Endeavour Reports 4Q Net Loss

Endeavour International Corporation has reported fourth quarter 2013 net loss, as adjusted of $24.7 million compared to a net loss, as adjusted of $7.7 million for the same period in 2012.

On a GAAP basis, net loss for the fourth quarter was $27.7 million as compared to net loss of $6.5 million for the same quarter in 2012.

Sales volumes for the fourth quarter of 2013 were 13,648 barrels of oil equivalent per day (“boepd”), compared to 11,541 boepd for the same quarter in the prior year. Physical production for the fourth quarter of 2013 averaged 12,422 boepd compared to 10,300 boepd for the same quarter of 2012. Year-over-year average daily physical production increased 121%.

“With the Rochelle situation resolved, we will continue our focus on reducing cost of capital and deleveraging our balance sheet. The reorganization and consolidation of our UK offices completed last year, combined with the reduced cost of capital from our refinancing effort in January, result in over $30 million in annual cash savings,” said William L. Transier, chairman, chief executive officer and president. “Now with our core assets online in the North Sea, we should expect improved production and cash flow on a comparative basis so we can move forward prudently in the exploitation of our portfolio for the benefit of our stakeholders.”

Operational Update 

North Sea

At Rochelle, the East (E2) and West (W1) development wells at Rochelle, a gas-condensate field, were fully completed and tied-in to the production manifolds in January. During the restart of production, a valve was discovered stuck in the ‘shut’ position on the outlet side of the Rochelle production manifold. An attempt to open the valve manually was unsuccessful and the operator secured an intervention vessel to open the valve. The valve was reopened on February 26th and the E2 well commenced first production on February 28th. The E2 production is ramping up and the W1 well is expected to be online in the next few days. When both wells are fully operational, the production from the Rochelle field is expected to exceed the available production capacity at the Scott Platform. Endeavour has a 44% working interest in the Rochelle development.

The Bacchus field continues to perform in line with expectations. The 2013 production exit rate at the field was over 10,000 barrels of oil per day (“bopd”) gross. Consistent with the original development plans, the first well drilled (B3Y) is expected to be turned into a water injector during the second quarter of 2014. This will provide pressure support to help sustain the field’s production rate and increase its overall recovery. A new 3D seismic survey was shot in 2013 and the results are being processed to define additional field development opportunities. Endeavour has a 30% working interest in the field.

Water handling and other operational issues at the Alba production facilities were addressed during the period up to and including the extended shutdown period last year. Subsequently, a problem occurred in the subsea water injection pipeline supplying pressure to the Southern area of the field. This has resulted in a portion of the Southern area being shut-in. The Alba 2013 exit rate was 18,500 bopd gross, below the levels expected from the field. Remedial action is currently being taken to reinstate partial water injection to offset some of this reduction and the permanent replacement of the pipeline is targeted for late 2014. Production will be improved by the first 2014 development well, which was recently brought online. An additional two development wells are scheduled to be drilled during the year. Endeavour has a 25.68% working interest in the field.

North America

During the fourth quarter in the Pennsylvania Marcellus area, the Company closed on a purchase and sale agreement covering 50% of its upstream and midstream assets to Samson Exploration LLC. The transaction provides for the joint development of the Marcellus assets, including the capital necessary for the next phase of development in the core Daniel Field area in Cameron County, Pennsylvania. Initially, the partnership plans to complete three previously drilled and cased horizontal Marcellus wells. These wells will be tied into a new third-party pipeline being constructed by EQT Corporation that allows firm capacity of up to 10 MMCF/D, with potential for future expansion. Endeavour will operate this initial phase of activity, which is expected to be completed by mid-year 2014.

In the Piceance Basin Rim play in Northwest Colorado, Endeavour has two projects targeting liquids-rich Niobrara and Frontier objectives. The Company has formed two federal units and has plans to drill initial horizontal tests in the Niobrara target zone by mid-year 2014. Endeavour has leasehold and drilling options on 40,000 gross acres and 27,000 net acres.

Finance

In December, the Company completed an additional $25 million expansion to the Monetary Production Payment, bringing the total to $175 million outstanding. The MPP has a two-year term and will be satisfied out of the production from the Alba, Bacchus and Rochelle fields. Repayment of the MPP began in July 2013 under its terms and the current outstanding balance is approximately $162 million.

In January 2014, Endeavour closed on a $255 million senior secured first lien term loan with an interest rate of 8.25% (Libor + 700 basis points). The first lien note is a strip facility consisting of a $125 million Secured Term Loan and a $130 million LC Procurement Facility. The Company has used the net proceeds from the offering to refinance its 13% $115 million Revolving Credit Facility and replace its two reimbursement agreements ($120 million at 13% and $33 million at 9%, interest rates, respectively). The facility is due in November 2017.

Due to a change in the U.K. tax treatment for decommissioning, Endeavour has amended its Decommissioning Securities Agreement for the Alba field. The new tax law, which allows companies to treat decommissioning on an after-tax basis (including Petroleum Revenue Tax), enables Endeavour to reduce its current Letter of Credit amount on the Alba field from $120 million to approximately $55 million. The reduced LC requirements as a result of the new U.K. decommissioning tax treatment, combined with the refinancing activities done in January, is expected to generate an annual cash savings of approximately $17 million to the Company.

On March 3rd, the Company completed a private placement for $25 million. The transaction was comprised of the issuance of 2.9 million shares at $4.28/share with the issuance of 729,000 warrants with a strike price of $5.29. In addition, the transaction involved the issuance of 6.5% convertible notes, with a conversion price of $4.66. The notes have a four year maturity. The transaction also includes an option for an additional $30 million and normal registration rights.

In the fourth quarter, Endeavour completed the consolidation of its U.K. offices in Aberdeen, Scotland. Annual cash savings are anticipated to be in the range of $15 million – $20 million.

First Quarter Production Guidance

With the unanticipated downtime at the Rochelle field and continued restricted rates at Alba, average daily production volumes are expected to be in the range of 9,000 – 10,000 boepd for the first quarter of 2014.

2014 Capital Expenditure Program

Endeavour’s direct capital expenditure program in 2014 is expected to be in the range of $60 million – $80 million. Having completed the work on the Company’s large North Sea development projects, Endeavour expects to spend approximately $45 million in the U.K., the majority on the Alba field for infill drilling, 4D seismic and the replacement of the subsea water injection line. The capital spend for the U.S. drilling program is expected to be in the range of $20 million – $25 million.

Decommissioning costs during the year are expected to be approximately $50 million for the IVRR, Renee and Rubie fields.

2013 Reserves

Year-over-year, the Company added 1.5MMboe of proved reserves, which represents a reserves replacement ratio of 41%. Oil represented 52% of total proved reserves at December 31, 2013 down slightly from 54% at the end of the prior year. Net proved and probable reserves (2P) were 40.1 million in 2013 compared to 47.2 million in the previous year, with oil representing 61% of the total. The reduction in 2P reserves was due to the 2013 production, a slightly shorter Alba field life due to lower SEC pricing, minor revisions in Rochelle reserves following development drilling and lack of new drilling activities in the U.S.