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, 2003
----------------------------------------
[ ] 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.)
P.O. Box 1146, Madison, Connecticut 06443-1146
.................................................................................
(Address of principal executive offices) (Zip Code)
(203) 245-7664
.................................................................................
(Registrant's telephone number, including area code)
.................................................................................
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
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 11, 2003 was 25,727,376.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
September 30, 2003
Table of Contents
PART I - FINANCIAL INFORMATION
Page
ITEM 1 Financial Statements (unaudited)
Consolidated balance sheets at September 30, 2003
and June 30, 2003 3
Consolidated statements of income (loss) for the three
months ended September 30, 2003 and 2002 4
Consolidated statements of cash flows for the three months
ended September 30, 2003 and 2002 5
Notes to consolidated financial statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 21
ITEM 4 Disclosure Controls and Procedures 21
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 22
ITEM 5 Other Information 22
ITEM 6 Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications 25-26
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
September 30, June 30,
CONSOLIDATED BALANCE SHEETS ------------- --------
ASSETS 2003 2003
- ------ ------------------- --------------------
Current assets: (unaudited) (Note)
Cash and cash equivalents $18,568,581 $20,041,464
Accounts receivable 6,592,801 5,273,999
Marketable securities 2,020,315 1,796,503
Inventories 520,226 423,931
Other assets 258,681 297,118
----------- -----------
Total current assets 27,960,604 27,833,015
----------- -----------
Marketable securities 390,000 390,000
Property and equipment:
Oil and gas properties (successful efforts method) 62,452,326 58,275,887
Land, buildings and equipment 2,183,683 2,093,555
Field equipment 1,444,470 1,421,636
----------- -----------
66,080,479 61,791,078
Less accumulated depletion, depreciation and amortization (41,871,267) (40,198,904)
------------ ------------
Net property and equipment 24,209,212 21,592,174
----------- -----------
Other assets 936,616 926,168
----------- -----------
Total assets $53,496,432 $50,741,357
=========== ===========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------
Current liabilities:
Accounts payable $ 3,934,010 $ 4,709,281
Accrued liabilities 1,533,265 1,218,997
Income taxes payable 89,929 106,246
---------- -----------
Total current liabilities 5,557,204 6,034,524
---------- ----------
Long term liabilities:
Deferred income taxes 1,795,298 1,770,727
Asset retirement obligations 4,604,127 3,858,263
---------- ----------
Total long term liabilities 6,399,425 5,628,990
---------- ----------
Minority interests 16,575,675 16,930,838
Commitments (Note 12) - -
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 200,000,000 shares
Outstanding 25,727,376 and 24,427,376 shares 257,274 244,274
Capital in excess of par value 44,402,741 42,907,741
----------- -----------
Total capital 44,660,015 43,152,015
Accumulated deficit (14,531,197) (15,598,483)
Accumulated other comprehensive loss (5,164,690) (5,406,527)
------------ ------------
Total stockholders' equity 24,964,128 22,147,005
----------- -----------
Total liabilities, minority interests and stockholders' equity $53,496,432 $50,741,357
=========== ===========
Note: The balance sheet at June 30, 2003 has been derived from
the audited consolidated financial statements at that date.
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
Three months ended September 30,
--------------------------------
2003 2002
--------------- --------------
Revenues:
Oil sales $ 1,093,102 $ 800,988
Gas sales 3,830,499 2,028,939
Other production related revenues 472,906 150,805
Interest income 335,412 206,576
---------- ----------
Total Revenues 5,731,919 3,187,308
---------- ----------
Costs and expenses:
Production costs 1,299,055 983,935
Exploration and dry hole costs 566,199 806,645
Salaries and employee benefits 562,955 410,514
Depletion, depreciation and amortization 1,077,959 873,926
Auditing, accounting and legal services 141,409 141,407
Accretion expense 81,873 73,685
Shareholder communications 32,765 30,579
Other administrative expenses 137,774 51,026
----------- -----------
Total costs and expenses 3,899,989 3,371,717
---------- ----------
Income (loss) before income taxes, minority interests and
cumulative effect of accounting change 1,831,930 (184,409)
Income tax provision (410,742) (852)
----------- -----------
Income (loss) before minority interests and cumulative
effect of accounting change 1,421,188 (185,261)
Minority interests (353,902) 13,872
---------- ---------
Income (loss) before cumulative effect of accounting change 1,067,286 (171,389)
Cumulative effect of accounting change - net - (737,941)
----------- ---------
Net income (loss) $ 1,067,286 $ (909,330)
=========== ==========
Average number of shares:
Basic 25,077,376 24,607,376
========== ==========
Diluted 25,091,900 24,607,376
========== ==========
Income (loss) per share (basic and diluted)
Before cumulative effect of accounting change $.04 $(.01)
Cumulative effect of accounting change - (.03)
----- -----
Net income (loss) $.04 $(.04)
==== ======
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended September 30,
----------------------------------------
2003 2002
----------------- -----------------
Operating Activities:
Net income (loss) $ 1,067,286 $ (909,330)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change - 2,025,690
Depletion, depreciation and amortization 1,077,959 873,926
Accretion expense 81,873 73,685
Deferred income taxes - (601,635)
Minority interests 353,902 (693,914)
Increase (decrease) in cash from operating assets and liabilities:
Accounts receivable (1,401,333) 817,698
Other assets 12,662 (36,326)
Inventories (104,064) (39,153)
Accounts payable and accrued liabilities (416,988) 402,002
Income taxes payable (16,317) (15,152)
--------- -----------
Net cash provided by operating activities 654,980 1,897,491
------- ---------
Investing Activities:
Marketable securities matured 997,528 -
Marketable securities purchased (1,221,340) -
Net additions to property and equipment (2,123,928) (646,764)
------------ ----------
Net cash used in investing activities (2,347,740) (646,764)
------------ ----------
Effect of exchange rate changes on cash
and cash equivalents 219,877 (580,225)
---------- -----------
Net increase (decrease) in cash and cash equivalents (1,472,883) 670,502
Cash and cash equivalents at beginning of year 20,041,464 15,784,851
----------- -----------
Cash and cash equivalents at end of period $18,568,581 $16,455,353
=========== ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2003
Item 1. Notes to 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, 2003, MPC's principal asset was a 55% equity interest
in its subsidiary, Magellan Petroleum Australia Limited (MPAL), which has one
class of stock that is publicly held and traded in Australia. 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, 2003 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2004. 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, 2003. All
amounts presented are in United States dollars, unless otherwise noted.
Note 2. Kotaneelee Litigation
---------------------
During September 2003, the litigants in the Kotaneelee litigation
entered into a settlement agreement. During October 2003, the Company received
approximately $851,000, after Canadian withholding taxes and reimbursement of
certain past legal costs. The plaintiffs agreed to terminate all litigation
against the defendants related to the field, including the claim that the
defendants failed to fully develop the field. Since each party agreed to bear
its own legal costs, there were no taxable costs assessed against any of the
parties. The components of the settlement payment which was recorded in
September 2003 were as follows:
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2003
Item 1. Notes to Consolidated Financial Statements
- ------- ------------------------------------------
Gas sales $1,135,000
Interest income 102,000
Canadian withholding taxes (386,000)
---------
Total $ 851,000
=========
Note 3. Capital and stock options
-------------------------
During December 2000, the Company announced a stock repurchase plan to
purchase up to one million shares of its common stock in the open market.
Through September 30, 2003, the Company had purchased 680,850 of its shares at a
cost of approximately $686,000, all of which have been or will be cancelled.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock options because the alternative fair
value accounting provided under FASB Statement No. 123, "Accounting for Stock
Based Compensation," as amended by SFAS 148 "Accounting for Stock-based
Compensation - Transition and Disclosure" requires use of option valuation
models that were not developed for use in valuing stock options. Under APB No.
25, because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Expiration Number of
Options outstanding Dates shares Exercise Prices ($)
- ------------------- ----------- -------------- -------------------
June 30, 1999 196,000 1.57
Granted Feb. 2005 745,000 1.28
-------
June 30, 2000 941,000 1.28-1.57
Expired (20,000) 1.57
--------
June 30, 2001 921,000 1.28-1.57
Expired (50,000) 1.57
--------
June 30, 2002 871,000
Granted Jan. 2008 50,000 .85
-------
June 30, 2003 and
September 30, 2003 921,000 ($1.30 weighted average)
=======
Summary of Options Outstanding at September 30, 2003
Expiration Exercise
Dates Total Vested Prices ($)
------------- ----- ------ ----------
Granted 1999 Oct. 2003 126,000 126,000 1.57
Granted 2000 Feb. 2005 745,000 745,000 1.28
Granted 2003 Feb. 2005 50,000 25,000 .85
-------- ------
Total 921,000 896,000
======= =======
Options reserved for future grants 205,000
- ---------------------------------- =======
Item 1. Notes to Consolidated Financial Statements
- ------- ------------------------------------------
On October 20, 2003, options to purchase 126,000 shares of the
Company's common stock expired without being exercised.
Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The assumptions used
in the 2000 valuation model were: risk free interest rate - 6.65%, expected life
- - 5 years, expected volatility - .419, expected dividend - 0. The assumptions
used in the 2003 valuation model were: risk free interest rate - 3.16%, expected
life - 5 years, expected volatility - .439, expected dividend - 0. The stock
option expense of the unvested options are being amortized over their 18 month
vesting period. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
Pro forma information regarding net income and earnings per share is
required by Statement 148, and has been determined as if the Company had
accounted for its stock options under the fair value method of Statement 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. For the purpose of pro forma disclosures,
the estimated fair value of the stock options is generally expensed in the year
of grant since most of the options are vested and immediately exercisable. The
Company's pro forma information follows:
Three months ended Three months ended
September 30, 2003 September 30, 2002
------------------------ -------------------
Net income (loss) as reported $1,067,286 $.04 $(909,330) $ (.04)
Stock option expense (1,500) - (3,900) -
----------- ---- ----------- ------
Pro forma net income (loss) $ 1,065,786 $.04 $(913,230) $ (.04)
=========== ==== ========== =======
On July 10, 2003, a subsidiary of Origin Energy, Sagasco Amadeus Pty.
Limited, agreed to exchange 1.2 million shares of MPAL for 1.3 million shares of
the Company's common stock. After the exchange, MPC's interest in MPAL increased
to 55% from 52.44%. The value on July 10, 2003 of the Company's common stock
issued to Origin Energy increased the amount of common stock by $13,000 and
increased capital in excess of par value by $1,495,000 for a total of
$1,508,000.
Note 4. Depletion, depreciation and amortization (DD&A)
-----------------------------------------------
The operator of the Mereenie field is implementing an extensive program
for additional drilling and capital improvements to meet gas sales' contract
requirements. The Mereenie Producers have agreed to install additional
compression equipment in the field at a cost of $13.1 million (MPAL share $4.6
million) that will increase field deliverability and partially meet certain gas
contract requirements. In addition, two gas wells will be drilled to meet the
gas contractual requirements until June 2007.
Item 1. Notes to Consolidated Financial Statements
- ------- ------------------------------------------
Note 5. Comprehensive income (loss)
---------------------------
Total comprehensive income (loss) during the three month period ended
September 30, 2003 and 2002 were as follows:
Three months ended Accumulated other
September 30, comprehensive loss
---------------------------------- -----------------
2003 2002 2003
---------- ----------- --------
Balance at June 30, 2003 $(5,406,527)
Net income (loss) $ 1,067,286 $ (909,330)
Foreign currency translation
adjustments 241,837 (647,712) 241,837
Reclassification adjustment
unrealized gain on available
-for-sale securities - 6,160 -
---------- ----------- ------------
Total comprehensive
income (loss) $1,309,123 $(1,550,882)
========== ============
Balance at September 30, 2003 $ (5,164,690)
=============
Note 6. Investment in MPAL
------------------
On July 10, 2003, a subsidiary of Origin Energy, Sagasco Amadeus Pty.
Limited, agreed to exchange 1.2 million shares of MPAL for 1.3 million shares of
the Company's common stock. After the exchange, MPC's interest in MPAL increased
to 55% from 52.44%. The value on July 10, 2003 of the Company's common stock
issued to Origin Energy increased the amount of common stock by $13,000 and
increased capital in excess of par value by $1,495,000 for a total of
$1,508,000. The difference of approximately $661,000 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. Earnings per share
------------------
Earnings per common share are based upon the weighted average number of
common and common equivalent shares outstanding during the period. The Company's
basic and diluted calculations of EPS are the same for the three month period
ended September 30, 2002 because the exercise of options is not assumed in
calculating diluted EPS, as the result would be anti-dilutive. The exercise
price of outstanding stock options exceeded the average market price of the
common stock during the 2002 period.
Note 8. Segment Information
--------------------
The Company has two reportable segments, MPC and its subsidiary, MPAL.
Each company is in the same business; MPAL is also a publicly held company with
its shares traded on the Australian Stock Exchange. MPAL issues separate audited
consolidated financial statements and operates independently of MPC. Segment
information (in thousands) for the Company's two operating segments is as
follows:
Item 1. Notes to Consolidated Financial Statements
- ------- ------------------------------------------
Three months ended
------------------
September 30,
-------------
2003 2002
---- ----
Revenues:
MPC $ 1,352 $ 110
MPAL 4,380 3,077
------ -------
$ 5,732 $ 3,187
======= =======
Income (loss) before cumulative
effect of accounting change:
MPC $ 635 $ (151)
Equity in earnings of MPAL 432 20
------ -------
$1,067 $ (171)
====== ========
Net income (loss):
MPC $ 635 $ (151)
MPAL 432 (758)
------ -------
$1,067 $ (909)
====== ========
Note 9. Unrealized Gain on Securities Held for Investment
-------------------------------------------------
During 1999, MPC sold its interest in the Tapia Canyon, California
heavy oil project for its approximate cost of $101,000 and received shares of
stock in the purchaser. During late 2000, the purchaser became a public company,
Sefton Resources, Inc. Effective November 30, 2002, MPC sold all of its interest
in Sefton Resources for $100,000 and recognized a gain of $6,666. Payment was in
the form of a 10% promissory note (secured by the Sefton Resources shares) which
is payable in installments as follows: $25,000 on March 31, 2003, $25,000 on
June 30, 2003 and $50,000 on September 30, 2003. As of June 30, 2003, only the
interest due on the March 31, 2003 installment had been paid. During September
2003, a payment of accumulated interest and a $5,000 principal payment were
received. The Company is currently negotiating a new monthly payment schedule
with the purchaser.
Note 10. Exploration and Dry Hole Costs
------------------------------
The 2003 and 2002 costs related primarily to the exploration work being
performed on MPAL's properties. During September 2003, the Wawiri 1 well in the
Taranaki Basin in the North Island, New Zealand was drilled and plugged and
abandoned as a dry hole at a cost to MPAL of approximately $223,000.
Item 1. Notes to Consolidated Financial Statements
- ------- ------------------------------------------
Note 11. Asset Retirement Obligation
---------------------------
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost is capitalized as part of the related
long-lived asset (oil & gas properties) and amortized on a units-of-production
basis over the life of the related reserves. Accretion expense in connection
with the discounted liability is recognized over the remaining life of the
related reserves. The estimated liability is based on the future estimated cost
of plugging the existing oil and gas wells and removing the surface facilities
equipment in the Palm Valley and Mereenie fields in the Northern Territory of
Australia. The liability is a discounted liability using a credit-adjusted
risk-free rate of approximately 8%. Revisions to the liability could occur due
to changes in the estimates of these costs.
Upon the adoption of SFAS 143, the Company recorded a discounted
liability (Asset retirement obligation) of $3,794,000, increased oil and gas
properties by $526,000 and recognized a one-time, cumulative effect after-tax
charge of $738,000 (net of $316,000 deferred tax benefit and minority interest
of $680,000) which was included in net loss for the three month period ended
September 30, 2002.
A reconciliation of the Company's asset retirement obligation for the
three months ended September 30, 2003, is as follows:
Balance July 1, 2003 $3,858,000
Liabilities incurred 618,000
Liabilities settled -
Accretion expense 82,000
Revisions to estimate -
Exchange effect 46,000
----------
Balance at September 30, 2003 $4,604,000
==========
During the quarter ended September 30, 2003, the Company recorded a
liability in the amount of $511,000 for the Nockatunga project in the Eromanga
Basin in Queensland and $107,000 for the Kotaneelee gas field in Canada. The
Kotaneelee settlement agreement provides that the carried interest partners will
share in the abandonment of the Kotaneelee field wells and facilities.
Note 12. Commitments
-----------
The following is a summary of MPAL's required and contingent
commitments for exploration expenditures for the five year period ending June
30, 2008 and its capital expenditure commitments for the year 2004. The
contingent amounts will be dependent on such factors as the results of the
current program to evaluate the exploration permits, drilling results and MPAL's
financial position.
Item 1. Notes to Consolidated Financial Statements
- ------- ------------------------------------------
Exploration Exploration
Capital Required Contingent
Fiscal Year Expenditures Expenditures Expenditures Total
----------- ------------ ------------- ------------ ----------
2004 $2,652,000 $2,693,000 $ 4,713,000 $ 10,058,000
2005 - 859,000 18,431,000 19,290,000
2006 - 253,000 5,327,000 5,580,000
2007 - - 855,000 855,000
2008 - 1,081,000 1,081,000
---------- ---------- ----------- -----------
Total $2,652,000 $3,805,000 $30,407,000 $36,864,000
========== ========== =========== ===========
MPAL expects to fund its exploration costs through its cash and cash
equivalents and cash flow from Australian operations. MPAL also expects that it
will seek partners to share the above exploration costs. If MPAL's effort to
find partners is unsuccessful, it may be unable or unwilling to complete the
exploration program for some of its properties.
Note 13. Accounts and Notes Receivable
-----------------------------
Accounts and notes receivable consist primarily of the amounts due from
the sale of oil and gas ($3,758,000) and the amounts due from working interest
partners ($1,579,000). In addition, the amount of $851,000 from the Kotaneelee
settlement is also included in accounts receivable.
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.
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 there is the risk that any wells drilled may fail to
encounter hydrocarbons in commercial quantities. The Company undertakes no
obligation to update or revise forward-looking statements, whether as a result
of new information, future events, or otherwise.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
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.
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 Obligation
- ---------------------------
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS 143 requires legal
obligations associated with the retirement of long-lived assets to be recognized
at their fair value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost is capitalized as part of the related
long-lived asset (oil & gas properties) and amortized on a units-of-production
basis over the life of the related reserves. Accretion expense in connection
with the discounted liability is recognized over the remaining life of the
related reserves.
The estimated liability was based on the future estimated cost of
plugging the existing oil and gas wells and removing the surface facilities
equipment in the Palm Valley and Mereenie fields in the Northern Territory of
Australia. The liability is a discounted liability using a credit-adjusted
risk-free rate of approximately 8%. Revisions to the liability could occur due
to changes in the estimates of these costs. During the quarter ended September
30, 2003, the Company recorded a liability for the Nockatunga project using a
credit-adjusted risk-free rate of 6.25% and for the Kotaneelee gas field using a
credit-adjusted risk-free rate of 4.5%.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Revenue Recognition
- -------------------
The Company recognizes oil and gas revenue from its interests in
producing wells as oil and gas is produced and sold from those wells. Oil and
gas sold is not significantly different from the Company's share of production.
Revenues from the purchase, sale and transportation of natural gas are
recognized upon completion of the sale and when transported volumes are
delivered. Shipping and handling costs in connection with such deliveries are
included in production costs. Revenue under carried interest agreements is
recorded in the period when the net proceeds become receivable, measurable and
collection is reasonably assured. The time the net revenues become receivable
and collection is reasonably assured depends on the terms and conditions of the
relevant agreements and the practices followed by the operator. As a result, net
revenues may lag the production month by one or more months.
Use of Estimates
- ----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Estimates are particularly
sensitive in the calculation of proven reserves, depletion, depreciation and
amortization and the amount of the Company's asset retirement obligations.
Actual results could differ from those estimates.
Liquidity and Capital Resources
- -------------------------------
Consolidated
- ------------
At September 30, 2003, the Company on a consolidated basis had
approximately $21 million in cash and cash equivalents and marketable
securities.
A summary of the major changes in cash and cash equivalents during the
three month period ended September 30, 2003 is as follows:
Cash and cash equivalents at beginning of period $20,041,000
Net cash provided by operations 655,000
Marketable securities purchased (matured) net (224,000)
Net additions to property and equipment (2,123,000)
Effect of exchange rate changes 220,000
-----------
Cash and cash equivalents at end of period $18,569,000
===========
Net cash provided by operations
- -------------------------------
Net cash provided by operations decreased $1,242,000 from $1,897,000
during the 2002 period compared to $655,000 in the 2003 period. While cash funds
derived from operations increased $1,817,000 during the 2003 period, the changes
in operating assets and liabilities decreased $3,059,000 during the 2003 period.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Marketable securities purchased and sold
- ----------------------------------------
During the 2003 period, investments with maturities of less than three
months were reinvested for more than three months.
Net additions to property and equipment
- ---------------------------------------
The net additions to property and equipment of $2,123,000 are primarily
the purchase of the Nockatunga project for approximately $1,400,000 and the
upgrading of the Mereenie field.
Effect of exchange rate changes
- -------------------------------
The value of the Australian dollar relative to the U.S. dollar
increased 1% to $.6813 at September 30, 2003 compared to a value of $.6737 at
June 30, 2003.
As to MPC
- ---------
At September 30, 2003, MPC, on an unconsolidated basis, had working
capital of approximately $3.3 million. MPC's current cash position, its annual
MPAL dividend and the anticipated revenue from the Kotaneelee field should be
adequate to meet its current cash requirements. MPC has in the past invested and
may in the future invest substantial portions of its cash to maintain its
majority interest in its subsidiary. On July 10, 2003, a subsidiary of Origin
Energy, Sagasco Amadeus Pty. Limited, agreed to exchange 1.2 million shares of
MPAL for 1.3 million shares of the Company's common stock. After the exchange,
the Company's interest in MPAL increased to 55% from 52.44%.
During November 2003, MPC received a dividend of approximately $911,000
from MPAL.
During December 2000, MPC announced a stock repurchase plan to purchase
up to one million shares of its common stock in the open market. Through
September 30, 2003, MPC had purchased 680,850 of its shares at a cost of
approximately $686,000, all of which have been or will be cancelled.
As to MPAL
- ----------
At September 30, 2003, MPAL had working capital of approximately $19.1
million. MPAL has budgeted approximately $3.4 million for specific exploration
projects in fiscal year 2004 as compared to the $4.5 million expended during
fiscal 2003. However, the total amount to be expended may vary depending on when
various projects reach the drilling phase. MPAL's future revenues are expected
to be derived from the sale of gas in Australia, based on its current
composition of oil and gas reserves. MPAL's current contracts for the sale of
Palm Valley and Mereenie gas will expire during fiscal year 2009. Unless MPAL is
able to obtain additional contracts for its remaining gas reserves or be
successful in its current exploration program, its revenues will be materially
reduced after 2009.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
The following is a summary of MPAL's required and contingent
commitments for exploration expenditures for the five year period ending June
30, 2008 and its capital expenditure commitments for the year 2004. The
contingent amounts will be dependent on such factors as the results of the
current program to evaluate the exploration permits, drilling results and MPAL's
financial position.
Exploration Exploration
Capital Required Contingent
Fiscal Year Expenditures Expenditures Expenditures Total
- ----------- ------------ ------------- ------------ -----------
2004 $2,652,000 $2,693,000 $ 4,713,000 $ 10,058,000
2005 - 859,000 18,431,000 19,290,000
2006 - 253,000 5,327,000 5,580,000
2007 - - 855,000 855,000
2008 - 1,081,000 1,081,000
---------- ---------- ----------- -----------
Total $2,652,000 $3,805,000 $30,407,000 $36,864,000
========== ========== =========== ===========
MPAL expects to fund its exploration costs through its cash and cash
equivalents and cash flow from Australian operations. MPAL also expects that it
will seek partners to share the above exploration costs. If MPAL's efforts to
find partners are unsuccessful, it may be unable or unwilling to complete the
exploration program for some of its properties.
Results of Operations
- ---------------------
New Accounting Standards
- ------------------------
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended. In April 2003,
the Financial Accounting Standards Board (FASB) issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities," which amends
SFAS No. 133. This new statement incorporates interpretations that were included
in previous Derivative Implementation Group (DIG) guidance, clarifies certain
conditions, and amends other existing pronouncements. It is effective for
contracts entered into or modified after June 30, 2003. Management has
determined that the adoption of SFAS No. 149 did not have an impact on the
Company's financial statements.
In January 2003, the FASB issued Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities," which was recently delayed and
will be effective for the Company on December 31, 2003. FIN 46 requires that the
party to a VIE that absorbs the majority of the VIE's losses, defined as the
"primary beneficiary," consolidate the VIE The Company has determined that
it is very unlikely that it will be required to consolidate or disclose
information about a VIE upon the effective date of FIN 46.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards on how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise effective for the Company for the first quarter of fiscal 2004.
The adoption of SFAS No. 150 did not have an impact on the Company's
financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Three months ended September 30, 2003 vs. September 30, 2002
- ------------------------------------------------------------
Revenues
--------
Oil sales increased 36% in the 2003 quarter to $1,093,000 from
$801,000 in 2002 because of a 20% Australian foreign exchange rate increase
discussed below and new oil sales from the Cooper Basin and the Nockatunga
project. Oil unit sales are expected to continue to decline in the Mereenie
field unless additional development wells are drilled to maintain production
levels. MPAL is dependent on the operator (65% control) of the Mereenie field to
maintain production. Oil unit sales (before deducting royalties) in barrels
(bbls) and the average price per barrel sold during the periods indicated were
as follows:
Three months ended September 30,
--------------------------------
2003 Sales 2002 Sales
------------------------------------------ ---------------------------------------
Average price Average price
Bbls A.$ per bbl Bbls A.$ per bbl
---- ----------- ---- -----------
Australia:
Mereenie field 32,916 40.67 36,632 44.35
Cooper Basin 2,881 34.57 - -
Nockatunga project 8,038 36.72 - -
----- -------
Total 43,835 39.54 36,632 44.35
====== ======
Gas sales increased 89% to $3,830,000 in 2003 from $2,029,000 in 2002
because of the 20% Australian foreign exchange rate increase discussed below and
the proceeds from the Canadian Kotaneelee gas field settlement.
Three months ended September 30,
--------------------------------
2003 2002
----------- ----------
Australia $2,596,000 $1,941,000
Canada-recurring 99,000 88,000
Canada-settlement 1,135,000 -
--------- ----------
Total $3,830,000 $2,029,000
========== ==========
During the 2003 period, the volume of gas sold in Australia increased
10%, but the average price of gas sold decreased 2%. The volumes in billion
cubic feet (bcf) (before deducting royalties) and the average price of gas per
thousand cubic feet (mcf) sold during the periods indicated were as follows:
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Three months ended September 30,
--------------------------------
2003 Sales 2002 Sales
----------------------- --------------------
A.$ average A.$ average
price per mcf price per mcf
--------------- ---------------
bcf mcf bcf mcf
--- --- --- ---
Australia: Palm Valley .741 2.17 .778 2.53
Australia: Mereenie .966 2.79 .773 2.60
---- ----
Total 1.707 2.52 1.551 2.57
===== =====
Other production related revenues increased 213% to $473,000 in 2003
from $151,000 in 2002. Other production related revenues are primarily MPAL's
share of gas pipeline tariff revenues which increased as a result of the higher
volumes of gas sold and increased prices.
Interest and other income increased 62% to $335,000 in 2003 from
$207,000 in 2002 primarily because of the $102,000 interest received from the
funds held in escrow from the Kotaneelee settlement and because of the 20%
Australian foreign exchange rate increase discussed below.
Costs and Expenses
------------------
Production costs increased 32% in 2003 to $1,299,000 from $984,000 in
2002 in part because of the 20% Australian foreign exchange rate increase
discussed below. During 2003, production costs also increased because of the
Nockatunga project ($167,000) and the Cooper Basin ($17,000).
Exploration and dry hole costs decreased 23% to $566,000 in 2003 from
$807,000 in 2002. The 2003 and 2002 costs related primarily to the exploration
work being performed on MPAL's properties. During September 2003, the Wawiri 1
well in the Taranaki Basin in the North Island, New Zealand was drilled and
plugged and abandoned as a dry hole at a cost to MPAL of approximately $223,000.
Salaries and employee benefits increased 37% to $563,000 in 2003 from
$411,000 in 2002. During the 2003 period, there was a 20% increase in the
Australian foreign exchange rate as discussed below. In addition, there were
also regular annual increases in salaries.
Depletion, depreciation and amortization increased 23% from $874,000 in
2002 to $1,078,000 in 2003. During the 2003 period, there was a 20% increase in
the Australian foreign exchange rate as discussed below. In addition, $22,000 in
DD&A was also recorded for the Nockatunga project and the Cooper Basin.
Auditing, accounting and legal expenses was unchanged at $141,000 for
both periods.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Accretion expense increased 11% in the 2003 period from $74,000 in 2002
to $82,000 in 2003. Accretion expense represents the accretion on the Asset
Retirement Obligations (ARO) under SFAS 143 that was adopted effective July 1,
2002. During the fourth quarter of fiscal year 2003, there was a revision of
estimates that reduced the amount of ARO. The decrease in the 2003 period was
offset by the 20% increase in the Australian foreign exchange rate as discussed
below and the additions for the Nockatunga project and the Kotaneelee gas field.
Shareholder communications increased 6% from $31,000 in 2002 to $33,000
in 2003 primarily because of MPAL's increased costs required as a public
company.
Other administrative expenses increased 171% from $51,000 in 2002 to
$138,000 in 2003. During the 2003 period, there was a 20% increase in the
Australian foreign exchange rate as discussed below. In addition, there were
increases in consultants' fees, directors' fees, insurance, rent and travel
expenses during the 2003 period.
Income Taxes
------------
Income tax provision increased in 2003 to $411,000 from $1,000 in
2002. The components of the income tax (in thousands) between MPC and MPAL were
as follows:
2003 2002
-------- -------
Pretax consolidated income $1,832 $ (184)
MPC's (income) loss not recognized (1,045) 129
Permanent differences (323) (15)
----- ----
Book taxable income $ 464 $ (70)
====== =======
Australian tax rate 30% 30%
=== ===
Australian income tax benefit (provision) $ (139) $ 21
Tax benefit of MPAL losses 139 -
MPC income tax (provision) (411) (22)
----- -----
Income tax (provision) $ (411) $ (1)
======= =====
Current income tax (provision) $ (411) $(22)
Deferred income tax benefit - 21
------- -----
Income tax (provision) $ (411) $ (1)
======= =====
Effective tax rate 22% 1%
=== ==
MPC's 2003 and 2002 income tax provisions represent the 25% Canadian
withholding tax on its Kotaneelee gas field carried interest net proceeds. The
tax benefit of $139,000 in fiscal 2003 relates primarily to tax deductions taken
in connection with financing exploration activities in Australia. As of June 30,
2003, MPAL had an operating loss of $5,550,000 from financing the exploration
activities, the $1,665,000 benefit of which had not been taken into account
because there was no assurance at the time that the loss benefit would be
realized.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
Exchange Effect
---------------
The value of the Australian dollar relative to the U.S. dollar
increased to $.6813 at September 30, 2003 compared to a value of $.6737 at June
30, 2003. This resulted in a $242,000 credit to the foreign currency translation
adjustments account for the three months ended September 30, 2003. The 1%
increase in the value of the Australian dollar increased the reported asset and
liability amounts in the balance sheet at September 30, 2003 from the June 30,
2003 amounts. The average exchange rate used to translate MPAL's operations in
Australia was $.6588 for the quarter ended September 30, 2003, which is a 20%
increase compared to the $.5472 rate for the quarter ended September 30, 2002.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
September 30, 2003
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. For fiscal
year 2003, oil sales represented approximately 25% of production revenues,
therefore, an increase in the world price of crude oil would only have a modest
positive impact on the Company's earnings, while a decrease in crude oil prices
would have a similar negative impact on earnings. Gas sales, which represented
approximately 75% of production revenues in fiscal 2003, 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. At September 30, 2003, the
carrying value of such investments including those classified as cash and cash
equivalents was approximately $20.9 million, which approximates the fair value
of the securities. Since the Company expects to hold the investments to
maturity, the maturity value should be realized.
Item 4. Disclosure Controls and Procedures
- ------- ----------------------------------
Disclosure Controls and Procedures
----------------------------------
An evaluation was performed under the supervision and with the
participation of the Company's management, including James R. Joyce, 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, 2003. 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 Securities and Exchange
Commission 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, particularly during the period when this report was being prepared.
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 first fiscal quarter of the Company's fiscal
year ending June 30, 2004 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
September 30, 2003
Item 1 Legal Proceedings
- ------ -----------------
During September 2003, the litigants in the Kotaneelee litigation
entered into a settlement agreement. During October 2003, the Company received
approximately $851,000, after Canadian withholding taxes and reimbursement of
certain past legal costs. The plaintiffs agreed to terminate all litigation
against the defendants related to the field, including the claim that the
defendants failed to fully develop the field. Since each party agreed to bear
its own legal costs, there were no taxable costs assessed against any of the
parties.
Item 5. Other Information
- ------- -----------------
During September 2003, the Wawiri 1 well in the Taranaki Basin in the
North Island, New Zealand was drilled and plugged and abandoned as a dry hole at
a cost to MPAL of approximately $150,000. During October 2003, the Bluff 1 well
also in the Taranaki Basin in the North Island, New Zealand was drilled and
plugged and abandoned as a dry hole at a cost to MPAL of approximately $150,000.
During October 2003, the Semaphore 1 well in PEL 110 of the Cooper
Basin in South Australia was drilled and plugged and abandoned as a dry hole at
a cost to MPAL of approximately $300,000.
On November 3, 2003, the Thungo 8 well in ATP267P (PL 51) reached
total depth with good shows. The well will be cased and suspended as a future
oil well. The Thungo 8 well was drilled in the Nockatunga project (MPAL interest
41%) in the Eromanga Basin in Queensland.
On November 6, 2003, the Callisto 1 well (MPAL share 39%) in ATP267P
was spudded and on November 8, 2003, the Waitpinga 1 well (MPAL share 50%) in
PEL 94 in the Cooper Basin was also spudded.
Palm Valley Petroleum Lease No. 3 which was due to expire on November
8, 2003, has been renewed for an additional 21 years.
Planning for the Palm Valley-11 well is in process but the well is not
expected to be spudded before February 2004.
MAGELLAN PETROLEUM CORPORATION
Form 10-Q
PART II - OTHER INFORMATION
September 30, 2003
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
31. Rule 13a-14(a) Certifications.
------------------------------
Certification of James R. Joyce, 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 James R. Joyce, President, Chief Executive
Officer and Chief Financial and Accounting Officer, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, is furnished herein.
(b) Reports on Form 8-K
-------------------
On July 11, 2003, the Company filed a Current Report on Form
8-K to report an agreement to acquire 1.2 million shares of its majority held
subsidiary, Magellan Petroleum Australia Limited.
On August 27, 2003, the Company filed a Current Report on Form
8-K to report the determination of the Audit Committee to dismiss Ernst & Young
LLP as the Company's independent auditors.
On September 3, 2003, the Company filed Amendment No.1 to
Current Report on Form 8-K to report the completion of the agreement to acquire
1.2 million shares of its majority held subsidiary, Magellan Petroleum Australia
Limited.
On September 8, 2003, the Company filed a Current Report on
Form 8-K to report the determination of the Audit Committee of Magellan
Petroleum Australia Limited to dismiss Ernst & Young LLP as the Company's
independent auditors.
On September 10, 2003, the Company filed a Current Report on
Form 8-K to report that the litigants in the Kotaneelee litigation entered into
a settlement agreement.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
September 30, 2003
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 12, 2003 By /s/ James R. Joyce
--------------------------------------
James R. Joyce, President and
Chief Financial and Accounting Officer