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Executives

Mike Kirksey – EVP and CFO

Bill Transier – Chairman, President and CEO

John Williams – EVP, Exploration

Jim Emme – EVP, North America

Analysts

Thomas Martin – Thomas Weisel Partners

Michael Bodino – Global Hunter Securities

Al Shams – Midsouth Capital

Jon Evans – Edmunds White Partners

Tamera Alabum [ph] – Terry Hill Capital [ph]

Endeavour International Corporation (END) Q1 2010 Earnings Call Transcript May 6, 2010 10:00 AM ET

Operator

Good day everyone and welcome to this Endeavour International Corporation’s first quarter 2010 earnings conference call and webcast. Today’s conference is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Mr. Mike Kirksey, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Mike Kirksey

Thank you Anthony, good day everyone. Thanks for joining us today. Joining me here in Houston today is Bill Transier, our Chief Executive Officer; as well as Jim Emme, our Executive Vice President for North American Operations. Joining us from London is Carl Grenz, our Executive Vice President for Operations; and John Williams, our Executive Vice President for Exploration. Again, thanks for joining us today.

Before we start, let me remind everyone that this presentation contains our best 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 disclosures and our latest 10-K and 10-Qs. We do expect our 10-Q to be filed later today, but certainly before the end of this week. For some opening comments, let me turn it over to Bill Transier.

Bill Transier

Thanks. I, like Mike, would like to welcome you to the call this morning, and what you can expect in the next few minutes from us is a number of things. Obviously you know we have had a lot of progress during this quarter. We completed two financings early in the quarter that helped us kick-start our activity in the US. We will bring you up-to-date on the US activities, and I think you will see that we have a lot of things going on and a lot of things that will impact our second quarter.

We did have a very successful appraisal well that we announced earlier from Cygnus in the Southern Gas Basin of the UK North Sea. Because of all the activity that we have going on in the US, we notified Caza this quarter that we would no longer continue our joint venture relationship and that has moved on to a different direction. We did announce a little over a month ago that we were going to take a strategic review of our UK business because of what we believe is a dislocation between the underlying value of the assets and our stock price. And I will bring you up-to-date on that process as we go through the call.

All of our development projects that are ongoing in the UK North Sea have had positive movement during the quarter and I will try to bring you up-to-date on those. And really offsetting some of the good news was what we would classify as less-than-expected financial performance. That was primarily a result of lower production. Specifically, it was unplanned shutdowns and timing of some of the liftings that will shift production from first quarter into the second and third quarter.

Mike will walk you through the quarterly financials and bring you up-to-date on the capital items, and so, I am going to turn it over to him and then I will come back and bring you up-to-date on the operating results.

Mike Kirksey

Thanks Bill. As Bill said, production and sales volumes experienced an unfortunate timing in the first quarter. Our largest gas producer Goldeneye was closed for an extended period in January because of a fire at the onshore facilities, resulting in production in sales from Goldeneye being down 20%. The operator shale was able to take some advantage of the time and performed some maintenance activities that were planned later in the year, which should allow us to recapture some of this during the normal third quarter downtime periods.

Our oil liftings that drive sales and cash flow were very low in the first quarter. Timing and scheduling of tankers obviously affect this part of our sales. Several liftings have already happened in April with more schedules in the second quarter and this will result in second quarter liftings being 60% to 70% ahead of the first quarter.

While overall production for Q1 was 3,700 barrels a day oil equivalent, production in the second quarter from our existing producing assets is expected to be back in the range of 4,000 to 4,500 barrels a day and sales obviously more than that with the delayed liftings in the 4,500 to 5,000 barrels range. US production is small right now, but we look forward to what the US drilling will add here in the near future. So, while we like production sales to continue in a consistent predictable manner, it doesn’t always happen that way. A similar situation occurred last year in the third quarter and the fourth quarter results demonstrated that this catch-up of financial results.

Covering a little more of the details now, first quarter had an average Brent oil price of about $76, up slightly from the fourth quarter, resulting in average price when you include natural gas liquids in our production of about $70. Average gas prices also increased from about $4.25 in the fourth quarter to $5.50 in the first quarter. Our hedge program for 2010 was a slight profit in the first quarter. We made money on our $10.50 gas hedges, but our average price was reduced by our $69 oil hedges.

Our operating expenditures and G&A expenses continue at expected levels, and we expect the forecast ranges for the year to continue to be accurate. We did report an impairment in the first quarter relating to the finalization of the program with Caza as Bill mentioned and abandoning due to mechanical problems of the Alligator Bayou effort in South Texas. While we discovered some reserves and have minimal production from these efforts, the reserves were not enough at average prices to recover all of our costs. Likewise, interest expenses is at expected levels. Two important notes here just for your information. About 50% of our interest expense is non-cash, and people asked me about that regularly, and secondly, about 1.5 million per quarter, while it was previously reported as preferred dividends is now reported as interest expense.

Speaking of the preferred holders, when you read the 10-Q, you will see that we had one fund that converted most of its position in Q1. They had about 5 million of the preferred. Those shares have entered the market in a very orderly manner and none of the other preferreds have informed us of any intent to convert their shares. Other income on the face of the income state is a translation gain as the Dollar strengthened against the Sterling in the first quarter.

Looking forward, we continue to estimate production in 2010 to be in the 4,500 to 6,000 barrels of oil equivalent per day range, which includes some add from US production in the second half. As Bill will cover in detail, we have several US wells at or near total depth in completion, which we are excited to get the result from early in the summer. As I mentioned in our fourth quarter 2009 call, the overall financing goal for Endeavour as we move through 2010 into 2011 is to synchronize cash flow and financings with spending. Like everyone else in our industry, we are monitoring capital and commodity prices of every day. We will adjust our capital spending as we move forward to accommodate our best thinking about commodity prices and capital.

In that regard, we are deep into expansion of our lending facilities. This is proceeding on several fronts and my hope is that during the second quarter to have this completed. Many lending institutions find the opportunity attractive. Our UK asset base especially with the recent Cygnus expansion is a very attractive collateral package, and the growing understanding of our valuable US position adds to this effort.

The growth portfolio of Endeavour assets when modeled for production and cash flow is very enticing, indicating operating cash flow in excess of $500 million annually when all the projects are turned on and running. We continue to be confident that the value of our underlying reserves in the UK, as well as our growing reserve base in the US will provide the support needed to achieve our financing goals this year.

While we are planning our financing alternatives assuming we proceed with our operational plans in the UK, our financing strategy will have optionality included so we can react properly to whatever happens in the strategic review process in the North Sea. I will stop there and I will turn it over to Bill for an operational update.

Bill Transier

Okay. Mike said upfront, we have our entire executive team here that will be ready to answer any questions that you might have at the conclusion of my remarks. I have got three things I would like to cover with you. One, kind of an update on the UK and both the development projects and our exploration efforts there. Two, give you an update on the accelerated activity that we have going on in the US. The third thing is, is I will bring you up-to-date on our strategic review process for our North Sea assets. And then at the conclusion of that, we will turn it over to all of you for questions that any of us might be able to help you with.

Going back to start with the UK business, as you all know, we had a very significant and positive development this quarter with the results from the Cygnus appraisal well in what we call Panel 4 now. We used to call these fault blocks, now we call them panels, and I will talk more about that in a second, but the appraisal was much better than we expected it. It now defines for us a common gas water contact between the eastern half of the field extending all the way to the western half of the field.

Because of that, the field area is expanded to the west and the north based upon preliminary mappings. Just so that you know, we have applied to the acreage in the 25th licensing round to protect that acreage to the north and to the west. And we were preliminarily awarded that acreage subject to an environmental impact assessment. We expect the acreage to be formally awarded almost any day and will announce that when the award does happen. We said in our press release this morning that the 1P reserves, actually the 1P reserves adds more than our expected production for 2010. So, we have already replaced reserves for the year with our appraisal drilling activity.

The continuing outstanding appraisal results on this Panel 4 now creates what we believe is an opportunity to optimize the field development plan with a new and more efficient concept. We are working hard on this and it involves much lower cost because now we have one platform versus several in what was perceived to be compartmentalized reserves where we now see that is not happening and we just have panels across the field. We also believe we can use subsea tiebacks that represent much lower cost. And all of that represents an NPV of a much higher amount because of less CapEx, more reserves and more production at the front end of the project versus the phase production development process that we have talked about before.

The commercial discussions are well advanced on the selected export route. All of this means to us though that you can assume that first production will be pushed back from what we had previously about in the fourth quarter of 2011. We can’t really say when we think production will be on, we have got work ongoing with our partners right now to address this new field development concept. But we do feel strongly as Endeavour that if we get after this, that production could be turned on by the middle of 2012. It’s a much simpler process today than what we had before, and we are working hard with our other two partners and workshops and other things to move this along as quickly as we can.

Let me move to Rochelle if I could. We are proceeding there with our front-end engineering and development process in preparing for project sanctioning in sometime around the middle of this year. We continue however to be frustrated with the responsiveness of the infrastructure owners and the unreasonable terms in what we consider a very simple development opportunity that extends the decommissioning to those owners by as much as 10 years and capture significant tail-end reserves for those owners. Endeavour and Nexen have been actively exploring in Block 1527 for over three years and are confident that the Rochelle field in this block can produce commercial quantities of gas with first gas fleet targeted for sometime in late 2011.

The field development plan for Rochelle envisioned that the field would be tied back to the Scott platform. As the operator of the Rochelle, Endeavor submitted to the Scott owners a request for the processing and exporting of those hydrocarbons from the Rochelle field, and we have been talking to them about this for over 10 months. In March of 2010, Endeavor received an indicative offer from the Scott owners, which the Rochelle owners consider to be unacceptable. This is kind of a process that many of you know has been going on for years in the North Sea. Therefore we move forward on the 23rd of April and submitted an application on behalf of all the Rochelle owners to the Secretary of State for Energy and Climate Change for a determination of the term for access to the Scott platform.

The determination process is now underway, a process which Endeavor understands from publicly available guidance issued by the DECC should take and their commitment is that it should take around 10 weeks. The Department of Energy and Climate Change has publicly stated that the determination process is desired to allow third parties to access existing infrastructure on fair and reasonable terms. Third-party access is part of the government’s commitment to promote greater competitiveness in the energy markets and to ensure the recovery of all economic hydrocarbon reserves. As part of the DECC’s role as regulator of the UK CS, the department seeks to ensure that the development option chosen by the prospective developer of a new field does not lead to the permanent loss of reserves, which could otherwise be recovered economically. The maturity of the UK means that an increasing portion of production comes from new fields, such as our Rochelle field, which are too small to support their own infrastructure to shore. Access the infrastructure services on a fair basis with a cost-reflective tariff is fundamental to bringing the best commercial option into line with the best economic option of a field’s development.

We expect this determination process to generate positive results, including a reasonable and fair commercial arrangement and those results should accelerate for us the approval of Rochelle’s FDP, the field development plan. If this process works as it should, I believe it will open up the North Sea in a way that’s not been seen there for over 30 years. We are excited about taking a leadership role in opening up the North Sea to production from new fields which is vital to the economy and the energy security of the UK. Once we open this up, upstream players, financial players can all see that they can return to coming from their investment and capital will flow back into the North Sea like it hasn’t been seen before.

Moving on to Columbus, we have completed our front-end engineering and development, commercial discussions are well advanced. We now have a off-take solution that we think is commercial. We are anticipating the projects sanction an FDP approval in the second half of this year and current target for first gas is sometime in the second half of 2012. The final development project we have underway is Bakhus [ph]. We are expecting projects sanctioned by the end of May with FDP approval shortly thereafter. The environmental statement has already been approved by the DECC, and we are targeting first oil in the second quarter of 2011. I think we are really on target with our partner Apache to achieve that production.

Now, let me just switch quickly to exploration activities. Obviously this quarter, the Cygnus appraisal well was successful. You have heard us talk about this in conferences and stuff to this point, but it was very successful in terms of defying of the Leman reservoir. It encountered at 54 feet high to prognosis. That higher quality Leman fluvial facies encountered the same as what we saw in our previous appraisal well at Panel 3. And in fact, each of the last three appraisal wells have tested around 30 million a day. So, we have extended the estimated ultimate recovery of the reserves and Cygnus dramatically. I think we attached to our press release this morning a map that kind of shows you what has happened there, and we have already moved the rig from Panel 4 over to Panel 5. We spudded that Panel 5 well last week, and you should expect that to take somewhere in the 45 to 60 days to finish that up.

We are going to do another field-wide 3D seismic in the second half of 2010. And then, we will move forward from there. A pretty exciting area. If the field grows to what we think it potentially grow to, it could be in the top 10 fields ever discovered in the Southern Gas Basin, and we are excited to be a part of that with our partners.

Moving on to West Rochelle, we started talking about this I think towards the end of last year and early part of this year. West Rochelle is a block that we own 100% and it’s a look-alike to the Rochelle development. It’s adjacent to our Rochelle block. The site survey was acquired in 1526C. We plan to drill a well in the second half of 2010 to potentially increase the value and the volumes of the Rochelle development. We are excited about that. Rochelle as you know, and West Rochelle are in a pretty impressive fairway of large fields and it looks like that Rochelle and West Rochelle is another part of that string of pearls that we are excited about.

Finally, the 26th round, as you know, we skipped a year in terms of licensing rounds in the UK. This one we were excited about, had a lot of activity applied for 17 blocks, and primarily in our two existing core areas with one potential core area given successful bids. The best opportunities in the last rounds or in the last few rounds were due to the first round relinquishments. And we are excited about the exploration and appraisal portfolio building that for continued activity in the UK going forward.

Let me move to the US activity. As we promised earlier in the year when we went out and raised a little bit of capital, were trying to capture that capital to accelerate what we saw was great opportunities in the US. Early in the year, we acquired interest in 526,000 gross acres, about 165,000 net in four resource plays in the United States, two of those being highly prospective and proven plays in Haynesville and Marcellus, and two front-tier plays, one in Alabama and one in Montana where the company is truly one of the first participants there.

We participated in drilling two wells operated by our partner Cohort and four relatively small working interest in third-party operated horizontal wells in Northern Louisiana and East Texas so far this year. We also through our arrangement with Cohort acquired interest in one well that is completing now in the Marcellus and one additional well in the Haynesville area. This provides us activities if you stayed with me there in eight new wells in the US. We expect completion results for all of these eight wells sometime in the second quarter and expect to see the Haynesville production impact us in June with continued activity through the rest of 2010.

Let me move now to the strategic review process in the UK and North Sea. Let me remind you that when we put our press release out discussing this, the process was focused on the goal of unlocking the underlying value in our UK assets, we just feel that the market discounts are stocked very heavily for the execution risk associated with the cycle times involved in the UK North Sea. In that press release and we have been consistent since then, we said that there was three potential results that could come out of that strategic review process. One would be to continue to develop and grow our business in the North Sea, which would involve some new financing, which Mike just commented on a minute ago. With the good results that we have had all quarter, particularly in the Cygnus area and now in the Rochelle area, this is something that we have to be very cognizant of, of one that we continue to try to get that value in our underlying assets, but that whatever we do, we coax the value out of those assets in a proper way.

The second alternative was to do a joint venture or some sort of similar arrangement with one of several larger companies to accelerate our business model in the North Sea, by building more scope and scale. You always heard us talk about the fact that we need more scope and scale if you are going to operate in a higher cost longer cycle time environment like the North Sea. We now have got traction in our business, we have moved the model from a pure exploration upstream company into what now appears to be a much lower risk development company, but we still need to be a lot bigger if we are going to continue to play in that arena over there.

The third option was to monetize some part or all of our UK business. If we did that, we would obviously work on a capital structure of the business and reapply some of those resources to the US. We get lots of questions from all of you regarding the timing of the process. I will tell you that the process is going extremely well, as we expected doing this and going through the thought process involved with all the alternatives that I just put in front of you. There is a number of other alternatives that have risen as a result of us just kind of working through this and talking to other parties about our platform of assets and people.

We have a fair amount of good news associated with the asset base as I just talked about, particularly Cygnus and Rochelle, and that impacts how we think about the UK process. We did not, in our press release, provide any guidance as to the timing on the completion of this strategic review process, and I won’t do that today. I can assure you a couple of things. One, the Board will do the right thing for the shareholders when we are completed, and we will move through this process as quickly as we can, that’s the right thing to do for our business, for our employees, and for everybody out there that’s interested in this process. So, that’s an update.

Let me now, if we can turn it over to Anthony to field some of your questions and answers.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Thomas Martin at Thomas Weisel. Please go ahead.

Thomas Martin – Thomas Weisel Partners

Hi, good morning, gents. First question just on Rochelle, you spoke about the tariffing process. Just tell us, does the proposed tariff make Rochelle uneconomic, or is it just reducing the profitability of the development?

Bill Transier

Well, Thomas, it’s always part of the process in the upstream business, you deal with it, with rate companies, you deal with infrastructure owners as to who thinks they should get the economic ramp out of the reserves that have been found. In this case, they were in our view and in our partner’s view, they were taken way too much economic ramp based upon other experiences in the North Sea, what’s fair and reasonable and what the incremental cost which are really negligible, almost negative to the Scott owners, because of the benefits they get out of us pushing the production across their platform.

So, we are not going to give up on that easily for our shareholders, and we are going to – that’s why we asked the DECC to step in and do a determination. This is a dance that has gone on and on for years and years in the North Sea, and I think it’s time to kind of set some standards about what is fair and reasonable tariffs over there going forward, not the least of which the stretch-out of the timing for small companies like us is painful because it pushes out NPV into the future.

Thomas Martin – Thomas Weisel Partners

Sure. Could I ask you then on the operating cash flow guidance that Mike spoke about in the future, what sort of production level, and I presume you are looking at commodity prices, I don't know, $80, $90, $100, something like that. When you are getting to $500 million per annum, what sort of levels are you looking at on production and commodity prices?

Bill Transier

Thomas, that is a five-year model that we run internally, and it assumes again the projects that we speak about are turned on in some ratable process across that time, and there is some risk result in our US portfolio. But the production level is upwards of 35,000 barrels a day in that model and out in 2014 and 2015, and we ran at kind of at the curve. We used kind of $80 oil generally speaking, and about $7 gas kind of as an average future price.

Mike Kirksey

Again, that’s just a model, it’s something that we think about in terms of our economics and how we see the fields developing and unfolding, projected costs and there is a lot of forecast in there, but it is indicative I think of the possibilities within Endeavor.

Thomas Martin – Thomas Weisel Partners

Okay, thanks. And just a final one and I will let someone else go. What was your proposed – can you remind us what was your proposed interest in those blocks to the west and north of Cygnus that you spoke about?

Bill Transier

This is Bill, Thomas. Let me just also say that, that model that we built is based upon the development projects we have in hand and the inventory of US properties that we are working on right now. So, it does not include which is what folks have historically asked any sort of hypothetical or exploration wedge, that is real projects that if we could put capital into work and execute on the timing and cycle times, you should see that kind of production level from us and those kinds of cash flows. So, it’s a pretty exciting model for us. Your comment, your question was the block to the west or West Rochelle block, we own that 100%. We would not expect to end up drilling that block at 100%, that’s not our model. And as you might expect with the success at Rochelle, and the success and kind of that fairway we are in, we have a lot of interest in parties wanting to come and be part of West Rochelle with us, and we are looking at that right now. We have already shot a drill site survey and we are moving forward with planning a well for the second half of the year, should be exciting for us.

Thomas Martin – Thomas Weisel Partners

Okay, sorry, I think I misunderstood. Did you say that you are applying for blocks in the Cygnus area to the west and north of your testing acreage?

Bill Transier

No, we have previously required for those blocks to the northern part of the field and some blocks around to the west, and so the southern area goes where applied for in the 25th licensing round almost two years ago. We were preliminarily awarded those blocks, Thomas, but it was subject to an environmental impact study that has been completed now. That’s why I said in my opening remarks that we expect those blocks to be formally awarded to us and our partners here in the very near future. Once we get that, we will put a note out to everybody to let them know that, that is in place, and what that means to us in terms of field area that we have under license.

We actually have a larger ownership interest in those protection acreage blocks than we do, the 12.5% in the existing Cygnus field. So, that expands our interest on kind of a weighted average basis as you go into the field.

Thomas Martin – Thomas Weisel Partners

Okay, that’s great. Thanks.

Operator

We will take our next question from Michael Bodino at Global Hunter Securities. Please go ahead.

Michael Bodino – Global Hunter Securities

Good morning guys.

Bill Transier

Hi Michael.

Mike Kirksey

Good morning Michael.

Michael Bodino – Global Hunter Securities

Just a few follow-up questions. Number one, just to follow up on the last comments on Rochelle, do you have a desired amount of working interest you would like to keep if 100% is too much? Is there a number that is a range that makes sense for you all?

Bill Transier

Michael, I think our strategy has changed. I mean, we, where we started out with Rochelle with 55% to 56% – 55.6% was probably higher than we would normally want to have, but when we were looking at allocating capital before we drill the Rochelle well and the tradeoffs between that, some of the exploration activities, we decided to keep it. But if you ask me, we would always prefer to be somewhere between 10% and 25% and 50% of a project going forward just because that makes good sense in our business. So, I don’t think you will see us do West Rochelle at anything more than our existing interest in Rochelle, but it could be something that generally we would like to stay between 25% and 50%.

Michael Bodino – Global Hunter Securities

Okay. Moving forward, on Cygnus, I know you are drilling Panel 5 now. Is drilling to the north contingent on 3-D or do your partners and you move a rig to the north and drill a well sooner than later?

Bill Transier

I will let John Williams respond to that.

John Williams

Well, the new 3-D we are going to shoot is actually, it covers two plus blocks. It’s 4411 and 4412, and the western three kilometers of 4413. The current 3-D survey we have actually is based on the former size of Cygnus, and the new 3D will cover the expanded size. Now, ideally when you would want to have all of your seismic in before you did the appraisal, but in this case, I think we have enough information from our appraisal drilling that we could potentially get ahead. Of course, that’s yet to be decided by the co-ventures. But what we are seeing is improved safety in the Leman. It looks like it extends to the north and west beyond the current seismic program. What the new seismic program will do is help to find this low-impedance, higher quality facies that we will be chasing in the development.

Michael Bodino – Global Hunter Securities

Okay. Sorry, I am just trying to take a couple of minutes here. That helps me. So, it sounds like more than anything else, after this well is drilled, the next well more likely to be early next year, 12 months from now?

John Williams

That would be a good enough estimate, yes.

Michael Bodino – Global Hunter Securities

Okay. A couple of US questions, and then I will get back in the queue here. Looking at the portfolio as it currently exists, starting out with, you are moving away from the Caza joint venture that you had. What does that do to your West Texas, South Texas portfolio? Do you keep it as is, do you monetize it, do you look for other partnerships in those areas?

Jim Emme

Yes, Michael, this is Jim Emme. We are looking at that right now, but I think we are basically looking at ways to preserve the asset and then likely rationalize it or monetize it.

Michael Bodino – Global Hunter Securities

Okay. And then my last question, looking at the shale portfolio, good acreage in the Haynesville, good acreage in the Marcellus, particularly in the liquids condensate window. We know Montana is oily. What is the hydrocarbon mix expected in Alabama?

Jim Emme

At this point, we are looking at that as a gas play.

Michael Bodino – Global Hunter Securities

Okay. And then thinking forward, and I know you have partners in each of these areas. Are you all slanted more toward oil and gas given the disparity in pricing in the US as you look at additional shale opportunities or if you are looking for additional opportunities?

Jim Emme

I think we are slanted towards opportunity. So, if there is opportunity in gas because of low prices, we will look at that. We obviously want to be cognizant of oil potential in these plays. And what’s great about virtually every shale play we are looking at is these are oil-prone shales that went into the gas window. So, there is going to be associated liquids and a liquid-rich portion of those plays as we understand them in different areas adjacent to where we were currently looking for gas. So, we will be opportunistic.

Michael Bodino – Global Hunter Securities

Okay. That helps me out. Thanks guys.

Bill Transier

Thank you Michael.

Operator

We will take our next question from Al Shams at Midsouth Capital. Please go ahead.

Al Shams – Midsouth Capital

I will fire three questions at you real quickly and give you a chance to respond to them. Number one, who is Cohort, tell us a little bit about who they are, their background. Number two, do we run the risk of drilling a lot of gas here in the continental US and ending up caught up in a gas glut because of all the shale operations going on? And then number three, talk a little bit about why you are attracted back to the US. What are the dynamics going on in the US that makes it much more attractive let's say than to recommitting more money into the North Sea or other areas?

Bill Transier

This is Bill and I will let Jim weigh in if he needs to do on this, but Cohort is the upstream E&P subsidiary of a large privately-owned service company called J-W Operating. They are a multi-billion dollar operation and they have a sizeable E&P company underneath them. They are actually the 9th largest producer in the Barnett shale. They drilled, once we got to know them with, they had a ton of experience. I think they drilled close to 140 horizontal wells at Haynesville, Barnett, Marcellus and others since 2004, and they are knowledgeable about these shale plays in and around the country because of their experience, and for us, they also represent another piece of intellectual capital, which is they have a big compression in metering business throughout these areas that we find to be very attractive. We spent a lot of time getting to know them and getting to know their strategy for the E&P operations. It’s always interesting when you have an E&P company that is inside of a service company. They have different kind of efficient capital models and stuff. So, we spent a lot of time getting to know them and we are very comfortable with them as a partner and they have been very good to us in terms of jumping into this going forward.

I would have to say the flip side of that, they got comfortable with us, as knowledgeable veterans in the upstream business and in the US, and they adopted us as their partner and we are going full speed ahead. We expect to do a lot more with them going forward. So, that answers your first question about Cohort unless there is follow-up on that. You asked about us drilling up Haynesville, Marcellus, potentially Alabama and getting into a gas glut in the United States, and part of my answer is in response to your third question about why we came back to the US. I personally have been doing deals in and around the US and other parts of the world for 35 years, and I have never seen the opportunity is good as it is right now in terms of being able to buy into an environment that frankly when we started Endeavor, we didn’t think we could be competitive in the environment that was there.

To be able to buy in on a rationale basis and be able to do a deal for us as a small company with a company like Cohort where we kind of pay as you go along the way at metrics as we have talked about before that are probably at least a third maybe a quarter of what they were just two years ago here in the United States, create a heck [ph] of a lot of opportunity. We actually believe that there is more upside in gas today than there is in oil. I know there is a lot of discussion about that worldwide. We spent an awful lot of time with folks that help us with this thought process, both domestically and internationally. But from one person’s mouth that being mine, we actually believe that the world including North America cannot operate on $4 gas for a long period of time. My belief is, is that if we stayed at this level, capital will not continue to flow back into the system, because capital has to seek a rate of return that’s reasonable, and that you will not get a little effect to the supply side of the equation, and then we will see some sort of a rebound.

Frankly, to be honest with you Al, I am wary as a smaller company trying to create a position for us out in the US, that’s why we jumped out here in January with a portfolio of assets, and we are trying to expand that as much as we can, but I am worried that we will see some sort of a rebound in prices and/or a rebound in the opening of capital markets that will create more completion than we are seeing right now, both in the US and potentially other places. So, we are going to be careful about how much capital we have put to work. We are really proving up our plays both in Haynesville and Marcellus even though they are proven areas, but we want to prove that up for our investors and then these front-tier plays at fairly low costs entrees for us over the next year to two years, pilot programs that will test what we really have and create the inventory for us going forward.

So, it’s not an expensive process for us and we don’t expect any significant production coming out of Alabama or Montana, and frankly, probably not for the next couple of years, and we probably won’t see much out of Marcellus until late this year or sometime next year. So, trust is that we have these discussions as recently as yesterday. (inaudible) here with us about the amount of capital we put to work but part of this is being able to prove that what we have and then move forward.

Al Shams – Midsouth Capital

Okay. Good enough. I think you have answered that very well. Thanks, again. I will let somebody else pose some questions.

Bill Transier

Yes, thanks.

Operator

And we will take our next question from Jon Evans at Edmunds White Partners. Please go ahead.

Jon Evans – Edmunds White Partners

Thanks. And maybe I missed this, I apologize. But you were drilling a couple of wells in Haynesville, and you don't have the metrics on them yet, or you do?

Jim Emme

This is Jim Emme. Yes, what we have got right now is production in the Haynesville at the Indigo Minerals well.

Jon Evans – Edmunds White Partners

Right, that was an existing one.

Jim Emme

Yes, that's at the Woodardville prospect in Red River Parish. And we are currently – we actually TDed a well which is immediate east offset a horizontal well and that well would be completed later this month.

Jon Evans – Edmunds White Partners

And what kind of production rates do you think it will – or do you just not have that yet?

Jim Emme

Don’t have it yet, but –

Jon Evans – Edmunds White Partners

And when do you think you will have it? I'm sorry.

Jim Emme

We will have it by early June.

Jon Evans – Edmunds White Partners

Okay, early June. Okay. And then I guess a question that I have for you just on the strategic review. You talked about it a little bit and you seemed potentially more positive and that there were some other things that were evolving. I guess, can you give us any more insight because as shareholders, it's frustrating, your company seems to be worth a lot more than it's valued, and you guys seem to be very good at finding oil and gas, but especially in the North Sea, you have a difficulty of bringing it on. You have pushed out projects a couple different times. And I guess it seems like it's your responsibility and the Board's responsibility from a fiduciary standpoint to really, realize the value in those properties. And I was hoping you could give us some more insight about how that process is going and kind of if you can give us any insight in how you think it may happen overtime.

Bill Transier

Jon, I have tried to do that as best I can, and you are absolutely right. We have a fiduciary responsibility to try to get the value to the investors, and as you know, the management team and Board are fairly significant investors in this company along with you. We have done a good job in the past of being able to one, find oil and gas reserves, but I think we have also done a good job that most recent example is Norway where we made a strategic decision to monetize those assets because of the dislocation between underlying asset value and our stock price. I think when we sold Norway, our stock I would argue reflected almost nothing in it for Norway because of the very long cycle times that are out there, and even though we have had success in building a G&G team and an exploration portfolio that actually, the subsequent buyers have had some success on, but they are going to have to spend a lot more capital and appraisal and openings over the long term that we weren’t as our size able to do. So, we were able to monetize that for investors, reallocate that capital both to the US and to the UK to try to build this model going forward.

What I can tell you is the following. We are going to continue to look at those same issues with respect to the UK. You made a comment which I take fairly that we have pushed out projects in the North Sea, and I would tell you that we haven’t pushed them out, others have pushed them out for us, and we fight against that kind of current all the time and trying to move projects along. I think it’s an issue for the North Sea, I think it’s access to infrastructure decommissioning of infrastructure are two major issues for them over there. They are going to have an election tomorrow. I am enthusiastic that something will change and actually has to change over there.

Whether that will change in time to impact our decision process in terms of how we come out of this strategic process or not, I don’t know, and in fact, I would doubt, but we will see how this goes forward. But one of the things we are not going to do is turn these assets over to somebody else and not get fair value for our investors as we go forward. So, I think you need to give us a little bit of time. I am not talking about years, I am talking about months to kind of work through this and come back, and we will continue to talk to you and our investors about how our decision process moves forward.

Jon Evans – Edmunds White Partners

Can you just give us any kind of insights so from the standpoint of, I mean when you announce the strategic review, would you say that there's more interest than you anticipated? I mean, are any of the discussions very far along? And then the last thing I was curious is you gave us last quarter your guy's assessment of NAV [ph]. We can all do it, but I'm curious what your guy's assessment roughly of NAV is.

Bill Transier

Whatever we said last quarter, it’s gone up significantly because of the improvement in both Cygnus and Rochelle and that NAV that we talked about last quarter did not include anything for US, and I think it’s unfair that start applying NAV to the US until we show you some results from our drilling activity. So, I still think that our stock price is or should be several multiple of where it is at, if that gives you an indication of what we think it should be. And I think Mike indicated earlier that if you were able to put capital to work, get these projects up and running, you end up with a company that you would generate reasonably 500 million plus a year in kind of cash flow.

You can do a multiple of that, and say what’s this business worth and then discount it for execution risk. That’s what we do, and that’s how we think about this business going forward.

Jon Evans – Edmunds White Partners

Okay. Thank you for your time. I really appreciate it.

Bill Transier

You bet, thanks Jon.

Operator

(Operator instructions) We will move next to Tamera Alabum [ph] at Terry Hill Capital [ph]. Please go ahead.

Tamera Alabum – Terry Hill Capital

Yes, I have a quick question. If you could just compare I guess the balance sheet as it is today to the pro forma 2009 number, just wanted to understand how it all worked with, because it seems like this is like a condensed version on the debt. So, just specifically on the debt, I just want to understand.

Bill Transier

Yes, really, the only change in the debt from the year-end number was the addition of the $25 million facility that we did to kind of end of January. There is some reclassification going on just because of the way the accounting rules classify things, but that’s really the only change.

Tamera Alabum – Terry Hill Capital

Okay. And so the current, what's in the current debt of $79 million is the bank, senior bank facility of $50 million, the junior lending facility of $25 million and –?

Bill Transier

Right. Plus one $5 million [ph] payment that’s on the preferred not out in the early part of or in the first quarter of next year. Those account receivables the three components.

Tamera Alabum – Terry Hill Capital

Okay. I understand. And then just to go back to the Rochelle, as I understand it right now, there was no way to bring that production online unless there is an agreement with Scott, whether it's been posed or agreed on just bilaterally?

Bill Transier

Yes, and the way it works in the UK, you have to have to the – really anywhere, you have to have commercial terms over the infrastructure that’s planning to take them. We asked for those commercial terms about 10 months ago, have done all the engineering work, there is not really – this is not a complicated matter from an engineering point of view in terms of going over the Scott platform. And we are into this dance now between the infrastructure owners and us on that. What we have chosen to do is put it into the hands of DECC and let them make the determination, because it’s something that I think is very telling to us in terms of how the North Sea should work.

We have done a lot of work on this in the years that we have been over there. And I think the results are going to be very positive for us and our shareholders as we move this thing along. The other thing that’s really important about that determination process is by their own rules they should get this done in about a 10-week period. I don’t know, I can’t sit here and promise you that’s going to be done in 10 weeks, but that’s their own rules and this process or standardization of how they are going to do determinations is going to work effectively for them, they have got to work through that process efficiently and get the results out.

If that helps, from our point of view, that speeds up timing of what we saw trying to deal with the infrastructure holders directly and stuff. So, I am actually pretty positive about the fact that we can work through this, get commercial terms, get the FDP approved and move on to setting this production in place and Carl who is on the line with us still thinks that if we can do that in an efficient manner in this kind of timeframe, we still have the ability to try to turn the production on by sometime before the end of 2011. That’s our goal.

Tamera Alabum – Terry Hill Capital

Okay. Is this the only site where there are these kind of deadlocks?

Bill Transier

No, I think what this gets played out, this is why we are excited about being a leader in the industry. The industry is looking to us.

Tamera Alabum – Terry Hill Capital

But within the Endeavour portfolio I guess?

Bill Transier

We got the issue of – you put every single producer, every single field development plan that goes on is going through the same issues with respect to infrastructure holders. That is why I believe that capital has kind of flowed away from the North Sea. I think that’s in some respect why our stock is discounted for execution risk. That’s why we are taking bold statements and bold actions to try to unlock that value on behalf of our shareholders.

Tamera Alabum – Terry Hill Capital

Okay. And then on the Montana, the Frontier oil shale play, I know there's this map and you circled it, but can you list like specific counties or something if I wanted to do a little digging?

Jim Emme

Yes, I think sure. I mean generally speaking, Rosebud, Garfield counties.

Tamera Alabum – Terry Hill Capital

Okay, great. Thanks a lot.

Jim Emme

You bet.

Operator

(Operator instructions) Next question is a follow-up from Thomas Martin at Thomas Weisel Partners. Please go ahead.

Thomas Martin – Thomas Weisel Partners

Hi again guys. Just a general question on the debt side. Are you able to give us any information regarding your discussions on renegotiating your facilities? I think you have got something of the order of, what, about I think $250 million maybe of gross debt outstanding, probably $70 million-odd of that is bank debt, I think. Do your lending banks just overlook the longer term, longer maturity notes that you have got outstanding, seeing as this is going to be asset-backed debt? Are they just looking at the asset value and seeing how much they would lend individually against those assets, excluding all of the longer maturity notes that you are also, could you –?

Bill Transier

All of the banks do exactly what you said, Thomas. They looked at it from an asset basis, but they also look at it out in the future, okay. The more aggressive ones, I say more aggressive, the more partnering ones look at it in a step process. In other words, you get to go through one step and you get to the next step and you get to the next step. They all see the – they would ask and they see these models that we have talked about in terms of how the company can develop overtime. But don’t limit your thought process to just banks as you and I know banks. In the US, the capital markets are very open to oil and gas companies now, and I am talking about lending institutions other than what you and I would just call banks. So, it’s a very active market in the US now, there’s lot of transactions that are going on. So, it’s not just banks we are talking to, it’s others also.

Thomas Martin – Thomas Weisel Partners

And you presumably wouldn't be willing to give us any indications of what sort of capacity you think your assets might attract?

Bill Transier

It’s too early for me to say that, but you can look at the NAVs that we talk about and the multiples that we talk about, and banks look for some coverage factor and depending on the type of facility what the coverage factor is, but we can see an easy calculation of 200 million in terms of just asset coverage, not necessarily we are going to raise that much, but we can see that kind of coverage if you just do the math.

Thomas Martin – Thomas Weisel Partners

Okay. That’s great. Thank you very much.

Operator

No further questions in the queue. Mr. Kirksey, I would like to turn the conference back over to you for any additional and closing remarks, sir.

Mike Kirksey

Thank you Anthony and thank you again everyone for joining today. Thank you for the good questions and lively interchange. We appreciate that very much. Stay tuned and look for some more good news from Endeavor as we go forward. Thank you again, have a good day.

Operator

And this does conclude today’s presentation. We thank everyone for their participation.

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Source: Endeavour International Corporation Q1 2010 Earnings Call Transcript
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