Endeavour International 10-Q 2010 Q2 Quarterly report

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 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 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 July 31, 2010, 163,709,894 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	21
Item 3: Quantitative and Qualitative Disclosures About Market Risk	34
Item 4: Controls and Procedures	35
Part II. Other Information
Item 1A: Risk Factors	35
Item 5. Other Information	36
Item 6: Exhibits	36
Signatures	37
EX-10.1
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)

	June 30,		December 31,
	2010		2009
Assets
Current Assets:
Cash and cash equivalents	$	13,593	$	27,287
Restricted cash		—		2,879
Accounts receivable		8,773		14,800
Prepaid expenses and other current assets		11,617		10,118
Total Current Assets		33,983		55,084
Property and Equipment, Net ($183,534 and $154,553 not subject to amortization at 2010 and 2009, respectively)		332,102		266,587
Goodwill		211,886		211,886
Other Assets		4,354		5,322
Total Assets	$	582,325	$	538,879

See accompanying notes to condensed consolidated financial statements.

1

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

	June 30,			December 31,
	2010			2009
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	30,147		$	12,401
Current maturities of debt		75,625			—
Accrued expenses and other		20,205			17,798
Total Current Liabilities		125,977			30,199
Long-Term Debt		168,552			223,385
Deferred Taxes		91,401			80,692
Other Liabilities		70,832			85,412
Total Liabilities		456,762			419,688
Commitments and Contingencies
Series C Convertible Preferred Stock
Face value (liquidation preference)		45,000			50,000
Net non-cash premiums under fair value accounting on redemption		8,152			9,058
Total Series C Convertible Preferred Stock		53,152			59,058
Stockholders’ Equity:
Series B preferred stock — Liquidation preference: $3,194
Common stock; shares issued and outstanding — 163,568 and 131,618 shares at 2010 and 2009, respectively		164			132
Additional paid-in capital		275,672			247,707
Treasury stock, at cost — 498 and 498 shares at 2010 and 2009, respectively		(587	)		(587	)
Accumulated deficit		(202,838	)		(187,119	)
Total Stockholders’ Equity		72,411			60,133
Total Liabilities and Stockholders’ Equity	$	582,325		$	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						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Revenues	$	21,532		$	18,082		$	35,253		$	34,420
Cost of Operations:
Operating expenses		3,465			4,397			6,286			10,580
Depreciation, depletion and amortization		7,912			7,858			13,593			19,182
Impairment of oil and gas properties		—			1,244			7,692			30,645
General and administrative		4,205			4,115			8,636			7,950
Total Expenses		15,582			17,614			36,207			68,357
Income (Loss) From Operations		5,950			468			(954	)		(33,937	)
Other Income (Expense):
Derivatives:
Realized gains (losses)		(1,332	)		9,114			(1,100	)		21,050
Unrealized gains (losses)		6,108			(32,722	)		5,036			(34,095	)
Interest expense		(5,623	)		(4,224	)		(11,259	)		(8,135	)
Interest income and other		586			(7,992	)		3,609			(8,333	)
Total Other Expense		(261	)		(35,824	)		(3,714	)		(29,513	)
Income (Loss) Before Income Taxes		5,689			(35,356	)		(4,668	)		(63,450	)
Income Tax Expense (Benefit)		5,084			916			9,917			(10,036	)
Income (Loss) from Continuing Operations		605			(36,272	)		(14,585	)		(53,414	)
Income from Discontinued Operations		—			46,092			—			46,370
Net Income (Loss)		605			9,820			(14,585	)		(7,044	)
Preferred Stock Dividends		547			2,696			1,136			5,365
Net Income (Loss) to Common Stockholders	$	58		$	7,124		$	(15,721	)	$	(12,409	)
Basic and Diluted Net Income (Loss) per Common Share:
Continuing operations	$	—		$	(0.31	)	$	(0.10	)	$	(0.46	)
Discontinued operations		—			0.36			—			0.36
Total	$	—		$	0.05		$	(0.10	)	$	(0.10	)
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted		162,014			129,741			155,815			129,521

See accompanying notes to condensed consolidated financial statements.

3

Endeavour International Corporation

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(Amounts in thousands)

	Six Months Ended June 30,
	2010			2009
Cash Flows from Operating Activities:
Net loss	$	(14,585	)	$	(7,044	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization		13,593			23,863
Impairment of oil and gas properties		7,692			30,645
Deferred tax expense (benefit)		8,445			(3,596	)
Unrealized (gains) losses on derivatives		(5,036	)		34,095
Gain on sale of Norwegian operations		—			(47,144	)
Amortization of non-cash compensation		1,998			1,664
Amortization of loan costs and discount		3,313			2,428
Non-cash interest expense		3,409			2,595
Other		(3,565	)		4,849
Changes in operating assets and liabilities:
Decrease in receivables		6,027			2,687
(Increase) decrease in other current assets		(1,738	)		6,062
Increase (decrease) in liabilities		4,900			(8,905	)
Net Cash Provided by Operating Activities		24,453			42,199
Cash Flows From Investing Activities:
Capital expenditures		(41,392	)		(65,068	)
Acquisitions		(33,047	)		(2,269	)
Proceeds from sales, net of cash		—			139,797
Decrease in restricted cash		2,878			18,592
Net Cash Provided by (Used in) Investing Activities		(71,561	)		91,052
Cash Flows From Financing Activities:
Repayments of borrowings		(9,317	)		(64,458	)
Borrowings under debt agreements		25,000			—
Proceeds from issuance of common stock		20,011			—
Dividends paid		(1,057	)		(5,313	)
Other financing		(1,223	)		(34	)
Net Cash Provided by (Used in) Financing Activities		33,414			(69,805	)
Net Increase (Decrease) in Cash and Cash Equivalents		(13,694	)		63,446
Cash and Cash Equivalents, Beginning of Period		27,287			38,156
Cash and Cash Equivalents, End of Period	$	13,593		$	101,602

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.

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 operating plans;

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

• Selling specific assets or the entire North Sea business.

We continue to evaluate various alternatives that have been presented to the company. As disclosed in the Management’s Discussion and Analysis, several significant events have occurred since we began this process in the first quarter. The company is committed to concluding this process as soon as practicable, and feels that it can accomplish this objective by the end of the year.

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.

5

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

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 would be dilutive.

For each of the periods presented, shares associated with stock options, warrants, convertible debt, convertible preferred stock and certain stock incentive plans were 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:

	June 30,
	2010		2009
Warrants, options and stock-based compensation		731		990
Convertible debt		38,535		36,139
Convertible preferred stock		36,000		50,000
		75,266		87,129

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.

6

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

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:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010		2009
Sales	$	—	$	4,180		$	—	$	17,550
Income before Taxes	$	—	$	1,811		$	—	$	4,656
Income Tax Expense		—		(2,863	)		—		(5,430	)
Loss from Operations		—		(1,052	)		—		(774	)
Gain on sale		—		47,144			—		47,144
Net Income from Discontinued Operations	$	—	$	46,092		$	—	$	46,370

7

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

Note 3 — Income Tax Expense (Benefit)

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

	UK			U.S.			Other			Total
Six Months Ended June 30, 2010
Net income (loss) before taxes from continuing operations	$	13,654		$	(18,370	)	$	48		$	(4,668	)
Current tax expense		1,472			—			—			1,472
Deferred tax expense		8,591			—			—			8,591
Foreign currency losses on deferred tax liabilities		—			—			(146	)		(146	)
Income tax expense (benefit)		10,063			—			(146	)		9,917
Net income (loss) from continuing operations	$	3,591		$	(18,370	)	$	194		$	(14,585	)
Six Months Ended June 30, 2009
Net loss before taxes from continuing operations	$	(46,620	)	$	(9,384	)	$	(7,446	)	$	(63,450	)
Current tax benefit		(408	)		—			—			(408	)
Deferred tax benefit		(18,637	)		—			—			(18,637	)
Foreign currency losses on deferred tax liabilities		9,009			—			—			9,009
Income tax expense (benefit)		(10,036	)		—			—			(10,036	)
Net loss from continuing operations	$	(36,584	)	$	(9,384	)	$	(7,446	)	$	(53,414	)

Our income tax expense relates primarily to our operations in the U.K. where the statutory income tax rate is 50%. Certain fields, such our Alba field, are subject to an additional 25% petroleum revenue tax (“PRT”). This PRT tax represents all of our current tax expense for 2010. The combined effects of PRT, statutory tax rate of 50% and the non-deductibility of certain interest charges causes our effective tax rate in the U.K. to vary considerably period to period, ranging from 25 percent to 75 percent.

Until 2009, we did not have revenue from U.S. operations. We have been building net operating loss carryforwards (NOLs) in the U.S. but have not been able to record income tax benefits on our U.S. losses as there has been no assurance that we can generate any U.S. taxable earnings. At June 30, 2010, we have approximately $77 million in NOLs that have been offset in full by valuation allowances. As operations expand in the U.S. and we are able to generate U.S. taxable earnings, we expect to record income tax benefits in the U.S. through the recognition of the NOLS and removal of the associated valuation allowance. With the substantial NOLs we have accumulated, we would not anticipate paying current federal income taxes in the U.S. for a number of years.

8

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 dates indicated below:

	June 30,			December 31,
	2010			2009
Oil and gas properties under the full cost method:
Subject to amortization	$	322,640		$	275,278
Not subject to amortization:
Acquired in 2010		51,588			—
Acquired in 2009		44,201			51,797
Acquired in 2008		25,817			32,970
Acquired prior to 2008		61,928			69,786
		506,174			429,831
Computers, furniture and fixtures		3,802			3,560
Total property and equipment		509,976			433,391
Accumulated depreciation, depletion and amortization		(177,874	)		(166,804	)
Net property and equipment	$	332,102		$	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 $1.2 million and $0.7 million in interest related to exploration activities for the quarters ended June 30, 2010 and 2009, respectively. For the six months ending June 30, 2010 and 2009, $1.9 million and $1.7, respectively, was capitalized in interest related to exploration.

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.

For the second quarter of 2010, 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 in the application of the full cost ceiling test were $76.21 per barrel for oil and $4.11 per Mcf for

9

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

gas for the U.S. properties, and $75.03 per barrel for oil and $4.79 per Mcf for gas for our U.K. properties.

On January 6, 2010, we acquired positions in several U.S. resource plays as discussed below. We funded the initial cash contributions for these new focus areas 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. Under this agreement, we also acquired additional acreage in the Marcellus gas shale play area for approximately $7.5 million during the second quarter of 2010.

We also acquired 50 percent of Hillwood Energy Alabama LP’s (“Hillwood”) position in Hillwood’s exploratory 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:

	June 30,			December 31,
	2010			2009
Senior notes, 6% fixed rate, due 2012	$	81,250		$	81,250
Senior bank facility, variable rate, due 2011		40,625			49,942
Convertible bonds, 11.5%, due 2014		52,745			49,838
Subordinated notes, 12.0%, due 2014		50,625			50,122
Junior facility, variable rate, due 2011		25,000			—
		250,245			231,152
Less: debt discount		(6,068	)		(7,767	)
Less: current maturities		(75,625	)		—
Long-term debt	$	168,552		$	223,385
Standby letters of credit outstanding for abandonment liabilities	$	30,822		$	33,388

The fair value of our debt obligations was $239 million and $219 million at June 30, 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.

10

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

We were in compliance with all financial and restrictive covenants of our debt obligations as of December 31, 2009. At June 30, 2010, we were in compliance with all financial and restrictive covenants of our senior notes, convertible bonds and subordinated notes. Subsequent to June 30, 2010, we executed a waiver and amendment of the Senior and Junior Bank Facility as follows:

• changed the minimum current assets to current liabilities ratio for June 30, 2010 from 1.1:1 to 0.6:1;

• changed the maximum consolidated net debt to earnings before interest, taxes, depreciation and amortization ratio for June 30, 2010 from 3.0:1 to 4.5:1; and

• included a new Event of Default if the Senior or Junior Bank Facility is not repaid and canceled by September 30, 2010.

After considering this amendment, we were in compliance with all financial and restrictive covenants of the Senior and Junior Bank Facilities as of June 30, 2010.

Junior Facility

In the first quarter of 2010, we entered into 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% (8.3% interest rate for the second quarter of 2010). Our indebtedness under the Junior Facility is secured by cross guarantees from our subsidiaries and a second ranking interest in the security package provided under our senior bank facility.

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 reserves, as calculated by the lenders under our Junior Facility, to consolidated secured debt ratio of 2:1.

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% (2.2% interest rate for the second quarter of 2010). At June 30, 2010, we had $40.6 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 June 30, 2010, we had $30.8 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

11

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

(Amounts in thousands, except per unit data)

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. At June 30, 2010, the borrowing base capacity was $40.6 million.

Proposed New Credit Facility

As of June 30, 2010, we had $75.6 million in debt due by the second quarter of 2011. We are currently in active discussions to finalize a new credit facility that would allow us to repay the $66 million outstanding under the Senior and Junior Bank Facilities. This proposed new financing alternative would also provide additional capital and flexibility as we pursue our development projects and drilling program. We expect to finalize this agreement and complete funding by the end of August. There can be no assurance that we will be able to complete this new facility in August, or at all, and we cannot predict the final terms or amount of the proposed facility.

Note 6 — Asset Retirement Obligations

Our asset retirement obligations relate to obligations for the future plugging and abandonment of oil and gas properties. The following table provides a rollforward of our asset retirement obligations for the six months ended June 30, 2010 and 2009:

	Six Months Ended
	June 30,
	2010			2009
Carrying amount of asset retirement obligations as of beginning of period	$	47,362		$	38,776
Accretion expense (included in DD&A expense)		2,245			2,044
Impact of foreign currency exchange rate changes		(3,640	)		4,998
Payment of asset retirement obligation		(567	)		(3,959	)
Reduction in asset retirement obligation		(1,812	)		—
Sale of assets		—			(248	)
Carrying amount of asset retirement obligations as of end of period		43,588			41,611
Less: Current portion		(4,849	)		—
Long-term asset retirement obligation	$	38,739		$	41,611

12

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

(Amounts in thousands, except per unit data)

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 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. The proceeds from this private placement have been used 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

13

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

(Amounts in thousands, except per unit data)

	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 June 30, 2010:

	Quoted Market Prices		Significant Other			Significant
	in Active Markets -		Observable Inputs -			Unobservable Inputs			Total
	Level 1		Level 2			Level - 3			Fair Value
Six Months Ended June 30, 2010 Oil and gas derivative contracts:
Oil and gas swaps	$	—	$	(8,057	)	$	—		$	(8,057	)
Embedded derivatives		—		—			(28,565	)		(28,565	)
Total derivative liabilities	$	—	$	(8,057	)	$	(28,565	)	$	(36,622	)
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:

14

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

(Amounts in thousands, except per unit data)

Six months ended June 30, 2010:
Balance at beginning of period	$	(28,843	)
Total gains or losses (realized/unrealized) Included in earnings		278
Balance at end of period	$	(28,565	)
Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at June 30, 2010	$	278
Six months ended June 30, 2009:
Balance at beginning of period	$	(12,057	)
Total gains or losses (realized/unrealized) Included in earnings		(6,515	)
Balance at end of period	$	(18,572	)
Changes in unrealized gains (losses) relating to derivatives assets and liabilities still held at June 30, 2009	$	(5,618	)

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

15

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:

	June 30,			December 31,
	2010			2009
Derivatives not designated as hedges:
Oil and gas commodity derivatives:
Assets:
Prepaid expenses and other current assets	$	397		$	2,890
Other assets — long term		—			318
Liabilities:
Accrued expenses and other		(4,926	)		(6,817	)
Other liabilities — long-term		(3,528	)		(9,207	)
	$	(8,057	)	$	(12,816	)
Embedded derivatives related to debt and equity instruments:
Liabilities:
Other liabilities — long-term		(28,565	)		(28,843	)

If all counterparties failed to perform, our maximum loss would have been $0.4 million as of June 30, 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						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Derivatives not designated as hedges:
Oil and gas commodity derivatives
Realized gains (losses)	$	(1,332	)	$	9,114		$	(1,100	)	$	21,050
Unrealized gains (losses)		4,553			(27,092	)		4,758			(26,695	)
		3,221			(17,978	)		3,658			(5,645	)
Embedded derivatives related to debt and equity instruments
Unrealized gains (losses)	$	1,555		$	(5,630	)	$	278		$	(7,400	)

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:

16

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

(Amounts in thousands, except per unit data)

		Three Months Ended					Six Months Ended
		June 30,					June 30,
	Location of
	Reclassification
	into Income	2010		2009			2010		2009
Interest rate swap
Gain recognized in other comprehensive income, net of tax		$	—	$	(207	)	$	—	$	(71	)
Gain reclassified from accumulated other comprehensive income into income	Interest expense		—		(376	)		—		(757	)

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

As of June 30, 2010, our outstanding commodity derivatives covered approximately 714 Mbbls and 1,143 MMcf cumulative through 2011 and consist of fixed price swaps with BNP Paribas and Bank of Scotland.

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:

	Six Months Ended June 30,
	2010			2009
Interest paid	$	6,007		$	3,753
Income taxes paid (refunded)	$	(10	)	$	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 $24.5 million for the six months ended June 30, 2010 as compared to $42.2 million for the six months

17

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

ended June 30, 2009 primarily due to a decrease in cash flows as a result of lower realized gains on commodity derivatives and sales volumes.

The cash provided by or used in investing activities represents expenditures for capital projects, acquisition costs and decreases to restricted cash.

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 Income (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					Six Months Ended
	June 30,					June 30,
	2010		2009			2010			2009
Net income (loss)	$	605	$	9,820		$	(14,585	)	$	(7,044	)
Unrealized gain on interest rate swap derivative instrument, net of tax		—		(207	)		—			(71	)
Reclassification adjustment for gain realized in net income (loss) above		—		376			—			757
Net impact on comprehensive income (loss)		—		169			—			686
Comprehensive income (loss)	$	605	$	9,651		$	(14,585	)	$	(6,358	)

Note 12 — 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. Non-cash stock-based compensation is recorded in general and administrative (“G&A”) expenses or capitalized G&A as follows:

18

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
G & A Expenses	$	739	$	471	$	1,759	$	939
Capitalized G & A		230		187		500		389
Total non-cash stock-based compensation	$	969	$	658	$	2,259	$	1,328

At June 30, 2010, total compensation cost related to awards not yet recognized was approximately $4.8 million and is expected to be recognized over a weighted average period of less than three years.

Stock Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. 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		(11	)		0.83
Forfeited		(64	)		1.98
Expired		(540	)		4.17
Balance outstanding — June 30, 2010		3,597		$	1.53		6.7	$	622
Currently exercisable — June 30, 2010		2,411		$	1.83		6.0	$	265

Restricted Stock

The restricted stock awards were valued based on the closing price of our common stock on the measurement date, typically the date of grant. Status of the restricted shares as of June 30, 2010 and the changes during the six months ended June 30, 2010 are presented below:

19

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		4,522			1.10
Vested		(2,130	)		1.15
Forfeited		(41	)		0.91
Balance outstanding — June 30, 2010		5,771		$	1.02
Total grant date fair value of shares vesting during the period	$	2,441

Note 13 — Commitments and Contingencies

We have previously disclosed a potential commitment on a drilling rig in our North Sea operations. We are in dispute with the rig operator in relation to this potential commitment and have also raised potential counterclaims. We will defend our position vigorously, but there can be no certainty that we will resolve this matter favorably.

20

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:

• During the second quarter of 2010, we have reached agreement to test the West Rochelle prospect that lies west of our Rochelle gas development area. Subject to final board approvals, this West Rochelle well is scheduled to begin drilling in August 2010.

• On March 15, 2010, we announced that our board of directors had approved a review of strategic alternatives for our North Sea assets.

• 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 have been used to partially fund our 2010 capital budget.

• In January 2010, we acquired 50 percent of Cohort Energy Company’s (“Cohort”) interests in certain acreage in North Louisiana/East Texas and Western Pennsylvania, primarily in the Haynesville and Marcellus gas shale plays, for $15 million in cash. As part of this acquisition, we also acquired additional acreage in the Marcellus gas shale play area for approximately $7.5 million during the second quarter of 2010. We also acquired 50 percent of Hillwood Energy Alabama LP’s (“Hillwood”) position in Hillwood’s exploratory gas shale play in Alabama with an initial net investment of approximately $8.0 million.

• In the fourth quarter of 2009, we entered into a participation agreement with 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

21

Endeavour International Corporation

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

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 while enabling us to allocate resources to effectively pursue our strategic objectives. Our North Sea assets remain a key source of value that can be further developed to increase our overall reserves and production. Our major development projects — Bacchus, Rochelle, Cygnus and Columbus — 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 properties to achieve maximum risk-adjusted value for our North Sea assets. There can be no assurance that we will pursue alternative options, as a result of the strategic review process, 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.

Results of Operations

Our revenues and cash flows from operating activities are very sensitive to changes in prices received for our products. Our revenues have increased from $34.4 million in the six months ended June 30, 2009 to $35.3 million in the same period of 2010 primarily as a result of substantially increased oil prices, partially offset by a decrease in natural gas prices. While overall volumes remained consistent between the periods, our expanded operations in the U.S. have lead to an increase in natural gas as a percentage of our total production. These trends in oil prices and the percentage of natural gas to our total production also applied to the comparison of second quarter 2010 to 2009, however natural gas prices increased slightly from the same period in the prior year. With our business policy to utilize various oil and gas derivative instruments to achieve a more predictable cash flow by reducing our exposure to price fluctuations, our realized commodity prices including the effect of derivatives, particularly for oil, were less volatile than commodity prices before the effect of derivatives.

For the six months ended 2010, discretionary cash flow was $15.3 million as compared to $42.4 million for the same period in 2009. The decline in discretionary cash flow reflects decreases in realized prices after the effects of commodity derivatives, increased interest expense related to additional debt issuances and increased current tax expense, partially offset by lower operating expenses. In addition, our discontinued operations had discretionary cash flow of approximately $10 million for the six months ended June 30, 2009, which was offset by the capital expenditures for these operations. While revenues increased slightly for the six months ended June 30, 2010, our realized losses on the settlement of commodity derivatives dropped to $1.1 million in comparison to $21.1 million in gains for the same period in 2009. This decrease in realization is primarily due to gains on oil collars with a floor of $100.00 per barrel that expired at the end of 2009 which offset losses on oil swaps.

22

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 six months ended June 30, 2010 was $15.7 million, or $0.10 per share. For the six months ended June 30, 2009, net loss to common shareholders was $12.4 million, or $0.10 per share. Net loss as adjusted for the six months ended June 30, 2010 would have been $10.8 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 $34.6 million for the same period in 2009, which includes the gain on the sale of our discontinued operations. Adjusted EBITDA decreased to $22.8 million for the six months ended June 30, 2010 from $37.8 million for the same period in 2009, primarily due to the decrease in realized prices after the effects of commodity derivatives discussed above. For definitions of Net Income (Loss) as Adjusted, 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 $24.5 million for the six months ended June 30, 2010 as compared to $42.2 million for the same period in 2009 primarily due to decreases in realized prices after the effects of commodity derivatives, increased interest expense related to additional debt issuances and increased current tax expense, partially offset by lower operating expenses. In addition, our discontinued operations had discretionary cash flow of approximately $10 million for the six months ended June 30, 2009, which was fully offset by the capital expenditures for these operations.

The following table shows our average sales volumes and sales prices for our operations for the periods presented. None of our current producing fields represent more than 15% of our total proved reserves during 2010 or 2009. However, certain of our non-producing North Sea development assets — the Rochelle, Cygnus and Columbus fields — each represent more than 15% of our proved reserves during these years. As these fields do not have any current sales or production, they have not been separately identified in the table below.

23

Endeavour International Corporation

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
Sales volume (1)
Oil and condensate sales (Mbbls):
United Kingdom		188			234		301			412
United States		1			—		3			1
Continuing operations		189			234		304			413
Discontinued operations — Norway		—			87		—			310
Total		189			321		304			723
Gas sales (MMcf):
United Kingdom		979			1,071		1,745			2,148
United States		441			60		721			111
Continuing operations		1,420			1,131		2,466			2,259
Discontinued operations — Norway		—			153		—			686
Total		1,420			1,284		2,466			2,945
Oil equivalent sales (MBOE)
United Kingdom		351			413		592			770
United States		75			10		123			20
Continuing operations		426			423		715			790
Discontinued operations — Norway		—			112		—			424
Total		426			535		715			1,214
Total BOE per day		4,684			5,877		3,951			6,710
Physical production volume (BOE per day) (2):
United Kingdom		3,279			3,995		3,199			4,132
United States		824			109		680			106
Continuing operations		4,103			4,104		3,879			4,238
Discontinued operations — Norway		—			1,324		—			2,332
Total		4,103			5,428		3,879			6,570
Realized Prices (3)
Oil and condensate price ($  per Bbl):
Before commodity derivatives	$	76.80		$	50.83	$	74.33		$	45.74
Effect of commodity derivatives		(8.50	)		18.88		(8.83	)		22.00
Realized prices including commodity derivatives	$	68.30		$	69.71	$	65.50		$	67.74
Gas price ($  per Mcf):
Before commodity derivatives	$	4.91		$	4.64	$	5.13		$	6.41
Effect of commodity derivatives		0.20			2.38		0.64			1.74
Realized prices including commodity derivatives	$	5.11		$	7.02	$	5.77		$	8.15
Equivalent oil price ($  per BOE):
Before commodity derivatives	$	50.51		$	41.62	$	49.30		$	42.79
Effect of commodity derivatives		(3.12	)		17.04		(1.54	)		17.34
Realized prices including commodity derivatives	$	47.39		$	58.66	$	47.76		$	60.13

24

Endeavour International Corporation

(1)	We record oil revenues using the sales method, i.e. when delivery has occurred. We use the entitlements method to account for sales of gas production.
(2)	Physical production may differ from sales volumes based on the timing of tanker liftings for our international oil sales.
(3)	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.

Sales volumes for our continuing operations remained largely unchanged for the second quarter of 2010 and 2009 with 4,684 BOE per day and 4,643 BOE per day, respectively. For the six months ended June 30, 2010, sales volumes decreased slightly compared to the corresponding period in the prior year. The slight decrease in sales volume in the U.K. is primarily attributable to fewer liftings and maintenance down time particularly during the first quarter, and was partially offset by increased activity from our expanding U.S. operations.

The production from our IVRRH, Renee and Rubie fields has been suspended until the development activities at Rochelle are completed 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 six months ended June 30, 2010, we realized $1.1 million in losses on the settlement of commodity derivatives, compared to $21.1 million in gains for the same period in 2009.

25

Endeavour International Corporation

Expenses

Our operating expenses have declined from 2009 to 2010 due to the suspension of production at the IVRRH and Rubie fields, which were our fields with the highest operating costs. For the second quarter of 2010, operating expenses decreased to $3.5 million as compared to $4.4 million for the same period in 2009. For the six months ended June 30, 2010, operating expenses decreased to $6.3 million as compared to $10.6 million for the same period in 2009. Operating costs per BOE decreased from $10.41 per BOE for the second quarter of 2009 to $8.13 per BOE for the same period in June 30, 2010. Operating costs per BOE decreased from $13.40 per BOE for the six months ended June 30, 2009 to $8.79 per BOE for the six months ended June 30, 2010.

Depreciation, depletions and amortization (“DD&A”) expense remained constant at $7.9 million for the second quarter of 2010 and 2009, and decreased to $13.6 million from $19.2 million for the six months ended of 2010 and 2009, respectively, reflecting a decrease in our DD&A rate per BOE after the reserve additions and impairments recorded in 2009 and slightly lower sale volumes.

General and administrative (“G&A”) expenses remained consistent at $4.2 million during the second quarter of 2010 as compared to $4.1 million for the corresponding period in 2009 and $8.6 million during the six months ended of 2010 as compared to $8.0 million for the corresponding period in 2009. The slight increase primarily resulted from higher compensation expense due to expanding U.S. operations and increased consulting, accounting, and legal fees that pertain to our expanding U.S. operations and strategic review of our U.K. assets, substantially offset by increased capitalized G&A. Components of G&A expenses for these periods are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Compensation	$	4,166		$	3,378		$	8,409		$	6,789
Consulting, legal and accounting fees		1,548			1,091			3,075			1,992
Occupancy costs		273			272			522			496
Other expenses		1,081			536			1,254			977
Total gross cash G&A expenses		7,068			5,277			13,260			10,254
Non-cash stock-based compensation		845			575			1,998			1,113
Gross G&A expenses		7,913			5,852			15,258			11,367
Less: capitalized G & A expenses		(3,708	)		(1,737	)		(6,622	)		(3,417	)
Net G&A expenses	$	4,205		$	4,115		$	8,636		$	7,950

Interest expense increased by $1.4 million to $5.6 million for the second quarter ending June 30, 2010 as compared to $4.2 million for the corresponding period in 2009. Interest expense increased by $3.2 million to $11.3 million for the six months ended June 30, 2010 as compared to $8.1 million for the corresponding period in 2009. The increases were 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, partially offset by the reduction in debt associated

26

Endeavour International Corporation

with our Senior Bank facility with a portion of the proceeds from the sale of our Norwegian operations.

Income Taxes

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

	UK			U.S.			Other			Total
Six Months Ended June 30, 2010
Net income (loss) before taxes from continuing operations	$	13,654		$	(18,370	)	$	48		$	(4,668	)
Current tax expense		1,472			—			—			1,472
Deferred tax expense		8,591			—			—			8,591
Foreign currency losses on deferred tax liabilities		—			—			(146	)		(146	)
Income tax expense (benefit)		10,063			—			(146	)		9,917
Net income (loss) from continuing operations	$	3,591		$	(18,370	)	$	194		$	(14,585	)
Six Months Ended June 30, 2009
Net loss before taxes from continuing operations	$	(46,620	)	$	(9,384	)	$	(7,446	)	$	(63,450	)
Current tax benefit		(408	)		—			—			(408	)
Deferred tax benefit		(18,637	)		—			—			(18,637	)
Foreign currency losses on deferred tax liabilities		9,009			—			—			9,009
Income tax expense (benefit)		(10,036	)		—			—			(10,036	)
Net loss from continuing operations	$	(36,584	)	$	(9,384	)	$	(7,446	)	$	(53,414	)

Our income taxes are substantially all attributable to our U.K. operations. The change in income tax expense (benefit) from $(10.0) million to $9.9 million for the six months ended June 30, 2009 and 2010, respectively, is primarily due to increased income resulting from decreases in operating expenses and impairments and unrealized gains on derivatives partially offset by lower realized revenue and losses on settled derivatives.

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 and net cash provided by operating activities, including non-financial performance indicators and non-GAAP measures as key metrics to manage our business. These metrics demonstrate our ability to maintain or grow production levels and reserves, internally fund capital expenditures and service debt as well as provide comparisons to

27

Endeavour International Corporation

other oil and gas exploration and production companies. 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, GAAP. We view these non-GAAP measures, and we believe that others in the oil and gas industry, securities analysts, investors, and other interested parties view these, or similar, non-GAAP measures, as commonly used analytic indicators to compare performance among companies in our industry and in the evaluation of issuers.

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, our non-GAAP measures as presented may not be comparable to 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.

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.

28

Endeavour International Corporation

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net income (loss)	$	605		$	9,820		$	(14,585	)	$	(7,044	)
Depreciation, depletion and amortization		7,912			7,804			13,593			23,863
Impairment of oil and gas properties		—			1,244			7,692			30,645
Deferred tax expense (benefit)		4,967			4,827			8,445			(3,596	)
Gain on asset sales		—			(47,144	)		—			(47,144	)
Unrealized (gain) loss on derivatives		(6,108	)		32,722			(5,036	)		34,095
Other		3,815			9,690			5,155			11,536
Discretionary Cash Flow (1)	$	11,191		$	18,963		$	15,264		$	42,355
Net income (loss) to common shareholders	$	58		$	7,124		$	(15,721	)	$	(12,409	)
Impairment of oil and gas properties (net of tax) (2)		—			1,244			7,692			15,988
Unrealized (gain) loss on derivatives (net of tax) (3)		(3,832	)		19,176			(2,657	)		20,748
Currency impact on deferred taxes		(87	)		10,955			(146	)		10,250
Net Income (Loss) as Adjusted	$	(3,861	)	$	38,499		$	(10,832	)	$	34,577
Net income (loss)	$	605		$	9,820		$	(14,585	)	$	(7,044	)
Unrealized (gain) loss on derivatives		(6,108	)		32,722			(5,036	)		34,095
Net interest expense		5,605			4,163			11,237			7,983
Depreciation, depletion and amortization		7,912			7,804			13,593			23,863
Impairment of oil and gas properties		—			1,244			7,692			30,645
Income tax expense (benefit)		5,084			3,779			9,917			(4,606	)
Gain on asset sales		—			(47,144	)		—			(47,144	)
Adjusted EBITDA	$	13,098		$	12,388		$	22,818		$	37,792

(1)	Discretionary cash flow is equal to cash flow from operating activities before the changes in operating assets and liabilities.
(2)	Net of tax benefits of $(14,657) for the six months ended June 30, 2009.
(3)	Net of tax (benefits) expense of $(2,277), $13,546, $(2,379) and $13,348, respectively.

Liquidity and Capital Resources

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

29

Endeavour International Corporation

	Six Months Ended June 30,
	2010			2009
Net cash provided by operating activities	$	24,453		$	42,199
Net cash provided by (used in) investing activities	$	(71,561	)	$	91,052
Net cash provided by (used in) financing activities	$	33,414		$	(69,805	)

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 $24.5 million for the six months ended June 30, 2010 as compared to $42.2 million for the same period in 2009 primarily due to decreases in realized prices, increased interest expense and increased current tax expense, partially offset by lower operating expenses. In addition, our discontinued operations had discretionary cash flow of approximately $10 million for the six months ended June 30, 2009, which was fully offset by the capital expenditures for these operations.

The cash provided by or used in investing activities represents expenditures for capital projects and decreases to restricted cash. For the six months ended June 30, 2010, cash used in investing activities was $71.6 million versus $91.1 million provided by investing activities for the same period in 2009, which includes net proceeds of $140 million for the sale of our discontinued operations. See “Capital Program — 2010 Activity” below for a discussion of 2010 capital expenditures.

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 six months ended June 30, 2010, net cash provided by financing activities included $25 million of borrowings under the Junior Facility. 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 June 30, 2010, we had $40.6 million outstanding under our Senior Bank Facility. The Senior Bank Facility has a current borrowing base capacity of $40.6 million, which is secured by our oil and gas assets.

As of June 30, 2010, we had $75.6 million in debt due by the second quarter of 2011. We are currently in active discussions with certain lenders regarding a new credit facility that would provide us with funds to repay in full and terminate the Senior and Junior Bank Facilities. This proposed new credit facility would also provide additional capital and flexibility as we pursue our development projects and drilling program. We expect to finalize this agreement and complete funding by the end of August. We cannot assure you that we will be able to complete this new facility in August, or at all, and we cannot predict the final terms or amount of the proposed facility.

30

Endeavour International Corporation

Capital Program

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.

2010 Activity

During the first half of 2010, we incurred $41.4 million of drilling and exploration activities. For the first six months of 2010, we also incurred approximately $33.0 million in leasehold acquisition costs to expand our existing U.S. acreage position.

United Kingdom Activity

Activity in the U.K. during 2010 continues to focus on our four development projects — Bacchus, Columbus, Cygnus and Rochelle — and we advanced the status of the projects or had positive drilling results.

For the Bacchus field, the U.K. Department of Energy and Climate Change sanctioned the development plans during the second quarter of 2010. The plans call for a subsea development with three wells to be drilled and linked to production facilities at the nearby Forties field. First production is planned for the first half of 2011.

At the Columbus field, we reached an agreement for production facilities that will feature a bridge-linked platform that will connect production to the Lomond field and provide gas and condensate reception facilities. Project sanction is scheduled for the end of 2010 with expected first production in the second half of 2012.

We have had significant activity on our Cygnus project in 2010. Two appraisal wells have been completed successfully this year and led to 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. In addition, the U.K. Department of Energy and Climate Change awarded us two Cygnus blocks adjacent to our other Cygnus acreage as part of the 25th Licensing Round. The Cygnus participants applied for additional Cygnus area acreage in the 26th Licensing Round that closed in June. Results are expected either late 2010 or early 2011. Endeavour and co-participants are pursuing an optimized field development concept to accommodate increased total field production rates and lower total capital expenditures.

We have reached agreement to test the West Rochelle prospect that lies west of our Rochelle gas development area. Subject to final board approvals, this West Rochelle well is scheduled to begin drilling in August 2010 to target oil and natural gas in the Lower Cretaceous. Nexen Petroleum U.K. Limited will operate the well. We will be carried for our share of the drilling costs, remain operator of the West Rochelle block and retain a 50 percent interest.

31

Endeavour International Corporation

We made applications for licenses containing 17 blocks in the U.K. 26^th Offshore Licensing Round licensing round. Results are expected in late 2010 or early 2011.

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.

United States Drilling

By January 2010, we acquired positions in four U.S. resource plays. We funded the initial cash contributions for these new focus areas from existing cash reserves. Our drilling activity during 2010 is greater than the previous year as we begin to pursue the potential of these recent acquisitions. During 2010, we have been active at 12 wells, eight of which are through our participation agreement with Cohort.

In the U.S., four wells in our gas shale portfolio were successfully drilled and completed, three of which were producing prior to the end of the second quarter of 2010. Another six wells are still in progress, four of which are awaiting completion. 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 and Participation Agreements

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 in cash, and we will pay a share of Cohort’s drilling and completion expenditures as wells are drilled over the next few years. In connection with this agreement, we also acquired additional acreage in the Marcellus gas shale play area for approximately $7.5 million.

We also acquired 50 percent of Hillwood’s position in its exploratory 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 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.

Disclosures About Contractual Obligations and Commercial Commitments

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

32

Endeavour International Corporation

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, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 impact of any future acquisitions. In particular, this report contains forward-looking statement pertaining to the following:

• our future financial position;

• our business strategy;

• budgets;

• projected costs, savings and plans;

• objectives of management for future operations;

• legal strategies; and

• legal proceedings.

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.

33

Endeavour International Corporation

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 June 30, 2010, we had the following commodity derivative instruments outstanding:

	2010		2011		Total
Oil:
Fixed Price Swaps (Mbbl)		227		487		714
Weighted Average Price ($/Barrel)	$	68.39	$	66.01	$	66.77
Gas: (1)
Fixed Price Swaps (MMcf)		516		627		1,143
Weighted Average Price ($/Mcf)	$	7.55	$	7.68	$	7.62

⁽¹⁾ Gas derivative contracts are designated in therms and have been converted to Mcf at a rate of 10 therm to 1 Mcf. The exchange rate at June 30, 2010 was $1.50 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.

34

Endeavour International Corporation

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 June 30, 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 June 30, 2010.

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (as defined in Rules 13a — 15(f) and 15d — 15(f) under the Securities Exchange Act of 1934, as amended, 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

35

Endeavour International Corporation

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 5: Other Information

On August 4, 2010, we amended the Senior and Junior Bank Facility as follows:

• change the minimum current assets to current liabilities ratio for June 30, 2010 from 1.1:1 to 0.6:1;

• change the maximum consolidated net debt to earnings before interest, taxes, depreciation and amortization ratio for June 30, 2010 from 3.0:1 to 4.5:1; and

• include a new Event of Default if the Senior or Junior Bank Facility is not repaid and canceled by September 30, 2010.

A copy of the amendment is filed with this Quarterly Report on Form 10-Q as Exhibit 10.1 and is incorporated herein by reference.

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).
3.1	(c)	Certificate of Amendment dated June 1, 2010 (Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (Commission File No. 001-32212) filed on June 3, 2010).
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	*	Amendment to $225,000,000 Secured Revolving Loan and Letter of Credit Facility Agreement.
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.

36

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: August 9, 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