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Summary

  • The June 10, 2014 operational and guidance update reflects progress made by the company to stabilize and improve operation of its valuable assets.
  • The company has made significant progress improving its balance sheet. This continues to be the highest priority now and in the future.
  • The June 10 raised guidance suggests that Q2 2014 could turn out to be profitable since many one-time charges applied in Q1 2014 won't occur in 2Q.

Endeavour International Corp. (NYSE:END) is an independent oil and gas company engaged in the exploration, development and acquisition of energy reserves in the U.S. and United Kingdom. It has three producing fields in the United Kingdom, including Alba, Bittern and Bacchus, as well as three development projects, including Bacchus, Greater Rochelle and Columbus. The company also has interests in the Pennsylvania Marcellus area; Haynesville producing project areas in Louisiana; and Heath Shale Oil Play in Montana, the United States. As of December 31, 2013, Endeavour had estimated proved reserves of 23.5 million barrels of oil equivalent, or $2.4 billion at current oil prices. The company was founded by William L. Transier and John N. Seitz in February 2004 and is headquartered in Houston, TX.

2014 has been very rough for END shareholders with the stock price having reached $7.5 on January 22, 2014 and sinking to an all-time low of $1.02 on June 9, 2014.

On March 5, 2014 the stock plunged 20% to $4.1 after reporting a wider-than-expected net loss for 4Q 2013 when the company posted a net loss of 54 cents a share. Analysts surveyed by Thomson Reuters had expected a per-share loss of 33 cents. Revenue for the quarter was $116.9 million, or a 19.8% year-over-year increase and beat estimates by $27.7 million.

The next major leg down was when END shares plunged 22.7% to $2, occurred on May 7, 2014 after the company reported a Q1 2014 GAAP-based net loss of $44.9 million, or $0.91 per share - more than tripling its $14.0 million net loss, or $0.91 per share during the same quarter last year. Excluding one-time items, the adjusted net loss was $12.1 million, or $0.24 per share, which compares with a $12.1 million net loss last year and beating analyst estimates by $0.11 per share. Revenue grew 63.3% year over year to $94.2 million, topping analyst consensus by $23.65 million.

But what made investors nervous was the statement by the company that production during the second quarter could be down by as much as 4.7% from the prior quarter to 9,000 barrels per day following a month-long Scott platform in the North Sea beginning shutdown beginning in late March. This incident required that the three fields flowing across the platform to be shut-in until repairs could be completed.

Following Q1 2014 earnings release the stock traded above $2 until June 2 but it plunged to $1.02 by June 9, 2014 on high volume during an obvious short attack.

The company surprised the market by issuing an operating and guidance update on June 10, 2010. That action sent the stock flying to $1.95 before closing at $1.6 on almost 23 million shares traded, or 12 times the average trading volume. The news were significant - William L. Transier, chairman, president and chief executive officer, stated:

"Endeavour remains committed to generating value for its shareholders through exploitation of our assets, operational efficiencies and managing the capital structure. Since our last update to the market in early May, our three large U.K. assets have been online and producing at consistent rates. As a result, we are revising our second quarter production guidance to 10,500-11,500 barrels of oil equivalent per day ("boepd") up from our previous guidance of 9,000-10,000 boepd.

Regarding liquidity, we have executed another Forward Sale for $22.5 million and have settled an insurance claim for the Rochelle E1 well, damaged in early 2013, for £7.5 million (approximately $12.6 million). The insurance claim is expected to be paid before the end of this month."

Based on Mr. Transier comments, I expect that the company will report a profitable Q2 2014 on August 5, 2014 on revenues of about $95 million. Any positive net income will beat the 33c loss expected by analysts by a large margin and could cause the stock to rally to the $2 to $3 range. Why do I think Q2 will be profitable? 1) The bulk of large one-time charges were taken during Q1 2014, and 2) Because END would have received the $12.6 million insurance claim before the quarter ended as stated in the press release. I also expect that guidance for Q3 2014 will be bullish: 1) Because the maintenance downtime usually taken during the quarter will be significantly shorter than the same period last year (as stated in the Q1 2014 conference call), and 2) The June 10 news suggest that the operational difficulties are behind.

The short interest data for END suggests that there was a significant short covering immediately after the June 10, 2014 new release. However, the June 30 data shows that the short interest jumped back up to over 17 million shares, or over 25% of the outstanding shares. Shorts were perhaps betting that they had plenty of time to cover with 7 more weeks until the release of Q2 2014 financial results on August 5, 2014. I expect a bit of short covering as Q2 earnings release gets closer. In fact, there are only 12 more trading days until that important day.

I believe that healthy liquidity in Q2 and beyond will enable the company to make its scheduled debt payments without having to resort to sales of valued assets out of its $2 billion plus portfolio. And this brings another major disparity with the stock price, the market cap of less than $70 million compared to over $2 billion in proven reserves.

Aside from working aggressively to improve operations to increase reliability and therefore cash flows, the company is focused on improving its balance sheet (Company ended Q1 2014 with $55 million in cash or over $1/share). Here are some of the highlights of those efforts:

  1. Closed the London office and consolidated technical teams in Aberdeen, Scotland resulting in an expected annual cash savings of $15 to $20 million; and
  2. Refinanced the term loan and procurement agreements at a significantly lower cost, a combined interest rate reduction of approximately 4.75% (from 13% to approximately 8.25%); and
  3. Executed a Forward Sale for $22.5 million and have settled an insurance claim for the Rochelle E1 well, damaged in early 2013, for £7.5 million (approximately $12.6 million).

Regarding the recently refinanced term loan, Catherine L. Stubbs - chief financial officer, principal accounting officer and senior vice president, stated the following during the Q1 2014 conference call:

"We've achieved steps to date to reduce our costs of capital and delever. As we've mentioned to you in January, we closed on the $255 million senior secured first term loan. This has an interest rate of 8.25%, and it's a strip facility comprised of a term loan for $125 million and then an LC facility for $130 million. The net proceeds from these new facilities were used to refinance our existing 13%, $115 million credit facility and replace our 2 LC facilities, one at $120 million that was a 13% cost, and one at $33 million that was a 9% cost. Our new facility matures in November of 2017, which allowed us to push out the maturities of our existing facilities coming due in June of this year.

As I mentioned, our LC requirement has dramatically improved. During the quarter we implemented the tax relief put in place by the U.K. government with respect to decommissioning, and in February reduced our LC amount outstanding down to $90 million, down from $150 million at year end. The cost savings from the new facility, just under 500 basis points improved, combined with the reduced LC requirement, results in annual cash saving to us of $17 million."

Transier concluded the Q1 2014 conference call stating confidently:

"We understand the best thing we can do for the shareholders is reduce the debt load on the company and reduce the cost of capital. We're focused on that singularly. But obviously, we got to make sure that these assets perform at the level that we expect them to……we still think that these assets perform at a high level, and they do spin off good margins when they're operating. The capital structure is something that we will work through and it will benefit the shareholders as we move down the road."

The June 10, 2014 press release is a testament that the company has achieved operating stability. I expect that they are in the process of optimizing flow rates and working proactively to prevent bottlenecks and unnecessary downtime.

I believe that END shares are at an inflection point and will recover in value significantly as management demonstrates good execution by successfully addressing balance sheet and operational issues. The potential appreciation is significant considering that the value of its assets alone is worth over $20/share. END reminds me of Kodiak Oil & Gas Corp (NYSE:KOG), which was driven to under $1 in 2009 and now it's trading North of $15/shares. Investors looking into investing in END shares should be reminded that they could lose a significant portion of their investment if END executes poorly as it navigates the rough waters of the 2 to 4 quarters. Potential END investors should read carefully the risks and uncertainties listed in the latest company 10-K and 10-Q filings with the SEC.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Endeavour Operational And Guidance Update Suggests Potentially Significant Gains