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Endeavour International (END)

Q3 2012 Earnings Call

November 01, 2012 10:00 am ET

Executives

K. Darcey Matthews - Director of Investor Relations and Corporate Communications

William L. Transier - Executive Chairman, Chief Executive Officer and President

Carl D. Grenz - Executive Vice President of International

James J. Emme - Executive Vice President of North American Operations

Analysts

Irene O. Haas - Wunderlich Securities Inc., Research Division

Michael Kelly - Global Hunter Securities, LLC, Research Division

Stephen F. Berman - Canaccord Genuity, Research Division

Amy Stepnowski

Steven Karpel - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, and welcome to this Endeavour International Corporation's Third Quarter 2012 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, for opening remarks and introductions, I would now like to turn the call over to Ms. Darcey Matthews, Director of Investor Relations. Please go ahead, ma'am.

K. Darcey Matthews

Great, thank you, Jennifer. Good morning, good afternoon, everyone, and thank you for joining us today for Endeavour's 2012 Third Quarter Earnings Conference Call. Joining us on the call, we have Bill Transier, our Chief Executive Officer; Carl Grenz, our Executive Vice President for International Operations; and Jim Emme, our Executive Vice President for North American Operations.

Before we begin, let me remind everyone that our comments today reflect current information and understanding. There a number of factors, however, that can cause actual results to differ materially from what we present here today. For the risk factors associated with our business, please read our full disclosures in our 10-K and our more recent 10-Q. The third quarter 10-Q will be filed some time early next week.

And now for some opening comments, I'd like to turn the call over to Bill.

William L. Transier

Good morning, everyone. I appreciate you joining us. Let me kind of give you an outline of what we'd like to talk with you about today before your questions and our responses to that. Well, I'll go through, first of all, a quick highlight of what we have been doing this quarter, a financial review that I will cover. And with the help of the financial pack that came out to you overnight, that should help you understand our comments better from where we've been in the past. Then I'll let Carl give you an operational update on the U.K., and Jim will follow with an operations comments on the U.S. Then I will come back at the conclusion of that and give you an update on the status of the MacCulloch and Nicol acquisitions, and I will address the resignation of our Chief Financial Officer before I close with a few comments and then allow your questions and comments.

Just regarding the highlights for the quarter. The biggest thing for us this quarter was the significant increase in production. You'll see in the slide pack that production was just above 11,000 BOEs per day.

We were also awarded through the competitive licensing around over in the U.K., 7 licenses on 10 offshore blocks. The licenses are traditional licenses, which mean that we have 4 years to complete the work programs, and we basically bid work programs that allows us to have a fairly nominal amount of capital that's involved for the next couple of years until we decide that there's other things that we want to do on the block. The blocks are important to us because they protect our core areas in the Central North Sea.

Our focus has and continues to be the Rochelle development, and you'll hear from Carl about several important milestones that we achieved along the way, including the installation of subsea pipelines and umbilicals, which are complete; the drilling to kind of the final casing point on our first development well; and the decision we made in a very tight service sector to adjust our development operations to preserve the option for first production at Rochelle early in 2013.

We made a transaction in the U.S. through an exchange, that you'll hear more about from Jim Emme, with our partner J-W Operating to give us expanded working interest, operator status and control of the upstream and midstream business there, an area that we're excited about going forward.

And then, as I said, our acquisition with ConocoPhillips for MacCulloch and Nicol is progressing. Like I said, I will give you some more details on that kind of after as we get through the formal part of this presentation.

Let me first go to the financial review. And like I said, Darcey, for the first time, put out a slide pack that should help you with this. So if you go to Page 3 on the slide pack, you can see that our sales volume for the quarter were up 370% comparatively and 215% for the 9 months. This is directly attributable to bringing on Bacchus in the first part of the year, the 2 development wells that we had there, and the acquisition of our additional interest in the Alba Field. Frankly, the increase in production was muted by no sales from Bittern and Enoch because both those fields were shut in during the period and various maintenance issues at Alba that affected the production capability there.

This is just something we have to deal with in the North Sea. And I just remind all of you that the U.K. North Sea is a very mature area. The infrastructure requires shut-ins and maintenance along the way. These matters, many times, are out of our control and maybe not known to us until they are upon us. Our job is to advise you about these matters as best we can in the future so that you have a good view of where we're going as a company.

But importantly, as you look at that slide on Page 3, we moved from a fairly low level of production in the second quarter 2011 of approximately 3,000 BOEs per day, of which 81% of that was U.S. natural gas, to 11,000 BOEs a day this quarter, of which 80% of that today is now U.K. oil. This is a big change for our company and, frankly, it's a big change for any company.

Commodity prices during the quarter remained strong. Brent crude oil prices averaged just below $110 of BOE, slightly higher than the second quarter where it was $108 of BOE. Everybody knows about Henry Hub gas prices, which averaged $2.88 in Mcf for the quarter, up from $2.29 in Mcf for the second quarter. I think importantly for us and the reason again for our focus on Rochelle. NGP pricing, natural gas pricing in Europe, today, is running at about $10.80 an MMBtu. We've seen prices move up over the last couple of months from the mid-$9 in MMBtu to their current levels. We're encouraged about the strength in natural gas prices in Europe, and we're anxious to get the Rochelle production on so that we can lock some of this in for ourselves going forward.

When you take the production and the commodity prices and the change in the mix of our production to liquids, you'll see on Page 7 that our revenues grew from $83 million for the quarter versus only $10 million for the quarter in the same quarter last year. So for the 9 months, our revenues are $121 million compared to $44 million last year.

I'll direct you to Page 8. We put on that page the metrics on a BOE basis. You can see that the metrics are obviously improving because of increasing production. I'll talk about a couple of items on here. In operating expenses, they're obviously up due to increased production, but there was a onetime nonrecurring adjustment, including operating expenses, of about $9.7 million. This represented the allocation of purchase price to crude oil inventory that we bought in the acquisition of the additional interest in Alba. And that had to flow through cost of sales or actually operating expense. If you take the impact of that onetime adjustment, you would reduce our cost per BOE on operating cost by about $7 of BOE, so just put that in perspective as you look forward for us going down the road.

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