Endeavour International 10-Q 2010 Q1 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 March 31, 2010

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 or organization)	(I.R.S. Employer Identification No.)

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 filer o Accelerated filer þ  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

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 May 6, 2010, 162,651,152 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	33
Item 4: Controls and Procedures	34
Part II. Other Information
Item 1A: Risk Factors	35
Item 6: Exhibits	35
Signatures	37
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. References to number of potential well locations are gross, unless otherwise indicated.

References to “GAAP” refer to U.S. generally accepted accounting principles.

Part I: Financial Information

Item 1: Financial Statements

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

	March 31,		December 31,
	2010		2009
Assets
Current Assets:
Cash and cash equivalents	$	31,923	$	27,287
Restricted cash		19		2,879
Accounts receivable		10,744		14,800
Prepaid expenses and other current assets		11,863		10,118
Total Current Assets		54,549		55,084
Property and Equipment, Net		305,913		266,587
Goodwill		211,886		211,886
Other Assets		5,725		5,322
Total Assets	$	578,073	$	538,879

See accompanying notes to condensed consolidated financial statements.

1

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

	March 31,			December 31,
	2010			2009
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	26,045		$	12,401
Current maturities of debt		79,942			—
Accrued expenses and other		18,180			17,798
Total Current Liabilities		124,167			30,199
Long-Term Debt		170,964			223,385
Deferred Taxes		83,033			80,692
Other Liabilities		75,295			85,412
Total Liabilities		453,459			419,688
Commitments and Contingencies
Series C Convertible Preferred Stock
Face value (liquidation preference)		46,625			50,000
Net non-cash premiums under fair value accounting on redemption		8,447			9,058
Total Series C Convertible Preferred Stock		55,072			59,058
Stockholders’ Equity:
Series B preferred stock — Liquidation preference: $3,154
Common stock; shares issued and outstanding — 161,256 and 131,618 shares at 2010 and 2009, respectively		161			132
Additional paid-in capital		272,864			247,707
Treasury stock, at cost - 498 and 498 shares at 2010 and 2009, respectively		(587	)		(587	)
Accumulated deficit		(202,896	)		(187,119	)
Total Stockholders’ Equity		69,542			60,133
Total Liabilities and Stockholders’ Equity	$	578,073		$	538,879

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)

	Three Months Ended
	March 31,
	2010			2009
Revenues	$	13,721		$	16,338
Cost of Operations:
Operating expenses		2,821			6,182
Depreciation, depletion and amortization		5,681			11,324
Impairment of oil and gas properties		7,692			29,402
General and administrative		4,431			3,835
Total Expenses		20,625			50,743
Loss From Operations		(6,904	)		(34,405	)
Other Income (Expense):
Derivatives:
Realized gains		232			11,936
Unrealized losses		(1,072	)		(1,373	)
Interest expense		(5,636	)		(3,911	)
Interest income and other		3,024			(341	)
Total Other Income (Expense)		(3,452	)		6,311
Loss Before Income Taxes		(10,356	)		(28,094	)
Income Tax Expense (Benefit)		4,834			(10,952	)
Loss from Continuing Operations		(15,190	)		(17,142	)
Income from Discontinued Operations		—			279
Net Loss		(15,190	)		(16,863	)
Preferred Stock Dividends		589			2,669
Net Loss to Common Stockholders	$	(15,779	)	$	(19,532	)
Basic and Diluted Net Loss per Common Share:
Continuing operations	$	(0.11	)	$	(0.15	)
Discontinued operations		—			—
Total	$	(0.11	)	$	(0.15	)
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted		149,546			129,291

See accompanying notes to condensed consolidated financial statements.

3

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

	Three Months Ended March 31,
	2010			2009
Cash Flows from Operating Activities:
Net loss	$	(15,190	)	$	(16,863	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization		5,681			16,059
Impairment of oil and gas properties		7,692			29,402
Deferred tax expense (benefit)		3,477			(8,423	)
Unrealized losses on derivatives		1,072			1,373
Amortization of non-cash compensation		1,153			657
Amortization of loan costs and discount		1,528			1,201
Non-cash interest expense		1,683			1,279
Other		(3,023	)		(1,293	)
Changes in operating assets and liabilities:
Decrease in receivables		4,056			4,504
(Increase) decrease in other current assets		(2,166	)		4,707
Increase in liabilities		3,451			7,136
Net Cash Provided by Operating Activities		9,414			39,739
Cash Flows From Investing Activities:
Capital expenditures		(21,768	)		(29,431	)
Acquisitions		(29,407	)		(1,153	)
(Increase) decrease in restricted cash		2,859			(11,814	)
Net Cash Used in Investing Activities		(48,316	)		(42,398	)
Cash Flows From Financing Activities:
Repayments of borrowings		—			(10,678	)
Borrowings under debt agreements		25,000			—
Proceeds from issuance of common stock		20,011			—
Dividends paid		(550	)		(2,656	)
Other financing		(923	)		(50	)
Net Cash Provided by (Used in) Financing Activities		43,538			(13,384	)
Net Increase (Decrease) in Cash and Cash Equivalents		4,636			(16,043	)
Cash and Cash Equivalents, Beginning of Period		27,287			38,156
Cash and Cash Equivalents, End of Period	$	31,923		$	22,113
Cash and Cash Equivalents, End of Period:
Continuing operations	$	31,923		$	12,599
Discontinued operations		—			9,514
Total	$	31,923		$	22,113

See accompanying notes to condensed consolidated financial statements.

4

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, 2009.

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 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.

Loss Per Share

Basic loss per common share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per share includes the effect of our outstanding stock options, warrants and shares issuable pursuant to convertible debt, convertible preferred stock and certain stock incentive plans under the treasury stock method, if including such instruments would be dilutive.

5

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

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 anti-dilutive.

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

	March 31,
	2010		2009
Warrants, options and stock-based compensation		674		282
Convertible debt		37,910		35,581
Convertible preferred stock		37,300		50,000
		75,884		85,863

New Accounting Developments

On January 1, 2010, we adopted the following new standards without material effects on our results of operations or financial position:

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

• Fair Value— New, expanded disclosures are required for recurring or nonrecurring fair-value measurements and the reconciliation of specific fair value measurements.

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:

6

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

	Three Months Ended
	March 31,
	2010		2009
Sales	$	—	$	13,370
Income before Taxes	$	—	$	2,846
Income Tax Expense		—		(2,567	)
Income from Operations		—		279
Net Income from Discontinued Operations	$	—	$	279

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 March 31, 2010, total compensation cost related to awards not yet recognized was approximately $4.5 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:

	Three Months Ended
	March 31,
	2010		2009
G & A Expenses	$	883	$	146
Capitalized G & A		270		392
Total non-cash stock-based compensation	$	1,153	$	538

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

7

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

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 following table summarizes the weighted average of the assumptions used.

	For the Three Months Ended March 31,
	2010		2009
Risk-free rate		—		1.3	%
Expected years until exercise		—		4.5
Expected stock volatility		—		56	%
Dividend yield		—		—

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
	Options			Share		Years		Value
Balance outstanding January 1, 2010		4,212		$	1.87
Exercised		(3	)		0.54
Forfeited		(20	)		1.56
Expired		(540	)		4.17
Balance outstanding — March 31, 2010		3,649		$	1.53		6.9	$	936
Currently exercisable — March 31, 2010		2,405		$	1.83		6.3	$	405

Restricted Stock

At March 31, 2010, our employees and directors held 5.1 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 March 31, 2010 and the changes during the three months ended March 31, 2010 are presented below:

8

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

				Weighted
				Average Grant
				Date Fair
	Number of			Value per
	Shares			Share
Balance outstanding — January 1, 2010		3,420		$	1.00
Granted		3,499			1.07
Vested		(1,779	)		1.09
Forfeited		(21	)		0.89
Balance outstanding — March 31, 2010		5,119		$	1.02
Total grant date fair value of shares vesting during the period	$	1,935

Note 4 — Property and Equipment

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

	March 31,			December 31,
	2010			2009
Oil and gas properties under the full cost method:
Subject to amortization	$	292,103		$	275,278
Not subject to amortization:
Acquired in 2010		49,905			—
Acquired in 2009		44,702			51,797
Acquired in 2008		26,872			32,970
Acquired prior to 2008		59,888			69,786
		473,470			429,831
Computers, furniture and fixtures		3,655			3,560
Total property and equipment		477,125			433,391
Accumulated depreciation, depletion and amortization		(171,212	)		(166,804	)
Net property and equipment	$	305,913		$	266,587

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 $1.0 million in interest related to exploration activities for the quarters ended March 31, 2010 and 2009, respectively.

9

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

In the first quarter of 2010, we recorded $7.7 million in impairment of our U.S. oil and gas properties, pre-tax, through the application of the full cost ceiling test at the end of the quarter. The impairment was primarily due to the declaration of two wells as dry holes during the first quarter of 2010; the Alligator Bayou well which was spud in 2008 and a well under our Caza participation agreement. The prices used to determine the impairment for the U.S. properties were $69.83 per barrel for oil and $4.01 per Mcf for gas. We did not have an impairment of U.K. oil and gas properties, pre-tax, through the application of the full cost ceiling test at the end of the first quarter 2010. The prices used to determine the impairment for the U.K. properties were $68.74 per barrel for oil and $4.51 per Mcf for gas.

On January 6, 2010, we acquired significant positions in several U.S. resource plays as discussed below. We funded the initial cash contributions for these new joint ventures from existing cash reserves.

We entered into a participation agreement with Cohort Energy Company (“Cohort”), a subsidiary of J-W Operating Company, and acquired 50 percent of Cohort’s interests in certain acreage in North Louisiana/East Texas and Western Pennsylvania, primarily in the Haynesville and Marcellus gas shale plays. Our initial investment was $15 million cash, and we will pay a share of Cohort’s drilling and completion expenditures as wells are drilled over the next few years.

We also acquired 50 percent of Hillwood Energy Alabama LP’s (“Hillwood”) position in Hillwood’s unproven, but highly prospective new multi-target gas shale play in Alabama with an initial net investment of approximately $8.0 million.

Note 5 — Debt Obligations

Our debt consisted of the following at the dates indicated:

10

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

	March 31,			December 31,
	2010			2009
Senior notes, 6% fixed rate, due 2012	$	81,250		$	81,250
Senior bank facility, variable rate, due 2011 (1)		49,942			49,942
Convertible bonds, 11.5%, due 2014		51,271			49,838
Subordinated notes, 12.0%, due 2014		50,373			50,122
Junior facility, variable rate, due 2011		25,000			—
		257,836			231,152
Less: debt discount		(6,930	)		(7,767	)
Less: current maturities		(79,942	)		—
Long-term debt	$	170,964		$	223,385
Standby letters of credit outstanding for abandonment liabilities	$	31,312		$	33,388

(1) Subsequent to March 31, 2010, we repaid $8.5 million of our senior bank facility.

The fair value of our debt obligations was $253 million and $219 million at March 31, 2010 and December 31, 2009, 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 our other debt. Book value approximates fair value for our senior bank and junior facilities as these instruments bear interest at market rates.

Junior Facility

In the first quarter of 2010, we entered a $25 million lending facility between us, our subsidiaries and Bank of Scotland PLC (the “Junior Facility”), with a maturity date of February 5, 2011, and interest at LIBOR plus 8% (8.2% for first quarter of 2010). Our indebtedness under the Junior Facility remains secured by cross guarantees from our subsidiaries and a second ranking interest in the security package provided under our senior bank facility. Outstanding amounts under the Junior Facility may be prepaid.

The Junior Facility contains customary covenants, similar to those in our senior bank facility, which limit our ability to incur indebtedness, create certain liens, dispose of our assets and make dividend payments or other distributions with respect to equity securities. The Junior Facility also includes certain mandatory prepayment requirements for the amount of net proceeds received upon a capital raise, of more than $50 million, or the sale of an asset. The Junior Facility also contains a covenant to maintain a minimum fair market value of proved plus probable reserves to consolidated secured debt ratio of 2:1.

11

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

Senior bank facility

We have a $225 million Senior Bank Facility, which is subject to a borrowing base limitation with interest of LIBOR plus 1.3% (2% for the first quarter of 2010). At March 31, 2010, we had $49.9 million outstanding under this facility. The Senior Bank Facility also provides for issuances of letters of credit of up to an aggregate $60 million. As of March 31, 2010, we have $31.3 million of outstanding letters of credit related to abandonment liabilities on certain of our oil and gas properties in the North Sea.

The borrowing base is subject to redetermination every six months (on April 1 and October 1), and we are required to provide our lenders with an independent reserve report every 12 months. Based on our reserve report at December 31 and June 30 each year, commodity prices set by our lenders and terms set forth in the credit agreement, the maximum capacity of our borrowing base is set, and any amounts outstanding over the redetermined borrowing base must be repaid within 45 days of the redetermination date. The senior bank facility is also subject to maximum commitment levels by the participating lenders that change over time. As of April 1, 2010, the redetermination set the borrowing base capacity at $40.6 million. Subsequent to March 31, 2010, we repaid $8.5 million of our Senior Bank Facility.

On February 5, 2010, we amended our Senior Bank Facility. Previously, the final maturity date of the Senior Bank Facility was the earlier of October 31, 2011 or the reserve tail date, being the date when the remaining borrowing base reserves are projected to be 20% or less of the initially approved borrowing base reserves. The amendment brings the maturity date of the senior bank facility into alignment with the originally expected reserve tail date and maturity of the Junior Facility by changing the final maturity date to the earlier of January 31, 2011 or the reserve tail date.

2011 Debt Maturities

As of March 31, 2010, we have $79.9 million in debt due in the first quarter of 2011, $8.5 million of which was repaid in April 2010. We plan to utilize our existing U.K. oil and gas assets, as well as our growing U.S. reserve base, as a basis for refinancing and expanding of our credit facilities. We are currently in discussions with several parties concerning this process, however, there can be no assurance that we would be able to refinance or expand our credit facilities. In addition, we cannot predict the potential terms of any new or revised credit facilities. We continually monitor the capital markets to evaluate the most appropriate actions to fund our activities. We strive to synchronize our capital expenditures with our cash flow. However, we believe our existing U.K. reserves, including probable reserves, are of significant value and together with our U.S. assets can be used as support for increased financial resources when necessary to fund our on-going activities. We continually monitor the capital markets to evaluate the most appropriate actions in our capital market activities.

12

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 three months ended March 31, 2010 and 2009:

	Three Months Ended
	March 31,
	2010			2009
Carrying amount of asset retirement obligations as of beginning of period	$	47,362		$	38,776
Accretion expense		1,134			965
Impact of foreign currency exchange rate changes		(3,062	)		(744	)
Payment of asset retirement obligation		(483	)		(97	)
Reduction in asset retirement obligation		(1,812	)		—
		43,139			38,900
Less: ARO Liability — Current		(5,000	)		—
Carrying amount of asset retirement obligations as of end of period	$	38,139		$	38,900

Note 7 — Equity Transactions

Series C Convertible Preferred Stock

On January 29, 2010, we and the holders of our outstanding Series C Convertible Preferred Stock corrected a technical oversight in the Subscription and Registration Rights Agreement for our Series C Convertible Preferred Stock. The amendment aligns the number of common shares reserved for the potential conversion of the Series C Convertible Preferred Stock to the terms of the Series C Convertible Preferred Stock after our partial redemption in November 2009. On March 10, 2010, we also amended the Certificate of Designation for the Series C Convertible Preferred Stock and the $50 million subordinated note issued to the holders of the Series C Convertible Preferred Stock to make certain technical changes that align certain definitions and provisions relating to potential repurchases of securities by us.

In February and March 2010, a combined 3,375 shares of our Series C Convertible Preferred Stock were converted into 2.7 million shares of our common stock. In April 2010, an additional 1,625 shares of our Series C Convertible Preferred Stock were converted into 1.3 million shares of our common stock.

Common Stock Issuance

On February 4, 2010, we completed a private placement of common stock pursuant to a Common Stock Purchase Agreement with existing stockholders, certain directors and other third-party investors, thereby selling 23.5 million shares of our common stock, for aggregate net cash

13

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

consideration of approximately $20.5 million. The purchase price per share was $0.90, the closing price of our shares on the NYSE Amex on February 3, 2010. We intend to use the net proceeds from this private placement to partially fund our 2010 capital budget.

Note 8 — Fair Value Measurements

We apply fair value measurements to certain assets and liabilities including 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.

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 March 31, 2010:

14

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

	Quoted Market Prices		Significant Other			Significant
	in Active Markets —		Observable Inputs —			Unobservable Inputs			Total
	Level 1		Level 2			Level — 3			Fair Value
Three Months Ended March 31, 2010
Oil and gas derivative contracts:
Oil and gas swaps	$	—	$	(12,610	)	$	—		$	(12,610	)
Embedded derivatives		—		—			(30,120	)		(30,120	)
Total derivative liabilities	$	—	$	(12,610	)	$	(30,120	)	$	(42,730	)
Twelve Months Ended December 31, 2009
Oil and gas derivative contracts:
Oil and gas swaps	$	—	$	(12,816	)	$	—		$	(12,816	)
Embedded derivatives		—		—			(28,843	)		(28,843	)
Total derivative liabilities	$	—	$	(12,816	)	$	(28,843	)	$	(41,659	)

Our commodity derivative contracts were measured based on quotes from our counterparties, all of whom 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 are all observable market data, and as a result these instruments have been classified as Level 2.

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

15

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

Three months ended March 31, 2010
Balance at beginning of period	$	(28,843	)
Total gains or losses (realized/unrealized)
Included in earnings		(1,277	)
Balance at end of period	$	(30,120	)
Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at March 31, 2010	$	(1,277	)
Three months ended March 31, 2009
Balance at beginning of period	$	(12,057	)
Total gains or losses (realized/unrealized)
Included in earnings		(299	)
Balance at end of period	$	(12,356	)
Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at March 31, 2009	$	528

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:

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 9 — Derivative Instruments

From time to time, we may utilize derivative financial instruments to hedge cash flows from operations or to hedge the fair value of financial instruments. We may use 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 crude oil and natural gas that we produce and sell, to increases in interest rates and to manage cash flows in support of our

16

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

annual capital expenditure budget. We also have embedded derivatives related to our debt instruments and convertible preferred stock.

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

	March 31,			December 31,
	2010			2009
Derivatives not designated as hedges:
Oil and gas commodity derivatives:
Assets:
Prepaid expenses and other current assets	$	2,469		$	2,890
Other assets — long term		626			318
Liabilities:
Accrued expenses and other		(8,668	)		(6,817	)
Other liabilities — long-term		(7,037	)		(9,207	)
	$	(12,610	)	$	(12,816	)
Embedded derivatives related to debt and equity instruments:
Liabilities:
Other liabilities — long-term		(30,120	)		(28,843	)

If all counterparties failed to perform, our maximum loss would be $3.1 million as of March 31, 2010.

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

	Three Months Ended
	March 31,
	2010			2009
Derivatives not designated as hedges:
Oil and gas commodity derivatives
Realized gains	$	232		$	11,936
Unrealized gains		205			397
		437			12,333
Embedded derivatives related to debt and equity instruments
Unrealized losses	$	(1,277	)	$	(1,770	)

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:

17

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

		First Quarter
		March 31,
	Location of
	Reclassification
	into Income	2010		2009
Interest rate swap
(Gain) loss recognized in other comprehensive income, net of tax		$	—	$	136
(Gain) loss reclassified from accumulated other comprehensive income into income	Interest expense		—		309

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 March 31, 2010, our outstanding commodity derivatives covered approximately 917 Mbbls and 1,401 MMcf cumulative through 2011 and consist of fixed price swaps with BNP Paribas.

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

Note 10 — Supplemental Cash Flow Information

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

	Three Months Ended March 31,
	2010		2009
Interest paid	$	4,119	$	2,438
Income taxes paid	$	217	$	3,654

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 $9.4 million for the three months ended March 31, 2010 as compared to $39.7 million for the three months ended March 31, 2009 primarily due to a decrease in cash flows from decreased revenues as a

18

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

result of lower realized gains on commodity derivatives and sales volumes and additional payables related to increased U.S. operations.

The cash provided by or used in investing activities represents 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, payment of financing costs, and proceeds from the issuance of common stock.

Note 11 — Comprehensive Loss

Excluding net loss, our source of comprehensive 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 loss:

	Three Months Ended
	March 31,
	2010			2009
Net loss	$	(15,190	)	$	(16,863	)
Unrealized (gain) loss on interest rate swap derivative instrument, net of tax		—			136
Reclassification adjustment for (gain) loss realized in net loss above		—			381
Net impact on comprehensive income (loss)		—			517
Comprehensive loss	$	(15,190	)	$	(16,346	)

Note 12 — Commitments and Contingencies

We have previously disclosed a potential commitment on a drilling rig in our North Sea operations. The rig owner and operator has made a claim for 46 days of rig time. We are in dispute with the rig operator in relation to this commitment and have also raised potential counterclaims. We will defend our position vigorously.

19

Endeavour International Corporation

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

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. Historically, we have focused our operations in the North Sea, but began expanding our focus in 2009 to target unconventional U.S. onshore resource shale plays with shorter production-cycle times and more compelling risk/return profiles. Since the beginning of 2009, we have taken measured and specific steps to achieve this strategic shift while maintaining our strong financial discipline, including:

• In the second quarter of 2009, we sold our Norwegian operations for cash consideration of $150 million, providing the financial flexibility and strength to continue our U.K. development program and accelerate our expanding U.S. initiative.

• In the fourth quarter of 2009, we entered into a joint venture relationship with Cohort Energy Company (“Cohort”), a subsidiary of J-W Operating Company, an established U.S. gas shale operator, providing us with acreage positions and production in the Haynesville and Marcellus gas shales.

• In the fourth quarter of 2009, we redeemed 60 percent of the outstanding shares of our Series C Preferred Stock, for face value of $75 million, and amended the terms of the remaining shares of Series C Preferred Stock. The redemption price consisted of a $25 million cash payment and the issuance of $50 million Subordinated Notes.

• In January 2010, we acquired 50 percent of Cohort’s interests in certain acreage in North Louisiana/East Texas and Western Pennsylvania, primarily in the Haynesville and Marcellus gas shale plays, for $15 million cash. We also acquired 50 percent of Hillwood Energy Alabama LP’s (“Hillwood”) position in Hillwood’s unproven, but highly prospective new multi-target gas shale play in Alabama with an initial net investment of approximately $8.0 million.

• In February 2010, we sold 23.5 million shares of common stock in a private placement for aggregate net proceeds of $20.5 million. We also entered into a $25 million junior lending facility, with a maturity date of February 5, 2011. The net proceeds from the private placement and the junior facility will be used to partially fund our 2010 capital budget.

20

Endeavour International Corporation

• On March 15, 2010, we announced that our board of directors had approved a review of strategic alternatives for our North Sea assets. In an effort to unlock the value of our underlying North Sea assets, we will study a full range of options, including:

• Continuing to execute our current operations plan;

• Entering into a joint venture to accelerate activities in the North Sea; and

• Selling specific assets or the entire North Sea business.

• During 2010, we plan to utilize our existing U.K. oil and gas assets, as well as our growing U.S. reserve base, as a basis for refinancing and expanding our credit facilities. We are currently in discussions with several parties concerning this process.

With our recent entry into the onshore U.S. shale plays, we are attempting to balance the capital intensive, long lead-time nature of our North Sea assets. We believe the resource-rich shale plays provide us with less expensive, shorter lead time opportunities in some of the most active hydrocarbon producing areas in the U.S. In addition, we intend to continue to actively manage our North Sea assets in a manner that maximizes value and enables us to allocate resources to effectively pursue our strategic objectives. Our North Sea activities and assets remain a key source of value that can be further developed to increase our overall reserves and production. Our major development projects — Bacchus, Columbus, Cygnus and Rochelle — have the potential to significantly expand our total proved reserves and production levels. While it is too early to speculate on the eventual outcome of our strategic review of our U.K. operations, further exploration and development efforts will continue on our current and nearby properties to achieve maximum risk-adjusted value for our North Sea assets. There can be no assurance that we will pursue alternative options, including those listed above, and we may elect not to implement any changes upon completion of our review.

We continue to believe that our balanced portfolio of exploration and development assets, exploited through a disciplined approach to capital resources, will enable us to realize the full value of our assets and increase shareholder return. We also believe our existing U.K. reserves, are of significant value and, together with our U.S. assets, may be used as support for increased financial resources, where necessary, to fund our on-going activities or refinance our outstanding indebtedness. We continually monitor the capital markets, assess growth opportunities like the U.S. resource plays, and review strategic alternatives to pursue the most appropriate actions to fund our activities and increase shareholder return.

Results of Operations

Our revenues and cash flows from operating activities are very sensitive to changes in prices received for our products. Market prices for natural gas have significantly declined since 2009 as a result of the global economic decline, impacting our revenues, which have decreased from $16.3 million in the three months ended March 31, 2009 to $13.7 million in the same period of 2010. Discretionary cash flow was $4.1 million for the three months ended March 31, 2010 as compared to $23.4 million for the same period in 2009. The declines in revenues and discretionary cash flow reflect decreases in sales volumes due to delays in oil tanker liftings and realized prices after the effects of commodity derivatives.

21

Endeavour International Corporation

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 three months ended March 31, 2010 was $15.8 million, or $0.11 per share. For the three months ended March 31, 2009, net loss to common shareholders was $19.5 million, or $0.15 per share. Net loss as adjusted for the three months ended March 31, 2010 would have been $7.0 million without the effect of derivative transactions, impairment of oil and gas properties and currency impacts of deferred taxes as compared to net loss as adjusted of $3.9 million for the same period in 2009. Adjusted EBITDA decreased to $9.7 million for the three months ended March 31, 2010 from $25.4 million for the same period in 2009. 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.”

The cash flows provided by operating activities decreased to $9.4 million for the nine months ended March 31, 2010 as compared to $39.7 million for the same period in 2009 primarily due to significant decreases in revenues as a result of lower commodity prices and lower sales volumes discussed below.

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

22

Endeavour International Corporation

	Three Months Ended
	March 31,
	2010			2009
Sales volume (1)
Oil and condensate sales (Mbbls):
United Kingdom		113			178
United States		1			1
Continuing operations		114			179
Discontinued operations — Norway		—			224
Total		114			403
Gas sales (MMcf):
United Kingdom		766			1,078
United States		280			51
Continuing operations		1,046			1,129
Discontinued operations — Norway		—			533
Total		1,046			1,662
Oil equivalent sales (MBOE)
United Kingdom		241			358
United States		48			9
Continuing operations		289			367
Discontinued operations — Norway		—			313
Total		289			680
Total BOE per day		3,209			7,551
Physical production volume (BOE per day):
United Kingdom		3,118			4,315
United States		578			90
Continuing operations		3,696			4,405
Discontinued operations — Norway		—			3,365
Total		3,696			7,770
Realized Prices (2)
Oil and condensate price ($  per Bbl):
Before commodity derivatives	$	70.24		$	41.68
Effect of commodity derivatives		(7.50	)		24.50
Realized prices including commodity derivatives	$	62.74		$	66.18
Gas price ($  per Mcf):
Before commodity derivatives	$	5.43		$	7.78
Effect of commodity derivatives		1.25			1.25
Realized prices including commodity derivatives	$	6.68		$	9.03
Equivalent oil price ($  per BOE):
Before commodity derivatives	$	47.51		$	43.71
Effect of commodity derivatives		1.55			17.56
Realized prices including commodity derivatives	$	49.06		$	61.27

23

Endeavour International Corporation

(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.

The markets in which we sell our oil and natural gas also materially impact our revenues and cash flows. Oil trades on a worldwide market and consequently, price movements for all types and grades of crude oil generally trend in the same direction and within a relatively narrow price range. However, natural gas prices vary among geographic areas as the prices received are largely impacted by local supply and demand conditions as the global transportation infrastructure for natural gas is still developing. As such, the oil we produce and sell is typically sold at prices in line with global prices, whereas our natural gas is to a large extent impacted by regional supply and demand issues and to a lesser extent by global fuel prices, including oil and coal. Specifically, we sell a majority of our gas into the U.K. 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 U.K. market is typically higher than the price for natural gas in other geographic regions and markets, including the U.S.

For the first quarter of 2010 and 2009, we had sales volume of 3,209 BOE per day and 4,080 BOE per day, respectively, for our continuing operations. Our physical daily production for our continuing operations was approximately 3,696 BOE and 4,405 BOE for the first quarter of 2010 and 2009, respectively. The decrease in sales volume is primarily attributable to fewer liftings and maintenance down time at our Alba, Bittern, Enoch and Goldeneye fields, and was partially offset by an increase in sales from our U.S. assets acquired in the fourth quarter of 2009.

The production from our IVRRH, Renee and Rubie fields has been suspended until the development activities at Rochelle are operational which we currently anticipate to be during 2011. These fields had a combined sales volume of 244 BOE per day for the first quarter of 2009, the last period during which they were in production. After the start of Rochelle production, we expect to re-develop these fields if commercially advisable and practicable.

During the three months ended March 31, 2010, we realized $0.2 million in gains on the settlement of commodity derivatives, compared to $11.9 million in gains for the same period in 2009.

24

Endeavour International Corporation

Expenses

For the three months ended March 31, 2010, operating expenses decreased to $2.8 million as compared to $6.2 million for the same period in 2009. Operating costs per BOE decreased from $16.84 per BOE for the three months ended March 31, 2009 to $9.77 per BOE for the three months ended March 31, 2010. The decrease in operating expenses from 2009 to 2010 is primarily due to the suspension of production at the IVRRH and Rubie fields, which were our fields with the highest operating costs. These fields were suspended at the end of the first quarter of 2009.

Depreciation, depletions and amortization (“DD&A”) expense decreased to $5.7 million from $11.3 million for the first quarter of 2010 and 2009, respectively, reflecting the lower sales volumes and the decrease in our DD&A rate per BOE after the reserve additions and impairments recorded in 2009.

General and administrative (“G&A”) expenses increased to $4.4 million during the first quarter of 2010 as compared to $3.8 million for the corresponding period in 2009. This increase primarily resulted from higher compensation expense due to expanding U.S. operations and increased legal, accounting, and consulting fees that pertain to our expanding U.S. operations and strategic review of our U.K. assets. Components of G&A expenses for these periods are as follows:

	Three Months Ended
	March 31,
	2010			2009
Compensation	$	4,243		$	3,411
Consulting, legal and accounting fees		1,527			901
Occupancy costs		249			224
Other expenses		173			441
Total gross cash G&A expenses		6,192			4,977
Non-cash stock-based compensation		1,153			538
Gross G&A expenses		7,345			5,515
Less: capitalized G & A expenses		(2,914	)		(1,680	)
Net G&A expenses	$	4,431		$	3,835

Interest expense increased by $1.7 million to $5.6 million for the three months ended March 31, 2010 as compared to $3.9 million for the corresponding period in 2009 due to interest related to the $50 million Subordinated Notes issued in the fourth quarter of 2009 and the new Junior Facility issued in the first quarter of 2010.

Income Taxes

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

25

Endeavour International Corporation

	UK			U.S.			Other			Total
Three Months Ended March 31, 2010
Net income (loss) before taxes from continuing operations	$	4,127		$	(11,842	)	$	(2,641	)	$	(10,356	)
Current tax expense (benefit)		1,356			—			—			1,356
Deferred tax expense (benefit)		3,536			—			—			3,536
Foreign currency losses on deferred tax liabilities		—			—			(58	)		(58	)
Income tax expense (benefit)		4,892			—			(58	)		4,834
Net loss from continuing operations	$	(765	)	$	(11,842	)	$	(2,583	)	$	(15,190	)
Three Months Ended March 31, 2009
Net loss before taxes from continuing operations	$	(22,610	)	$	(3,404	)	$	(2,080	)	$	(28,094	)
Current tax expense (benefit)		594			—			—			594
Deferred tax expense (benefit)		(9,600	)		—			—			(9,600	)
Foreign currency losses on deferred tax liabilities		(1,946	)		—			—			(1,946	)
Income tax expense (benefit)		(10,952	)		—			—			(10,952	)
Net loss from continuing operations	$	(11,658	)	$	(3,404	)	$	(2,080	)	$	(17,142	)

The change in income tax expense (benefit) from $(11.0) million to $4.8 million for the three months ended March 31, 2009 and 2010, respectively, is primarily the result of taxes on increased income resulting from decreases in operating expenses and impairments partially offset by lower revenues from lower realized commodity prices and sales volumes.

In 2010 and 2009, 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.

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, 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 in the United States (GAAP). We use these non-

26

Endeavour International Corporation

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 in our industry. 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.

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.

27

Endeavour International Corporation

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
	March 31,
	2010			2009
Net loss	$	(15,190	)	$	(16,863	)
Depreciation, depletion and amortization		5,681			16,059
Impairment of oil and gas properties		7,692			29,402
Deferred tax expense (benefit)		3,477			(8,423	)
Unrealized (gain) loss on derivatives		1,072			1,373
Other		1,341			1,844
Discretionary Cash Flow (1)	$	4,073		$	23,392
Net loss to common shareholders	$	(15,779	)	$	(19,532	)
Impairment of oil and gas properties (net of tax) (2)		7,692			14,745
Unrealized (gain) loss on derivatives (net of tax) (3)		1,174			1,571
Currency impact on deferred taxes		(59	)		(705	)
Net Income (Loss) as Adjusted	$	(6,972	)	$	(3,921	)
Net loss to common shareholders	$	(15,779	)	$	(19,532	)
Unrealized (gain) loss on derivatives		1,072			1,373
Net interest expense		5,633			3,820
Depreciation, depletion and amortization		5,681			16,059
Impairment of oil and gas properties		7,692			29,402
Income tax expense (benefit)		4,834			(8,385	)
Preferred stock dividends		589			2,669
Adjusted EBITDA	$	9,722		$	25,406

(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 none and $(14,657), respectively.
(3)	Net of tax expense of $102 and $198, respectively.

28

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.

	Three Months Ended March 31,
	2010			2009
Net cash provided by operating activities	$	9,414		$	39,739
Net cash used in investing activities	$	(48,316	)	$	(42,398	)
Net cash provided by (used in) financing activities	$	43,538		$	(13,384	)

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 $9.4 million for the first quarter of 2010 as compared to $39.7 million for the first quarter of 2009 primarily due to decreased revenues as a result of lower realized commodity prices after including the effects of our derivatives and lower sales volumes.

The cash provided by or used in investing activities represents expenditures for capital projects, and decreases to restricted cash under escrow for our rig commitments. For the three months ended March 31,2010, cash used in investing activities was $48.3 million. See “Capital Program — 2010 Activity” below.

The cash provided by financing activities consists of borrowings, payments of preferred dividends, payment of financing costs, and proceeds from the issuance of common stock. For the three months ended March 31, 2010, net cash provided by financing activities included $25 million of borrowings under the Junior Facility. The Junior Facility matures February 5, 2011, with interest at LIBOR plus 8%. In February 2010, we also issued 23.5 million shares of common stock for aggregate net proceeds of $20.5 million.

We strive to synchronize our capital expenditures with our cash flow. However, we believe our existing U.K. reserves are of significant value and together with our U.S. assets can be used as support for increased financial resources when necessary to fund our on-going activities or refinance indebtedness. At March 31, 2010, we had $49.9 outstanding under our Senior Bank Facility. The Senior Bank Facility has a current borrowing base capacity of $49.9 million, which is secured by our oil and gas assets. As of April 1, 2010, the redetermination set the borrowing base capacity at $40.6 million. Subsequent to March 31, 2010 we repaid $8.5 million of our Senior Bank Facility.

At March 31, 2010, we had $79.9 million in debt due by the end of the first quarter of 2011. During 2010, we plan to utilize our existing U.K. oil and gas assets, as well as our growing U.S. reserve base, as a basis for refinancing and expanding our credit facilities. We are currently in discussions with several parties concerning this process, however there can be no assurance that we would be able to refinance or expand our credit facilities. In addition, we cannot predict the

29

Endeavour International Corporation

potential terms of any new or revised credit facilities. We continually monitor the capital markets to evaluate the most appropriate actions to fund our activities.

Capital Program

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

• 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

• U.K. and U.S.

Our U.K. North Sea portfolio generally provides greater financial impact but is more expensive and requires longer lead times to first production. Our U.S. activity provides significantly shorter lead times but is likely to have less financial impact as the wells are, on average, both, less expensive and have less reserve potential than our U.K. assets.

We anticipate spending approximately $90 million, excluding acquisition costs, during 2010 to fund oil and gas activities in the U.S. and U.K. The majority of this amount is controllable by us. Our primary focus during 2010 in the U.S. will be in the Haynesville area as we believe this acreage contains attractive near-term production potential. Our ongoing U.S. program and expenditures will be further developed and tailored following the completion of our early drilling results. During 2010, we also expect to begin the evaluation program of our other U.S. assets in the Marcellus area and the two frontier plays in Alabama and Montana. Four U.K. wells have been or will be drilled in 2010; two Cygnus appraisal wells in the western portion of the field; the Deacon well that began in 2009 and finished in 2010, and the exploration well west of the Rochelle development. While this drilling is occurring, we expect to continue to further our development programs at our four existing development projects, including ongoing engineering assessments for future production and commercial off-take solutions.

We intend to fund these development activities through cash on hand and cash flow generated from operations, as well as expansion of our credit facilities as needed. 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.

30

Endeavour International Corporation

The timing, completion and process of our 2010 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.

2010 Activity

In the first quarter of 2010, we incurred $21.8 million of drilling and exploration activities. Drilling activity in the U.K. during the quarter was ongoing at both Cygnus and Deacon prospects, while in the U.S., we were active at eight wells, seven of which are through our participation agreement with Cohort. We expect to have results of the seven Cohort wells in the second quarter of 2010. We also incurred approximately $29.4 million in leasehold acquisition costs to expand our existing U.S. acreage position.

Results from the 44-11a appraisal well drilled during the quarter have led to preliminary estimates of reserves and resources that are significantly increased to make the Cygnus field one of the largest gas fields ever discovered in the Southern North Sea. The appraisal well was drilled to a depth of 12,207 feet, encountering a high quality, gas-saturated Leman sand reservoir with a sand thickness of 130 feet gross and 85 feet net. The rig then moved south to spud another Cygnus appraisal well, the 44/12a-5, at the end of April 2010.

In 2009, we began drilling an exploration well at the U.K. Deacon prospect, which resulted in a dry hole during the first quarter of 2010. In the U.S., two wells were declared dry holes during the first quarter of 2010, the Alligator Bayou well which was spud in 2008 and a well under our participation agreement with Caza Petroleum Inc., a subsidiary of Caza Oil and Gas, Inc. (“Caza”).

United States Acquisitions

We have made significant recent acquisitions to bolster our holdings in unconventional U.S. onshore resource shale plays. On January 6, 2010, we acquired significant positions in several U.S. resource plays. We funded the initial cash contributions for these new joint ventures from existing cash reserves.

We entered into a participation agreement with Cohort and acquired 50 percent of Cohort’s interests in certain acreage in North Louisiana/East Texas and Western Pennsylvania, primarily in the Haynesville and Marcellus gas shale plays. Our initial investment was $15 million cash, and we will pay a share of Cohort’s drilling and completion expenditures as wells are drilled over the next few years. As part of this joint venture, we also acquired additional acreage in the Marcellus gas shale play area for $7.5 million.

We also acquired 50 percent of Hillwood’s position in its unproven, but highly prospective new multi-target gas shale play in Alabama with an initial net investment of approximately $8.0 million. In addition, we will pay a share of Hillwood’s drilling and completion expenditures of

31

Endeavour International Corporation

the first two wells in the program. During 2010, we expect to participate in the drilling of two wells and a 38 mile 2D seismic program.

In April 2009, we executed 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. We terminated the agreement effective April 2010.

2010 Outlook

The table below sets forth a range of estimates for the company’s operating statistics for the full year ending December 31, 2010 .

Estimated Average Production (A)
Daily Production (BOE per day)		4,500		to		6,000
Differentials (B)
Oil ($/Bbl)	$	(5.00	)	to	$	(6.00	)
Gas ($Mcf)	$	(0.50	)	to	$	(0.60	)
Gas percentage of Total		55	%	to		60	%
Lease Operating Expense ($  per barrel)	$	8.00		to	$	10.00

(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 Henry Hub pricing, and oil price differentials are stated as premiums (discounts) from West Texas Intermediate pricing.

Disclosures About Contractual Obligations and Commercial Commitments

See “Capital Program” for a discussion of our planned expenditures.

Cautionary Statement for Forward-Looking Statements

Certain statements and information in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential

32

Endeavour International Corporation

impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

• discovery, estimation, development and replacement of oil and gas reserves;

• decreases in proved reserves due to technical or economic factors;

• drilling of wells and other planned exploitation activities;

• timing and amount of future production of oil and gas;

• the volatility of oil and gas prices;

• availability and terms of capital;

• operating costs such as lease operating expenses, administrative costs and other expenses;

• our future operating or financial results;

• amount, nature and timing of capital expenditures, including future development costs;

• cash flow and anticipated liquidity;

• availability of drilling and production equipment;

• uncertainties related to drilling and production operations in a new region;

• business strategy and the availability of acquisition opportunities; and

• factors not known to us at this time.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

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 9 to the Condensed Consolidated Financial Statements.

At March 31, 2010, we had the following commodity derivative instruments outstanding:

	2010		2011		Total
Oil:
Fixed Price Swaps (Mbbl)		430		487		917
Weighted Average Price ($/Barrel)	$	68.39	$	66.01	$	67.13
Gas: (1)
Fixed Price Swaps (MMcf)		774		627		1,401
Weighted Average Price ($/Mcf)	$	7.38	$	7.79	$	7.56

33

Endeavour International Corporation

⁽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 March 31, 2010 was 1.52 to £1.00.

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. Our oil revenues are received in U.S. dollars while gas revenues in the U.K. are received in pounds sterling. Capital expenditures, payroll and operating expenses may be denominated in U.S. dollars or pounds sterling. 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. We have not reduced this risk by hedging to date as the timing of expenditures in pounds sterling has been predictable and we have been able to match revenues received in pounds sterling and foreign currency purchases to minimize our exposure to foreign currency exchange rate risk.

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. A 250 basis point change in LIBOR would not result in a material change in interest expense, given our floating rate debt at March 31, 2010.

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 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 March 31, 2010.

34

Endeavour International Corporation

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, 2009 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.

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. Portions of the exhibits marked with the double asterisk symbol (**) have been omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, and the omitted material has been separately filed with the Securities and Exchange Commission.

2.1**	Purchase and Sale and Participation Agreement by and between Endeavour and Hillwood Energy Alabama LP. Schedules and Exhibits are omitted pursuant to Section 601(b)(2) of Regulation S-K. Endeavour agrees to furnish supplementally a copy of any omitted Schedule to the SEC upon request. (Incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K (Commission File No. 001-32212) filed on January 19, 2010).
2.2**	Purchase and Sale Agreement between Endeavour and Cohort Energy Company. Schedules and Exhibits are omitted pursuant to Section 601(b)(2) of Regulation S-K. Endeavour agrees to furnish supplementally a copy of any omitted Schedule to the SEC upon request. (Incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K (Commission File No. 001-32212) filed on January 19, 2010).
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.)

35

Endeavour International Corporation

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(a)	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.)
3.2(b)	Amendment to Amended and Restated Bylaws dated December 12, 2007 (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on December 13, 2007.)
10.1	Change in Control and Termination Benefits Agreement dated January 11, 2010, by and between Endeavour International Corporation and James Joseph Emme (Incorporated by reference to Exhibit 10.7 of our Annual Report on Form 10-K for the year ended December 31, 2009 (Commission File No. 001-32212)).
10.2	Amendment No. 1 to Subscription and Registration Rights Agreement, dated January 29, 2010, by and among Endeavour International Corporation and the Investors party thereto (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on February 1, 2010).
10.3**	Final Participation Agreement between Endeavour and Cohort Energy Company (Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on January 19, 2010).
10.4	Waiver and consent to $225,000,000 Secured Revolving Loan and Letter of Credit Facility Agreement, dated as of February 5, 2010 (Incorporated by reference to Exhibit 10.13(c) of our Annual Report on Form 10-K for the year ended December 31, 2009 (Commission File No. 001-32212)).
10.5	Amendment to Junior Facility Agreement dated February 5, 2010 by and among Endeavour International Holding B.V., as borrower, Endeavour International Corporation and certain of its affiliates party thereto, as guarantors, BNP Paribas and Bank of Scotland Plc, as the mandated lead arrangers and original lenders, and BNP Paribas, as agent and security trustee (Incorporated by reference to Exhibit 10.15(b) of our Annual Report on Form 10-K for the year ended December 31, 2009 (Commission File No. 001-32212)).
10.6	Amendment to Note Agreement dated November 17, 2009 by and among Endeavour International Corporation and the holders of its Series C Preferred Stock, dated March 10, 2010 (Incorporated by reference to Exhibit 10.26(b) of our Annual Report on Form 10-K for the year ended December 31, 2009 (Commission File No. 001-32212)).
10.7	Common Stock Purchase Agreement, dated as of February 4, 2010, by and between Endeavour International Corporation and the purchasers named therein (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on February 5, 2010).
10.8	Registration Rights Agreement, dated as of February 4, 2010, by and between Endeavour International Corporation and the purchasers named therein (Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on February 5, 2010).
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.

36

Endeavour International Corporation

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: May 6, 2010	/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)

37