| ENDEAVOUR INTERNATIONAL CORP Item 1A Risk Factors The following material risk factors, among others, may affect our financial condition and results of operations |
| 8 _________________________________________________________________ [46]Table of Contents Endeavour International Corporation We have had operating losses to date and do not expect to be profitable in the foreseeable future |
| We have been operating at a loss each year since our inception, and we expect to continue to incur substantial losses for the foreseeable future |
| Net loss applicable to common stockholders for the years ended December 31, 2005, 2004 and 2003 was dlra31dtta5 million, dlra23dtta8 million and dlra41dtta2 million, respectively |
| We expect to incur substantial expenditures in connection with our oil and gas exploration activities which will be in excess of operating cash flows |
| If we are unable to generate additional financing, we will not be able to adequately fund our existing development and exploration projects, acquire additional oil and gas interests, or maintain our rights in such projects |
| We may not have an adequate amount of financial resources to adequately fund our development and exploration projects on a long-term basis |
| In the past, we have relied on the sale of our debt and equity securities to fund the acquisition, exploration and development of our petroleum properties |
| We will need to raise additional capital to continue funding these projects and to have the ability to fund additional projects |
| We cannot assure you that additional funding will be available to us for exploration and development of our projects or to fulfill our obligations under any agreements |
| We also cannot assure you that we will be able to generate sufficient operating cash flow or obtain adequate financing in the future or that the terms of any such financing will be favorable |
| Failure to generate such additional operating cash flow or obtain such additional financing could result in delay, postponement or cancellation of further exploration and development of our projects or the loss of our interest in our prospects |
| Acquiring interests in properties for oil and natural gas exploration is speculative in nature and may not ever result in operating revenues or profits |
| We cannot assure you that we will discover oil and gas in commercial quantities in our current properties or properties we may acquire in the future |
| Our success depends upon our ability to acquire working and revenue interests in properties upon which oil and gas reserves ultimately are discovered |
| We expect to derive the cash flow necessary to fund our operations from the oil and gas produced from our producing properties and/or the sale of our properties, but there is no assurance we will be able to do so |
| If we are unable to identify additional oil and gas prospects in which we can acquire an interest at an affordable price, we may not be able to sustain our growth rate and our ability to spread risk will be impaired |
| One element of our strategy is to continue to grow and spread risk through selected acquisitions of additional ownership interests in oil and gas prospects; provided, however: • we may not be able to identify additional desirable oil and gas prospects and acquire leasehold or other ownership interests in such prospects at a desirable price; • any of our completed, currently planned, or future acquisitions of ownership interests in oil and gas prospects may not include prospects that contain proven oil or gas reserves; • we may not have the ability to develop prospects that contain proven oil or gas reserves to the point of commercial production; 9 _________________________________________________________________ [47]Table of Contents Endeavour International Corporation • we may not have the financial ability to consummate additional acquisitions of ownership interests in oil and gas prospects or to develop the prospects that we acquire to the point of production; and • we may not be able to consummate additional acquisitions on terms favorable to us or at all |
| We may not be able to replace production with new reserves |
| Our future oil and gas production is highly dependent upon our level of success in finding or acquiring additional reserves |
| In general, the volume of production from oil and gas properties declines as reserves are depleted |
| The decline rates depend on reservoir characteristics |
| Our reserves will decline unless we acquire properties with proved reserves or conduct successful development and exploration drilling activities |
| Our recent growth is due in large part to acquisitions of producing properties |
| The successful acquisition of producing properties requires an assessment of a number of factors, some of which are beyond our control |
| These factors include: • our estimates of recoverable reserves; • future oil and gas prices; • operating costs; and • potential environmental and other liabilities |
| These assessments are inexact and their accuracy is inherently uncertain |
| In connection with such assessments, we perform a review of the subject properties consistent with industry practices |
| However, our review will not reveal all existing or potential problems |
| In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities |
| We cannot assure you that we will be able to acquire properties at acceptable prices because the competition for producing oil and gas properties is intense and many of our competitors have financial and other resources that are substantially greater than those available to us |
| Market fluctuations in the prices of oil and gas could adversely affect the price at which we can sell oil or gas discovered on our properties |
| In recent decades, there have been periods of both worldwide over-production and underproduction of hydrocarbons and periods of both increased and relaxed energy conservation efforts |
| These conditions have resulted in periods of excess supply of, and reduced demand for, crude oil on a worldwide basis and for natural gas on a regional basis |
| These periods historically have been followed by periods of short supply of, and increased demand for, crude oil and, to a lesser extent, natural gas |
| The excess or short supply of oil and gas has placed pressures on prices and has resulted in dramatic price fluctuations, even during relatively short periods of seasonal market demand |
| We cannot predict with any degree of certainty future oil and gas prices |
| Changes in oil and gas prices significantly affect our revenues, operating results, profitability and the value of our oil and gas reserves |
| Lower prices may reduce the amount of oil and gas that we can produce economically |
| In an attempt to reduce our price risk, we periodically enter into hedging transactions with respect to a portion of our expected future production |
| Lower oil and gas prices may cause us to record ceiling test write-downs |
| We use the full cost method of accounting for our oil and gas operations |
| Accordingly, we capitalize the cost to acquire, explore for and develop oil and gas properties |
| Under full cost accounting rules, the net capitalized costs of oil and gas properties (net of related deferred taxes), including estimated capitalized 10 _________________________________________________________________ [48]Table of Contents Endeavour International Corporation abandonment costs, may not exceed a “ceiling limit,” which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10prca and excluding cash flows related to estimated abandonment costs, plus the lower of cost or fair value of unproved properties |
| If net capitalized costs of oil and gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings |
| This is called a “ceiling test write-down |
| ” This charge does not impact cash flow from operating activities, but does reduce net income |
| The risk that we will be required to write down the carrying value of oil and gas properties increases when oil and natural gas prices are low |
| In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves |
| We cannot assure you that we will not experience ceiling test write-downs in the future |
| Our ability to produce sufficient quantities of oil and gas from our properties may be adversely affected by factors outside of our control |
| If we are unable to produce oil and gas from our properties in commercial quantities, our operations will be severely affected |
| Our business of exploring for and producing oil and gas involves a substantial risk of investment loss |
| Drilling oil and gas wells involves the risk that the wells may be unproductive or that the wells, although productive, do not produce oil or gas in economic quantities |
| Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids, or other conditions may substantially delay or prevent completion of any well |
| This could result in a total loss of our investment in a particular property |
| Adverse weather conditions also can hinder drilling operations |
| A productive well may become uneconomic if water or other substances are encountered, which impair or prevent the production of oil and gas from the well |
| In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances |
| We cannot assure you that oil and gas will be produced from the properties in which we have interests, nor can we assure the marketability of oil and gas that may be acquired or discovered |
| Numerous factors are beyond our control, including the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, allowable production and environmental regulations |
| We cannot predict how these factors may affect our business |
| We operate in foreign countries and are subject to political, economic and other uncertainties |
| We currently have operations in the United Kingdom, Norway and the Netherlands |
| We may expand international operations to other countries or regions |
| International operations are subject to political, economic and other uncertainties, including: • the risk of war, acts of terrorism, revolution, border disputes, expropriation, renegotiation or modification of existing contracts, and import, export and transportation regulations and tariffs; • taxation policies, including royalty and tax increases and retroactive tax claims; • exchange controls, currency fluctuations and other uncertainties arising out of foreign government sovereignty over our international operations; • laws and policies of the US affecting foreign trade, taxation and investment; and • the possibility of being subject to the exclusive jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States |
| Foreign countries occasionally have asserted rights to land, including oil and gas properties, through border disputes |
| If a country claims superior rights to oil and gas leases or concessions granted to us by 11 _________________________________________________________________ [49]Table of Contents Endeavour International Corporation another country, our interests could be lost or decreased in value |
| Various regions of the world have a history of political and economic instability |
| This instability could result in new governments or the adoption of new policies that might have a substantially more hostile attitude toward foreign investment |
| In an extreme case, such a change could result in termination of contract rights and expropriation of foreign–owned assets |
| This would adversely affect our interests |
| If the operator of a prospect in which we participate does not maintain or fails to obtain adequate insurance, our interest in such prospect could be materially and adversely affected |
| Oil and gas operations are subject to particular hazards incident to the drilling and production of oil and gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires and pollution and other environmental risks |
| These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations |
| We do not currently operate all of our oil and gas properties |
| In the projects in which we own non-operating interests, the operator may maintain insurance of various types to cover our operations with policy limits and retention liability customary in the industry |
| The occurrence of a significant adverse event that is not fully covered by insurance could result in the loss of our total investment in a particular prospect, which could have a material adverse effect on our financial condition and results of operations |
| The cost of decommissioning is uncertain |
| We expect to incur obligations to abandon and decommission certain structures in the North Sea |
| To date the industry has little experience of removing oil and gas structures from the North Sea |
| Fewer than 10prca of the 400 structures have been removed and these were small steel structures and sub sea installations in the shallow waters of the Southern North Sea |
| Certain groups have been established to study issues relating to decommissioning and abandonment and how the costs will be borne |
| Because the experience is limited, we cannot predict the costs of any future decommissions for which we might become obligated |
| Our cost of compliance with environmental regulations could result in large expenses |
| Our operations are subject to a variety of national, state, local, and international laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection |
| Significant fines and penalties may be imposed for the failure to comply with environmental laws and regulations |
| Some environmental laws provide for joint and several strict liability for remediation of releases of hazardous substances, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person |
| In addition, we may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances such as oil and gas related products |
| Some environmental protection laws and regulations may expose us to liability arising out of the conduct of operations or conditions caused by others, or for acts that were in compliance with all applicable laws at the time the acts were performed |
| Changes in the environmental laws and regulations, or claims for damages to persons, property or the environment, could expose us to substantial costs and liabilities |
| 12 _________________________________________________________________ [50]Table of Contents Endeavour International Corporation Governmental regulations to which we are subject could expose us to significant fines and/or penalties and our cost of compliance with such regulations could be substantial |
| Oil and gas exploration, development and production are subject to various types of regulation by local, state and federal agencies |
| Regulations and laws affecting the oil and gas industry are comprehensive and under constant review for amendment and expansion |
| These regulations and laws carry substantial penalties for failure to comply |
| The regulatory burden on the oil and gas industry increases our cost of doing business and, consequently, adversely affects our profitability |
| We are dependent on our executive officers and need to attract and retain additional qualified personnel |
| Our future success depends in large part on the service of William L Transier and John N Seitz, both of whom have substantial experience in the oil and gas industry |
| The loss of either of these executives could have a material adverse effect on our business |
| Although we have employment agreements with each of Mr |
| Seitz, there can be no assurance that such agreements will be enforceable in all circumstances or that we will have the ability to retain their services due to resignation or otherwise |
| Our future success also depends upon our ability to attract, assimilate and retain highly qualified technical and other management personnel |
| There can be no assurance that we will be able to attract, assimilate and retain key personnel, and our failure to do so would have a material adverse effect on our business |
| The trading price of our common stock may be volatile |
| The trading price of our common stock has from time to time fluctuated significantly and in the future may be subject to similar fluctuations |
| The trading price may be affected by a number of factors, including the risk factors set forth herein, as well as our operating results, financial condition, announcements or drilling activities, general conditions in the oil and gas exploration and development industry, and other events or factors |
| Smaller capitalization companies like us often experience substantial fluctuations in the trading price of their securities |
| We may experience wide fluctuations in the market price of our common stock |
| There is a limited market for our common stock |
| Our common stock is traded on the American Stock Exchange |
| Historically, there has not been an active trading market for a significant volume of our common stock |
| We are not certain that an active trading market for our common stock will develop, or if such a market develops, that it will be sustained |
| If we are unable to fulfill commitments under any of our licenses, we will lose our interest, and our entire investment, in such license |
| Our ability to retain licenses in which we obtain an interest will depend on our ability to fulfill the commitments made with respect to each license |
| We cannot assure you that we or the other participants in the projects will have the financial ability to fund these potential commitments |
| 13 _________________________________________________________________ [51]Table of Contents Endeavour International Corporation Our operations are dependent on other companies and other service providers over which we have no control |
| We employ exploration and development personnel and we also rely upon the services of geologists, geophysicists, chemists, engineers and other scientists to assist in the exploration and analysis of our prospects to determine a method in which the prospects may be developed in a cost-effective manner |
| We have developed relationships with a number of third party service providers, but we cannot assure you that we will be able to continue to rely on these providers |
| If any of these relationships are terminated or are unavailable on terms that are favorable to us, then we may not be able to execute our business plan |
| We have no control over the availability or cost of equipment and services which are essential to our operations |
| The availability and cost of services and equipment which are necessary for us to carry out our exploration and development activities are matters which are beyond our control |
| The costs of these items (particularly drilling rigs and related services) have risen substantially in the past two years and could escalate even more in the future |
| These changes could make it more difficult to execute our business plan |
| Our debt level could negatively impact our financial condition, results of operations and business prospects |
| As of December 31, 2005, we had dlra81dtta25 million in outstanding indebtedness |
| Our level of indebtedness could have important consequences on our operations, including: • making it more difficult for us to satisfy our obligations under our indentures or other debt and increasing the risk that we may default on our debt obligations; • requiring us to dedicate a substantial portion of our cash flow from operating activities to required payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities; • limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and other general business activities; • decreasing our ability to successfully withstand a downturn in our business or the economy generally; and • placing us at a competitive disadvantage against other less leveraged competitors |
| If we fail to comply with the covenants and other restrictions in the agreements governing our debt, it could lead to an event of default and the acceleration of our repayment of outstanding debt |
| Our ability to comply with these covenants and other restrictions may be affected by events beyond our control, including prevailing economic and financial conditions |
| We may not have sufficient funds to make such repayments |
| If we are unable to repay our debt out of cash on hand, we could attempt to refinance such debt, sell assets or repay such debt with the proceeds from an equity offering |
| We cannot assure you that we will be able to generate sufficient cash flow from operating activities to pay the interest on our debt or that future borrowings, equity financings or proceeds from the sale of assets will be available to pay or refinance such debt |
| Factors that will affect our ability to raise cash through an offering of our capital stock, a refinancing of our debt or a sale of assets include financial market conditions and our market value and operating performance at the time of such offering 14 _________________________________________________________________ [52]Table of Contents Endeavour International Corporation or other financing |
| We cannot assure you that any such offering, refinancing or sale of assets can be successfully completed |
| Upon specified change of control events, each holder of those notes may require us to purchase all or a portion of the holder’s notes at a price equal to 100prca of the principal amount, plus accrued and unpaid interest, if any, up to but excluding the date of purchase, plus in certain circumstances, a make-whole premium |
| We cannot assure you we would have sufficient financial resources to purchase the notes for cash or satisfy our other debt obligations if we are required to purchase the notes upon the occurrence of a change of control |
| In addition, events involving a change of control may result in an event of default under other debt we may incur in the future |
| Because we are a holding company, our ability to pay our debts depends upon the ability of our subsidiaries to pay us dividends and to advance us funds |
| In addition, our ability to participate in any distribution of our subsidiaries’ assets is generally subject to the prior claims of the subsidiaries’ creditors |
| Because we conduct our business primarily through our subsidiaries, our ability to pay our debts depends upon the earnings and cash flow of our subsidiaries and their ability to pay us dividends and advance us funds |
| Contractual and legal restrictions applicable to our subsidiaries could limit our ability to obtain cash from them |
| Our rights to participate in any distribution of our subsidiaries’ assets upon their liquidation, reorganization or insolvency generally would be subject to the prior claims of the subsidiaries’ creditors |