Endeavour International Corporation (NYSE:END)
Q2 2008 Earnings Call
August 5, 2008 10:00 am ET
Mike Kirksey - Chief Financial Officer and Executive Vice President
Bill Transier - Chairman, President and Chief Executive Officer
Peter Nicol - Tristone Capital
Welcome to the Endeavour International Corporation’s 2008 second quarter earnings release conference call. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer, Mike Kirksey.
With me today is Bill Transier, our Chairman and President and Chief Executive Officer. We’ll be handling the call together today.
In order for us to begin, let me remind everyone that this presentation contains our best and most reasonable estimates; however, a number of factors can cause actual results to differ materially from what we present today. For the risk factors associated with our business you should read our full disclosures on forward-looking statements in our 10-K and 10-Q as well as our recent press releases.
With that said I’d like to take you through the financial and production points and then turn it over to Bill for operations and strategic comments. First of all, the first six months results have been good for Endeavour with excellent cash flow, one successful exploration well and two more currently drilling.
The next six months will be exciting as exploration plans unfold and growth opportunities continue to come our way. In addition to the two wells drilling, there are five more that are expected to spud before the year is over and Bill will cover that in more detail.
Turning to the financial points; overall we were very pleased in the first half with our discretionary cash flow of $75 million and EBITDA of $95 million. We reduced debt by about $20 million and continued to self fund our development and exploration plans. Discretionary cash flow for the second quarter was $38.6 million, up from the $36.3 million in Q1 that’s a record for us, as well as revenues of $86.3 million compared to $61.3 million in the first quarter, also a record.
The second quarter sales volumes were 10,222 barrels equivalent per day, compared to 8,800 in Q1. More current production is running between 9,500 and 10,000 barrels a day during the month of July and early August. The first six months average production is approximately 9,500 barrels of oil equivalent per day with 10,100 in Q1 and 8,900 barrels per day in Q2.
We continue to get strong performance from a number of our operating units, especially Brage, Njord and Goldeneye. We do want to tell you that Q3 as has been the case in the prior year will be a lower production quarter due to the significant downtime for summer planned maintenance.
In the North Sea, the month of August is always scheduled for the major maintenance operations and that will be the case for us during the third quarter. The full-year forecast is still within the guidance we have previously given of 8,600 to 9,000 barrels equivalent per day.
Overall average market prices, mixing oil and gas in the second quarter was about $93 compared to $76 in Q1. Our hedges have realized the impact as a reduction of $15.50 per barrels in Q2, compared to $4 of barrels in Q1. The increase in the impact of the hedges in Q2 was a combination of the higher commodity prices as well as the seasonal downward curve in gas hedges during the second quarter.
Lease operating expense was $13.84 per barrel for the first six months varying somewhat by quarter depending on production, but well within our expectations. DD&A continued on track at about $25.50 a barrel and G&A was about the same as Q1 at $4.8 million remaining under control and down from Q2 of last year.
As you’ll note the unrealized mark-to-market charge continues to be a significant number with the rise in oil prices. As we have stated before, this is an accounting charge based on the current price curve against forward contracted volumes measured at June 30. The remaining forward contracted volumes are $3.6 million.
The average price in this calculation at the end of Q2 was $140 versus $102 at the end of Q1, so that $38 variance between Q1 and Q2 against $3.6 million of forward contracted volumes results in the mark-to-market charge of about a $130 million. If you rework this calculation today with the recent reversal in prices, Endeavour would have a gain in excess of $40 million thus far in Q3; again, just demonstrating the volatility of this accounting pronouncement.
Another much discussed failing of this accounting approach is that it doesn’t measure the increase value of the reserves in the ground. It only measures the impact of the price increased on contracted volumes. As I stated before the forward contracted volumes amounts to about $3.6 barrels of oil equivalent giving rise to the mark-to-market charge of $130 million.
If you use the same Q2 ending price; the value, all of Endeavour’s $30 million 2P reserves that are not hedged, the unrealized net present value of future cash flows is roughly $1.5 billion, but just as a reminder the majority of these hedges were put in place at the time of the Talisman asset purchase with an eye towards securing $100 million in annual cash flow for the next several year to allow us the opportunity to execute our business plan.
With the raising oil prices, the half of our production not hedged has resulted in cash flow that is the envy of many of our peers with annualized six month cash flow of about $150 million. Our current quarter cash taxes are about $10 million based on increased operational profitability this quarter.
CapEx for the quarter was $30 million bringing the first half’s total to $32 million. As the majority of our drilling program is backend loaded this year there will be a lot of activity upcoming. We still expect to invest around $90 million this year in exploration and development activities. We continue to pay down debt with a $15 million pay down in Q2 and expect to again pay down a substantial amount in Q3, while funding our exploration and development programs.
We ended the quarter with $29 million in cash. As you know we also have a rig deposit of $22 million, which is applicable to a prior jack-up contract previously expected to be use in 2009. This deposit is in the process to being converted to the semi that we will use to drill Rochelle this year effectively freeing up this cash to our pleasure.
Our capital restructure is very quiet with no restrictions or covenants that impair our ability to continue to operate and grow Endeavour. As I stated our EBITDA for the six months was about $95 million. On an annualized basis that gives us debt-to-EBITDA of 1.3, the very low ratio by any measure.
As I said at the beginning, the next six months will be exciting times as cash flow is very good, expenses are under control, our exploration program hits full stride with all rigs in place and many growth opportunities continue to present themselves so we stay tune for an exciting last half of the year.
Now I’ll turn the call over to Bill.
Hopefully, everyone on the phone here this morning can see that we had a good quarter; particularly from a production cash flow and cost control standpoint and as Mike said we’re very excited about the second half of the year and ended 2009.
If I can just take a few minutes of your time here this morning I’d like to touch on four different areas quickly about our development projects and what they will mean to us going forward, our exploration program for the second half of the year and going into 2009. I’d like to make some comments with respect to consolidation in the North Sea and I’ll wrap up with just a comment about our business strategy, the reconfirmation of it and some changes that you’ll see going forward for Endeavour.
First, the development projects; we’ve talked about it quite a bit, we’re excited about the progress that we have two significant development projects moving forward at a fairly fast pace. The first one Columbus; as you’ve heard us talk about it, both us and our partners are on track to submit the plan of development here in the third quarter of ’08.
Just as a remainder, this was a very sizable discovery by North Sea standards, about 70 million BOEs of 2P reserves and once we get this on peak production in late 2010 and 2011, you can count on that meaning somewhere between 3,000 and 5,000 BOEs a day net to our interest.
The second one, Cygnus; a very significant southern gas basin discovery, probably the largest in the last five or six years; we think potentially 600 BCF of obtainable reserves. We’ve got two appraisal wells starting in the fourth quarter of ’08 and we hope to submit the plan of development here, sometime in the fourth quarter of ’08.
Just to put that in perspective, as Mike talked about our guidance this year is somewhere between 8,600 and 9,000 BOEs a day. Once these two projects are on stream at peak production for ourselves, it would more or less replace all the production we have today. That’s the kind of investment we’re making for our investors and we’re trying to move those along as quickly as we can.
Let me talk next about the expiration program. John Williams is not here today, he’s actually on holiday down in Australia with his family. He’ll actually be back in October at our next conference call, when we actually will have quite a bit of activity going on for you to visit with him then, but to speak to our expiration program, Mike said that we had a lot of activity planned in the second half of the year and we do; we’re on track to spud nine exploration and appraisal wells during the course of 2008.
I’ll put these in kind of three categories: one, those wells that are near or in producing fields. The second, the appraisal wells for fairly significant discoveries we already have on hand and that we’re moving forward towards increased production in the next two years and then some higher potential, but also higher risk wells that we’ll spud towards the end of the year.
Let me just go through these quickly with you so that to bring you up-to-date. We’ve already announced the Galvort prospect in Norway. It was the successful discovery of natural gas in the initial well and we went back up dip in an appraisal side track and also found gas in that well. A nice discovery, close to infrastructure, should mean some production for us in the near-term.
The Noatun C is near our Njord field. It’s a well that is approaching its Jurassic reservoir targets as we speak today. We should have some results for you in the very near-term, can’t tell you exactly when that will be, but we’re getting very close be into target depths on that.
We also have the Brage North, well testing to Jurassic expiration prospects, the Knockandoo Brent and the Talisker Statfjord formations. This is operated by StatoilHydro; it’s a much longer test well, probably will not have any results for you until sometime early in the fourth quarter to talk about.
Those are the wells that are near our producing fields, all of those happen to be in Norway. We got five additional wells that we plan to spud in the remainder of 2008. The first one is very significant to Endeavour and represent a change of some of the work that we’ve been doing. It is the Rochelle Prospect in the R block area that you’ve heard us talked about.
Importantly for us, new processing of our 2006 3-D seismic transform what was originally a smaller four way dipping structural discovery to a much larger three way stereographic discovery. As a result of that, we’ve shifted our R block focus in the short-term from Renee Rubie to Rochelle and we’re now drilling an appraisal well in the fourth quarter ’08 with the SEDCO 704 to assist in the design of a development plan for our discovery.
The second one as we’ve already talked about is the Cygnus, the two appraisal wells to test both the Rotliegendes and the Carboniferous formations in this very sizable gas discovery to test both, the quality and quantity as well as the fluid context there. Gaz de France is the operator and they will use a noble jack-up rate to drill that those two back to back wells that should start sometime in about the middle of the fourth quarter.
We have three other wells that are planned to start before the end of the year; all of them have high potential, higher risk associated with them, the first one being the Aegis prospect in the Norway block 25/10. We have a 20% working interest in that prospect. This is higher risk and a higher potential of the Tertiary reservoirs objectives in the Eocene and Paleocene. Lundene is the operator; we’ve worked with the four on many occasions and they’re providing an Aker rig to do to work.
For us, excitingly the first operated exploration well in Norway is the Jade prospect in block 35/3. Most of you heard us talk about that as the Agat area. We currently have a 65% working interest in that prospect. You will likely see us farm down that to a lesser interest before we actually spud the well, but we’re very excited about the area because it will test the area where we already have two of natural gas discoveries and the well is designed to unlock the up dip portion of the block.
Hopefully, after that well we’ll have commercial gas in the area and we can begin our development process from there going forward. We are using the Bredford Dolphin semi to drill that well for ourselves. We hope to get the rig sometime by the end of the year to spud that well and move forward.
The last one that we’ll spud in 2008 is the Tesla prospect. This is a high pressure, high temperature prospect in block 22/24. We currently have a 25% working interest, GDF is the operator and they will use the Ensco 101 which is heavy duty jack-up rig to do the workforce.
As you can see there is a lot of activity for us in the second half of the year in exploration. We’re excited about the potential and the prospects for our shareholders in moving that forward.
Let me switch gears now to consolidation in the North Sea. I can’t go on a conference call with you folks on the phone without talking about some of the activities for the last quarter, particularly with respect to Ithaca and you may want some of our thoughts with respect to our attempts there to combine them with Endeavor. Let me say first and foremost that we thought that this transaction was a good strategic fit for our company.
I think anytime when you look at combining companies or assets up, you have to look first whether it’s a good strategic fit and we thought because of their development projects, they don’t really have an exploration activity to speak up, but because of their development projects that we in some of our core areas it would be a good strategic fit for us.
Second, we felt like we could combine our excess cash flows that Mike’s talked about and eliminate their need to raise cash through debt and equity financing in order to finalize their two small acquisitions and to move ahead on two development projects that they have in place.
Third and importantly from a strategic point of view, we thought that the combination with us and Ithaca will create a mid-cap company and we would have significant re-rating potential for our investors actually on both size. As you know today small-cap companies are at a huge discount to mid-cap companies and the ability to build something with more scope and scale, put it into the mid-cap range, take execution risk out of the business model and get a re-rating potential for our investors was something that we were very excited about.
Let me just say that, we still believe in the underlying rational for consolidation in the North Sea and we think it’s compelling for several reasons; one, because it gives you better access to capital at more competitive rates, it gives you economies of scale, it increases the scope for future growth and better portfolio management, it gives you better access to technical and managerial talent and eliminates some of the French players, which from my point of view have failed business models and probably shouldn’t be in this business.
Small-cap companies like ours and Ithaca are trading at significant discounts to true value today. I believe that shareholders, capital providers, banks and others are going to force consolidation from these undervalued companies in a fairly short period of time and we want to be a part of that as we move forward for our investors.
Finally, moving to our overall business strategy, as we’ve talked about our business model it’s working very effectively and is sustainable for the time period. The North Sea has become increasingly expensive and its cycle times keep stretching out as a result of the dominance of the European utilities and the major integrators that have both underwritten costs of capitals and different economic motivations; because of our qualifications as a proven operator in both Norway and the U.K., our competitive position, what we believe as a competitive advantage and as a result we’ve had many opportunities come our way to look at as a company.
Although and I say this with to the utmost promise the North Sea will remain our core area of business and we’re going to continue to advance our exploration development activities, but we’re going to continue to look at opportunities that improve our potential to become a more substantive E&P company in a quicker timeframe and that would include areas that have shorter cycle times, lower cost to access and explore for new reserves and potentially less competition than what we see in the North Sea today.
Let’s open it up for Q-and-A and we’ll see what questions we have to respond today.
(Operator Instructions) Your first question comes from Peter Nicol - Tristone Capital.
Peter Nicol - Tristone Capital
A quick question for you, just on your comments on Columbus and sitting and getting close to sort of FTP, etc. When do you expect that and have you sort of settled on an off-take route for Columbus?
We’re still working on that; we’re in final stages and we expect when we file the FTP, by the end of this quarter, that we’ll have that resolved for ourselves, but obviously you know the variables Peter and stuff. We feel good about where we’re heading on this and it would be premature for me to speak directly about that before we finalize the FTP that we’re going to file with the BERR.
Peter Nicol - Tristone Capital.
Just sort of following-up with that a little bit, a couple of things; one is, does the recent Moth discovery make any difference to sort of off-take routes; meaning that they maybe looking from the same sort of routes and secondly, I wasn’t too sure if I heard the size that you quoted for Columbus crack that was started, I was wondering if you could repeat that?
What I said for Columbus, we think the 2P reserves is in the range of about 40 million BOEs. The average of the two that I was speaking to earlier with Columbus and Cygnus average for us in terms of that is on average about 70 million BOEs for the two of us. About 600 bcf for Cygnus and about 40 million for Columbus and then we’ll move that forward. Peter, you asked another question and I lost it.
Peter Nicol - Tristone Capital.
Yes, I was just wondering with the recent Oilexco Moth Discovery in the area, does that give any sort of competition for off state facilities etc or is it too early to say?
Well, it’s too early to say. We looked at the Moth discovery because it was an interest for us and the obviously Oilexco has been excited about the size of the discovery and stuff. I don’t think at this point that it has any real impact, but it’s really too early for us to say, as we move our thing forward, but Peter I think by the time we have our third quarter conference call, we’ll be able to say definitively about our plan of development and where we see the up-tick rates and all the issues that I know you’re very familiar with. I think we can be able to respond to those effectively for you at that time.
At this time we have no further questions.
Thank you everyone for joining us today. Obviously, if you have other questions you can call those contacts that are listed on the press release. We hope to look forward to some exciting news coming out over the next few weeks as our exploration plan unfolds. Again, thank you for joining us today. Good-bye.