Endeavour International Corporation Q3 2008 Earnings Call Transcript

Nov.19.08 | About: Endeavour International (END)

Endeavour International Corporation (NYSE:END)

Q3 2008 Earnings Call

November 4, 2008 10:00 am ET


Mike Kirksey - Chief Financial Officer and Executive Vice President

Bill Transier - Chairman, President and Chief Executive Officer

John Williams - Executive Vice President of Exploration

Bruce Stover - Executive Vice President, Business Development & New Ventures

Carl Grenz - Executive Vice President of Operations


Irene Haas - Canaccord Adams

Peter Nicol - Tristone Capital

Ed Eduscan - Private Investor.


Welcome to the Endeavour International Corporation’s 2008 third quarter earnings release conference call. Today’s conference is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer, Mr. Mike Kirksey. Please go ahead sir.

Mike Kirksey

Welcome everyone and thank you for joining today’s third quarter conference call. Joining me here in Houston today is Bill Transier, our Chairman and Chief Executive Officer and John Williams, our Executive Vice President of Exploration. Also joining us from London is Bruce Stover, Executive Vice President of Business Development and New Ventures, and joining us for the first time today is Carl Grenz, our Executive Vice President of Operations.

Let me remind you that this presentation contains our best and most reasonable estimates. However, a number of factors can cause actual results to differ materially from what we present today. For the risk factors associated with our business, you should read our full disclosures on forward-looking statements in our 10-K and 10-Qs as well as our recent press releases.

I will turn the call over now to Bill Transier, our Chief Executive Officer.

Bill Transier

Thanks Mike. Welcome to everyone for joining us this morning and let me also add my welcome to Carl Grenz who joins us for the first time, actually yesterday it is a little bit too much to ask him to speak about operations today, but next quarter you could be assured he will be deep into it and available to respond to any questions that you might have. This was really a tremendous quarter for our company and we will walk through the details with you in a minute. What I’d like to do is take a few minutes and talk about the state of the market and Endeavour’s business model.

All of us are aware of the extreme volatility and turmoil we have had in the capital markets over the last several months. What we set out to do when we established Endeavour was to build a balanced E&P Company that could withstand the ups and downs that the oil and gas business surely brings to us if you are in this business long enough. Now more than ever, we are showing that Endeavour has taken the right steps to build value and weather a very difficult market.

Indications of that are that we have cash flow that exceeds our capital expenditures making us really one of the only peer companies operating the North Sea that is self-funded. We actually expect to have excess cash flows in the range of $60 million for 2008 that is a very good position to be in when you are considering the status of the capital markets.

We have hedges in place to secure somewhere close to $140 million of cash flow for 2008 and in excess of $100 million in cash flow in 2009. After that you can expect our development projects, which we will talk about in a few minutes to start production and cash flow should take off from these levels to something much greater than that.

The cash flow that we have today and through next year ensures that we could stay on track with our development and exploration projects, something that many of our peer group companies cannot do.

We have also built an exploration team and a process that we go through in exploration that is showing extraordinary results, with now nine successes in a row over the last 12 months since we brought John Williams on board with the company. We have debt capacity with a core group of banks that we have talked to and we believe are some of the strongest banks in the industry today and hopefully untapped capability that we don’t need to go and look to.

We’ve been forecasting consolidation for at least the last 12 to 18 months amongst our peer group companies in the North Sea. The high cost, the long cycle time environment in the North Sea makes execution risk very difficult for small cap companies. Since we started Endeavour four and a half years ago, there have been over 160 companies that have entered the North Sea and in just the last couple of weeks, we’ve seen transactions that provide strong evidence of the value considerations we made in focussing on the North Sea when we started Endeavour and support much stronger underlying values for our companies. Some examples of that is Centrica’s purchase of Marathon’s Norwegian assets including Heimdal.

Last week the German E&P Company Wintershall, which is owned by BASF, announced its acquisition of Revus and then most recently EDF Energy, one of the UK’s largest electric companies announced they were acquiring about 80% of ATPs North Sea oil and gas assets. If you looked underneath these transactions, at the value per 2P reserve, it was running at about $36 per BOE, and on our Floyd production barrel of equivalent, it was about $80,000 per BOE.

I would like to apply those metrics to Endeavour, the market value would be somewhere between 700 million and 1.1 billion, and what that means is the arbitrage between asset values and equity values is the largest I have ever seen in my career. So it is, likely we will see a couple of things happen, equity values will probably rebound from the levels that they are today and asset values will probably come down.

With that said, there seems to be voracious appetite for gas assets by the UK and European utilities. I would just like to note, that about half of Endeavour’s production is gas and two of our three development projects, which we will talk about more in a minute are also gas.

Today, there is likely less than 10 companies that would considered good candidates for us to consolidate because they either have current production, they have exploration potential, our developments projects that can lead to near-term production. In almost every case, these companies need capital to extend their business model, which means almost certain business failure unless they can sell their assets to a buyer or merge with another party.

Alternatively, you can see what happens to a company when they have no production, no cash flow and cannot access capital markets like Ithaca who last week announced that they were selling 40% of their asset base to Diaz, a privately owned conglomerate in the Netherlands for an implied price of only around $7 per BOE. That is why I believe you should have a lot of confidence in Endeavour and its underlying value.

We built this company for sustainability, which means that we have less execution risk than many of our peer group companies. We built our company for times exactly like these and we are beginning to thrive when others are in jeopardy. When your peer group is trading at an average of about 39% of NAV, you have to assume there is going to be more consolidation activity in the peer group.

It is difficult to understand why somebody like Ithaca will go to the great lengths to stay independent and then in the meantime significantly dilute their shareholders, but it appears that they had no alternatives because of their financial position. I really believe that investors, banks, regulatory agencies in the capital markets are not going to sit around and wait for companies to make their decisions about building scope, scale and sustainability in a high cost, long cycle time environment like the North Sea.

This is the best opportunity I have seen in 32 years for someone to build a mid-cap E&P company and reap the significant benefits of the markets returning to normal multiples, which as we know it will in time and the potential for re-rating as a larger company with less execution rates. We have been talking about this as we started Endeavour and I can assure you that we are focused on in the potential today. Now let me outline what we would like to talk to you about in the conference call today.

We have got Mike, who will give you an analysis of the quarterly results. He will address our cash flow, our balance sheet improvement, hedge position and the impact of lower commodity prices on our business model going forward. Then Bruce Stover will talk about our production and then give you an overview of our three large development projects Columbus, Cygnus and Rochelle.

Next after that, John Williams will discuss our year-to-date results in exploration, the remaining activity for 2008, which is significant I might add in our preliminary plans for preliminary plans for 2009. When all of that is done we will come back to you and open it up for Q-&-A. Let me just thank you again for joining us today, and now I will turn it over to Mike.

Mike Kirksey

Thanks Bill. Endeavour’s Q3 results is again another strong quarter for cash flows with DCF, discretionary cash flow for the quarter of $30 million and EBITDA of $48 million demonstrating again the balance and sustainability of our business model.

We paid down debt of $15 million and continue to sell fund, our development and exploration projects. Discretionary cash flow for the nine months was $105 million up front $79 million for the prior year nine-month period. EBITDA for the nine months was $143 million up from $89 million last year.

Revenues were $71 million for the third quarter, down from $86 million in the second quarter. The decrease is primarily due to reduction in volumes for the third quarter. Sales volumes for the third quarter were 8500 BOE per day compared to 10,200 BOE per day in Q2.

As we mentioned in our earnings call at the second quarter, we expected a decline in the third quarter production in sales volumes due to down time for plant maintenance on several of our facilities. Bruce will cover production in more detail in a few minutes. We continue to expect our production for the year to be within the guidance we have previously given of 8600 to 9000 barrels of oil equivalent per day.

Turning to prices, interestingly, the run-up in Q2 of oil prices was matched by the drop in Q3, so that the average prices were comparable between quarters. Realized price for oil and gas combined in Q3 for Endeavour before hedges was $92 mostly unchanged from the $93 realized in the second quarter. Our hedges reduced our realized price for oil and gas by about $17 in Q3 compared to $15 in Q2.

Lease operating expenses per barrel remained constant at about $14 for both the quarter and the nine months within our expectations. DD&A per barrel is in line with the previous quarter’s holding at $24 a barrel. G&A has been an item of focus for us this year, it remains at about $5 million or just a little under for the quarter and we expect that to continue for the year.

You will notice the unrealized mark-to-market change is again a significant for Endeavour as it is for many companies with hedge positions, this quarter a large gain being the reverse of the impact of the oil price increases we saw in the second quarter.

We recorded an unrealized pre-tax gain in the quarter of $119 million primarily due to the drop in oil prices at September 30. As you know, the mark-to-market amount is based on the current price curve against our forward contracted volumes measured at September 30. The oil price at the end of the third quarter was $94 versus $139 at the end of the second quarter and average gas price at the end of the third quarter was $11 versus $13.40 at the end of Q2. So the drop in oil and gas prices in our mark-to-market accounting results in this large gain.

If you perform this calculation again today, an additional gain in excess of $90 million would result. With the recent steep decline in oil prices, we expect average prices to decline from the third quarter to the fourth quarter. However, the impact on our revenues is mitigated by our balance of oil and gas production and our commodity hedges. We are approximately 50% hedged on both oil and gas for the remainder of the year. Our average contracted price for gas on our hedges is about $11 an MCF barely in line with the forward curve and average contracted price for our oil hedges is $70 a barrel.

Given this position, the only exposure to price risk is roughly 50% of our liquid volumes, at a $65 oil price scenario our Q3 revenues would have been approximately $9 million less than those actually reported as $72 million, but because of the resulting cash tax affect, net cash flow would have been impacted by only approximately $5 million. During this past summer, we entered into collars for additional oil and gas volumes for 2009 with a four on the oil of $100 and gas of $11.

Therefore, for 2009, our average price per hedged oil volumes is $81. Our counterparty on the $100 oil hedge is BNP Paribas, one of the most financially sound banks today. The $70 hedges are with J Aron, a unit of Goldman Sachs. So we feel very comfortable with our counter party position there. Cash taxes for the third quarter were $12 million consistent with the second quarter. CapEx spending for the quarter was $15 bringing the year-to-date total to $47 million.

As we have previously stated, the majority of our drilling was skewed to the second half of 2008. We currently expect to invest about $60 million to $70 million this year in exploration and development activities with two important wells still to drill in Q4. John will walk you through our drilling plans for the remainder of 2008 in just a moment. As I said earlier, we paid down an additional $15 million in debt in Q3; we continue to balance a reduction of debt with the funding of our exploration development programs and expect that to continue in 2009.

Our ending quarter cash position is $26 million and as you may know, we have a rig deposit of $22 million. This deposit has been reset and now applies to the semi that we will use to drill Rochelle in a few weeks, therefore freeing up this cash deposit in the fourth quarter.

Overall, we are very comfortable with our cash flow, our business model and our liquidity position as well as our capital structure leading into 2009. Now let me turn the call over to Bruce.

Bruce Stover

Thanks Mike. Let me start with production and then I will give you an overview of some of our development projects. As for production, during the quarter we had very strong performance from our Norwegian assets at Brage and Njord, which are currently producing around 3200 BOE per day net. When we purchased these deals production was about 2000 BOE per day net, terrific performance from these two assets. Year-to-date through September, we have averaged almost 8900 BOE per day. On normal days, we produce between 9000 and 10,000 BOE per day during this quarter.

We have only one significant plant maintenance period during the rest of the year and that is underway at the Alba field currently. We will come out of that about mid-month this month and go back into pretty much steady state production thereafter. This has been incorporated in our forecast and in our guidance. We remain confident in our net production guidance in the range of 8600 to 9000 BOE per day net for the year. As far as development projects, let me start with Columbus. Columbus is operated by [Inaudible]; we have a 25% working interest.

We filed their FDP mid October to the regulatory authorities here in the UK. The FDP proposes a 24 kilometer Subsea tie-back to BPs ETAP system which is located to the west through the thorough the [inaudible] system. The partner’s plan is for a three-phase development strategy. The first phase will be two horizontal well in the core area of Block 23/16F, this is the area that has been appraised by the three wells we drilled to-date.

The Subsea system will be a four-slot Subsea manifold tieback through ETAP through a 10-inch pipeline. The second phase, we will consider one additional horizontal well on our block, which will be an eastern extension to the core area to be determined by the performance of Phase I production. There is a plan for a Phase III addition, one more, well contingent, well based on potential reserves that maybe extended in the Block 23/21 to the south operated by DG.

We hope for approval of regulatory authorities in the first quarter next year. We like the ETAP off-take solution because it has minimal modifications and it can be achieved with a reasonable start date compared to the other options we have. The operators goal is to achieve first production in the second half of 2010 from Phase I. Condensate production will go to deployed system and gas and this is mostly gas will go to the CAT systems; the CATs is a Central Area Transmission system that comes off of ETAP.

As for Cygnus, we have a 12.5% interest in the GDF operated project; the FTP is being prepared for Phase I development as we speak. We hope to file it by year-end, if it is not filed by year-end, it will file early in the first quarter next year. The off-take facility will likely be the ConcoPhillips operated CMS production facilities through the McAdam platform, which is located to the south. The environmental impact studies and pipeline surveys have commenced. Front-end engineering design work is in progress. We are targeting first gas in mid 2010 from Phase I, which will be the Fault Block I development.

There are two back-to-back appraisal wells, which John will talk about in a minute, which will add to our knowledge of this field and further development planning. The final one I want to talk about is Rochelle, Endeavour is the operator of Rochelle we have a 55% working interest. We as operator, have currently contracted the TransOcean, Sedco 704 which is a semi-submersible, which will drill, the last company offering their well for this year at Rochelle, it is going to be an appraisal well of the undeveloped Rochelle discovery.

We anticipate this spud dig will be about mid November just in a few weeks. We have begun preliminary engineering studies to get a fast track start on the development in the case of success. So we are real pleased with the development and progress of all these and look forward to a good result from Rochelle so we can get after this first company to operate a development in a short history. Now I want to turn it over to John, who will give you an overview of exploration activities.

John Williams

Thanks Bruce. I would like to cover three things as Bill mentioned, I would like to give you a year-to-date summary and then I would like to talk about what is left for the rest of 2008 and I would like to finish off with our plans for 2009.

Today, three near field explorations prospects have been drilled in Norway all discoveries. The first one Njord field area is the Galtvort prospect, we drilled a discovery well and followed up with a sidetrack well, both of those well bores confirmed a gas condensate discovery and the operator estimates the reserve size to be in the 10 million barrels of oil equivalent gross range.

The second well in the Njord area, Noatun C we found again gas condensate, the operator estimates the reserves to be between 30 million to 50 million barrels of oil equivalent gross based on what we have seen in the two well bores. The second well bore being a down dip side track. We drilled that well to confirm the gas water contact but failed to establish it, we didn’t see any contacts that means there is more gas even deeper down. So we feel like there is an upside to this 30 million to 50 million barrels.

A tieback to Njord is being worked by the operator and for Galtvort, we planned to drill a well, which is just at the south of it between Galtvort and Njord and we will have that drilled next year and the two discoveries together, hopefully we will be large enough to tieback to Njord as well. The third Norway discovery was in the Brage field, we drilled an exploration target called Knockandoo from the platform sidetracking out of an old production well. We found oil, we estimate between 1 million to 3 million barrels of oil gross and that plans to go onto production in the fourth quarter of 2008.

So in summary, this year-to-date five well bores drilled and all five found hydrocarbons. Turning to the rest of 2008, we have got two wells remaining to spud, Bruce has already mentioned the Rochelle appraisal well, that is a significant well for Endeavour, we are going to be testing an up-dip lower cretaceous discovery that is on trend with Goldeneye and Brodgar reserve estimates for this are 21 million barrels gross and our P10 are the P upside, P Big is 42 million barrels gross.

So we will get that well hopefully down by the end, that will add significantly to our reserves and we will be on a fast track production scenario. The second appraisal well Bruce also mentioned would be the Cygnus Fault Block IIb that is the first of two wells back-to-back. The first one will get started in 2008 and the second one will be spudded and drilled in the first quarter of 2009.

We have got 12.5% interest in this one and we were estimating the Fault Block IIb P mean volumes at about 165 BCF gross. The second appraisal well adds a similar volume of about 150 BCF gross and if you look at the fulfilled, it can vary anywhere from the low case of 400 BCF up to 1 TCF in the high case.

So we are very excited about this one. Now I would like to turn to our explorations plans for 2009, we are ahead of our position that we were in last year this time. We currently have 11 exploration assets that have been matured and are being considered for potential inclusion in our 2009 drilling program. Of these 11 wells, 2 are appraisal wells, I have mentioned Cygnus, the second one is Cyclops near the two gas discoveries in Block 353 in Norway and in addition to the two appraisals, we have nine exploration wells from which to chose, five in the UK and 4 in Norway.

So over the next month, these prospects will be reviewed including economics, risk, costs and the final program will be recommended to the board in early December 2008. As previously stated, Endeavour will continue to run exploration as a value based business, it will manage risk and equity, we will drill our best prospects and we will replenish our portfolio with attractive prospects. Bill will now take over and finish the presentation.

Bill Transier

Thanks everyone. We are obviously interested in your questions and comments, so Derrick if you would, let’s go to Q-&-A and then I will wrap it up with the conclusion of that with a few final comments.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Irene Haas - Canaccord Adams.

Irene Haas - Canaccord Adams

A question really regarding your three projects that is going to be developed Columbus, Cygnus and Rochelle. Would you be able to sort of point out in addition to start time to what kind of volume net to Endeavour we should expect and really looking at 2009. Is it going to be a pretty flat year in terms of production versus ’08?

Bill Transier

Irene, this is Bill. I think you can expect production in ‘09 to be flat to down. Most of that decline is related to what we expect to see out of Goldeneye, it’s held in there much stronger than we anticipated, but we continue to plan for some decline in that field, everything else we think should be pretty much on track. So there is some decline, the flat to down in ‘09 with these projects coming on in 2010 and as I have talked about several times in the past, if you could put all three of these projects on, we would have with the clients through 2010, we would have somewhere between 16 and 18,000 BOE’s a day of production on a run-rate basis. So the hope is, that we could move these forward into 2010 and have that kind of volume increase. So a substantial increase from where we are at today and a pretty exciting set of assets for us to work hard on to get on production.

Irene Haas - Canaccord Adams

Quickly would you remind me of how much money did you spend for each of the quarter this year CapEx wise?

Mike Kirksey

Irene, this is Mike, it was $15 million in the third quarter, it was $32 million through the six months, if I recall right, the first quarter was about 10 or 12.


Your next question comes from Peter Nicol - Tristone Capital.

Peter Nicol - Tristone Capital.

Bill just, it was interesting or maybe I missed some of it, if you could come back to your comment about the 100 million of cash flow for next year and maybe you could just give a little bit more color about sort of oil price, obviously you have just mentioned the production sort of estimate and, how much are your cash flow for next year is effectively hedged and then following on from that, if we still get oil prices to fall around today’s level. How do you see the priorities in terms of development, debt repayment and exploration spend?

Bill Transier

Well, you have asked a combination of questions Peter and they are all good questions. Let me speak to production and cash flow. As Mike commented on earlier about half of our production is hedged and you can split that kind of half and half between oil and gas. The oil piece of our production next year, which is say 30% of our overall production, is hedged at about $81 BOE and the rest would be subject to market conditions and you could put whatever price curve you want, our management case is running about $60 a barrel right now as we look at it.

Gas is once again, about half of that hedged and about half of that hedged at $11 in MCF and the forward market is a little bit above that right now. I think that we have run our internal cases at around $10 in MCF. So, if all that worked and we had the normal declines and we haven’t put out any guidance, we will do that next quarter for you in terms of our guidance for next year’s production, but with some decline, you would have north of $100 million in cash flow, probably 105 to 110, but we will try to refine that for you as we go into next year, but remember one thing Peter, when we did the acquisition at Talisman, we told ourselves and our investors that we were going to lock in $100 million of cash flow or more for the next three to four years so that we could go to work on some of the exploration and development assets that we had.

That is exactly where we are today, the only thing that has happened for us is that we had a great year this year in terms of commodity prices and the assets that outperformed our best expectations to-date and so we are subject to these kind of normal situation in ‘09 in terms of kind of normal declines and stuff, but we feel pretty comfortable about continuing to move forward our assets. Now you asked the second question about where the priorities are going to be? We continue to stay focused on financial strength and Mike continues to work on the balance sheet, kind of where we go there.

We will continue to pay down debt as we go forward next year, but we don’t really have any requirements to pay any debt down next year, although we do have another kind of market revaluation with the banks on April 1, of next year and we don’t really view that as a big concern from where we are today, because we should have assets coming into the asset base with our development assets at both Columbus and Cygnus as we go forward. That should add capacity and not take away from capacity on that.

Now what can happen to us is and that is why John talked about the opportunities we have on the exploration in the Frazer size, but if we have success at some things like Rochelle, we will have to put some capital of the work on those assets right away, because we want to fast track those towards production. Something like Rochelle and John talked about the P mean at 21 million barrels and the P10 or the P Big as he likes to call it, 42 million barrels, we own 56% of that, that is a significant asset for us and we will go hard to work on that and apply capital to that and it may mean that we have got to modify some of our exploration activities, but we will manage capital appropriately, we will pay down some more debt next year and we will stay within cash flow without having to go back to the banks.

Peter Nicol - Tristone Capital.

Can I ask one along which is, John mentioned the back-to-back appraisal wells on Cygnus. At what point do you think the partnership stops appraising the additional Fault Blocks and starts fast tracking development?

John Williams

Well, as Bruce mentioned we are already fast tracking our development. We have an FDP going in for Fault Block I, either the end of this year or first quarter next year. The appraisal is to give us more information for the additional Fault Blocks; it is de-risking or reducing the uncertainty in the reserves. I mentioned 400 to 400 BCF to a trillion with each appraisal while we drill that range will get smaller and smaller and we will know more of what kind of animal, we are really looking at.

We will drill some additional appraisal wells and the other Fault Blocks. We have got five Fault Blocks in total and as we learn from each appraisal well and a production well from the Phase I production, we will fine tune the program as we go along, but we are fast tracking just a key message there, we are fast tracking our Phase I development, all the partners are aligned and the FDP is gone in and we are moving ahead.

Peter Nicol - Tristone Capital.

Will you be satisfied with that or will they want the whole project size first.

John Williams

I will defer that one to Bruce.

Bruce Stover

Peter it is Bruce, the authorities are going to accept this phase development approach, they are anxious for us to move this thing along, I think once the other appraisal wells are done, we will be looking at up to two additional phases of development with as many as five to six platforms out there in this whole accumulation. The next phase of gas would be coming on probably a year later than the first phase and then the third phase shortly after that. So we are anxious to see the results of these appraisal wells, but I think this first phase development is something that they we have already warned the DDCC up to.

Peter Nicol - Tristone Capital.

That is great, thanks very much.

Bill Transier

Peter this is Bill, let me just add a couple of comments. I get a little bit tippled when John who’s been with us a year talks about this being fast tracked, we had the discovery well in April 2006. I don’t call that fast tracking and that we are just now drilling with the appraisal wells in November of 2008, but the good thing that has happened to this very substantial gas assets in the southern gas basin is as you know, Venture has bought out [TALO] and Venture and GDF have bought out Dion and now I think that the partners are aligned and all focused on exactly the same kind of strategy moving forward and we all want the same thing going down the road.

I feel fairly confident as Bruce has just said in the Phase development. We have got a substantial gas asset here, if it had been just up to Endeavour, we would have probably, subsea tieback the discovery well and head production and done the other stuff, but there’s a lot of smart people involved in this trying to make it happen, but it is going to mean a good amount of production for us. It is gas production, which is as we know fairly valuable and we are excited about moving it forward.


(Operator Instructions) Your final question comes from [Ed Eduscan] - Private Investor.

Ed Eduscan - Private Investor

On your bank line, you said you are going to have a next borrowing bridge determination for ’09, so if I back track eight months, I mean six months, I mean you must have just had one, can you tell us how much borrowing bridge availability you had after that re-determination?

Mike Kirksey

Ed, the normal bank lines with North Sea Banks, you have a re-determination twice per year, once in the middle of the year and then once at then end of the year. We just went through one for the June, it finishes up October 1, and the one at the end of the year finishes up April 1. We have about $15 million of valuables under our facility right now, if we wanted to borrow it down and as Bill said, as we go into the year-end, we hope to add assets to that facility for the April re-determination.

Ed Eduscan - Private Investor

The $15 million that you paid off in debt against the last quarter; did that payoff this line or your junior debt?

Mike Kirksey

We paid off the junior facility, if you recall earlier in the year when we paid off the second lean note that existed, we borrowed a $25 million what was called junior facility to help us do that with our goal to pay that off during 2008, we actually paid that off in August.

Ed Eduscan - Private Investor

Okay that has a higher interest rate anyway right?

Mike Kirksey


Ed Eduscan - Private Investor

Crude reserves for year-end ’08, SEC crude reserves, how does it work in the North Sea, once you file FDP, for example for Columbus, would you be able to book crude reserves for 12/31/08 or do you need to wait longer than that?

Bill Transier

Well Ed you ask a very intelligent question, this is Bill. Generally I would say that the FDP has to be approved before you can actually work those as two peer reserves, but we are actually talking to our reserve engineers and I think that the real issue in terms of being able to book reserves has to do with a development plan in place, a plan that you know is basically approved and supported by the regulatory agencies and capital budgets in place by the participating companies to go forward and execute on that development plan.

All of those are really in place for Columbus and so I think we have a strong argument to add those reserves into our reserve base this year, but we can’t speak to that until we kind of get through the process with Netherland who are our independent reserve engineers.

Ed Eduscan - Private Investor

Now what about in the case of this Rochelle well, are you going to drill later this month. That just an extension of an existing project, so would that not be able to be included?

Mike Kirksey

We had already counted the discovery well and the area that it would drain. I think that was around, if I recall 9 million barrels of oil equivalent gross and when we drill the appraisal well, P mean would take that up to 21 million, so it would be an increment of about 12 million barrels gross and just to remind you we got 55.6% of that.

Ed Eduscan - Private Investor

Right that is great. I guess --

Mike Kirksey

Those are 2P by the way.

Ed Eduscan - Private Investor


Mike Kirksey

2P once we have accounted to do.

Ed Eduscan - Private Investor

Last question is more of a generic question. Have you seen any movement in day rate rig costs coming down to match the lower oil price yet?

Bill Transier

Ed, this is Bill. We haven’t really seen that yet as is typical of service companies that are usually 6 to 12 months behind.

Ed Eduscan - Private Investor

Well, they are always quick to raise it when the oil price is going up, but there is not so much when it’s going in the other direction.

Bill Transier

There is no question, but we are seeing capacity building into the system and that capacity should drive rig rates in time, that is why you have seen us not go out and lock up big rig commitments for ourselves going forward, because we think that there will be some downward pressure and there will be some availability from some people that are cutting back on their capital budgets that allow us an opportunity to jump into that, most of what John has talked about and stuff, at least through the middle half of ’09 is pretty well taken care of from our perspective, but after that we are going to look at the market and see where it goes, but we expect to come down so.


There are no further questions from the phone audience at this time. I will now turn the call over back to Mr. Kirksey for any closing remarks.

Bill Transier

This is Bill. Let me just wrap up for us, hopefully you have seen and heard from our team here that we have had an excellent quarter from a performance standpoint in all pages of our business model that including operations, exploration and development with strong cash flows and our improving balance sheet. I just want to thank all of you for joining us today and we look forward to talking to you as the quarter proceeds and you see other hopefully positive events come out of the company. Have a great day.


Once again that will conclude today Endeavour International Corporation conference call. That you for your participation and have a wonderful rest of the day.

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