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 March 31, 2004
------------------------------------
[ ] 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 May 13, 2004 was 25,783,243.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
March 31, 2004
Table of Contents
PART I - FINANCIAL INFORMATION
Page
ITEM 1 Financial Statements (unaudited)
Consolidated balance sheets at March 31, 2004
and June 30, 2003 3
Consolidated statements of income (loss) for the three and
nine months ended March 31, 2004 and 2003 4
Consolidated statements of cash flows for the nine months
ended March 31, 2004 and 2003 5
Notes to consolidated financial statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 26
ITEM 4 Disclosure Controls and Procedures 26
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 27
ITEM 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 27
ITEM 5 Other Information 27
ITEM 6 Exhibits and Reports on Form 8-K 29
Signatures
Certifications
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
ASSETS 2004 2003
- ------ ------------ ------------
Current assets: (unaudited) (Note)
Cash and cash equivalents $19,878,800 $20,041,464
Accounts and notes receivable 4,555,436 5,273,999
Marketable securities 2,491,294 1,796,503
Inventories 655,932 423,931
Other assets 350,983 297,118
----------- -----------
Total current assets 27,932,445 27,833,015
----------- -----------
Marketable securities 390,000 390,000
Property and equipment:
Oil and gas properties (successful efforts method) 76,103,334 59,407,254
Land, buildings and equipment 2,435,481 2,093,555
Field equipment 1,623,419 1,421,636
----------- -----------
80,162,234 62,922,445
Less accumulated depletion, depreciation and amortization (51,782,304) (41,330,271)
------------ ------------
Net property and equipment 28,379,930 21,592,174
----------- -----------
Other assets 1,052,645 926,168
----------- -----------
Total assets $57,755,020 $50,741,357
=========== ===========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,853,622 $ 4,709,281
Accrued liabilities 1,598,616 1,218,997
Income taxes payable 98,286 106,246
---------- ----------
Total current liabilities 4,550,524 6,034,524
---------- ----------
Long term liabilities:
Deferred income taxes 2,019,362 1,770,727
Asset retirement obligations 5,416,939 3,858,263
---------- ----------
Total long term liabilities 7,436,301 5,628,990
---------- ----------
Minority interests 18,247,458 16,930,838
Commitments (Note 12) - -
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 200,000,000 shares
Outstanding 25,783,243 and 24,427,376 shares 257,832 244,274
Capital in excess of par value 44,402,182 42,907,741
----------- -----------
Total capital 44,660,014 43,152,015
Accumulated deficit (14,895,013) (15,598,483)
Accumulated other comprehensive loss (2,244,264) (5,406,527)
------------ ------------
Total stockholders' equity 27,520,737 22,147,005
----------- -----------
Total liabilities, minority interests and stockholders' equity $57,755,020 $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 Nine months ended
------------------------- --------------------
March 31, March 31,
--------------- ---------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Oil sales $ 1,362,321 $ 982,019 $3,636,534 $2,507,322
Gas sales 3,013,700 2,497,647 9,931,831 7,153,145
Other production related revenues 463,274 383,538 1,265,893 848,572
Interest and other income 270,331 207,138 847,765 632,487
---------- ---------- ----------- ----------
Total revenues 5,109,626 4,070,342 15,682,023 11,141,526
---------- ---------- ----------- ----------
Costs and expenses:
Production costs 1,277,313 1,168,878 4,055,062 3,064,956
Exploration and dry hole costs 680,111 656,126 2,585,043 1,951,872
Salaries and employee benefits 702,161 469,421 1,982,767 1,415,548
Depletion, depreciation and amortization 1,581,332 906,667 4,324,933 2,562,995
Auditing, accounting and legal services 89,470 49,081 329,875 314,214
Accretion expense 102,629 79,960 273,093 228,824
Shareholder communications 35,149 33,836 155,631 148,604
Other administrative expenses 131,068 12,921 427,000 262,323
---------- ---------- ---------- ----------
Total costs and expenses 4,599,233 3,376,890 14,133,404 9,949,336
---------- ---------- ---------- ---------
Income before income taxes, minority interests
and cumulative effect of accounting change 510,393 693,452 1,548,619 1,192,190
Income tax provision (114,523) (189,663) (463,391) (402,863)
----------- ----------- ----------- -----------
Income before minority interests and cumulative
effect of accounting change 395,870 503,789 1,085,228 789,327
Minority interests (254,052) (273,507) (381,758) (577,014)
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change 141,818 230,282 703,470 212,313
Cumulative effect of accounting change - net - - - (737,941)
----------- ----------- ---------- ----------
Net income (loss) $ 141,818 $ 230,282 $ 703,470 $ (525,628)
=========== =========== ========== ===========
Average number of shares outstanding
Basic 25,741,343 24,571,126 25,602,693 24,592,876
========== ========== ========== ==========
Diluted 25,894,912 24,571,126 25,640,557 24,592,876
========== ========== ========== ==========
Net income (loss) per share (basic and diluted)
Before cumulative effect of accounting change $ .01 $ .01 $ .03 $ .01
Cumulative effect of accounting change-net - - - (.03)
------ ----- ----- ------
Net income (loss) $ .01 $ 01 $ .03 $ (.02)
===== ==== ===== =======
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
-----------------
March 31,
---------
2004 2003
------------------- ------------------
Operating Activities:
Net income (loss) $ 703,470 $ (525,628)
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 4,324,933 2,562,995
Accretion expense 273,093 228,824
Deferred income taxes 1,474 (373,769)
Minority interests 381,758 (113,579)
Change in operating assets and liabilities:
Accounts and notes receivable 533,946 (1,145,297)
Other assets (219,469) (151,208)
Inventories (253,354) (156,303)
Accounts payable and accrued liabilities (1,343,239) 2,506,455
Income taxes payable (7,960) (74,322)
Asset retirement obligations - 108,775
---------- ----------
Net cash provided by operating activities 4,394,652 4,892,633
---------- ----------
Investing Activities:
Marketable securities purchased (5,208,687) (1,671,248)
Marketable securities sold or matured 4,513,896 1,305,605
Repurchase of common stock - (138,950)
Sale of available-for-sale securities - 93,334
Net additions to property and equipment (4,792,966) (2,045,536)
----------- -----------
Net cash used in investing activities (5,487,757) (2,459,795)
----------- -----------
Financing Activities:
Dividends to MPAL minority shareholders (744,971) (628,209)
--------- ---------
Net cash used in financing activities (744,971) (628,209)
========= =========
Effect of exchange rate changes on cash
and cash equivalents 1,675,412 1,139,595
---------- ----------
Net increase (decrease) in cash and cash equivalents (162,664) 2,944,224
Cash and cash equivalents at beginning of year 20,041,464 15,784,851
---------- ----------
Cash and cash equivalents at end of period $19,878,800 $18,729,075
=========== ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
March 31, 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 March 31, 2004, 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 and nine month
periods ended March 31, 2004 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
March 31, 2004
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
-------------------------
The Company through its stock repurchase plan may purchase up to one
million shares of its common stock in the open market. Through March 31, 2004,
the Company had purchased 680,850 of its shares at a cost of approximately
$686,000, all of which shares have been cancelled.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock options because the alternative fair
value accounting provided under FASB Statement No. 123, "Accounting for Stock
Based Compensation," as amended by SFAS 148 "Accounting for Stock-based
Compensation - Transition and Disclosure" requires use of option valuation
models to value stock options. Under APB No. 25, because the exercise price of
the Company's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Expiration Number of
Options outstanding Dates shares Exercise Prices ($)
- ------------------- ----------- -------------- -------------------
June 30, 2001 921,000 1.28-1.57
Expired (50,000) 1.57
--------
June 30, 2002 871,000 1.28-1.57
Granted Jan. 2008 50,000 .85
-------
June 30, 2003 921,000 .85-1.57
Expired (126,000) 1.57
Cancelled (25,000) .85
Exercised (175,000) .85-1.28
---------
March 31, 2004 595,000 1.28
=======
($1.28 weighted average)
Summary of Options Outstanding at March 31, 2004
Expiration Exercise
Dates Total Vested Prices ($)
------------- ----- ------ ----------
Granted 2000 Feb. 2005 595,000 595,000 1.28
======= ======= ====
Options reserved for future grants 230,000
- ---------------------------------- =======
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.
Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. 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.
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
March 31, 2004 March 31, 2003
------------------ ---------------
Net income as reported $141,818 $.01 $230,282 $ .01
Stock option expense - - (12,797) -
-------- ---- -------- -----
Pro forma net income $141,818 $.01 $217,485 $ .01
======== ==== ======== =====
Nine months ended Nine months ended
March 31, 2004 March 31, 2003
--------------- ---------------
Net income (loss) as reported $703,470 $.03 $(525,628) $ (.02)
Stock option expense - - (20,597) -
-------- ---- ---------- ------
Pro forma net income (loss) $703,470 $.03 $(546,225) $ (.02)
======== ==== ========== =======
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. On October 8, 2003, the Company filed a registration statement on
Form S-3 to register the 1.3 million shares issued to Origin Energy for resale
that was declared effective on February 20, 2004. As of April 21, 2004, Origin
Energy had resold all of the 1.3 million shares of the Company's common stock.
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 are installing 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 in fiscal 2005
to meet the gas contractual requirements until June 2007.
Note 5. Comprehensive income (loss)
---------------------------
Total comprehensive income (loss) during the three and nine month
periods ended March 31, 2004 and 2003 is as follows:
Accumulated other
Three months ended Nine months ended comprehensive
March 31, March 31, loss
------------------ ------------------ -------------
2004 2003 2004 2003
---- ---- ---- ----
Balance at June 30, 2003 $(5,406,527)
Net income (loss) $141,818 $ 230,282 $ 703,470 $(525,628)
Foreign currency translation
adjustments 429,122 1,325,758 3,162,263 1,265,110 3,162,263
Reclassification adjustment - - - 44,054
Unrealized gain on available-
for-sale securities - - - 6,160 -
-------- ---------- ---------- ------- -------------
Total comprehensive
income (loss) $570,940 $1,556,040 $3,865,733 $789,696
======== ========== ========== ========
Balance at March 31, 2004 $(2,244,264)
============
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 March 31, 2003 and the nine month period ended March 31, 2003 because the
exercise of options is not assumed in calculating diluted EPS, as the result
would be anti-dilutive. For the three and nine month periods ended March 31,
2004, the potential dilution items are the outstanding stock options disclosed
in Note 3.
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:
Three months ended Nine months ended
March 31, March 31,
-------------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
MPC $ 134 $ 185 $ 2,500 $ 1,093
MPAL 4,976 3,886 14,093 10,735
Intersegment dividend - - (911) (686)
------- ------- ------- -------
Total consolidated revenues $ 5,110 $ 4,071 $15,682 $11,142
======= ======= ======= =======
Net income (loss) before cumulative effect of accounting change:
MPC $(169) $ (70) $1,148 $ 274
MPAL 311 300 466 624
Intersegment dividend - - (911) (686)
----- ----- ------- -------
Consolidated net income (loss) $142 $ 230 $ 703 $ (212)
====== ===== ====== =======
Net income (loss):
MPC $(169) $ (70) $1,148 $ 274
MPAL 311 300 466 (114)
Intersegment dividend - - (911) (686)
----- ----- ------- -------
Consolidated net income (loss) $ 142 $ 230 $ 703 $ (526)
===== ===== ====== =======
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). The
unpaid balance of $81,000 at March 31, 2004, is being paid in monthly
installments of $3,000, plus interest.
Note 10. Exploration and Dry Hole Costs
------------------------------
The 2004 and 2003 costs related primarily to the exploration work being
performed on MPAL's properties. The dry holes were drilled on MPAL properties in
Australia and New Zealand.
Note 11. Asset Retirement Obligations
----------------------------
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 obligations) 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 nine month period ended
March 31, 2003.
A reconciliation of the Company's asset retirement obligations for the
nine months ended March 31, 2004, is as follows:
Balance at July 1, 2003 $3,858,000
Liabilities incurred 675,000
Liabilities settled -
Accretion expense 273,000
Revisions to estimate -
Exchange effect 611,000
---------
Balance at March 31, 2004 $5,417,000
==========
During the nine month period ended March 31, 2004, the Company
recorded a liability in the amount of $526,000 for the Nockatunga project in the
Eromanga Basin in Queensland and $149,000 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 fiscal year 2004. The
amount of capital expenditures for the period 2005-2008 is not known at this
time. 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. It is not likely that the total amount of the
contingent exploration expenditures will be incurred for the fiscal year ending
June 30, 2004.
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 ($2,824,000) and the amounts due from working interest
partners ($1,631,000).
Note 14. Pension plan costs
------------------
Pension plan costs for the three and nine month periods ended March 31,
2004 and 2003 are as follows:
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
$43,007 $37,475 $127,115 $112,424
The individual components of net pension expense for pension plan costs
were not significantly different during the periods.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
March 31, 2004
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (Cont'd)
------------------------------
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 faces the risk that any wells drilled may fail to
encounter hydrocarbons in commercially recoverable quantities. The Company
undertakes no obligation to update or revise forward-looking statements, whether
as a result of new information, future events, or otherwise.
Critical Accounting Policies
- ----------------------------
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its
oil and gas operations. Under this method, the costs of successful wells,
development dry holes and productive leases are capitalized and amortized on a
units-of-production basis over the life of the related reserves. Cost centers
for amortization purposes are determined on a field-by-field basis. The Company
records its proportionate share in joint venture operations in the respective
classifications of assets, liabilities and expenses. Unproved properties with
significant acquisition costs are periodically assessed for impairment in value,
with any impairment charged to expense. The successful efforts method also
imposes limitations on the carrying or book value of proved oil and gas
properties. Oil and gas properties are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable. The Company estimates the future undiscounted cash flows from the
affected properties to determine the recoverability of carrying amounts. In
general, analyses are based on proved developed reserves, except in
circumstances where it is probable that additional resources will be developed
and contribute to cash flows in the future.
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
- ----------------------------
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 nine months ended March
31, 2004, 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%.
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 March 31, 2004, the Company on a consolidated basis had
approximately $22.8 million in cash and cash equivalents and marketable
securities.
A summary of the major changes in cash and cash equivalents during the
nine month period ended March 31, 2004 is as follows:
Cash and cash equivalents at beginning of period $20,041,000
Net cash provided by operations 4,395,000
Marketable securities (purchased) matured net (694,000)
Net additions to property and equipment (4,793,000)
Dividends to MPAL minority shareholders (745,000)
Effect of exchange rate changes 1,675,000
-----------
Cash and cash equivalents at end of period $19,879,000
===========
Net cash provided by operations
- -------------------------------
Net cash provided by operations decreased $498,000 from $4,893,000
during the 2003 period compared to $4,395,000 in the 2004 period. Cash funds
derived from operations increased $1,880,000 during the 2004 period, which was
offset by the $2,378,000 decrease in changes in operating assets and liabilities
during the 2004 period. The primary reason for the increase in cash funds
derived from operations during the 2004 period was the nonrecurring receipt of
the settlement payment of $851,000 from the Kotaneelee litigation. The
$3,850,000 change in accounts payable reduced cash funds available during 2004.
Marketable securities purchased and sold or matured
- ---------------------------------------------------
During the 2004 period, part of the proceeds of the Kotaneelee gas
field settlement was invested in securities with maturities of more than three
months.
Net additions to property and equipment
- ---------------------------------------
The net additions to property and equipment of $4,793,000 are primarily
the purchase of the Nockatunga project for approximately $1,400,000 and the
upgrading of the Mereenie field.
Dividends to MPAL minority shareholders
- ---------------------------------------
During November 2003, MPAL paid a dividend of A.$.05 per share to all
of its shareholders which totaled $1,656,000. MPC's share of the dividend was
approximately $911,000 and the amount paid to the minority shareholders was
$745,000.
Effect of exchange rate changes
- -------------------------------
The value of the Australian dollar relative to the U.S. dollar
increased 14% to $.7657 at March 31, 2004, compared to a value of $.6737 at June
30, 2003.
As to MPC
- ---------
At March 31, 2004, MPC, on an unconsolidated basis, had working capital
of approximately $3.8 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 or
increase its majority ownership 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.
MPC through its stock repurchase plan may purchase up to one million
shares of its common stock in the open market. Through March 31, 2004, 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 nine months ended March 31, 2004.
As to MPAL
- ----------
At March 31, 2004, MPAL had working capital of approximately $19.6
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.
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 fiscal year 2004. The
amount of capital expenditures for the period 2005-2008 is not known at this
time. 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. It is not likely that the total amount of the
contingent exploration expenditures will be incurred for the fiscal year ending
June 30, 2004.
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. In addition to the expenditures
discussed above, 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 are installing 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. Two gas wells will also be drilled in fiscal 2005 to meet
the gas contractual requirements until June 2007.
The operator of the Kotaneelee gas field is proposing, that commencing
on about August 15, 2004, a development well be drilled in the field at a cost
of approximately $12 million of which MPC's approximate 2.67% share would be
approximately $320,000. Because MPC is in a carried interest position, MPC will
not be required to advance any funds for the drilling of the proposed well.
There are no assurances that the proposed well will be drilled. If the proposed
well is drilled, the cost of the well would be charged to the Company's carried
interest account as the costs are incurred. MPC's monthly revenue payments would
be reduced until the working interest partners recover MPC's share of the cost
of the proposed well. If the well is successful, MPC will receive its share of
revenue from the sale of gas from well when the well is put on production.
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," was 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 not required to consolidate or
disclose information about a VIE. In December 2003, the FASB issued a revised
version of FIN 46R that was effective for the Company on March 31, 2004. FIN 46R
did not have an impact on the Company's consolidated financial statements.
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.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." (SFAS
No. 132R) This statement revises employers' disclosures about pension plans and
other postretirement benefit plans, requires additional disclosures about the
assets, obligations, cash flows, and the net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans and
requires companies to disclose various elements of pension and postretirement
benefit costs in interim period financial statements. The annual disclosures in
SFAS No. 132R are effective for the Company's defined benefit pension plan for
the fiscal year ending June 30, 2004, while the new interim period disclosures
were required for the quarter ended December 31, 2003. The required disclosures
are included in Note 14. Pension plan costs.
Three months ended March 31, 2004 vs. March 31, 2003
- ----------------------------------------------------
Revenues
--------
Oil sales increased 39% in the 2004 quarter to $1,362,000 from
$982,000 in 2003 because of a 29% Australian foreign exchange rate increase
discussed below and new oil sales from the Cooper Basin and the Nockatunga
project. Oil unit sales are expected to continue to decline in the Mereenie
field unless additional development wells are drilled to maintain production
levels. MPAL is dependent on the operator (65% control) of the Mereenie field to
maintain production. Oil unit sales (before deducting royalties) in barrels
(bbls) and the average price per barrel sold during the periods indicated were
as follows:
Three months ended March 31,
----------------------------
2004 2003
------------------- ----------------------
Sales Sales
----- -----
Average price Average price
Bbls A.$ per bbl Bbls A.$ per bbl
---- ----------- ---- -----------
Australia:
Mereenie field 32,301 43.93 36,676 49.44
Cooper Basin 1,565 37.51 - -
Nockatunga project 12,077 37.67 - -
------ -------
Total 45,943 42.07 36,676 49.44
====== ======
Gas sales increased 21% to $3,014,000 in 2004 from $2,498,000 in 2003
because of the 29% Australian foreign exchange rate increase discussed below.
Three months ended March 31,
----------------------------
2004 2003
---------- --------
Australia $2,895,000 $2,335,000
Canada-recurring 119,000 163,000
---------- ----------
Total $3,014,000 $2,498,000
========== ==========
During the 2004 period, the volume of gas sold in Australia decreased
4%, and the average price of gas sold decreased 1%. The volumes in billion cubic
feet (bcf) (before deducting royalties) and the average price of gas per
thousand cubic feet (mcf) sold during the periods indicated were as follows:
Three months ended March 31,
----------------------------
2004 Sales 2003 Sales
----------------------- --------------------
bcf A.$ average price per mcf bcf A.$ average price per mcf
--- ------------------------- --- -------------------------
Australia: Palm Valley .711 2.13 .756 2.14
Australia: Mereenie .960 2.78 .987 2.85
---- ----
Total 1.671 2.51 1.743 2.54
===== ====
Other production related revenues increased 21% to $463,000 in 2004
from $384,000 in 2003 because of the 29% Australian foreign exchange rate
increase discussed below. Other production related revenues are primarily MPAL's
share of gas pipeline tariff revenues.
Interest and other income increased 30% to $270,000 in 2004 from
$207,000 in 2003 primarily because of the 29% Australian foreign exchange rate
increase discussed below.
Costs and Expenses
------------------
Production costs increased 9% in 2004 to $1,277,000 from $1,169,000 in
2003. The increase in 2004 is primarily the 29% Australian foreign exchange rate
increase discussed below and the new production costs of $128,000 for the
Nockatunga project and the Cooper Basin. These increases were partially offset
by a decrease in production costs applicable to two wells that were plugged and
abandoned in the Mereenie field in 2003. In addition, a Mereenie two well
workover program was completed during the 2003 period.
Exploration and dry hole costs increased 4% to $680,000 in 2004 from
$656,000 in 2003. The 2004 and 2003 costs related to the exploration work being
performed on MPAL's properties. The primary reason for the increase is the 29%
Australian foreign exchange rate increase discussed below. For the 2004 period,
exploration costs totaled $370,000 and dry hole costs totaled $310,000. For the
2003 period, exploration costs totaled $656,000. The dry holes were drilled on
MPAL properties in Australia and New Zealand.
Salaries and employee benefits increased 50% to $702,000 in 2004 from
$469,000 in 2003. During the 2004 period, there was a 29% increase in the
Australian foreign exchange rate as discussed below. In addition, there were
also regular annual increases in salaries and MPC hired a new officer.
Depletion, depreciation and amortization increased 74% from $907,000 in
2003 to $1,581,000 in 2004. During the 2004 period, there was a 29% increase in
the Australian foreign exchange rate as discussed below. Depletion expense for
the Palm Valley and Mereenie fields increased 26% during the period primarily
because of the increased costs of the current Mereenie development program. In
addition, $128,000 in DD&A was also recorded in the 2004 period for the
Nockatunga project and the Cooper Basin. In the 2003 period, there was a
reduction in the depletion costs attributable to the Palm Valley field because
the gas reserves were increased by 35%.
Auditing, accounting and legal expenses increased 82% in 2004 to
$89,000 from $49,000 in 2003 primarily because of the 29% Australian foreign
exchange rate increase discussed below and complying with the statutory
requirements applicable to public companies.
Accretion expense increased 29% in the 2004 period from $80,000 in 2003
to $103,000 in 2004. Accretion expense represents the accretion on the asset
retirement obligations (ARO) under SFAS 143 that was adopted effective July 1,
2002. The increase in the 2004 period is primarily the 29% increase in the
Australian foreign exchange rate as discussed below and the additions for the
Nockatunga project and the Kotaneelee gas field. These increases were offset by
a revision of estimates that reduced the amount of ARO in 2003.
Shareholder communications costs increased 3% from $34,000 in 2003 to
$35,000 in 2004 primarily because of MPC and MPAL's increased costs related to
their status as public companies.
Other administrative expenses increased 908% from $13,000 in 2003 to
$131,000 in 2004. During the 2004 period, there was a 29% increase in the
Australian foreign exchange rate as discussed below. In addition, there were
increases in consultants' fees ($71,000), directors' fees and expenses
($38,000), insurance costs ($23,000), rent ($24,000) and taxes ($10,000) during
the 2004 period that were partially offset by the amount of $48,000 in overhead
charges that MPAL as operator was able to charge its partners.
Income Taxes
------------
Income tax provision decreased in 2004 to a tax provision of $115,000
from a tax provision of $190,000 in 2003 because of lower book taxable income in
2004. The components of the income tax (in thousands) between MPC and MPAL are
as follows:
2004 2003
------- -------
Pretax consolidated income $511 $ 693
MPC's non Australian loss not recognized 139 32
Permanent differences-Australia (337) (217)
----- -----
Book taxable income-Australia $313 $ 508
==== =====
Australian tax rate 30% 30%
=== ===
Australian income tax provision $(94) $(152)
Tax benefit of MPAL priors year losses 8 -
MPC income tax provision (29) (38)
----- -----
Income tax provision $(115) $(190)
====== ======
Current income tax provision $(29) $(38)
Deferred income tax provision (86) (152)
----- ------
Income tax provision $(115) $ (190)
====== =======
Effective tax rate 22% 27%
=== ===
MPC's 2004 and 2003 income tax provisions represent the 25% Canadian
withholding tax on its Kotaneelee gas field carried interest net proceeds. 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.
Exchange Effect
---------------
The value of the Australian dollar relative to the U.S. dollar
increased to $.7657 at March 31, 2004 compared to a value of $.7529 at December
31, 2003. This resulted in a $429,000 credit to the foreign currency translation
adjustments account for the three months ended March 31, 2004. The average
exchange rate used to translate MPAL's operations in Australia was $.7658 for
the quarter ended March 31, 2004, which is a 29% increase compared to the $.5938
rate for the quarter ended March 31, 2003.
Nine months ended March 31, 2004 vs. March 31, 2003
- ---------------------------------------------------
Revenues
--------
Oil sales increased 45% in 2004 to $3,637,000 from $2,507,000 in 2003
because of a 26% Australian foreign exchange rate increase discussed below and
new oil sales from the Cooper Basin and the Nockatunga project. Oil unit sales
are expected to continue to decline in the Mereenie field unless additional
development wells are drilled to maintain production levels. MPAL is dependent
on the operator (65% control) of the Mereenie field to maintain production. Oil
unit sales (before deducting royalties) in barrels (bbls) and the average price
per barrel sold during the periods indicated were as follows:
Nine months ended March 31,
------------------------------------------------------------
2004 Sales 2003 Sales
-------------------------------- ----------------------------
Average price Average price
Bbls A.$ per bbl Bbls A.$ per bbl
---- ----------- ---- -----------
Australia:
Mereenie field 101,317 41.48 106,686 45.44
Cooper Basin 6,227 36.14 - -
Nockatunga project 30,344 36.60 - -
------- -------
Total 137,888 40.16 106,686 45.44
======= =======
Gas sales increased 39% to $9,932,000 in 2004 from $7,153,000 in 2003
because of the 26% Australian foreign exchange rate increase discussed below and
the proceeds from the Canadian Kotaneelee gas field settlement.
Nine months ended March 31,
2004 2003
---------- --------
Australia $8,487,000 $6,820,000
Canada-recurring 310,000 333,000
Canada-settlement 1,135,000 -
--------- ----------
Total $9,932,000 $7,153,000
========== ==========
During the 2004 period, the volume of gas sold in Australia remained
relatively unchanged but the average price of gas sold decreased 2%. The volumes
in billion cubic feet (bcf) (before deducting royalties) and the average price
of gas per thousand cubic feet (mcf) sold during the periods indicated were as
follows:
Nine months ended March 31,
---------------------------
2004 Sales 2003 Sales
----------------------- --------------------
bcf A.$ average price per mcf bcf A.$ average price per mcf
--- ------------------------- --- -------------------------
Australia: Palm Valley 2.166 2.19 2.333 2.37
Australia: Mereenie 2.989 2.81 2.805 2.78
----- -----
Total 5.155 2.54 5.138 2.58
===== =====
Other production related revenues increased 49% to $1,266,000 in 2004
from $849,000 in 2003. 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 at Mereenie, and because of the 26% Australian foreign
exchange rate increase discussed below.
Interest and other income increased 34% to $848,000 in 2004 from
$632,000 in 2003 primarily because of the $102,000 interest received from the
funds held in escrow from the Kotaneelee settlement and because of the 26%
Australian foreign exchange rate increase discussed below.
Costs and Expenses
------------------
Production costs increased 32% in 2004 to $4,055,000 from $3,065,000 in
2003 in part because of the 26% Australian foreign exchange rate increase
discussed below. During 2004, production costs also increased because of the new
costs of $431,000 for the Nockatunga project and the Cooper Basin. These
increase were partially offset by a decrease in production costs applicable to
two wells that were plugged and abandoned in the Mereenie field in 2003. In
addition, a Mereenie two well workover program was completed during the 2003
period.
Exploration and dry hole costs increased 32% to $2,585,000 in 2004 from
$1,952,000 in 2003. The 2004 and 2003 costs related to the exploration work
being performed on MPAL's properties. The primary reason for the increase in
2004 is the 26% Australian foreign exchange rate increase discussed below. For
the 2004 period, exploration costs totaled $1,145,000 and dry hole costs totaled
$1,440,000. For the 2003 period, exploration costs totaled $1,366,000 and dry
hole costs totaled $586,000. The dry holes were drilled on MPAL properties in
Australia and New Zealand
Salaries and employee benefits increased 40% to $1,983,000 in 2004 from
$1,416,000 in 2003. During the 2004 period, there was a 26% increase in the
Australian foreign exchange rate as discussed below. In addition, there were
also regular annual increases in salaries and MPC hired a new officer.
Depletion, depreciation and amortization increased 69% from $2,563,000
in 2003 to $4,325,000 in 2004. During the 2004 period, there was a 26% increase
in the Australian foreign exchange rate as discussed below. Depletion expense
for the Palm Valley and Mereenie fields increased 27% during the period
primarily because of the increased costs of the current Mereenie development
program. In addition in 2004, $356,000 in DD&A was also recorded for the
Nockatunga project and the Cooper Basin. The reserves in the Cooper Basin were
reduced by 50% from 50,000 barrels to 25,000 barrels during the current period
because of lower oil production than estimated. In the 2003 period the Palm
Valley gas reserves were increased by 35% and DD&A decreased by approximately
$405,000 because of this change in gas reserves. In addition, in 2003 the amount
estimated for salvage value was increased and reduced DD&A by approximately
$145,000.
Auditing, accounting and legal expenses increased 5% in 2004 to
$330,000 from $314,000 in 2003 primarily because of the 26% Australian foreign
exchange rate increase discussed below and complying with the statutory
requirements applicable to public companies. The increase was partially offset
because the 2003 period included higher audit fees in connection with the
adoption of the new accounting standard for asset retirement obligations.
Accretion expense increased 19% in the 2004 period from $229,000 in
2003 to $273,000 in 2004. Accretion expense represents the accretion on the
asset retirement obligations (ARO) under SFAS 143 that was adopted effective
July 1, 2002. The increase in the 2004 period results from the 26% increase in
the Australian foreign exchange rate as discussed below and the additions for
the Nockatunga project and the Kotaneelee gas field. In 2003, there was a
revision of estimates that reduced the amount of ARO in 2003 that partially
offset the increase in 2004.
Shareholder communications costs increased 5% from $149,000 in 2003 to
$156,000 in 2004 primarily because of MPC and MPAL's increased costs related to
their status as public companies.
Other administrative expenses increased 63% from $262,000 in 2003 to
$427,000 in 2004. During the 2004 period, there was a 26% increase in the
Australian foreign exchange rate as discussed below. In addition, there were
increases in consultants' fees ($65,000), directors' fees and expenses
($89,000), insurance costs ($25,000), rent ($39,000) and travel expenses
($26,000) during the 2004 period that were partially offset by the amount of
$79,000 in overhead charges that MPAL as operator was able to charge its
partners.
Income Taxes
------------
Income tax provision increased in 2004 to $463,000 from $403,000 in
2003 primarily because of MPC's income from the Kotaneelee settlement. The
components of the income tax (in thousands) between MPC and MPAL are as follows:
2004 2003
------ -----
Pretax consolidated income $1,549 $ 1,192
MPC's non Australian (income) loss not recognized (700) 333
Permanent differences-Australia (819) (448)
----- -----
Book taxable income-Australia $ 30 $ 1,077
==== =======
Australian tax rate 30% 30%
=== ===
Australian income tax provision $(9) $ (323)
Tax benefit of MPAL prior year losses 9 -
MPC income tax provision (463) (80)
----- -----
Income tax provision $(463) $ (403)
====== =====
Current income tax provision $(463) $(80)
Deferred income tax provision - (323)
----- ------
Income tax provision $(463) $ (403)
====== ======
Effective tax rate 30% 34%
=== ===
MPC's 2004 and 2003 income tax provisions represent the 25% Canadian
withholding tax on its Kotaneelee gas field carried interest net proceeds. 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.
Exchange Effect
---------------
The value of the Australian dollar relative to the U.S. dollar
increased to $.7657 at March 31, 2004 compared to a value of $.6737 at June 30,
2003. This resulted in a $3,162,000 credit to the foreign currency translation
adjustments account for the nine months ended March 31, 2004. The 14% increase
in the value of the Australian dollar increased the reported asset and liability
amounts in the balance sheet at March 31, 2004 from the June 30, 2003 amounts.
The average exchange rate used to translate MPAL's operations in Australia was
$.7138 for the nine month period ended March 31, 2004, which is a 26% increase
compared to the $.5664 rate for nine month period ended March 31, 2003.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
March 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. For the nine
month period ended March 31, 2004, oil sales represented approximately 27% 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 73% of production revenues in 2004,
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
March 31, 2004, the carrying value of such investments in marketable securities
including those classified as cash and cash equivalents was approximately $21.6
million, which approximates the fair value of the securities. Since the Company
expects to hold the investments to maturity, the maturity value should be
realized.
Item 4. Controls and Procedures
- ------- -----------------------
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 March 31, 2004. 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 fiscal quarter ended March 31, 2004 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
March 31, 2004
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 2 Changes in Securities, Use of Proceeds and Issuer Purchases of
- ---------- --------------------------------------------------------------
Equity Securities
------------------
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 Maximum Number of
Shares Purchased as Shares that May Yet
Total Number of Average Price Paid Part of Publicly Be Purchased Under
Period Shares Purchased per Share Announced Plan (1) Plan
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Jan. 1-31, 2004 0 0 0 319,150
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Feb. 1-29, 2004 0 0 0 319,150
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Mar. 1- 31, 2004 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 March 31, 2004, 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
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During March 2004, MPAL reached an agreement with Antrim Energy
Australia regarding its 50 percent interest in each of exploration permits
WA-306-P and WA-307-P in the Barcoo Sub-Basin located in the southwest portion
of the Browse Basin. Antrim Energy Australia, Operator of the joint ventures,
will fund the drilling of the South Galapagos-1 well in WA-306-P to earn a
further 37.5% interest in the WA-306-P permit. MPAL's interest in WA-306-P will
reduce to 12.5%. The operator has entered into a drilling contract with
SedcoForex International Inc to use the Sedco 703 semi-submersible drilling rig
to drill the well later this year.
During March 2004, MPAL reached an agreement with a United Kingdom
listed company, Black Rock Oil & Gas Plc, to farmout a 15% interest in PEL 94
and a 10% interest in PEL 110, located in the Cooper Basin of South Australia.
Black Rock will fund part of the cost of the upcoming Malleus 2D seismic survey
in PEL 94 and part of the cost of the next well drilled in each of the two
permits to earn the interests. MPAL currently holds a 50% interest in PEL 94 and
a 37.5% interest in PEL 110, and these interests will reduce accordingly.
MAGELLAN PETROLEUM CORPORATION
Form 10-Q
PART II - OTHER INFORMATION
March 31, 2004
Beach Petroleum (Operator) will drill the Myponga-1 well in PEL 94 and the
Noarlunga-1 well in PEL 95 (MPAL 50% interest), commencing in June 2004.
A development well, Palm Valley-11, received approval from the Northern
Territory Government in January 2004 and is scheduled for drilling in May to
increase deliverability from the field. MPAL is currently planning to start the
drilling of the well on May 17, 2004.
A United Kingdom company, Electro Silica Oil & Gas Plc, is earning a
25% interest in exploration permit PEP 38222 (MPAL currently holds a 100%
interest) in the Great South Basin, offshore the South Island of New Zealand, by
funding the acquisition, processing and interpretation of 2000 line kilometers
of 2D seismic data in the permit. The acquisition of the survey was completed in
late April. Under the farmout arrangement, Electro Silica has the option to
acquire a further 50% interest from MPAL by funding the drilling of an
exploration well in the permit.
In February 2004, the New Zealand Government announced the award of six
offshore and seven onshore permits in the Taranaki Basin of the North Island of
New Zealand. MPAL and its co-venturers were successful in their bid for Block M
(formerly PPP 38761) and Block N, which were granted as PEP 38765 (MPAL 12.5%
interest) and PEP 38766 (MPAL 25% interest). The operator, Tap Oil, will drill
an exploration well in PEP 38765 later this year.
Effective March 1, 2004, the Company appointed Daniel J. Samela as its
Treasurer pursuant to an employment agreement with a continually renewing
three-year and 30 day term. The employment agreement provides that Mr. Samela
will serve as the Company's Chief Financial Officer and Acting President and
Chief Executive Officer, effective July 1, 2004. Mr. Samela will replace Mr.
James R. Joyce, the Company's President and Chief Financial Officer, upon Mr.
Joyce's previously announced retirement from the Company, effective June 30,
2004. Mr. Samela, 56, a Certified Public Accountant has held various senior
level financial positions during his career. Most recently he was Chief
Financial Officer of Evercel, Inc., a publicly held energy related company.
Prior to that position he was Controller and Chief Accounting Officer of Trigen
Energy Corporation, a publicly held thermal and electric cogeneration company.
Under the employment agreement, Mr. Samela will receive an annual
salary of $125,000, increasing to $175,000 effective July 1, 2004. Mr. Samela is
also eligible to receive an annual bonus award of up to $25,000 in the
discretion of the Board of Directors. In addition, Mr. Samela will receive
reimbursements of approximately $21,000 for insurance costs and there will be a
annual contribution of 15% of his total compensation to a Simplified Employee
Pension. The agreement also provides that Mr. Samela will be awarded options to
acquire 30,000 shares of the Company's common stock, with an exercise price per
share equal to the closing price per share of the Company's common stock as
reported by the Nasdaq SmallCap Market on July 1, 2004. Options covering 10,000
of such shares will vest as of July 1, 2005, with the remaining shares vesting
ratably on the second and third anniversaries of the effective date of the
grant. A copy of Mr. Samela's employment agreement is filed herewith as Exhibit
10.1.
MAGELLAN PETROLEUM CORPORATION
Form 10-Q
PART II - OTHER INFORMATION
March 31, 2004
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
10(1) Material contracts
Employment Agreement between Daniel J. Samela and Magellan
Petroleum Corporation effective March 1, 2004 is filed
herein.
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 February 20, 2004, the Company filed a Current Report on
Form 8-K to report that the Company's registration statement in Form S-3
relating to the public sale of up to 1,300,000 shares of the Company's Common
stock became effective.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
March 31, 2004
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: May 13, 2004 By /s/ James R. Joyce
- ----- ------------ ---------------------------------------------
James R. Joyce, President and Chief Executive
Officer, Chief Financial and Accounting Officer