Endeavour International 10-Q 2005 Q2 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2005
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:1-13463

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.)
1000 Main Street, Suite 3300, Houston, Texas	77002
(Address of principal executive offices)	(Zip code)

(713) 307-8700

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report.)

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.  ý  Yes   o   No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   ý Yes   o  No

As of August 4, 2005, 74,317,259 shares of the registrant’s common stock were outstanding.

Endeavour International Corporation

Index

Part I:
	Item 1: Financial Statements		1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Operations	2
		Condensed Consolidated Statements of Cash Flows	3
		Notes to Condensed Consolidated Financial Statements	4
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 3: Quantitative and Qualitative Disclosures about Market Risk		16
	Item 4: Controls and Procedures		17
Part II. Other Information			18
	Item 1: Legal Proceedings		18
	Item 6: Exhibits		19
Signatures			19

Item 1:  Financial Statements

Endeavour International Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except share data)

	June 30, 2005			December 31, 2004
Assets
Current Assets:
Cash and cash equivalents	$	96,108		$	8,975
Accounts receivable	4,073			4,286
Prepaid expenses and other current assets	3,594			3,814
Total Current Assets	103,775			17,075
Equity Interests in Entities with Oil and Gas Properties	—			3,688
Property and Equipment, Net	53,278			50,228
Goodwill	27,811			20,119
Restricted Cash	4,346			2,507
Other Assets	11,346			8,120
Total Assets	$	200,556		$	101,737
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	3,635		$	2,909
Accrued expenses	6,719			7,106
Current portion of long-term debt	—			2,138
Other	8,611			223
Total Current Liabilities	18,965			12,376
Long-Term Debt	81,250			2,150
Deferred Taxes	13,840			18,012
Other Liabilities	10,524			8,979
Total Liabilities	124,579			41,517
Minority Interest	—			3,248
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock (Liquidation preference:  $2,379)	—			—
Common stock; shares issued and outstanding – 74,272,759 at 2005 and 69,995,165 shares at 2004	74			70
Additional paid-in capital	151,152			133,919
Accumulated other comprehensive loss	(4,313		)	(528		)
Deferred compensation	(9,542		)	(6,570		)
Accumulated deficit	(61,394		)	(69,919		)
Total Stockholders’ Equity	75,977			56,972
Total Liabilities and Stockholders’ Equity	$	200,556		$	101,737

See accompanying notes to consolidated financial statements.

1

Endeavour International Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Revenues	$	9,091		$	—		$	16,793		$	8
Cost of Operations:
Operating expenses	2,958			—			5,374			1
Depreciation, depletion and amortization	2,243			376			4,461			508
Equity loss from entities with oil and gas properties	—			77			79			134
General and administrative	4,373			2,950			8,525			5,483
Total Expenses	9,574			3,403			18,439			6,126
Loss From Operations	(483		)	(3,403		)	(1,646		)	(6,118		)
Other (Income) Expense:
Consideration given in excess of fair value of identifiable assets acquired	—			—			—			10,779
Interest income	(626		)	(160		)	(944		)	(244		)
Interest expense	1,182			—			1,965			254
(Gain) loss on sale of oil and gas interests	(14,944		)	895			(14,944		)	(355		)
Gain on collection of promissory notes	—			(1,848		)	—			(1,848		)
Other (income) expense	(237		)	1			(661		)	208
Total Other (Income) Expense	(14,625		)	(1,112		)	(14,584		)	8,794
Income (Loss) Before Minority Interest	14,142			(2,291		)	12,938			(14,912		)
Minority Interest	—			4			(470		)	7
Income (Loss) Before Income Taxes	14,142			(2,287		)	12,468			(14,905		)
Income Tax Expense	2,885			—			3,864			—
Net Income (Loss)	11,257			(2,287		)	8,604			(14,905		)
Preferred Stock Dividends	39			39			79			346
Net Income (Loss) to Common Stockholders	$	11,218		$	(2,326	)	$	8,525		$	(15,251	)
Net Income (Loss) Per Common Share:
Basic	$	0.15		$	(0.03	)	$	0.12		$	(0.26	)
Diluted	$	0.13		$	(0.03	)	$	0.11		$	(0.26	)
Weighted Average Number of Common Shares Outstanding:
Basic	74,159			69,271			73,786			59,173
Diluted	93,095			69,271			76,094			59,173

See accompanying notes to consolidated financial statements.

2

Endeavour International Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

	Six Months Ended June 30,
	2005			2004
Cash Flows from Operating Activities:
Net income (loss)	$	8,604		$	(14,905	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization	4,461			508
Consideration given in excess of fair value of identifiable assets acquired	—			10,779
Deferred tax benefit	(341		)	—
Gain on collection of promissory notes	—			(1,848		)
Amortization of non-cash compensation	3,482			2,868
Fair market value adjustment of stock options	(392		)	658
Gain on sale of assets	(14,944		)	(355		)
Other	915			590
Changes in assets and liabilities:
Decrease in receivables	116			1,786
(Increase) Decrease in other current assets	913			(405		)
Increase in accounts payable and accrued expenses	6,475			596
Net Cash Provided by Operating Activities	9,289			272
Cash Flows From Investing Activities:
Capital expenditures	(10,179		)	(2,640		)
Acquisitions, net of cash acquired	(1,437		)	(66		)
Investment in Limited Partnership	(156		)	(936		)
Proceeds from sale of assets	19,465			741
Increase in restricted cash	(1,876		)	—
Net Cash Provided by (Used in) Investing Activities	5,817			(2,901		)
Cash Flows From Financing Activities:
Proceeds from borrowings	81,250			—
Repayment of borrowings	(4,006		)	(1,751		)
Purchase and retirement of common and preferred stock	—			(5,031		)
Proceeds from warrant and stock option exercises	669			—
Financing costs paid	(3,648		)	—
Proceeds from common and preferred stock issued and issuable	—			46,399
Other financing	(70		)	—
Net Cash Provided by Financing Activities	74,195			39,617
Net Increase in Cash and Cash Equivalents	89,301			36,988
Effect of Foreign Currency Changes on Cash	(2,168		)	—
Cash and Cash Equivalents, Beginning of Period	8,975			57
Cash and Cash Equivalents, End of Period	$	96,108		$	37,045

See accompanying notes to consolidated financial statements.

3

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Significant Accounting Policies

General

Endeavour International Corporation is an international oil and gas exploration and production company primarily focused on the acquisition, exploration and development of energy reserves in the North Sea.  As used in these Notes to Consolidated Financial Statements, the terms the “Company”, “Endeavour”, “we”, “us”, “our” and similar terms refer to Endeavour International Corporation and, unless the context indicates otherwise, its consolidated subsidiaries.  The accompanying consolidated financial statements of Endeavour should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Basis of Presentation and Use of Estimates

The accompanying financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and, accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted.

The financial statements herein reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation.  Certain amounts for prior periods have been reclassified to conform to the current presentation.  In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period.  Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Income (Loss) Per Share

Basic loss per common share is computed by dividing net loss attributable 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 and certain stock incentive plans under the treasury stock method, if including such instruments is dilutive.

4

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
(Amounts in thousands, except per share data)	2005		2004			2005		2004
Net income (loss) to common stockholders
Basic	$	11,218	$	(2,326	)	$	8,525	$	(15,251	)
Add Effect of:
Convertible debt	1,199		—			—		—
Certain stock incentive plans	43		—			—		—
Diluted	$	12,460	$	(2,326	)	$	8,525	$	(15,251	)
Weighted Average Number of Common Shares Outstanding:
Basic	74,159		69,271			73,786		59,173
Add Effect of:
Stock options	1,016		—			1,100		—
Warrants	1,129		—			1,208		—
Convertible debt	16,185		—			—		—
Certain stock incentive plans	606		—			—		—
Diluted	93,095		69,271			76,094		59,173

For the six months ended June 30, 2005, 14.4 million common shares potentially issuable related to convertible debt and certain stock incentive plans were excluded from diluted weighted average shares outstanding as their effects were anti-dilutive (i.e., increase the net income per share).  At June 30, 2004, 2.8 million common shares potentially issuable, relating to outstanding options and warrants, were excluded from diluted weighted average shares outstanding as their effects were anti-dilutive (i.e., reduce the net loss per share).

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued a revised Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS 123 and supersedes APB Opinion No. 25.  SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.  The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition.  In April 2005, the SEC delayed the effective date of SFAS 123R to fiscal years beginning after June 15, 2005.  As a result SFAS 123R will be effective for the Company beginning in the first quarter of 2006.  The guidance also provides for classifying awards as either liabilities or equity, which impacts when and if the awards must be remeasured to fair value subsequent to the grant date.  We plan to adopt SFAS 123R on January 1, 2006.

At the time of adoption, companies can select from various transition methods, two of which would allow for restatement of certain prior periods.  Management anticipates selecting the

5

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

transition method in which prior period financial statements would not be restated. The adoption of SFAS No. 123R is not expected to have a significant effect on our financial condition and will not affect our consolidated cash flows.  The future impact on our consolidated results of operations of the adoption of SFAS 123R cannot be predicted as certain of our deferred compensation plans are treated as liabilities and are currently accounted for using the variable method of accounting. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and loss per share above.

Note 2 – Stock-Based Compensation Arrangements

We account for stock-based compensation plans for employees, including directors, using the intrinsic value method.  Under this method, we record no compensation expense for stock options granted when the exercise price of options granted is equal to or greater than the fair market value of our common stock on the date of grant.

For non-employees, we apply the fair value method in accounting for stock-based grants using the Black-Scholes Method.

During 2003, we granted 700,000 options to then-current directors.  While all the options granted had an exercise price higher than the market value of the stock on the date of grant, a subsequent modification of these options has triggered variable accounting.  We are required to record compensation expense if the modified option price is lower than the market price of the stock at the end of a reporting period until the options expire or are exercised.  For the three months ended June 30, 2005 and 2004, we recorded non-cash general and administrative expenses of $0.1 million and $(0.5) million, respectively, related to these options.  For the six months ended June 30, 2005 and 2004, we recorded non-cash general and administrative expenses of $(0.4) million and $0.7 million, respectively, related to these options.

Had compensation expense been determined under fair value provisions, our net income (loss) and net income (loss) per share would have been the following:

6

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Amounts in thousands, except per share data)	2005			2004			2005			2004
Net income (loss) to common stockholders, as reported	$	11,218		$	(2,326	)	$	8,525		$	(15,251	)
Add:
Stock-based compensation expense as reported	1,159			701			1,755			2,667
Less:
Total stock-based compensation expense determined under fair-value-based method for all awards, net of tax	(1,339		)	(2,572		)	(2,680		)	(3,379		)
Pro forma net income (loss)	$	11,038		$	(4,197	)	$	7,600		$	(15,963	)
Income (Loss) per share – as reported:
Basic	$	0.15		$	(0.03	)	$	0.12		$	(0.26	)
Diluted	$	0.13		$	(0.03	)	$	0.11		$	(0.26	)
Income (Loss) per share – pro forma:
Basic	$	0.15		$	(0.06	)	$	0.10		$	(0.27	)
Diluted	$	0.13		$	(0.06	)	$	0.10		$	(0.27	)

These pro forma amounts may not be representative of future amounts since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be issued in future years.  The estimated fair value of each option granted was calculated using the Black-Scholes Method.  The following summarizes the weighted average of the assumptions used in the method.

	2005		2004
Risk free rate	3.9	%	4.0	%
Expected years until exercise	5.0		7.0
Expected stock volatility	48	%	33	%
Dividend yield	—		—

7

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3 – Acquisitions and Dispositions

Acquisition of OER Oil AS

In November 2004, we purchased a 76.66% majority interest in OER Oil AS (“OER”), a privately held Norwegian exploration and production company based in Oslo, Norway (the “OER Acquisition”).  The purchase price of the OER Acquisition was NOK (Norwegian kroner) 172.5 million, approximately $27.6 million, plus $0.8 million in professional expenses for legal and accounting services.

Purchase of Minority Interest in OER

In January 2005, we purchased the remaining 23.34% minority interest, representing 1,299,772 shares, in OER for consideration of NOK 6.98 per share and 1.68 shares of our common stock per share of OER.  The aggregate consideration paid of $10.7 million was approximately $1.4 million in cash and 2,183,617 shares of our common stock.  As a result of this purchase, goodwill increased by $7.7 million.

Acquisition of NSNV, Inc.

On February 26, 2004, we acquired NSNV, Inc. (“NSNV”), through a merger with a newly created subsidiary of the Company, resulting in NSNV becoming a wholly-owned subsidiary of the Company (the “NSNV Acquisition”).  NSNV was a private company owned by William L. Transier, John N. Seitz and PGS Exploration (UK) Limited (“PGS”), a United Kingdom corporation that is a provider of geophysical services.  The former shareholders of NSNV received an aggregate of 12.5 million of our common shares in the merger, representing approximately 18.9% of our outstanding common stock immediately after the closing of the NSNV Acquisition.

The NSNV Acquisition was accounted for as a purchase of assets and not a business combination.  Therefore, the consideration given was allocated to the fair value of the identifiable assets and liabilities acquired with the excess, approximately $10.8 million, expensed.

The Restructuring

Simultaneous with the consummation of the NSNV Acquisition and a private placement of our common stock for aggregate gross proceeds of $50 million, we restructured various financial and stockholder related items (the “Restructuring”).  With the Restructuring we sold substantially all of our United States oil and gas assets, eliminated outstanding convertible notes and eliminated all of the Series A and C preferred stock as well as nearly all of the Series B Preferred Stock.

8

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Sale of Knox Miss. Partners, L.P.

During the first quarter of 2004, we sold all of our limited partnership units in Knox Miss. Partners, L.P (“Knox Miss”) for $5.0 million and received $500,000 in cash and a $4.5 million short-term note that was secured by a pledge of the limited partnership interest.  The short-term note was paid in full during 2004.  We recorded a gain on the sale of Knox Miss of $1.2 million during the first quarter of 2004.

Sale of Partnership Interests in Thailand Project

During the second quarter of 2005, we sold our partnership interests in Thailand to a private entity for net proceeds of approximately $19 million.  We recorded a gain on the sale of these interests of approximately $15 million.

Note 4 – Convertible Senior Notes

During the first quarter of 2005, we issued $81.25 million aggregate principal amount of convertible senior notes due 2012.  The notes bear interest at a rate of 6.00% per annum, payable in January and July.  The notes are convertible into shares of our common stock at an initial conversion rate of 199.2032 shares of common stock per $1,000 principal amount of notes, subject to adjustment, which represents an initial conversion price of approximately $5.02 per share.  In connection with the issuance of these notes, we paid $3.6 million in financing and other costs.

9

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 5 - Property and Equipment

Property and equipment included the following:

(Amounts in thousands)	June 30, 2005			December 31, 2004
Oil and gas properties under the full cost method:
Subject to amortization	$	20,668		$	20,081
Not subject to amortization:
Acquired in 2005	6,335			—
Acquired in 2004	26,749			26,749
	53,752			46,830
Other oil and gas assets	4,875			4,875
Computers, furniture and fixtures	954			635
Total property and equipment	59,581			52,340
Accumulated depreciation, depletion and amortization	(6,303		)	(2,112		)
Net property and equipment	$	53,278		$	50,228

The costs not subject to amortization relate to unproved properties which are excluded from amortized capital costs until it is determined whether or not proved reserves can be assigned to such properties.  We capitalized $1.9 million and $1.3 million in certain employee costs directly related to exploration activities for the quarter ended June 30, 2005 and 2004, respectively.  We capitalized $3.5 million and $1.8 million in certain employee costs directly related to exploration activities for the six months ended June 30, 2005 and 2004, respectively.

Note 6 – Derivative Instruments

In January 2005, we entered into an oil commodity swap where we pay market IPE Brent and receive a fixed price that ranges from $46.20 per barrel in the initial month to $40.00 per barrel at the end of the contract.  The contract covers 600 barrels per day from February 2005 through December 2006.  The contract requires us to provide certain collateral.  For the three and six months ended June 30, 2005, we realized $0.4 million and $0.5 million, respectively, as a reduction to revenue related to settlements for this contract.  We did not exclude any component of the hedging instrument’s gain or loss when assessing effectiveness.

At June 30, 2005, the net deferred loss recognized in accumulated other comprehensive income was $3.5 million, net of tax.  Based on current prices, we anticipate a loss of $2.3 million, net of tax, will be transferred out of accumulated other comprehensive income and recognized within earnings over the next 12 months.

10

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

We discontinue hedge accounting prospectively when (1) we determine that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.

Note 7 – Supplemental Cash Flow Information

As described above, in the first quarter of 2005, we purchased the minority interest in OER for a combination of cash and common stock.  During the first quarter of 2004, we had noncash investing activities with the acquisition of NSNV for 12.5 million shares of our common stock with a total purchase price of approximately $25 million.  Therefore, the NSNV Acquisition increased current assets by $1 million, oil and gas property by $11.4 million, other assets by $8.3 million, current liabilities by $2.5 million other liabilities by $3.5 million and equity by $25 million through a noncash transaction that was not reflected in the statement of cash flows.  However, $65,811 of acquisition costs reflected in “investing activities” in the statement of cash flows represents the cash expenses paid in connection with the NSNV Acquisition, less the cash of NSNV on the date the NSNV Acquisition was consummated.  Noncash investing activities and financing activities were also incurred with the transactions involved in the Restructuring.  In the first quarter of 2004, we exercised a call option and issued 835,000 shares of our common stock to RAM Trading Ltd. in full payment of the option.

Note 8 – Comprehensive Loss

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

11

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Amounts in thousands)	2005			2004			2005			2004
Net income (loss)	$	11,257		$	(2,287	)	$	8,604		$	(14,905	)
Unrealized loss on commodity derivative instruments, net of tax	(564		)	—			(3,508		)	—
Unrealized loss on marketable debt securities	(288		)	(108		)	(276		)	174
Reclassification adjustment for loss realized in net loss above	244			—			394			207
Net impact on comprehensive income (loss)	(608		)	(108		)	(3,390		)	381
Comprehensive income (loss)	$	10,649		$	(2,395	)	$	5,214		$	(14,524	)

Note 9 – Commitments and Contingencies

General

The oil and gas industry is subject to regulation by federal, state and local authorities.  In particular, gas and oil production operations and economics are affected by environmental protection statutes, tax statutes and other laws and regulations relating to the petroleum industry.  We believe we are in compliance with all federal, state and local laws and regulations applicable to the Company and its properties and operations, the violation of which would have a material adverse effect on us or our financial condition.

PGS Commitment

We have a three-year product and service commitment to PGS in return for the right to use 79,200 square kilometers of 3-D seismic and related data in the North Sea region, including the 3D Mega Merge and North Sea Digital Atlas databases.  Under the agreement, we are required to purchase products and services from PGS, or affiliates, that have an aggregate invoice value over three years of at least $4.5 million for a period of three years ending on December 15, 2006 as follows:

(amounts in thousands)
Through December 15, 2005	$	2,500
December 16, 2005 to December 15, 2006	2,000
Total PGS commitment	$	4,500

12

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

At June 30, 2005, approximately $3.4 million of the commitment remains outstanding.

Legal Proceeding

In March 2004, the GHK Company, LLC, GHK/Potato Hills Limited Partnership, and Brian F. Egolf (collectively “Plaintiffs”) commenced an action against Endeavour International Corporation (“Endeavour”), f/k/a Continental Southern Resources, Inc. (“CSOR”), as well as BWP Gas, L.L.C. (“BWP”) and HBA Gas, Inc. (“HBA”) in state court in Oklahoma City, Oklahoma.  In the petition, Plaintiffs allege that in 2003, at a time when CSOR intended to acquire a majority of the membership interests in BWP, that BWP entered into an agreement to assign to Plaintiffs 2.5 million common shares of Endeavour stock upon compliance by Plaintiffs with certain contractual obligations including but not limited to completion and initial commercial production of the Mary #2-34 well, along with the presentation of a development plan and the commencement of the next exploration or development well in the Potato Hills Deep Prospect.  Plaintiffs allege in their petition that BWP, HBA and Endeavour are alter egos of each other and jointly and severally liable to Plaintiffs for failing to deliver to Plaintiffs the Endeavour common stock.  Plaintiffs seek delivery of the stock as well as a temporary restraining order and a primary and permanent injunction (i) enjoining all dilutions of Plaintiffs’ rights pertaining to Endeavour stock; (ii) enjoining Endeavour from all future stock issuances and transfers of assets not in the ordinary course of business and (iii) prohibiting the alienation or encumbrance of the Endeavour stock that is allegedly in HBA’s possession.  In April 2004, the defendants removed the action from the state court to the United States District Court for the Western District of Oklahoma.  In October 2004, the United States District Court granted a motion to remand to state court filed by the Plaintiffs and remanded the matter to the District Court of Oklahoma County, Oklahoma.  In June 2005, BWP and HBA filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Pennsylvania.  In July 2005, Endeavour filed a Notice of Removal to the federal courts based among other things on the fact that the case of the Plaintiffs relates to the pending bankruptcy proceedings of BWP and HBA.  The Plaintiffs have indicated they will contest this removal.  While the outcome can not be predicted at this time, management believes it has good and valid defenses in this litigation and intends to litigate vigorously.

13

Endeavour International Corporation

Cautionary Statement for Forward-Looking Statements

The information contained in this Quarterly Report on Form 10-Q and in other public statements by the Company and Company officers or directors includes or may contain certain forward-looking statements. The words “may,” “will,” “expect,” “anticipate,” “believe,” “continue,” “estimate,” “project,” “intend,” and similar expressions used in this Report are intended to identify forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. You should not place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions. These factors include, but are not limited to, those risks described in detail in the Company’s Annual Report on Form 10-K under the caption “Risk Factors” and other filings with the Securities and Exchange Commission. Should any of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, actual results may differ materially from those included within the forward-looking statements.

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

Unless the context otherwise requires, references to the “Company”, “Endeavour”, “we”, “us” or “our”, mean Endeavour International Corporation or any of our consolidated subsidiaries or partnership interests. The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes thereto included elsewhere in this Report.

General

During the first quarter of 2004, we completed a series of mutually interdependent transactions that significantly expanded our scope and provided a new focus, primarily on international oil and gas exploration.  As a result of the 2004 transactions, all of our producing operations were sold as well as our exploration activities in Mississippi.  We retained our equity interests relating to Thailand and Louisiana through the end of the first quarter of 2004; however our equity interests in Louisiana were sold in May 2004 and our partnership interests in Thailand were sold in April 2005.

During the fourth quarter of 2004, we purchased a 76.66% majority interest in OER oil AS (“OER”), a privately held Norwegian exploration and production company based in Oslo.  In the first quarter of 2005, we purchased the remaining minority interest in OER.

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Results of Operations

As a result of our acquisition of producing oil and gas properties in Norway, we had revenues of $9.1 million and $16.8 million for the three and six months ended June 30, 2005, respectively, with sales volumes of 2,020 barrels of oil equivalent per day for the second quarter of 2005 and 1,948 barrels of oil equivalent per day for the six months ended June 30, 2005.  Our Norwegian operations are also responsible for nearly all of the increases in operating expenses, DD&A expense and income taxes.

The increases in general and administrative (“G&A”) expenses were driven primarily by the significant increase in operations through the acquisition of NSNV at the end of February 2004 and our Norway operations at the end of November 2004, partially offset by the fair market value adjustment of stock options under variable plan accounting.  Components of G&A expenses for these periods are as follows:

(Amounts in thousands)	Three Months Ended June 30,						Six Months Ended une 30,
	2005			2004			2005			2004
Compensation	$	2,444		$	1,249		$	4,971		$	1,502
Consulting, legal and accounting fees	1,006			657			1,912			1,032
Occupancy costs	417			128			703			152
Other expenses	574			572			932			769
Total gross cash G&A expenses	4,441			2,606			8,518			3,455
Non-cash stock-based compensation	1,727			2,075			3,859			3,148
Fair market value adjustment of stock options	97			(448		)	(392		)	658
Total gross non-cash G&A expenses	1,824			1,627			3,467			3,806
Gross G&A expenses	6,265			4,233			11,985			7,261
Less: capitalized G&A expenses	(1,892		)	(1,283		)	(3,460		)	(1,778		)
Net G&A expenses	$	4,373		$	2,950		$	8,525		$	5,483

Interest expense increased to $2.0 million for the six months ended June 30, 2005 as compared to $0.3 million for the corresponding period in 2004 primarily due to the issuance of our convertible senior notes during the first quarter of 2005.

Income Taxes

Our tax expense, relating solely to our Norwegian operations, of $2.9 million and $3.9 million for the three and six months ended June 30, 2005, respectively, includes $0.4 million and $1.2 million, respectively of foreign currency gains attributable to tax liability balances.  For the three and six months ended June 30, 2005, our Norwegian operations had income before taxes of $4.2 million and $7.3 million, respectively, as compared to a net income before taxes of $14.1 million and $12.5 million, respectively, for the total company.  During the each of the periods presented for 2005 and 2004, we did not record any income tax benefits on our non-Norwegian operations as there was no assurance that we could generate any taxable earnings, and therefore recorded

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valuation allowances on the full amount of deferred tax assets generated.  The gain from the sale of our partnership interests is offset by other current year tax losses in the U.S.

Liquidity and Capital Resources

In the first quarter of 2005, we issued $81.25 million in convertible senior notes due 2012.  Interest expense on the senior notes is expected to be approximately $4.9 million annually and we anticipate being able to fund interest payments from cash flows from operating activities.

We anticipate exploration and development expenditures in 2005 to be $43 million.  These expenditures include $26 million in the United Kingdom, $6 million in Norway, $1 million in the Netherlands, $2 million on other exploration expenditures and $8 million in capitalized employee costs and interest.  We may increase or decrease our planned activities for 2005, depending upon drilling results, potential acquisition candidates, product prices, the availability of capital resources, and other factors affecting the economic viability of such activities.

In addition, we sold our partnership interests in Thailand in April 2005 for net proceeds of approximately $19 million.  Proceeds from the sale and capital expenditures originally targeted for Thailand will be used to accelerate North Sea drilling activity in 2005.

Drilling Program

During the third and fourth quarters, we expect to operate two exploration wells that will test three of four identified prospects on Block 31/26b in the Central Graben region of the UK sector of the North Sea.  The Turnberry prospect will spud first followed immediately by the exploration well to test the Turriff and Tulliallan prospects.  Block 31/26b is part of License P1183 in which we acquired a 60 percent interest during the 22nd Seaward Licensing Round in 2004.

Also during the third quarter, we will participate in the drilling of the Fiacre prospect located in Block 23/11(N) where we will hold a 20 percent working interest as part of a farm-in agreement with Dana Petroleum plc.  Additionally, a fourth well in the exploration program is the Prometheus prospect on Blocks 42/21 and 42/22 in the Southern Gas Basin.  We will hold a 22.5 percent working interest in the well, which is expected to be drilled during the third quarter.

Disclosures About Contractual Obligations and Commercial Commitments

As discussed above, we issued $81.25 million in convertible senior notes due 2012.  As of June 30, 2005, there have been no other material changes in our contractual obligations.

Item 3:  Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency 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

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Endeavour International Corporation

to effects that foreign exchange rate movements of those currencies have on our costs and on the cash flows that we receive from foreign operations.  We operate a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other.  To date, we have addressed our foreign currency exchange rate risks principally by maintaining our liquid assets in interest-bearing accounts in U.S. dollars, until payments in foreign currency are required, but we have not reduced this risk by hedging to date.

Commodity Price Risk

We produce and sell crude oil and natural gas.  Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices applicable which 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.  At June 30, 2005, we had an oil commodity swap where we pay market IPE Brent and receive a fixed price that ranges from $44.65 per barrel in the initial month to $40.00 per barrel at the end of the contract covering 600 barrels per day through December 2006.  At June 30, 2005, a $1.00 change in the Brent oil price would result in a $0.3 million change in revenues through 2005 and 2006.

Interest Rate Risk

Our newly issued convertible senior notes bear interest at a fixed rate of 6%.  We do not currently use interest rate derivative financial instruments to manage exposure to interest rate changes, but may do so in the future.

Since the filing of our 2004 Annual Report on Form 10-K, there have been no material changes, other than those discussed above, in reported market risk as it relates to foreign currencies, interest rates and commodity prices.

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 co-chief executive officers (the “CEOs”) and our chief accounting officer (the “CAO”), of the effectiveness of our disclosure controls and procedures required by Rule 13a-15 of the Securities Exchange Act of 1934.  Based on that evaluation, the CEOs and CAO believe:

(i)that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the CEOs and CAO, as appropriate to allow timely decisions regarding required disclosure; and

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Endeavour International Corporation

(ii)that our disclosure controls and procedures are effective.

Changes in Internal Controls over Financial Reporting

There has been no significant change in our internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.  In reaching this conclusion, management, with the participation of the CEOs and CAO, included in its assessment of internal controls over financial reporting all consolidated entities except those falling under OER oil AS.  Endeavour International Corporation acquired OER oil AS on November 23, 2004.  OER oil AS’s internal control over financial reporting related to total assets of $63.3 million and total revenues of $3.7 million as of and for the year ended December 31, 2004.  As permitted by the SEC’s published guidance, we excluded these entities from our assessment as they were acquired late in the year, and it was not possible to conduct our assessment between the date of acquisition and the end of the quarter.

Part II. Other Information

Item 1:  Legal Proceedings

In March 2004, the GHK Company, LLC, GHK/Potato Hills Limited Partnership, and Brian F. Egolf (collectively “Plaintiffs”) commenced an action against Endeavour International Corporation (“Endeavour”), f/k/a Continental Southern Resources, Inc. (“CSOR”), as well as BWP Gas, L.L.C. (“BWP”) and HBA Gas, Inc. (“HBA”) in state court in Oklahoma City, Oklahoma.  In the petition, Plaintiffs allege that in 2003, at a time when CSOR intended to acquire a majority of the membership interests in BWP, that BWP entered into an agreement to assign to Plaintiffs 2.5 million common shares of Endeavour stock upon compliance by Plaintiffs with certain contractual obligations including but not limited to completion and initial commercial production of the Mary #2-34 well, along with the presentation of a development plan and the commencement of the next exploration or development well in the Potato Hills Deep Prospect.  Plaintiffs allege in their petition that BWP, HBA and Endeavour are alter egos of each other and jointly and severally liable to Plaintiffs for failing to deliver to Plaintiffs the Endeavour common stock.  Plaintiffs seek delivery of the stock as well as a temporary restraining order and a primary and permanent injunction (i) enjoining all dilutions of Plaintiffs’ rights pertaining to Endeavour stock; (ii) enjoining Endeavour from all future stock issuances and transfers of assets not in the ordinary course of business and (iii) prohibiting the alienation or encumbrance of the Endeavour stock that is allegedly in HBA’s possession.  In April 2004, the defendants removed the action from the state court to the United States District Court for the Western District of Oklahoma.  In October 2004, the United States District Court granted a motion to remand to state court filed by the Plaintiffs and remanded the matter to the District Court of Oklahoma County, Oklahoma.  In June 2005, BWP and HBA filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Pennsylvania.  In July 2005, Endeavour filed a Notice of Removal to the federal courts based among other things on the fact that the case of the Plaintiffs relates to the pending bankruptcy proceedings of BWP and HBA.  The Plaintiffs have

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indicated they will contest this removal.  While the outcome can not be predicted at this time, management believes it has good and valid defenses in this litigation and intends to litigate vigorously.

Item 6:  Exhibits

The following exhibits are included herein:

31.1 *	Certification of William L. Transier, Co-Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 *	Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.3 *	Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 *	Certification of William L. Transier, Co-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 John N. Seitz, Co-Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 *	Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*	Filed herewith.

Signatures

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

Endeavour International Corporation

Date: August 5, 2005	/s/ William L. Transier	/s/ John N. Seitz
	William L. Transier	John N. Seitz
	Co-Chief Executive Officer	Co-Chief Executive Officer
	/s/ Robert L. Thompson
	Robert L. Thompson
	Vice President and Chief Accounting Officer
	(Principal Financial Officer and Principal Accounting Officer)

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