Endeavour eyes balance sheet improvements as key transaction complete

By Paul Deckelman

New York, June 26 - Endeavour International Corp., which faced potential balance sheet problems earlier in the year due to unexpected delays in completing its acquisition of certain North Sea energy assets, has successfully cleared that major hurdle and now expects continued improvement in its debt and leverage profile.

"Our goal is really to get those [U.K. North Sea ] assets turned on, get the production turned on, hedge it properly and then manage the balance sheet going forward next year," William L. Transier, the Houston-based oil and natural gas exploration and production company's chairman, president and chief executive officer, said on Tuesday.

He told participants at Global Hunter Securities LLC's GHS 100 Energy Conference in San Francisco that his company has done "a lot of work on the capital structure," including a $500 million two-part high-yield bond offering in February, paying off some $241 million of term loan debt due in 2013, entering into a $100 million revolving credit facility to provide for working capital and letters of credit and topping that off with a recent equity offering that raised nearly $60 million, "to make sure that we have enough capital to get to the finish line and turn on these development assets for ourselves going forward."

A house of cards?

But that whole complex structure of transactions threatened to come apart earlier in the year, running aground on the rocks surrounding Endeavour's ambitious purchase of energy assets in the British sector of the North Sea from global oil and gas giant ConocoPhillips Co.

In December, Endeavour, which then had some existing North Sea oil and gas assets as well as onshore natural gas operations in the United States, announced that it would acquire ConocoPhillips' interest in three producing North Sea oil fields in the Central North Sea - Alba, MacCulloch and Nicol - for $330 million, including about $94 million of tax attributes.

To fund the purchase, Endeavour got senior secured bank financing, which it then planned to replace with a $500 million high-yield bond issue. Besides paying for the ConocoPhillips assets, it also would use bond deal proceeds plus other cash on hand to take out its existing first-lien term loan debt.

The bond deal finally went off in mid-February, a little later than expected, after having been restructured into a two-part offering. Endeavour sold a $350 million tranche of 12% first-priority senior secured notes due March 1, 2018, which was priced on Feb. 13 at 96 to yield 12.975%, as well as a $150 million tranche of 12% second-priority senior secured notes due June 1, 2018 at 96 to yield 12.954%.

Then, the $480 million of proceeds was put into an escrow account to await closing of the first North Sea transaction, for the Alba field, the largest of the three ConocoPhillips properties.

However, things started to get sticky when one of the other companies with a piece of the action in the Alba field, Chevron Corp., refused to sign off on ConocoPhillips' pending transfer of its Alba position to Endeavour, claiming that Endeavour and ConocoPhillips had not adequately addressed the problem of paying for the eventual decommissioning of Alba wells when they would become exhausted years from now.

Several months of legal wrangling followed, with Endeavour anxiously eyeing a June 15 deadline by which the Alba transfer would have to be completed.

If the deadline was not met, some $40 million of outstanding borrowings on the new revolver would immediately come due. At the same time, with the bond deal proceeds in escrow pending completion of the Alba transfer, Endeavour could not use those funds for their intended purpose of paying off the term loan, which continued to accrue heavy interest charges - 12% cash plus a 3% payment-in-kind (PIK) component, even while the new high-coupon bonds were also accruing interest.

When Endeavor announced first-quarter results in early May, Transier openly expressed annoyance and frustration during the conference call with the way the deal had become bogged down and accused "some parties" - a veiled reference to Chevron - of "trying to hold us [for] ransom until such time as we agree to some things that we're just not going to agree to."

Alba finally accomplished

From that low point, however, things picked up, and by May 31, Endeavour was able to announce the completion of the Alba transaction and the release of the bond deal proceeds from escrow. The proceeds funded the North Sea acquisition and the repayment of the term loan.

Pro forma for the completion of all of the transactions, Endeavour's net debt level rose to $621.7 million from $439.6 million, mostly due to a decrease in its cash levels.

But Transier said during the presentation that with Endeavour finally closing the Alba deal, it clears the way for completion of the MacCulloch and Nicols portions of the ConocoPhillips transaction, which he predicted would likely occur by the end of the third quarter. Besides output from those three fields, the company has also been ramping up production efforts at two other North Sea oil fields it already owned, Bacchus and Rochelle.

Transier said that the company's total output from those fields - as well as the limited drilling activity at its several U.S. natural gas fields, largely suspended for now due to the current low-price environment - has more than tripled to around 13,000 daily barrels of oil equivalent currently from around 4,000 barrels at the start of the year.

"We expect to double that again by the end of the year," he added, projecting production of 20,000 to 25,000 daily barrels of oil equivalent.

Debt cutting ahead

The CEO continued: "If we do what we say we're going to do, and we come anywhere close to the estimates that the analyst community has made in terms of EBITDA next year," in a range of about $500 to $550 million, "we should have $300 or $400 million of free cash flow. We will use a significant amount of that to pay down debt next year, to manage the balance sheet back."

He said that with that kind of debt reduction expected, "It's not unreasonable to see this company in a position by the end of 2013 [with] the debt-to-EBITDA ratios kind of in the 1-to-1 range. That would be our goal for the long term - having a strong balance sheet, a sustainable production rate, a fair amount of exposure to liquids, in terms of Brent crude oil and European gas, and then proceed with our inventory as we go forward from there."

He concluded that from a financial perspective, Endeavour's focus "is really to manage the balance sheet, which we did with our high-yield debt offering and paid back our first-lien debt. We don't really have any debt that threatens us now until after 2016 and beyond. Our job today, going forward, will be to manage the amount of leverage down and reduce the cost of capital was we go forward."

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