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, 2002
-------------------------------------------------
[ ] 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 13, 2002 was 24,607,376.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
September 30, 2002
Table of Contents
PART I - FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Consolidated balance sheets at September 30, 2002
and June 30, 2002 3
Consolidated statements of income for the three months
ended September 30, 2002 and 2001 4
Consolidated statements of cash flows for the three months
ended September 30, 2002 and 2001 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 17
Item 4 Controls and Procedures 17
PART II - OTHER INFORMATION
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
Rule 13a-14 Certifications 20
Exhibits 21
18
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
------------- --------
2002 2002
---- ----
ASSETS (unaudited) (Note)
- ------
Current assets:
Cash and cash equivalents $16,455,353 $15,784,851
Accounts receivable 2,908,108 4,162,821
Marketable securities 899,619 899,619
Inventories 369,577 377,847
Other assets 248,466 280,537
---------- -----------
Total current assets 20,881,123 21,505,675
---------- -----------
Marketable securities 792,494 794,070
Property and equipment:
Oil and gas properties (successful efforts method) 43,307,145 44,155,824
Land, buildings and equipment 1,620,361 1,669,330
Field equipment 1,145,623 1,189,093
----------- -----------
Total property and equipment: 46,073,129 47,014,247
Less accumulated depletion, depreciation and amortization (29,708,288) (29,967,865)
------------ ------------
Net property and equipment 16,364,841 17,046,382
---------- -----------
Other assets 797,941 820,189
----------- -----------
Total assets $38,836,399 $40,166,316
=========== ===========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,196,608 $ 2,323,781
Accrued liabilities 1,036,266 1,086,193
Income taxes payable 196,921 233,339
---------- ----------
Total current liabilities 3,429,795 3,643,313
---------- ----------
Long term liabilities:
Deferred income taxes 2,009,130 2,731,221
Asset retirement obligation 3,728,399 1,242,398
----------- ----------
Total long term liabilities 5,737,529 3,973,619
----------- ----------
Minority interests 12,603,501 13,932,928
Commitments (Note 2) - -
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 200,000,000 shares
Outstanding 24,607,376 shares 246,074 246,074
Capital in excess of par value 43,085,841 43,085,841
----------- ------------
Total capital 43,331,915 43,331,915
Accumulated deficit (16,660,265) (15,750,935)
Accumulated other comprehensive loss (9,606,076) (8,964,524)
------------ ------------
Total stockholders' equity 17,065,574 18,616,456
------------ ------------
Total liabilities, minority interests and stockholders' equity $38,836,399 $40,166,316
=========== ===========
Note: The balance sheet at June 30, 2002 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,
-------------
2002 2001
---- ----
Revenues:
Oil sales $ 800,988 $ 1,017,989
Gas sales 2,028,939 1,977,392
Other production related revenues 150,805 747,025
Interest income 206,576 181,690
---------- ----------
Total Revenues 3,187,308 3,924,096
---------- ----------
Costs and expenses:
Production costs 983,935 999,135
Exploration and dry hole costs 806,645 167,766
Salaries and employee benefits 410,514 352,821
Depletion, depreciation and amortization 873,926 793,004
Auditing, accounting and legal services 141,407 109,108
Accretion expense 73,685 -
Shareholder communications 30,579 25,696
Other administrative expenses 51,026 232,268
---------- ----------
Total costs and expenses 3,371,717 2,679,798
---------- ----------
Income (loss) before income taxes, minority interests and
cumulative effect of accounting change (184,409) 1,244,298
Income tax provision (852) (308,621)
----------- ----------
Income (loss) before minority interests and cumulative
effect of accounting change (185,261) 935,677
Minority interests 13,872 (513,081)
--------- ----------
Income (loss) before cumulative effect of accounting change (171,389) 422,596
Cumulative effect of accounting change - net (737,941) -
--------- ----------
Net income (loss) $ (909,330) $ 422,596
=========== ==========
Average number of shares:
Basic 24,607,376 24,658,089
========== ==========
Diluted 24,607,376 24,658,089
========== ==========
Income (loss) per share (basic and diluted)
Before cumulative effect of accounting change $(.01) $.02
Cumulative effect of accounting change (.03) -
----- -----
Net income (loss) $(.04) $.02
====== ====
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, 2002 24,607,376 $246,074 $43,085,841 $(15,750,935) $(8,964,524) $18,616,456
Net loss - - - (909,330) - (909,330) $(909,330)
Foreign currency
translation
adjustments - - - - (647,712) (647,712) (647,712)
Unrealized gain on
available-for-sale
securities - - - - 6,160 6,160 6,160
Comprehensive loss ------------
$(1,550,882)
---------- -------- ----------- ------------- ------------ ----------- ============
September 30, 2002 24,607,376 $246,074 $43,085,841 $(16,660,265) $(9,606,076) $17,065,574
========== ======== =========== ============= ============ ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2002
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
September 30,
-------------
2002 2001
---- ----
Operating Activities:
Net income (loss) $ (909,330) $ 422,596
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change 2,025,690 -
Depletion, depreciation and amortization 873,926 793,004
Accretion expense 73,685 -
Deferred income taxes (601,635) -
Minority interests (693,914) 513,081
Increase (decrease) in operating assets and liabilities:
Accounts receivable 817,698 (1,449,107)
Other assets (36,326) (57,679)
Inventories (39,153) 67,516
Accounts payable and accrued liabilities 402,002 458,454
Income taxes payable (15,152) 17,260
Reserve for site restoration costs - 175,661
--------- --------
Net cash provided by operating activities 1,897,491 940,786
--------- --------
Investing Activities:
Marketable securities matured - 346,401
Net additions to property and equipment (646,764) (398,119)
Repurchases of common stock - (94,542)
--------- ----------
Net cash used in investing activities (646,764) (146,260)
---------- ----------
Effect of exchange rate changes on cash
and cash equivalents (580,225) (471,043)
----------- ----------
Net increase in cash and cash equivalents 670,502 323,483
Cash and cash equivalents at beginning of year 15,784,851 12,792,191
----------- -----------
Cash and cash equivalents at end of period $16,455,353 $13,115,674
=========== ===========
See accompanying notes.
Item 1. Consolidated Financial Statements
-----------------------------------------
Note 1. Basis of Presentation
- ------- ---------------------
The accompanying unaudited consolidated financial statements include
the accounts of Magellan Petroleum Corporation (MPC) and the Company's 52.2%
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, 2002 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2003. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended June 30,
2002.
Certain amounts for the 2001 period under Operating and Investing
Activities in the Consolidated Statements of Cash Flows have been reclassified
to conform to the classifications in the 2002 period.
Note 2. Revenue Recognition
- ------- -------------------
Prior to the Kotaneelee field reaching undisputed payout status during
fiscal 2001, 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 at September 30, 2002 (including interest) was at least $1.5 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, in December 2001, the defendants
filed a notice of appeal of the trial court's decision. The court also made no
ruling on the issue of taxable costs of the litigation. Due to the uncertainty
of the litigation, the Company will not accrue the $1.5 million estimated amount
due until the uncertainty is resolved.
The trial was lengthy, complicated and costly to all parties. The court
has very broad discretion as to whether to award costs and disbursements and as
to the calculation of the amount to be awarded. Accordingly, MPC is unable to
determine whether costs will be assessed against MPC or in what amount. However,
since the costs incurred by the defendants have been substantial, and since the
court has broad discretion in the awarding of costs, an award to the defendants
potentially could be material. Costs may be assessed jointly and severally
against nonprevailing parties. MPC has not agreed to share any costs that might
be assessed against Canada Southern which initiated the lawsuit and would seek
to be indemnified by Canada Southern for any such costs.
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, 2002, the Company had purchased 500,850 of its shares at a cost of
approximately $506,000.
Item 1. Financial Statements- (Cont'd)
- ------- ------------------------------
Note 4. Comprehensive income (loss)
- ------- ---------------------------
Total comprehensive income (loss) during the three month periods ended
September 30, 2002 and 2001 were as follows:
Three months ended Accumulated
September 30, at September 30,
------------- ----------------
2002 2001 2002
------------ -------------- ---------
Net income (loss) $(909,330) $422,596
Foreign currency
translation adjustments
(647,712) (656,181) $(9,562,022)
Unrealized gain (loss) on
available-for-sale securities
6,160 (55,440) (44,054)
----------- ------------- -------------
Total comprehensive
income (loss)
$(1,550,882) $ (289,025) $(9,606,076)
============ =========== ============
Note 5. Investment in MPAL
- ------- ------------------
During the three months ended September 30, 2002, MPC purchased 66,941
shares of MPAL at an approximate cost of $64,000 and increased its ownership in
MPAL from 52.0% to 52.2%.
Note 6. Earnings per share
- ------- ------------------
Earnings per 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 month periods ended
September 30, 2002 and 2001 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 7. 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:
Item 1. Financial Statements- (Cont'd)
- ------- ------------------------------
Three months ended
September 30,
-----------------------------------
2002 2001
---- ----
Revenues:
MPC $ 110 $ 155
MPAL 3,077 3,769
Intersegment dividend - -
------- -------
Total consolidated revenues $ 3,187 $ 3,924
======= =======
Net income (loss):
MPC $ (151) $ (122)
MPAL (758) 545
Intersegment dividend - -
------- --------
Consolidated net income (loss) $ (909) $ 423
======== ========
Note 8. Unrealized Loss on Securities Held for Investment
- ------- -------------------------------------------------
During August 1999, MPC 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 listed on the London
Stock Exchange. At September 30, 2002, MPC owned approximately 2% of Sefton
Resources, Inc. with a fair market value of $49,280 and a cost of $93,334 which
is included in other assets. The $44,054 has been recorded as unrealized loss on
available-for-sale securities.
Note 9. Exploration and Dry Hole Costs
- ------- ------------------------------
The 2002 and 2001 costs related primarily to the exploration work being
performed on MPAL's offshore Western Australia properties. The costs in 2002
also include the dry hole costs (a total of $367,000) of the two wells drilled
in the Cooper Basin in South Australia.
Note 10. Asset Retirement Obligation
- -------- ---------------------------
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost is capitalized as part of the related
long-lived asset (oil & gas properties) and amortized on a units-of-production
basis over the life of the related reserves. Accretion expense in connection
with the discounted liability is recognized over the remaining life of the
related reserves. The estimated liability is based on the future estimated cost
of plugging the existing oil and gas wells and removing the surface facilities
equipment in the Palm Valley and Mereenie fields in the Northern Territory of
Australia. The liability is a discounted liability using a credit-adjusted
risk-free rate of approximately 8%. Revisions to the liability could occur due
to changes in the estimates of these costs.
Item 1. Financial Statements- (Cont'd)
- ------- ------------------------------
Upon the adoption of SFAS 143, the Company recorded a discounted
liability (Asset retirement obligation) of $3,794,000, increased oil and gas
properties by $526,000 and recognized a one-time, cumulative effect after-tax
charge of $738,000 (net of $316,000 deferred tax benefit and minority interest
of $680,000) which has been included in net loss for the three month period
ended September 30, 2002.
If the provisions of SFAS 143 had been adopted in prior years, net
income for the three months ended September 30, 2001 would have been reduced by
approximately $37,000. The adoption of SFAS 143 increased the net loss before
cumulative effect of accounting change by approximately $19,000 for the three
months ended September 30, 2002 and is estimated to reduce fiscal year 2003
earnings before cumulative effect of accounting change by approximately $74,000.
The pro forma effects for the three month periods ended September 30,
2002 and 2001, assuming the adoption of SFAS 143 as of July 1, 2001, were not
material to earnings per share.
A reconciliation of the Company's liability for the three months ended
September 30, 2002, is as follows:
Upon adoption at July 1, 2002 $3,794,000
Liabilities incurred -
Liabilities settled -
Accretion expense 74,000
Revisions to estimate -
Exchange effect (140,000)
---------
Balance at September 30, 2002 $3,728,000
=========
Note 11. Commitments
MPAL has required commitments for exploration expenditures to evaluate
certain of its exploration permits. MPAL expects to fund its exploration costs
through its cash and cash equivalents and cash flow from Australian operations.
MPAL also expects that it will seek partners to share the exploration costs.
MPAL has entered into farmout agreements covering the Cooper Basin, the
Maryborough Basin and offshore Western Australia which will reduce the amount of
MPAL's required expenditures of $2,323,000 in fiscal 2003 by approximately
$900,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Forward Looking Statements
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.
Critical Accounting Policies
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its
oil and gas operations. Under this method, the costs of successful wells,
development dry holes and productive leases are capitalized and amortized on a
units-of-production basis over the life of the related reserves. Cost centers
for amortization purposes are determined on a field-by-field basis. The Company
records its proportionate share in joint venture operations in the respective
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
---------------------------------------------------------------
classifications of assets, liabilities and expenses. Unproved properties with
significant acquisition costs are periodically assessed for impairment in value,
with any impairment charged to expense. The successful efforts method also
imposes limitations on the carrying or book value of proved oil and gas
properties. Oil and gas properties are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable. The Company estimates the future undiscounted cash flows from the
affected properties to determine the recoverability of carrying amounts. In
general, analyses are based on proved reserves, except in circumstances where it
is probable that additional resources will be developed and contribute to cash
flows in the future.
Exploratory drilling costs are initially capitalized pending
determination of proved reserves but are charged to expense if no proved
reserves are found. Other exploration costs, including geological and
geophysical expenses, leasehold expiration costs and delay rentals, are expensed
as incurred.
Asset Retirement Obligation
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost should be capitalized as part of the
related long-lived asset (oil & gas properties) and amortized on a
units-of-production basis over the life of the related reserves. Accretion
expense in connection with the discounted liability is recognized over the
remaining life of the related reserves.
The estimated liability is based on the future estimated cost of
plugging the existing oil and gas wells and removing the surface facilities
equipment in the Palm Valley and Mereenie fields in the Northern Territory of
Australia. The liability is a discounted liability using a credit-adjusted
risk-free rate of approximately 8%. Revisions to the liability could occur due
to changes in the estimates of these costs.
Revenue Recognition
The Company recognizes oil and gas revenue from its interests in
producing wells as oil and gas is produced and sold from those wells. Oil and
gas sold is not significantly different from the Company's share of production.
Revenues from the purchase, sale and transportation of natural gas are
recognized upon completion of the sale and when transported volumes are
delivered. Shipping and handling costs in connection with such deliveries are
included in production costs. Revenue under carried interest agreements is
recorded in the period when the net proceeds become receivable, measurable and
collection is reasonably assured. The time the net revenues become receivable
and collection is reasonably assured depends on the terms and conditions of the
relevant agreements and the practices followed by the operator. As a result, net
revenues may lag the production month by one or more months.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
---------------------------------------------------------------
Liquidity and Capital Resources
Prior to the Kotaneelee field reaching undisputed payout status during
fiscal year 2001, 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 at September 30, 2002 (including interest) was at least $1.5 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, in December 2001, the defendants
filed a notice of appeal of the trial court's decision. The court also made no
ruling on the issue of taxable costs of the litigation. Due to the uncertainty
of the litigation, the Company will not accrue the $1.5 million estimated amount
due until the uncertainty is resolved.
The trial was lengthy, complicated and costly to all parties. The court
has very broad discretion as to whether to award costs and disbursements and as
to the calculation of the amount to be awarded. Accordingly, MPC is unable to
determine whether costs will be assessed against MPC or in what amount. However,
since the costs incurred by the defendants have been substantial, and since the
court has broad discretion in the awarding of costs, an award to the defendants
potentially could be material. Costs may be assessed jointly and severally
against nonprevailing parties. MPC has not agreed to share any costs that might
be assessed against Canada Southern which initiated the lawsuit and would seek
to be indemnified by Canada Southern for any such costs.
Consolidated
At September 30, 2002, the Company on a consolidated basis had
approximately $18.1 million of cash and cash equivalents and marketable
securities. A summary of the major changes in cash and cash equivalents during
the period is as follows:
Cash and cash equivalents at beginning of period $15,785,000
Cash provided by operations 1,897,000
Net additions to property and equipment (647,000)
Effect of exchange rate changes (580,000)
----------
Cash and cash equivalents at end of period $16,455,000
===========
As to MPC (unconsolidated)
At September 30, 2002, MPC, on an unconsolidated basis, had working
capital of approximately $2.1 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 2003, MPC purchased
66,941 shares of MPAL's stock at a cost of approximately $64,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
---------------------------------------------------------------
During November 2002, MPC expects to receive a dividend from MPAL of
approximately $670,000, which will be added to MPC's working capital.
During the fiscal year 2001, MPC announced a stock repurchase plan to
purchase up to one million shares of its common stock in the open market. At
June 30, 2002, MPC had purchased 500,850 of its shares at a cost of
approximately $506,000.
As to MPAL
At September 30, 2002, MPAL had working capital of approximately $15.3
million. MPAL has budgeted approximately $3.5 million for specific exploration
projects in the fiscal year 2003 as compared to the $4.1 million expended during
fiscal 2002. 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 between the fiscal year
2009 and 2012. 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, 2007. The contingent amounts will be dependent on such factors as the
results of the current program to evaluate the exploration permits, drilling
results and MPAL's financial position.
Fiscal Year Required Expenditures Contingent Expenditures Total
----------- ------------------- ----------------------- ----------
2003 $2,323,000 $ 84,000 $ 2,407,000
2004 879,000 7,945,000 8,824,000
2005 963,000 14,113,000 15,076,000
2006 616,000 2,454,000 3,070,000
2007 - 1,421,000 1,421,000
----------- ----------- -----------
Total $4,781,000 $26,017,000 $30,798,000
========== =========== ===========
MPAL expects to fund its exploration costs through its cash and cash
equivalents and cash flow from Australian operations. 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
exploration program for some of its properties. In addition to the above
commitments, MPAL has capital commitments of approximately $924,000 with respect
to the Palm Valley and Mereenie fields which have not been included in the
consolidated financial statements. MPAL has entered into farmout agreements
covering the Cooper Basin, the Maryborough Basin and offshore Western Australia
which will reduce the amount of MPAL's required expenditures of $2,323,000 in
fiscal 2003 by approximately $900,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
---------------------------------------------------------------
Results of Operations
New Accounting Standards
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost is capitalized as part of the related
long-lived asset (oil & gas properties) and amortized on a units-of-production
basis over the life of the related reserves. Accretion expense in connection
with the discounted liability is recognized over the remaining life of the
related reserves. The estimated liability is based on the future estimated cost
of plugging the existing oil and gas wells and removing the surface facilities
equipment in the Palm Valley and Mereenie fields in the Northern Territory of
Australia. The liability is a discounted liability using a credit-adjusted
risk-free rate of approximately 8%. Revisions to the liability could occur due
to changes in the estimates of these costs.
Upon the adoption of SFAS 143, the Company recorded a discounted
liability (Asset retirement obligation) of $3,794,000, increased oil and gas
properties by $526,000 and recognized a one-time, cumulative effect after-tax
charge of $738,000 (net of $316,000 deferred tax benefitand minority interest of
$680,000) which has been included in net loss for the three month period ended
September 30, 2002.
If the provisions of SFAS 143 had been adopted in prior years, net
income for the three months ended September 30, 2001 would have been reduced by
approximately $37,000. The adoption of SFAS 143 increased the net loss before
cumulative effect of accounting change by approximately $19,000 for the three
months ended September 30, 2002 and is estimated to reduce fiscal year 2003
earnings before cumulative effect of accounting change by approximately $74,000.
The pro forma effects for the three month periods ended September 30,
2002 and 2001, assuming the adoption of SFAS 143 as of July 1, 2001, were not
material to earnings per share.
Three months ended September 30, 2002 vs. September 30, 2001
The components of consolidated net income for the comparable periods
were as follows:
Three months ended
September 30,
-------------
2002 2001
---- ----
MPC unconsolidated pretax (loss) $ (129,299) $ (91,234)
MPC income tax expense (21,965) (31,040)
Share of MPAL pretax income (loss) (32,166) 687,831
Share of MPAL income tax benefit (provision) 12,041 (142,961)
Share of MPAL cumulative effect of accounting change(737,941) -
--------- ---------
Consolidated net income (loss) $ (909,330) $ 422,596
========= =========
Net income (loss) per share (basic and diluted) $(.04) $.02
====== ====
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
---------------------------------------------------------------
Revenues
Oil sales decreased 21% in the current quarter to $801,000 from
$1,018,000 in 2001 because of an 8% decrease in oil prices and a 16% decrease in
the number of units sold which was partially offset by the 7% Australian foreign
exchange rate increase discussed below. 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,
--------------------------------
2002 Sales 2001 Sales
---------- ----------
Average price Average price
bbls per bbl bbls per bbl
---- ------- ---- -------
Australia-Mereenie 36,632 A.$44.35 43,842 A.$48.27
Gas sales increased 5% to $2,029,000 in 2002 from $1,977,000 in 2001
primarily because of the 7% Australian foreign exchange rate increase discussed
below. The volume of gas sold and the average price of gas sold remained
relatively unchanged between the periods. Gas sales in 2002 include $88,000 of
gas sales from the Kotaneelee field compared to $124,000 of gas sales from the
field in the 2001 period. The volumes in billion cubic feet ("bcf") (before
deducting royalties) and the average price of gas per thousand cubic feet
("mcf") sold during the periods indicated were as follows:
Three months ended September 30,
--------------------------------
2002 Sales 2001 Sales
---------- ----------
bcf Average price per mcf bcf Average price per mcf
--- --------------------- ----- --- ---------------------
(A.$) (A.$)
Australia: Palm Valley
Alice Springs contract .290 3.25 .306 3.22
Darwin contract .488 2.10 .473 2.10
Australia: Mereenie
Darwin contact .719 2.52 .698 2.49
Other .054 3.62 .082 3.71
---- ----
Total 1.551 1.559
===== =====
Other production related revenues decreased 80% to $151,000 in 2002
from $747,000 in 2001. The primary reason for this decrease was that MPAL's
share of gas pipeline tariffs in 2001 included an additional amount ($472,000)
of pipeline tariff revenue to reflect a resolution of a dispute regarding the
calculation of the pipeline tariffs.
Interest income increased 14% to $207,000 in 2002 from $182,000 in 2001
because of the 7% Australian foreign exchange rate increase discussed below and
additional funds were available for investment.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
---------------------------------------------------------------
Costs and Expenses
Production costs decreased 2% in 2002 to $984,000 from $999,000 in 2001
because the 2001 period includes $40,000 of site restoration costs which under
SFAS 143 is a component of depletion, depreciation and amortization beginning in
the 2002 period.
Exploration and dry hole costs increased 380% to $807,000 in 2002 from
$168,000 in 2001. The 2002 and 2001 costs related primarily to the exploration
work being performed on MPAL's offshore Western Australia properties. The costs
in 2002 also include the dry hole costs (a total of $367,000) of the two wells
drilled in the Cooper Basin in South Australia.
Salaries and employee benefits increased 16% to $411,000 in 2002 from
$353,000 in 2001 because of the 7% increase in the Australian foreign exchange
rate as discussed below and salary increases for MPAL personnel.
Depletion, depreciation and amortization increased 10% from $793,000 in
2001 to $874,000 in 2002 primarily because of the 7% increase in the Australian
foreign exchange rate as discussed below.
Auditing, accounting and legal expenses increased 29% from $109,000 in
2001 to $141,000 in 2002 primarily because of an increase in auditing fees and
because of the 7% increase in the Australian foreign exchange rate as discussed
below.
Accretion expense was $74,000 in the 2002 period. Accretion expense
represents the accretion on the Asset Retirement Obligation under SFAS 143 which
was adopted effective July 1, 2002. The corresponding expense for the 2001
period would have been $64,000.
Shareholder communications increased 19% from $26,000 in 2001 to
$31,000 in 2002 because of MPAL's increased costs in satisfying its statutory
obligations in Australia as a public company.
Other administrative expenses decreased 78% from $232,000 in 2001 to
$51,000 in 2002 because of an increase in the amount of overhead that MPAL, as
operator, charged its partners during 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Cont'd)
---------------------------------------------------------------
Income Taxes
Income tax expense decreased from a tax provision of $309,000 in 2001
to a tax provision of $1,000 in 2002. The components of tax income expense
between MPC and MPAL were as follows:
2002 2001
------ ------
Pretax consolidated income (loss) $ (184) $ 1,244
MPC's losses not recognized 129 91
Permanent differences (15) (410)
------ -------
Book taxable income $ (70) $ 925
====== ========
Australian tax rate 30% 30%
====== ======
Australian income tax (benefit) provision $ (21) $ 278
MPC income tax provision 22 31
------ --------
Consolidated income tax provision $ 1 $ 309
=== ======
Current income tax provision $ 22 $ 309
Deferred income tax benefit (21) -
------ --------
Consolidated income tax provision $ 1 $ 309
====== ======
Effective tax rate 1% 25%
== ===
MPC's 2002 and 2001 income tax represents the 25% Canadian withholding
tax on its Kotaneelee carried interest net proceeds. The 2002 period includes
$15,000 in permanent tax differences on certain MPAL income as compared to
$410,000 in the 2001 period. The 2001 period included an additional amount
($472,000) of pipeline tariff revenue to reflect a resolution of a dispute
regarding the calculation of the pipeline tariffs which gives rise to the
difference.
Exchange Effect
The value of the Australian dollar relative to the U.S. dollar
decreased to $.5429 at September 30, 2002 compared to a value of $.5635 at June
30, 2002. This resulted in a $648,000 charge to the foreign currency translation
adjustments account for the three month period ended September 30, 2002. The 4%
decrease in the value of the Australian dollar decreased the reported asset and
liability amounts in the balance sheet at September 30, 2002 from the June 30,
2002 amounts. The average exchange rate used to translate MPAL's operations in
Australia was $.5472 for the quarter ended September 30, 2002, which is a 7%
increase compared to the $.5132 rate for the quarter ended September 30, 2001.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------- ---------------------------------------------------------
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, 2002, the carrying value of such investments (including those classified as
cash and cash equivalents) was approximately $18.1 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.
Item 4 - Controls and Procedures
- ------ - -----------------------
I, James R. Joyce, the principal executive officer and the principal
financial officer have evaluated the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) adopted under the
Securities Act of 1934) within the ninety (90) day period prior to the date of
this report and have concluded:
1. That the Company's disclosure controls and procedures are adequately
designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is timely made known to such
officers by others within the Company and its subsidiaries,particularly
during the period in which this quarterly report is being prepared; and
2. That there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of my evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
September 30, 2002
Item 5. Other Information
- ------- -----------------
During October 2002, MPAL entered into a farmout agreement with Novus
Petroleum Limited, an Australian based company with respect to exploration
permits ATP 613P and ATP 674P in the Maryborough Basin of Queensland. Novus has
the right to earn a 50% in both permits by drilling two wells.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
99 (1) Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley act of 2002 executed by James R. Joyce.
(b) Reports on Form 8-K
On September 20, 2002, the Company filed a Current Report on
Form 8-K that the Company's common stock was delisted from trading on the
Pacific Stock Exchange effective September 20, 2002.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
September 30, 2002
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
Registrant
Date: November 13, 2002 By /s/ James R. Joyce
--------------------------------
James R. Joyce
President and Chief Financial
and Accounting Officer
Form 10-Q
Magellan Petroleum Corporation
Rule 13a-14 Certification
I, James R. Joyce, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Magellan Petroleum
Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ James R. Joyce
---------------------------------
James R. Joyce
President and Chief Accounting
and Financial Officer