivable		19,214		22,325
Prepaid expenses and other current assets		22,634		42,194
Current assets of discontinued operations		—		16,726
Total Current Assets		145,597		133,405
Property and Equipment, Net		227,341		232,346
Goodwill		213,949		213,949
Other Assets		6,274		9,165
Long Term Assets of Discontinued Operations		—		148,605
Total Assets	$	593,161	$	737,470

1

Endeavour International Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands)

	June 30, 2009			December 31, 2008
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	20,508		$	38,630
Current maturities of debt		—			13,000
Accrued expenses and other		33,301			36,642
Current liabilities of discontinued operations		—			22,231
Total Current Liabilities		53,809			110,503
Long-Term Debt		167,510			214,855
Deferred Taxes		66,869			67,299
Other Liabilities		71,884			55,791
Long-term Liabilities of Discontinued Operations		—			46,051
Total Liabilities		360,072			494,499
Commitments and Contingencies
Series C Convertible Preferred Stock (Liquidation preference: $125,000)		125,000			125,000
Stockholders’ Equity:
Series B preferred stock (Liquidation preference: $3,036)		—			—
Common stock; shares issued and outstanding – 130,875 and 128,572 shares at 2009 and 2008, respectively		131			129
Additional paid-in capital		246,395			244,471
Treasury stock, at cost (457 and 327 shares at 2009 and 2008, respectively)		(536	)		(450	)
Accumulated other comprehensive loss		(580	)		(1,266	)
Accumulated deficit		(137,321	)		(124,913	)
Total Stockholders’ Equity		108,089			117,971
Total Liabilities and Stockholders’ Equity	$	593,161		$	737,470

See accompanying notes to condensed consolidated financial statements.

2

Endeavour International Corporation

Condensed Consolidated Statement of Operations

(Unaudited)

(Amounts in thousands, except per share data)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Revenues	$	18,082		$	55,343		$	34,420		$	101,151
Cost of Operations:
Operating expenses		4,397			9,180			10,580			16,527
Depreciation, depletion and amortization		7,858			19,503			19,182			38,391
Impairment of oil and gas properties		1,244			—			30,645			—
General and administrative		4,115			3,845			7,950			7,553
Total Expenses		17,614			32,528			68,357			62,471
Income (Loss) From Operations		468			22,815			(33,937	)		38,680
Other Income (Expense):
Derivatives:
Realized gains (losses)		9,114			(14,494	)		21,050			(17,644	)
Unrealized losses		(32,722	)		(130,686	)		(34,095	)		(160,328	)
Interest expense		(4,224	)		(5,478	)		(8,135	)		(13,794	)
Interest income and other		(7,992	)		(122	)		(8,333	)		(31	)
Total Other Expense		(35,824	)		(150,780	)		(29,513	)		(191,797	)
Loss Before Income Taxes		(35,356	)		(127,965	)		(63,450	)		(153,117	)
Income Tax Expense (Benefit)		916			(58,304	)		(10,036	)		(66,931	)
Loss from Continuing Operations		(36,272	)		(69,661	)		(53,414	)		(86,186	)
Discontinued Operations, net of tax
Income (loss) from operations		(1,052	)		5,637			(774	)		5,370
Gain on sale		47,144			—			47,144			—
Income from Discontinued Operations		46,092			5,637			46,370			5,370
Net Income (Loss)		9,820			(64,024	)		(7,044	)		(80,816	)
Preferred Stock Dividends		2,696			2,709			5,365			5,404
Net Income (Loss) to Common Stockholders	$	7,124		$	(66,733	)	$	(12,409	)	$	(86,220	)
Basic and Diluted Income (Loss) per Common Share:
Continuing operations	$	(0.31	)	$	(0.56	)	$	(0.46	)	$	(0.72	)
Discontinued operations		0.36			0.04			0.36			0.04
Total	$	0.05		$	(0.52	)	$	(0.10	)	$	(0.68	)
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted		129,741			127,626			129,521			127,581

See accompanying notes to condensed consolidated financial statements.

3

Endeavour International Corporation

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(Amounts in thousands)

	For the Six Months
	Ended June 30,
	2009			2008
Cash Flows from Operating Activities:
Net loss	$	(7,044	)	$	(80,816	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization		23,863			45,123
Impairment of oil and gas properties		30,645			—
Deferred tax benefit		(3,596	)		(58,277	)
Unrealized loss on derivatives		34,095			160,328
Gain on sale of Norwegian operations		(47,144	)		—
Other		11,536			8,568
Changes in operating assets and liabilities:
(Increase) decrease in receivables		2,687			(2,824	)
(Increase) decrease in other current assets		6,062			(4,907	)
Increase (decrease) in liabilities		(8,905	)		4,759
Net Cash Provided by Operating Activities		42,199			71,954
Cash Flows From Investing Activities:
Capital expenditures		(67,337	)		(32,168	)
Proceeds from sales, net of cash		139,797			—
Decrease in restricted cash		18,592			—
Net Cash Provided by (Used in) Investing Activities		91,052			(32,168	)
Cash Flows From Financing Activities:
Repayments of borrowings		(64,458	)		(105,000	)
Borrowings under debt agreements		—			88,000
Dividends paid		(5,313	)		(5,313	)
Financing costs paid		—			(4,282	)
Other financing		(34	)		(252	)
Net Cash Used in Financing Activities		(69,805	)		(26,847	)
Net Increase in Cash and Cash Equivalents		63,446			12,939
Cash and Cash Equivalents, Beginning of Period		38,156			16,440
Cash and Cash Equivalents, End of Period	$	101,602		$	29,379
Cash and Cash Equivalents, End of Period:
Continuing operations	$	101,602		$	16,552
Discontinued operations		—			12,827
Total	$	101,602		$	29,379

See accompanying notes to condensed consolidated financial statements.

4

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – General

Endeavour International Corporation (a Nevada corporation) is an independent oil and gas company engaged in the acquisition, exploration and development of energy reserves. As used in these Notes to Condensed Consolidated Financial Statements, the terms “Endeavour,” “we,” “us,” “our” and similar terms refer to Endeavour International Corporation and, unless the context indicates otherwise, its consolidated subsidiaries. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10–K for the year ended December 31, 2008.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These accounting principles require management to use estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period. Management reviews its estimates, including those related to the determination of proved reserves, estimates of future dismantlement costs, income taxes and litigation. Actual results could materially differ from those estimates. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in these financial statements. Certain amounts for prior periods have been reclassified to conform to the current presentation.

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

• proved oil and gas reserves,

• expected future cash flow from proved oil and gas properties,

• future dismantlement and restoration costs,

• fair values used in purchase accounting; and

• fair value of derivative instruments.

Income (Loss) Per Share

Basic income (loss) per common share is computed by dividing net income (loss) to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income (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 is dilutive.

5

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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

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

(Amounts in thousands)	June 30,
	2009		2008
Warrants, options and stock-based compensation		990		1,253
Convertible debt		36,139		34,000
Convertible preferred stock		50,000		50,000
Common shares potentially issuable		87,129		85,253

New Accounting Developments

On January 1, 2009, we adopted the following new standards without material effects on our results of operations or financial position:

• Business combinations– Guidance related to the measurement of identifiable assets acquired, liabilities assumed and disclosure of information related to business combinations and their effect.

• Noncontrolling interests– Guidance for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as a component of consolidated equity. Similarly, the new standard requires consolidated net income and comprehensive income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interests.

• Expanded disclosures of derivatives– Expanded and detailed financial statement disclosures for derivatives and hedged financial instruments. This standard applies to all derivatives and non-derivative instruments designated and qualifying as hedges, including bifurcated derivative instruments and related hedged items.

• Convertible debt– Guidance for convertible debt that may be settled in part or in whole in cash upon conversion requiring issuers of this form of debt to account for its debt and equity components separately. The new guidance also expands the definition of mandatorily redeemable convertible preferred shares that should be classified as liabilities.

• Share-based payments– Guidance for instruments that are granted in share-based payment transactions to treat unvested share-based payment awards with non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share (“EPS”). The impact of the adoption of this standard our weighted

6

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

average shares outstanding and EPS were not material, therefore, we have not restated prior periods.

• Fair Value– Framework for measuring fair value and expanded disclosures about fair value measurements. New fair value measurements are not required; rather, the provisions apply when fair value measurements are performed under other accounting pronouncements.

On June 30, 2009, we adopted the following new standard without material effects on our results of operations or financial position:

• Subsequent Events– Standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.

Subsequent Events

As of August 5, 2009, which is the date these financial statements were issued, we completed our review and analysis of potential subsequent events and none were identified.

Note 2 – Discontinued Operations

On May 14, 2009, we completed the divestiture of our Norwegian subsidiary, Endeavour Energy Norge AS, to Verbundnetz Gas AG for cash consideration of $150 million (the “Norway Sale”). We recognized a gain upon closing the Norway Sale of $47 million, after the allocation of $68 million of goodwill to the assets sold.

As a result of the Norway Sale, we have classified the results of operations and financial position of our Norwegian subsidiary as discontinued operations for all periods presented. The following table details selected financial data for the assets included in the Norway Sale:

7

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(Amounts in thousands)	June 30, 2009		December 31, 2008
Current Assets:
Cash	$	—	$	6,735
Accounts receivable		—		4,559
Prepaid expenses and other		—		5,432
		—		16,726
Long-term Assets:
Property, plant and equipment, net		—		80,611
Goodwill		—		67,994
		—		148,605
Current Liabilities:
Accounts payable		—		(3,717	)
Accrued expenses and other		—		(18,514	)
		—		(22,231	)
Long-term Liabilities:
Deferred tax liability		—		(36,828	)
Asset retirement obligation		—		(9,223	)
		—		(46,051	)
Net Assets and Liabilities	$	—	$	97,049

	For the Three Months						For the Six Months
(Amounts in thousands)	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Sales	$	4,180		$	30,999		$	17,550		$	46,445
Income before Taxes	$	1,811		$	21,077		$	4,656		$	29,907
Income Tax Expense		(2,863	)		(15,440	)		(5,430	)		(24,537	)
Income (Loss) from Operations		(1,052	)		5,637			(774	)		5,370
Gain on Sale		47,144			—			47,144
Net Income from Discontinued Operations	$	46,092		$	5,637		$	46,370		$	5,370

Note 3 – Stock-Based Compensation Arrangements

We grant restricted stock and stock options to employees and directors as incentive compensation. The restricted stock and options generally vest over three years. The vesting of these shares and options is dependent upon the continued service of the grantees with Endeavour.

8

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Upon the occurrence of a change in control, each outstanding share of restricted stock and stock option will immediately vest.

At June 30, 2009, total compensation costs related to awards not yet recognized was approximately $3.7 million and is expected to be recognized over a weighted average period of less than three years. Non-cash stock-based compensation is recorded in general and administrative (“G&A”) expenses or capitalized G&A as follows:

	For the Three Months				For the Six Months
(Amounts in thousands)	Ended June 30,				Ended June 30,
	2009		2008		2009		2008
G&A expense	$	388	$	308	$	724	$	604
Capitalized G&A		187		176		389		540
Total non-cash stock-based compensation	$	575	$	484	$	1,113	$	1,144

Stock Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on the historical volatility of common stock prices of Endeavour for the length of the expected term. We use historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for the expected term is the yield on the zero-coupon U.S. treasury security with a term comparable to the expected term of the option. We do not include an estimated dividend yield since we have not paid dividends on our common stock historically.

The estimated fair value of each option granted was calculated using the Black-Scholes Method. The following table summarizes the weighted average of the assumptions used in the method.

	For the Six Months Ended June 30,
	2009			2008
Risk-free rate		1.3	%		3.2	%
Expected years until exercise		4.3			4.25
Expected stock volatility		56	%		46.0	%
Dividend yield		—			—

9

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Information relating to stock options, including notional stock options, is summarized as follows:

				Weighted		Weighted
	Number of			Average		Average
	Shares			Exercise		Contractual		Aggregate
	Underlying			Price per		Life in		Intrinsic
(Amounts in thousands, except per share data)	Options			Share		Years		Value
Balance outstanding – January 1, 2009		4,807		$	2.35
Granted		1,170			0.54
Exercised		(84	)		0.77
Forfeited		(5	)		3.43
Expired		(907	)		2.06
Balance outstanding – June 30, 2009		4,981		$	1.99		6.4	$	1,166
Currently exercisable – June 30, 2009		2,245		$	3.07		3.7	$	71

The weighted average grant-date fair value of options granted for the six months ended June 30, 2009 was $0.25 per option.

Restricted Stock

At June 30, 2009, our employees and directors held 3.4 million restricted shares of our common stock that vest over the service period of up to three years. The restricted stock awards were valued based on the closing price of our common stock on the measurement date, typically the date of grant, and compensation expense is recorded on a straight-line basis over the restricted share vesting period.

Status of the restricted shares as of June 30, 2009 and the changes during the six months ended June 30, 2009 are presented below:

10

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

				Weighted
				Average Grant
				Date Fair
	Number of			Value per
(Amounts in thousands, except per share data)	Shares			Share
Balance outstanding – January 1, 2009		3,966		$	1.88
Granted		1,554			0.62
Vested		(2,119	)		2.20
Forfeited		(46	)		1.77
Balance outstanding – June 30, 2009		3,355		$	1.04
Total grant date fair value of shares vesting during the period	$	4,691

Note 4 — Property and Equipment

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

				December 31,
	June 30, 2009			2008
Oil and gas properties under the full cost method:
Subject to amortization	$	230,513		$	239,024
Not subject to amortization:
Acquired in 2009		31,850			—
Acquired in 2008		33,946			37,288
Acquired in 2007		11,172			14,746
Acquired prior to 2007		77,606			82,522
		385,087			373,580
Other oil and gas assets		4,875			4,873
Computers, furniture and fixtures		3,584			3,238
Total property and equipment		393,546			381,691
Accumulated depreciation, depletion and amortization		(166,205	)		(149,345	)
Net property and equipment	$	227,341		$	232,346

The costs not subject to amortization relate to unproved properties and properties being made ready to be placed in service, which are excluded from amortizable capital costs until it is determined whether or not proved reserves can be assigned to such properties. We capitalized

11

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

$0.7 million and $0.9 million in interest related to exploration activities for the quarters ended June 30, 2009 and 2008, respectively. For the six months ending June 30, 2009 and 2008, $1.7 million and $2.0 million, respectively, was capitalized in interest related to exploration. We capitalized $1.7 million and $1.8 million in certain employee costs directly related to exploration activities for the quarters ended June 30, 2009 and 2008, respectively. We capitalized $3.4 million and $4.0 million in certain employee costs directly related to exploration activities for the six months ended June 30, 2009 and 2008, respectively.

In the first quarter of 2009, we recorded $29.4 million in impairment of oil and gas properties, pre-tax, through the application of the full cost ceiling test at the end of the quarter. The prices used to determine the impairment were $46.52 per barrel for oil and $6.37 per Mcf for gas. While our commodity derivatives had a fair value of $31.4 million at March 31, 2009, these derivatives were not included in the calculation of the full cost ceiling test as the derivatives are not accounted for as cash flow hedges. In the second quarter of 2009, we recorded $1.2 million in impairment of oil gas properties, pre-tax, related to dry hole costs in the United States.

Note 5 – Debt Obligations

Our debt consisted of the following at the indicated dates:

	June 30,			December 31,
(Amounts in thousands)	2009			2008
Senior notes, 6% fixed rate, due 2012	$	81,250		$	81,250
Senior bank facility, variable rate, due 2011		48,542			113,000
Convertible bonds, due 2014		47,091			44,496
		176,883			238,746
Less: debt discount		(9,373	)		(10,891	)
Less: current maturities		—			(13,000	)
Long-term debt	$	167,510		$	214,855
Standby letters of credit outstanding for abandonment liabilities	$	33,924		$	30,115

The capacity and amounts available under our senior bank facility is subject to a number of considerations, including certain borrowing base limitations. Our borrowing base is primarily established through the evaluation of all of our oil and gas assets which are used as collateral to support the senior bank facility. This borrowing base is subject to a redetermination every six months (on April 1 and October 1) with an independent reserve report required every 12 months. At June 30, 2009, the borrowing base capacity was $63.5 million.

12

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The fair value of our debt obligations was $152 million and $191 million at June 30, 2009 and December 31, 2008, respectively. The fair values of long-term debt were determined based upon quotes obtained from brokers for our senior notes, discounted cash flows for our 11.5% convertible debt and book value for other debt. Book value approximates fair value for our senior bank facility and second lien term loan as these instruments bear interest at a market rate.

Note 6 – Asset Retirement Obligations

Our asset retirement obligations relate to obligations for the future plugging and abandonment of oil and gas properties. The following table provides a rollforward of our asset retirement obligations for the six months ended June 30, 2009 and 2008:

	Six Months Ended June 30,
	2009			2008
Carrying amount of asset retirement obligations as of beginning of period	$	38,776		$	30,790
Accretion expense		2,044			1,454
Impact of foreign currency exchange rate changes		4,998			101
Payment of asset retirement obligation		(3,959	)		—
Sale of assets		(248	)		—
Carrying amount of asset retirement obligations as of end of period	$	41,611		$	32,345

Note 7 – Fair Value Measurements

We apply fair value measurements to certain assets and liabilities including commodity and interest rate derivative instruments, marketable securities and embedded derivatives relating to conversion and change in control features in certain of our debt instruments. We seek to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value measurements are classified and disclosed in one of the following categories:

Level 1:	Fair value is based on actively-quoted market prices, if available.
Level 2:	In the absence of actively-quoted market prices, we seek price information from external sources, including broker quotes and industry publications. Substantially all of these inputs are observable in the marketplace during the entire term of the instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

13

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Level 3: If valuations require inputs that are both significant to the fair value measurement and less observable from objective sources, we must estimate prices based on available historical and near-term future price information and certain statistical methods that reflect our market assumptions.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The following table summarizes the valuation of our investments and financial instruments by pricing levels as of June 30, 2009:

	Quoted Market Prices		Significant Other			Significant
	in Active Markets –		Observable Inputs –			Unobservable Inputs			Total Fair
	Level 1		Level 2			– Level 3			Value
Oil and gas derivative contracts:
Oil and gas swaps	$	—	$	(5,161	)	$	—		$	(5,161	)
Oil and gas collars		—		5,975			3,468			9,443
Interest rate swaps		—		(793	)		—			(793	)
Embedded derivatives		—		—			(22,040	)		(22,040	)
Total derivative liabilities	$	—	$	21		$	(18,572	)	$	(18,551	)

Our commodity and interest rate derivative contracts were measured based on quotes from our counterparties, which are major financial institutions or commodities trading institutions. Such quotes have been derived using models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term. The inputs for the fair value models for our swaps and Brent oil collars are all observable market data and these instruments have been classified as Level 2. Although we utilize the same option pricing models to assess the reasonableness of the fair values of our gas collars, an active futures market does not exist for our UK gas options. We base the inputs to the option models for our UK gas collars on observable market data in other markets to verify the reasonableness of the counterparty quotes. These UK gas collars are classified as Level 3.

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

	Six Months Ended June 30,
	2009
Balance at beginning of period	$	(12,057	)
Total gains or losses (realized/unrealized):
Included in earnings		(6,515	)
Balance at end of period	$	(18,572	)
Changes in unrealized gains (losses) relating to derivative assets and liabilities still held at June 30, 2009	$	(5,618	)

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Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis in our consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:

Asset Retirement Obligations —The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and is based on internal estimates of future retirement costs associated with oil and gas properties. Significant Level 3 inputs used in the calculation of asset retirement obligations include plugging costs and reserve lives. A reconciliation of our asset retirement obligations is presented in Note 6.

Goodwill —Goodwill is tested annually at year end for impairment. The first step of that process is to compare the fair value of the reporting unit to which goodwill has been assigned to the carrying amount of the associated net assets and goodwill. Significant Level 3 inputs are used in the determination of the fair value of the reporting unit, including present values of expected cash flows from operations.

Note 8 – Derivative Instruments

From time to time, we manage fluctuations in derivative financial instruments with respect to a portion of our oil and gas production or a portion of our variable rate debt to achieve a more predictable cash flow by reducing our exposure to price fluctuations. These transactions are likely to be swaps, collars or options and to be entered into with major financial institutions or commodities trading institutions. Derivative financial instruments are intended to reduce our exposure to declines in the market prices of our crude oil and natural gas sales and increases in interest rates and to manage cash flows in support of our annual capital expenditure budget. We also have two embedded derivatives related to our debt instruments. Additionally, we have an interest rate swap that is accounted for as a cash flow hedge.

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

	June 30,			December 31,
	2009			2008
Derivatives not designated as hedges:
Oil and gas commodity derivatives:
Assets:
Prepaid expenses and other current assets	$	14,042		$	31,649
Other assets – long-term		—			1,702
Liabilities:
Other liabilities – short-term		(1,528	)		—
Other liabilities – long-term		(8,232	)		(2,375	)
	$	4,282		$	30,976

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Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

	June 30,			December 31,
	2009			2008
Embedded derivatives related to debt instrument
Liabilities:
Other liabilities – long-term		(22,040	)		(14,640	)
Derivatives designated as cash flow hedge:
Interest rate swap
Liabilities:
Accrued expenses and other		(793	)		(1,334	)

If all counterparties failed to perform, our maximum loss would be $14.0 million as of June 30, 2009.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Derivatives not designated as hedges:
Oil and gas commodity derivatives
Realized gains (losses) on derivative instruments		9,114			(14,494	)		21,050			(17,644	)
Unrealized gains (losses) on derivative instruments		(27,092	)		(121,876	)		(26,695	)		(152,188	)
		(17,978	)		(136,370	)		(5,645	)		(169,832	)
Embedded derivatives related to debt instrument
Unrealized gains (losses) on derivative instruments		(5,630	)		(8,810	)		(7,400	)		(8,140	)

The effect of derivatives designated as cash flow hedges on our results of operations and other comprehensive income was as follows:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
	Location of
	Reclassification
	into Income	2009			2008			2009			2008
Interest rate swap
(Gain) loss recognized in other comprehensive income, net of tax		$	(207	)	$	460		$	(71	)	$	(506	)
(Gain) loss reclassified from accumulated other comprehensive income into income	Interest expense		(376	)		(211	)		(757	)		(319	)

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Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

We did not exclude any component of the hedging instruments’ gain or loss when assessing effectiveness. The ineffective portion of the hedges is not material for the periods presented and is included in other income (expense).

As of June 30, 2009, our outstanding commodity derivatives covered approximately 1,420 Mbbls and 3,058 MMcf cumulative through 2011 and consist of a combination of fixed price swaps and collars. These include two oil swaps, one gas swap, and three oil and five gas collars, all with BNP Paribas.

We have an interest rate swap with BNP Paribas for a notional amount of $37.5 million whereby we pay a fixed rate of 5.05% and receive three-month LIBOR through November 2009.

Additional information regarding our derivative instruments is presented in Note 7 to these Condensed Consolidated Financial Statements.

Note 9 – Supplemental Cash Flow Information

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

(Amounts in thousands)	For the Six Months Ended June 30,
	2009		2008
Interest paid	$	3,753	$	10,525
Income taxes paid	$	3,654	$	6,028

The net cash flows provided by operating activities are primarily impacted by the earnings from our business activities. The cash flows provided by operating activities decreased to $42.2 million for the six months ended June 30, 2009 as compared to $72.0 million for the six months ended June 30, 2008 primarily due to a decrease in cash flows from decreased revenues as a result of lower commodity prices.

The cash provided by or used in investing activities represents proceeds from the sale of our discontinued operations, expenditures for capital projects and decreases to restricted cash under escrow for our rig commitments.

The cash used in financing activities consists of borrowings and repayments of debt, payments of preferred dividends and payment of financing costs.

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Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 10 – Comprehensive Loss

Excluding net income (loss), our source of comprehensive income (loss) is the net unrealized loss on derivative instruments and marketable securities, which are classified as available-for-sale. The following summarizes the components of comprehensive income (loss):

	For the Three Months						For the Six Months Ended
(Amounts in thousands)	Ended June 30,						June 30,
	2009			2008			2009			2008
Net income (loss)	$	9,820		$	(64,024	)	$	(7,044	)	$	(80,816	)
Unrealized (gain) loss on interest rate swap derivative instrument, net of tax		(207	)		460			(71	)		(506	)
Unrealized loss on marketable securities, net of tax		—			1,226			—			1,226
Reclassification adjustment for (income) loss realized in net loss above		376			211			757			319
Net impact on comprehensive income (loss)		169			1,897			686			1,039
Comprehensive income (loss)	$	9,651		$	(62,127	)	$	(6,358	)	$	(79,777	)

Note 11 – Commitments and Contingencies

Rig Commitment

We have a commitment for 69 days use of a drilling rig in our North Sea operations that we expect to utilize in late 2009. We have $2 million in escrow toward this commitment, included in “Restricted Cash” on our Condensed Consolidated Balance Sheet. The reserved amounts in escrow will be released as payments are made for this drilling activity.

Participation Agreement

In April 2009, we executed an agreement with Caza Petroleum Inc., a subsidiary of Caza Oil and Gas, Inc., (“Caza”) to participate in a jointly established exploration and development program covering Caza’s onshore acreage position and opportunity portfolio in the United States. During the initial two-year term of the agreement, we have the option but not the obligation to participate in the acquisition, exploration and appraisal activities of selected assets. Caza provides economic and engineering analysis on projects submitted for our selection. We receive 75% of Caza’s interest in exchange for $250,000 per month and payment of our share of all external costs on any projects we select.

Contingencies

Hess Limited, the operator of the facility supporting production from the Ivanhoe, Rob Roy, and Hamish fields, (collectively, “IVRRH”), has advised us that there has been a mis-measurement of the volumes of oil produced from the IVRRH fields. At June 30, 2009 the estimate of our liability from this mis-measurement was $4.1 million.

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Endeavour International Corporation

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, references to “Endeavour,” “we,” “us,” “our” and similar terms refer to Endeavour International Corporation and, unless the context indicates otherwise, any of our consolidated subsidiaries or partnership interests. 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.

Overview

We are an international oil and gas exploration and production company focused on the acquisition, exploration and development of energy reserves in the North Sea and United States. To date, we have invested a significant amount of our resources on various development, acquisition and exploration projects.

On May 14, 2009, we completed the sale of our Norwegian subsidiary, Endeavour Energy Norge AS, to Verbundnetz Gas AG for cash consideration of $150 million (the “Norway Sale”). We recognized a gain upon closing the Norway Sale of $47 million, after the allocation of $68 million of goodwill to the assets sold.

Our revenues and cash flows from operating activities are very sensitive to changes in prices received for our products. Market prices for both oil and natural gas have significantly declined since mid 2008 as a result of the global economic decline. Accordingly, revenues have decreased from $101.2 million in the first six months of 2008 to $34.4 million in the same period of 2009. With our various oil and gas derivative instruments, discretionary cash flow did not drop as precipitously as revenue. Discretionary cash flow was $42.4 million for the first six months of 2009 as compared to $74.9 million for the same period in 2008.

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, currency impact of long-term liabilities and deferred taxes. Net loss to common shareholders for the first six months of 2009 was $12.4 million, or $0.10 per share. For the first six months of 2008, net loss to common shareholders was $86.2 million, or $0.68 per share. The net loss for 2009 reflects a smaller unrealized loss on the mark-to-market of commodity derivatives, an impairment of oil and gas properties of $30.6 million and $47 million in gain on sale of our discontinued operations. Net loss as adjusted for the six months ended June 30, 2009 would have been $34.5 million without the effect of derivative transactions, impairment of oil and gas properties and currency impacts of deferred taxes as compared to net income as adjusted of $0.7 million for the same period in 2008. Adjusted EBITDA decreased to $28.5 million for the six months ended June 30, 2009 from $58.7 million for 2008. For definitions of Adjusted EBITDA and Discretionary Cash Flow, and a reconciliation of Adjusted EBITDA to net income as adjusted, please see “Reconciliation of Non-GAAP Accounting Measures.”

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Endeavour International Corporation

The cash flows provided by operating activities decreased to $42.1 million for the six months ended June 30, 2009 as compared to $72.0 million for the same period in 2008 primarily due to significant decreases in revenues as a result of lower commodity prices.

Results of Operations

The following table shows our average sales volumes and sales prices for our operations for the periods presented.

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Sales volume (1):
Oil and condensate sales (Mbbls):
United Kingdom		234		332		412		598
United States		—		—		1		—
Continuing operations		234		332		413		598
Discontinued operations — Norway		87		246		310		342
Total		321		578		723		940
Gas sales (MMcf):
United Kingdom		1,071		1,644		2,148		3,679
United States		60		—		111		—
Continuing operations		1,131		1,644		2,259		3,679
Discontinued operations — Norway		153		467		686		1,065
Total		1,284		2,111		2,945		4,744
Oil equivalent sales (MBOE):
United Kingdom		413		606		770		1,211
United States		10		—		20		—
Continuing operations		423		606		790		1,211
Discontinued operations — Norway		112		324		424		520
Total		535		930		1,214		1,731
Total BOE per day		5,877		10,222		6,710		9,509

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Endeavour International Corporation

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
Physical production volume (BOE per day):
United Kingdom		3,995		6,123			4,132		6,678
United States		41		—			65		—
Continuing Operations		4,036		6,123			4,197		6,678
Discontinued operations — Norway		1,324		2,791			2,332		2,843
Total		5,360		8,914			6,529		9,521
Realized Prices(2):
Oil and condensate price ($  per Bbl):
Before commodity derivatives	$	50.83	$	105.45		$	45.74	$	99.44
Effect of commodity derivatives		18.88		(20.57	)		22.00		(19.42	)
Realized prices including commodity derivatives	$	69.71	$	84.88		$	67.74	$	80.02
Gas price ($  per Mcf):
Before commodity derivatives	$	4.64	$	12.01		$	6.41	$	11.41
Effect of commodity derivatives		2.38		(1.23	)		1.74		0.13
Realized prices including commodity derivatives	$	7.02	$	10.78		$	8.15	$	11.54
Equivalent oil price ($  per BOE):
Before commodity derivatives	$	41.62	$	92.82		$	42.79	$	85.29
Effect of commodity derivatives		17.04		(15.58	)		17.34		(10.20	)
Realized prices including commodity derivatives	$	58.66	$	77.24		$	60.13	$	75.09

(1)	We record oil revenues on the sales method, i.e. when delivery has occurred. Actual production may differ based on the timing of tanker liftings. We use the entitlements method to account for sales of gas production.
(2)	The average sales prices reflect both our continuing and discontinued operations and include gains and losses for derivative contracts we utilize to manage price risk related to our future cash flows.

Our revenues and cash flows from operating activities are very sensitive to changes in the prices we receive for the oil and natural gas we produce. Our production is sold at prevailing market prices which may be volatile and subject to numerous factors which are outside of our control. 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. While market prices for both oil and natural gas were at historically high levels in 2007 and early 2008, both oil and natural gas prices have significantly declined as a result of diminished demand and the global economic downturn.

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 this commodity is still developing. As such, the oil we produce and sell is typically 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 global fuel prices, including oil and

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Endeavour International Corporation

coal. Specifically, we sell a majority of our gas into the UK market, which is very sensitive to and impacted by tighter European gas supplies and gas deliveries from Russia. Therefore, the price for natural gas in the UK market is typically higher than the price for natural gas in other geographic regions and markets, including the U.S.

For the second quarter of 2009 and 2008, we had sales volume of 4,600 BOE per day and 6,700 BOE per day, respectively, for our continuing operations. Our physical daily production for our continuing operations was approximately 4,036 BOE and 6,123 BOE for the second quarter of 2009 and 2008, respectively. The decrease in sales volume is primarily attributable to maintenance down time at Goldeneye, the timing of liftings and the suspension of production at IVRRH, Renee and Rubie. The production from IVRRH, Renee and Rubie has been suspended until the development activities at Rochelle are operational which we currently anticipate to be late 2010. After the start of Rochelle production, we expect to re-develop these fields if commercially advisable and practicable.

During the six months ended June 30, 2009, we realized $21.1 million in gains on the settlement of commodity derivatives, compared to $17.6 million in losses for the same period in 2008. In the second quarter of 2009, we also recognized $9.1 million in gains on the mark-to-market of our commodity derivatives versus a loss of $14.5 million for the same period in 2008.

Expenses

Operating expenses decreased to $4.4 million for the second quarter of 2009 as compared to $9.2 million in the second quarter of 2008. For the six months ending June 30, 2009, operating expenses decreased to $10.6 million as compared to $16.5 million for the same period in 2008. Operating costs per BOE decreased from $15.14 per BOE in the second quarter of 2008 to $10.41 per BOE in the second quarter of 2009, and from $13.64 per BOE for the six months ending June 30, 2008 to $13.40 per BOE for the six months ending June, 30, 2009. The decrease in operating expenses from 2008 to 2009 is primarily due to the suspension of production at the IVRRH and Rubie fields, which were our highest operating cost fields.

DD&A expense decreased to $7.9 million from $19.5 million for the second quarter of 2009 and 2008, respectively, reflecting the lower sales volumes and the decrease in our DD&A rate per BOE after the impairments recorded in the fourth quarter 2008 and first quarter 2009. DD&A for the six months of 2009 had similar declines versus the same period in 2008.

General and administrative (“G&A”) expenses increased to $4.1 million during the second quarter of 2009 as compared to $3.8 million for the corresponding period in 2008. G&A expenses increased to $8.0 million during the six months ended June 30, 2009 as compared to $7.6 million for the corresponding period in 2008. This increase primarily resulted from higher compensation expense due to increase in headcount associated with the expanding development projects in the U.K. Components of G&A expenses for these periods are as follows:

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Endeavour International Corporation

	For the Three Months						For the Six Months
(Amounts in thousands)	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Compensation	$	3,378		$	2,860		$	6,789		$	6,195
Consulting, legal and accounting fees		1,091			948			1,992			1,867
Occupancy costs		272			306			496			621
Other expenses		536			1,093			977			2,043
Total gross cash G&A expenses		5,277			5,207			10,254			10,726
Non-cash stock-based compensation		575			484			1,113			849
Gross G&A expenses		5,852			5,691			11,367			11,575
Less: capitalized G&A expenses		(1,737	)		(1,846	)		(3,417	)		(4,022	)
Net G&A expenses	$	4,115		$	3,845		$	7,950		$	7,553

Interest expense decreased by $5.7 million to $8.1 million for the six months ended June 30, 2009 as compared to $13.8 million for the corresponding period in 2008 due to the repayment of debt following the Norway Sale and costs related to our early retirement of the Second Lien Term Loan in 2008 of $4.3 million.

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Endeavour International Corporation

Income Taxes

The following summarizes the components of tax expense (benefit):

(Amounts in thousands)	UK			U.S.			Other			Total
Six Months Ended June 30, 2009
Net loss before taxes from continuing operations	$	(46,620	)	$	(3,780	)	$	(13,050	)	$	(63,450	)
Current tax benefit		(408	)		—			—			(408	)
Deferred tax benefit		(18,637	)		—						(18,637	)
Foreign currency losses on deferred tax liabilities		9,009			—			—			9,009
Total tax benefit		(10,036	)		—			—			(10,036	)
Net loss from continuing operations	$	(36,584	)	$	(3,780	)	$	(13,050	)	$	(53,414	)
Six Months Ended June 30, 2008
Net loss before taxes from continuing operations	$	(136,434	)	$	(3,140	)	$	(13,543	)	$	(153,117	)
Current tax expense		1,867			—			—			1,867
Deferred tax benefit		(68,958	)		—			—			(68,958	)
Foreign currency losses on deferred tax liabilities		160			—			—			160
Total tax benefit		(66,931	)		—			—			(66,931	)
Net loss from continuing operations	$	(69,503	)	$	(3,140	)	$	(13,543	)	$	(86,186	)

The change in income tax benefit from $66.9 million to $10.0 million for the first six months of 2008 and 2009, respectively, is primarily the result of lower deferred tax benefits on decreased unrealized losses on derivatives, partially offset by decreased income resulting from lower commodity prices and the effect of foreign currency changes on the deferred tax liabilities as a result of the strengthening of the British pound versus the U.S. dollar.

In 2009 and 2008, 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 of deferred tax assets generated.

As our deferred tax liabilities are denominated in their respective currencies, we revalue those deferred tax liabilities to the applicable foreign currency exchange rate at the end of each period. Those foreign currency gains and losses are included in income tax expense as shown above.

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Endeavour International Corporation

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, including non-financial performance indicators and non-GAAP measures as key metrics to manage our business. These key metrics demonstrate the company’s 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. These measures include, among others, debt and cash balances, production levels, oil and gas reserves, drilling results, Discretionary Cash Flow, adjusted earnings before interest, taxes, depreciation, depletion and amortization (“Adjusted EBITDA”) and Net Income as Adjusted.

Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow are internal, supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles (GAAP). We use these non-GAAP measures as internal measures of performance and to aid in our budgeting and forecasting processes. We view these non-GAAP measures, and we believe that others in the oil and gas industry view these, or similar, non-GAAP measures, as commonly used analytic indicators to compare performance among companies. We further believe that these non-GAAP measures are frequently used by securities analysts, investors, and other interested parties in the evaluation of issuers, many of which present these measures when reporting their results. We believe these non-GAAP measures provide useful information to both management and investors to gain an overall understanding of our current financial performance and provide investors with financial measures that most closely align to our internal measurement processes. Since the application of mark-to-market accounting has the effect of pulling forward into current periods non-cash gains and losses related to commodity derivatives relating to future delivery periods, analysis of results of operations from one period to another can be difficult. We believe that excluding these unrealized non-cash gains and losses related to commodity derivatives and currency exchange changes provides a more meaningful representation of our economic performance in the reporting period and is therefore useful to us, investors, analysts and others in facilitating the analysis of our results of operations from one period to another. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from these measures are significant components in understanding and assessing financial performance.

Because Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow are not measurements determined in accordance with GAAP and thus susceptible to varying calculations, Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow as presented may not be comparable to other similarly titled measures of other companies.

Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of our financial statement data presented in the consolidated financial statements as reported under GAAP. For example, Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow may not reflect:

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Endeavour International Corporation

• our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

• changes in, or cash requirements for, our working capital needs;

• unrealized gains (losses) on derivatives;

• non-cash foreign currency gains (losses);

• our interest expense, or the cash requirements necessary to service interest and principal payments on our debts;

• our preferred stock dividend requirements; and

• depreciation, depletion and amortization.

Because of these limitations, Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow should not be considered as measures of cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and by using Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow only supplementally.

Provided below are reconciliations of net loss to the following non-GAAP financial measures: Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow.

	For the Three Months						For the Six Months
(Amounts in thousands)	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Net income (loss)	$	9,820		$	(64,024	)	$	(7,044	)	$	(80,816	)
Depreciation, depletion and amortization		7,804			23,720			23,863			45,123
Impairment of oil and gas properties		1,244			—			30,645			—
Deferred tax benefit		4,827			(55,133	)		(3,596	)		(58,277	)
Gain/Loss on asset sales		(47,144	)		—			(47,144	)		—
Unrealized loss on derivative instruments		32,722			130,686			34,095			160,328
Other		9,690			3,366			11,535			8,568
Discretionary Cash Flow (1)	$	18,963		$	38,615		$	42,354		$	74,926
Net income (loss) to common shareholders	$	7,124		$	(66,733	)	$	(12,409	)	$	(86,220	)
Impairment of oil and gas properties (net of tax) (2)		1,244			—			15,945			—
Unrealized losses on derivatives (net of tax)(3)		19,176			69,748			20,747			84,234
Currency impact on deferred taxes		10,955			81			10,250			2,722
Net Income (Loss), as Adjusted	$	38,499		$	3,096		$	34,533		$	736

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Endeavour International Corporation

	For the Three Months						For the Six Months
(Amounts in thousands)	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Net income (loss) to common shareholders	$	7,124		$	(66,733	)	$	(12,409	)	$	(86,220	)
Unrealized losses on derivatives		32,722			130,686			34,095			160,328
Net interest expense		4,186			5,183			8,071			13,139
Depreciation, depletion and amortization		7,858			19,503			19,182			38,391
Impairment of oil and gas properties		1,244			—			30,645			—
Income tax expense (benefit)		916			(58,304	)		(10,036	)		(66,931	)
(Income) loss from discontinued operations		(46,092	)		(5,637	)		(46,370	)		(5,370	)
Preferred stock dividends		2,696			2,709			5,365			5,405
Adjusted EBITDA	$	10,654		$	27,407		$	28,543		$	58,742

(1)	Discretionary cash flow is equal to cash flow from operating activities before the changes in operating assets and liabilities.
(2)	Net of tax benefits of $14,701 for the six months ended June 30, 2009.
(3)	Net of tax benefits of $13,546, $60,938, $13,348 and $76,094, respectively.

Liquidity and Capital Resources

The following table summarizes our net cash flows from operating, investing and financing activities for the periods indicated. For additional details regarding the components of our primary cash flow amounts, see the Condensed Consolidated Statements of Cash Flows under Item 1 of this report.

(Amounts in thousands)	For the Six Months Ended June 30,
	2009			2008
Net cash provided by Operating Activities	$	42,199		$	71,954
Net cash provided by (used in) Investing Activities	$	91,052		$	(32,168	)
Net cash used in Financing Activities	$	(69,805	)	$	(26,847	)

The net cash flows provided by operating activities are primarily impacted by the earnings from our business activities. The cash flows provided by operating activities decreased to $42.2 million for the six months ended June 30, 2009 as compared to $72.0 million for the six months ended June 30, 2008 primarily due to decreased revenues as a result of lower commodity prices.

The cash provided by or used in investing activities represents the proceeds from the Norway Sale, expenditures for capital projects, as discussed in “Drilling Program” below, and decreases to restricted cash under escrow for our rig commitments. For the six months ended June 30, 2009, cash provided by investing activities includes $139.8 million in proceeds from the Norway Sale, net of expenses and cash sold.

The cash used in financing activities consists of borrowings and repayments of debt, payments of preferred dividends and payment of financing costs. For the six months ended June 30, 2009, net cash used by financing activities includes $64.5 million in repayments under our borrowing base facility. These repayments were funded through a combination of cash on hand and net proceeds from the Norway Sale. At June 30, 2009, the borrowing base capacity was $63.5 million with $48.5 million outstanding.

Operating, Investing and Financing Activities include the net cash flows from our discontinued operations. For the six months ended June 30, 2009, our discontinued operations had net cash flows provided by operating activities of approximately $9 million offset by net cash used by investing activities of approximately $9 million, excluding the proceeds from the sale. We do not expect the sale of our discontinued operations to have a material effect on cash flows for the remainder of 2009. For the six months ended June 30, 2008, our discontinued operations had net cash flows provided by operating activities of $31 million offset by $19 million in net cash used by investing activities.

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Drilling Program

We design our drilling program to maintain a balanced portfolio along multiple fronts, including:

• Value creation, such as net present value per BOE and internal return rate of return;

• Lead time from initial acquisition to first production;

• Ownership interest, risks and rewards, for example lower interests in high risk projects;

• Financial impact, for example finding costs per BOE and timing of capital commitments;

• Growth opportunities, i.e. a successful well unlocks a play and supplies a string of future drill locations;

• Gas versus oil; and

• UK and US.

Our UK North Sea portfolio generally provides greater financial impact but requires longer lead times to first production. Our US activity has been chosen to provide a significantly shorter lead times but is likely to have less financial impact as the wells are both, on average, less expensive and have less reserve potential than our UK portfolio.

We currently anticipate spending approximately $65 — $75 million during 2009 to fund oil and gas exploration, production and development activities, with $42 million incurred through June 30, 2009 (including $9 million incurred by our Norwegian assets). We plan to drill approximately 10 wells per year during 2009 and 2010 in the United Kingdom sector of the North Sea and onshore United States.

Our drilling program for the first half of 2009 concentrated on appraisal drilling at two of our UK development projects, Rochelle and Cygnus. The program also included exploratory drilling in the UK and the US. For the last half of 2009, we expect to continue our US activity in our three exploratory focus areas in Texas, Louisiana and New Mexico and drill exploratory wells in the UK at Maureen and Deacon.

We have an agreement with Caza to participate in a jointly established exploration and development program covering Caza’s onshore acreage position and opportunity portfolio in the United States. During the initial two-year term of the agreement, we have the option but not the obligation to participate in the acquisition, exploration and appraisal activities of selected assets.

As in 2008, we intend to finance this capital program through our cash flow generated from operations and cash on hand. To the extent our cash flow from operations is unable to completely finance our capital program, we intend to postpone certain proposed capital projects until our capital spending does not exceed our available resources. However, we believe our existing production base, combined with our commodity derivatives in place, should generate sufficient cash flows to fund our ongoing operations and capital program.

The timing, completion and process of our 2009 capital program is subject to a number of factors, including availability of capital, drilling results, drilling and production costs, availability of drilling services and equipment, partner approvals and technical work. Based on these and other factors, we may increase or decrease our planned capital program or prioritize certain projects over others.

Rig Commitments

We have a commitment for 69 days use of a drilling rig in our North Sea operations that we expect to utilize in late 2009. We have $2 million in escrow toward this commitment, included in “Restricted Cash” which will be released as payments are made for this drilling activity.

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2009 Outlook

The table below sets forth a range of estimates for the company’s operating statistics for the full year ending December 31, 2009 following the completion of the Norway Sale.

Estimated Average Production (A)
Daily Production (BOE per day)		4,000		to		5,000
Differentials (B)
Oil ($/Bbl)	$	(5.50	)	to	$	(6.50	)
Gas ($/Mcf)	$	(0.10	)	to	$	(0.20	)
Gas Percentage of Total		50	%	to		55	%
Lease Operating Expense ($  per barrel)	$	9.50		to	$	12.00

(A)	Actual results may differ materially from these estimates.
(B)	For purposes of the estimates, assumptions of price differentials are based on location, quality and other factors, excluding the effects of derivative financial instruments. Gas price differentials are stated as premiums (discounts) from National Balancing Point pricing, and oil price differentials are stated as premiums (discounts) from Dated Brent pricing.

Our IVRRH, Renee and Rubie fields all produce to a single floating production facility that has experienced significant increases in operating costs in recent periods. With the decline in oil prices and rising operating costs, the operator ceased operations and began removal and salvage procedures at that floating production facility. The removal of the facility was completed in July 2009. As a result, we suspended production at these fields during the first quarter of 2009. The production from these fields will be suspended until the development activities at Rochelle are operational, which we currently anticipate to be late 2010. After the start of Rochelle production, we expect to re-develop IVRRH, Renee and Rubie if commercially advisable and practicable. We also expect to incur approximately $10 million of abandonment costs for the facility, before salvage value, by mid 2010. As of June 30, 2009, we have spent approximately $4.0 million of abandonment costs.

Disclosures About Contractual Obligations and Commercial Commitments

See “Drilling Program” for a discussion of our rig commitments and planned expenditures.

Cautionary Statement for Forward-Looking Statements

The information contained in this Quarterly Report on Form 10-Q and in other public statements by Endeavour and our officers or directors includes or may contain certain forward-looking statements. The words “may,” “will,” “expect,” “anticipate,” “believe,” “continue,” “estimate,” “project,” “intend,” and similar expressions used in this Quarterly Report are intended to identify forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of

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1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. You should not place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions. These factors include, but are not limited to, those risks described in detail below and in the our Annual Report on Form 10-K for the year ended December 31, 2008 under the caption “Risk Factors” and other filings with the Securities and Exchange Commission. These risk factors include, among others, our ability to replace reserves and sustain production; the level of our indebtedness; the availability of capital on an economic basis to fund reserve replacement costs; uncertainties in evaluating oil and natural gas reserves of acquired properties and associated potential liabilities; unsuccessful exploration and development drilling; and production interruptions that could adversely affect our cash flow. Should any of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, actual results may differ materially from those included within the forward-looking statements.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

The international scope of our business operations exposes us to the risk of fluctuations in foreign currency markets. As a result, we are subject to foreign currency exchange rate risk due to effects that foreign exchange rate movements have on our costs and on the cash flows that we receive from foreign operations. We operate a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other. To date, we have addressed our foreign currency exchange rate risks principally by maintaining our liquid assets in interest-bearing accounts, until payments in foreign currency are required, but we have not reduced this risk by hedging to date.

Commodity Price Risk

We produce and sell crude oil and natural gas. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and regional gas spot market prices that have been volatile and unpredictable for several years. As a result, our financial results can be significantly impacted as these commodity prices fluctuate widely in response to changing market forces. We have engaged in oil and gas hedging activities to realize commodity prices that we consider favorable. For additional information regarding our derivative instruments, see Note 8 to the Condensed Consolidated Financial Statements.

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Endeavour International Corporation

At June 30, 2009, we had the following commodity derivative instruments outstanding:

	2009		2010		2011		Total
Oil:
Fixed Price Swaps (Mbbl)		159		573		487		1,220
Weighted Average Price ($/Barrel)	$	69.08	$	68.39	$	66.01	$	67.53
Costless Collar (Mbbl)		200		—		—		200
Weighted Average Ceiling Price ($/Barrel)	$	121.88	$	—	$	—	$	121.88
Weighted Average Floor Price ($/Barrel)	$	100.00	$	—	$	—	$	100.00
Gas: (1)
Fixed Price Swap (MMcf)		694		1,032		627		2,353
Weighted Average Price ($/Mcf)	$	8.63	$	8.82	$	8.45	$	8.67
Costless Collar (MMcf)		706		—		—		706
Weighted Average Ceiling Price ($/Mcf)	$	14.93		—		—	$	14.93
Weighted Average Floor Price ($/Mcf)	$	10.50		—		—	$	10.50

⁽¹⁾ Gas derivative contracts are designated in therms and have been converted to Mcf at a rate of 10 therm to 1 Mcf. The exchange rate at June 30, 2009 was $1.65 to £1.00.

Interest Rate Risk

We are exposed to changes in interest rates. Changes in interest rates affect the interest earned on cash and cash equivalents and the interest rate paid on borrowings under debt.

At June 30, 2009, we had an interest rate swap for a notional amount of $37.5 million whereby we pay a fixed rate of 5.05% and receive three-month LIBOR through November 2009. A 250 change in basis points on LIBOR would not result in a material change in our results of operations.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, our management carried out an evaluation, with the participation of our chief executive officer (the “CEO”) and chief financial officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded:

(i) that our disclosure controls and procedures are designed to ensure that information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) is

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Endeavour International Corporation

accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure; and

(ii) that our disclosure controls and procedures were effective as of June 30, 2009.

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1A: Risk Factors

There have been no material changes in our risk factors since December 31, 2008. For a detailed discussion of our risk factors, please read, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 4: Submission of Matters to a Vote of Security Holders

At the May 29, 2009 Annual Meeting of Stockholders, our stockholders voted on two matters: the election of two Class II directors to each serve three-year terms; and the ratification of the appointment of an independent registered public accounting firm for the year ending December 31, 2009.

Votes were cast as follows:
(1)	Election of two Class II Directors*:

					Broker
					Non-
	For		Withheld		Votes
Election as a Director of the Company of:
John Seitz		120,478,406		1,318,002		—
Nancy Quinn		114,070,533		7,725,875		—

* Those directors whose term of office continued were as follows: John B. Connally, Leiv L. Nergaard, Charles Hue-Williams, William L. Transier and Thomas D. Clark, Jr.

(2) Ratification of the appointment of KPMG LLP as the independent registered public accounting firm for 2009:

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For	Withheld	Abstained
121,341,082	244,263	211,062

Item 6: Exhibits

The exhibits marked with the asterisk symbol (*) are filed or furnished (in the case of Exhibits 32.1 and 32.2) with this Form 10-Q.

3.1(a)	Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form 10-Q (Commission File No. 001-32212) for the quarter ended June 30, 2004.)
3.1(b)	Certificate of Amendment dated June 1, 2006 (Incorporated by reference to Exhibit 4.2 of our Registration Statement on Form S-3 (Commission File No. 333-139304) filed on December 13, 2006.)
3.2	Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.4 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on November 6, 2006.)
31.1 *	Certification of William L. Transier, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *	Certification of J. Michael Kirksey, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *	Certification of William L. Transier, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *	Certification of J. Michael Kirksey, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Endeavour International Corporation

Date: August 5, 2009 /s/ J. Michael Kirksey   J. Michael Kirksey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) /s/ Robert L. Thompson   Robert L. Thompson
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)

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