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, 2005
[ ] 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.)
10 Columbus Boulevard, Hartford, Connecticut 06106
(Address of principal executive offices) (Zip Code)
(860) 293-2006
(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
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of the issuer's single class of common
stock as of November 14, 2005 was 25,783,243.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
SEPTEMBER 30, 2005
TABLE OF CONTENTS
PAGE
-----
PART I - FINANCIAL INFORMATION
ITEM 1 Condensed financial statements (unaudited)
Condensed consolidated balance sheets at September 30, 2005 and
June 30, 2005 3
Condensed consolidated statements of loss for the three months
ended September 30, 2005 and 2004 4
Condensed consolidated statements of cash flows for the three
months ended September 30, 2005 and 2004 5
Notes to condensed consolidated financial statements 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 17
ITEM 4 Controls and Procedures 18
PART II - OTHER INFORMATION
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 19
ITEM 6 Exhibits 20
Signatures 21
Certifications 22-23
2
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, JUNE 30,
2005 2005
------------- ------------
(NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 23,280,653 $ 21,733,375
Accounts receivable-Trade 4,687,187 4,210,174
Accounts receivable-Working Interest Partners 432,530 864,922
Marketable securities 2,938,746 3,216,541
Inventories 443,338 591,997
Other assets 629,031 526,703
------------ ------------
Total current assets 32,411,485 31,143,712
------------ ------------
Deferred income taxes 1,494,907 1,014,907
Property and equipment:
Oil and gas properties (successful efforts method) 81,337,246 80,765,911
Land, buildings and equipment 2,553,707 2,552,980
Field equipment 823,299 1,620,909
------------ ------------
84,714,252 84,939,800
Less accumulated depletion, depreciation and
amortization (61,118,981) (60,674,306)
------------ ------------
Net property and equipment 23,595,271 24,265,494
------------ ------------
Total assets $ 57,501,663 $ 56,424,113
============ ============
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,353,831 $ 3,602,085
Accrued liabilities 1,427,756 1,308,004
Income taxes payable -- 25,879
------------ ------------
Total current liabilities 5,781,587 4,935,968
------------ ------------
Long term liabilities:
Asset retirement obligations 5,832,721 5,729,180
------------ ------------
Total long term liabilities 5,832,721 5,729,180
------------ ------------
Minority interests 18,802,774 18,583,046
Commitments
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 200,000,000 shares Outstanding
25,783,243 and 25,783,243 shares 257,832 257,832
Capital in excess of par value 44,404,660 44,402,182
Accumulated deficit (15,189,518) (15,161,462)
Accumulated other comprehensive loss (2,388,393) (2,322,633)
------------ ------------
Total stockholders' equity 27,084,581 27,175,919
------------ ------------
Total liabilities, minority interests and stockholders'
equity $ 57,501,663 $ 56,424,113
============ ============
Note: The balance sheet at June 30, 2005 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes.
3
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2005
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
----------- -----------
REVENUES:
Oil sales $ 2,455,048 $ 1,910,847
Gas sales 3,217,938 2,366,807
Other production related revenues 421,694 299,787
Gain on sale of field equipment 155,106 --
----------- -----------
Total revenues 6,249,786 4,577,441
----------- -----------
COSTS AND EXPENSES:
Production costs 2,209,654 1,527,790
Exploration and dry hole costs 1,311,441 1,118,460
Salaries and employee benefits 676,229 670,140
Depletion, depreciation and amortization 1,363,915 1,400,658
Auditing, accounting and legal services 107,119 180,835
Accretion expense 109,969 94,370
Shareholder communications 52,349 43,511
Other administrative expenses 344,059 101,393
----------- -----------
Total costs and expenses 6,174,735 5,137,157
----------- -----------
Operating income (loss) 75,051 (559,716)
Interest income 340,109 355,652
----------- -----------
Income (loss) before income taxes and minority interests 415,160 (204,064)
Income tax provision (190,347) (5,334)
Minority interests (252,868) (86,124)
----------- -----------
Net loss $ (28,055) $ (295,522)
=========== ===========
Average number of shares:
Basic 25,783,243 25,783,243
=========== ===========
Diluted 25,797,638 25,783,243
=========== ===========
Net loss per share (basic and diluted) $ -- $ (.01)
=========== ===========
See accompanying notes.
4
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2005
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2005 2004
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (28,055) $ (295,522)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Gain from sale of field equipment (155,106) --
Depletion, depreciation and amortization 1,363,915 1,400,658
Accretion expense 109,969 94,370
Deferred income taxes (482,264) (4,753)
Minority interests 252,868 86,124
Exploration and dry hole costs 1,293,082 585,321
Increase (decrease) in operating assets and liabilities:
Accounts receivable (486,226) (936,526)
Other assets (102,328) 42,520
Inventories 147,504 113,864
Accounts payable and accrued liabilities (140,964) (358,072)
Income taxes payable (26,801) (210,896)
----------- -----------
Net cash provided by operating activities 1,745,594 517,088
INVESTING ACTIVITIES:
Proceeds from sale of field equipment 155,106 --
Additions to property and equipment (294,797) (528,755)
Increase (decrease) in construction payables 1,024,133 (1,486,283)
Oil and gas exploration activities (1,293,082) (585,321)
Marketable securities matured 1,166,268 1,597,637
Marketable securities purchased (888,473) (1,750,649)
----------- -----------
Net cash used in investing activities (130,845) (2,753,371)
----------- -----------
FINANCING ACTIVITIES:
Net cash used in financing activities -- --
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (67,471) 471,527
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,547,278 (1,764,756)
Cash and cash equivalents at beginning of period 21,733,375 20,406,620
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $23,280,653 $18,641,864
=========== ===========
See accompanying notes.
5
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
ITEM 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Magellan Petroleum Corporation (the Company or MPC) is engaged in the sale
of oil and gas and the exploration for and development of oil and gas reserves.
At September 30, 2005, MPC's principal asset was a 55.13% equity interest in its
subsidiary, Magellan Petroleum Australia Limited (MPAL), which has one class of
stock that is publicly held and traded in Australia and listed on the Australian
Stock Exchange under the trading symbol MAG. MPAL's major assets are two
petroleum production leases covering the Mereenie oil and gas field (35% working
interest) and one petroleum production lease covering the Palm Valley gas field
(52% working interest). Both fields are located in the Amadeus Basin in the
Northern Territory of Australia. MPC has a direct 2.67% carried interest in the
Kotaneelee gas field in the Yukon Territory of Canada.
The accompanying unaudited consolidated financial statements include the
accounts of MPC and 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 month period ended September
30, 2005 are not necessarily indicative of the results that may be expected for
the year ending June 30, 2006. 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, 2005. All
amounts presented are in United States dollars, unless otherwise noted.
Certain reclassifications of prior period data included in the accompanying
consolidated financial statements have been made to conform with the June 30,
2005 10K. Reclassifications associated with the 2004 consolidated statement of
cash flows resulted in an increase in net cash provided by operating activities
and a corresponding increase in net cash used in investing activities of
$624,805 related to changes in exploration and dry hole costs, accounts
receivable, and accounts payable and accrued liabilities of $(533,139),
$(328,339), and $1,486,283, respectively.
Note 2. Exchange Offer
On October 18, 2005 MPC announced its intention to commence an exchange
offer (the Offer) to acquire all of the ordinary shares of MPAL that it does not
currently own. MPC currently has a 55.13% ownership interest in MPAL. The Offer
consideration will be seven (7) newly-issued shares of MPC common stock for each
ten (10) outstanding MPAL shares. If the Offer is successful, new MPC shares
will be issued to MPAL's Australian shareholders in the form of CDIs (CHESS
Depository Interests), which will be listed on the Australian Stock Exchange
("ASX").
Based on MPC's closing share price of $1.93 on October 17, 2005 on the
NASDAQ Capital Market and an A$/US$ exchange rate of 0.75, the Offer values MPAL
at A$84.1 million in total (including the shares currently owned by Magellan),
or A$1.80 per share. Accordingly, the proposed consideration in aggregate for
the 44.87% of MPAL's shares which Magellan does not already own is approximately
14.7 million Magellan shares, with an aggregate value of A$37.7 million based on
the above.
The Offer is subject to certain conditions including MPC acquiring at least
90% of MPAL's outstanding shares on or before the end of the prescribed Offer
Period, and approval of the issuance of MPC common stock in the Offer by MPC's
shareholders at the upcoming 2005 annual meeting of shareholders.
On October 31, 2005, MPC filed with the U.S. Securities and Exchange
Commission a registration statement on Form S-4, which contained a
prospectus/proxy statement in connection with the proposed Offer.
Included in other assets are $325,375 of capitalized costs related to the
proposed transaction. These costs will be written off if the transaction is not
completed.
6
Note 3. Capital and stock options
The Company through its stock repurchase plan may purchase up to one
million shares of its common stock in the open market. Through June 30, 2003,
the Company had purchased 680,850 of its shares at a cost of approximately
$686,000, all of which shares have been cancelled. No shares were repurchased
during the three months ended September 30, 2005 or for the fiscal year ended
June 30, 2005.
7
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
The Company's 1998 Stock Option Plan (the Plan") provides for grants of
non-qualified stock options principally at an option price per share of 100% of
the fair value of the Company's common stock on the date of the grant. Stock
options are generally granted with a 3-year vesting period and a 10-year term.
The stock options vest in equal annual installments over the vesting period,
which is also the requisite service period.
In December 2004 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123(R), "Share -Based Payment."
SFAS 123 (R) is effective for the first annual reporting period beginning after
June 15, 2005 and is a revision of SFAS No. 123, "Accounting for Stock Based
Compensation" and supersedes Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees SFAS 123(R) eliminates the alternative
to use the intrinsic value method of accounting provided by SFAS 123, which
generally resulted in no compensation expense recorded in the financial
statements related to the issuance of equity awards to employees. SFAS 123(R)
requires recognition in the financial statements of the cost resulting from all
share-based payment transactions by applying a fair-value-based measurement
method to account for generally all share-based payment transactions with
employees.
On July 1, 2005, the Company adopted SFAS 123(R) and elected the modified
prospective application permitted under SFAS 123(R). Under this application, the
Company is required to record compensation expense for all awards granted after
the date of adoption and for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. Compensation expense has been
and will continue to be recorded for the unvested portion of previously issued
awards that were outstanding at July 1, 2005 using the same estimate of the
grant date fair value and the same attribution method used to determine the pro
forma disclosure under SFAS No. 123. In the first quarter of 2006, the Company
recorded stock-based compensation expense for the cost of stock options of
approximately $2,500 ($2,500 after tax or $.00 per basic and diluted share).
Prior to the adoption of SFAS 123(R), the Company applied the requirements of
APB 25 to account for its stock-based awards. Under APB 25, because the exercise
price of the Company's stock option equaled the market price of the underlying
stock on the date of grant, no compensation expense was recognized.
The Company determined the fair value of the options at the date of grant
using the Black-Scholes option pricing model. Option valuation models require
the input of highly subjective assumptions including the expectation stock price
volatility. The assumptions used to value the Company's grants were: risk free
interest rate - 4.95%, expected life - 10 years, expected volatility -.518,
expected dividend -0.
For the quarter ended September 30, 2004, pro forma information regarding
net income and earnings per share was required by SFAS 148, and was determined
as if the Company had accounted for its stock options under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using the Black-Scholes option pricing model. The Company's pro forma
information follows:
THREE MONTHS ENDED
SEPTEMBER 30, 2004
------------------
PER SHARE
BASIC AND
DILUTED
Net loss as reported $(295,522) $(.01)
Stock option expense (4,500) --
--------- -----
Pro forma net loss $(300,022) $(.01)
========= =====
EXPIRATION NUMBER OF
OPTIONS OUTSTANDING DATES SHARES EXERCISE PRICES ($)
- ------------------- ------------ --------- -----------------------
June 30, 2003 921,000 .85-1.57
Expired (126,000) 1.57
Cancelled (25,000) .85
Exercised (175,000) .85-1.28
--------
June 30, 2004 595,000 1.28
Granted July 1, 2014 30,000 1.45
--------
8
September 30, 2004 625,000 ($1.29 weighted average)
Expired (595,000) 1.28
--------
September 30, 2005 30,000 1.45
========
SUMMARY OF OPTIONS OUTSTANDING AT SEPTEMBER 30, 2005
EXPIRATION EXERCISE
DATES TOTAL VESTED PRICES ($)
---------- ------- ------ ----------
Granted 2004 July 2014 30,000 10,000 1.45
=======
OPTIONS RESERVED FOR FUTURE GRANTS 795,000
=======
On October 20, 2003, options to purchase 126,000 shares of the Company's
common stock expired without being exercised. On December 31, 2003, unvested
options to purchase 25,000 shares of the Company's common stock were cancelled
when the terms of the grant were not satisfied. On March 8, 2004, 175,000
options to purchase shares of common stock were exercised in a cashless exercise
that resulted in 55,867 shares being issued. On February 23, 2005 options to
purchase 595,000 shares of the Company's common stock expired without being
exercised.
Note 4. Comprehensive (loss) income
Total comprehensive (loss) income during the three month periods ended
September 30, 2005 and 2004 is as follows:
THREE MONTHS ENDED ACCUMULATED
SEPTEMBER 30, OTHER
-------------------- COMPREHENSIVE
2005 2004 LOSS
-------- --------- -------------
Balance at June 30, 2005 $(2,322,633)
Net loss $(28,055) $(295,522)
Foreign currency translation adjustments (65,760) 604,572 (65,760)
-------- --------- -----------
Total comprehensive (loss) income $(93,815) $309,050
======== =========
Balance at September 30, 2005 $(2,388,393)
===========
Note 5. 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 only
reconciling item in the calculation of diluted EPS is the dilutive effect of
stock options which were computed using the treasury stock method. For the three
months ended September 30, 2005, the Company had 14,395 options that were issued
that had a strike price below the average stock price for the quarter. For the
period ended September 30, 2004, the Company did not have any stock options that
were issued that had a strike price below the average stock price for the
quarter. The Company's basic and diluted calculations of EPS are the same in
2004 because the exercise of 625,000 in 2004 and 30,000 in 2005 of outstanding
options is not assumed in calculating diluted EPS, as the result would be
anti-dilutive.
Note 6. Investment in MPAL
During the quarter ended September 30, 2004, MPC invested $29,466 in 31,606
shares of MPAL. This increased MPC's interest in MPAL from 55.06% to 55.13%. The
difference between the acquisition cost of the MPAL shares and the book value of
the additional MPAL interest acquired was allocated to oil and gas properties.
9
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
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 ASX under the symbol MAG. 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,
------------------
2005 2004
------ ------
Revenues:
MPC $ 22 $ 40
MPAL 6,228 4,537
------ ------
Total consolidated revenues $6,250 $4,577
====== ======
Net income (loss):
MPC $ (303) $ (351)
MPAL 275 55
------ ------
Consolidated net loss $ (28) $ (296)
====== ======
Note 8. Exploration and Dry Hole Costs
These costs relate primarily to the exploration work being performed on
MPAL's properties. The dry holes were drilled on MPAL properties in Australia,
New Zealand and the United Kingdom. During the 2005 quarter, the Company
incurred costs of $302,000 for PEDL 098 in the United Kingdom.
Note 9. Asset Retirement Obligations
A reconciliation of the Company's asset retirement obligations for the
three months ended September 30, 2005 is as follows:
Balance at July 1, 2005 $5,729,180
Liabilities incurred
Liabilities settled --
Accretion expense 109,969
Revisions to estimate --
Exchange effect (6,428)
----------
Balance at September 30, 2005 $5,832,721
==========
Note 10. Recent Accounting Pronouncements
On March 30, 2005 the FASB issued FASB Interpretation No. (FIN) 47,
"Accounting for Conditional Asset Retirement Obligations." FIN 47 requires an
entity to recognize a liability for the fair value of an asset retirement
obligation that is conditional on a future event if the liabilitiy's fair valur
can be reasonably estimated. FIN 47 is effective for the fiscal year end June
30, 2006. Management is currently evaluating the impact on the Company and
cannot yet reasonably estimate the impact on the financial statement.
10
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
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. The
results reflect fully consolidated financial statements of MPC and MPAL. These
could change if the Exchange Offer (Note 2) is approved based on the fair value
of the assets to be acquired. Among these risks and uncertainties are pricing
and production levels from the properties in which the Company has interests,
and the extent of the recoverable reserves at those properties. In addition, the
Company has a large number of exploration permits and faces the risk that any
wells drilled may fail to encounter hydrocarbons in commercially recoverable
quantities. The Company undertakes no obligation to update or revise
forward-looking statements, whether as a result of new information, future
events, or otherwise.
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
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 developed reserves, except in
circumstances where it is probable that additional resources will be developed
and contribute to cash flows in the future. For Mereenie and Palm Valley, proved
developed reserves are limited to contracted quantities. If such contracts are
extended, the proved developed reserves will be increased to the lesser of the
actual proved developed reserves or the contracted quantities.
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. Because
the Company follows the successful efforts method of accounting, the results of
operations may vary materially from quarter to quarter. An active exploration
program may result in greater exploration and dry hole costs.
11
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
Asset Retirement Obligations
Statement of Financial Accounting Standards ("SFAS") 143, "Accounting for
Asset Retirement Obligations"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 land
reclamation, plugging the existing oil and gas wells and removing the surface
facilities equipment in the Palm Valley, Mereenie, Kotaneelee, Nockatunga, Dingo
and Aldinga fields. The liability is a discounted liability using a
credit-adjusted risk-free rate on the date such liabilities are determined. A
market risk premium was excluded from the estimate of asset retirement
obligations because the amount was not capable of being estimated. Revisions to
the liability could occur due to changes in the estimates of these costs,
acquisition of additional properties and as new wells are drilled.
Estimates of future asset retirement obligations include significant
management judgment and are based on projected future retirement costs. Such
costs could differ significantly when they are incurred.
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 when 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.
Recent Accounting Pronouncements
On March 30, 2005 the FASB issued FASB Interpretation No. (FIN) 47,
"Accounting for Conditional Asset Retirement Obligations." FIN 47 requires an
entity to recognize a liability for the fair value of an asset retirement
obligation that is conditional on a future event if the liability's fair value
can be reasonably estimated. FIN 47 is effective for the fiscal year end June
30, 2006. Management is currently evaluating the impact on the Company and
cannot yet reasonably estimate the impact on the financial statements.
Executive Summary
Magellan Petroleum Corporation (MPC) is engaged in the sale of oil and gas
and the exploration for and development of oil and gas reserves. MPC's principal
asset is a 55.125% equity interest in its subsidiary, Magellan Petroleum
Australia Limited (MPAL).
MPAL's major assets are two petroleum production leases covering the
Mereenie oil and gas field (35% working interest) and one petroleum production
lease covering the Palm Valley gas field (52% working interest). Both fields are
located in the Amadeus Basin in the Northern Territory of Australia. Santos
Ltd., a publicly owned Australian company, owns a 48% interest in the Palm
Valley field and a 65% interest in the Mereenie field.
12
MPAL is refocusing its exploration activities into two core areas, the
Cooper Basin in onshore Australia and the Weald Basin in the onshore southern
United Kingdom with an emphasis on developing a low to medium risk acreage
portfolio.
MPC also has a direct 2.67% carried interest in the Kotaneelee gas field in
the Yukon Territory of Canada. The Company received approximately $21,000 from
this investment during the 2005 quarter.
On October 18, 2005 MPC announced its intention to commence an exchange
offer (the Offer) to acquire all of the ordinary shares of MPAL that it does not
currently own. MPC currently has a 55.13% ownership interest in MPAL. The Offer
consideration will be seven (7) newly-issued shares of MPC common stock for each
ten (10) outstanding MPAL shares. If the Offer is successful, new MPC shares
will be issued to MPAL's Australian shareholders in the form of CDIs (CHESS
Depository Interests), which will be listed on the Australian Stock Exchange
("ASX").
13
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
LIQUIDITY AND CAPITAL RESOURCES
Consolidated
At September 30, 2005 the Company on a consolidated basis had approximately
$23.3 million of cash and cash equivalents and $2.9 million of marketable
securities.
Net cash provided by operations was $1,746,000 in 2005 versus $517,000 in
2004. The increase in cash provided by operations is primarily related to
increased MPAL revenues.
The Company invested $564,000 and $2,600,000 in oil and gas exploration
activities during the three months ended September 30, 2005 and 2004,
respectively. The net decrease is due to the decline in construction payables in
2005 partially offset by higher investments in the United Kingdom and the 7%
Australian foreign exchange rate increase discussed below . The Company
continues to invest in exploratory projects that result in exploratory and dry
hole expenses in the consolidated financial statements.
Effect of exchange rate changes
The value of the Australian dollar relative to the U.S. dollar decreased
..2% to $.7603 at September 30, 2005, compared to a value of $.7620 at June 30,
2005.
As to MPC
At September 30, 2005, MPC, on an unconsolidated basis, had working capital
of approximately $3.6 million. Working capital is comprised of current assets
less current liabilities. MPC's current cash position and its annual MPAL
dividend should be adequate to meet its current cash requirements.
The Company will receive a dividend of approximately $941,000 from MPAL
during the second quarter.
MPC through its stock repurchase plan may purchase up to one million shares
of its common stock in the open market. Through September 30, 2005, MPC had
purchased 680,850 of its shares at a cost of approximately $686,000, all of
which shares have been cancelled. No purchases of shares under the repurchase
plan were made by MPC during the three months ended September 30, 2005.
As to MPAL
At September 30, 2005, MPAL had working capital of approximately $23.7
million. MPAL had budgeted approximately $6.2 million for specific exploration
projects in fiscal year 2005 as compared to the $5.1 million expended during
fiscal 2005. 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 2012 and 2009, respectively. 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
Palm Valley Producers are actively pursuing gas sales contracts for the
remaining uncontracted reserves at both the Mereenie and Palm Valley gas fields
in the Amadeus Basin. While opportunities exist to contract additional gas sales
in the Northern Territory market after these dates, there is strong competition
within the market and there are no assurances that the Palm Valley producers
will be able to contract for the sale of the remaining uncontracted reserves.
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 continue to seek partners to share its 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.
14
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
OFF BALANCE SHEET ARRANGEMENTS
We do not use off-balance sheet arrangements such as securitization of
receivables with any unconsolidated entities or other parties. The Company does
not engage in trading or risk management activities and does not have material
transactions involving related parties. The following is a summary of our
consolidated contractual obligations:
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
MORE
LESS THAN THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ---------- ---------- --------- ---------- ---------
Operating Lease Obligations 706,000 183,000 388,000 135,000 --
Purchase Obligations(1) 3,380,000 3,380,000 -- -- --
Asset Retirement Obligations 5,833,000 40,000 3,863,000 1,930,000
---------- ---------- -------- ---------- ---------
Total $9,919,000 $3,603,000 $388,000 $3,998,000 1,930,000
========== ========== ======== ========== =========
- ----------
(1) Represents firm commitments for exploration and capital expenditures. The
Company is committed to these expenditures, however some may be farmed out
to third parties. Exploration contingent expenditures of $30,083,000 which
are not legally binding have been excluded from the table above and based
on exploration decisions would be due as follows: $14,685,000 (less than 1
year), $4,327,000 (1-3 years), $11,071,000 (3-5 years).
15
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
THREE MONTHS ENDED SEPTEMBER 30, 2005 VS. SEPTEMBER 30, 2004
REVENUES
OIL SALES INCREASED 29% in the 2005 quarter to $2,455,000 from $1,911,000
in 2004 because of the 31% increase in the average sales price per barrel and
the 7% Australian foreign exchange rate increase discussed below. This was
partially offset by the 9% decrease in volumes sold. Oil unit sales (after
deducting royalties) in barrels (bbls) and the average price per barrel sold
during the periods indicated were as follows:
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
2005 SALES 2004 SALES
---------------------- ----------------------
AVERAGE PRICE AVERAGE PRICE
BBLS A.$ PER BBL BBLS A.$ PER BBL
------ ------------- ------ -------------
Australia:
Mereenie field 27,237 85.88 31,999 66.52
Cooper Basin 941 93.25 1,110 56.44
Nockatunga project 8,074 76.73 6,766 55.03
------ ----- ------ -----
Total 36,252 84.04 39,875 64.37
====== ===== ====== =====
GAS SALES INCREASED 36% to $3,218,000 in 2005 from $2,367,000 in 2004. The
increase was the result of the 13% increase in volume and the 9.8% increase in
the average price per mcf sold. Due to a development well (L-38) drilled in the
Kotaneelee gas field in which MPC has a carried interest, MPC will not receive
any revenue from the operator of this field until its share of the drilling cost
is absorbed. We currently estimate that it will take approximately nine months
for the operator to recover the Company's share of the well's costs from the
Company's carried interest account. Accordingly, the Company does not expect to
receive any revenues from the L-38 well until the third or fourth quarter of
fiscal 2006 at the earliest.
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2005 2004
---------- ----------
Australia $3,196,000 $2,327,000
Canada 22,000 40,000
---------- ----------
Total $3,218,000 $2,367,000
========== ==========
The volumes in billion cubic feet (bcf) (after deducting royalties) and the
average price of gas per thousand cubic feet (mcf) sold during the periods
indicated were as follows:
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2005 SALES 2004 SALES
------------------- -------------------
A.$ AVERAGE A.$ AVERAGE
PRICE PER PRICE PER
----------- -----------
BCF MCF BCF MCF
----- ----------- ----- -----------
Australia: Palm Valley .464 2.16 .542 2.14
Australia: Mereenie .966 2.98 .726 2.70
----- ---- ----- ----
Total 1.430 2.70 1.268 2.46
===== ==== ===== ====
OTHER PRODUCTION RELATED REVENUES INCREASED 41% to $422,000 in 2005 from
$300,000 in 2004. Other production related revenues are primarily MPAL's share
of gas pipeline tariff revenues. The revenue increase is due to higher sales
volume from the Mereenie field in 2005 and the 7% Australian foreign exchange
rate increase discussed below.
16
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
COSTS AND EXPENSES
PRODUCTION COSTS INCREASED 45% in 2005 to $2,210,000 from $1,528,000 in
2004 The increase in 2005 was primarily the result of increased expenditures in
the Mereenie and Palm Valley fields ($657,000) and the 7% Australian foreign
exchange rate increase discussed below.
EXPLORATION AND DRY HOLE COSTS INCREASED 17% to $1,311,000 in 2005 from
$1,118,000 in 2004. These costs related to the exploration work performed on
MPAL's properties. The primary reasons for the increase in 2005 were increased
expenditures in the United Kingdom for PEDL 098 ($302,000) and the 7% Australian
foreign exchange rate increase discussed below, offset partially by lower
expenditures on the Nockatunga project and also on properties in New Zealand.
DEPLETION, DEPRECIATION AND AMORTIZATION DECREASED 3% from $1,401,000 in
2004 to $1,364,000 in 2005. During the 2005 period, there was a 7% increase in
the Australian foreign exchange rate as discussed below. This was offset by
lower depletion expense for the Palm Valley and Mereenie fields during the
period because of lower net oil and gas properties in 2005 compared to 2004.
AUDITING, ACCOUNTING AND LEGAL EXPENSES DECREASED 41% IN 2005 to $107,000
from $181,000 in 2004 due to reduced accounting and auditing costs.
ACCRETION EXPENSE INCREASED 17% IN THE 2005 PERIOD from $94,000 in 2004 to
$110,000 in 2005. Accretion expense represents the accretion on the asset
retirement obligations (ARO) under SFAS 143. The increase in the 2005 period is
primarily the 7% increase in the Australian foreign exchange rate discussed
below and increased costs for the Palm Valley and Mereenie fields.
SHAREHOLDER COMMUNICATIONS COSTS INCREASED 18% from $44,000 in 2004 to
$52,000 in 2005 primarily because of MPC and MPAL's increased costs related to
their status as public companies.
OTHER ADMINISTRATIVE EXPENSES INCREASED 241% from $101,000 in 2004 to
$344,000 in 2005. The increase in the 2005 period is primarily due to increased
administrative costs from the Mereenie and Palm Valley joint ventures, increased
marketing expenses and the 7% increase in the Australian foreign exchange rate
as discussed below.
17
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
INCOME TAXES
INCOME TAX PROVISION INCREASED IN 2005 to a tax provision of $190,000 from
a tax provision of $5,000 in 2004 because of higher book taxable income in 2005.
The components of the income tax (in thousands) between MPC and MPAL are as
follows:
2005 2004
----- -----
Income(loss) before income taxes and minority interests $ 415 $(204)
===== =====
Tax at 30% 125 (61)
MPC's non Australian loss (income)(a) 89 117
Non-taxable revenue from Australian government sources (75) (48)
MPAL non-taxable foreign income (New Zealand) 38 --
Other permanent differences 5 (13)
----- -----
Australian income tax (benefit) provision 182 (5)
MPC income tax provision(a) 8 10
----- -----
Consolidated Income tax provision $ 190 $ 5
===== =====
Current income tax provision $ 670 $ 10
Deferred income tax (benefit) provision (480) (5)
----- -----
Income tax provision $ 190 $ 5
===== =====
Effective tax rate 46% --
===== =====
(a) While MPC did recognize a deferred tax for its non-Australian income tax
losses during the 2004 and 2005 quarters, it is not likely that such
deferred assets will be realized and have been fully reserved for.
EXCHANGE EFFECT
THE VALUE OF THE AUSTRALIAN DOLLAR RELATIVE TO THE U.S. DOLLAR DECREASED TO
$.7603 AT SEPTEMBER 30, 2005 compared to a value of $.7620 at June 30, 2005.
This resulted in a $66,000 debit to the foreign currency translation adjustments
account for the three months ended September 30, 2005. The average exchange rate
used to translate MPAL's operations in Australia was $.7601 for the quarter
ended September 30, 2005, which was a 7% increase compared to the $.7097 rate
for the quarter ended September 30, 2004.
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 and the risk of
fluctuations in the world price of crude oil, as the only market risk sensitive
instruments are its investments in marketable securities. At September 30, 2005,
the carrying value of our investments in marketable securities including those
classified as cash and cash equivalents was approximately $26 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. A 10% change
in the Australian foreign currency rate compared to the U.S. dollar would
increase or decrease revenues and costs and expenses by $609,000 and $617,000,
respectively. For the three month period ended September 30, 2005, oil sales
represented approximately 43% of production revenues. Based on the current
quarter's sales volume and revenue, a 10% change in oil price would increase or
decrease oil revenues by $246,000. Gas sales, which represented approximately
57% of production revenues in the current quarter, are derived primarily from
the Palm Valley and Mereenie fields in the Northern Territory of Australia and
the gas prices are set according to long term contracts that are subject to
changes in the Australian Consumer Price Index (ACPI).
18
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2005
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including Daniel J. Samela, the
Company's President, Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated
under the Securities and Exchange Act of 1934) as of September 30, 2005. Based
on this evaluation, the Company's President concluded that the Company's
disclosure controls and procedures were effective such that the material
information required to be included in the Company's SEC reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to the Company, including its consolidated
subsidiaries, and was made known to him by others within those entities.
Internal Control Over Financial Reporting.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter ended September 30, 2005 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
19
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
SEPTEMBER 30, 2005
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following schedule sets forth the number of shares that the Company has
repurchased under any of its repurchase plans for the stated periods, the cost
per share of such repurchases and the number of shares that may yet be
repurchased under the plans:
TOTAL NUMBER OF SHARES
PURCHASED AS PART OF MAXIMUM NUMBER OF SHARES
TOTAL NUMBER OF AVERAGE PRICE PUBLICLY ANNOUNCED PLAN THAT MAY YET BE
PERIOD SHARES PURCHASED PAID SHARE (1) PURCHASED UNDER PLAN
- ---------------- ---------------- ------------- ----------------------- ------------------------
July 1-31, 2005 0 0 0 319,150
Aug. 1-31, 2005 0 0 0 319,150
Sept. 1-30, 2005 0 0 0 319,150
(1) The Company through its stock repurchase plan may purchase up to one
million shares of its common stock in the open market. Through September
30, 2005, the Company had purchased 680,850 of its shares at an average
price of $1.01 per share or a total cost of approximately $686,000, all of
which shares have been cancelled.
20
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
SEPTEMBER 30, 2005
ITEM 6. EXHIBITS
31. Rule 13a-14(a) Certifications.
Certification of Daniel J. Samela, President, Chief Executive Officer
and Chief Financial and Accounting Officer, pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934 is filed herein.
32. Section 1350 Certifications.
Certification of Daniel J. Samela, President, Chief Executive Officer
and Chief Financial and Accounting Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, is furnished herein.
21
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
SEPTEMBER 30, 2005
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 14, 2005 By /s/ Daniel J. Samela
-------------------------------------
Daniel J. Samela, President and Chief
Executive Officer, Chief Financial
and Accounting Officer
22