Endeavour International Corporation Q4 2007 Earnings Call Transcript

| About: Endeavour International (END)

Endeavour International Corporation (NYSE:END)

Q4 2007 Earnings Call

March 12, 2008, 10:00 am ET


William (Bill) L. Transier – Chairman, Chief Executive Officer, President

Bruce H. Stover – Executive Vice President, Operations and Business Development

J. Michael Kirksey - Executive Vice President, Chief Financial Officer

John G. Williams - Executive Vice President, Exploration

Rusty Fisher – Vice President, Investor Relations


Irene Haas – Canaccord Adams

Peter Nicol – Tristone Capital Inc.

Joseph Allman – J. P. Morgan


Ladies and gentlemen, please stand by. The conference is about to begin. Good day, everyone, and welcome to this Endeavour International Corporation’s 2007 fourth 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 Vice President of Investor Relations, Mr. Rusty Fisher. Please go ahead, Sir.

Rusty Fisher

Thank you, Cynthia. Good morning, everybody, and thank you for joining us today to discuss our fourth quarter and full-year 2007 results. Overall we’re pretty happy with the year and we think 2008 is shaping up to be even better.

Before we get started let me remind everybody 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 disclosure on forward-looking statements in our 10K and 10Q, as well as our recent press releases. The 10K should be out in the next few days, just for your information.

On the call to discuss the quarter and the year are the four members of the executive team: Bill Transier, our chairman, president, and chief executive officer. Bill is going to discuss the highlights of the year and then conclude our formal presentations with comments regarding our strategy and the outlook for the company. Mike Kirksey, our executive vice president and chief financial officer. As most of you know, Mike joined Endeavour in September of last year and has already made a meaningful impact on the company’s financials. Mike will walk everyone through the details of the results for the quarter and the year. Bruce Stover, Executive Vice President, Operations and Business Development. Bruce will discuss the performance of our assets last year from a reserve and production point of view and what we should expect from them in the coming years. John Williams, Executive Vice President of Exploration, is on the line as well. John joined us this fall and brings a wealth of experience and valuable insight to our exploration efforts. John is going to discuss the exploration successes we had last year, the appraisal of the Columbus discovery, and he will also discuss the preparations for our upcoming drilling program that we’ll kick off in the next few weeks. He also will give you some details on kind of the changes and adjustments he’s made to help improve the exploration results in the future.

So with that out of the way let me turn the call over to Bill.

William (Bill) L. Transier

Thanks, Rusty. Good morning to everybody. Good afternoon to those of you over in Europe. Let me just start off by saying what Rusty said, that 2007 was a very significant year both from a growth and transition point of view for Endeavour. Part of the year on the heels of a large acquisition of UK North Sea oil and gas properties. That acquisition was sizeable and complex, but one we deem critical to the long-term sustainability of our company. We have proven that we have the ability to make acquisitions that move our company forward strategically and generate excellent returns on capital for the company. It is clear we are now beginning to show we have a competitive advantage among our peer group in a very difficult capital market environment.

Let me just review 2007 and some of the accomplishments before I turn it over to the rest of the guys to speak with you. Production and revenues were both up over 300% in 2007.

Cash flow was up to $113 million representing about a 10-fold increase over 2006.

G&A was down overall $2 million representing a 9% decrease over the prior year. Importantly, on a per unit of production basis, G&A improved by 72% demonstrating that our strategy of assembling a team of quality professionals and then building the asset base around them was the right way to build a business for the long term. We definitely have shown we can integrate large and complex transactions seamlessly.

We’ve reduced debt by $40 million during 2007 while still spending over $88 million on capital projects. We had a 40% exploration success rate. This success combined with revisions allowed us to replace over 100% of our production for the year.

We also had a successful appraisal of our Columbus discovery and we’re preparing for an appraisal on the Cygnus discovery of 2008. Those two discoveries, as you remember, came in 2006 and found over 11 million barrels of P&E (sic) net reserves to the company.

We currently have five significant development projects moving forward that if we execute on these properly we’ll double our production in the next three years. We also add a significant strength to our leadership team, as Rusty talked about, in the fourth quarter of last year and we just completed our listing process on the main board at the London Stock Exchange where we hope to gain better valuations for our investors. This move gives us the option over time to move away from the US markets and the regulatory process there if we don’t receive what we consider proper valuations for our shareholders.

Finally, our management team and business strategy gained significant credibility with the investment and commitment of over $100 million by the Smedvig family of Norway late in the year.

Endeavour is a very good company. We have a balanced strategy that includes disciplined financial planning and capital deployment, excellent exploitation of our existing asset base, a significant exploration portfolio, and a proven ability to make strategic acquisitions combined with and experienced management team.

Currently our company is producing in excess of 10,000 BOEs a day of production. With that we should generate foreign access of $100 million in cash flow for 2008 just like we did in 2007.

We’re progressing 10 identified exploration and appraisal projects to add value in the future.

We are actively advancing five development projects that I said should double our production in the next three years.

And we have a team of professionals enthusiastic about the potential to build significant shareholder value in the near term.

Now let me turn the call over to Mike, then Bruce and John, to give you an update on various matters. Mike?

J. Michael Kirksey

Thank you, Bill. Endeavour reported today a record revenue and discretionary cash flow of $176 million US and $113 million, respectively, for 2007. This result reflects the excellent assets the company has accumulated over its history, as well as the current attractive commodity prices.

Revenues of $176 million reflect sales of 3.3 million barrels of oil equivalent for the year, an increase of over 300%.

Discretionary cash flow was $113 million and when combined with cash flow from working capital during 2007 the company achieved cash flow from operations of $128 million. Using this cash flow, the company paid down debt of approximately $40 million and spent $88 million on maintenance development and exploration capital projects.

Obviously the company benefit from the ongoing upward trend in commodity prices. At the time of the Talisman transaction last year the banks required about 50% hedging at that time. Also, we wanted to ensure stable cash flows to invest in the future, so about half our production is hedged while the remaining production receives current high commodity prices.

During the fourth quarter our average realized oil price was $69.00, net of differentials. Regarding gas, we continue to enjoy an excellent hedge position and a strong gas market resulting in our average realized gas price for Q4 of $10.85, with a portion of our gas actually hedged at $13.00 in the fourth quarter. For the year, our average realized price was approximately $65 for oil and $8 for gas.

Revenues were up 15% in the fourth quarter compared to Q3, while production in the fourth quarter was down about 15% compared to the previous quarter as a result of several unplanned mechanical issues and scheduled down times and the timing of liftings. We still delivered our highest quarterly revenue in the company’s history. While on that point, we record sales based on liftings, not production. Because of the delay in the recognition of one lifting until just after the year end for accounting purposes, revenues are based on approximately 9,000 barrels of oil equivalent per day for the year. If the lifting had occurred sales would have been about 9,200 barrels of oil equivalent per day.

Operating expenses for the fourth quarter were $14.50 per BOE, higher than the average for 2007 of $12.50.

Q4 LOE was higher as we experienced, as I said, down time and repair costs at Goldeneye, Bittern, and the IVRR complex that increased expenses at a time when the wells were shut in for repair. These fields are all back to normal production rates.

DD&A and G&A continue to run about $20 million and $5 million respectively per quarter consistent with prior 2007 quarters. The DD&A rate of $27.00 BOE reflects the full quarter impact of 2007 spendings and the slight increase in future abandonment cost estimates.

As Bill said, I think it’s important to point out that G&A is down almost 9% between 2006 and 2007 even though production in revenues are up over 300%. This reflects the solid infrastructure built within Endeavour and its capability to leverage the existing people as we continue to grow. Headcount was about 60 people as we started 2007 and continues in that range.

As a result of good production, excellent prices, and expense control, income from operations was $17.5 million for the fourth quarter compared to $11.8 million for Q3 – again, the highest in the company’s history – and $38 million for the year compared to a loss from operations of $4.3 million in 2006. We are very pleased with the result and look forward to an even better 2008.

With regard to derivatives, we attempted to explain the accounting for these contracts in our press release. Simply stated, that the current state of accounting requires a company to report each quarter the impact of the change in market prices on all future production under the contract. In 2006 this was a significant non-cash gain for Endeavour, which we told you not to give us credit for, and in 2007 with oil prices significantly up this is a non-cash charge. This accounting treatment will continue to cause swings in ours and other companies’ net results as prices fluctuate from quarter to quarter.

Cash taxes for 2007 are about $3.7 million and are included in the calculation of discretionary cash flow. These are primarily petroleum revenue taxes in the UK as we continue to use existing NOLs for tax purposes.

Turning to the balance sheet, 2007 was a very positive year for our overall financial position. With $128 million of operating cash flow the company paid off debt of $40 million while continuing its planned capital programs. In addition, shortly after year end we extinguished the $75 million second lean, which was expensive and cumbersome for Endeavour. We are now able to pay the preferred dividends in cash, eliminating the additional shares that were coming into the market each quarter. Our financial position continues to improve and our capital structure is more simplified as we continue to use operating cash to fund capital expenditures and repay debt.

We are currently in the process to revalidate our senior borrowing base facility with year-end reserves. The result of this is expected to generate a very comfortable borrowing base, primarily resulting from our excellent year-end reserve position as well as higher commodity prices.

We expect to again reduce debt in 2008 and continue with our development and exploration spending plans of around $90 million, all from internal cash flow.

I cannot emphasize enough the strength that comes from having significant cash flow in this market. There are many companies that do not have this advantage and they will have to approach the capital markets in these difficult times or find themselves without options.

Additionally, as you saw in our recent reserve report release, our technical team has identified opportunities to increase production in the relative near term from the ‘R’ Block (sic) complex which we operate. The combination of these new production opportunities combined with our ongoing development work in previous discoveries and our strong cash flow have positioned us to be very optimistic about 2008 and beyond.

I should not conclude without mentioning the investment by the Smedvig family near year end. We are honoured that they chose Endeavour as their vehicle for investing in the North Sea E&P industry. I worked daily with the Smedvig team to finalize the investment and found them to be extremely confident and understanding of our business and opportunities. We welcome them as a long-term partner with Endeavour.

I will now turn the call over to Bruce.

Bruce H. Stover

Thanks, Mike. As we reported in our two recent releases, 2007 was a good year for production and reserves. We have interest in 10 producing fields – eight in the UK and two in Norway. We see a well-balanced contribution from most of these fields, which is a major factor in the solid production performance we achieved in 2007. In the fourth quarter we had an abnormal number of short-duration operational shut downs, but overcame them with strong performance in several fields, notably Goldeneye and Brage, and the late contribution of the gas export project at Njord.

Production performance continues to be very strong in the first quarter of this year, as Bill has mentioned, averaging over 10,000 BOE per day to date.

Looking beyond 2008 we continue to expect the development projects at Columbus, Cygnus, and Rochelle, combined with exploitation activities in our ‘R’ Blocks. Combined with those act ivies we expect to stay on track to effectively double our production by 2010.

Now let me move on to reserves. Our reserves were determined at year end and reported by our independent reserve engineering firm, Netherland, Sewell and Associates. Their work was an extension of the Confident Persons Report, which as you may recall was produced to the fourth quarter 2007 as part of our obligation for listing on the LSE. As a consequence of that, we asked them to determine reserves for proved or 1P, proved and probable or 2P as normally is reported in Europe, and proved plus probable plus possible or 3P. All reserves were determined in accordance with SEC and Society Petroleum Engineering, or SPE, guidelines and definitions.

At the end of 2007 2P reserves were 29.8 million BOE versus 29.6 million BOE at year-end 2006. Upward revisions to prior estimates, plus extensions and discoveries, have more than replaced production for the year. Measured contributors to this result were Goldeneye, the ‘R’ Blocks – which are Renee, Rubie and Rochelle, which we operate – and Brage and Njord in Norway.

Proved reserves are 8.7 million BOE, which compared to 9.9 million BOE at year-end 2006. Upward revisions were 2.1 million BOE for the year.

In 2008 we expect that reserves currently carried as probable will be moved into approved categories as certain drilling results and approved plans of development materialize in our ‘R’ Blocks and at Columbus and Cygnus.

In our release you will also have seen that we reported 3P reserves, which include possible reserves. 3P reserves are 67 million BOE at year end. This compares to about 47 million BOE at year-end 2006. This increase is largely a result of recognition of potential upside results in our Rochelle, Cygnus, and Columbus assets as they are fully developed and begin producing.

As Bill has continued to emphasize, we are extremely pleased with the quality and performance of our base assets, as well as the increasing recognition of the growth potential in reserves and production from several of these assets, all of which bode well for our future.

I’ll now turn you over to John Williams, who will review our exploration activities.

John G. Williams

Thanks, Bruce. I’d like to talk about our 2007 exploration successes and then mention our plans for 2008 and 2009.

In 2007 we had two near field exploration discoveries that were drilled from platforms in producing fields. The first was the Brage Balmore (sic) that drilled into a lower Brent reservoir and found oil. The second was the Njord North West Flank exploration tail to a production well that also found hydrocarbons in the Njord field. These two successes resulted in a 40% exploration success rate for 2007.

In addition to the exploration drilling we also had a successful appraisal of our 2006 Columbus discovery completing two well bores into the discovery. The 12 well and the 12Z well gave us sufficient information to declare appraisal complete and we’re now moving forward with development planning.

In addition, we did significant G&G work on the 2006 Cygnus discovery and now we have plans and approval to drill our first appraisal well on Fault Block 2B in the field in 2008.

Then lastly, in the last quarter of the year we put together a 10-well exploration drilling campaign that will take place with six wells in 2008 and currently four wells in 2009.

Moving to 2008 drilling plans, we have three wells planned in our near field low-equity wells. We’re going to kick off our drilling in the second quarter of 2008 with the Geld Bort well (sp) and that’s going to be followed second quarter with the Nowaton (sp) sea well. Both of these wells are near the Njord field. And in the third near field well will be another Brage tail targeting the Nakandu (sp) and Talisger (sp) prospects and that will spout in the third quarter.

The key exploration wells for 2008 are the Rochelle strat trap in the ‘R’ Block area and the Jadewell (sp) and the Agat (sp) area near the two gas discoveries that we have.

And then lastly, I’d mentioned that we’re going to drill the Cygnus fault block to appraisal well beginning in fourth quarter.

Moving to 2009, we’re going to drill four wells. We’re going to drill the Geigrid (sp) well, spudding in first quarter in 2009. This is also near the Njord field. And then we have three key exploration wells. The Aegus (sp) and Mon (sp) wells in the tertiary play in Norway and the Tesla (sp) well, a high-temperature, high-pressure well in the UK. All are significant wells for us and will spud in the first and second quarters with that program finishing about mid-2009. And I will say that we’re still putting our 2009 program together, so there could be more wells in addition to these.

And last I’d like to finish, I’ve been at Endeavour now since October the 1st. What’s going to be different going forward in our exploration plans. Firstly we’re going to have better management of our risk and working interests. Two, we’re going to have lower working interest in general to get into more wells to increase our chances of letting our portfolio work for us. Third, we’re going to avoid the very high-risk wells that have too critical risk in that industry has shown that these typically or seldom work and really there are very few winners playing the very high-risk end of the exploration game. We’re going to be more focused when replenishing our portfolio. And lastly, we’re going to be value based, letting economics help us make our decisions about which prospects we drill.

That’s all for me. Bill?

William (Bill) L. Transier

Thank you, John, Bruce, and Mike. Now let me just talk a little bit about what you can expect from Endeavour during 2008 and beyond.

We talked about it a lot already, but you can expect us to exploit our existing asset base, operate those assets with the highest level of professionalism while remaining conscious of our obligation to both health, safety, and the environment.

With success you can expect us to control costs, double production, and fund the growth activities of our company for the future without the need to go back to the capital markets.

Next you can expect us to aggressively pursue acquisitions that accelerate our business strategy and add scope and scale to our operations. With cash flowing production, an extensive exploration portfolio, and an experienced professional team, we feel like we have a competitive advantage versus most of our peer group operating in the North Sea.

However, as all of us know, our stock price remains at a discount to our peers and that creates challenges for us in regards to relative value transactions. If you just looked at the period from just before the announcement of the Smedvig family investment late last year to today, we have closed the gap on market values with our peer group significantly. We take that as support for our business plan and its execution.

With that said, we have shown the ability to do difficult and complex transactions when they were in the best interest of our shareholders. Consolidation of the North Sea peer group is inevitable and we plan to be a part of that activity.

Exploration, as we’ve always said, has to be a core competency in order to grow an E&P company, whether it’s in the North Sea or anywhere else. You can expect us to test our exploration inventory. As we mentioned earlier, we’ve already identified nine drillable exploration prospects and one appraisal well in the coming years. We plan to drill these starting next quarter. Additionally, we’ll continue to build and replenish that inventory of prospects and leads in this world class hydrocarbon environment.

Financially, we should generate in excess of $100 million in cash flow, and that was based upon a business model that included oil at $67.50 and gas at $7.50. So that should more that fund our exploration and development activities for the year.

We also plan to continue to pay down additional debt, as Mike talked about, at least $25 million, improving our leverage position further.

Let me just wrap up by saying in the last four years Endeavour has grown from a concept to a well-balanced, publicly traded organization intent on realizing the value of its vision to become a pre-eminent, independent E&P company focused in the North Sea. We appreciate those investors who have stayed with us during the formative period and pledge to work hard in the future to reward them for their support and patience.

I also want to thank all our employees and business partners, as well, for their ongoing efforts on our company’s behalf and a very successful 2007.


Rusty Fisher

With that, that concludes our prepared remarks. We’d now like to open up the lines for any questions you might have. Cynthia, can you please pole the audience for questions?

Question-and-Answer Session


Thank you, Mr. Fisher. Our question and answer session will be conducted electronically. (Operator Instructions). We’ll take our first question from Irene Haas with Canaccord Adams. Please go ahead.

Irene Haas – Canaccord Adams

Hi, everybody. Two questions. Firstly is, fourth quarter for oil seems to be a little light. Can you explain to me what kind of operational issues there might have been during the fourth quarter?

And secondarily, are there some rumblings in terms of a tax increase in the UK?

William (Bill) L. Transier

Bruce, do you want to talk about the fourth quarter operating issues?

Bruce H. Stover

Yeah, I will. Irene, this is Bruce. I think we kind of hit, some of it’s winter operating conditions, some of it was just a perfect storm of things that kind of go wrong. That could have been anywhere from a simple trip of a compressor that’s off for a few days to power outages on platforms to, we had a temporary loss of gas supply at our Ivanhoe floating production facility which is used for both power generation on the platform and gas lift. So a combination of a number of things, all of which have been rectified. As we said a couple of times in this call, we’re producing well over 10,000 BOE per day year to date through this year. We still have some, a few bits and pieces of operating down time, but nothing major. It just seemed like the fourth quarter was a perfect storm of several bad things happening over a period of a few weeks.

J. Michael Kirksey

Irene, I can address your tax question. In the UK there is always talk about tax changes. We monitor those closely. Don’t expect anything of significance in the near term. We do have an NOL in the UK of about $46 million, so again in 2008 in (inaudible) we expect that our taxes will be quite low, limited frankly to just the petroleum revenue tax.

Rusty Fisher

Irene, it’s Rusty. I think it’s also important to note that we were within our guidance even with the mechanical issues and had the timing of the lifting that occurred in early January we’d have been right in the middle of the guidance despite the issues.

William (Bill) L. Transier

Irene, one more thing. This is Bill. Mike likes to kid about the fact that the fourth quarter it seemed like everybody had their budgets already intact, so a number of mechanical issues just seemed to show up in the fourth quarter. It’s funny how production all turned back on full stream in the first quarter of this year, the first month of this year, and we’ve been running full speed ahead with very little mechanical problems. So not to be sceptical about things, we can only control so much, but I think our guidance for the year is good and right now it looks fairly conservative.

Irene Haas – Canaccord Adams

Great. Thanks.


(Operator Instructions). We will take our next question from Peter Nicol with Tristone Capital. Please go ahead.

Peter Nicol – Tristone Capital Inc.

Hi, good morning. A couple questions. I was just wondering if you could elaborate on your last comment there about the, some of cash taxes between, I guess, your exploration program, sort of the tax pools from the acquisition, and sort of, I guess, general investment when you see your cash tax position of when you might stop paying cash taxes in the North Sea and what the historics of that instance are at this stage.

The second one was on the Columbus development. Your partner (inaudible) yesterday was talking about the 23/21 block weren’t going to drill a well this year in their results. Therefore, I was wondering what your development plan and thinking was if you weren’t going to be able to prove any extension to the south.

One question in discussion, the comment about changing the mix of exploration risk and taking down the size of stake. A couple of things. What sort of size of interest you want in the exploration portfolio and should we expect a significant increase in the number of wells you can commit to on an annual basis.

J. Michael Kirksey

Peter, this is Mike. You’ve kind of hit the home run here. We’ve got three of us here who will answer that question.

First of all on cash taxes, as I said, there’s about $3.7 million for 2007. As we look forward into 2008 we expect that that number will not be significantly different than that. Maybe $4 million or $5 million. Most of it again is PRT. When you look at our mix of business, we have a large NOL in the UK coming from previous years, as I mentioned. And in Norway you’re allowed to expense currently your exploration costs and a lot of our exploration dollars will be spent in 2008 in Norway. So the combination of those two and that kind of mix as we move forward, we think current taxes will not be a significant number in 2008 and 2009, at least.

Peter Nicol – Tristone Capital Inc.

Okay. Great.

Bruce H. Stover

Peter, this is Bruce Stover. Let me address your question on Columbus. As you know, there’s a high probability that the fissure that we’ve discovered on the Columbus block does go on to the block to the south. We haven’t given up on the fact that the operator there may drill a well this year to confirm that. But I can also tell you that we’ve been working independently on a development solution and have proven to ourselves, that is, ourselves as Endeavour and our partners independently, have determined that we can make a plan for a phased development that is economically viable on a stand-alone basis. So we’re prepared to proceed on that basis and are doing so as we speak.

We’re continuing to look at off-take facilities, the best off-take solution. Right now the two that are most competitive are, most likely, the Lowman (sp) field to the south and Etap (sp) complex just to the west. It’s still a horse race there and we’re working on both solutions. So I would say that we’re prepared to move along regardless of what the group to the south does. I hope that answers your question. I think John can comment on our portfolio strategy for exploration.

John G. Williams

Yeah. Addressing of the risk issue versus number of wells, let’s just take for example a one in five chance of success. You could drill one well at 100% or you could drill five wells at 20% or 10 wells at 10%. The more you spread out and drill more of those types of wells at lower working interest the better the overall portfolio results. You give the portfolio a chance to work for you. So we’re implementing that type of strategy in dealing with working interest in the higher risk portfolio.

I also mention that beyond a certain risk level usually two components of a prospect need to work in order for it to be a success. There have been studies by a lot of major companies. I think Amoco probably did the bench mark study for this back in the early ‘90s showing that those prospects that had two components, let’s say reservoir and source, that were high risk seldom, if ever, worked. In fact, I think that Amoco spent more than a half billion dollars on these types of prospects and none succeeded. That pretty much turned industry’s idea about the very high risk end of the portfolio. Our strategy is, we don’t want to participate in those, period. And then lastly, even in the middle risk type categories, you know, 30% in two is probably better than 60% in one. It’s all about spreading your risk, don’t put all your eggs in one basket, so to speak.

Peter Nicol – Tristone Capital Inc.

Yeah, I agree. To me it makes absolute sense. I guess what I was trying to get to was, obviously you’re outlining the program. At the moment your four wells for 2009 and you have half a dozen or so for this year. Should we expect that as you move to implement this (inaudible) that we’ll be sort of doubling the number of wells to maintain the risk but have more activity?

John G. Williams

Yeah, I think Endeavour has said all along that we would drill between five and 10 wells per year. We drilled five last year, we’ve got six planned for this year, and somewhere between five to 10 in 2009 would be about right. For the size of Endeavour and its budget.

Peter Nicol – Tristone Capital Inc.

That’s great. Thanks very much to all of you.


(Operator Instructions) We will take our next question from Joseph Allman with J. P. Morgan. Please go ahead.

Joseph Allman – J. P. Morgan

Hi, everybody. In terms of your goal to double production by 2010, are you talking about organically or supplemented by acquisitions as well?

William (Bill) L. Transier

Joe, this is Bill. What we tried to convince the market of is that our existing asset base, if we can move these development projects along we can double our existing production without any acquisitions. Acquisitions would be on top of that. So here we’ve created a business model that is generating north of $100 million in cash flow and an internal business model that’s forecasting $67.00 oil and $7.50 gas, so that’s probably conservative. And we’ve been able to work on those assets with very good technical work and identify other things that we can go capture and put on production.

When we went on the road we showed a slide that had the components of production that would come forward, taking into effect normal declines from our existing asset base, and those are primarily from the ‘R’ Blocks that Bruce talked about, Columbus and Cygnus as we moved those towards real development activities. So for us what we need to do as a company is to make sure that we control as much of our own destiny as we can so that we can move these projects along.

As you know, cycle times in the North Sea are frustrating, to be honest, and our ability to work with our partners and put everybody on the same strategic plan to move those things along as efficiently as we can is going to allow us to create NPV out of those assets as we go forward. That has changed in that last four years. When we started this business we wanted to be a player, we saw the reservoir base, we just wanted to be a non-operator. We realized that we have to control more of our own destiny to be able to create the right kind of NPV for ourselves going forward.

So the real answer to your question is, and I don’t think we get respect for this yet, we’ve got to prove that to you and others, is if we go out and execute on these development projects and do the right kind of drilling for ourselves on the ‘R’ Blocks we should be able to double our production from our internal assets to date without any acquisitions on top of that.

Let me just add one thing to that. We still believe that scope and scale that we need to be 25,000 to 30,000 BOEs a day. Just doing that from our existing asset base is not going to get us there. It’s a good core set of assets that generate cash flow when we have sustainability, but for long term we need to be a bigger company and we need to be part of the consolidation game that goes forward. We think that we’ve positioned ourselves reasonably to go forward and take advantage of some of that here in the next couple years.

Joseph Allman – J. P. Morgan

Okay. That’s helpful, Bill. Any comments on how that consolidation game is looking these days? Any colour on the acquisition markets?

William (Bill) L. Transier

Well, if you, in answer to your question, Joe, I’m focused only on the North Sea peer group. I’m not saying anything about anything outside of the North Sea right now. When you look at the smaller and mid-cap E&P companies over there, very few of those companies have a self-sustaining asset base like we do. When I say self-sustaining, it’s generating sufficient cash flow to self-fund your exploration and development activities and, in our case, pay back existing debt from former acquisitions.

The capital markets, as you know, are in turmoil. There’s been no exploration capital around the market for at least two years. It died in March of ’06. And development capital has become very tight. All the banks that would go out and formerly support that are having other issues that they’re having to deal with right now and they’re not anxious to lend money to anybody in the marketplace over there.

What that means to me, Joe, is I look at the peer group and there’s probably on the list, we look at every one of them, we run a model against every single one of them and see how they might work with us strategically. But there’s probably 10 or 15 companies that would help us strategically as we go forward. There’s probably 140 or so companies that are playing the game in the North Sea. My guess is, just like we saw in the Gulf of Mexico 10 years ago, that’s going to consolidate down to a handful of players that have the right kind of asset base, they have the right kind of technical people, and have the right kind of management teams to move that along.

I think my own view is that this is going to get played out in the next 12 to 24 months. That’s why we worked so hard to get in the position we are right now. Our biggest, my biggest fear, to be honest, is that we have on a relative value basis, we have a discounted stock price. That makes us a real target for some of these other companies to come in a sweep us away where we can’t prove the value to our investors that we should. We have good underlying value in our assets and we believe that what’s going to happen is the consolidation’s going to happen fairly soon. We just want to be positioned to take advantage of it for our existing shareholder base.

Joseph Allman – J. P. Morgan

And then lastly, could you comment on the trend you’re seeing most recently in terms of costs, service costs over there in the North Sea?

J. Michael Kirksey

Well, you’ve heard this over and over again. Our guys in our position, I think the economic rent pendulum has swung way over to the service sector of the business, but there’s nothing we can do about it right now. Costs of rigs and equipment, the ability just to get equipment like pipe lay vehicles and sub-surface robotics and stuff like that has become very difficult over there. Luckily in the program that John and Bruce have laid out for the next two years, we have in all situations equipment already contracted for with one exception. And that’s what we’re doing on the ‘R’ Blocks and we’re very close to getting something contracted for there.

The costs have gone to astronomical levels. Frankly, margins have been squeezed in the North Sea as a result of that. But when you have $100 oil and almost $11 gas we can still make good margins for ourselves and move forward.

One other thing for us, and it’s really sort of related to your question is, the assets that we bought have very little maintenance capital required on them, so we get to generate fairly high ratios of free cash flow that we get to reinvest in our business and move our model forward. Costs are a concern, but I don’t see that changing in the near term.

Joseph Allman – J. P. Morgan

Okay. Very helpful. Thank you.


(Operator Instructions). We will take a follow up question from Irene Haas with Canaccord Adams. Please go ahead.

Irene Haas – Canaccord Adams

Yeah, just a little follow up on Joe’s question. So you are thinking of consolidating an acquisition as such, in the perfect world you would like to use share, so it looks like the guys are ready to be mopped up would likely be sort of long on upside and probably short on near term production from the way it sounds. So you’d still, theoretically, be taking on sort of execution and development risks. Is that correct? You know how realistic it is to sort of double your production using this acquisition strategy. Will there still be some sort of a time lag, as such?

William (Bill) L. Transier

Well, Irene, if I understand your question correctly, what we’re not going to do is jeopardize the short term net realizable value out of our assets to jump into some sort of acquisition out there. And we see some situations that make a lot of sense to us in terms of layering on production starting in kind of ’09, ’10, and beyond that would accelerate what we’re doing and not detract from it.

What I was referring to earlier when I was talking to Joe’s, responded to Joe’s question was that there are a lot of players that are just going to frankly go away. Those assets are going to cycle back through licensing rounds and other things that they just can’t make the business model work. And when you start to narrow those candidates down from a strategic point of view, those that have production and cash flow and/or development projects that can accelerate and get us to this scope and scale that I think is very important for us there’s a limited number of those candidates. Maybe 10 or 15 in the North Sea, and you know those players as well as I do. I think that those good players are going to end up consolidating and the smaller players that were built upon an exploration strategy to farm all that stuff out and get their costs paid for aren’t going to survive. And we’re going to see a fallout of that in the near term over the next 12 to 24 months.

Irene Haas – Canaccord Adams

Thank you.


Gentlemen, at this time there are no further questions. Mr. Transier, I will turn the call back over to you for closing comments.

William (Bill) L. Transier

Well, Cynthia, thank you. I want to thank everybody for their involvement in today’s conference call. We are working very hard to move this company forward in a reasonable and strategic fashion. We feel very good about what occurred in 2007. We feel even better about how we’ve started 2008. We’re going to look forward to coming back and visiting with you here in about a month or so with regards to our first quarter numbers.

I hope everybody has a good day and we look forward to follow up with you as the days go by.


Ladies and gentlemen, this will conclude the Endeavour International Corporation’s 2007 fourth quarter earnings release conference call. We do thank you for your participation and you may disconnect at this time.

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