UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission file number 1-5507
--------------
MAGELLAN PETROLEUM CORPORATION
................................................................................
(Exact name of registrant as specified in its charter)
DELAWARE 06-0842255
................................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
149 Durham Road, Madison, Connecticut 06443
................................................................................
(Address of principal executive offices) (Zip Code)
(203) 245-7664
................................................................................
(Registrant's telephone number, including area code)
................................................................................
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
The number of shares outstanding of the issuer's single class of common
stock as of November 12, 2001 was 24,607,376.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
September 30, 2001
Table of Contents
PART I - FINANCIAL INFORMATION
Page
ITEM 1 Financial Statements
Consolidated balance sheets at September 30, 2001
and December 31, 2000 3
Consolidated statements of income for the three months
ended September 30, 2001 and 2000 4
Consolidated statements of cash flows for the three months
ended September 30, 2001 and 2000 5
Notes to consolidated financial statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 15
PART II - OTHER INFORMATION
ITEM 5 Other Information 16
ITEM 6 Exhibits and Reports on Form 8-K 16
Signatures 17
11
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- --------------------
CONSOLIDATED BALANCE SHEETS
Sept 30, June 30,
-------- --------
2001 2001
---- ----
ASSETS (Unaudited) (Note)
------
Current assets:
Cash and cash equivalents $13,115,674 $12,792,191
Accounts receivable 5,234,705 4,580,809
Marketable securities 501,238 846,063
Inventories 385,815 537,138
Other assets 244,029 283,372
------------ ------------
Total current assets 19,481,461 19,039,573
----------- -----------
Marketable securities 959,938 961,514
Property and equipment (successful efforts method): 39,080,878 40,367,660
Less accumulated depletion, depreciation and amortization (23,739,558) (23,885,240)
------------ ------------
Net property and equipment 15,341,320 16,482,420
----------- -----------
Other assets 933,523 1,014,578
------------- -------------
Total assets $36,716,242 $37,498,085
=========== ===========
LIABILITIES, MINORITY INTERESTS
-------------------------------
AND STOCKHOLDERS' EQUITY
------------------------
Current liabilities:
Accounts payable $ 1,815,711 $ 1,907,672
Accrued liabilities 831,560 741,972
Income taxes payable 862,292 991,571
----------- -----------
Total current liabilities 3,509,563 3,641,215
---------- ----------
Long term liabilities:
Deferred income taxes 2,906,289 3,029,180
Reserve for future site restoration costs 955,549 953,210
------------- -------------
Total long term liabilities 3,861,838 3,982,390
------------ ------------
Minority interests 12,554,928 12,701,000
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 200,000,000 and 200,000,000 shares
Outstanding 24,607,376 and 24,698,226 shares 246,074 246,982
Capital in excess of par value 43,085,841 43,179,475
------------ ------------
Total capital 43,331,915 43,426,457
Accumulated deficit (15,420,060) (15,842,656)
Accumulated other comprehensive loss (11,121,942) (10,410,321)
--------------- ---------------
Total Stockholders' equity 16,789,913 17,173,480
------------ ------------
Total liabilities, minority interests and stockholders' equity $36,716,242 $37,498,085
=========== ===========
Note: The balance sheet at June 30, 2001 has been derived from
the audited consolidated financial statements at that date.
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- --------------------
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
September 30,
-------------
2001 2000
---- ----
Revenues:
Oil sales $ 1,017,989 $ 1,188,802
Gas sales 1,977,392 2,159,587
Other production related revenues 747,025 263,506
Interest income 181,690 255,830
------------ ------------
Total Revenues 3,924,096 3,867,725
----------- -----------
Costs and expenses:
Production costs 999,135 843,701
Exploration and dry hole costs 167,766 131,985
Salaries and employee benefits 352,821 442,355
Depletion, depreciation and amortization 793,004 674,359
Auditing, accounting and legal services 109,108 101,836
Shareholder communications 25,696 28,422
Other administrative expenses 232,268 237,656
------------ ------------
Total costs and expenses 2,679,798 2,460,314
----------- -----------
Income before income taxes and minority interests 1,244,298 1,407,411
Income tax provision (308,621) (478,462)
-------------- --------------
Income before minority interests 935,677 928,949
Minority interests (513,081) (538,099)
------------- -------------
Net income $ 422,596 $ 390,850
=========== ===========
Average number of shares:
Basic 24,658,089 25,108,226
========== ==========
Diluted 24,658,089 25,108,226
========== ==========
Net income per share (basic and diluted) $.02 $.02
==== ====
See accompanying notes.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Capital in Other Comprehensive
Number Common excess of Accumulated comprehensive income
of shares Stock par value deficit loss Total (loss)
--------- ----- --------- ------- ----------- ----- ------
July 1, 2001 24,698,226 $246,982 $43,179,475 $(15,842,656) $(10,410,321) $17,173,480
Repurchase of
common stock (90,850) (908) (93,634) - - (94,542)
Net income - - - 422,596 - 422,596 422,596
Foreign currency
translation
adjustments - - - - (656,181) (656,181) (656,181)
Unrealized loss on
available-for-sale
securities - - - - (55,440) (55,440) (55,440)
------------ ------------- ---------- -------------- ------------- -------------- -------------
Comprehensive loss $(289,025)
==========
September 30, 2001 24,607,376 $246,074 $43,085,841 $(15,420,060) $(11,121,942) $16,789,913
========== ======== =========== ============= ============= ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2001
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
September 30,
-------------
2001 2000
---- ----
Operating Activities:
Net income $ 422,596 $ 390,850
Adjustments to reconcile net income
to net cash provided by operating activities:
Depletion, depreciation and amortization 793,004 674,359
Restoration costs 175,661 76,002
Deferred income tax - 478,462
Minority interests 513,081 538,099
Increase (decrease) in operating assets and liabilities:
Accounts receivable (1,449,107) (509,890)
Other assets (57,679) (9,975)
Inventories 67,516 (199,624)
Accounts payable and accrued liabilities 458,454 (502,631)
Income taxes payable 17,260 67,370
------------- -------------
Net cash provided by operating activities 940,786 1,003,022
------------ -----------
Investing Activities:
Marketable securities matured 346,401 117,527
Net additions to property and equipment (398,119) (700,105)
Repurchases of common stock (94,542) -
------------- -----------------
Net cash used in investing activities (146,260) (582,578)
------------ ------------
Effect of exchange rate changes on cash
and cash equivalents (471,043) (1,290,504)
------------ --------------
Net increase (decrease) in cash and cash equivalents 323,483 (870,060)
Cash and cash equivalents at beginning of year 12,792,191 13,890,834
------------ ------------
Cash and cash equivalents at end of period $13,115,674 $13,020,774
=========== ===========
See accompanying notes.
Item 1. Notes to Consolidated Financial Statements
- ------- ------------------------------------------
Note 1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements include
the Company's 51% owned subsidiary, Magellan Petroleum Australia Limited
("MPAL") and have been prepared in accordance with accounting principles
generally accepted in the United States, for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. Operating results for the three months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 2001.
Certain amounts for the 2000 period under Operating and Investing
Activities in the Consolidated Statements of Cash Flows have been reclassified
to conform to the classifications in the 2001 period.
Note 2. Revenue Recognition
-------------------
On January 19, 2001, the Company's carried interest account in the
Kotaneelee gas field reached undisputed payout status. During the 4th quarter of
the fiscal year 2001, the Company began accruing its share of Kotaneelee net
proceeds as income. At September 30, 2001, the amount due of $549,000 from the
working interest partners is included in accounts receivable. These funds are
currently being held in escrow pending the execution of the trial court's
judgment order which was rendered on November 1, 2001.
Prior to the Kotaneelee field reaching undisputed payout status, the
operator of the Kotaneelee field had been reporting and depositing in escrow its
share of the disputed amount of MPC's share of net revenues. Based on the
reported data, the Company believes the total amount due MPC through June 30,
2001 production (including interest) was at least $1.4 million. The disputed
amount, which has not been included in income, represents gas processing fees
claimed by the working interest partners. The trial court ruled in favor of the
Company on this issue. However, on November 2, 2001, Canada Southern Petroleum
Ltd,which holds a 30% (out of the 33 1/3% total) carried interest in the field,
announced that it intended to appeal the trial court's decision. Due to the
uncertainty of the litigation, the Company will not accrue the $1.4 million
estimated amount due, until the uncertainty is resolved.
Item 1. Notes to Consolidated Financial Statements- (Cont'd)
- ------- ----------------------------------------------------
Note 3. Capital
-------
During December 2000, the Company announced a stock repurchase plan to
purchase up to one million shares of its common stock in the open market. At
September 30, 2001, the Company had purchased 500,850 of its shares at a cost of
approximately $506,000.
Note 4. Depletion, depreciation and amortization
----------------------------------------
The operator of the Mereenie field is implementing an extensive program
for additional drilling and capital improvements. The estimated cost of these
proposed expenditures (MPAL share $9 million) has been added to the costs being
amortized. In addition, as the field continues to age, the cost of maintaining
the field is expected to increase.
Note 5. Comprehensive loss
------------------
Total comprehensive income (loss) during the three months ended
September 30, 2001 and 2000 were as follows:
Three months ended Accumulated
September 30, September 30,
------------- -------------
2001 2000 2001
---- ---- ----
Net income $ 422,596 $ 390,850
Foreign currency translation adjustments (656,181) (1,741,736) $(11,299,648)
Unrealized gain (loss) on available
-for-sale securities (55,440) - 177,706
------------ ----------------- -----------------
Total comprehensive loss $(289,025) $(1,350,886) $(11,121,942)
========== ============ ===============
Note 6 Pending Adoption of Accounting Standard
---------------------------------------
In June 2001, the Financial Accounting Statements Board (FASB) issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS
No. 143 addresses the accounting for obligations arising from the retirement of
tangible long-lived assets and expands the scope to include obligations that are
identifiable by the entity upon acquisition, construction and during the
operating life of a long-lived asset. The statement requires asset retirement
obligations (AROs) to be initially measured at fair value at the time the
obligation is incurred. SFAS No. 143 is effective for the Company's 2003 fiscal
year. The Company is currently assessing SFAS No. 143 and the accounting for
future site restoration costs to determine whether there will be any significant
effect on earnings or the financial condition of the Company.
Item 1. Notes to Consolidated Financial Statements- (Cont'd)
- ------- ----------------------------------------------------
Note 7. Investment in MPAL
------------------
During fiscal 2002, MPC has purchased 85,680 shares of MPAL at an
approximate cost of $92,000 and increased its ownership in MPAL from 51.3% to
51.5%.
Note 8. Earnings per share
------------------
Earnings per common share are based upon the weighted average number of
common and common equivalent shares outstanding during the period. The Company's
basic and diluted calculations of EPS are the same for the three months ended
September 30, 2001 and 2000 because the exercise of options is not assumed in
calculating diluted EPS, as the result would be anti-dilutive. The exercise
price of outstanding stock options exceeded the average market price of the
common stock during the 2002 and 2001 periods.
Note 9. Segment Information
-------------------
The Company has two reportable segments, MPC and its subsidiary, MPAL.
Each company is in the same business; MPAL is also a publicly held company with
its shares traded on the Australian Stock Exchange. MPAL issues separate audited
consolidated financial statements and operates independently of MPC. Segment
information (in thousands) for the Company's two operating segments is as
follows:
Three months ended September 30,
--------------------------------
2001 2000
---- ----
Revenues:
MPC $ 155 $ 44
MPAL 3,769 3,824
--------- ----------
Total consolidated revenues $ 3,924 $ 3,868
========= =========
Net income (loss):
MPC $ (122) $ (173)
MPAL 545 564
----------- -----------
Consolidated net income $ 423 $ 391
========== ==========
Item 1. Notes to Consolidated Financial Statements- (Cont'd)
- ------- ----------------------------------------------------
Note 10. Unrealized Gain on Securities Held for Investment
-------------------------------------------------
During August 1999, MPL sold its interest in the Tapia Canyon,
California heavy oil project for its approximate cost of $101,000 and received
shares of stock in the purchaser. During late December 2000, the purchaser
became a public company (Sefton Resources, Inc) which is now listed on the
London Stock Exchange. At September 30, 2001, MPC owned approximately 3.3% of
Sefton Resources, Inc. with a fair market value of $271,040 and a cost of
$93,334. The $177,706 has been recorded as unrealized gain on available sale
securities. The shares of Sefton Resources, Inc. are restricted and cannot be
sold before December 2001.
Note 11. Change in Estimate
- ------ ------------------
During the three months ended September 30, 2001, MPAL recorded an
additional amount of pipeline tariff revenue to reflect a resolution of a
dispute regarding the calculation of the pipeline tariffs.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as, "forward looking statements"
for purposes of the "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements.
The Company follows the successful efforts method of accounting for its
oil and gas operations; therefore, the results of operations may vary materially
from quarter to quarter. An active exploration program may result in greater
exploration and dry hole costs. Under this method, the cost of drilling a dry
hole is written off immediately. During the quarter ending December 31, 2001,
MPAL will participate in the drilling of two wells offshore Western Australia.
MPAL's share of the cost of these wells, which is approximately $2 million, will
be written off if the wells are unsuccessful in finding oil or gas.
On January 19, 2001, the Company's carried interest account in the
Kotaneelee gas field reached undisputed payout status. During the 4th quarter of
the fiscal year 2001, the Company began accruing its share (2.67%) of Kotaneelee
net proceeds as income. At September 30, 2001, the amount due of $549,000 from
the working interest partners is included in accounts receivable. These funds
are currently being held in escrow pending the execution of the trial court's
judgment order that was rendered on November 1, 2001.
Prior to the Kotaneelee field reaching undisputed payout status, the
operator of the Kotaneelee field had been reporting and depositing in escrow its
share of the disputed amount of MPC's share of net revenues. Based on the
reported data, the Company believes the total amount due MPC through June 30,
2001 production (including interest) was at least $1.4 million. The disputed
amount, which has not been included in income, represents gas processing fees
claimed by the working interest partners. The trial court ruled in favor of the
Company on this issue. However, on November 2, 2001, Canada Southern Petroleum
Ltd, which holds a 30%(out of the 33 1/3% total) carried interest in the field,
announced that it intended to appeal the trial court's decision. Due to the
uncertainty of the litigation, the Company will not accrue the $1.4 million
estimated amount due, until the uncertainty is resolved.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
The Company's Annual Report on Form 10-K for the year ended June 30,
2001 should be read for a detailed discussion of the Kotaneelee litigation.
In June 2001, the Financial Accounting Statements Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No.
143 addresses the accounting for obligations arising from the retirement of
tangible long-lived assets and expands the scope to include obligations that are
identifiable by the entity upon acquisition, construction and during the
operating life of a long-lived asset. The statement requires asset retirement
obligations (AROs) to be initially measured at fair value at the time the
obligation is incurred. SFAS No. 143 is effective for the Company's 2003 fiscal
year. The Company is currently assessing SFAS No. 143 and the accounting for
future site restoration costs to determine whether there will be any significant
effect on earnings or the financial condition of the Company.
Liquidity and Capital Resources
- -------------------------------
Consolidated
- ------------
At September 30,2001, the Company on a consolidated basis had
approximately $14.6 million in cash and cash equivalents and marketable
securities.
A summary of the major changes in cash and cash equivalents during the
three month period ended September 30, 2001 is as follows:
Cash and cash equivalents at beginning of period $12,792,000
Cash provided by operations 941,000
Marketable securities that matured 347,000
Net additions to property and equipment (398,000)
Repurchases of common stock (95,000)
Effect of exchange rate changes (471,000)
-----------
Cash and cash equivalents at end of period $13,116,000
===========
As to MPC
- ---------
At September 30, 2001, MPC, on an unconsolidated basis, had working
capital of approximately $2 million. MPC's current cash position, its annual
MPAL dividend and the anticipated revenue from the Kotaneelee field should be
adequate to meet its current cash requirements. MPC has in the past invested and
may in the future invest substantial portions of its cash to maintain its
majority interest in its subsidiary, MPAL. During fiscal 2002, MPC purchased
85,680 shares of MPAL's stock at a cost of approximately $92,000 and increased
its ownership in MPAL from 51.3% to 51.5%.
During November 2001, MPC expects to receive a dividend from MPAL of
approximately $620,000, which will be added to MPC's working capital.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
During December 2000, MPC announced a stock repurchase plan to
purchase up to one million shares of its common stock in the open market. At
September 30, 2001, MPC had purchased 500,850 of its shares at a cost of
approximately $506,000.
As to MPAL
- ----------
At September 30, 2001, MPAL had working capital of approximately $13.9
million. MPAL has budgeted approximately $4.5 million for specific exploration
projects in the fiscal year 2002 as compared to the $2.3 million expended during
fiscal 2001. However, the total amount to be expended may vary depending on when
various projects reach the drilling phase. The current composition of MPAL's oil
and gas reserves are such that MPAL's future revenues in the long term are
expected to be derived from the sale of gas in Australia. MPAL's current
contracts for the sale of Palm Valley and Mereenie gas will expire during fiscal
year 2009. Unless MPAL is able to obtain additional contracts for its remaining
gas reserves or be successful in its current exploration program, its revenues
will be materially reduced after 2009.
The following is a summary of MPAL's required and contingent
commitments for exploration expenditures for the five year period ending June
30, 2006. The contingent amounts will be dependent on such factors as the
results of the current program to evaluate the exploration permits, the drilling
results and MPAL's financial position.
Required Contingent
Fiscal Year Expenditures Expenditure Total
- -------------- ------------ ----------- -----------
2002 $2,971,000 $ - $ 2,971,000
2003 2,175,000 8,431,000 10,606,000
2004 1,145,000 2,666,000 3,811,000
2005 924,000 5,566,000 6,490,000
2006 - 1,100,000 1,100,000
------------ --------- ---------
Total $7,215,000 $17,763,000 $24,978,000
========== =========== ===========
MPAL expects to fund its exploration costs through its cash and cash
equivalents, cash flow from Australian operations and any balance remaining from
its available A.$10 million bank line of credit. MPAL also expects that it will
seek partners to share the above exploration costs. If MPAL's efforts to find
partners are unsuccessful, it may be unable or unwilling to complete the
contemplated exploration program for some of its properties.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Results of Operations
---------------------
Three months ended September 30, 2001 vs. September 30, 2000
- ------------------------------------------------------------
The components of consolidated net income for the comparable periods
were as follows:
Three months ended
September 30,
-------------
2001 2000
---- ----
MPC unconsolidated pretax (loss) $ (91,234) $ (172,796)
MPC income tax expense (31,040) -
Share of MPAL pretax income 687,831 808,424
Share of MPAL income tax provision (142,961) (244,778)
------------ ------------
Consolidated net income $ 422,596 $ 390,850
========= ==========
Net income per share (basic and diluted) $.02 $.02
==== ====
Revenues
--------
Oil sales decreased 14% in the current quarter to $1,018,000 from
$1,189,000 in 2000 because of a 16% decrease in oil prices and the 11%
Australian foreign exchange rate decrease discussed below which was partially
offset by a 12% increase in the number of units sold. Oil unit sales are
expected to decline unless additional development wells are drilled to maintain
production levels. MPAL is dependent on the operator (65% control) of the
Mereenie field to maintain production. Oil unit sales (before deducting
royalties) in barrels ("bbls") and the average price per barrel sold during the
periods indicated were as follows:
Three months ended September 30,
--------------------------------
2001 Sales 2000 Sales
---------- ----------
Average price Average price
bbls per bbl bbls per bbl
---- ------- ---- -------
Australia-Mereenie 43,842 A.$48.27 39,092 A.$57.69
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Gas sales decreased 8% to $1,977,000 in 2001 from $2,160,000 in 2000
primarily because of the 11% Australian foreign exchange rate decrease discussed
below and an 8% decrease in the volume of gas sold, which were partially offset
by a 4% increase in the average price of gas sold. Gas sales in 2001 include
$124,000 of gas sales from the Kotaneelee field for the production period May -
June 2001. The volumes in billion cubic feet ("bcf") (before deducting
royalties) and the average price of gas per thousand cubic feet ("mcf") sold
during the periods indicated were as follows:
Three months ended September 30,
--------------------------------
2001 Sales 2000 Sales
---------- ----------
bcf Average price per mcf bcf Average price per mcf
--- --------------------- --- ---------------------
(A.$) (A.$)
Australia: Palm Valley
Alice Springs contract .306 3.22 .279 3.03
Darwin contract .473 2.10 .511 2.03
Australia: Mereenie
Darwin contact .698 2.49 .604 2.28
Other .082 3.71 .309 3.17
---- ----
Total 1.559 1.703
===== =====
Other production related revenues increased 183% to $747,000 in 2001
from $264,000 in 2000. The primary reason for this increase was that MPAL's
share of gas pipeline tariffs increased to $713,000 in 2001 from $241,000 in
2000. During the 2001 period, MPAL recorded an additional amount of pipeline
tariff revenue to reflect a resolution of a dispute regarding the calculation
of the pipeline tariffs.
Interest income decreased 29% to $182,000 in 2001 from $256,000 in 2000
because of the 11% Australian foreign exchange rate decrease discussed below and
lower interest rates.
Costs and Expenses
------------------
Production costs increased 18% in 2001 to $999,000 from $844,000 in
2000 because of the increased costs to operate the Palm Valley and Mereenie
fields.
Exploration and dry hole costs increased 27% to $168,000 in 2001 from
$132,000 in 2000. The 2001 and 2000 costs related primarily to the exploration
work being performed on MPAL's offshore Western Australia properties.
Salaries and employee benefits decreased 20% to $353,000 in
2001 from $442,000 in 2000 primarily because of the 11% decrease in the
Australian foreign exchange rate as discussed below.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Depletion, depreciation and amortization increased 18% from
$674,000 in 2000 to $793,000 in 2001. There was an actual 33 % increase in DD&A
that was partially offset by the 11% decrease in the Australian exchange rate
discussed below. The operator of the Mereenie field has implemented an extensive
program for additional drilling and capital improvements. The estimated cost of
these expenditures increased the amount of depletion by approximately $76,000 in
the 2001 period. In addition, there was a 25% net decrease in the reserve base
used to calculate the depletion rate during the 2001 period which also increased
DD&A expense.
Auditing, accounting and legal expenses increased 7% from $102,000 in
2000 to $109,000 in 2001 primarily because of an increase in MPAL's legal costs
in Australia.
Shareholder communications decreased 7% from $28,000 in 2000 to $26,000
in 2001.
Other administrative expenses decreased 2% from $238,000 in 2000 to
$232,000 in 2001.
Income Taxes
------------
Income tax expense decreased 35% in 2001 to $309,000 from $478,000 in
2000. The components of tax income expense between MPC and MPAL were as follows:
2001 2000
---------- -------
Pretax consolidated income $ 1,244 $ 1,407
MPC's losses not recognized 91 173
Permanent differences (410) (175)
------------ -----------
Book taxable income $ 925 $ 1,405
============ ==========
Australian tax rate 30% 34%
============= =============
Australian income tax $ 278 $ 478
MPC income tax 31 -
------------- --------------
Consolidated income tax $ 309 $ 478
=========== ===========
Current income tax provision $ 309 $ 478
Deferred income tax provision - -
------------- --------------
Consolidated income tax provision $ 309 $ 478
=========== ===========
Effective tax rate 25% 34%
=== ===
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
MPAL's 2001 income tax represents the 25% Canadian withholding tax on
its Kotaneelee carried interest net proceeds. The primary reason for the lower
effective tax rate in 2001 is the lower Australian income tax rate of 30% as
compared to the 34% rate in the 2000 period. In addition, the 2001 period
includes $410,000 in permanent tax differences on certain income as compared to
$175,000 in the 2000 period.
Exchange Effect
---------------
The value of the Australian dollar relative to the U.S. dollar
decreased to $.4914 at September 30, 2001 compared to a value of $.5104 at June
30, 2001. This resulted in a $656,000 charge to the foreign currency translation
adjustments account for the three months ended September 30, 2001. The 4%
decrease in the value of the Australian dollar decreased the reported asset and
liability amounts in the balance sheet at September 30, 2001 from the June 30,
2001 amounts. The average exchange rate used to translate MPAL's operations in
Australia was $.5132 for the quarter ended September 30, 2001, which is an 11%
decrease compared to the $.5734 rate for the quarter ended September 30, 2000.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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The Company does not have any significant exposure to market risk other
than as previously discussed regarding foreign currency risk, as the only market
sensitive instruments are its investments in marketable securities. At September
30, 2001, the carrying value of such investments (including those classified as
cash and cash equivalents) was approximately $14.4 million, which approximates
the fair value of the securities. Since the Company expects to hold the
investments to maturity, the maturity value should be realized.
MAGELLAN PETROLEUM CORPORATION
PART II - OTHER INFORMATION
September 30, 2001
Item 5. Other Information
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On September 14, 2001 the trial court in Calgary rendered its decision
in the Kotaneelee field litigation. In the litigation, Canada Southern Petroleum
Ltd. Magellan and the other carried interest partners were seeking monetary
damages for the defendants' alleged breach of contractual obligations and
fiduciary duties, a reduction in the carried interest account because of
improper charges to the account by the defendants, and a declaration that
charges for gas processing fees were improperly made by the defendants.
The Court held that while the defendants had an affirmative contractual
obligation (but not a fiduciary obligation) to market the gas from the
Kotaneelee gas field when it was possible to do so, the defendants had not
breached their contractual obligation. The Court also held that the defendants
made improper charges to the carried interest account in the amount of
approximately US $3.4 million in connection with the repair and rebuilding of
the field's dehydration facilities. The Court further held that defendant Amoco
Canada was not entitled to make gas processing fee charges to the carried
interest account.
On November 2, 2001, Canada Southern Petroleum Ltd, which holds a (30% out
of the 33 1/3% total) carried interest in the field, announced that it intended
to appeal the trial court's decision. Due to the uncertainty of the litigation,
the Company will not accrue the $1.4 million estimated amount due, until the
uncertainty is resolved.
Effective October 30, 2001, Mr. T. Gwynn Davies, MPAL's exploration
manager, was appointed acting General Manager. Mr. Hedley Howard, MPAL's
General Manager and a director of the Company, has taken a medical leave of
absence, which is expected to last approximately three months.
On November 6, 2001, MPAL and its partners spudded the Carbine -1 well
on permit WA-283-P in the Browse Basin offshore Western Australia. The drilling
of the well is expected to take approximately 15 days.
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
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None.
(b) Reports on Form 8-K
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None.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
SEPTEMBER 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
MAGELLAN PETROLEUM CORPORATION
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Registrant
Date: November 13, 2001 By /s/ James R. Joyce
--------------------------------
James R. Joyce, President and
Chief Financial and Accounting Officer