Endeavour Uses Bond Gambit to Boost Cash Flow: Distressed Debt

Endeavour International Corp., the North Sea energy explorer and producer that decided not to make an interest payment on its bonds this week, is seen buying itself time for revenue from new fields to pick up before it runs out of cash as soon as January.

“Endeavour needs an interest expense holiday to extend the breathing room by a year,” Mark Pibl, the head of high-yield research and strategy at New York-based Canaccord Genuity Inc., said in a telephone interview. “With new projects coming online, they can get the earnings to a level that’s sustainable.”

The $33.5 million in coupons weren’t paid after talks since June with creditors failed to result in a “constructive resolution regarding the company’s capital structure,” Houston-based Endeavour said in a Sept. 2 statement. Its bonds fell to a record low.

As production develops at Endeavour’s projects in the U.K., earnings may increase to a level that would give the energy company sufficient cash flow to service its debt, according to Pibl. Absent an accord with creditors, the 8.6 percent interest it pays on its $788.7 million of high-yield bonds may cause the energy explorer to run out of cash in as few as 4.2 months, according to data compiled by Bloomberg.

Bond Rout

Darcey Matthews, a spokeswoman at Endeavour, didn’t return telephone calls seeking comment.

The company’s $150 million of 12 percent second-lien notes due June 2018 -- which would recover 10 percent or less in a default, according to Standard & Poor’s -- plunged 7 cents on the dollar yesterday to 35 cents, erasing almost 13 cents since the missed payment, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Endeavour shares traded at 56 cents at 11:40 a.m. in New York, down from $6.89 on Jan. 22.

“Management chose not to pay so that they could get the creditors’ attention to re-engage in talks,” said Pibl.

Endeavour, which was founded in 2004 and relied on its European business for 97.5 percent of its 2013 revenue, hasn’t had enough cash to service its debt. The company raised $30 million of equity and convertible notes so that it would be able to make a $33 million interest payment in March, according to S&P, which gives it a CCC rating. That implies the energy firm is vulnerable to nonpayment.

Few Alternatives

“There were few alternatives,” Catherine Stubbs, Endeavour’s chief financial officer, said in a May 7 earnings call with investors. “And expensive alternatives.”

The company reported its 14th straight loss after realizing a $36.7 million deficit in the three months ended June 30, Bloomberg data show. Results were affected by the high levels of capital needed to develop new wells in the U.K. and the slower-than-expected pace to ramp up productions, said Pibl.

Endeavour paid $104.5 million in interest expense in 2013 and currently has a weighted averaged fixed coupon on its bonds of 8.6 percent, Bloomberg data show. The company had $83.2 million of cash as of June 30, according to an Aug. 8 filing with the Securities and Exchange Commission.

The energy producer has more than $100 million of monetary production payments due in the first four months of next year, which it doesn’t have the liquidity to make, Stubbs said in an Aug. 5 earnings call. The company may extend the amount of time it has to make the payments, refinance the obligations, look for new sources of capital or sell assets in order to make the payments, she said.

Debt Service

Endeavour restarted its Rochelle gas-condensate field in the U.K.’s North Sea and it will operate for the remainder of 2014, according to a March 20 S&P report. Production was delayed for several months due to a mechanical failure, according to the May 7 call.

“The combination of these debt servicing requirements, capital expenditures and the delay in cash flow resulting from the Rochelle mechanical issues may exceed the cash flow from our current operations,” according to the quarterly report.

Earnings before interest, taxes, depreciation and amortization may rise to $261.7 million next year, according to analysts surveyed by Bloomberg.

“That would be more than enough to service its debt as well as its operations, especially after the capital needs drop as the development completes,” he said.

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