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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission file number 1-5507
MAGELLAN PETROLEUM CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-0842255
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Columbus Boulevard, Hartford, Connecticut 06106
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(860) 293-2006
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of the issuer's single class of common
stock as of November 15, 2004 was 25,783,243.
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
SEPTEMBER 30, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1 Financial Statements (unaudited)
Consolidated balance sheets at September 30, 2004
and June 30, 2004 3
Consolidated statements of income (loss) for the three
months ended September 30, 2004 and 2003 4
Consolidated statements of cash flows for the three months
ended September 30, 2004 and 2003 5
Notes to consolidated financial statements 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 17
ITEM 4 Disclosure Controls and Procedures 18
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 19
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 19
ITEM 6 Exhibits 20
Signatures 21
Certifications 22-23
2
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
------------- ------------
2004 2004
------------- ------------
(unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 18,641,864 $ 20,406,620
Accounts receivable-Trade 3,946,620 2,931,609
Accounts receivable-Working Interest Partners 742,422 1,044,619
Marketable securities 2,737,849 2,584,296
Inventories 495,751 595,948
Other assets 275,620 318,141
------------ ------------
Total current assets 26,840,126 27,881,233
------------ ------------
Marketable securities 591,597 592,138
Property and equipment:
Oil and gas properties (successful efforts method) 72,750,687 69,970,134
Land, buildings and equipment 2,340,373 2,264,004
Field equipment 1,519,743 1,482,639
------------ ------------
76,610,803 73,716,777
Less accumulated depletion, depreciation and amortization (51,981,773) (49,295,770)
------------ ------------
Net property and equipment 24,629,030 24,421,007
------------ ------------
Total assets $ 52,060,753 $ 52,894,378
============ ============
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,718,574 $ 4,367,305
Accrued liabilities 1,478,582 1,550,045
Income taxes payable 58,487 267,645
------------ ------------
Total current liabilities 4,255,643 6,184,995
------------ ------------
Long term liabilities:
Deferred income taxes 408,661 403,261
Asset retirement obligations 5,065,130 4,852,416
------------ ------------
Total long term liabilities 5,473,791 5,255,677
------------ ------------
Minority interests 17,107,915 16,533,491
Commitments
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 200,000,000 shares
Outstanding 25,783,243 and 25,783,243 shares 257,832 257,832
Capital in excess of par value 44,402,182 44,402,182
------------ ------------
Total capital 44,660,014 44,660,014
Accumulated deficit (15,549,805) (15,248,422)
Accumulated other comprehensive loss (3,886,805) (4,491,377)
------------ ------------
Total stockholders' equity 25,223,404 24,920,215
------------ ------------
Total liabilities, minority interests and stockholders' equity $ 52,060,753 $ 52,894,378
============ ============
Note: The balance sheet at June 30, 2004 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes.
3
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
Three months ended
September 30,
-----------------------------
2004 2003
------------ ------------
REVENUES:
Oil sales $ 1,910,847 $ 1,093,102
Gas sales 2,366,807 3,830,499
Other production related revenues 299,787 472,906
------------ ------------
Total revenues 4,577,441 5,396,507
------------ ------------
COSTS AND EXPENSES:
Production costs 1,527,790 1,299,055
Exploration and dry hole costs 1,118,460 566,199
Salaries and employee benefits 670,140 562,955
Depletion, depreciation and amortization 1,400,658 1,077,959
Auditing, accounting and legal services 180,835 141,409
Accretion expense 94,370 81,873
Shareholder communications 43,511 32,765
Other administrative expenses 101,393 137,774
------------ ------------
Total costs and expenses 5,137,157 3,899,989
------------ ------------
Operating income (loss) (559,716) 1,496,518
------------ ------------
Interest income 355,652 335,412
Income (loss) before income taxes and minority interests (204,064) 1,831,930
Income tax provision 5,334 410,742
------------ ------------
Income (loss) before minority interests (209,398) 1,421,188
Minority interests (86,124) (353,902)
------------ ------------
Net income $ (295,522) $ 1,067,286
============ ============
Average number of shares:
Basic 25,783,243 25,077,376
============ ============
Diluted 25,783,243 25,091,900
============ ============
Income (loss) per share (basic and diluted)
Net income (loss) $ (.01) $ .04
============ ============
See accompanying notes.
4
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
September 30,
-----------------------------
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (295,522) $ 1,067,286
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depletion, depreciation and amortization 1,400,658 1,077,959
Accretion expense 94,370 81,873
Deferred income taxes (4,753) -
Minority interests 86,124 353,902
Exploration and dry hole costs 1,118,460 566,199
Increase (decrease) in operating assets and liabilities:
Accounts and notes receivable (608,187) (1,401,333)
Other assets 42,520 12,662
Inventories 113,864 (104,064)
Accounts payable and accrued liabilities (1,844,355) (416,988)
Income taxes payable (210,896) (16,317)
------------ ------------
Net cash (used in) provided by operating activities (107,717) 1,221,179
INVESTING ACTIVITIES:
Additions to property and equipment (857,094) (2,123,928)
Oil and gas exploration activities (1,118,460) (566,199)
Marketable securities matured 1,597,637 997,528
Marketable securities purchased (1,750,649) (1,221,340)
------------ ------------
Net cash used in investing activities (2,128,566) (2,913,939)
------------ ------------
FINANCING ACTIVITIES:
Net cash used in financing activities - -
------------ ------------
Effect of exchange rate changes on cash
and cash equivalents 471,527 219,877
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,764,756) (1,472,883)
Cash and cash equivalents at beginning of year 20,406,620 20,041,464
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,641,864 $ 18,568,581
============ ============
See accompanying notes.
5
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Magellan Petroleum Corporation (the Company or MPC) is engaged in the sale
of oil and gas and the exploration for and development of oil and gas reserves.
At September 30, 2004, MPC's principal asset was a 55% equity interest in its
subsidiary, Magellan Petroleum Australia Limited (MPAL), which has one class of
stock that is publicly held and traded in Australia. MPAL's major assets are two
petroleum production leases covering the Mereenie oil and gas field (35% working
interest) and one petroleum production lease covering the Palm Valley gas field
(52% working interest). Both fields are located in the Amadeus Basin in the
Northern Territory of Australia. MPC has a direct 2.67% carried interest in the
Kotaneelee gas field in the Yukon Territory of Canada.
The accompanying unaudited consolidated financial statements include the
accounts of MPC and MPAL and have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All such adjustments are of a normal
recurring nature. Operating results for the three month period ended September
30, 2004 are not necessarily indicative of the results that may be expected for
the year ending June 30, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 2004. All
amounts presented are in United States dollars, unless otherwise noted.
Certain reclassifications have been made to previously disclosed amounts to
conform to current period reporting.
Note 2. Kotaneelee Litigation
During September 2003, the litigants in the Kotaneelee litigation entered
into a settlement agreement. During October 2003, the Company received
approximately $851,000, after Canadian withholding taxes and reimbursement of
certain past legal costs. The plaintiffs agreed to terminate all litigation
against the defendants related to the field, including the claim that the
defendants failed to fully develop the field. Since each party agreed to bear
its own legal costs, there were no taxable costs assessed against any of the
parties. The components of the settlement payment, which was recorded in
September 2003, were as follows:
Gas sales $ 1,135,000
Interest income 102,000
Canadian withholding taxes (386,000)
-----------
Total $ 851,000
===========
6
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
Note 3. Capital and stock options
The Company through its stock repurchase plan may purchase up to one
million shares of its common stock in the open market. Through June 30, 2003,
the Company had purchased 680,850 of its shares at a cost of approximately
$686,000, all of which shares have been cancelled. No shares were repurchased
during the three months ended September 30, 2004 or for the fiscal year ended
June 30, 2004.
On July 10, 2003, a subsidiary of Origin Energy, Sagasco Amadeus Pty.
Limited, agreed to exchange 1.2 million shares of MPAL for 1.3 million shares of
the Company's common stock. The exchange was completed on September 2, 2003. The
fair value of the 1,300,000 shares on July 10, 2003 was $1,508,000, based on the
closing price of the Company's common stock on the Nasdaq SmallCap market on
that date.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock options because the alternative fair
value accounting provided under FASB Statement No. 123, "Accounting for Stock
Based Compensation," as amended by SFAS 148 "Accounting for Stock-based
Compensation - Transition and Disclosure" requires use of option valuation
models to value stock options. Under APB No. 25, because the exercise price of
the Company's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
EXPIRATION NUMBER OF
OPTIONS OUTSTANDING DATES SHARES EXERCISE PRICES ($)
- ------------------- ------------ --------- ------------------------
June 30, 2002 871,000 1.28-1.57
Granted Jan. 2008 50,000 .85
--------
June 30, 2003 921,000 .85-1.57
Expired (126,000) 1.57
Cancelled (25,000) .85
Exercised (175,000) .85-1.28
--------
June 30, 2004 595,000 1.28
Granted July 1, 2014 30,000 1.45
--------
September 30, 2004 625,000 ($1.29 weighted average)
========
SUMMARY OF OPTIONS OUTSTANDING AT SEPTEMBER 30, 2004
EXPIRATION EXERCISE
DATES TOTAL VESTED PRICES ($)
----------- ------- ------- ----------
Granted 2000 Feb. 2005 595,000 595,000 1.28
Granted 2004
Total July 2014 30,000 - 1.45
-------
625,000 595,000
======= =======
OPTIONS RESERVED FOR FUTURE GRANTS 175,000
=======
7
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
On October 20, 2003, options to purchase 126,000 shares of the Company's
common stock expired without being exercised. On December 31, 2003, unvested
options to purchase 25,000 shares of the Company's common stock were cancelled
when the terms of the grant were not satisfied. On March 8, 2004, 175,000
options to purchase shares of common stock were exercised in a cashless exercise
that resulted in 55,867 shares being issued.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The assumptions used in the 2004
valuation model were: risk free interest rate - 4.95%, expected life - 10 years,
expected volatility - .518, expected dividend - 0. These options will vest
ratably over three years.
Pro forma information regarding net income and earnings per share is
required by Statement 148, and has been determined as if the Company had
accounted for its stock options under the fair value method of Statement 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. The Company's pro forma information follows:
Three months ended Three months ended
September 30, 2004 September 30, 2003
---------------------------- ---------------------------
Net income (loss) as reported $ (295,522) $ (.01) $ 1,067,286 $ .04
Stock option expense (4,500) - (1,500) -
----------- ----------- ----------- -----------
Pro forma net (loss) income $ (300,022) $ (.01) $ 1,065,786 $ .04
=========== =========== =========== ===========
Note 4. Depletion, depreciation and amortization (DD&A)
The operator of the Mereenie field has implemented an extensive program
for additional drilling and capital improvements to meet gas sales' contract
requirements. During 2004, the Mereenie Producers installed additional
compression equipment in the field at a cost of $13.1 million (MPAL share $4.6
million) designed to increase field deliverability and partially meet certain
gas contract requirements. During October 2004, one of two gas wells necessary
to improve field deliverability and meet gas contractual requirements through
2009 was drilled. The second well will be drilled later in the fiscal year.
8
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
Note 5. Comprehensive income (loss)
Total comprehensive income (loss) during the three month periods ended
September 30, 2004 and 2003 is as follows:
Accumulated
other
Three months ended comprehensive
September 30, loss
--------------------------- -------------
2004 2003
------------ -----------
Balance at June 30, 2004 $(4,491,377)
Net income (loss)
$ (295,522) $ 1,067,286
Foreign currency translation
adjustments 604,572 241,837 604,572
----------- ----------- -----------
Total comprehensive
income $ 309,050 $ 1,309,123
=========== ===========
Balance at September 30, 2004 $(3,886,805)
===========
Note 6. Investment in MPAL
During the quarter ended September 30, 2004, MPC invested $29,466 in
31,606 shares of MPAL. This increased MPC's interest in MPAL from 55.06% to
55.13%. The difference between the acquisition cost of the MPAL shares and the
book value of the additional MPAL interest acquired was allocated to oil and
gas properties.
Note 7. Earnings per share
Earnings per common share are based upon the weighted average number of
common and common equivalent shares outstanding during the period. The Company's
basic and diluted calculations of EPS are the same for the three month period
ended September 30, 2004 because the exercise of options is not assumed in
calculating diluted EPS, as the result would be anti-dilutive. For the three
months ended September 30, 2004, the potential dilution items were 625,000
options on Company shares issued to employees and directors at an average price
of $1.29 per share.
9
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
Note 8. Segment Information
The Company has two reportable segments, MPC and its subsidiary,
MPAL. Each company is in the same business; MPAL is also a publicly held company
with its shares traded on the Australian Stock Exchange. MPAL issues separate
audited consolidated financial statements and operates independently of MPC.
Segment information (in thousands) for the Company's two operating segments is
as follows:
Three months ended
September 30,
-------------------
2004 2003
------- -------
Revenues:
MPC $ 40 $ 1,234
MPAL 4,537 4,162
------- -------
Total consolidated revenues $ 4,577 $ 5,396
======= =======
Net income (loss):
MPC $ (351) $ 635
MPAL 55 432
------- -------
Consolidated net income (loss) $ (296) $ 1,067
======= =======
Note 9. Exploration and Dry Hole Costs
The 2004 and 2003 costs related primarily to the exploration work being
performed on MPAL's properties. The dry holes were drilled on MPAL properties in
Australia and New Zealand. During the 2004 quarter, the Company incurred
$394,000 in costs for a dry hole in the Cooper Basin in South Australia.
Note 10. Asset Retirement Obligations
A reconciliation of the Company's asset retirement obligations for the
three months ended September 30, 2004, is as follows:
Balance at July 1, 2004 $4,852,000
Liabilities incurred
Liabilities settled -
Accretion expense 94,000
Revisions to estimate -
Exchange effect 119,000
----------
Balance at September 30, 2004 $5,065,000
==========
Note 11. Pension plan costs
On August 31, 2004, the MPAL board formally terminated its defined benefit
plan. The termination was effective as of June 30, 2004 and a settlement and
curtailment loss of $1,237,425
10
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
was recognized during the fourth quarter of 2004. The final termination payment
was $256,190. Therefore, there were no pension costs during the three months
ended September 30, 2004. Pension costs for the three months ended September 30,
2003 were approximately $ 37,000.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as, forward looking statements for
purposes of the "Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995. The Company cautions readers that forward looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward looking statements.
Among these risks and uncertainties are pricing and production levels from the
properties in which the Company has interests, and the extent of the recoverable
reserves at those properties. In addition, the Company has a large number of
exploration permits and faces the risk that any wells drilled may fail to
encounter hydrocarbons in commercially recoverable quantities. The Company
undertakes no obligation to update or revise forward-looking statements, whether
as a result of new information, future events, or otherwise.
CRITICAL ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its
oil and gas operations. Under this method, the costs of successful wells,
development dry holes and productive leases are capitalized and amortized on a
units-of-production basis over the life of the related reserves. Cost centers
for amortization purposes are determined on a field-by-field basis. The Company
records its proportionate share in joint venture operations in the respective
classifications of assets, liabilities and expenses. Unproved properties with
significant acquisition costs are periodically assessed for impairment in value,
with any impairment charged to expense. The successful efforts method also
imposes limitations on the carrying or book value of proved oil and gas
properties. Oil and gas properties are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable. The Company estimates the future undiscounted cash flows from the
affected properties to determine the recoverability of carrying amounts. In
general, analyses are based on proved developed reserves, except in
circumstances where it is probable that additional resources will be developed
and contribute to cash flows in the future.
Exploratory drilling costs are initially capitalized pending determination
of proved reserves but are charged to expense if no proved reserves are found.
Other exploration costs, including geological and geophysical expenses,
leasehold expiration costs and delay rentals, are expensed as incurred. Because
the Company follows the successful efforts method of accounting, the results of
operations may vary materially from quarter to quarter. An active exploration
program may result in greater exploration and dry hole costs.
11
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
Asset Retirement Obligations
Effective July 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires legal obligations associated with the retirement
of long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost is
capitalized as part of the related long-lived asset (oil & gas properties) and
amortized on a units-of-production basis over the life of the related reserves.
Accretion expense in connection with the discounted liability is recognized over
the remaining life of the related reserves. See Note 2 to the consolidated
financial statements regarding the cumulative effect of the accounting change
and its effect on net income.
The estimated liability is based on the future estimated cost of land
reclamation, plugging the existing oil and gas wells and removing the surface
facilities equipment in the Palm Valley, Mereenie, Kotaneelee, Nockatunga and
Dingo fields. The liability is a discounted liability using a credit-adjusted
risk-free rate on the date such liabilities are determined. A market risk
premium was excluded from the estimate of asset retirement obligations because
the amount was not capable of being estimated. Revisions to the liability could
occur due to changes in the estimates of these costs, acquisition of additional
properties and as new wells are drilled.
Estimates of future asset retirement obligations include significant
management judgment and are based on projected future retirement costs. Such
costs could differ significantly when they are incurred.
Revenue Recognition
The Company recognizes oil and gas revenue from its interests in producing
wells as oil and gas is produced and sold from those wells. Oil and gas sold is
not significantly different from the Company's share of production. Revenues
from the purchase, sale and transportation of natural gas are recognized upon
completion of the sale and when transported volumes are delivered. Shipping and
handling costs in connection with such deliveries are included in production
costs. Revenue under carried interest agreements is recorded in the period when
the net proceeds become receivable, measurable and collection is reasonably
assured. The time the net revenues become receivable and collection is
reasonably assured depends on the terms and conditions of the relevant
agreements and the practices followed by the operator. As a result, net revenues
may lag the production month by one or more months.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Estimates are particularly
sensitive in the calculation of proven reserves, depletion, depreciation and
amortization and the amount of the Company's asset retirement obligations.
Actual results could differ from those estimates.
12
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
LIQUIDITY AND CAPITAL RESOURCES
Consolidated
At September 30, 2004, the Company on a consolidated basis had
approximately $18.6 million of cash and cash equivalents and $3.3 million of
marketable securities.
Net cash used in operations was $108,000 in 2004 compared to cash provided
by operations of $1,221,000 in 2003. The decrease in cash provided by operations
is primarily related to the absence in 2004 of cash received from the Kotaneelee
settlement, lower MPAL net income and payment of 2003 payables in 2004 related
to the Palm Valley drilling program.
During 2004, the Company had net investments in marketable securities of
$153,000 compared to $224,000 in 2003. The decrease in investments was the
result of less cash provided by operations mentioned above.
The Company invested $1,976,000 and $2,690,000 in oil and gas exploration
activities during 2004 and 2003, respectively. The net decrease resulted from
less investments in the Mereenie and Palm Valley fields in 2004 versus 2003. In
addition, the Company purchased the Nockatunga oil field in 2003. The Company
continues to invest in exploratory projects that result in exploratory and dry
hole expenses in the consolidated financial statements.
Effect of exchange rate changes
The value of the Australian dollar relative to the U.S. dollar increased
2.5% to $.7168 at September 30, 2004, compared to a value of $.6993 at June 30,
2004.
As to MPC
At September 30, 2004, MPC, on an unconsolidated basis, had working
capital of approximately $3.3 million. MPC's current cash position and its
annual MPAL dividend should be adequate to meet its current cash requirements.
MPC has in the past invested and may in the future invest substantial portions
of its cash to maintain or increase its majority ownership interest in its
subsidiary.
During November 2004, MPC received a dividend of approximately $975,000
from MPAL.
MPC through its stock repurchase plan may purchase up to one million
shares of its common stock in the open market. Through September 30, 2004, MPC
had purchased 680,850 of its shares at a cost of approximately $686,000, all of
which shares have been cancelled. No purchases of shares under the repurchase
plan were made by MPC during the three months ended September 30, 2004.
As to MPAL
At September 30, 2004, MPAL had working capital of approximately $19.5
million. MPAL has budgeted approximately $4 million for specific exploration
projects in fiscal year 2005 as compared to the $5 million expended during
fiscal 2004. However, the total amount to be expended may vary depending on when
various projects reach the drilling phase. MPAL's future revenues are expected
to be derived from the sale of gas in Australia, based on its current
13
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
composition of oil and gas reserves. MPAL's current contracts for the sale of
Palm Valley and Mereenie gas will expire during fiscal year 2009. Unless MPAL is
able to obtain additional contracts for its remaining gas reserves or be
successful in its current exploration program, its revenues will be materially
reduced after 2009.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We do not use off-balance sheet arrangements such as securitization of
receivables with any unconsolidated entities or other parties. The Company does
not engage in trading or risk management activities and does not have material
transactions involving related parties. The following is a summary of our
consolidated contractual obligations:
Payments Due by Period
---------------------------------------------------------------------
More
Less Than Than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
- ---------------------------- ----------- ----------- ----------- ----------- --------
Operating Lease Obligations 858,000 163,000 347,000 348,000 -
Purchase Obligations(1) 4,496,000 4,102,000 394,000 - -
Asset Retirement Obligations 5,065,000 35,000 157,000 4,873,000 -
----------- ----------- ----------- ----------- -
Total $10,419,000 $ 4,300,000 $ 898,000 $ 5,221,000 -
=========== =========== =========== =========== =
- ------------
(1) Represents firm commitments for exploration and capital expenditures.
Exploration contingent expenditures of $36,419,000 which are not legally binding
have been excluded from the table above and, based on exploration decisions,
would be due as follows: $17,195, 000 (less than 1 year), $16,649,000 (1-3
years), $2,575,000 (3-5 years).
MPAL expects to fund its exploration costs through its cash and cash
equivalents and cash flow from Australian operations. MPAL also expects that it
will seek partners to share the above exploration costs. If MPAL's effort to
find partners is unsuccessful, it may be unable or unwilling to complete the
exploration program for some of its properties. In addition to the expenditures
discussed above, the operator of the Mereenie field is implementing an extensive
program for additional drilling and capital improvements to meet gas sales'
contract requirements. During October 2004, one of two gas wells necessary to
meet gas contractual requirements through 2009 was drilled. The second well will
be drilled later in fiscal 2005.
14
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
THREE MONTHS ENDED SEPTEMBER 30, 2004 VS. SEPTEMBER 30, 2003
REVENUES
OIL SALES INCREASED 75% in the 2004 quarter to $1,911,000 from $1,093,000
in 2003 because of the 8% Australian foreign exchange rate increase discussed
below, increased volumes sold and a 63% increase in the average sales price per
barrel. Oil unit sales (after deducting royalties) in barrels (bbls) and the
average price per barrel sold during the periods indicated were as follows:
Three months ended September 30,
--------------------------------------------------------
2004 Sales 2003 Sales
--------------------------- -------------------------
Average price Average price
Bbls A.$ per bbl Bbls A.$ per bbl
------ ------------- ------ -------------
Australia:
Mereenie field 31,999 66.52 28,287 40.67
Cooper Basin 1,110 56.44 2,592 34.57
Nockatunga project 6,766 55.03 7,234 36.72
------ ------
Total 39,875 64.37 38,113 39.54
====== ======
GAS SALES DECREASED 38% to $2,367,000 in 2004 from $3,830,000 in 2003. The
decrease was the result of the one time proceeds of $1,135,000 from the
Kotaneelee gas field settlement recorded in 2003, the decrease in volume and the
decrease in the average price per mcf sold. This was partially offset by the 8%
Australian foreign exchange rate increase discussed below. Due to a well being
drilled in the Kotaneelee gas field in which MPC has a carried interest, MPC
will not receive any revenue from this field until its share of the drilling
cost is absorbed.
Three months ended September 30,
--------------------------------
2004 2003
---------- ----------
Australia $2,327,000 $2,596,000
Canada-recurring 40,000 99,000
----------
Canada-settlement 1,135,000
----------
Total $2,367,000 $3,830,000
========== ==========
During the 2004 period, the volume of gas sold in Australia decreased 12%,
and the average price of gas sold decreased 2%. The volumes in billion cubic
feet (bcf) (after deducting royalties) and the average price of gas per thousand
cubic feet (mcf) sold during the periods indicated were as follows:
Three months ended September 30,
-----------------------------------------------------------------
2004 Sales 2003 Sales
----------------------------- -----------------------------
A.$ average price per A.$ average price per
--------------------- ---------------------
bcf mcf bcf mcf
----- ---- ----- ----
Australia: Palm Valley .542 2.14 .612 2.17
Australia: Mereenie .726 2.70 .830 2.79
----- -----
Total 1.268 2.46 1.442 2.52
===== =====
OTHER PRODUCTION RELATED REVENUES DECREASED 37% to $300,000 in 2004 from
$473,000 in 2003. Other production related revenues are primarily MPAL's share
of gas pipeline tariff revenues. The revenue decrease was due to lower sales
volume from the Mereenie field in 2004.
15
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
INTEREST INCOME INCREASED 6% to $356,000 in 2004 from $335,000 in 2003
primarily because of the 8% Australian foreign exchange rate increase discussed
below.
COSTS AND EXPENSES
PRODUCTION COSTS INCREASED 18% IN 2004 to $1,528,000 from $1,299,000 in
2003. The increase in 2004 was primarily the 8% Australian foreign exchange rate
increase discussed below and increased salary costs related to the Mereenie
field project.
EXPLORATION AND DRY HOLE COSTS INCREASED 98% to $1,118,000 in 2004 from
$566,000 in 2003. These costs related to the exploration work performed on
MPAL's properties. The primary reasons for the increase in 2004 were seismic
work performed on the Nockatunga project ($284,000) and costs related to a dry
hole in the Cooper Basin in South Australia ($394,000). Also contributing to
this increase was the 8% Australian foreign exchange rate increase discussed
below. These costs were partially offset by less costs incurred in 2004 on
properties in New Zealand.
SALARIES AND EMPLOYEE BENEFITS INCREASED 19% to $670,000 in 2004 from
$563,000 in 2003. During the 2004 period, there was an 8% increase in the
Australian foreign exchange rate discussed below. In addition, there were also
regular annual increases in salaries.
DEPLETION, DEPRECIATION AND AMORTIZATION INCREASED 30% from $1,078,000 in
2003 to $1,401,000 in 2004. During the 2004 period, there was a 8% increase in
the Australian foreign exchange rate as discussed below. Depletion expense for
the Palm Valley and Mereenie fields increased $169,000 during the period
primarily because of the increased depletion rate for 2004 due to lower
reserves. In addition, depletion increased by $119,000 in the 2004 period for
the Nockatunga project and the Cooper Basin.
AUDITING, ACCOUNTING AND LEGAL EXPENSES INCREASED 28% IN 2004 to $181,000
from $141,000 in 2003 primarily because of the 8% Australian foreign exchange
rate increase discussed below and because of the increased statutory
requirements applicable to public companies.
ACCRETION EXPENSE INCREASED 15% IN THE 2004 PERIOD from $82,000 in 2003 to
$94,000 in 2004. Accretion expense represents the accretion on the asset
retirement obligations (ARO) under SFAS 143 that was adopted effective July 1,
2002. The increase in the 2004 period is primarily the 8% increase in the
Australian foreign exchange rate discussed below and the increased rate used for
the Palm Valley and Mereenie fields.
SHAREHOLDER COMMUNICATIONS COSTS INCREASED 33% from $33,000 in 2003 to
$44,000 in 2004 primarily because of MPC and MPAL's increased costs related to
their status as public companies.
OTHER ADMINISTRATIVE EXPENSES DECREASED 27% from $138,000 in 2003 to
$101,000 in 2004. During the 2004 period, there was a 8% increase in the
Australian foreign exchange rate discussed below. This increase was offset by
increases in overhead charges that MPAL as operator was able to charge its
partners.
16
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
INCOME TAXES
INCOME TAX PROVISION DECREASED IN 2004 to a tax provision of $5,000 from a
tax provision of $411,000 in 2003 because of lower book taxable income in 2004.
The components of the income tax (in thousands) between MPC and MPAL are as
follows:
2004 2003
------- -------
Income(loss) before income taxes and minority interests $ (204) $ 1,832
MPC's non Australian loss (income) (a) 391 (1,045)
Permanent differences-Australia (203) (323)
------- -------
Book taxable income (loss)-Australia $ (16) $ 464
======= =======
Australian tax rate 30% 30%
======= =======
Australian income tax (benefit) provision (5) $ 139
Tax benefit of MPAL losses (139)
MPC income tax provision (a) 10 411
------- -------
Income tax provision $ 5 $ 411
======= =======
Current income tax provision $ 10 $ 411
Deferred income tax (benefit) provision (5) -
------- -------
Income tax provision $ 5 $ 411
======= =======
Effective tax rate 22%
=======
(a) MPC did not recognize a deferred tax for its non Australian income tax
losses during the quarter, as it is not likely that such deferred assets will be
realized.
EXCHANGE EFFECT
THE VALUE OF THE AUSTRALIAN DOLLAR RELATIVE TO THE U.S. DOLLAR INCREASED
TO $.7168 AT SEPTEMBER 30, 2004 compared to a value of $.6993 at June 30, 2004.
This resulted in a $605,000 credit to the foreign currency translation
adjustments account for the three months ended September 30, 2004. The average
exchange rate used to translate MPAL's operations in Australia was $.7097 for
the quarter ended September 30, 2004, which was an 8% increase compared to the
$.6588 rate for the quarter ended September 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any significant exposure to market risk, other
than as previously discussed regarding foreign currency risk and the risk of
fluctuations in the world price of crude oil, as the only market risk sensitive
instruments are its investments in marketable securities. For the three month
period ended September 30, 2004, oil sales represented approximately 45% of
production revenues, therefore, an increase in the world price of crude oil
would only have a positive impact on the Company's earnings, while a decrease in
crude oil prices would have a similar negative impact on earnings. Gas sales,
which represented approximately
17
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION
SEPTEMBER 30, 2004
55% of production revenues in 2004, are derived primarily from the Palm Valley
and Mereenie fields in the Northern Territory of Australia and the gas prices
are set according to long term contracts that are subject to changes in the
Australian Consumer Price Index (ACPI). Accordingly, the price of gas will
increase or decrease consistent with movement in the ACPI. At September 30,
2004, the carrying value of our investments in marketable securities including
those classified as cash and cash equivalents was approximately $22 million,
which approximates the fair value of the securities. Since the Company expects
to hold the investments to maturity, the maturity value should be realized.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including Daniel J. Samela, the
Company's President, Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated
under the Securities and Exchange Act of 1934) as of September 30, 2004. Based
on this evaluation, the Company's President concluded that the Company's
disclosure controls and procedures were effective such that the material
information required to be included in the Company's SEC reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to the Company, including its consolidated
subsidiaries, and was made known to him by others within those entities,
particularly during the period when this report was being prepared.
Internal Control Over Financial Reporting.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter ended September 30, 2004 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
SEPTEMBER 30, 2004
ITEM 1 LEGAL PROCEEDINGS
During September 2003, the litigants in the Kotaneelee litigation entered
into a settlement agreement. During October 2003, the Company received
approximately $851,000, after Canadian withholding taxes and reimbursement of
certain past legal costs. The plaintiffs terminated all litigation against the
defendants related to the field, including the claim that the defendants failed
to fully develop the field. Since each party agreed to bear its own legal costs,
there were no taxable costs assessed against any of the parties.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following schedule sets forth the number of shares that the Company
has repurchased under any of its repurchase plans for the stated periods, the
cost per share of such repurchases and the number of shares that may yet be
repurchased under the plans:
TOTAL NUMBER OF SHARES
PURCHASED AS PART OF MAXIMUM NUMBER OF SHARES
TOTAL NUMBER OF SHARES AVERAGE PRICE PAID PER PUBLICLY ANNOUNCED PLAN THAT MAY YET BE
PERIOD PURCHASED SHARE (1) PURCHASED UNDER PLAN
- ------------------- ---------------------- ---------------------- ----------------------- ------------------------
July 1-31, 2004 0 0 0 319,150
Aug. 1-31, 2004 0 0 0 319,150
Sept. 1- 30, 2004 0 0 0 319,150
(1) The Company through its stock repurchase plan may purchase up to one million
shares of its common stock in the open market. Through September 30, 2004, the
Company had purchased 680,850 of its shares at an average price of $1.01 per
share or a total cost of approximately $686,000, all of which shares have been
cancelled.
19
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
PART II - OTHER INFORMATION
SEPTEMBER 30, 2004
ITEM 6. EXHIBITS
31. Rule 13a-14(a) Certifications.
Certification of Daniel J. Samela, President, Chief Executive
Officer and Chief Financial and Accounting Officer, pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934 is
filed herein.
32. Section 1350 Certifications.
Certification of Daniel J. Samela, President, Chief Executive
Officer and Chief Financial and Accounting Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, is furnished herein.
20
MAGELLAN PETROLEUM CORPORATION
FORM 10-Q
SEPTEMBER 30, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
MAGELLAN PETROLEUM CORPORATION
------------------------------
Registrant
Date: November 19, 2004 By /s/ Daniel J. Samela
-------------------------------------
Daniel J. Samela, President and Chief
Executive Officer, Chief Financial and
Accounting Officer
21