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FORM 10-K
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________to __________
Commission file number 1-5507
MAGELLAN PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0842255
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
149 Durham Road, Madison, Connecticut 06443
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 245-8380
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common stock par value $.01 per share Boston Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
From 10-K or any amendment to this Form 10-K |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $72,092,000 at September 4,1996 (based on the last sale price of
such stock as quoted on the Pacific Stock Exchange).
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.01 per share, 24,691,245 shares outstanding as of
September 4, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the Annual Meeting of
Stockholders for the fiscal year ended June 30, 1996, are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
TABLE OF CONTENTS
PART I
Page
Item 1 Business. 4
Item 2 Properties. 18
Item 3 Legal Proceedings. 23
Item 4 Submission of Matters to a Vote of Security Holders. 26
PART II
Item 5 Market for the Company's Common Stock and Related
Stockholder Matters. 28
Item 6 Selected Financial Data. 29
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 30
Item 8 Financial Statements and Supplementary Data. 38
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 70
PART III
Item 10 Directors and Executive Officers of the Company. 70
Item 11 Executive Compensation. 70
Item 12 Security Ownership of Certain Beneficial Owners and
Management. 70
Item 13 Certain Relationships and Related Transactions 70
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. 71
Unless otherwise indicated, all dollar figures set forth herein are in
United States currency. Amounts expressed in Australian currency are indicated
as "A.$00". The exchange rate at September 4, 1996 was A.$1.00 equaled
U.S.$.7922.
PART I
Item 1. Business.
Magellan Petroleum Corporation (the "Company" or "MPC") is engaged,
directly and through its majority-owned subsidiary, in the sale of oil and gas
and the exploration for and development of oil and gas reserves. At June 30,
1996, the Company's principal asset was a 50.7% 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 owns interests in various oil and gas properties in Australia, the
United States and Belize, Central America. MPAL's major Australian 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 (50.775% working interest). Both fields are located in the Amadeus
Basin in the Northern Territory of Australia ("NTA"). Santos Ltd ("Santos"), an
Australian company, which owns a 37.4% interest in the Palm Valley field and a
65% interest in the Mereenie field, also owns 18.2% of MPAL's outstanding stock.
Boral Limited, an Australian company owns 1.2% of the Palm Valley field and also
owns a 18.1% interest in MPAL's outstanding stock.
MPAL and its co-venturers in the Mereenie and Palm Valley fields have been
discussing the sale of additional quantities of gas from these fields with the
Power and Water Authority ("PAWA") in the Northern Territory and other
purchasers. While another new gas supply contract for the sale of gas from both
fields appears likely, the ultimate purchaser, the timing, and terms of any new
contracts are uncertain.
In Canada, the Company has a direct 2.67% carried interest in the
Kotaneelee gas field in the Yukon Territory of Canada. The Company has not
received any revenues from this field to date. See Item 3 - Legal Proceedings.
MPC also has a 10% working interest in a Baca County, Colorado exploration
program with MPAL (90%). In addition, the Company also has a 2 1/2% working
interest in the Belize Joint Venture in which MPAL has a 20% working interest.
The following chart illustrates the various relationships between the
Company and the various companies discussed above.
The following graphic presentation has been omitted, but the following is a
tabular presentation of the omitted material:
MPC - MPAL RELATIONSHIPS CHART
MPC owns 50.7% of MPAL.
MPAL owns 50.8% of the Palm Valley Field, Australia.
MPAL owns 35% of the Mereenie Field, Australia.
BORAL owns 18.1% of MPAL.
BORAL owns 1.2% of the Palm Valley Field, Australia.
SANTOS owns 18.2% of MPAL.
SANTOS owns 37.4% of the Palm Valley Field, Australia.
SANTOS owns 65% of the Mereenie Field, Australia.
(a) General Development of Business.
Operational Developments Since the Beginning of the Last Fiscal Year.
AUSTRALIA
Mereenie
Field Operations
MPAL (35%) and Santos (65%), the operator, (together known as the Mereenie
Joint Venture or "MJV") own the Mereenie field which is located in the Amadeus
Basin of the NTA. MPAL's share of production from the field is subject to net
overriding royalties aggregating 3.0625% and the statutory government royalty of
10%. MPAL's share of the Mereenie field proved developed oil reserves was
approximately 1.2 million barrels at June 30, 1996.
Four development wells were drilled in fiscal 1996 and subsequently
completed as oil wells. The field was producing about 2800 (MPAL share 980)
barrels of crude oil per day ("bpd") from 36 wells at June 30, 1996. During
1996, MPAL's share of oil sales was 365,000 barrels and 2.8 bcf of gas sold. The
oil is transported by means of a 167 mile eight-inch oil pipeline from the field
to the Brewer Estate industrial park near Alice Springs. Most of the oil is then
shipped south approximately 950 miles by rail and road to a refinery in the
Adelaide area. The cost of transporting the oil to the refinery is being borne
by the producers.
The MJV is also providing Mereenie gas to the Power and Water Authority
("PAWA") of the NTA for use in Darwin and other NTA centers. See "Darwin Gas
Supply Contracts".
Palm Valley
Field Operations
MPAL has a 50.775% interest in the Palm Valley gas field which is located
in the NTA. Ten wells have been drilled in the field, six of which are currently
connected to the gas treatment plant and are flowed at maximum deliverability
levels to meet the Alice Springs and Darwin supply contracts with PAWA. During
fiscal 1996, MPAL's share of gas sales was 3.4 bcf.
In 1981, the Palm Valley Joint Venture ("PVJV") agreed to supply the PAWA
facility in Alice Springs with 48 bcf of natural gas (MPAL share - 24.4 bcf)
from the field. During the twenty-five year period 1983-2008, PAWA is required
to take and/or pay for at least 28 bcf (MPAL share -14.2 bcf). The price of gas
is adjusted quarterly to reflect fully changes in the Australian Consumer Price
Index.
The PVJV is also providing Palm Valley gas for use in Darwin and other NTA
centers. See "Darwin Gas Supply Contracts".
MPAL's share of Palm Valley production revenues is subject to a 10%
statutory government royalty and net overriding royalties aggregating 4.2548%.
Darwin Gas Supply Contracts
In 1985, MPAL signed an agreement as a participant in the PVJV and also
signed an agreement as a participant in the MJV for the sale of gas to PAWA for
use in PAWA's Darwin generating station and at a number of other generating
stations in the Northern Territory. The gas is being delivered via the 922 mile
Amadeus Basin to Darwin gas pipeline which was built by an Australian
consortium.
Palm Valley Agreement
The PVJV has contracted to supply a maximum of 175 bcf (MPAL share - 88.9
bcf) of gas from the Palm Valley field and PAWA has agreed to take or pay for
134 bcf (MPAL share - 68 bcf) during the 25 year period of the contract. The
price is subject to quarterly adjustments to partially reflect changes in the
Australian Consumer Price Index and certain increases in the price of
electricity.
Mereenie Agreement
The MJV has agreed to supply a maximum of 56 bcf (MPAL share - 19.6 bcf) of
gas from the Mereenie field and PAWA has agreed to take or pay for 40 bcf (MPAL
share - 14 bcf) during the 25 year period of the contract. This agreement also
provides for price adjustments identical to the Palm Valley agreement. The
difference in price between Palm Valley gas and Mereenie gas for the first 20
years of the contract takes into account the additional cost to the pipeline
consortium to build a spur line to the Mereenie field and increase the size of
the pipeline from Palm Valley to Mataranka.
On May 29, 1995, the MJV concluded a contract for sale of an additional
21.4 bcf of gas to PAWA. The additional gas was required to meet the power needs
of new mining developments in the NTA including the McArthur River Mine.
Agreements Between the PVJV and the MJV
In consideration for the PVJV forgoing 20% of the Amadeus Basin to Darwin
gas supply contract during the first twenty contract years, the MJV made a
payment to the PVJV to partially compensate the PVJV for the reduced net present
value of the future gas sales revenue which were postponed from contract years 1
to 20 to contract years 21 to 26. The agreement also provides that if the MJV
sells any additional gas from the Mereenie field, the PVJV is entitled, as
additional consideration, to 35% of the revenues from the first 38 bcf (MPAL
share - 19.5 bcf) of gas sold. At June 30, 1996, the balance of the MJV gas
subject to this entitlement was 29 bcf (MPAL share - 15 bcf).
Other Related Matters
The PVJV and the MJV are now entitled to receive a share of pipeline
tariffs earned for transporting gas in excess of the contracted volumes referred
to above. In fiscal 1996, MPAL's share was approximately A.$1,126,000.
Summary of Amadeus Basin Gas Supply Contracts
The following is a summary of MPAL's interest in the Palm Valley Joint
Venture and the Mereenie Joint Venture gas supply contracts.
Maximum contract Take or pay Percentage of
(Before/after royalties) (Before/after royalties) contract completed
(bcf) (bcf) Maximum Take or Pay
Palm Valley:
Alice Springs 24.4 21.0 14.2 12.3 40 53
Darwin 88.9 76.6 68.0 58.6 34 45
----- ---- ---- ----
113.3 97.6 82.2 70.9
----- ---- ---- ----
Mereenie:
Darwin (1985) 19.6 17.0 14.0 12.2 37 52
Darwin (1995) 7.5 6.5 6.0 5.2 27 34
Cosmo Howley 1.8 1.5 1.8 1.5 78 78
N.T. Gas .3 .3 .3 .3 - -
------- -------- -------- ------
29.2 25.3 22.1 19.2 - -
------ ------ ------ -----
Total 142.5 122.9 104.3 90.1
===== ====== ===== ====
Contract Price
Contract Period at June 30, 1996
(mcf)
Palm Valley:
Alice Springs 25 years (1983-2008) A.$2.94
Darwin 25 years (1987-2012) A.$2.02
Mereenie:
Darwin (1985) 25 years (1987-2012) A.$ .48* (Contract years 6-21)
Darwin (1985) 25 years (1987-2012) A.$2.07 (Contract years 22-26)
Darwin (1995) 10 years (1995-2009) A.$2.70
Cosmo Howley 10 years (1989-1999) A.$2.92
N.T. Gas 10 years (1996-2006) A.$2.72
(*) To the extent that PAWA purchases gas from the Mereenie field in excess of
probable requirements, then the MJV receives A.$2.07 per mcf.
Dingo Gas Field
MPAL has a 34.26 percent interest in the Dingo gas field which is held
under Retention License 2. The Dingo gas field, which is located in the Amadeus
Basin in the NTA, has approximately 18 bcf of presently proved and recoverable
reserves based on three production gas wells. Sufficient reserves are indicated
to fulfill a modest gas contract, however, the initial well flow rates and
consequent reserves per well are considered too low to be currently economic,
given the high drilling costs of the wells. The current retention license
requires that a well be drilled by May, 1997 at an estimated cost of A.$3.5
million (MPAL share - A.$1.2 million). Because of the sub-commercial status of
the field, an application to waive the drilling commitment will be filed. It is
expected that the waiver will be granted. MPAL's share of potential production
from these permit areas is subject to a 10% statutory government royalty and
overriding royalties aggregating 2.5043%.
The Surat Basin
MPAL currently has a 15.625% working interest in the Burunga permit in
Queensland (ATP 378P). During fiscal 1996, the Scotia No. 3 well was drilled to
test for coal bed methane gas. The gas well is presently being tested to
determine whether it would be economic to develop the discovery.
Ngalia Basin
MPAL has been granted a renewal of permit EP-15 in the Ngalia basin in the
NTA which expires in May 1999. The renewal permit covers 1.9 million acres. The
minimum obligations of this permit total A.$1.2 million for the period 1997-1999
including an obligation to drill a well by May 1998. Previously MPAL had held a
permit in the Ngalia basin where a 6,000 foot wildcat well, Davis No. 1, was
drilled in 1981. Although the well was abandoned as a dry hole, it did yield
minor shows of natural gas. MPAL is seeking co-venturers in this project.
Maryborough Basin
MPAL is seeking partners for exploration permit ATP 613P, a 670,000 acre
block, in the Maryborough Basin in Queensland, Australia. During fiscal 1996, a
seismic survey was completed on the permit. Processing and analysis of the data
is being completed. The minimum expenditure obligation of the permit is A.$.9
million over the term of the permit which ends March 1999.
UNITED STATES
Baca County, Colorado
MPC (10%) and MPAL (90%) are participating in an exploration program in
Colorado. During late April 1995, MPAL commenced an initial three well
exploration drilling program. The initial three well appraisal program has been
completed. All three wells were dry holes. MPC has the right, but not the
obligation, to a 10% participation in drilling of future prospects. Based on the
data derived from the appraisal program during fiscal 1996, the Company has
written off $2,500,000 in costs incurred to date. In early 1997, the Company
expects to drill an additional exploration well on the most prospective
structure.
Belize
Gladden Basin PSA
During January 1996, MPAL acquired a 20% working interest in a Production
Sharing Agreement ("Gladden PSA") which covers approximately 351,000 acres
offshore Belize, Central America. On May 30, 1996, MPC acquired a 2 1/2% working
interest in the Gladden PSA. The Gladden PSA expires on May 31, 2001 and
requires that a well be drilled by December 1, 1996. The estimated cost of the
well is $10 million (MPAL share $2 million, MPC share $250,000).
Block 13 PSA
MPC (2 1/2%) and MPAL (20%) are also participants in a Production Sharing
Agreement ("Block 13 PSA") offshore Belize adjourning the western and southern
boundaries of the Gladden PSA. The Block 13 PSA covers approximately 788,000
acres. The Block 13 PSA expires on January 31, 2004. The aggregate estimated
cost for 1997 and 1998 is approximately $68,000 for MPAL and MPC.
CANADA
The Company owns a 2.67% carried interest in a lease (31,885 gross acres,
850 net acres) in the southeast Yukon Territory, Canada, which includes the
Kotaneelee gas field. This partially developed field is connected to a major
pipeline system. Three wells have been completed to date and are capable of an
estimated output of in excess of 60 mmcfd, the capacity of the field dehydration
plant. Present production is approximately 40-45 million cubic feet per day.
Anderson Oil & Gas, Inc., ("Anderson") is the operator of the field.
Production at the Kotaneelee field commenced in February 1991. Total
production from the field according to government reports, has been as follows:
Calendar Year Production (BCF)
------------- ----------------
1991 8.1
1992 18.0
1993 17.5
1994 16.7
1995 15.7
1996 (To June 30) 7.4
In a 1989 application to the National Energy Board, a reserve study by the
operator estimated gas in place at 1.6 trillion cubic feet with proved and
probable recoverable reserves of 781 bcf.
The operator has not permitted the Company access to detailed pricing and
volume information, citing the litigation regarding the field. See Item 3 -
Legal Proceedings for a discussion of litigation relating to the Kotaneelee
field which may affect the status of the carried interest and the amount of the
carried interest account.
The Company is not entitled to any revenue from the field until the working
interest owners recover their costs. The operator last reported to the Company
unrecovered development costs totaling approximately Cdn. $30,264,000 (Company
share - Cdn. $807,000) at January 31,1996. It is expected that the Company will
begin to receive proceeds from the field in 1998 based upon present prices. The
period before payment to the Company begins may be shorter or longer, depending
on prevailing market conditions, gas volumes sold and the results of the
litigation. Under ordinary circumstances, increased natural gas prices or
increased volumes would result in a shorter period to payout.
For financial statement purposes in fiscal 1987 and 1988, the Company wrote
down its Canada cost center which included the Kotaneelee field to a nominal
value because of the uncertainty as to the date when sales of Kotaneelee gas
might begin and the immateriality of the carrying value of the investment.
Although the field is now producing, the Company has not yet classified its
share of the Kotaneelee gas reserves as proved because the gas field is still
the subject of litigation. The Company will reclassify the reserves at the
Kotaneelee field as proved when there is greater assurance as to the timing and
assumptions regarding the investment.
(b) Financial Information about Industry Segments.
Since the Company is engaged in only one industry, namely, oil and gas
exploration, development, production and sale this item is not applicable to the
Company.
(c) (1) Narrative Description of the Business.
The Company was incorporated in 1957 under the laws of Panama and was
reorganized under the laws of Delaware in 1967. The Company is engaged in the
exploration for, and the development and production and sale of oil and gas
reserves in the United States, Canada, and Belize and, through its subsidiary
MPAL, in Australia, the United States and Belize.
(i) Principal Products.
MPAL has an interest in the Palm Valley gas field which began production in
1983 and in the Mereenie oil and gas field which began production in 1984. See
Item 1(a) - Australia - for a discussion of the oil and gas production from the
Mereenie and Palm Valley fields. The Company has a direct 2.67% carried interest
in the Kotaneelee gas field in Canada.
(ii) Status of Product or Segment.
See Item 1(a) - Australia - for a discussion of the current and future
operations of the Mereenie and Palm Valley fields in Australia.
(iii) Raw Materials.
Not applicable.
(iv) Patents, Licenses, Franchises and Concessions Held.
In Australia, the Company has interests directly and indirectly through its
subsidiaries in the following permits. Permittees are required to carry out
agreed work and expenditure programs.
Permit Expiration Date Location
Retention License 2 (Dingo) May 24, 1997 Northern Territory
Exploration Permit 15 (Ngalia) May 14, 1999 Northern Territory
Authority to Prospect 378P (Surat) September 30, 1996 Queensland
Authority to Prospect 613P (Maryborough) March 31, 1999 Queensland
In 1981, the NTA issued Petroleum Leases No. 4 and No. 5 in the NTA which
cover the Mereenie oil and gas field to MPAL's subsidiaries. As part of the
lease conditions, MPAL and its Mereenie partners had agreed to construct an oil
refinery near Alice Springs, if it were determined that such a refinery is
economically feasible. MPAL believes that the oil refinery would not be
economically viable under current market conditions, and the NTA has not raised
any current objection to this conclusion. In the event that a refinery becomes
economically viable and the MJV does not construct the refinery, MPAL and its
partners will be required to pay the NTA liquidated damages based on the value
of the crude oil produced from the lands under lease. The amount to be paid to
the Territory is an amount per barrel which is the greater of (a) A.$3.00 per
barrel or (b) A.$2.00 per barrel plus 10% of the amount by which the market
price of Mereenie crude oil exceeds A.$27.50. Production is subject to a
statutory 10 percent royalty payable to the NTA.
In 1982 the NTA granted a production lease for the Palm Valley gas field to
a MPAL subsidiary. Production is subject to a statutory 10 percent royalty
payable to the NTA.
The above leases are subject to the Petroleum (Prospecting and Mining) Act
of the Northern Territory. Lessees have the exclusive right to produce petroleum
from the land subject to a lease upon payment of a rental and a royalty at the
rate of 10% of the wellhead value of the petroleum produced. Rental payments may
be offset against the royalty paid. The term of a lease is 21 years, and leases
may be renewed for successive terms of 21 years each.
During 1992, the Australian High Court overthrew the doctrine of terra
nullius ("no man's land") in the so-called "Mabo" case. Although the wider
implications of this specific judgment have yet to be tested in the Courts, it
allows particular groups of Aborigines who can prove an uninterrupted and
continuing link with their traditional lands to claim ownership of such land
provided it has not previously been alienated by the Crown (either the Federal
or State Governments). Subsequently, the Australian Federal Government passed
the Native Title Act validating all titles granted to June 30, 1993 and
providing that any compensation payable to Aboriginals for the dispossession of
their lands will be funded by the Government and not by the title owner. The
Company does not consider that this issue will have a material adverse impact on
MPAL's properties.
In Belize, Central America, the Company has interests directly and
indirectly through a subsidiary in the following Production Sharing Agreements
("PSA"). Permits in Belize are issued for eight years but work and expenditure
obligations are calculated in two year blocks. Application is made ninety days
prior to the two year block expiration.
PSA Expiration Date Next Block Application Date
Gladden Basin May 31, 2001 Year 5 - March 1, 1998
Block 13 January 31, 2004 Year 3 - November 1, 1998
SUMMARY OF BENEFICIAL OWNERSHIP OF MAJOR WORKING INTERESTS
(BEFORE ROYALTIES)
June 30, 1996
Palm Dingo Belize
Valley Mereenie Gas Baca County, Surat Gladden
Field Field Field Colorado 378P Basin
% % % % % %
MPAL
50.775 35.00 34.2583 90 15.625 20.0
Santos Ltd. 37.354 65.00 52.9333 - 84.375
Kufpec Australia Pty. Ltd. 1.248 - - - -
Boral Limited 1.248 - 10.9744 - -
GFE Resources Ltd 9.375 - 1.7558 - -
Canada Southern Petroleum Ltd. - - .0782 - -
Magellan Petroleum Corporation - - - 10. - 2.5
Dover Technology, Inc. - - - - - 20.0
Fina Exploration Belize B.V. - - - - - 30.0
Deminez Belize Petroleum Ltd. - - - - - 20.0
Mountain States Petroleum Corporation - - - - - 5.0
Mallon Production Co. - - - - - 2.5
________________________________________________________________________________________________________________________
TOTAL 100 100 100 100 100 100
________________________________________________________________________________________________________________________
(v) Seasonality of Business.
Although the Company's business is not seasonal, the demand for oil and
especially gas is subject to fluctuations in the Australian weather.
(vi) Working Capital Items.
See Item 7 - Liquidity and Capital Resources for a discussion of this
information.
(vii) Customers.
Although the majority of the Company's oil and gas properties are located
in a relatively remote area in central Australia (See Item 1 - Business and Item
2 - Properties), the completion in January 1987 of the Amadeus Basin to Darwin
gas pipeline has provided access to and expanded the potential market for the
Company's gas production.
MPAL's principal customer and the most likely customer for future gas sales
is PAWA, a governmental authority of the Northern Territory Government, which
also has substantial regulatory authority over MPAL's oil and gas operations.
Oil Production
There is presently a small local market for the Australian Mereenie crude
oil in the Alice Springs area. Most of the crude oil production is being shipped
and sold to a refinery in Adelaide.
Natural Gas Production
(viii) Backlog.
Not applicable.
(ix) Renegotiation of Profits or Termination of Contracts or
Subcontracts at the Election of the Government.
Not applicable.
(x) Competitive Conditions in the Business.
The exploration for and production of oil and gas are highly competitive
operations. The ability to exploit a discovery of oil or gas is dependent upon
such considerations as the ability to finance development costs, the
availability of equipment, and engineering and construction delays and
difficulties. The Company also must compete with major companies which have
substantially greater resources than the Company.
Furthermore, competitive conditions may be substantially affected by
various forms of energy legislation which have been or may be proposed in
Australia, Canada, the United States and Belize; however, it is not possible to
predict the nature of any such legislation which may ultimately be adopted or
its effects upon the future operations of the Company.
At the present time, the Company's principal income producing operations
are in Australia and for this reason, current competitive conditions in
Australia are material to the Company's future. Currently, most indigenous crude
oil is consumed within Australia. In addition, imports of crude oil are made by
refiners and others to meet the overall demand in Australia. MPAL and its joint
venture partners in Mereenie and Palm Valley are coordinating their efforts to
develop and market the production from each field. Because of the relatively
remote location of the Amadeus Basin and the inherent nature of the market for
gas, it would be impractical for each working interest partner to attempt to
market its respective share of production from each field.
(xi) Research and Development.
Not applicable.
(xii) Environmental Regulation.
The Company is subject to the environmental laws and regulations of the
jurisdictions in which it carries on its business, and existing or future laws
and regulations could have a significant impact on the exploration for and
development of natural resources by the Company. However, to date, the Company
has not been required to spend any unusual material amounts for environmental
control facilities. The federal and state governments in Australia strictly
monitor compliance with these laws but compliance therewith has not had any
adverse impact on the Company's operations or its financial resources.
(xiii) Number of Persons Employed by Company.
At June 30, 1996, the Company had no full time employees in the United
States and MPAL had 32 employees in Australia. The Company relies to a great
extent on consultants for legal, accounting and administrative services.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales.
(1) Financial Information Relating to Foreign and Domestic Operations.
See Note 1 to the Consolidated Financial Statements.
(2) Risks Attendant to Foreign Operations.
Most of the properties in which the Company has interests are located
outside the United States and are subject to certain risks involved in the
ownership and development of such foreign property interests. These risks
include but are not limited to those of: nationalization; expropriation;
confiscatory taxation; changes in foreign exchange controls; currency
revaluations; price controls or excessive royalties; export sales restrictions;
limitations on the transfer of interests in exploration licenses; and other laws
and regulations which may adversely affect the Company's properties, such as
those providing for conservation, proration, curtailment, cessation, or
other limitations of controls on the production of or exploration for
hydrocarbons. Thus, an investment in the Company represents a speculation with
risks in addition to those inherent in domestic petroleum exploratory ventures.
(3) Data Which are Not Indicative of Current or Future Operations.
MPAL and its co-venturers in the Mereenie and Palm Valley fields have been
negotiating with PAWA and other parties to sell production out of the
uncommitted gas reserves at both fields. A new gas supply contract for the
uncommitted reserves in the Palm Valley or Mereenie fields could substantially
increase revenue from gas sales in the future. While new contracts appear
likely, the ultimate purchaser, the timing and the terms of any new contracts
are uncertain.
Item 2. Properties
(a) The Company has interests in properties in Australia, United States and
Canada and Belize. In Australia, it has interests through its 50.7% equity
interest in MPAL in exploratory permits, a retention license and production
leases in the Northern Territory and Queensland. In Canada, the Company has
direct interests in 5 leases and one exploration license. The Company also has
interests in properties in the United States and Belize directly through MPAL's
interests in these areas. For additional information regarding the Company's
properties, See Item 1 - Business.
(b) (1) The information regarding reserves, costs of oil and gas
activities, capitalized costs, discounted future net cash flows and results of
operations is contained in Item 8 - Financial Statements and Supplementary Data.
The following graphic presentation has been omitted, but the following is a
description of the omitted material:
AMADEUS BASIN PROJECTS MAP
The map indicates the location of the Amadeus and Ngalia Basin interests in
the Northern Territory of Australia. The following items are identified:
Palm Valley Gas Field
Mereenie Oil & Gas Field
Dingo Gas Field
Ngalia Basin
Palm Valley - Alice Springs Gas Pipeline
Palm Valley - Darwin Gas Pipeline
Mereenie Spur Gas Pipeline
The following graphic presentation has been omitted, but the following is a
description of the omitted material:
CANADIAN PROPERTY INTERESTS MAP
The map indicates the location of the Kotaneelee Gas Field in the Yukon
Territories of Canada. The map identifies the following items:
Kotaneelee Gas Field
Wells drilled on the permit
Pointed Mountain Gas Field
Beaver River Gas Field
Westcoast Transmission Pipeline
(2) Reserves reported to other agencies.
None
(3) Production
The average sales price per unit of production for the following fiscal
years are as follows:
June 30,
-----------------------------------------------
1996 1995 1994
------------ ------------ ----------
Australia:
Gas (per mcf) A.$ 2.24 A.$ 2.06 A.$ 1.99
Crude oil (per bbl) A.$23.85 A.$23.83 A.$23.76
Americas:
Gas (per mcf) $ - $ 1.56 $ 1.54
Crude oil (per bbl) $ - $ 17.31 $15.29
The average production cost per unit of production for the following fiscal
years has been impacted by transportation costs on Mereenie oil in Australia:
June 30,
----------------------------------------------------
1996 1995 1994
------------ ------------ --------
Australia:
Gas (per mcf) A.$ .32 A.$ .21 A.$ .29
Crude oil (per bbl) A.$ 6.68 A.$10.37 A.$ 10.83
Americas:
Gas (per mcf) $ - $ 2.09 $ 3.42
Crude oil (per bbl) $ - $ 4.15 $ 6.07
(4) Productive Wells and Acreage.
Productive wells and acreage at June 30, 1996:
Productive Wells
Oil Gas Developed Acreage
--- --- -----------------
Gross Net Gross Net Gross Acres Net Acres
----- --- ----- --- ----------- ---------
Australia 36 12.60 28 10.69 72,025 30,001
Americas - - 3 .08 3,350 89
----- -------- ---- ------- ----- ---------
36 12.60 31 10.77 75,375 30,090
== ===== == ===== ====== ======
(5) Undeveloped Acreage.
The Company's undeveloped acreage (except as indicated) is set forth in the
table below:
GROSS AND NET ACREAGE AS OF JUNE 30, 1996
(i) MPAL has interests in the following properties (before royalties). The
Company has an interest in these properties through its 50.7% interest in MPAL.
Properties held by MPAL:
The Company
MPAL
Net Interest Net Interest
Gross Acres Acres % Acres %
Australia
Northern Territory:
Amadeus Basin:
Mereenie (OL4&5) (1) 69,407 24,292 35.00 12,316 17.74
Palm Valley (OL3)(2) 151,905 77,130 50.78 39,105 25.74
Dingo (RL2) 115,596 39,601 34.26 20,078 17.37
---------- --------- ---------
Total Amadeus Basin 336,908 141,023 71,499
Ngalia Basin (EP-15) 1,914,497 1,914,497 100.00 970,650 50.70
Queensland:
Bowen-Surat Basin (ATP 378P) 76,076 11,887 15.63 6,027 7.92
Maryborough Basin(ATP 613P) 631,085 618,463 98.00 313,561 49.69
---------- ---------- ---------
Total Australia 2,958,566 2,685,870 1,361,737
--------- --------- ---------
United States
Colorado (Baca County) 75,088 67,579 90.00 34,263 45.63
----------- ----------- ----------
Belize
Gladden Basin 350,740 70,148 20.00 35,565 10.14
Block 13 787,436 157,487 20.00 79,846 10.14
---------- ---------- ----------
1,138,176 227,635 115,411
--------- ---------- ---------
Total MPAL 4,171,830 2,981,084 1,511,411
---------- --------- ---------
Properties held directly by the Company:
United States
Colorado (Baca County) (3) - - - 7,509 10.00
Belize
Gladden Basin (3) - - - 8,769 2.50
Block 13 (3) - - - 19,686 2.50
-----------
28,455
Canada
Yukon and Northwest Territories:
Carried interest (4) 35,076 935 2.67
----------- -------------
Total 4,206,906 1,548,310
========= ==========
- ----------------------------
(1) Includes 41,644 gross developed acres and 14,575 net acres.
(2) Includes 30,381 gross developed acres and 15,426 net acres .
(3) Gross acres shown above.
(4) Includes 3,350 gross developed acres and 89 net acres.
(6) Drilling activity.
Productive and dry net wells drilled during the following years (data
concerning Canada is insignificant):
Australia
---------
Year ended Exploratory Development
----------- -----------
June 30, Productive Dry Productive Dry
-------- ---------- --- ---------- ---
1996 .16 - 1.75 -
1995 - - 1.40 .51
1994 - - 2.10 -
United States
-------------
Year ended Exploratory Development
----------- -----------
June 30, Productive Dry Productive Dry
-------- ---------- --- ---------- ---
1996 - 1.00 - -
1995 .24 1.00 - -
1994 .24 - - -
(7) Present Activities.
At June 30, 1996, there were no wells being drilled.
(8) Delivery Commitments.
See discussion under Item 1 concerning the Palm Valley and Mereenie fields.
Item 3. Legal Proceedings.
Kotaneelee Gas Field
The Company's 2.67% carried interest in the Kotaneelee gas field is held in
trust by Canada Southern Petroleum Ltd. ("Canada Southern") which has a 30%
carried interest in the field. Canada Southern and the Company (the
"Plaintiffs") believe that the working interest owners in the Kotaneelee gas
field have not adequately pursued the attainment of contracts for the sale of
Kotaneelee gas; accordingly, legal action in the United States was commenced by
Canada Southern in 1987 against Allied Signal Inc. and Allied Corporation
(collectively, Allied Signal). This suit was ultimately dismissed in December
1988.
In October 1989 and in March 1990, Canada Southern filed statements of
claim in the Court of Queens Bench of Alberta, Judicial District of Calgary,
Canada, against the working interest partners in the Kotaneelee gas field. The
named defendants were Amoco Canada Petroleum Corporation, Ltd., Dome Petroleum
Limited (now Amoco Canada Resources Ltd.), and Amoco Production Company
(collectively the "Amoco Dome Group"), Columbia Gas Development of Canada Ltd.
("Columbia"), Mobil Oil Canada Ltd. ("Mobil") and Esso Resource of Canada Ltd.
("Esso") (collectively the "Defendants").
The Plaintiffs claim that the Defendants breached either a contract
obligation or a fiduciary duty owed to the Plaintiffs to market gas from the
Kotaneelee gas field when it was possible to so do. The Plaintiffs asserts that
marketing the Kotaneelee gas was possible in 1984 and that the Defendants
deliberately failed to do so. The Company seeks money damages and the forfeiture
of the Kotaneelee gas field. The Plaintiffs expects to argue at trial that the
money damages sustained by the Plaintiffs are at least Cdn. $ 96 million
(Company share-Cdn. $8 million).
In addition, the Plaintiffs have claimed that the Plaintiff's carried
interest account should be reduced because of the negligent operation of the
field and improper charges to the carried interest account by the Defendants.
The Plaintiffs claim that when the Defendants in 1980 suspended production from
the field's gas wells, they failed to take precautionary measures necessary to
protect and maintain the wells in good operating condition. The wells thereafter
deteriorated, which caused unnecessary expenditures to be incurred, including
expenditures to redrill one well. In addition, the Plaintiffs claim that
expenditures made to repair and rebuild the field's dehydration plant should not
have been necessary had the facilities been properly constructed and maintained
by the Defendants. The expenditures, the Plaintiffs claim, were inappropriately
charged to the field's carried interest account. The effect of an increased
carried interest account is to extend the period before payout begins to the
carried interest account owners.
The Plaintiffs claim that production from the field should have commenced
in 1984. At that time the field's carried interest account was approximately
Cdn. $63 million. The Company claims that by 1993 at least Cdn. $34 million of
unnecessary expenses had been wrongfully charged to the carried interest
account. The Company's 2.6% share of these expenses would be approximately Cdn.
$.9 million. The Plaintiffs further claim that, if production had commenced in
1984, the carried interest account would have been paid off in approximately two
years and the Company would have begun to receive revenues from the field in
1986. At present, the Company does not expect to receive revenues until 1998.
Columbia has filed a counterclaim against the Plaintiffs seeking, if the
Plaintiffs are successful in its claim for the forfeiture of the field,
repayment from the Plaintiffs of all sums Columbia has expended on the
Kotaneelee lands before the Plaintiffs are entitled to their interest.
The parties to the litigation have conducted extensive discovery since the
filing of the claims. The Court has scheduled a six-month trial which started on
September 3, 1996.
Matters Ancillary to Kotaneelee Litigation
In its 1989 statement of claim, the Plaintiffs sought a declaratory
judgment regarding two issues:
(1) whether interest accrued on the carried interest account; and
(2) whether expenditures for gathering lines and dehydration equipment are
expenditures chargeable to the carried interest account or whether the Plaintiff
will be assessed a processing fee on gas throughput.
With respect to the first issue, the Plaintiffs maintains that no interest
should accrue on the account and the Defendants have not contested this
position. With regard to the second issue, the Plaintiffs maintain that the
expenditures are chargeable to the carried interest account. Mobil, Esso and
Columbia have essentially agreed to the Company's position while the Amoco Dome
Group continues to contest this issue.
On January 22, 1996, the Plaintiffs settled two claims outstanding against
the Company in the Court of Queens Bench, Calgary, Alberta, which related to a
suit brought against AlliedSignal Inc. ("AlliedSignal") in Florida which was
dismissed on the basis that Canada was the appropriate forum for the litigation.
AlliedSignal had sought additional relief against the Company in Canada to
preclude other types of suits by the Company and to recover the costs of the
defense of the initial action. The settlement bars Allied Signal from making a
claim against the Plaintiffs for any costs in connection with the Kotaneelee
Litigation. The Plaintiffs agreed not to bring any action against AlliedSignal
in connection with the Kotaneelee gas field. Neither party made any monetary
payment to the other party.
In 1991, Anderson Exploration Ltd. acquired all of the shares in Columbia
and changed its name to Anderson Oil & Gas Inc. ("Anderson"). Anderson is now
the sole operator of the field and is a direct defendant in the Canada Court
lawsuits. Columbia's previous parent, The Columbia Gas System, Inc., which was
reorganized in a bankruptcy proceeding in the United States, is contractually
liable to Anderson in the legal proceeding described above.
The working interest owners have reported that they have been selling
Kotaneelee gas since February 1991. The Company is uncertain as to what impact,
if any, these sales may have on the status of the litigation.
Under Canadian law, certain costs of the litigation are assessed against
the nonprevailing party. These costs consist primarily of attorney and expert
witness fees during trial. The trial is presently scheduled to last six months,
therefore, these costs could be substantial. While the costs are not now
determinable, the Company estimates that such costs, assuming a six month trial,
would not exceed Cdn. $1.1 million (Company share - Cdn. $88,000) . There are no
assurances however, that such costs will not exceed this amount or that the
duration of the trial will not exceed six months.
Canada Southern has been advancing and paying all the legal and other
expenses of the Kotaneelee litigation. The Company has not received an
accounting of the amounts spent to date. However the Company believes that the
outcome of the Kotaneelee litigation is not reasonably likely to have a material
adverse effect on the Company's future consolidated financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
The following information with respect to the executive officers of the
Company is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Length of Service Other Positions Held
Name Age Office Held as an Officer with Company
James R. Joyce 55 President and Chief Financial President since Director
Officer July 1, 1993
Dennis D. Benbow 57 General Manager - MPAL Since 1993 Director
The Company is not aware of any arrangements or understandings between any
of the individuals named above and any other person pursuant to which any
individual named above was selected as an officer.
All officers of MPC are elected annually by the Board of Directors and
serve at the pleasure of the Board of Directors.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder
Matters.
(a) Principal Market
The principal markets for the Company's common stock is the Pacific Stock
Exchange [MPC] and the NASDAQ SmallCap market [MPET]. The stock is also traded
on the Boston Stock Exchange. The quarterly high and low closing prices on the
Pacific Stock Exchange during the calendar quarterly periods indicated were as
follows:
1996 1st quarter 2nd quarter 3rd quarter* 4th quarter
- ---- ----------- ----------- ----------- -----------
High.................. 2 7/16 3 3
Low................... 1 15/16 2 3/8 2 3/16
1995 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High.................. 1 1/2 2 3/8 2 3/16 4 1/16
Low................... 3/4 1 7/16 1 9/16 2 1/16
1994 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High.................. 1 13/16 3/4 1
Low................... 3/4 11/16 5/8 9/16
- ---------------------------------
* Through September 4, 1996, on which date the closing price was $2 15/16.
(b) Approximate Number of Holders of Common Stock at September 4, 1996
Title of Class Number of Record Holders
Common stock, par
value $.01 per share 13,000
(c) Frequency and Amount of Dividends
The Company has never paid a cash dividend on its common stock. The Company
will consider the payment of dividends when it has the ability to make such
payments.
Item 6. Selected Consolidated Financial Information
The following table sets forth selected data (in thousands) of the Company
insofar as it relates to each of the five fiscal years in the period ended June
30, 1996. This data should be read in conjunction with Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes thereto.
Year ended June 30,
--------------- -------------- --------------- --------------- ---------------
1996 1995 1994 1993 1992
---- ---- ----- ----- ----
Financial Data $ $ $ $ $
Operating revenues 15,667 13,556 12,528 12,999 13,959
====== ====== ====== ====== ======
Total revenues 18,073 15,424 13,318 13,863 14,763
====== ====== ====== ====== ======
Net income (loss) 881 821 502 660 (916)
====== ====== ====== ====== ======
Net income (loss) per share .04 .03 .02 .03 (.04)
====== ====== ====== ====== ======
Working capital 9,858 8,806 8,559 7,722 8,220
====== ====== ====== ====== ======
Cash provided by operating activities 9,185 8,587 4,376 6,969 7,091
====== ====== ====== ====== ======
Total assets 58,422 48,828 46,431 43,281 44,897
====== ====== ====== ====== ======
Long-term liabilities 12,957 11,005 9,157 8,333 11,471
====== ====== ====== ====== ======
Minority interests 18,966 16,616 16,764 14,931 14,310
====== ====== ====== ====== ======
Stockholders' equity:
Capital 43,492 43,358 43,227 43,223 43,214
Accumulated deficit (18,735) (19,616) (20,437) (20,939) (21,598)
Foreign currency translation adjustments (2,785) (4,833) (4,474) (5,760) (4,290)
------- ------- ------- ------- -------
21,972 18,909 18,316 16,524 17,326
======= ======= ======= ====== =======
Exchange rate A.$=U.S. at end of period .7875 .7097 .7287 .6667 .7484
======= ======= ======= ====== =======
Common stock outstanding 24,691 24,544 24,387 24,382 24,382
======= ======= ======= ====== ======
Book value per share .89 .77 .75 .68 .71
======= ======= ======= ====== ======
Quoted market value per share 2.50 1,94 .69 1.19 .81
======= ======= ======= ====== ======
Operating Data
Annual production (Net of royalties)
Gas (BCF) 5.422 5.066 5.141 4.751 6.856
======= ======= ======= ====== ======
Oil(BBLS)(In thousands)(net of royalties) 318 369 374 300 289
======= ======= ======= ====== ======
Standard measure of discounted future cash
flow relating to proved oil and gas reserves.
(49.3% attributable to minority interests 44,213 38,381 46,720 46,127 44,433
======= ======= ======= ====== ======
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(1) Liquidity and Capital Resources - June 30, 1996
Consolidated
At June 30, 1996, the Company on a consolidated basis had approximately
$11,279,000 of cash and cash equivalents as compared to approximately $8,983,000
at June 30, 1995. A summary of the major changes in cash items during the period
is as follows:
Cash and cash equivalents at beginning of period $ 8,983,000
Cash provided by operations 9,185,000
Dividends to MPAL minority shareholders (1,619,000)
Net additions to property and equipment (5,596,000)
Other 326,000
----------
Cash and cash equivalents at end of period $11,279,000
===========
As to the Company (unconsolidated)
At June 30, 1996, Magellan Petroleum Corporation ("MPC"), on an
unconsolidated basis, had cash and cash equivalents of approximately $2,067,000.
MPC's annual operating budget is approximately $700,000 and its current cash
position and annual MPAL dividend should be adequate to meet its current cash
requirements. During fiscal 1997, MPC has budgeted approximately $350,000 for
oil and gas exploration. MPC also has available a $1.5 million bank line of
credit. 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
company, Magellan Petroleum Australia Limited ("MPAL").
During December 1995, MPC received a dividend from MPAL of $1,662,000 less
Australian withholding taxes of $249,000. The net proceeds of $1,413,000 were
added to MPC's working capital.
As to MPAL
At June 30, 1996, MPAL had cash and cash equivalents of approximately
$9,212,000. MPAL has budgeted approximately $2.9 million for exploration in
fiscal 1997 as compared to the $5.6 million incurred during fiscal 1996. The
current composition of MPAL's oil and gas reserves are such that the Company's
future revenues in the long term are expected to be derived from the sale of gas
in Australia.
MPAL expects to fund its exploration costs through its cash flow from
Australian operations and any balance from its A.$10 million bank line of
credit.
(2) Results of Operations
1996 vs. 1995
The Company had consolidated net income of $880,606 for fiscal 1996
compared to net income of $820,843 for fiscal 1995. The components of
consolidated net income for the comparable periods were as follows:
Year ended June 30,
1996 1995
---- ----
MPC unconsolidated pretax loss $ (889,808) $ (845,349)
MPC income tax expense (251,888) (260,580)
Share of MPAL pretax income 2,574,166 3,044,725
Share of MPAL income tax (551,864) (1,117,953)
----------- -----------
Consolidated net income $ 880,606 $ 820,843
========== ===========
Net Income per share $.04 $.03
==== ====
Revenues
Oil and Gas Sales
Oil and gas sales (in thousands) by geographic location for the comparable
periods were as follows:
1996 1995
----------- ----- ------------ ----
Sales % Sales %
Australia $15,667 100 $13,078 96
Americas - 478 4
---------- ----- --------- -----
$15,667 100 $13,556 100
======= ===== ======== ===
Oil sales increased 4% in fiscal 1996. Oil sales in Australia increased 11%
to $5,922,000 from $5,693,000 in 1995 because of a 13% increase in the number of
units produced with a 1% increase in oil prices and a 2% increase in the average
value of the Australian dollar. Sales of Mereenie crude increased in fiscal 1996
as a result of additional development drilling. There were no oil sales in the
United States ($363,000 in 1995) because the producing properties were sold on
March 31, 1995. Oil unit sales
(before deducting royalties) in barrels ("bbls") and the average price per
barrel sold during the periods indicated were as follows:
Fiscal 1996 Sales Fiscal 1995 Sales
----------------- -----------------
Average Average
Price Price
bbls per bbl bbls per bbl
Australia - Mereenie 365,325 A.$23.85 322,414 A.$23.83
Gas sales in Australia increased 24% in fiscal 1996. Gas sales increased
from $7,863,000 in 1995 to $9,746,000 in 1996 because of increases in gas prices
under long term contracts, an 8% increase in the volume of gas sold and a 2%
increase in the average value of the Australian dollar. Total gas sales
increased primarily because of the 1995 Mereenie gas contract. The volumes in
billion cubic feet ("bcf") (before deducting royalties) and the average price of
gas per thousand cubic feet ("mcf") sold during the periods indicated were as
follows:
Fiscal 1996 Sales Fiscal 1995 Sales
----------------- -----------------
Average Average
Price Price
bcf per mcf bcf per mcf
Australia: (A.$) (A.$)
Palm Valley
Alice Springs contract 1.070 2.89 1.012 2.77
Darwin contract 2.328 2.01 2.854 1.98
Mereenie
Darwin contract 1.917 1.97 1.700 1.71
Other .908 2.65 .208 2.68
------ -----
Total 6.223 5.774
===== =====
Other production income increased 128% to $1,360,000 in 1996 compared to
$597,000 in 1995. The primary reason for this increase is that MPAL's share of
gas pipeline tariffs increased to $1,126,000 compared to $167,000 in 1995.
Interest income increased 16% to $696,000 in 1996 from $597,000 in 1995.
The combination of additional funds available for investment and higher interest
rates is the reason for this increase.
Costs and Expenses
Production costs increased 22%. The 22% increase in Australia relates to an
increase in costs at Palm Valley in preparation for the installation of
compression units in the field. The increase was also the result of development
activities being undertaken in the Mereenie field. The U.S. producing properties
were sold March 31,1995. Production costs (in thousands) by geographic area are
as follows:
1996 1995
-------- ------
Australia $4,409 $3,455
United States - 145
------- ------
$4,409 $3,600
====== ======
Salaries increased 16% from $1,500,000 in 1995 to $1,742,000 in 1996
because of increased compensation costs in Australia and a 2% increase in the
value of the Australian dollar.
Depreciation, depletion and amortization decreased 2% in 1996. There was a
20% increase in the Australian component because of the increase in the number
of units sold in Australia and an increase in capitalized costs. The U.S.
component was eliminated because the U.S. producing properties were sold March
31, 1996. The following table is a summary of the depreciation, depletion and
amortization expense (in thousands) by geographic area:
1996 1995 % Change
-------- -------- --------
Australia $3,288 $2,734 20
United States - 621
------ ------
$3,288 $3,355
====== ======
Shareholder communications increased 15% in 1996. The increase from
$157,000 in 1995 to $181,000 in 1996 is attributable to higher printing and
mailing costs.
Abandonments and write downs include a $2,500,000 write down of costs
relating to the United States cost center that pertains to the Baca County,
Colorado project. The write down was based on a thorough evaluation of the
remaining prospects and the drilling data derived from the three dry holes that
were drilled in 1995.
Other costs increased 11%. In 1996 other costs increased from $928,610 to
$1,026,889. The increase is primarily due to higher travel and insurance costs.
Income Taxes
MPC's income tax provision (in thousands) was computed as follows:
Fiscal 1996 Fiscal 1995
----------- -----------
Pretax consolidated net income $ 1,684 $2,199
Losses (income) not recognized:
MPC's U.S. operations 890 845
MPAL's non Australian operations 423 (63)
Permanent differences (818) (109)
-------- --------
Book taxable income $2,179 $2,872
====== ======
Australian income tax rate 36% 36%
=== ===
Australian income tax provision $ 784 $1,034
Australian withholding taxes on dividend 252 261
Tax provision attributable to reconciliation
of year end tax liability (232) 84
--------- --------
Consolidated income tax provision $ 804 $1,379
======= ======
Exchange Effect
The value of the Australian dollar relative to the U.S. dollar increased to
$.7875 at June 30, 1996 compared to the value of $.7097 at June 30, 1995. This
resulted in a $2,049,000 credit to accumulated translation adjustments for
fiscal 1996. The 11% increase in the value of the Australian dollar increased
the reported asset and liability amounts in the balance sheet at June 30, 1996
from the June 30, 1995 amounts. The annual average exchange rate used to
translate MPAL's operations in Australia for fiscal 1996 was $.7593, which is a
2% increase compared to a $.7427 rate for the comparable 1995 period.
1995 vs. 1994
The Company had consolidated net income of $820,843 for fiscal 1995
compared to net income of $501,868 for fiscal 1994. The components of
consolidated net income for the comparable periods were as follows:
Year ended June 30,
1995 1994
---- ----
MPC unconsolidated pretax loss $ (845,349) $(1,321,218)
MPC income tax expense (260,580) (222,900)
Share of MPAL pretax income 3,044,725 2,025,999
Share of MPAL income (tax) credit (1,117,953) 19,987
----------- -----------
Consolidated net income $ 820,843 $ 501,868
=========== ============
Net Income per share $.03 $.02
==== ====
Oil and Gas Sales
Oil and gas sales (in thousands) by geographic location for the comparable
periods were as follows:
1995 1994
----------- ----- ------------ ----
Sales % Sales %
Australia $13,078 96 $11,816 94
United States 478 4 712 6
--------- ----- ------- ---
$13,556 100 $12,528 100
======= === ======= ===
Oil Sales
Oil sales decreased 1% in fiscal 1995. Oil sales in Australia increased 2%
despite a 2% decrease in the number of units produced with a relatively small
increase in oil prices because of a 7% increase in the average value of the
Australian dollar. Sales of Mereenie crude are expected to increase in fiscal
1996 as a result of additional development drilling. U.S. oil sales decreased
33% as a result of declining production (40%) which was partially offset by a
13% increase in prices. Oil unit sales (before deducting royalties) in barrels
("bbls") and the average price per barrel sold during the periods indicated were
as follows:
Fiscal 1995 Sales Fiscal 1994 Sales
----------------- -----------------
Average Average
Price Price
bbls per bbl bbls per bbl
Australia - Mereenie 322,414 A.$23.83 328,287 A.$23.76
U. S. - Navajo Venture (*) 28,359 U.S. $17.31 47,197 U.S.$15.29
(*) Properties sold March 31, 1995.
Gas Sales
Gas sales in Australia increased 16% in fiscal 1995. Gas sales increased
with modest increases in gas prices under long term contracts, a 4% increase in
the volumes of gas sold and a 7% increase in the average value of the Australian
dollar. Total gas
volumes are expected to increase in fiscal 1996 as the result of the new
Mereenie gas contract. The volumes in billion cubic feet ("bcf") (before
deducting royalties) and the average price of gas per thousand cubic feet
("mcf") sold during the periods indicated were as follows:
Fiscal 1995 Sales Fiscal 1994 Sales
----------------- -----------------
Average Average
Price Price
bcf per mcf bcf per mcf
Australia: (A.$) (A.$)
Palm Valley
Alice Springs contract 1.012 2.77 .948 2.70
Darwin contract 2.854 1.98 3.565 1.97
Mereenie
Darwin contract 1.700 1.71 .834 1.12
Other .208 2.68 .225 2.52
-- ---- -- ----
Total 5.774 5.572
===== =====
Interest and Other Income
Interest and other income increased 51% in 1995. Interest and other income
includes $167,000, MPAL's share of gas pipeline tariffs which commenced in May
1995. Interest income also increased $248,000.
Gain on Sale of Producing Properties
Effective March 31, 1995, MPAL sold its interest in the Navajo venture for
approximately $906,000 and recognized a gain of $672,533.
Costs and Expenses
Production costs decreased 7%. The 2% decrease in Australia relates to a
reduction in costs at Palm Valley. U. S. costs in 1995 have declined primarily
because production decreased and field operations were scaled back during the
year. In addition, the U.S. producing properties were sold March 31,1995.
Production costs (in thousands) by geographic area and the relationship to oil
and gas sales is as follows:
1995 1994
----- ----
Production % % Production % %
costs total sales sales by country costs total sales sales by country
Australia $3,455 25 26 $3,524 28 30
United States 145 1 30 354 3 50
------ ---- ------ ---
$3,600 26 $3,878 31
====== ====== ==
Salaries increased 21% because of increased compensation costs in Australia
and a 7% increase in the value of the Australian dollar.
Depreciation, depletion and amortization increased 1% in 1995. There was an
increase in the Australian component because of the increase in the number of
units sold in Australia. The U.S. component decreased because of a decline in
U.S. production. The following table is a summary of the depreciation, depletion
and amortization expense (in thousands) by geographic area:
Fiscal 1995 Fiscal 1994 % Change
----------- ----------- --------
Australia $2,734 $2,424 13
United States 621 898 31
------- -------
$3,355 $3,322
====== ======
Income Taxes
Effective July 1, 1995, the Australian income tax rate increased from 33%
to 36%. The effect of the change was to increase the consolidated income tax
provision for fiscal 1995 by $375,000.
MPC's income tax provision (in thousands) was computed as follows:
Fiscal 1995 Fiscal 1994
----------- -----------
Pretax consolidated net income $2,199 $ 705
Losses (income) not recognized:
MPC's U.S. operations 845 1,321
MPAL's U.S. operations (63) 309
Permanent differences (109) 59
-------- --------
Book taxable income 2,872 2,394
====== ======
Australian income tax rate 36% 33%
=== ===
Australian income tax provision $1,034 $ 790
Australian withholding taxes on dividend 261 223
Tax credit attributable to settlement of Australian tax audit - (810)
Tax provision attributable to reconciliation
of year end deferred tax liability 84 -
-------- --------
Consolidated income tax provision $1,379 $ 203
====== ======
Exchange Effect
The value of the Australian dollar relative to the U.S. dollar decreased to
$.7097 at June 30, 1995 compared to the value of $.7287 at June 30, 1994. This
resulted in a $360,000 charge to accumulated translation adjustments for fiscal
1995. The 3% decrease in the value of the Australian dollar decreased the
reported asset and liability amounts in the balance sheet at June 30, 1995 from
the June 30, 1994 amounts. The annual average exchange rate used to translate
MPAL's operations in Australia for fiscal 1995 was $.7427, which is a 7%
increase compared to a $.6922 rate for the comparable 1994 period.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Magellan Petroleum Corporation
We have audited the accompanying consolidated balance sheet of Magellan
Petroleum Corporation as of June 30, 1996, and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Magellan Petroleum Corporation at June 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Hartford, Connecticut
September 5, 1996
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
June 30,
--------
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $11,278,957 $ 8,982,582
Accounts receivable 2,496,085 1,772,342
Reimbursable development costs 237,112 141,015
Inventories 371,925 208,334
----------- -----------
Total current assets 14,384,079 11,104,273
----------- -----------
Property and equipment:
Oil and gas properties (full cost method) 65,621,151 54,334,921
Land, buildings and equipment 2,328,174 2,084,616
Field equipment 1,621,561 1,457,894
----------- -----------
69,570,886 57,877,431
Less accumulated depletion, depreciation and amortization (26,053,222) (20,516,580)
------------- ------------
43,517,664 37,360,851
------------ ----------
Other assets 519,759 363,084
-------------- ------------
$58,421,502 $48,828,208
=========== ===========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY Current
liabilities:
Accounts payable $ 1,504,167 $ 1,416,315
Accrued liabilities 1,041,372 881,734
Income taxes payable 1,980,817 -
------------- -------------------
Total current liabilities 4,526,356 2,298,049
------------- ------------
Long term liabilities:
Deferred income taxes 9,054,117 8,877,253
Reserve for future restoration costs 3,902,909 2,127,805
------------ -----------
12,957,026 11,005,058
----------- ----------
Minority interests 18,966,281 16,616,405
----------- ----------
Commitments (Note 2) - -
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 50,000,000 shares
Outstanding 24,691,245 and 24,543,745 shares, respectively 246,912 245,437
Capital in excess of par value 43,244,901 43,112,376
----------- ----------
43,491,813 43,357,813
Accumulated deficit (18,735,378) (19,615,984)
Foreign currency translation adjustments (2,784,596) (4,833,133)
------------- ------------
21,971,839 18,908,696
----------- -----------
$58,421,502 $48,828,208
=========== ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30,
1996 1995 1994
-------- -------- -------
Revenues:
Oil sales $ 5,921,529 $ 5,693,108 $5,764,794
Gas sales 9,745,520 7,863,457 6,762,688
Other production related revenues 1,360,403 597,451 441,262
Interest income 695,613 597,423 348,985
Gain on sale of assets 349,953 672,533 -
----------- ---------- -----------------
18,073,018 15,423,972 13,317,729
---------- ----------- ----------
Costs and expenses:
Production costs 4,409,440 3,600,452 3,878,339
Salaries and employee benefits 1,741,721 1,500,289 1,238,757
Depletion, depreciation and amortization 3,287,774 3,355,081 3,322,394
Auditing, accounting and legal services 703,833 689,400 664,654
Shareholder communications 181,039 157,222 162,811
Interest expense 30,690 27,937 28,416
Other 1,026,889 928,610 931,385
Abandonments and write downs 2,500,000 - -
Tender offer and litigation expenses - - 412,840
----------------- ------------------ -----------
13,881,386 10,258,991 10,639,596
Income before minority interests and income taxes 4,191,632 5,164,981 2,678,133
Minority interests 2,507,274 2,965,605 1,973,352
---------- ---------- ----------
Income before income taxes 1,684,358 2,199,376 704,781
Income tax provision 803,752 1,378,533 202,913
----------- ---------- -----------
Net income $ 880,606 $ 820,843 $ 501,868
=========== ============ ============
Average number of shares 24,599,899 24,421,309 24,382,291
=========== ========== ==========
Per share, based on average number of shares
outstanding during the period:
Net income $.04 $.03 $.02
==== ==== ====
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
Three years ended June 30, 1996
Foreign
Capital in currency
Number Common excess of Accumulated translation
of shares stock par value Deficit adjustments Total
June 30, 1993 24,381,890 $ 243,819 $42,978,833 $(20,938,695) $(5,760,431) $16,523,526
Net income - - - 501,868 - 501,868
Currency
translation - - - - 1,286,811 1,286,811
adjustments
Common stock issued
to directors 5,217 52 3,861 - - 3,913
---------- ------------ ----------- ------------ ----------- -----------
June 30, 1994 24,387,107 243,871 42,982,694 (20,436,827) (4,473,620) 18,316,118
Net income - - - 820,843 - 820,843
Currency
translation - - - - (359,513) (359,513)
adjustments
Common stock issued
to directors 16,638 166 12,957 - - 13,123
Exercise of stock
options 140,000 1,400 116,725 - - 118,125
----------- ----------- ------------ ------------ ----------- -----------
June 30, 1995 24,543,745 245,437 43,112,376 (19,615,984) (4,833,133) 18,908,696
Net income - - 880,606 - 880,606
Currency
translation - - - 2,048,537 2,048,537
adjustments
Exercise of stock
options 147,500 1,475 132,525 - - 134,000
------------ ----------- ------------ ---------------- ----------------- -----------
June 30, 1996 24,691,245 $ 246,912 $43,244,901 $(18,735,378) $(2,784,596) $21,971,839
========== ========= =========== ============= ============ ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended June 30,
1996 1995 1994
---- ---- ----
Operating Activities:
Net income $ 880,606 $ 820,843 $ 501,868
Adjustments to reconcile net income to
net cash provided by operating activities:
Abandonments and write downs 2,500,000 - -
Depletion, depreciation and amortization 3,287,774 3,355,081 3,322,394
Deferred income taxes (360,659) 849,766 653,457
Minority interests 2,507,274 2,965,605 1,973,352
Increase (decrease) in operating assets and liabilities:
Accounts receivable (991,763) 358,474 (800,388)
Reimbursable development costs (122,153) (44,536) 406,025
Other assets (217,509) (42,539) (8,704)
Inventories (203,575) 86,750 (36,569)
Accounts payable and accrued liabilities (75,766) 237,064 (1,635,618)
Income taxes payable 1,980,817 - -
---------- ----------------- ----------------
Net cash provided by operating activities 9,185,046 8,586,508 4,375,817
---------- ---------- ---------
Investing Activities:
Additions to property and equipment (5,596,156) (7,283,821) (3,898,629)
Sale of assets - 905,556 -
--------------- ----------- ----------------
Net cash used in investing activities (5,596,156) (6,378,265) (3,898,629)
----------- ----------- -----------
Financing Activities:
Dividends to MPAL minority shareholders (1,619,104) (1,673,345) (1,447,208)
Sales of common stock by MPC 134,000 131,248 3,913
----------- ----------- ------------
Net cash used in financing activities (1,485,104) (1,542,097) (1,443,295)
----------- ----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 192,589 (34,141) 334,812
----------- ------------ ----------
Net increase (decrease) in cash and cash
equivalents 2,296,375 632,005 (631,295)
Cash and cash equivalents at beginning of year 8,982,582 8,350,577 8,981,872
---------- ---------- ----------
Cash and cash equivalents at end of year $11,278,957 $8,982,582 $8,350,577
=========== ========== ==========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
1. Summary of significant accounting policies
(a) Principles of consolidation
The accompanying consolidated financial statements include the accounts
of Magellan Petroleum Corporation ("MPC") and its subsidiaries, hereafter
referred to collectively as the Company. All intercompany transactions have been
eliminated. At June 30, 1996, MPC owned a 50.7% interest in Magellan Petroleum
Australia Limited ("MPAL").
(b) Oil and gas properties
The Company follows the full cost method of accounting for oil and gas
properties. The Company's cost centers are Australia, United States, Canada and
Belize. All costs, whether successful or unsuccessful, associated with property
acquisition, exploration and development activities are capitalized within the
appropriate cost center. The estimated cost of restoring the properties to their
original state at the end of the life of the producing fields is also included
in oil and gas properties. The Company does not recognize gain or loss on the
sale of proved oil and gas properties unless significant proved oil and gas
reserves of that cost center are sold. Sales proceeds are credited to the
appropriate cost center.
Capitalized costs are depleted on the unit-of-production method based
on proved oil and gas reserves. Take or pay adjustment payments are included in
gas sales when the applicable gas is actually delivered.
The Company assesses whether its unproved properties are impaired on a
periodic basis. This assessment is based upon work completed on the properties
to date, the status of drilling activities and technical data from the
properties and adjacent areas. Based on the exploration activities on the
properties completed to date, the Company expects to recover its $2.9 million of
capitalized costs. However, there can be no assurance that it will be successful
and that costs associated with these properties will be realized.
1. Summary of significant accounting policies (Cont'd)
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(d) Land, buildings and equipment
Land, buildings and equipment and field equipment are carried at cost.
Depreciation and amortization are provided on a straight-line basis over their
estimated useful lives.
(e) Inventories
Inventories consist of crude oil in various stages of transit to the
point of sale and are valued at the lower of cost (determined on an average cost
basis) or market.
(f) Foreign currency translations
The accounts of the Company's Australian subsidiaries are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52. The translation adjustment is included as a component of stockholders'
equity, whereas gain or loss on foreign currency transactions is included in the
determination of income. All assets and liabilities are translated at the rates
in effect at the balance sheet dates. Revenues, expenses, gains and losses are
translated using a quarterly weighted average exchange rate for the period. At
June 30, 1996 and 1995, the Australian dollar was equivalent to U.S. $.7875, and
$.7097, respectively.
(g) Accounting for income taxes
The Company follows FASB Statement 109, the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
1. Summary of significant accounting policies (Cont'd)
(h) Cash and cash equivalents
The Company considers all highly liquid short term investments with
maturities of three months or less to be cash equivalents. Cash and cash
equivalents are carried at cost which approximates market value. The components
of cash and cash equivalents are as follows:
June 30,
1996 1995
---- ----
Cash $ 394,224 $ 300,873
U. S. Treasury Bills 1,678,858 1,183,559
Australian money market accounts and short
term commercial paper. 9,205,875 6,892,594
----------- ----------
11,278,957 8,377,026
Marketable securities (*) - 605,556
----------- ----------
$11,278,957 $8,982,582
=========== ==========
(*) Includes 534,000 shares of Harken Energy Corporation as of June 30,
1995. See Note 2(c).
(I) Earnings per share
Earnings per common share is based upon the weighted average number of
common and common equivalent shares outstanding during the period. Primary and
fully diluted earnings per share are the same.
1. Summary of significant accounting policies (Cont'd)
(j) Geographic information
As of each of the stated dates, the Company's revenue, operating
income, net income or loss and identifiable assets (in thousands) were
geographically attributable as follows:
Year ended June 30,
1996 1995 1994
--------- --------- -------
Revenue:
Australia $17,639 $14,113 $12,365
Americas 434 1,311 953
---------- -------- --------
$18,073 15,424 $13,318
======= ------- =======
Operating income:
Australia $ 5,891 $ 4,874 $ 4,081
Americas (3,108) (650) (826)
--------- --------- --------
2,783 4,224 3,255
Corporate overhead and interest
net of other income 1,409 941 (577)
-------- -------- -------
Consolidated operating income before
minority interests and income taxes $ 4,192 $ 5,165 $2,678
======== ======== ======
Net income:
Australia $ 3,617 $ 1,864 $ 2,355
Americas (2,736) (1,043) (1,853)
-------- -------- ------
$ 881 $ 821 $ 502
========= ========= =========
Identifiable assets:
Australia $52,901 $43,421 $43,515
Americas 2,831 3,400 1,778
--------- -------- -------
55,732 46,821 45,293
Corporate assets 2,690 2,007 1,138
--------- -------- -------
$58,422 $48,828 $46,431
======= ======= =======
Substantially all of the Company's Australian gas sales were to the Power
and Water Authority ("PAWA") of the Northern Territory of Australia ("NTA").
Most of the Company's crude oil production was sold to the Mobil Port Stanvac
Refinery near Adelaide.
1. Summary of significant accounting policies (Cont'd)
(k) Other financial information.
Year ended June 30,
1996 1995 1994
---------- ---------- -------
Costs and expenses - Other
Consultants $ 135,135 $ 174,499 $ 159,308
Directors' fees and expense 167,002 163,922 163,056
Insurance 272,275 241,023 215,002
Rent 283,954 350,290 271,067
Taxes 220,968 234,008 152,351
Travel 337,132 183,351 143,624
Other (net of overhead reimbursements) (389,577) (418,483) (173,023)
----------- ---------- -------
$1,026,889 $ 928,610 $ 931,385
========== ========== ===========
Royalty payments $1,544,508 $1,596,516 $1,415,283
========== ========== ==========
Interest payments $ 30,690 $ 27,937 $ 28,416
============ =========== ============
Income tax payments $ 251,888 $ 260,580 $ 222,900
=========== ========== ===========
2. Oil and gas properties
(a) Australia
Mereenie
Field Development and Oil Production
MPAL has a 35% working interest in the Mereenie oil and gas field in the
NTA. MPAL's share of production from the field is subject to net overriding
royalties aggregating 3.0625% and the statutory government royalty of 10%.
The field was producing about 2,800 (MPAL share 980) barrels of crude oil
per day ("bpd") from 36 producing oil wells at June 30, 1996. The oil is being
transported by means of a 167 mile, eight-inch oil pipeline from the field to an
industrial park near Alice Springs. Most of the oil is then shipped south
approximately 950 miles by rail and road to a refinery in the Adelaide area.
2. Oil and gas properties (Cont'd)
MPAL and its partner (the Mereenie Joint Venture - MPAL share 35%) are providing
Mereenie gas for use in Darwin and other NTA centers. (See Darwin Gas Supply
Contracts below).
Refinery Obligation
Under the terms of the Mereenie petroleum leases, the Mereenie Joint
Venture ("MJV") is obligated to construct a refinery in the Alice Springs area
if it is determined that such a refinery is economically viable. The MJV
submitted a study in early 1986 which concluded that a refinery was not
economically viable at that time, and under the terms of the leases, an updated
study may be required at any time. The Company believes a refinery in Alice
Springs would not be economically viable under current market conditions. The
Northern Territory Government has not raised any current objection to this
conclusion.
Palm Valley
Field Development and Gas Production
MPAL has a 50.775% interest in the Palm Valley gas field which is located
in the Northern Territory of Australia. Ten wells have been drilled in the
field, six of which are currently connected to the gas treatment plant and
flowed as required to meet the Alice Springs and Darwin supply contracts with
PAWA. During fiscal 1996, MPAL's share of gas sales was 3.4 bcf.
In 1981, the Palm Valley Joint Venture ("PVJV") agreed to supply the PAWA
facility in Alice Springs with 48 billion cubic feet ("bcf") of natural gas
(MPAL share 24.4 bcf) from the Palm Valley field. During the twenty-five year
period 1983-2008, PAWA is required to take and/or pay for at least 28 bcf (MPAL
share -14.2 bcf). The price of the gas is adjusted quarterly to reflect fully
changes in the Australian Consumer Price Index.
2. Oil and gas properties (Cont'd)
The PVJV is providing Palm Valley gas for use in Darwin and other NTA
centers. (See Darwin Gas Supply Contracts below)
MPAL's share of Palm Valley production revenues is subject to a 10%
statutory Government royalty and net overriding royalties aggregating 4.2548%.
Darwin Gas Supply Contracts
In 1985, MPAL signed an agreement as a participant in the PVJV and also
signed an agreement as a participant in the MJV for the sale of gas to the PAWA
for use in PAWA's Darwin generating station and at a number of other generating
stations in the Northern Territory. The gas is being delivered via the 922 mile
Amadeus Basin to Darwin gas pipeline which was built by an Australian
consortium.
Palm Valley Agreement
The PVJV has contracted to supply a maximum of 175 bcf of gas (MPAL share
- -88.9 bcf) from the Palm Valley field and PAWA has agreed to take or pay for 134
bcf (MPAL share - 68 bcf) during the 25 year period of the contract. The price
of gas being sold is subject to quarterly adjustments to partially reflect
changes in the Australian Consumer Price Index and certain increases in the
price of electricity.
Under the terms of the contract, PAWA is required to reimburse MPAL and its
PVJV partners, subject to certain conditions, for any development expenditures
(applicable to the Darwin contract) plus interest over a 10 year period (40
quarterly payments) after the expenditures are incurred. However, PAWA has
elected to reimburse the PVJV on a current basis (free of any interest) for the
costs incurred to date.
Mereenie Agreement
The MJV has contracted to supply a maximum of 56 bcf of gas (MPAL share -
19.6 bcf) from the Mereenie field and PAWA has agreed to take or pay for 40 bcf
(MPAL share - 14 bcf) during the 25 year period of the contract. This agreement
also provides for price adjustments identical to the Palm Valley agreement.
On May 29, 1995, the MJV concluded a new ten year contract for the sale of
an additional 21.4 bcf of gas to PAWA. The additional gas was required to meet
the power needs of new mining developments in the NTA including the McArthur
River Mine.
2. Oil and gas properties (Cont'd)
Agreements Between the PVJV and the MJV
The agreement provides that if the MJV sells additional gas from the
Mereenie field, the PVJV will be entitled to 35 percent of the revenues from the
first 38 bcf of additional gas sold. At June 30, 1996, the balance of the MJV
gas subject to this entitlement was 34 bcf (MPAL share - 17 bcf). MPAL's share
of the above revenues in fiscal 1996, 1995 and 1994 was A.$716,000, A.$552,000
and A$249,000, respectively.
The PVJV and the MJV are now entitled to receive a share of pipeline
tariffs earned for transporting gas in the Amadeus Basin to Darwin pipeline.
MPAL's share was $1,126,000 in fiscal 1996 and $167,000 in fiscal 1995.
Dingo Gas Field
MPAL has a 34.26% interest in Retention License 2 in the Amadeus basin in
the NTA. The Dingo gas field has approximately 18 bcf of presently proved and
recoverable reserves based on three production gas wells. Sufficient reserves
are indicated to fulfill a modest gas contract, however, the initial well flow
rates and consequent reserves per well are considered too low to be currently
economic, given the high drilling costs of the wells. The current retention
license requires that a well be drilled by May, 1997 at an estimated cost of
A.$3.5 million (MPAL share - A.$1.2 million). Because of the subcommercial
status of the field, an application to waive the drilling commitment will be
filed. It is expected that the waiver will be granted. MPAL's share of potential
production from these permit areas is subject to a 10% statutory government
royalty and overriding royalties aggregating 2.5043%.
The Surat Basin
MPAL currently has a 15.625% working interest in the Burunga permit in
Queensland (ATP 378P). During fiscal 1996, the Scotia No. 3 well was drilled to
test for coal bed methane gas. The gas well is presently being tested to
determine whether it would be economic to develop the discovery.
2. Oil and gas properties (Cont'd)
Ngalia Basin
MPAL has been granted a renewal of permit EP-15 in the Ngalia basin in the
NTA which expires in May 1999. The renewal permit covers 1.9 million acres. The
minimum obligations of this permit total A.$1.2 million for 1997-1999 including
an obligation to drill a well by May 1998. Previously MPAL had held a permit in
the Ngalia basin where a 6,000 foot wildcat well, Davis No. 1, was drilled in
1981. Although the well was abandoned as a dry hole, it did yield minor shows of
natural gas. MPAL is seeking co-venturers in this project.
Maryborough Basin
MPAL is seeking partners for exploration permit ATP 613P, a 670,000 million
acre block in the Maryborough Basin in Queensland, Australia. During fiscal
1996, a seismic survey was completed on the permit. Processing and analysis of
the data is being completed. The minimum expenditure obligation of the permit is
A.$.9 million over the term of the permit which ends March 31, 1999.
(b) Canada
The Company has a 2.67% carried interest in the Kotaneelee gas field in the
Yukon Territory which has been on production since February 1991. There are
three wells capable of production in the field which is part of a permit
covering 31,885 gross acres. For financial statement purposes in fiscal 1987 and
1988, the Company wrote down its Canada cost center, which included the
Kotaneelee field to a nominal value because of the uncertainty as to the date
when sales of Kotaneelee gas might begin and the immateriality of the carrying
value of the investment. Although the field is now producing, the Company has
not yet classified its share of the Kotaneelee gas reserves as proved because
the gas field is still the subject of litigation. The Company will reclassify
the reserves at the Kotaneelee field as proved when there is greater assurance
as to the timing and assumptions regarding the investment. Based on the current
price of gas and the unrecovered development costs, the Company does not expect
to receive any revenue from the field until 1998.
(c) United States
Navajo Joint Venture
Effective March 31, 1995, MPAL sold its 11.625% interest in oil and gas
exploration, drilling, operating and production agreements covering properties
located on
2. Oil and gas properties (Cont'd)
Navajo Tribal lands in the Four Corners Region of Arizona, New Mexico and Utah.
MPAL realized proceeds of $906,000 on the sale and recorded a gain of $673,000.
The consideration paid consisted of $300,000 in cash and 534,000 shares of the
purchaser, Harken Energy Corporation. During fiscal 1996, all of the shares were
sold at a gain of $350,000.
Baca County, Colorado
MPC (10%) and MPAL (90%) are participating in an exploration program in
Colorado. During late April 1995, MPAL commenced an initial three well
exploration drilling program. There are approximately 25 prospects that have
been identified over the past 2 1/2 years from previous seismic surveys. The
initial three well appraisal program has been completed. All three wells were
dry holes. MPC has the right, but not the obligation to a 10% participation in
drilling future prospects. Based on the data derived from the appraisal program
during fiscal 1996, the Company has written off $2,500,000 in costs incurred to
date. In early 1997, the Company expects to drill an additional exploratory well
on the most prospective structure.
(d) Belize
Gladden Basin PSA
During January 1996, MPAL acquired a 20% working interest in a Production
Sharing Agreement ("Gladden PSA") which covers approximately 351,000 acres
offshore Belize, Central America. On May 30, 1996, MPC acquired a 2 1/2% in the
Gladden PSA. The Gladden PSA expires on May 31, 2001 and requires that a well be
drilled by December 1, 1996. The estimated cost of the well is $10 million (MPAL
share $2 million, MPC share $250,000).
Block 13 PSA
MPC (2 1/2%) and MPAL (20%) are also participants in a Production Sharing
Agreement ("Block 13 PSA") offshore Belize adjourning the western and southern
boundaries of the Gladden PSA. The Block 13 PSA covers approximately 788,000
acres. The Block 13 PSA expires on January 31, 2004. The aggregate estimated
cost for 1997 and 1998 is approximately $68,000 for MPAL and MPC.
3. MPC Condensed financial statements
The following are unconsolidated condensed balance sheets (in thousands) of
MPC and condensed statements of operations and cash flows.
MAGELLAN PETROLEUM CORPORATION
BALANCE SHEET
June 30,
1996 1995
---- ----
ASSETS
Current assets $ 2,287 $ 1,691
Oil and gas properties - net 283 195
Investment in MPAL 19,493 17,085
--------- --------
Total $ 22,063 $ 18,971
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 91 $ 62
----------- ------------
Stockholders' equity:
Capital 43,492 43,358
Accumulated deficit (18,735) (19,616)
Foreign currency translation adjustments 2,785) (4,833)
---------- ----------
21,972 18,909
-------- ---------
Total $ 22,063 $ 18,971
======== =========
MAGELLAN PETROLEUM CORPORATION
STATEMENT OF OPERATIONS
Year ended June 30,
1996 1995 1994
---- ---- ----
Revenues $ 84 $ 58 $ 25
Costs and expenses (973) (903) (1,346)
--------- ---------- -------
Loss before income taxes (889) (845) (1,321)
Income tax provision 252 261 223
-------- ---------- -------
Loss before equity in MPAL (1,141) (1,106) (1,544)
Equity in MPAL net income 2,022 1,927 2,046
------- --------- -----
Net income $ 881 $ 821 $ 502
========= ========== =======
3. MPC Condensed financial statements (Cont'd)
MAGELLAN PETROLEUM CORPORATION
STATEMENT OF CASH FLOWS
Year ended June 30,
1996 1995 1994
---- ---- ----
Operating Activities:
Net income $ 881 $ 821 $ 502
Adjustments to reconcile net income
to net cash used in operating activities:
Abandonments 200 - -
Equity in MPAL income (2,022) (1,927) (2,046)
Change in operating assets and liabilities:
Accounts receivable (62) 239 (186)
Accounts payable and accrued liabilities 29 (8) (339)
-------- ---------- --------
Net cash used in operating activities (974) (875) (2,069)
Investing Activities:
Additions to property and equipment (288) (195) -
-------- -------- ---------
Financing Activities:
Dividends from MPAL 1,662 1,718 1,486
Sales of common stock 134 131 4
------- -------- -------
1,796 1,849 1,490
------ ------- -----
Net increase (decrease) in cash and
cash equivalents 534 779 (579)
Cash and cash equivalents at
beginning of year 1,533 754 1,333
------ ------- ------
Cash and cash equivalents at
end of year $2,067 $ 1,533 $ 754
====== ======= =======
4. MPAL transactions and condensed financial statements
The following are the condensed consolidated balance sheet of MPAL and
condensed consolidated statement of operations (in thousands). At June 30, 1996,
Santos Ltd. held 18.2% of MPAL and Boral Limited held 18.1% with the balance of
12.9% held by approximately 2,500 shareholders in Australia.
4. MPAL transactions and condensed financial statements (Cont'd)
The consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and include all of MPAL's subsidiaries.
Magellan Petroleum Australia Limited
Consolidated Balance Sheet
June 30,
1996 1995
---- ----
ASSETS
Current assets $12,617 $ 9,776
Oil and gas properties - net 41,949 36,076
Land, building and equipment - net 1,166 969
--------- ---------
Total $55,732 $ 46,821
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 4,436 $ 2,236
-------- ---------
Long term liabilities 13,052 11,100
-------- --------
Stockholders' equity:
Capital 34,408 34,408
Retained earnings 8,353 7,642
Foreign currency translation adjustments (4,517) (8,565)
---------- -----------
38,244 33,485
-------- ---------
Total $55,732 $ 46,821
======= =========
4. MPAL transactions and condensed financial statements (Cont'd)
Magellan Petroleum Australia Limited
Consolidated Statement of Operations
Year ended June 30,
1996 1995 1994
---- ---- ----
Revenues $17,989 $15,366 $13,293
Costs and expenses 12,908 9,355 9,294
------- -------- -------
Income before taxes 5,081 6,011 3,999
Income tax provision (credit) 1,089 2,207 (39)
-------- -------- ----------
Net income $ 3,992 $ 3,804 $ 4,038
======== ======== ========
Magellan and Minority Equity in MPAL
Magellan equity interest in MPAL:
Income before tax $2,574 $3,045 $2,026
Income tax (credit) provision 552 1,118 (20)
-------- ------- --------
Magellan equity in net income $2,022 $1,927 $2,046
------ ------ ------
Minority equity interest in MPAL:
Income before tax $2,507 $2,966 $1,973
Income tax (credit) provision 537 1,089 (19)
-------- ------- -------
Minority interest in net income 1,970 1,877 1,992
Foreign currency translation 1,999 (352) 1,253
Dividends paid (1,619) (1,673) (1,447)
Other - - 35
----------- ----------- --------
Total minority interest increase (decrease) $2,350 $ (148) $1,833
====== ========= ======
5. Capital and stock options
The Company's Certificate of Incorporation provides that any matter to be
voted upon must be approved not only by a majority of the shares voted, but also
by a majority of the stockholders casting votes present in person or by proxy
and entitled to vote thereon.
On October 5, 1989, the Company adopted a Stock Option Plan covering
1,000,000 shares of the Company's common stock.
Following is a summary of option transactions for the three years ended
June 30, 1996:
Options outstanding Number of shares Option Prices
June 30,1993 388,750 .94 - 1.125
Granted 275,000 .8125
Granted 140,000 .75
---------
June 30, 1994 803,750 .75 - 1.125
Exercised (105,000) .75
Exercised (35,000) 1.125
----------
June 30, 1995 663,750 .75 - 1.125
Exercised (25,000) .75
Exercised (35,000) 1.125
Exercised (87,500) .75 - .94
----------
June 30, 1996 516,250 .75 - 1.0625
=======
Options reserved for future grants 196,250
=======
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," 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.
The Company will institute the disclosure requirements of FASB No. 123 starting
in fiscal 1997.
Upon exercise of options, the excess of the proceeds over the par value of
the shares issued is credited to capital in excess of par value. No charges have
been made against income in accounting for options during the three year period
ended June 30, 1996.
6. Income taxes
(a) Components of pretax income (loss) by geographic area (in thousands)
are as follows:
Year ended June 30,
1996 1995 1994
---------- ------- -------
Americas $(2,484) $ (783) $(1,630)
Australia 4,168 2,982 2,335
-------- ----- -------
Total $1,684 $2,199 $ 705
====== ====== =======
(b) Reconciliation of the provision for income taxes (in thousands)
computed at the Australian statutory rate to the reported provision for
income taxes is as follows:
Year ended June 30,
1996 1995 1994
---------- ---------- -------
Pretax consolidated income
before minority interests $4,192 $ 5,165 $2,678
Losses not recognized:
MPC's operations 890 845 1,321
MPAL's non Australian operations 831 (124) 610
Permanent differences (1,615) (217) 115
--------- -------- ---
Book taxable income $4,298 $5,669 $4,724
====== ====== ======
Australian tax rate 36% 36% 33%
=== === ===
Australian income tax provision $1,547 $2,041 $ 1,559
Tax provision attributable to reconciliation of
year end deferred tax liability 458 166 -
Tax credit attributable to settlement of
Australian tax audit - - 1,599
------------ ----------- -----
1,089 2,207 (40)
Less: Minority interests 537 1,089 20
--------- ------ -------
Australian tax provision (credit) 552 1,118 (20)
MPC income tax provision 252 261 223
--------- ------- ---
Consolidated income tax provision $ 804 $1,379 $ 203
======== ====== =======
Current income tax provision $ 804 $ - $ -
Deferred income tax - 1,379 203
----------- ----- ----
$ 804 $1,379 $ 203
======== ====== =======
The amount of $9,054,000 and $8,877,000 in deferred income taxes payable at
June 30, 1996 and June 30, 1995, respectively, relates primarily to the
deduction of exploration and development costs which are capitalized for
financial statement purposes.
6. Income taxes (Cont'd)
(c) United States
The following net operating loss carryforwards ("NOLS") and foreign tax
credit carryovers ("FTC") available at June 30, 1996 (in thousands):
MPC MPC MPAL
Year Expires NOLS FTC NOLS
------------ ---- --- ----
1997 $ - $ 131 $ -
1998 - 115 -
1999 351 223 -
2000 982 258 -
2001 684 250 -
2002 911 - -
2003 209 - -
2004 915 - -
2005 570 - 268
2006 - - 2,392
2007 865 - -
2008 2,055 - -
2010 - - 1,669
2011 - - 1,765
--------- -------- -----
$7,542 $ 977 $6,093
====== ===== ======
A deferred tax asset in the amount of $6,526,000 in 1996 and $5,639,000 in
1995 relates to the potential federal and state tax benefit of the above net
operating losses and foreign tax credits carryovers. The Company has established
a valuation allowance of $6,526,000 at June 30, 1996 and $5,639,000 at June 30,
1995 because it is more likely than not at this time that none of the losses and
credits will be realized.
MPAL's investments in the U.S. have created deemed dividends under Subpart
F of the Internal Revenue Code. These dividends have reduced MPC's net operating
losses in earlier years. At June 30, 1996, the amount of unpaid deemed dividends
was $4,343,000. For financial statement purposes, MPC's share of MPAL's after
tax accumulated earnings at June 30, 1996 was $3,941,000 with $2,782,000 in
accumulated currency translation losses. The tax cost of the MPAL investment at
June 30, 1996 was approximately $15,800,000.
(d) Australia
Effective July 1, 1995, the Australian income tax rate increased to 36%
from 33%. The effect of this change was to increase the consolidated income tax
provision for fiscal 1995 by $375,000.
At June 30, 1996, A.$9,448,000 of consolidated losses and capitalized
expenditures remain to be carried forward indefinitely by MPAL and its
subsidiaries to reduce future petroleum taxable income.
7. Bank loan
MPC has a $1,500,000 revolving line of credit at the bank's prime rate of
interest (8 1/4% at June 30, 1996 and 9% at June 30, 1995) plus 1%, which will
expire in December 31, 1996. The line is secured by 4,400,000 shares of MPAL
common stock and requires a compensating balance of $100,000 plus 10% of the
amount used under the line of credit. In addition, there is a 1/2% commitment
fee charged on the unused portion of the line of credit. MPC has an additional
$700,000 bank commitment to provide each director and officer with a $100,000
letter of credit. The letters of credit secure MPC's agreement to indemnify its
directors and officers. The directors and officers bear the cost of the letters
of credit. At June 30, 1996 and 1995, the line of credit and letters of credit
were not being utilized.
MPAL has a A.$10 million line of credit with an Australian bank at the
bank's prime rate of interest (7.6% at June 30, 1996, and 7.4% at June 30, 1995)
plus .45%. This line of credit is unsecured and expires December 31, 1996. In
addition, there is an annual fee of A.$30,000 payable with respect to the line
of credit. At June 30, 1996 and 1995, the line of credit was not being utilized.
8. Related party and other transactions
Mr. C. Dean Reasoner, a director of the Company, is a member of the law
firm of Reasoner, Davis & Fox, which firm was paid fees of $109,000, $120,000
and $132,000 for fiscal years 1996, 1995 and 1994, respectively. In fiscal 1995,
the final year of his two year consulting agreement, Mr. Heath, a director of
the Company, was paid $35,000 plus an expense reimbursement. G&O'D INC, a firm
that provides accounting and administrative services, office facilities and
support staff to the Company, was paid $187,898, $256,196 and $325,388 in fees
for fiscal years 1996, 1995 and 1994, respectively. James R. Joyce, the
President and Chief Financial Officer, is the owner of G&O'D INC. Mr. Timothy L.
Largay, a director of the Company since February 1996, is a member of the law
firm of Murtha, Cullina, Richter and Pinney, which firm was paid fees of $28,449
for fiscal 1996. In addition, Messrs. Benjamin W. Heath and C. Dean Reasoner
have overriding royalty interests which were granted between 1957 and 1968 on
certain of the Company's oil and gas properties prior to any discoveries. The
following gross royalty amounts represent payments by all of the owners of the
fields, not just the Company's share. The payments to Messrs. Heath and Reasoner
with respect to these royalties in fiscal 1996 were $ 45,657 and $20,071, in
fiscal 1995 were $45,220 and $21,403 and in fiscal 1994 were $46,362 and
$22,516, respectively.
9. Leases
MPAL leases various offices. At June 30, 1996 future minimum rental
payments applicable to noncancelable operating leases were as follows:
Fiscal Year Amount
1997 $163,000
1998 160,000
-------
$323,000
========
The information regarding the rental expense for all operating leases is
included in Note 1 above.
10. Pension Plan
A defined benefit pension plan is operated by MPAL. All salaried employees
are eligible to become participants of the plan. MPAL contributes to the plan at
rates which (based on actuarial determination) are sufficient to meet the cost
of employees' retirement benefits. No employee contributions are required. MPAL
is committed to make up any shortfall in the plan's assets to meet payments to
employees as they become due.
Plan participants are entitled to defined benefits on normal retirement,
death or disability. The retirement benefits are dependent on years of
participation and the highest average salary over three consecutive years. In
the event of termination of employment within ten years of participation,
employees are entitled to a partial vesting of their equitable share of the plan
based on the number of years of participation. After ten years of participation,
there is full vesting of benefits.
The investments of the plan at June 30, 1996 are comprised of units of NMFM
Superannuation Fund, a managed growth fund. The fund's assets are invested
primarily in growth assets such as Australian and international shares.
10. Pension Plan (Cont'd)
The following table sets forth the actuarial present value of benefit
obligations and funded status for the MPAL pension plan:
June 30,
1996 1995
---- ----
Plan assets at fair value $3,214,103 $2,469,925
---------- ----------
Actuarial value of accumulated
benefit obligation $3,062,115 $2,272,237
Effect of assumed future
compensation increases (108,603) 10,157
-------------- --------------
Projected benefit obligation
for service to date 2,953,512 2,282,394
------------ ------------
Plan assets in excess of
projected benefit obligation 260,591 187,531
Unrecognized net loss 539,425 459,691
Unrecognized net asset at transition (280,256) (284,139)
------------ ------------
$ 519,760 $ 363,083
============ ===========
The net pension expense for the MPAL pension plan was as follows:
Year ended June 30,
1996 1995 1994
---- ---- ----
Service cost $247,010 $228,421 $256,123
Interest cost 204,554 157,409 128,100
Actual return on plan assets (259,695) (201,565) (124,517)
Net amortization and deferred items (19,298) (15,503) (14,964)
------------ ----------- ----------
Net pension cost $172,571 $168,762 $244,742
======== ======== ========
Plan contributions by MPAL $279,000 $250,000 $223,000
======== ======== =========
Significant assumptions used in determining pension cost and the related
obligations were as follows:
1996 1995 1994
Assumed discount rate 8.0% 9.0% 9.0%
Rate of increase in future
compensation levels 6.5% 15.0% 7.5%
Expected long term rate of
return on plan assets 8.5% 10.0% 10.0%
Australian exchange rate $.7875 $.7097 $.7287
11. Tender offer and litigation expenses
MPC and MPAL had been parties to several legal proceedings that were
instituted directly or indirectly as a result of the offer in 1993 by Sagasco
Holdings Limited for all of the outstanding shares of MPC and MPAL. All of MPC's
lawsuits have been terminated.
12. Financial instruments
The carrying value for cash and cash equivalents, accounts receivable and
accounts payable approximates fair value based on anticipated cash flows and
current market conditions.
13. Selected quarterly financial data (unaudited)
The following is a summary (in thousands) of the quarterly results of
operations for the years ended June 30, 1996 and 1995:
1996 QTR 1 QTR 2 QTR 3 QTR 4
----- ----- ----- -----
Total revenues $3,935 $4,649 $4,770 $4,719
Costs and expenses 2,748 2,929 2,745 5,459
Minority interests 687 963 1,062 (205)
Income taxes 227 632 368 (423)
------ ------ ------ -------
Net income (loss) $ 273 $ 125 $ 595 $ (112)
======= ======= ====== ========
Per share $.01 $.01 $.02 $ -
==== ==== ==== ===
1995 QTR 1 QTR 2 QTR 3 QTR 4
----- ----- ----- -----
Total sales and revenues $3,450 $3,661 $3,941 $4,372
Costs and expenses 2,631 2,605 2,756 2,267
Minority interests 532 666 653 1,114
Income taxes 199 513 239 428
------ ------- ------ ------
Net income (loss) $ 88 $ (123) $ 293 $ 563
======= ======== ====== ======
Per share $ - $(.01) $.01 $.03
==== ====== ==== ====
MAGELLAN PETROLEUM CORPORATION
SUPPLEMENTARY OIL AND GAS INFORMATION
(unaudited)
June 30, 1996
The consolidated data presented herein include estimates which should not
be construed as being exact and verifiable quantities. The reserves may or may
not be recovered, and if recovered, the cash flows therefrom, and the costs
related thereto, could be more or less than the amounts used in estimating
future net cash flows. Moreover, estimates of proved reserves may increase or
decrease as a result of future operations and economic conditions, and any
production from these properties may commence earlier or later than anticipated.
Estimated net quantities of proved developed and proved oil and gas reserves:
Natural Gas Oil
(BCF) (Thousand Bbls)
Proved Reserves: Australia U.S. Australia U.S.
(*)
June 30, 1993 86.527 .176 1,710 70
Revision of previous estimates .018 .310 (61) 85
Extensions and discoveries - - - -
Production (4.783) (.358) (285) (89)
------- ------ ----- -----
June 30, 1994 81.762 .128 1,364 66
Revision of previous estimates .244 .200 - 150
Extensions and discoveries 6.502 - 412 -
Production (4.934) (.132) (280) (89)
Sales of minerals in place - (.196) - (127)
----------- ------ -------- -----
June 30, 1995 83.574 - 1,496 -
Revision of previous estimates - - - -
Extensions and discoveries 1.518 - 23 -
Production (5.422) - (318) -
------- --------- ----- ------
June 30, 1996 79.670 - 1,201 -
====== ========= ===== ======
Proved Developed Reserves:
June 30, 1993 86.527 .176 1,710 70
====== ====== ===== ==
June 30, 1994 81.762 .128 1,364 66
====== ====== ===== ==
June 30, 1995 83.574 - 1,496 -
====== ====== ===== ======
June 30, 1996 79.670 - 1,201 -
====== ====== ===== ====== =
- -------------------
(*) The amount of proved reserves applicable to the Palm Valley and Mereenie
fields only reflects the amount of gas committed to specific contracts.
Approximately 49.3% of reserves are attributable to minority interests.
Costs of oil and gas activities (in thousands):
Australia
-----------------------------------------------------------------------------
Exploration Development
Fiscal Year Costs Costs
1996 $ 335 $2,989
1995 14 4,025
1994 224 3,071
Americas
-----------------------------------------------------------------------------
Exploration Acquisition
Fiscal Year Costs Costs
1996 $2,138 $ 426
1995 2,448 386
1994 652 83
Capitalized costs subject to depletion, depreciation and amortization ("DD&A")
(in thousands):
June 30, 1996
Australia Americas Total
Costs subject to DD&A $66,673 $ - $66,673
Costs not subject to DD&A - 2,898 2,898
Less accumulated DD&A (26,053) - (26,053)
-------- ---------- --------
Net capitalized costs $40,620 $2,898 $43,518
======= ====== =======
June 30, 1995
Australia Americas Total
Costs subject to DD&A $ 55,044 $ - $55,044
Costs not subject to DD&A - 2,834 2,834
Less accumulated DD&A (20,517) - (20,517)
--------- ------------ --------
Net capitalized costs $ 34,527 $ 2,834 $37,361
========= ======== =======
Discounted future net cash flows:
The following is the standardized measure of discounted (at 10%) future net
cash flows (in thousands) relating to proved oil and gas reserves during the
three years ended June 30, 1996. Approximately 49.3% of the reserves and the
respective discounted future net cash flows are attributable to minority
interests.
Australia
-----------------------------------------------------
1996 1995 1994
------- ------ ------
Future cash inflows $138,797 $ 132,435 $129,973
Future production costs (21,065) (23,354) (23,264)
Future development costs - (1,139) (765)
Future income tax expense (41,824) (38,870 (31,680)
---------- --------- --------
Future net cash flows 75,908 69,072 74,264
10% annual discount for estimating timing
of cash flows (31,695) (30,691) (28,524)
---------- ---------- --------
Standardized measures of discounted future
net cash flows $ 44,213 $ 38,381 $ 45,740
========= ======== ========
United States
-----------------------------------------------------
1996 1995 1994
------ ------ ------
Future cash inflows $(*) $ (*) $ 1,490
Future production costs (393)
Future development costs -
Future income tax expense -
-------
Future net cash flows 1,097
10% annual discount for estimating timing
of cash flows (117)
Standardized measures of discounted future
net cash flows $980
(*) U.S. producing properties sold effective March 31, 1995.
Total
-----------------------------------------------------
1996 1995 1994
------ ----- ------
Future cash inflows $138,797 $ 132,435 $131,463
Future production costs (21,065) (23,354) (23,657)
Future development costs - (1,139) (765)
Future income tax expense (41,824) (38,870) (31,680)
--------- ---------- --------
Future net cash flows 75,908 69,072 75,361
10% annual discount for estimating timing
of cash flows (31,695) (30,691) (28,641)
--------- --------- --------
Standardized measures of discounted future
net cash flows $ 44,213 $ 38,381 $46,720
======== ======== =======
The following are the principal sources of changes in the above
standardized measure of discounted future net cash flows (in thousands):
1996 1995 1994
---- ---- ----
Net change in prices and production costs $6,330 $(3,141) $ 77
Extensions and discoveries 87 6,838 -
Revision of previous quantity estimates - 148 (226)
Changes in estimated future development costs - (1,534) (700)
Sales and transfers of oil and gas produced (9,583) (9,266) (8,502)
Sales of minerals in place - (1,313) -
Previously estimated development cost
incurred during the period 1,493 765 1,983
Accretion of discount 3,180 4,113 3,715
Net change in income taxes (43) (3,921) 353
Net change in exchange rate 4,368 (1,028) 3,893
------ --------- -----
$5,832 $(8,339) $ 593
====== ======== ======
Additional information regarding discounted future net cash flows.
Australia
Reserves - Natural Gas
Future net cash flows from net proved gas reserves in Australia were based
on MPAL's share of reserves in the Palm Valley and Mereenie fields which have
been limited to the quantities of gas to be sold under long-term supply
contracts. A summary of these contracts is as follows:
MPAL
MPAL Share of contract Contract % share
quantities of gas completed through (before Contract
Gas supply contract to be sold (bcf) June 30 1996 royalties) period
------------------- ------------------ --------------- ----------- -------
(after royalties)
Palm Valley - Alice Springs 21.0 40 50.775% 1983-2008
Palm Valley - Darwin 76.6 34 50.775% 1987-2012
Mereenie - Darwin (1985) 17.0 37 35% 1987-2012
Mereenie - Darwin (1995) 6.5 27 40.5% 1995-2009
Mereenie - Cosmo Howley 1.5 78 40.5% 1989-1999
Mereenie - N.T. Gas .3 - 40.5% 1996-2006
-------
122.9
Prices
The prices (Australian dollars) used in the foregoing estimates in
Australia were based upon the following contract prices of gas per mcf:
1996 1995 1994
------ ------ ------
Palm Valley-Alice Springs A.$2.94 A.$2.85 A.$2.73
Palm Valley-Darwin 2.02 2.00 1.97
Mereenie-Darwin
Years 6-21 (1985 contract) .48 .48 .48
Years 22-26 (1985 contract) 2.07 2.05 2.07
1995 contract 2.70 2.64 -
Mereenie - Cosmo Howley 2.92 2.77 2.70
Mereenie - NT Gas contract 2.72 - -
Crude oil per barrel 25.00 23.71 24.14
Exchange rate A.$= $U.S. .79 .71 .73
Reserves and Costs - Oil
At June 30, 1996, future net cash flows from the net proved oil reserves in
Australia were calculated by the Company. Estimated future production and
development costs were based on current costs and rates for each of the three
years ended at June 30, 1996. All of the crude oil reserves are developed
reserves. Undeveloped proved reserves have not been estimated since there are
only tentative plans to drill a few additional wells.
Income taxes
Future Australian income tax expense applicable to the future net cash
flows has been reduced by the tax effect of approximately A$9,448,000,
A.$9,583,000 and A.$13,600,000 in unrecouped capital expenditures at 1996, 1995,
and 1994, respectively. The tax rate in computing Australian future income tax
expense was 36% at June 30, 1996 and 1995 and 33% in 1994.
For financial statements purposes in fiscal 1987 and 1988, MPC wrote down
its Canada cost center which included the Kotaneelee gas field to a nominal
value because of the uncertainty as to the date when sales of Kotaneelee gas
might begin and the immateriality of the carrying value of the investment.
Although the field is now producing, the Company has not yet classified its
share of the Kotaneelee gas reserves as proved because the gas field is still
the subject of litigation. The Company will reclassify the reserves at the
Kotaneelee field as proved when there is greater assurance as to the timing and
assumptions of the investment.
Results of Operations
The following are the Company's results of operations (in thousands) for
the oil and gas producing activities during the three years ended June 30, 1996:
United States Australia
-------------------------------------- ---------------------------------------
1996 (1) 1995 (1) 1994 1996 1995 1994
----- ---- ---- ---- ---- ----
Revenues:
Oil sales $363 $ 540 $ 5,922 $ 5,330 $5,224
Gas sales 115 172 9,746 7748 6,592
---- ----- ------ ------- ------
478 712 15,668 13,078 11,816
---- ----- ------- ------ ------
Costs:
Production costs 145 354 4,410 3,455 3,524
Depletion, abandonments
and write downs (sales) (54) 889 2,713 2,302 2,018
------ ----- -------- ------ ------
91 1,243 7,123 5,757 5,542
----- ----- -------- ------ ------
Income (loss) before taxes and
minority interest 387 (531) 8,545 7,321 6,274
Minority interest (49.3%) (191) 263 (4,217) (3,612) (3,096)
------ ----- -------- ------- -------
Income (loss) before taxes 196 (268) 4,328 3,709 3,178
Income tax provision (2) - - (1,558) (1,224) (1,049)
-------- ----- -------- --------- -------
Net income (loss) from
operations $ 196 $(268) $2,770 $2,485 $2,129
===== ====== ====== ====== ======
Depletion per unit of
production $14.88 $13.27 A$3.17 A.$2.96 A.$2.88
====== ====== ====== ======= =======
- -----------------
(1) The Company's interest in the Navajo Joint Venture was sold effective
as of March 31, 1995.
(2) Australian income tax provision 36% in 1996 and 33% in 1995 and 1994.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
For information concerning Item 10 - Directors and Executive Officers of
the Company, Item 11 Executive Compensation, Item 12 - Security Ownership of
Certain Beneficial Owners and Management and Item 13 Certain Relationships and
Related Transactions, see the Proxy Statement of Magellan Petroleum Corporation
relative to the Annual Meeting of Stockholders for the fiscal year ended June
30, 1996, which will be filed with the Securities and Exchange Commission, which
information is incorporated herein by reference. For information concerning Item
10 - Executive officers of the Company, see Part I.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
The financial statements listed below and included under Item 8, are filed
as part of this report.
Page reference
Report of Independent Auditors 38
Consolidated balance sheet at June 30, 1996 and
June 30, 1995 39
Consolidated statement of operations
for each of the three years in the period
ended June 30, 1996 40
Consolidated statement of changes in stockholders'
equity for each of the three years in the period
ended June 30, 1996 41
Consolidated statement of cash flows for each of
the three years in the period ended June 30, 1996 42
Notes to consolidated financial statements 43-63
Supplementary oil and gas information (unaudited) 64-70
(2) Financial Statement Schedules.
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and the notes thereto.
(3) Exhibits.
The following exhibits are filed as part of this report:
Item Number
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
None.
3. Articles of Incorporation and By-Laws.
Restated Certificate of Incorporation as filed on May
4, 1987 with the State of Delaware and Amendment of
Article Twelfth as filed on February 12, 1988 with
the State of Delaware filed as exhibit 3 to
Registration Statement No. 33-21311 are incorporated
herein by reference.
Copy of the By-Laws, as amended filed as exhibit 3 to
Form 8-K filed on December 10, 1992 is incorporated
herein by reference.
4. Instruments defining the rights of security holders, including
indentures.
None.
9. Voting Trust Agreement.
None.
10. Material contracts.
(a) Petroleum Lease No. 4 dated November 18, 1981 granted by the
Northern Territory of Australia to United Canso Oil & Gas Co. (N.T.)
Pty Ltd., filed as exhibit 10(c) to Report on Form 10-K for the fiscal
year ended April 30, 1982 is incorporated herein by reference.
(b) Petroleum Lease No. 5 dated November 18, 1981 granted by the
Northern Territory of Australia to Magellan Petroleum (N.T.) Pty.
Ltd., filed as exhibit 10(d) to Report on Form 10-K for the fiscal
year ended April 30, 1982 is incorporated herein by reference.
(c) Gas Sales Agreement between The Palm Valley Producers and The
Northern Territory Electricity Commission dated November 11, 1981,
filed as exhibit 10(e) to Report on Form 10-K for the fiscal year
ended April 30, 1982 is incorporated herein by reference.
(d) Palm Valley Petroleum Lease (OL3) dated November 9, 1982 filed as
exhibit 10(h) to Report on Form 10-K for the fiscal year ended April
30, 1983 is incorporated herein by reference.
(e) Agreements relating to Kotaneelee.
(1) Copy of Agreement dated May 28, 1959 between the Company et
al and Home Oil Company Limited et al and Signal Oil and Gas
Company filed as exhibit 10(d) to Report on Form 10-K filed by
Canada Southern Petroleum Ltd. for the fiscal year ended June 30,
1987 is incorporated herein by reference.
(2) Copies of Supplementary Documents to May 28, 1959 Agreement
(see (1) above), dated June 24, 1959, consisting of Guarantee by
Home Oil Company Limited and Pipeline Promotion Agreement filed
as exhibit 10(d) to Report on Form 10-K filed by Canada Southern
Petroleum Ltd. for the fiscal year ended June 30, 1987 is
incorporated herein by reference.
(3) Copy of Modification to Agreement dated May 28, 1959 (see (1)
above), made as of January 31, 1961 filed as exhibit 10(d) to
Report on Form 10-K filed by Canada Southern Petroleum Ltd. for
the fiscal year ended June 30, 1987 is incorporated herein by
reference.
(4) Copy of Letter Agreement dated February 1, 1977 between the
Company and Columbia Gas Development of Canada, Ltd. for
operation of the Kotaneelee gas field filed by Canada Southern
Petroleum Ltd. as Exhibit 10(d) to Report on Form 10-K for the
fiscal year ended June 30, 1981 is incorporated herein by
reference.
(f) Palm Valley Operating Agreement dated April 2, 1985 between Magellan
Petroleum (N.T.) Pty. Ltd., C. D. Resources Pty. Ltd., Farmout
Drillers N.L., Canso Resources Limited, International Oil Proprietary,
Pancontinental Petroleum Limited, I.E.D.C. Australia Pty. Ltd.,
Southern Alloys Ventures Pty. Limited and Amadeus Oil N.L. filed as
exhibit 10(i) to Report on Form 10-K for the fiscal year ended April
30, 1985 is incorporated herein by reference.
(g) Mereenie Operating Agreement dated April 27, 1984 between Magellan
Petroleum (N.T.) Pty., United Oil & Gas Co. (N.T.) Pty. Ltd., Canso
Resources Limited, Oilmin (N.T.) Pty. Ltd., Krewliff Investments Pty.
Ltd., Transoil (N.T.) Pty. Ltd. and Farmout Drillers NL filed as
exhibit 10(l) to Report on Form 10-K for the fiscal year ended April
30, 1984 and Amendment of October 3, 1984 to the above agreement filed
as exhibit 10(j) to Report on Form 10-K for the fiscal year ended
April 30, 1985 is incorporated herein by reference.
(h) Palm Valley Gas Purchase Agreement dated June 28, 1985 between
Magellan Petroleum (N.T.) Pty. Ltd., C. D. Resources Pty., Ltd,
Farmout Drillers N.L., Canso Resources Limited, International Oil
Proprietary, Pancontinental Petroleum Limited, IEDC Australia Pty
Limited, Amadeus Oil N.L., Southern Alloy Venture Pty. Limited and
Gasgo Pty., Limited. Also included are the Guarantee of the Northern
Territory of Australia dated June 28, 1985 and Certification letter
dated June 28, 1985 that the Guarantee is binding . All of the above
were filed as exhibit 10(p) to Report on Form 10-K for the fiscal year
ended April 30, 1985 and are incorporated herein by reference.
(i) Mereenie Gas Purchase Agreement dated June 28, 1985 between Magellan
Petroleum (N.T.) Pty. Ltd., United Oil & Gas Co. (N.T.) Pty. Ltd.,
Canso Resources Limited, Moonie Oil N.L., Petromin No Liability,
Transoil No Liability, Farmout Drillers N.L., Gasgo Pty. Limited, The
Moonie Oil Company Limited, Magellan Petroleum Australia Limited and
Flinders Petroleum N.L. Also included are the Guarantee of the
Northern Territory of Australia dated June 28, 1985 and Certification
letter dated June 28,1985 that the Guarantee is binding. All of the
above were filed as exhibit 10(q) to Report on Form 10-K for the
fiscal year ended April 30, 1985 and are incorporated herein by
reference.
(j) Agreements dated June 28, 1985 relating to Amadeus Basin -Darwin
Pipeline which include Deed of Trust Amadeus Gas Trust, Undertaking by
the Northern Territory Electric Commission and Undertaking from the
Northern Territory Gas Pty Ltd. filed as exhibit 10(r) to Report on
Form 10-K for the fiscal year ended April 30, 1985 are incorporated
herein by reference.
(k) Agreement between the Mereenie Producers and the Palm Valley Producers
dated June 28, 1985, filed as exhibit 10(s) to Report on Form 10-K for
the fiscal year ended April 30, 1985 is incorporated herein by
reference.
(l) Form of Agreement pursuant to Article SIXTEENTH of the Company's
Certificate of Incorporation and the applicable By-Law to indemnify
the Company`s directors and officers is filed as exhibit 10(s) to
Registration Statement No. 33-21311, is incorporated herein by
reference.
(m) Revolving Credit Agreement dated as of March 19, 1987, as amended and
restated as of May 5, 1988 between Magellan Petroleum Corporation and
National Australian Bank Limited and First Amendment to such agreement
dated as of May 5, 1988 filed as exhibit (t) to Registration Statement
No. 33-21311, are incorporated herein by reference. Second Amendment
to such agreement dated as of March 19, 1990 as filed as exhibit 10(s)
to Report on Form 10-K for the fiscal year ended June 30, 1990 is
incorporated herein by reference.
11. Statement re computation of per share earnings.
Not applicable.
12. Statement re computation of ratios.
None.
13. Annual report to security holders.
Not applicable.
16. Letter re change in certifying accountant.
None.
18. Letter re change in accounting principles.
None.
19. Report furnished to security holders.
None.
21. Subsidiaries of the registrant.
(a) Magellan Petroleum Australia Limited, incorporated in Queensland,
Australia.
(b) Magellan Petroleum (N.T.) Pty. Ltd., incorporated in Queensland,
Australia.
(c) Paroo Petroleum Pty. Ltd., incorporated in Queensland, Australia.
(d) Paroo Petroleum (Holdings), Inc., incorporated in Delaware, U.S.A.
(e) Paroo Petroleum(USA), Inc., incorporated in Delaware, U.S.A.
(f) Pacoota Resources Limited, incorporated in Alberta, Canada
(g) Hadborough Pty. Ltd., incorporated in Queensland, Australia
(h) Magellan Petroleum (Eastern) Pty. Ltd., incorporated in
Queensland, Australia. (i) Magellan Petroleum (Burunga) Pty., Ltd.,
incorporated in Queensland, Australia.
(j) Magellan Petroleum (Belize) Limited.
22. Published report regarding matters submitted to vote of security
holders.
Not applicable.
23. Consent of experts and counsel.
Consent of Ernst & Young LLP filed herewith.
24. Power of attorney.
Not applicable.
27. Financial Data Schedule.
Filed herein.
28. Information from reports furnished to state insurance regulatory
agencies.
None.
99. Additional Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ James R. Joyce
James R. Joyce, President
Dated: September 18, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Benjamin W. Heath /s/ James R. Joyce
Benjamin W. Heath James R. Joyce
Director Director, President and Chief
Executive Officer, Chief
Financial and Accounting Officer
Dated: September 18, 1996 Dated: September 18, 1996
/s/ Dennis D. Benbow /s/ Walter McCann
Dennis D. Benbow Walter McCann
Director Director
Dated: September 18, 1996 Dated: September 18, 1996
/s/ Timothy L. Largay /s/ C. Dean Reasoner
Timothy L. Largay C. Dean Reasoner
Director Director
Dated: September 18, 1996 Dated: September 18, 1996