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 DECEMBER 31, 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, CT 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 large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (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 February 11, 2006 was 25,783,243.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
DECEMBER 31, 2005
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 Condensed financial statements (unaudited) 3
Condensed consolidated balance sheets at December 31, 2005 and
June 30, 2005 3
Condensed consolidated statements of loss for the three and
six months ended December 31, 2005 and 2004 4
Condensed consolidated statements of cash flows for the
six months ended December 31, 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 10
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 19
ITEM 4 Controls and Procedures 19
PART II - OTHER INFORMATION
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 20
ITEM 5 Other Information 20
ITEM 6 Exhibits 21
Signatures 22
Certifications 23-24
2
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2005 2005
------------ ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 19,659,751 $ 21,733,375
Accounts receivable-Trade 4,397,458 4,210,174
Accounts receivable-Working Interest Partners 180,931 864,922
Marketable securities 3,282,094 3,216,541
Inventories 798,144 591,997
Other assets 1,336,719 526,703
------------ ------------
Total current assets 29,655,097 31,143,712
------------ ------------
Deferred income taxes 1,630,794 1,014,907
Property and equipment:
Oil and gas properties (successful efforts method) 78,516,584 80,765,911
Land, buildings and equipment 2,579,753 2,552,980
Field equipment 788,007 1,620,909
------------ ------------
81,884,344 84,939,800
Less accumulated depletion, depreciation and amortization (60,029,290) (60,674,306)
------------ ------------
Net property and equipment 21,855,054 24,265,494
------------ ------------
Total assets $ 53,140,945 $ 56,424,113
============ ============
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,130,664 $ 3,602,085
Accrued liabilities 1,422,606 1,308,004
Income taxes payable -- 25,879
------------ ------------
Total current liabilities 3,553,270 4,935,968
------------ ------------
Long term liabilities:
Asset retirement obligations 5,695,930 5,729,180
------------ ------------
Total long term liabilities 5,695,930 5,729,180
------------ ------------
Minority interests 17,663,478 18,583,046
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 44,922,956 44,402,182
Accumulated deficit (15,415,698) (15,161,462)
Accumulated other comprehensive loss (3,536,823) (2,322,633)
------------ ------------
Total stockholders' equity 26,228,267 27,175,919
------------ ------------
Total liabilities, minority interests and stockholders' equity $ 53,140,945 $ 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
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUES:
Oil sales $ 2,184,124 $ 1,490,512 $ 4,639,172 $ 3,401,359
Gas sales 3,715,290 3,457,733 6,933,228 5,824,540
Other production related revenues 559,604 505,854 981,298 805,641
----------- ----------- ----------- -----------
Total revenues 6,459,018 5,454,099 12,553,698 10,031,540
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Production costs 1,949,329 1,316,141 4,158,983 2,843,931
Exploration and dry hole costs 846,517 934,792 2,157,958 2,053,252
Salaries and employee benefits 632,998 649,438 1,309,227 1,319,578
Depletion, depreciation and amortization 1,541,416 2,053,759 2,905,331 3,454,417
Auditing, accounting and legal services 133,658 101,073 240,777 281,908
Accretion expense 108,747 101,281 218,716 195,651
Shareholder communications 85,181 111,341 137,530 154,852
Other administrative expenses 717,048 232,689 1,061,107 334,082
----------- ----------- ----------- -----------
Total costs and expenses 6,014,894 5,500,514 12,189,629 10,637,671
----------- ----------- ----------- -----------
Operating income (loss) 444,124 (46,415) 364,069 (606,131)
Interest income 321,117 377,035 661,226 732,687
(Loss) gain on sale of field equipment (5,339) -- 149,767 --
----------- =========== ----------- ===========
Income before income taxes and minority interests 759,902 330,620 1,175,062 126,556
Income tax provision (424,910) (152,463) (615,257) (157,797)
----------- ----------- ----------- -----------
Income (loss) before minority interests 334,992 178,157 559,805 (31,241)
Minority interests (561,176) (254,169) (814,044) (340,293)
----------- ----------- ----------- -----------
NET LOSS (226,184) (76,012) (254,239) (371,534)
=========== =========== =========== ===========
Average number of shares outstanding
Basic 25,783,243 25,783,243 25,783,243 25,783,243
=========== =========== =========== ===========
Diluted 25,783,243 25,783,243 25,783,243 25,783,243
=========== =========== =========== ===========
NET LOSS PER SHARE (BASIC AND DILUTED) $ (.01) $ -- $ (.01) $ (.01)
=========== =========== =========== ===========
See accompanying notes.
4
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (254,239) $ (371,534)
Adjustments to reconcile net income loss to net
cash provided by operating activities:
Gain from sale of field equipment (149,767) --
Depletion, depreciation and amortization 2,905,331 3,454,417
Accretion expense 218,716 195,651
Deferred income taxes (661,172) 121,698
Minority interests 814,044 340,293
Exploration and dry hole costs 1,917,812 315,933
Stock option expense 520,774 --
Increase (decrease) in operating assets and liabilities:
Accounts receivable (370,086) (271,308)
Other assets 59,592 64,607
Inventories (237,161) 49,108
Accounts payable and accrued liabilities (305,355) (506,608)
Income taxes payable (57,249) (485,135)
----------- -----------
Net cash provided by operating activities 4,401,240 2,907,122
INVESTING ACTIVITIES:
Proceeds from sale of field equipment 149,767 --
Additions to property and equipment (1,150,482) (2,482,679)
Decrease in construction payables (868,723) (126,498)
Oil and gas exploration activities (1,917,812) (315,933)
Marketable securities matured 1,952,880 2,580,977
Marketable securities purchased (2,018,433) (3,310,086)
Deferred acquisition costs (869,609) --
----------- -----------
Net cash used in investing activities (4,722,412) (3,654,219)
----------- -----------
FINANCING ACTIVITIES:
Dividends to MPAL minority shareholders (765,641) (821,732)
----------- -----------
Net cash used in financing activities (765,641) (821,732)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (986,811) 1,932,276
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,073,624) 363,447
Cash and cash equivalents at beginning of period 21,733,375 20,406,620
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,659,751 $20,770,067
=========== ===========
See accompanying notes.
5
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 December 31, 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 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 and six month periods ended
December 31, 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 Form 10-K. Reclassifications associated with the 2004 consolidated
statement of cash flows resulted in an decrease in net cash provided by
operating activities and a corresponding decrease in net cash used in investing
activities of $(1,379,928) related to changes in exploration and dry hole costs,
accounts receivable, and accounts payable and accrued liabilities of $(868,660),
$(637,766), and $126,498, respectively.
On March 30, 2005 the FASB issued FASB Interpretation No. ("FIN") 47,
"Accounting for Conditional Asset Retirement Obligations ("ARO")." 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 has determined currently the Company does not have
any conditional ARO'S, but may incur such in the future at which time they will
be recorded.
On February 3, 2006 the FASB issued FASB Staff Position ("FSP") 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation that Allow for Cash Settlement upon the Occurrence of a Contingent
Event." FSP 123(R)-4 requires that an option or similar instrument that is
classified as equity, but subsequently becomes a liability because a contingent
cash settlement event is probable of occurring, shall be accounted for similar
to a modification from equity to liability award. FSP 123(R)-4 is effective for
the Company for the quarter ending March 31, 2006. Management expects no impact
on its financial statements upon adoption of this FSP since the terms of its
stock option plan do not provide for cash settlements as contemplated by the
FSP.
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
original Offer consideration was 7 newly-issued shares of MPC common stock for
each 10 outstanding MPAL shares. On January 24, 2006, MPC increased the exchange
ratio and added a cash component to the terms of exchange offer. Under the terms
of the revised Offer, MPC is offering to exchange 7.5 newly-issued shares of MPC
common stock for each 10 outstanding MPAL shares and A$0.10 in cash
consideration for each outstanding MPAL share that it does not currently own. If
the Offer is successful, new MPC shares will be issued to MPAL's
6
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 $2.23 on January 20, 2006 on the
NASDAQ Capital Market and an A$/US$ exchange rate of 0.75, the Offer values MPAL
at A$106.3 million in total (including the shares currently owned by Magellan),
or A$2.33 per share. Accordingly, the proposed consideration in aggregate for
the 44.87% of MPAL's shares which Magellan does not already own is approximately
15.7 million MPC shares and cash of approximately A$ 2.1 million.
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 The
registration statement was declared effective on January 26,2006.. On January
30, 2006 MPC filed a prospectus/proxy statement pursuant to Rule 424(b)(3)
reflecting the revised offer terms discussed above.
Included in other assets are $1,072,556 of capitalized costs related to the
proposed transaction. These costs will be written off if the transaction is not
completed.
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 December 31,
2005, 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 six months ended December 31, 2005 or for the fiscal year ended June
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. The Plan
has 1,000,000 shares authorized for awards of equity share options. 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. The 400,000 options granted to
Directors on November 28,2005 have an immediate vesting 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 interim or 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 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. For the three month and six month periods
ended December 31, 2005, the Company recorded stock-based compensation expense
for the cost of stock options of approximately $519,000 both pre-tax and post
- -tax (or $.02 per basic and diluted share) and $522,000 both pre-tax and post
- -tax (or $.02 per basic and diluted share). The grant date fair value of the
400,000 options granted on November 28, 2005 was $515,818. 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 expected stock price
volatility. The assumptions
7
used to value the Company's grants on July 1, 2004 and November 28, 2005,
respectively were: risk free interest rate - 4.95% and 4.58%, expected life - 10
years and 5 years, expected volatility -.518 and .627, expected dividend -0. The
expected life of the options granted on November 28, 2005 was determined under
the "simplified" method described in SEC Staff Accounting Bulletin ("SAB") No.
107.
For the three months and six months ended December 31, 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 PER SHARE BASIC
DECEMBER 31, 2004 AND DILUTED
------------------ ---------------
Net loss as reported $(76,012) $ --
Stock option expense (4,500) --
-------- ---------
Pro forma net loss $(80,512) $ --
======== =========
SIX MONTHS ENDED
DECEMBER 31, 2004
-----------------
Net loss as reported $(371,534) $(.01)
Stock option expense (9,000) --
--------- ---------
Pro forma net loss $(380,534) $(.01)
========= =========
SUMMARY OF OPTIONS OUTSTANDING AT DECEMBER 31, 2005.
EXPIRATION NUMBER OF
OPTIONS OUTSTANDING DATES SHARES EXERCISE PRICES ($)
- ------------------- ------------- --------- ------------------------
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
--------
September 30, 2004 625,000 ($1.29 weighted average)
Expired February 23,2005 (595,000) 1.28
Granted November 28,2005 Nov. 28, 2015 400,000 1.60
-------- ----
December 31, 2005 430,000 ($1.59 weighted average)
========
SUMMARY OF OPTIONS OUTSTANDING AT DECEMBER 31, 2005
EXPIRATION EXERCISE
DATES TOTAL VESTED PRICES ($)
------------- ------- ------- ----------
Granted 2004 July 2014 30,000 10,000 1.45
Granted 2005 Nov. 28, 2015 400,000 400,000 1.60
-------
Total outstanding 430,000
=======
OPTIONS RESERVED FOR FUTURE GRANTS 395,000
=======
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 six month periods ended
December 31, 2005 and 2004 is as follows:
8
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, ACCUMULATED OTHER
------------------------ ------------------------- COMPREHENSIVE
2005 2004 2005 2004 LOSS
----------- ---------- ----------- ----------- -----------------
Balance at June 30, 2005 $(2,322,633)
Net loss (226,184) (76,012) (254,239) (371,534)
Foreign currency translation
adjustments (1,148,430) 1,865,163 (1,214,190) 2,469,735 (1,214,190)
----------- ---------- ----------- ----------- -----------
Total comprehensive (loss) income $(1,374,614) $1,789,151 $(1,468,429) $ 2,098,201
=========== ========== =========== ===========
Balance at December 31, 2005 $(3,536,823)
===========
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
and six month periods ended December 31, 2005, the Company had 430,000 and
30,000 outstanding options that were antidilutive as the Company reported a loss
from continuing operations for the respective periods. For the three and six
month periods ended December 31, 2004, the Company had 595,000 and 30,000
outstanding options that were antidilutive as the Company reported a loss from
continuing operations for the respective periods.
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.
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
2005 2004 2005 2004
------ ------ ------- -------
Revenues:
MPC $ 30 $ 118 $ 51 $ 158
MPAL 6,429 5,337 12,503 9,874
------ ------ ------- -------
Total consolidated revenues $6,459 $5,455 $12,554 $10,032
====== ====== ======= =======
Net income (loss):
MPC $ (875) $ (338) (1,178) (689)
MPAL 649 262 924 317
------ ------ ------- -------
Consolidated net loss $ (226) $ (76) (254) (372)
====== ====== ======= =======
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.
Note 9. Asset Retirement Obligations
A reconciliation of the Company's asset retirement obligations for the six
months ended December 31, 2005 is as follows:
Balance at July 1, 2005 $5,729,180
Liabilities incurred
Liabilities settled --
Accretion expense 218,716
Revisions to estimate --
Exchange effect (251,966)
----------
Balance at December 31, 2005 $5,695,930
==========
9
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.
10
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.
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.
11
Management has determined currently the Company does not have any conditional
ARO'S, but may incur such in the future at which time they will be recorded.
On February 3, 2006 the FASB issued FASB Staff Position ("FSP") 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation that Allow for Cash Settlement upon the Occurrence of a Contingent
Event." FSP 123(R)-4 requires that an option or similar instrument that is
classified as equity, but subsequently becomes a liability because a contingent
cash settlement event is probable of occurring, shall be accounted for similar
to a modification from equity to liability award. FSP 123(R)-4 is effective for
the Company for the quarter ending March 31, 2006. Management expects no impact
on its financial statements upon adoption of this FSP snce the terms of its
stock option plan do not provide for cash settlements as contemplated by the
FSP.
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.
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 $57,000 in
cash from this investment during the six months ended December 31, 2005.
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 was 7 newly-issued shares of MPC common stock for each 10
outstanding MPAL shares. On January 24, 2006, MPC increased the exchange ratio
and added a cash component to the terms of exchange offer. Under the terms of
the revised Offer, MPC is offering to exchange 7.5 newly-issued shares of MPC
common stock for each 10 outstanding MPAL shares and A$0.10 in cash
consideration for each outstanding MPAL share that it does not currently own. 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"). The offer is scheduled to
expire on March 9, 2006.
MPAL's financial performance and cash flows are substantially dependent
upon its Palm Valley and Mereenie existing supply contracts to sell gas produced
at these fields to MPAL's major customers, The Power and Water Corporation of
the Northern Territories and its subsidiary, Gasgo Pty Ltd. The Palm Valley
Darwin contract expires in the year 2012 and the Mereenie contracts expire in
the year 2009. On December 23, 2005, MPAL announced that the Northern Territory
Government announced on December 22, 2005 the signing of a Heads of Agreement
between the Northern Territory's Power and Water Corporation and Eni Australia
for a six-month exclusive negotiation period in relation to long-term gas supply
arrangements in the Northern Territory from 2009 onwards. MPAL also noted that
the Heads of Agreement with Eni Australia only contemplates exclusive
negotiations over the 6 month period, and there is no certainty that a final
agreement will be concluded with Eni Australia.
If these gas supply contracts were to be terminated or not renewed, MPAL's
revenues, share price and business outlook could be adversely affected. The Palm
Valley Producers are actively pursuing gas sales contracts for the remaining
uncontracted reserves at
12
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.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated
At December 31, 2005, the Company on a consolidated basis had approximately
$19.7 million of cash and cash equivalents and $3.3 million of marketable
securities.
Net cash provided by operations was $4,401,000 in 2005 versus $2,907,000 in
2004. The increase in cash provided by operations is primarily related to the
increase in MPAL's net income adjusted for non-cash items.
The Company invested $4,722,000 and $2,925,000 in oil and gas exploration
activities during the six months ended December 31, 2005 and 2004, respectively.
The net increase is due to higher investments in the Mereenie and Palm Valley
fields and the Cooper Basin. 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 4%
to $.7280 at December 31, 2005, compared to a value of $.7620 at June 30, 2005.
As to MPC
At December 31, 2005, MPC, on an unconsolidated basis, had working capital
of approximately $4.3 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 received 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 December 31, 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 six months ended December 31, 2005.
As to MPAL
At December 31, 2005, MPAL had working capital of approximately $21.8
million. MPAL had budgeted approximately $15.5 million for specific exploration
projects in fiscal year 2006 as compared to the $5.1 million expended through
December 31, 2005. However, the total amount to be expended may vary depending
on when various projects reach the drilling phase.
MPAL's financial performance and cash flows are substantially dependent
upon its Palm Valley and Mereenie existing supply contracts to sell gas produced
at these fields to MPAL's major customers, The Power and Water Corporation of
the Northern Territories and its subsidiary, Gasgo Pty Ltd. The Palm Valley
Darwin contract expires in the year 2012 and the Mereenie contracts expire in
the year 2009. On December 23, 2005, MPAL announced that the Northern Territory
Government announced on December 22, 2005 the signing of a Heads of Agreement
between the Northern Territory's Power and Water Corporation and Eni Australia
for a six-month exclusive negotiation period in relation to long-term gas supply
arrangements in the Northern Territory from 2009 onwards. MPAL also noted that
the Heads of Agreement with Eni Australia only contemplates exclusive
negotiations over the 6 month period, and there is no certainty that a final
agreement will be concluded with Eni Australia.
If these gas supply contracts were to be terminated or not renewed, MPAL's
revenues, share price and business outlook could be adversely affected. 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
13
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.
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 660,000 183,000 388,000 89,000 --
Purchase Obligations (1) 3,380,000 3,380,000 -- -- --
Asset Retirement Obligations 5,696,000 38,000 3,738,000 1,920,000
---------- ---------- -------- ---------- ---------
Total $9,736,000 $3,601,000 $388,000 $3,827,000 1,920,000
========== ========== ======== ========== =========
- ----------
(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 could be due as follows: $14,685,000 (less than 1
year), $4,327,000 (1-3 years), $11,071,000 (3-5 years).
THREE MONTHS ENDED DECEMBER 31, 2005 VS. DECEMBER 31, 2004
REVENUES
OIL SALES INCREASED 46% in the 2005 quarter to $2,184,000 from $1,491,000
in 2004 primarily because of the significant increase in the average sales price
per barrel which was partially offset by the 2% Australian foreign exchange rate
decrease discussed below. Oil unit sales (after deducting royalties) in barrels
(bbls) and the average price per barrel sold during the periods indicated were
as follows:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------------------
2005 SALES 2004 SALES
-------------------- --------------------
AVERAGE AVERAGE
PRICE PRICE
BBLS A.$ PER BBL BBLS A.$ PER BBL
------ ----------- ------ -----------
Australia:
Mereenie field 25,806 75.02 26,462 52.63
Cooper Basin 3,680 82.62 1,113 47.85
Nockatunga project 6,762 71.14 8,332 53.46
------ ----- ------ -----
Total 36,248 75.05 35,907 52.68
====== ===== ====== =====
GAS SALES INCREASED 7% to $3,715,000 in 2005 from $3,458,000 in 2004. The
increase was the result of the increase in volume and average price per mcf sold
partially offset by the 2% Australian foreign exchange rate decrease discussed
below. Due to 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. Based upon average field
production and costs for the last seven months provided to us by the operator,
we currently estimate that it will take until the third or fourth calendar
quarter of 2007 for the operator to recover the Company's share of the wells'
costs from the Company's carried interest account. This estimate could change
based upon future production and expenses.
14
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2005 2004
---------- ----------
Australia $3,686,000 $3,340,000
Canada 29,000 118,000
---------- ----------
Total $3,715,000 $3,458,000
========== ==========
The volumes in billion cubic feet (bcf) (after deducting royalties) and the
average price of gas per thousand cubic feet (mcf) sold during the periods
indicated were as follows:
THREE MONTHS ENDED DECEMBER 31,
-----------------------------------------------------
2005 SALES 2004 SALES
A.$ AVERAGE PRICE A.$ AVERAGE PRICE
PER PER
BCF MCF MCF
----- ----------------- -----------------
Australia: Palm Valley .448 2.17 .514 2.14
Australia: Mereenie 1.135 3.11 1.049 2.98
----- ---- ----- ----
Total 1.583 2.83 1.563 2.70
===== ==== ===== ====
OTHER PRODUCTION RELATED REVENUES INCREASED 11% to $560,000 in 2005 from
$506,000 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 partially offset by the 2% Australian
foreign exchange rate decrease discussed below.
COSTS AND EXPENSES
PRODUCTION COSTS INCREASED 48% in 2005 to $1,949,000 from $1,316,000 in
2004. The increase in 2005 was primarily the result of increased expenditures of
$618,000 in the Mereenie and Palm Valley fields.
EXPLORATION AND DRY HOLE COSTS DECREASED 9% to $847,000 in 2005 from
$935,000 in 2004. These costs related to the exploration work performed on
MPAL's properties. The primary reasons for the decrease in 2005 were lower
expenditures in New Zealand ($499,000) and the Nockatunga project ($124,000),
partially offset by higher expenditures in the Cooper Basin ($509,000).
DEPLETION, DEPRECIATION AND AMORTIZATION DECREASED 25% from $2,054,000 in
2004 to $1,541,000 in 2005. This is mostly due to lower depletion expense for
the Palm Valley and Mereenie fields during the period of $651,000 because of
lower net oil and gas properties depletion base in 2005 compared to 2004.
AUDITING, ACCOUNTING AND LEGAL EXPENSES INCREASED 33% IN 2005 to $134,000
from $101,000 in 2004 due to increased accounting and auditing costs. The
Company anticipates that it will be required in the future to incur significant
administrative, auditing and legal expenses with respect to new SEC and
accounting rules adopted pursuant to the Sarbanes-Oxley Act of 2002,
particularly the requirements to document, test and audit the Company's internal
controls to comply with Section 404 of the Act and rules adopted thereunder that
will apply to the Company for the first time with respect to its annual report
for the fiscal year ending June 30, 2007.
ACCRETION EXPENSE INCREASED 8% IN THE 2005 PERIOD from $101,000 in 2004 to
$109,000 in 2005. Accretion expense represents the accretion on the asset
retirement obligations (ARO) under SFAS 143.
SHAREHOLDER COMMUNICATIONS COSTS DECREASED 23% from $111,000 in 2004 to
$85,000 in 2005 due to decreased printing costs related to the timing of public
company filings.
OTHER ADMINISTRATIVE EXPENSES INCREASED 208% from $233,000 in 2004 to
$717,000 in 2005 due to a non-cash charge for directors' stock option expense of
$516,000. The expense occurred in accordance with the adoption of FAS 123R.
INCOME TAXES
INCOME TAX PROVISION INCREASED IN 2005. The components of the income tax
(in thousands) between MPC and MPAL are as follows:
15
2005 2004
----- ----
Income before income taxes and minority interests $ 760 $331
===== ====
Tax at 30% 228 99
MPC's non Australian loss (income)(a) 260 108
Non-taxable revenue from Australian government sources (91) (91)
MPAL non-taxable foreign income (New Zealand) 12 (15)
Other permanent differences 12 23
----- ----
Australian income tax provision 421 124
MPC income tax provision(a) 4 28
----- ----
Consolidated income tax provision $ 425 $152
===== ====
Current income tax provision $ 561 $ 28
Deferred income tax (benefit) provision (136) 124
----- ----
Income tax provision $ 425 $152
===== ====
Effective tax rate 56% 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
$.7280 at December 31, 2005 compared to a value of $.7603 at September 30, 2005.
This resulted in a $1,148,000 debit to the foreign currency translation
adjustments account for the three months ended December 31, 2005. The average
exchange rate used to translate MPAL's operations in Australia was $.7447 for
the quarter ended December 31, 2005, which was a 2% decrease compared to the
$.7570 rate for the quarter ended December 31, 2004.
SIX MONTHS ENDED DECEMBER 31, 2005 VS. DECEMBER 31, 2004
REVENUES
OIL SALES INCREASED 36% in the six months to $4,639,000 from $3,401,000 in
2004 primarily because of a 35% increase in the average sales price per barrel
and the 3% Australian foreign exchange rate increase discussed below. This was
partially offset by a decrease in volumes sold. Oil unit sales (after deducting
royalties) in barrels (bbls) and the average price per barrel sold during the
periods indicated were as follows:
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2005 SALES 2004 SALES
---------------------- ----------------------
AVERAGE PRICE AVERAGE PRICE
BBLS A.$ PER BBL BBLS A.$ PER BBL
------ ------------- ------ -------------
Australia:
Mereenie field 53,043 80.60 58,461 60.24
Cooper Basin 4,621 84.78 2,223 52.14
Nockatunga project 14,835 74.18 15,098 54.17
------ ----- ------ -----
Total 72,499 79.55 75,782 58.84
====== ===== ====== =====
GAS SALES INCREASED 19% to $6,933,000 in 2005 from $5,825,000 in 2004. The
increase was the result of an increase in volume, an increase in price per mcf
sold and the 3% increase in the Australian foreign exchange rate increase
discussed below.
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2005 2004
---------- ----------
Australia $6,882,000 $5,667,000
Canada 51,000 158,000
---------- ----------
Total $6,933,000 $5,825,000
========== ==========
During the 2005 period, the volume of gas sold in Australia increased 7%,
and the average price of gas sold increased 7%. The
16
volumes in billion cubic feet (bcf) (after deducting royalties) and the average
price of gas per thousand cubic feet (mcf) sold during the periods indicated
were as follows:
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------------------------
2005 SALES 2004 SALES
A.$ AVERAGE PRICE A.$ AVERAGE PRICE
PER PER
BCF MCF BCF MCF
----- ----------------- ----- -----------------
Australia: Palm Valley .912 2.16 1.055 2.14
Australia: Mereenie 2.101 3.05 1.776 2.87
----- ---- ----- ----
Total 3.013 2.77 2.831 2.59
===== ==== ===== ====
OTHER PRODUCTION RELATED REVENUES INCREASED 22% to $981,000 in 2005 from
$806,000 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 3% Australian foreign exchange
rate increase discussed below.
COSTS AND EXPENSES
PRODUCTION COSTS INCREASED 46% IN 2005 to $4,159,000 from $2,844,000 in
2004. The increase in 2005 was primarily the result of the 3% Australian foreign
exchange rate increase discussed below and increased expenditures of $1,275,000
in the Mereenie and Palm Valley fields.
EXPLORATION AND DRY HOLE COSTS INCREASED 5% to $2,158,000 in 2005 from
$2,053,000 in 2004. These costs related to the exploration work performed on
MPAL's properties. The primary reasons for the increase in 2005 were higher
expenditures in the Mereenie and Palm Valley fields ($461,000) and the Cooper
Basin ($572,000), partially offset by lower expenditures in the Nockatunga
project ($277,000) and in New Zealand ($637,000).
DEPLETION, DEPRECIATION AND AMORTIZATION DECREASED 16% from $3,454,000 in
2004 to $2,905,000 in 2005. This is mostly due to lower depletion expense for
the Palm Valley and Mereenie fields of $710,000 during the period because of
lower net oil and gas properties depletion base in 2005 compared to 2004.
AUDITING, ACCOUNTING AND LEGAL EXPENSES DECREASED 15% IN 2005 to $241,000
from $282,000 in 2004 due to decreased accounting and auditing costs. The
Company anticipates that it will be required in the future to incur significant
administrative, auditing and legal expenses with respect to new SEC and
accounting rules adopted pursuant to the Sarbanes-Oxley Act of 2002,
particularly the requirements to document, test and audit the Company's internal
controls to comply with Section 404 of the Act and rules adopted thereunder that
will apply to the Company for the first time with respect to its annual report
for the fiscal year ending June 30, 2007.
ACCRETION EXPENSE INCREASED 12% IN THE 2005 PERIOD from $196,000 in 2004 to
$219,000 in 2005. Accretion expense represents the accretion on the asset
retirement obligations (ARO) under SFAS 143 that was adopted effective July 1,
2002.
SHAREHOLDER COMMUNICATIONS COSTS DECREASED 11% from $155,000 in 2004 to
$138,000 in 2005 due to decreased printing costs related to the timing of public
company filings.
OTHER ADMINISTRATIVE EXPENSES INCREASED 218% to $1,061,000 in 2005 from
$334,000 in 2004 due to a non-cash charge for directors' stock option expense of
$516,000, increased administrative costs from the Mereenie and Palm Valley joint
ventures and increased marketing expenses. The charge for directors' stock
option expense occurred due to the adoption of FAS 123R.
INCOME TAXES
INCOME TAX PROVISION INCREASED IN 2005. The components of the income tax
(in thousands) between MPC and MPAL are as follows:
17
2005 2004
------ -----
Income before income taxes and minority interests $1,175 $ 127
====== =====
Tax at 30% 353 38
MPC's non Australian loss (income)(a) 349 225
Non-taxable revenue from Australian government sources (166) (139)
MPAL non-taxable foreign income (New Zealand) 55 (15)
Other permanent differences 12 10
------ -----
Australian income tax (benefit) provision 603 119
MPC income tax provision(a) 12 39
------ -----
Consolidated income tax provision $ 615 $ 158
====== =====
Current income tax provision $1,231 $ 39
Deferred income tax (benefit) provision (616) 119
------ -----
Income tax provision $ 615 $ 158
====== =====
Effective tax rate 52 --
====== =====
(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.
18
EXCHANGE EFFECT
THE VALUE OF THE AUSTRALIAN DOLLAR RELATIVE TO THE U.S. DOLLAR DECREASED TO
$.7280 AT December 31, 2005 compared to a value of $.7620 at June 30, 2005. This
resulted in a $1,214,000 debit to the foreign currency translation adjustments
account for the six months ended December, 2005. The average exchange rate used
to translate MPAL's operations in Australia was $.7524 for the six month period
ended December 31, 2005, which was an 3% increase compared to the $.7334 rate
for the six month period ended December 31, 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 December 31, 2005,
the carrying value of our investments in marketable securities including those
classified as cash and cash equivalents was approximately $23 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 $1,255,000 and
$1,219,000, for the six months, respectively. For the six month period ended
December 31, 2005, oil sales represented approximately 40% of production
revenues. Based on the current six month sales volume and revenue, a 10% change
in oil price would increase or decrease oil revenues by $464,000. Gas sales,
which represented approximately 60% 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).
MPAL's financial performance and cash flows are substantially dependent
upon its Palm Valley and Mereenie existing supply contracts to sell gas produced
at these fields to MPAL's major customers, The Power and Water Corporation of
the Northern Territories and its subsidiary, Gasgo Pty Ltd. The Palm Valley
Darwin contract expires in the year 2012 and the Mereenie contracts expire in
the year 2009. If these gas supply contracts were to be terminated or not
renewed when they become due, MPAL's revenues, share price and business outlook
could be adversely affected. 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. On December 23, 2005, MPAL announced that the
Northern Territory Government announced on December 22, 2005 the signing of a
Heads of Agreement between the Northern Territory's Power and Water Corporation
and Eni Australia for a six-month exclusive negotiation period in relation to
long-term gas supply arrangements in the Northern Territory from 2009 onwards.
MPAL also noted that the Heads of Agreement with Eni Australia only contemplates
exclusive negotiations over the 6 month period, and there is no certainty that a
final agreement will be concluded with Eni Australia. Further, MPAL and its
joint venture parties will continue to explore other opportunities to
commercialize its Mereenie gas resources beyond 2009.
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 December 31, 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 December 31, 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
DECEMBER 31, 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
SHARES PURCHASED PAID SHARE (1) PURCHASED UNDER PLAN
---------------- ------------- ----------------------- ------------------------
Oct 1-31, 2005 0 0 0 319,150
Nov 1-30, 2005 0 0 0 319,150
Dec 1-31, 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 December 31,
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.
Item 5. Other Information
As previously disclosed, on October 18, 2005, the Company announced
its intention to commence an exchange offer (the "Exchange Offer") for all of
the outstanding ordinary shares of Magellan Petroleum Australia Limited,
incorporated in Australia, our 55.13% owned subsidiary, that we do not currently
own (the "Minority Shares"). On December 19, 2005, the Company lodged its final
Bidder's Statement with the ASIC and ASX and mailed the Bidder's Statement to
MPAL shareholders in Australia.
On December 22, 2005, MPAL announced to the ASX in a letter of Rod
Cormie, Chairman of the Board of MPAL, to MPAL shareholders, that the MPAL
Target Statement had been prepared, lodged with the ASX and ASIC and served on
the Company. In his letter, Mr. Cormie also outlined the reasons why MPAL
shareholders should reject the Exchange Offer. In the Target Statement, the
independent directors of the MPAL Board unanimously recommended that MPAL
shareholders reject the Exchange Offer, based upon their consideration of all
available information and the report of MPAL's independent expert that the
Exchange Offer is neither fair nor reasonable to MPAL shareholders.
On December 23, 2005, MPAL announced that the Northern Territory
Government announced on December 22, 2005 the signing of a Heads of Agreement
between the Northern Territory's Power and Water Corporation and Eni Australia
for a six-month exclusive negotiation period in relation to long-term gas supply
arrangements in the Northern Territory from 2009 onwards.
On January 3, 2006, the Independent Directors of MPAL issued a
Supplementary Target Statement which was lodged with ASIC and the ASX. In the
Supplementary Target Statement, the Independent Directors explained that the
December 22, 2005 announcement by the Northern Territory Government did not
alter the conclusion reached by MPAL's independent expert that the Exchange
Offer is neither fair nor reasonable and does not alter the recommendation of
the Independent Directors that MPAL shareholders should reject the Exchange
Offer.
On January 18, 2006, the Company announced that it has revised the
terms of the Exchange Offer to offer 0.75 of a share of its common stock and
Aus. $.10 in cash for each outstanding MPAL share not currently owned by the
Company. On January 23, 2006, the Company issued a press release in Australia
and the United States announcing the revised terms of the Exchange Offer and the
filing of the Supplemental Bidder's Statement with the ASIC and ASX. On January
24, 2006, the Company filed a current report on Form 8-K with the SEC detailing
these two announcements.
On January 26, 2006, the SEC declared the Company's Form S-4
registration statement effective under the Securities Act of 1933. On January
30, 2006, the Company mailed this prospectus/ proxy statement and its 2005
annual report to the Company's shareholders in connection with the 2005 annual
meeting of shareholders.
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On February 9, 2006, the Independent Directors of MPAL issued a Second
Supplementary Target Statement which was lodged with ASIC and the ASX. In the
Second Supplementary Target Statement, the Independent Directors reaffirmed
their recommendation that MPAL shareholders should reject the Company's revised
Exchange Offer terms.
On February 23, 2006, the Company will hold its 2005 annual meeting of
shareholders at which shareholders will be asked to approve the issuance of
approximately 15.7 million shares of the Company's common stock in connection
with the Exchange Offer, if successful. The Company's Exchange Offer is
scheduled to expire on March 9, 2006.
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.
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MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
DECEMBER 31, 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: February 14, 2006 By /s/ Daniel J. Samela
------------------------------------
Daniel J. Samela, President and
Chief Executive Officer,
Chief Financial and Accounting
Officer
22