Endeavour International 10Q 2009 Q3 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 September 30, 2009


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	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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 November 6, 2009, 131,150,229 shares of the registrant’s common stock were outstanding.

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			20
Item 3: Quantitative and Qualitative Disclosures About Market Risk			31
Item 4: Controls and Procedures			33
Part II. Other Information
Item 1A: Risk Factors			33
Item 6: Exhibits			34
Signatures			35
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 natural 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)


	September 30,		December 31,
	2009		2008

Assets
Current Assets:
Cash and cash equivalents	$	77,805	$	31,421
Restricted cash		374		20,739
Accounts receivable		12,185		22,325
Prepaid expenses and other current assets		18,781		42,194
Current assets of discontinued operations		—		16,726

Total Current Assets		109,145		133,405

Property and Equipment, Net		243,834		232,346
Goodwill		211,886		213,949
Other Assets		5,964		9,165
Long Term Assets of Discontinued Operations		—		148,605


Total Assets	$	570,829	$	737,470

See accompanying notes to condensed consolidated financial statements.

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


	September 30,			December 31,
	2009			2008

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	12,725		$	38,630
Current maturities of debt		—			13,000
Accrued expenses and other		23,157			36,641
Current liabilities of discontinued operations		—			22,232

Total Current Liabilities		35,882			110,503

Long-Term Debt		169,656			214,855
Deferred Taxes		69,847			67,299
Other Liabilities		68,426			55,791
Long-term Liabilities of Discontinued Operations		—			46,051

Total Liabilities		343,811			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: $3,075)
Common stock; shares issued and outstanding — 131,072 and 128,572 shares at 2009 and 2008, respectively		131			129
Additional paid-in capital		247,114			244,471
Treasury stock, at cost (463 and 327 shares at 2009 and 2008, respectively)		(543	)		(450	)
Accumulated other comprehensive loss		(184	)		(1,266	)
Accumulated deficit		(144,500	)		(124,913	)

Total Stockholders’ Equity		102,018			117,971


Total Liabilities and Stockholders’ Equity	$	570,829		$	737,470

See accompanying notes to condensed consolidated financial statements.

Endeavour International Corporation

Condensed Consolidated Statement of Operations
(Unaudited)
(Amounts in thousands, except per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Revenues	$	7,759		$	44,160		$	42,179		$	145,312

Cost of Operations:
Operating expenses		3,876			7,154			14,455			23,681
Depreciation, depletion and amortization		5,646			14,856			24,828			53,247
Impairment of oil and gas properties		—			—			30,645			—
General and administrative		4,091			4,064			12,041			11,617

Total Expenses		13,613			26,074			81,969			88,545


Income (Loss) From Operations		(5,854	)		18,086			(39,790	)		56,767


Other Income (Expense):
Derivatives:
Realized gains (losses)		7,530			(13,631	)		28,581			(31,276	)
Unrealized gains (losses)		(4,360	)		119,089			(38,455	)		(41,239	)
Interest expense		(3,919	)		(4,694	)		(12,054	)		(18,489	)
Interest income and other		1,402			2,863			(6,932	)		2,834


Total Other Income (Expense)		653			103,627			(28,860	)		(88,170	)


Income (Loss) Before Income Taxes		(5,201	)		121,713			(68,650	)		(31,403	)
Income Tax Expense (Benefit)		(441	)		57,736			(10,477	)		(9,195	)


Income (Loss) from Continuing Operations		(4,760	)		63,977			(58,173	)		(22,208	)

Discontinued Operations, net of tax:
Income (loss) from operations		—			14,219			(774	)		19,588
Gain on sale		277			—			47,420			—

Income from Discontinued Operations		277			14,219			46,646			19,588


Net Income (Loss)		(4,483	)		78,196			(11,527	)		(2,620	)
Preferred Stock Dividends		2,696			2,709			8,061			8,113


Net Income (Loss) to Common Stockholders	$	(7,179	)	$	75,487		$	(19,588	)	$	(10,733	)


Basic Net Income (Loss) per Common Share:
Continuing operations	$	(0.06	)	$	0.48		$	(0.51	)	$	(0.23	)
Discontinued operations		—			0.11			0.36			0.15

Total	$	(0.06	)	$	0.59		$	(0.15	)	$	(0.08	)


Diluted Net Income (Loss) per Common Share:
Continuing operations	$	(0.06	)	$	0.29		$	(0.51	)	$	(0.23	)
Discontinued operations		—			0.07			0.36			0.15

Total	$	(0.06	)	$	0.36		$	(0.15	)	$	(0.08	)


Weighted Average Number of Common Shares Outstanding:
Basic		130,109			127,810			129,719			127,658

Diluted		130,109			211,811			129,719			127,658

See accompanying notes to condensed consolidated financial statements.

Endeavour International Corporation

Condensed Consolidated Statement of Cash Flows
(Unaudited)
(Amounts in thousands)


	Nine Months Ended September 30,
	2009			2008
Cash Flows from Operating Activities:
Net loss	$	(11,527	)	$	(2,620	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization		29,509			64,073
Impairment of oil and gas properties		30,645			—
Deferred tax benefit		(3,269	)		(5,568	)
Unrealized losses on derivatives		38,455			41,239
Gain on sale of Norwegian operations		(47,420	)		—
Other		13,577			7,945
Changes in operating assets and liabilities:
(Increase) decrease in receivables		6,593			(4,259	)
(Increase) decrease in other current assets		5,060			(6,716	)
Increase (decrease) in liabilities		(21,939	)		5,520

Net Cash Provided by Operating Activities		39,684			99,614

Cash Flows From Investing Activities:
Capital expenditures		(92,766	)		(46,512	)
Proceeds from sales, net of cash		144,765			—
Decrease in restricted cash		20,366			—

Net Cash Provided by (Used in) Investing Activities		72,365			(46,512	)

Cash Flows From Financing Activities:
Repayments of borrowings		(64,458	)		(120,000	)
Borrowings under debt agreements		—			88,000
Dividends paid		(7,969	)		(7,969	)
Financing costs paid		—			(3,382	)
Other financing		27			(514	)

Net Cash Used in Financing Activities		(72,400	)		(43,865	)

Net Increase in Cash and Cash Equivalents		39,649			9,237
Cash and Cash Equivalents, Beginning of Period		38,156			16,440


Cash and Cash Equivalents, End of Period	$	77,805		$	25,677


Cash and Cash Equivalents, End of Period:
Continuing operations	$	77,805		$	18,260
Discontinued operations		—			7,417

Total	$	77,805		$	25,677

See accompanying notes to condensed consolidated financial statements.

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

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.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Net income (loss) to common shareholders
Basic	$	(7,179	)	$	75,487		$	(19,588	)	$	(10,733	)
Add Effect of:
Preferred dividends		—			2,656			—			—
Convertible debt		—			(2,861	)		—			—

Diluted	$	(7,179	)	$	75,282		$	(19,588	)	$	(10,733	)


Weighted Average Number of Common Shares Outstanding:
Basic		130,109			127,810			129,719			127,658
Add Effect of:
Preferred stock		—			50,000			—			—
Convertible debt		—			34,001			—			—

Diluted		130,109			211,811			129,719			127,658

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 standard 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

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

			earnings per share (“EPS”). The impact of the adoption of this standard on our weighted average shares outstanding and EPS was 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 that did not have a material effect 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 November 6, 2009, which is the date these financial statements were issued, we completed our review and analysis of potential subsequent events. We identified one subsequent event that occurred after September 30, 2009. Additional information regarding this subsequent event is presented in Note 12 to these Condensed Consolidated Financial Statements.

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 $47.0 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:


	September 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:

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)


	September 30, 2009		December 31, 2008
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


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009			2008

Sales	$	—	$	27,315		$	17,550		$	73,760


Income before Taxes	$	—	$	21,878		$	4,656		$	51,784
Income Tax Expense		—		(7,659	)		(5,430	)		(32,196	)

Income (Loss) from Operations		—		14,219			(774	)		19,588

Gain on sale		277		—			47,420			—

Net Income from Discontinued Operations	$	277	$	14,219		$	46,646		$	19,588

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

At September 30, 2009, total compensation cost related to awards not yet recognized was approximately $3.1 million and is expected to be recognized over a weighted average period of

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

less than three years. Non-cash stock-based compensation is recorded in general and administrative (“G&A”) expenses or capitalized G&A as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

G & A Expenses	$	409	$	562	$	1,334	$	808
Capitalized G & A		158		496		346		1,551


Total non-cash stock-based compensation	$	567	$	1,058	$	1,680	$	2,359

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 Nine Months Ended September 30,
	2009			2008

Risk-free rate		1.3	%		3.9	%
Expected years until exercise		4.30			4.10
Expected stock volatility		56	%		44	%
Dividend yield		—			—

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

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)


				Weighted		Weighted
	Number of			Average		Average
	Shares			Exercise		Contractual		Aggregate
	Underlying			Price per		Life in		Intrinsic
	Options			Share		Years		Value

Balance outstanding January 1, 2009		4,807		$	2.35
Granted		1,170			0.54
Exercised		(164	)		0.81
Forfeited		(281	)		3.69
Expired		(932	)		2.09


Balance outstanding — September 30, 2009		4,600		$	1.89		6.3	$	849


Currently exercisable — September 30, 2009		2,004		$	2.99		3.6	$	4,667

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

Restricted Stock

At September 30, 2009, our employees and directors held 3.2 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 September 30, 2009 and the changes during the nine months ended September 30, 2009 are presented below:


				Weighted
				Average Grant
				Date Fair
	Number of			Value per
	Shares			Share

Balance outstanding — January 1, 2009		3,966		$	1.88
Granted		1,698			0.68
Vested		(2,354	)		2.13
Forfeited		(74	)		1.66


Balance outstanding — September 30, 2009		3,236		$	1.03


Total grant date fair value of shares vesting during the period	$	4,825

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

Note 4 — Property and Equipment

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


	September 30,			December 31,
	2009			2008

Oil and gas properties under the full cost method:
Subject to amortization	$	239,983		$	239,024
Not subject to amortization:
Acquired in 2009		43,405			—
Acquired in 2008		33,683			37,288
Acquired in 2007		10,837			14,746
Acquired prior to 2007		77,586			82,522

		405,494			373,580

Other oil and gas assets		4,875			4,875

Computers, furniture and fixtures		2,912			3,236

Total property and equipment		413,281			381,691

Accumulated depreciation, depletion and amortization		(169,447	)		(149,345	)


Net property and equipment	$	243,834		$	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 $0.7 million and $0.9 million in interest related to exploration activities for the quarters ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, $2.4 million and $2.9 million, respectively, was capitalized in interest related to exploration. We capitalized $2.0 million and $2.0 million in certain employee costs directly related to exploration activities for the quarters ended September 30, 2009 and 2008, respectively. We capitalized $5.4 million and $6.0 million in certain employee costs directly related to exploration activities for the nine months ended September 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

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

not accounted for as cash flow hedges. In the second quarter of 2009, we recorded $1.2 million in impairment of oil and gas properties, pre-tax, related to dry hole costs in the United States.

For the third quarter of 2009, we did not have an 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 $74.97 per barrel for oil and $4.79 per Mcf for gas which represent market prices as of October 30, 2009. If we had used prices as of September 30, 2009 ($65.68 per barrel for oil and $3.18 per Mcf for gas), we would have had an impairment of $17.1 million.

Note 5 — Debt Obligations

Our debt consisted of the following at the indicated dates:


	September 30,			December 31,
	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, 11.5%, due 2014		48,445			44,496


Less: debt discount		(8,581	)		(10,891	)
Less: current maturities		—			(13,000	)


Long-term debt	$	169,656		$	214,855


Standby letters of credit outstanding for abandonment liabilities	$	32,941		$	30,115

The capacity and amounts available under our senior bank facility are 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 September 30, 2009, the borrowing base capacity was $63.50 million. Effective October 1, 2009, the redetermination was completed and the borrowing base capacity was set at $49.95 million.

The fair value of our debt obligations was $158 million and $191 million at September 30, 2009 and December 31, 2008, respectively. The fair values of long-term debt were determined based upon quotes obtained from banks 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 as this instrument bears interest at a market rate.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

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 nine months ended September 30, 2009 and 2008:


	Nine Months Ended
	September 30,
	2009			2008

Carrying amount of asset retirement obligations as of beginning of period	$	38,776		$	30,790
Accretion expense		3,082			2,165
Impact of foreign currency exchange rate changes		3,782			(3,325	)
Payment of asset retirement obligation		(6,620	)		—
Sale of assets		(248	)		—


Carrying amount of asset retirement obligations as of end of period	$	38,772		$	29,630

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.


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.

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

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 September 30, 2009:


	Quoted Market Prices		Significant Other			Significant
	in Active Markets -		Observable Inputs -			Unobservable Inputs -			Total
	Level 1		Level 2			Level 3			Fair Value

Oil and gas derivative contracts:
Oil and gas swaps	$	—	$	(3,600	)	$	—		$	(3,600	)
Oil and gas collars		—		3,079			1,852			4,931
Interest rate swaps		—		(427	)		—			(427	)
Embedded derivatives		—		—			(23,450	)		(23,450	)


Total derivative liabilities	$	—	$	(948	)	$	(21,598	)	$	(22,546	)

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 as a result 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. As a result, 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:

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)


	Nine Months Ended
	September 30,
	2009

Balance at beginning of period	$	(12,057	)
Total gains or losses (realized/unrealized)
Included in earnings		(9,541	)


Balance at end of period	$	(21,598	)


Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at September 30, 2009	$	(6,663	)

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.

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 commodity 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 for the periods indicated:

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)


	September 30,			December 31,
	2009			2008

Derivatives not designated as hedges:
Oil and gas commodity derivatives:
Assets:
Prepaid expenses and other current assets	$	9,156		$	31,649
Other assets — long term		324			1,702
Liabilities:
Accrued expenses and other		(1,943	)		—
Other liabilities — long-term		(6,205	)		(2,375	)

	$	1,332		$	30,976

Embedded derivatives related to debt instrument:
Liabilities:
Other liabilities — long-term		(23,450	)		(14,640	)

Derivatives designated as cash flow hedge:
Interest rate swap
Liabilities:
Accrued expenses and other		(427	)		(1,334	)

If all counterparties failed to perform, our maximum loss would be $9.5 million as of September 30, 2009.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Derivatives not designated as hedges:
Oil and gas commodity derivatives
Realized gains (losses)	$	7,530		$	(13,631	)	$	28,581		$	(31,276	)
Unrealized gains (losses)		(2,950	)		112,809			(29,645	)		(25,919	)

		4,580			99,178			(1,064	)		(57,195	)

Embedded derivatives related to debt instrument
Unrealized gains (losses)	$	(1,410	)	$	6,280		$	(8,810	)	$	(15,320	)

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

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)


		Three Months Ended					Nine Months Ended
		September 30,					September 30,
	Location of
	Reclassification
	into Income	2009			2008		2009			2008

Interest rate swap
(Gain) loss recognized in other comprehensive income, net of tax		$	(21	)	$	4	$	(94	)	$	(21	)
(Gain) loss reclassified from accumulated other comprehensive income into income	Interest expense		418			213		1,176			532

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 September 30, 2009, our outstanding commodity derivatives covered approximately 1,240 Mbbls and 2,359 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:


	Nine Months Ended September 30,
	2009		2008

Interest paid	$	6,191	$	14,485


Income taxes paid	$	4,334	$	12,737

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 $39.7 million for the nine months ended September 30, 2009 as compared to $99.6 million for the nine

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

months ended September 30, 2008 primarily due to a decrease in cash flows from decreased revenues as a result of lower commodity prices and sales volumes.

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.

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):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Net income (loss)	$	(4,483	)	$	78,196		$	(11,527	)	$	(2,620	)

Unrealized (gain) loss on interest rate swap derivative instrument, net of tax		(21	)		4			(94	)		(21	)

Unrealized loss on marketable securities, net of tax		—			(1,225	)		—			(480	)

Reclassification adjustment for (gain) loss realized in net income (loss) above		418			213			1,176			532


Net impact on comprehensive income (loss)		397			(1,008	)		1,082			31


Comprehensive income (loss)	$	(4,086	)	$	77,188		$	(10,445	)	$	(2,589	)

Note 11 — Commitments and Contingencies

Rig Commitment

We have a commitment for 46 days use of a drilling rig in our North Sea operations that we expect to utilize in 2010. We have $0.4 million in escrow toward this commitment, included in

Endeavour International Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per unit data)

“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 September 30, 2009 the estimate of our liability from this mis-measurement was $2 million, which represents a $2 million decrease since December 31, 2008. As the settlement of the mis-measurement liability is covered under the purchase agreement for these assets, the decrease in our net liability was recorded as a decrease to goodwill during the third quarter of 2009.

Note 12 — Subsequent Events

Subsequent to September 30, 2009, we acquired 50% of the working interest owned by Cohort Energy Company (“Cohort”), a subsidiary of J-W Operating Company, in 24 wells located in five fields and certain proved undeveloped locations associated with Cohort’s proved developed assets in North Louisiana and East Texas for $15 million.

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 $47.0 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 $145.3 million in the nine months ended September 30, 2008 to $42.2 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 $50.0 million for the nine months ended September 30, 2009 as compared to $105.1 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 nine months ended September 30, 2009 was $19.6 million, or ($0.15) per share. For the nine months ended September 30, 2008, net loss to common shareholders was $10.7 million, or ($0.08) 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 $47.4 million in gain on sale of our discontinued operations. Net loss as adjusted for the nine months ended September 30, 2009 would have been $27.5 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 $6.6 million for the same period in 2008. Adjusted EBITDA decreased to $46.5 million for the nine months ended September 30, 2009 from $142.9 million for the same period in 2008. For definitions of Adjusted EBITDA and Discretionary Cash Flow, and a reconciliation

Endeavour International Corporation

of Adjusted EBITDA to net income as adjusted, please see “Reconciliation of Non-GAAP Accounting Measures.”

The cash flows provided by operating activities decreased to $39.7 million for the nine months ended September 30, 2009 as compared to $99.6 million for the same period in 2008 primarily due to significant decreases in revenues as a result of lower commodity prices and lower production volumes discussed below.

Results of Operations

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Sales volume (1)
Oil and condensate sales (Mbbls):
United Kingdom		82		235		494		834
United States		1		—		2		—

Continuing operations		83		235		496		834
Discontinued operations — Norway		—		204		310		545

Total		83		439		806		1,379


Gas sales (MMcf):
United Kingdom		629		1,470		2,777		5,149
United States		19		—		130		—

Continuing operations		648		1,470		2,907		5,149
Discontinued operations — Norway		—		575		686		1,640

Total		648		2,045		3,593		6,789


Oil equivalent sales (MBOE)
United Kingdom		187		480		957		1,692
United States		4		—		23		—

Continuing operations		191		480		980		1,692
Discontinued operations — Norway		—		299		425		819

Total		191		779		1,405		2,511


Total BOE per day		2,072		8,477		5,147		9,162


Physical production volume (BOE per day):
United Kingdom		2,777		5,075		3,675		6,064
United States		32		—		54		—

Continuing operations		2,809		5,075		3,729		6,064
Discontinued operations — Norway		—		2,763		1,545		2,816

Total		2,809		7,838		5,274		8,880


Realized Prices (2)
Oil and condensate price ($ per Bbl):
Before commodity derivatives	$	61.73	$	106.22	$	47.38	$	101.60

Endeavour International Corporation


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
Effect of commodity derivatives		46.05		(23.70	)		24.47		(20.78	)

Realized prices including commodity derivatives	$	107.78	$	82.52		$	71.85	$	80.82


Gas price ($ per Mcf):
Before commodity derivatives	$	4.10	$	12.14		$	5.99	$	11.63
Effect of commodity derivatives		5.75		(1.58	)		2.46		(0.39	)

Realized prices including commodity derivatives	$	9.85	$	10.56		$	8.45	$	11.24


Equivalent oil price ($ per BOE):
Before commodity derivatives	$	40.70	$	91.65		$	42.51	$	87.26
Effect of commodity derivatives		39.50		(17.48	)		20.34		(12.46	)

Realized prices including commodity derivatives	$	80.20	$	74.17		$	62.85	$	74.80


⁽¹⁾		We record oil revenues using 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 natural gas 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 by global fuel prices, including oil and 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 third quarter of 2009 and 2008, we had sales volume of 2,072 BOE per day and 5,222 BOE per day, respectively, for our continuing operations. Our physical daily production for our continuing operations was approximately 2,809 BOE and 7,838 BOE for the third quarter of 2009 and 2008, respectively. The decrease in sales volume is primarily attributable to maintenance down time at Alba, Bittern, Enoch and Goldeneye. In addition, the suspension of

Endeavour International Corporation

production at IVRRH, Renee and Rubie reduced sales volumes. With facilities in the UK off line for maintenance during the third quarter, we had less than half the oil liftings in the third quarter of 2009 than we had during the second quarter of 2009 or the third quarter 2008. We also had 50% more downtime at Goldeneye in the third quarter of 2009 than in 2008 as the onshore compressor facility for Goldeneye was undergoing maintenance.

The production from IVRRH, Renee and Rubie has been suspended until the development activities at Rochelle are operational which we currently anticipate to be during the second quarter of 2011. After the start of Rochelle production, we expect to re-develop these fields if commercially advisable and practicable.

During the nine months ended September 30, 2009, we realized $28.6 million in gains on the settlement of commodity derivatives, compared to $31.3 million in losses for the same period in 2008. In the third quarter of 2009, we also recognized $7.5 million in gains on the mark-to-market of our commodity derivatives versus a loss of $13.6 million for the same period in 2008.

Expenses

Operating expenses decreased to $3.9 million for the third quarter of 2009 as compared to $7.2 million in the third quarter of 2008. For the nine months ended September 30, 2009, operating expenses decreased to $14.5 million as compared to $23.7 million for the same period in 2008. Operating costs per BOE increased from $14.89 per BOE in the third quarter of 2008 to $20.33 per BOE in the third quarter of 2009, and from $14.00 per BOE for the nine months ended September 30, 2008 to $14.75 per BOE for the nine months ended September 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. The operating expense per BOE increased due to the significantly lower volumes sold for both periods, thereby causing the fixed costs to have a greater impact on out total operating expense per BOE.

Depreciation, depletions and amortization (“DD&A”) expense decreased to $5.6 million from $14.9 million for the third 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 nine months ended September 30, 2009 had similar declines versus the same period in 2008.

General and administrative (“G&A”) expenses increased to $12.0 million during the nine months ended of 2009 as compared to $11.6 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:

Endeavour International Corporation


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Compensation	$	3,659		$	2,228		$	10,448		$	8,423
Consulting, legal and accounting fees		1,537			1,491			3,529			3,358
Occupancy costs		221			245			717			866
Other expenses		85			1,027			1,062			3,070

Total gross cash G&A expenses		5,502			4,991			15,756			15,717

Non-cash stock-based compensation		567			1,058			1,680			1,907

Gross G&A expenses		6,069			6,049			17,436			17,624
Less: capitalized G & A expenses		(1,978	)		(1,985	)		(5,395	)		(6,007	)

Net G&A expenses	$	4,091		$	4,064		$	12,041		$	11,617

Interest expense decreased by $(6.4) million to $12.1 million for the nine months ended September 30, 2009 as compared to $18.5 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.

Income Taxes

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

Endeavour International Corporation


	UK			U.S.			Other			Total

Nine Months Ended September 30, 2009
Net loss before taxes from continuing operations	$	(44,641	)	$	(7,914	)	$	(16,095	)	$	(68,650	)

Current tax expense (benefit)		(1,176	)		—			—			(1,176	)
Deferred tax expense (benefit)		(16,203	)		—			—			(16,203	)
Foreign currency losses on deferred tax liabilities		6,902			—			—			6,902

Income tax expense (benefit)		(10,477	)		—			—			(10,477	)


Net loss from continuing operations	$	(34,164	)	$	(7,914	)	$	(16,095	)	$	(58,173	)


Nine Months Ended September 30, 2008
Net loss before taxes from continuing operations	$	(17,582	)	$	(5,656	)	$	(8,165	)	$	(31,403	)

Current tax expense (benefit)		6,043			—			—			6,043
Deferred tax expense (benefit)		(15,256	)		—			—			(15,256	)
Foreign currency losses on deferred tax liabilities		18			—			—			18

Income tax expense (benefit)		(9,195	)		—			—			(9,195	)


Net loss from continuing operations	$	(8,387	)	$	(5,656	)	$	(8,165	)	$	(22,208	)

The change in income tax benefit from $(9.2) million to $(10.5) million for the nine months ended September 30, 2008 and 2009, respectively, is primarily the result of lower current taxes on decreased income resulting from lower commodity prices and sales volumes offset by 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.

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 our ability to maintain or grow production levels and reserves, internally fund capital expenditures and service debt as well as provide comparisons to other oil and gas exploration and production companies. These measures include, among others, debt and cash balances, production levels, oil and gas reserves, drilling results, Discretionary Cash Flow, adjusted earnings before interest,

Endeavour International Corporation

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:

	•		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.

Endeavour International Corporation

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.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

Net income (loss)	$	(4,483	)	$	78,196		$	(11,527	)	$	(2,620	)

Depreciation, depletion and amortization		5,646			18,949			29,509			64,073
Impairment of oil and gas properties		—			—			30,645			—
Deferred tax expense (benefit)		327			52,709			(3,269	)		(5,568	)
Gain on asset sales		(277	)		—			(47,420	)		—
Unrealized (gain) loss on derivatives		4,360			(119,089	)		38,455			41,239
Other		2,042			(621	)		13,577			7,946


Discretionary Cash Flow (1)	$	7,615		$	30,144		$	49,970		$	105,070


Net income (loss) to common shareholders	$	(7,179	)	$	75,487		$	(19,588	)	$	(10,733	)

Impairment of oil and gas properties (net of tax) (2)		—			—			15,322			—
Unrealized (gain) loss on derivatives (net of tax) (3)		2,885			(62,684	)		23,632			21,549
Currency impact on deferred taxes		(2,106	)		(6,926	)		8,143			(4,203	)


Net Income (Loss) as Adjusted	$	(6,400	)	$	5,877		$	27,509		$	6,613


Net income (loss) to common shareholders	$	(7,179	)	$	75,487		$	(19,588	)	$	(10,733	)

Unrealized (gain) loss on derivatives		4,360			(119,089	)		38,455			41,239
Net interest expense		3,877			4,338			11,860			17,182
Depreciation, depletion and amortization		5,646			18,949			29,509			64,073
Impairment of oil and gas properties		—			—			30,645			—
Income tax expense (benefit)		(441	)		65,395			(5,047	)		23,001
Gain on asset sales		(277	)		—			(47,420	)		—
Preferred stock dividends		2,696			2,709			8,061			8,113


Adjusted EBITDA	$	8,682		$	47,789		$	46,475		$	142,875


⁽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 $ (15,323) for the nine months ended September 30, 2009.

⁽³⁾		Net of tax expense (benefit) of $ (1,475), $ 56,404, $ (14,823) and $ (19,689), respectively.

Endeavour International Corporation

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.

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 $39.7 million for the third quarter September 30, 2009 as compared to $99.6 million for the third quarter September 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 nine months ended September 30, of 2009, cash provided by investing activities includes $144.8 million in proceeds from the Norway Sale, net of expenses and cash sold, and sales of other assets.

The cash used in financing activities consists of borrowings and repayments of debt, payments of preferred dividends and payment of financing costs. For the nine months ended September 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 September 30, 2009, the borrowing base capacity was $63.5 million with $48.5 million outstanding. Effective October 1, 2009, the redetermination was completed and the borrowing base capacity was set at $49.95 million.

Operating, Investing and Financing Activities include the net cash flows from our discontinued operations. For the nine months ended September 30, 2009, our discontinued operations had net cash flows provided by operating activities of approximately $9.0 million offset by net cash used by investing activities of approximately $9.0 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 nine months ended September 30, 2008, our discontinued operations had net cash flows provided by operating activities of $29.7 million offset by $(24.9) million in net cash used by investing activities.


	Nine Months Ended September 30,
	2009			2008

Net cash provided by operating activities	$	39,684		$	99,614

Net cash provided by (used in) investing activities	$	72,365		$	(46,512	)

Net cash used in financing activities	$	(72,400	)	$	(43,865	)

Drilling Program

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

Endeavour International Corporation

	•		Value creation, such as net present value per BOE and internal 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 $75 to $85 million, before acquisitions, during 2009 to fund oil and gas exploration, production and development activities, with $68 million incurred through September 30, 2009 (including $9 million incurred by our Norwegian assets).

Our drilling program for the first nine months 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 quarter of 2009, we expect to continue our US activity in our three exploratory focus areas in Texas, Louisiana and New Mexico. We also anticipate drilling an exploration well at the Deacon prospect in the UK in the fourth quarter of 2009 or early 2010.

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.

Subsequent to September 30, 2009, we acquired 50% of the working interest owned by Cohort Energy Company, a subsidiary of J-W Operating Company, in 24 wells located in five fields and certain proved undeveloped locations associated with the proved developed assets in North Louisiana and East Texas for $15 million. Net production acquired is currently 3.9 million cubic feet per day of natural gas or 650 barrels of oil equivalent per day.

Our primary sources of financial resources and liquidity are internally generated cash flows from operations and access to the credit and capital markets, to the extent available. We have historically utilized a combination of borrowings under our bank facility and accessing the capital markets to fund our operations, capital projects or strategic acquisitions. We believe the combination of our available cash on hand, cash flow from operations, our ability to time capital expenditures and development phase financing for specific projects will allow us to pursue our drilling program for the next 18 months while enabling us to further our strategic objectives.

Endeavour International Corporation

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 46 days use of a drilling rig in our North Sea operations that we expect to utilize in 2010. We have $0.4 million in escrow toward this commitment, included in “Restricted Cash” which will be released as payments are made for this drilling activity.

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 sale of Norwegian assets.


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 produced 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 second quarter 2011. 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 September 30, 2009, we have spent approximately $7.0 million of these abandonment costs.

Endeavour International Corporation

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 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 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.

Endeavour International Corporation

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.

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


	2009		2010		2011		Total

Oil:
Fixed Price Swaps (Mbbl)		80		573		487		1,140
Weighted Average Price ($/Barrel)	$	69.08	$	68.39	$	66.01	$	67.42

Costless Collar (Mbbl)		100		—		—		100
Weighted Average Ceiling Price ($/Barrel)	$	121.88	$	—	$	—	$	121.88
Weighted Average Floor Price ($/Barrel)	$	100.00	$	—	$	—	$	100.00

Gas: (1)
Fixed Price Swaps (MMcf)		347		1,032		627		2,006
Weighted Average Price ($/Mcf)	$	9.58	$	8.57	$	8.21	$	8.63

Costless Collar (MCF)		353		—		—		353
Weighted Average Ceiling Price ($/Mcf)	$	14.50	$	—	$	—	$	14.50
Weighted Average Floor Price ($/Mcf)	$	10.20	$	—	$	—	$	10.20


⁽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 September 30, 2009 was 1.5991 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 September 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.

Endeavour International Corporation

Evaluation of Disclosure Controls and Procedures

Item 4: 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 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 September 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

In addition to the factors discussed elsewhere in this report, including the financial statements and related notes, you should consider carefully the risks and uncertainties described below and in our Annual Report on Form 10-K for the year ended December 31, 2008 under Item 1A “Risk Factors,” which could materially adversely affect our business, financial condition and results of operations. While these are the risks and uncertainties we believe are most important, you should know that they are not the only risks or uncertainties facing us or that may adversely affect our business. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also could impair our business operations and financial condition. If any of these risks or uncertainties were to occur, our business, financial condition or results of operation could be adversely affected.

The adoption of derivatives legislation by the U.S. Congress could have an adverse impact on our ability to hedge risks associated with our business.

Several proposals for derivative reform have been developed by committees across both the U.S. House of Representatives and the U.S. Senate. These proposals are focused on expanding

Endeavour International Corporation

Federal regulation surrounding the use of financial derivative instruments, including credit default swaps, commodity derivatives and other over-the-counter derivatives. Among the recommendations included in the proposals are the requirements for centralized clearing or settling of such derivatives as well as the expansion of collateral margin requirements for certain derivative-market participants. Depending on the ultimate form of legislation, our derivatives utilization could be adversely affected with (i) greater administrative burden, (ii) limitations on the form and use of derivatives, and (iii) expanded collateral margin requirements.

Although it is not possible at this time to predict when the U.S. Congress may act on derivatives legislation, any laws or regulations that may be adopted that subject us to additional collateral margin requirements relating to, or additional restrictions on, our trading and commodity positions could have an adverse effect on the cost of our hedging activity.

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.

Endeavour International Corporation

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: November 6, 2009	/s/ J. Michael Kirksey	/s/ Robert L. Thompson

	J. Michael Kirksey	Robert L. Thompson
	Executive Vice President and	Senior Vice President and
	Chief Financial Officer	Chief Accounting Officer
	(Principal Financial Officer)	(Principal Accounting Officer)

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Endeavour International Inactive 10-Q2009 Q3 Quarterly report

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