UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5507
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MAGELLAN PETROLEUM CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 06-0842255
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
149 Durham Road, Madison, Connecticut 06443
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 245-7664
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock, par value $.01 per share Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
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(Title of Class)
Common stock, par value $.01 per share NASDAQ SmallCap Market
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
Form 10-K or any amendment to this Form 10-K. |X|
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was $19,548,000 at September 23, 2002.
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, 24,607,376 shares outstanding
as of September 23, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the Annual Meeting of
Stockholders for the fiscal year ended June 30, 2002, are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 2. Properties 15
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters 24
Item 6. Selected Consolidated Financial Information 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 73
PART III
Item 10. Directors and Executive Officers of the Company 73
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners and Management 73
Item 13. Certain Relationships and Related Transactions 73
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 74
--------------------
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 23, 2002 was approximately A.$1.00
equaled U.S. $.54 .
PART I
Item 1. Business
Magellan Petroleum Corporation (the Company or MPC) is engaged,
directly and indirectly, 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, 2002, MPC's principal asset was a 52% 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. Santos
Ltd., a publicly owned Australian company, owns a 48% interest in the Palm
Valley field, a 65% interest in the Mereenie field and 18.2% of MPAL's
outstanding stock. Origin Energy Limited, a publicly owned Australian company,
owned 17.1% of MPAL's outstanding stock at June 30, 2002.
MPC has a direct 2.67% carried interest in the Kotaneelee gas field in
the Yukon Territory of Canada. See Item 3 - Legal Proceedings.
The following chart illustrates the various relationships between MPC
and the various companies discussed above.
The following is a tabular presentation of the omitted material:
MPC - MPAL RELATIONSHIPS CHART
MPC owns 52% of MPAL.
MPC owns 2.67% of the Kotaneelee Field, Canada.
MPAL owns 52% of the Palm Valley Field, Australia.
MPAL owns 35% of the Mereenie Field, Australia.
Origin Energy Limited owns 17.1% of MPAL.
SANTOS owns 18.2% of MPAL.
SANTOS owns 48% 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.
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AUSTRALIA
Mereenie
MPAL (35%) and Santos (65%), the operator, (together known as the
Mereenie Producers) own the Mereenie field which is located in the Amadeus Basin
of the Northern Territory. MPAL's share of the Mereenie field proved developed
oil reserves was approximately 520,000 barrels and 14.4 billion cubic feet (bcf)
of gas at June 30, 2002.
During fiscal 2002, MPAL's share of oil sales was 162,000 barrels and
3.6 bcf of gas sold which is subject to net overriding royalties aggregating
3.0625% and the statutory government royalty of 10%. The oil is 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. The cost of
transporting the oil to the refinery is being borne by the producers. The
Mereenie Producers are providing Mereenie gas in the Northern Territory to the
Power and Water Authority (PAWA) and Gasgo Pty. Ltd., a company PAWA wholly
owns, for use in Darwin and other Northern Territory centers. See "Gas Supply
Contracts" below.
The leases covering the Mereenie field are due to expire in November
2002 and applications have been made to the Northern Territory governmental
authorities to renew the leases. Concurrently, negotiations have commenced with
the Aboriginal landowners. MPAL expects that the leases will be renewed.
Palm Valley
MPAL has a 52% interest in, and is the operator, of the Palm Valley gas
field which is also located in the Amadeus Basin of the Northern Territory.
Santos, the operator of the Mereenie field, owns the remaining 48% interest in
Palm Valley which provides gas to meet the Alice Springs and Darwin supply
contracts with PAWA. See "Gas Supply Contracts" below. MPAL's share of the Palm
Valley proved developed reserves was 14.7 bcf at June 30, 2002. Effective
December 1, 2001, MPAL acquired the 1.248% interest in the Palm Valley field
held by Kufpec Australia Pty, Ltd. for approximately $270,000 and increased its
interest from 50.8% to 52%. During fiscal 2002, MPAL's share of gas sales was
3.2 bcf which is subject to a 10% statutory government royalty and net
overriding royalties aggregating 5%. As of June 30, 2001, the remaining
estimated proved reserves at Palm Valley were reduced by approximately 46% to
reflect the inability of the field to deliver the amount of gas that has been
contracted. Under the terms of the sales contract, PAWA is obligated to pay for
the capital costs of maintaining production levels to meet the annual contract
volumes. For more than five years, PAWA has been on notice that additional
drilling would be necessary to meet the contract supply requirements. The Palm
Valley producers and PAWA have executed a Heads of Agreement to resolve these
matters with the likely drilling of a well at Palm Valley in the second quarter
of calendar year 2003.
Gas Supply Contracts
In 1983, the Palm Valley Producers (MPAL and Santos) commenced the sale
of gas to Alice Springs under a 1981 agreement. In 1985, the Palm Valley
Producers and Mereenie Producers signed agreements 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. Since 1985, there have been several additional contracts for the
sale of Mereenie gas. Both the Palm Valley and Mereenie contracts expire in the
year 2009. Under the 1985 contracts, there is a difference in price between Palm
Valley gas and most of the Mereenie gas for the first 20 years of the 25 year
contracts which 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.
At June 30, 2002, MPAL's commitment to supply gas under the above
agreements as revised under the Heads of Agreement discussed above was as
follows:
Period Bcf
------ ---
Less than one year 6.91
Between 1-5 years 25.38
Greater than 5 years 15.02
-----
Total 47.31
=====
Dingo Gas Field
MPAL has a 34.3% interest in the Dingo gas field which is subject to
renewal in 2003. The Dingo gas field, which is located in the Amadeus Basin in
the Northern Territory, has approximately 25 bcf of presently proved and
recoverable reserves based on four delineation wells. MPAL's share of potential
production from these permit areas is subject to a 10% statutory government
royalty and overriding royalties aggregating 2.5043%.
Browse Basin
During fiscal year 1999, MPAL (17.5%) and its partners were granted
exploration permits WA-281-P, WA-282-P and WA-283-P in the Browse Basin offshore
Western Australia. After a three year program of 2D and 3D seismic acquisition
to define drilling prospects in the permits, two wells were drilled during
fiscal year 2002. Both wells were dry holes at a total cost of $2.7 million to
MPAL and the cost is included in exploratory and dry hole costs. MPAL has
withdrawn from all of these permits.
During fiscal year 2000, MPAL was granted exploration blocks WA-287-P
and WA-288-P in the Eastern Browse Basin. During fiscal 2001, MPAL applied for a
permit over area WA-311-P which is adjacent to WA-288-P and the permit was
granted on September 3, 2001. At June 30, 2002, MPAL's share (100%) of the work
obligations of the three permits totaled $9,887,000 ($112,000 obligatory and
$9,775,000 discretionary). MPAL has reached an agreement in principle with INPEX
Corporation, a Japanese company, to farm out permits WA-288-P and WA-311-P.
INPEX will earn a 65% interest in each permit by paying for the cost of drilling
a well, Strumbo-1, in early 2003. MPAL will retain a 35% interest in the
permits.
Carnarvon Basin
During fiscal year 1999, MPAL was awarded permit WA-291-P, offshore
Western Australia in the Carnarvon Basin. At June 30, 2002, MPAL's share (100%)
of the work obligations of the permit totaled $4,074,000 all of which is
discretionary. Tap Oil, an Australian company, has agreed to participate in the
drilling of a well on the permit and will earn a 15% interest in the permit.
MPAL is seeking additional partners to share the cost of drilling a well.
Maryborough Basin
MPAL holds a 98% interest in exploration permit ATP 613P, in the
Maryborough Basin in Queensland, Australia. MPAL (100%) also has an application
pending for permit ATP 674P which is adjacent to ATP 613P. MPAL is seeking
partners to drill a well to test the gas potential of the block in exchange for
an interest in the permit. At June 30, 2002, MPAL's share of the work
obligations of the two permits totaled $1,128,000 ($423,000 obligatory and
$705,000 discretionary).
Cooper Basin
During fiscal year 1999, MPAL (50%) and its partner Beach Petroleum NL
were successful in bidding for two exploration blocks (PEL 94 and PEL 95) in
South Australia's Cooper Basin. At June 30, 2002, MPAL's share of the work
obligations of the two permits totaled $2,903,000 ($2,086,000 obligatory and
$817,000 discretionary). During August 2002, Maslins-1, the first of a three
well program, was drilled. The well was a dry hole. The second well, Aldinga-1
was completed in September 2002. The well has been cased and suspended for
future completion for oil production. Production testing is scheduled for the
fourth quarter of 2002. The third well, Henley-1, which was drilled in early
September 2002, was a dry hole. Each well is estimated to cost approximately
$550,000 (MPAL share - $275,000).
During fiscal year 2001, MPAL (50%) and its partner Beach Petroleum NL
were also successful in bidding for two additional exploration blocks (PELA 110
and PELA 116) in the Cooper Basin. At June 30, 2002, MPAL's share of the work
obligations of the two permits totaled $1,959,000 ($1,043,000 obligatory and
$916,000 discretionary).
Canning Basin
During fiscal year 2001, MPAL acquired a 37.5% working interest in each
of exploration permits WA-306-P and WA-307-P in the Barcoo Sub-basin of the
offshore Canning Basin adjacent to the Browse Basin. Antrim Energy, a Canadian
company, is the operator of the joint venture. At June 30, 2002, MPAL's share of
the work obligations of the two permits totaled $254,000 all of which is
obligatory.
NEW ZEALAND
During fiscal year 2001, MPAL earned a 7.5% interest in permit PEP
38256 in the Canterbury Basin of New Zealand by funding part of the cost of
drilling the Ealing-1 exploration well which was plugged and abandoned. The cost
of approximately $336,000 was included in exploratory and dry hole costs during
fiscal year 2001. There are no work obligations at June 30, 2002.
During fiscal 2002, MPAL (100%) was granted exploration permit PEP
38222 offshore south of the South Island of New Zealand. At June 30, 2002,
MPAL's share of the work obligations of the permit totaled $10,131,000 ($142,000
obligatory and $9,989,000 discretionary).
UNITED KINGDOM
During fiscal year 2001, MPAL acquired a 30% interest in two licenses
in southern England in the Weald-Wessex basin. The two licenses; PEDL 098 in the
Isle of Wight and PEDL 099 in the Portsdown area of Hampshire, were each granted
for a period of six years. At June 30, 2002, MPAL's share of the work
obligations of the permit total $622,000, all of which is obligatory.
During fiscal year 2002, MPAL acquired two additional licenses in
southern England. The two licenses; PEDL 113 (30%) in the Isle of Wight and PEDL
112 (33 1/3%) in the Kent area on the margin of the Weald-Wessex basin were each
granted for a period of six years. At June 30, 2002, MPAL's share of the work
obligations of the permit totaled $611,000, ($99,000 obligatory and $512,000
discretionary).
UNITED STATES
Baca County, Colorado
During fiscal 2002, MPAL held leases in Baca County, Colorado, in which
an exploration company drilled two wells during late 2001. MPAL elected to
participate (25%) in the completion of the wells for production, both of which
were dry holes. MPAL has now withdrawn from the area. The cost of approximately
$62,000 is included in exploratory and dry hole costs.
CANADA
MPC 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. Devon Canada Corporation is the operator of this partially
developed field which is connected to a major pipeline system. During the month
of June 2002, average production from the field was approximately 36.7 million
cubic feet per day compared to 41.8 million cubic feet per day in June 2001.
Production at Kotaneelee commenced in February 1991. According to
government reports, total production in bcf from the Kotaneelee gas field for
the calendar years 1991 through 2001 has totaled 181 bcf as follows: 1991 - 8.1,
1992 - 18.0, 1993 -17.5, 1994 - 16.7, 1995 - 15.7, 1996 - 15.2, 1997 - 14.4,
1998 - 16.0, 1999 - 22.3, 2000 - 20.2 and 2001 - 16.9.
On January 19, 2001, MPC's carried interest account in the Kotaneelee
gas field reached undisputed payout status. During fiscal year 2001, MPC began
accruing its share of Kotaneelee net proceeds as income. MPC began receiving
regular payments of its share of Kotaneelee gas revenues during December 2001.
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.
(b) Financial Information about Industry Segments.
---------------------------------------------
Company is engaged in only one industry, namely, oil and gas exploration,
development, production and sale. The Company conducts such business through its
two operating segments; MPC and its majority owned subsidiary MPAL. See Item 8.
Notes 11 and 12 to the Consolidated Financial Statements.
(c) (1) Narrative Description of the Business.
-------------------------------------
MPC was incorporated in 1957 under the laws of Panama and was
reorganized under the laws of Delaware in 1967. MPC is directly engaged in the
exploration for, and the development and production and sale of oil and gas
reserves in Canada, and indirectly through its subsidiary MPAL in Australia, New
Zealand and the United Kingdom.
(i) Principal Products.
------------------
MPAL has an interest in the Palm Valley gas field and in the
Mereenie oil and gas field. See Item 1(a) - Australia - for a discussion of the
oil and gas production from the Mereenie and Palm Valley fields. MPC 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. See
Item 3. Legal Proceedings for a discussion of MPC's interest in the Kotaneelee
field in Canada.
(iii) Raw Materials.
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Not applicable.
(iv) Patents, Licenses, Franchises and Concessions Held.
--------------------------------------------------
MPAL has interests directly and indirectly in the following permits.
Permit holders are generally required to carry out agreed work and expenditure
programs.
Permit Expiration Date Location
-------------------------------------------- --------------- ----------------
Petroleum Lease No. 4 and No.5 (Mereenie) November 2002 Northern Territory
Petroleum Lease No. 3 (Palm Valley) November 2003 Northern Territory
Retention License 2 (Dingo) October 2003 Northern Territory
ATP 613P (Maryborough) March 2003 Queensland
ATP 674P (Maryborough) Application pending Queensland
WA-291-P (Carnarvon Basin) August 2005 Offshore Western Australia
WA-287-P (Browse Basin) February 2005 Offshore Western Australia
WA-288-P (Browse Basin) February 2005 Offshore Western Australia
WA-311-P (Bonaparte Basin) September 2007 Offshore Western Australia
WA-306-P (Canning Basin) July 2006 Offshore Western Australia
WA-307-P (Canning Basin) August 2006 Offshore Western Australia
PEL 94(Cooper Basin) November 2006 South Australia
PEL 95 (Cooper Basin) October 2006 South Australia
PELA 110(Cooper Basin) Application pending South Australia
PELA 116 (Cooper Basin) Application pending South Australia
PEP 38256 (Canterbury Basin) Renewal pending New Zealand
PEP 38222 (Great South) April 2007 New Zealand
PEDL 098 (Weald/Wessex Basins) September 2006 United Kingdom
PEDL 099 (Weald/Wessex Basins) September 2006 United Kingdom
PEDL 112 (Weald/Wessex Basins) January 2008 United Kingdom
PEDL 113 (Weald/Wessex Basins) January 2008 United Kingdom
Leases issued by the Northern Territory 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 25 years each.
Since 1992, there has been an ongoing controversy regarding the
Aborigines and the ownership of their traditional lands. There has been
legislation aimed at resolving this controversy. The Company does not believe
that this issue will have a material adverse impact on MPAL's properties.
(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 MPAL's producing 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 MPAL's gas production.
Natural Gas Production
MPAL's principal customer and the most likely major 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. The loss of PAWA as a customer would have a material adverse
effect on MPAL's business.
Oil Production
There is presently a small local market for the Mereenie crude
oil in the Alice Springs area. Most of the crude oil production is being shipped
and sold to a refinery in Adelaide.
(viii) Backlog.
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Not applicable.
(ix) Renegotiation of Profits or Termination of Contracts or
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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 the possibility of engineering and
construction delays and difficulties. The Company also must compete with major
oil and gas companies which have substantially greater resources than the
Company.
Furthermore, various forms of energy legislation which have
been or may be proposed in the countries in which the Company holds interests
may substantially affect competitive conditions. 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. The Palm
Valley Producers and the Mereenie Producers are developing and separately
marketing 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 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.
At June 30, 2002, the Company had accrued $1,242,000 for future site
restoration costs for the Mereenie, Palm Valley and Dingo fields. The balance of
the estimated liability was $2,806,000 at June 30, 2002. In June 2001, the
Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 addresses the
accounting for obligations arising from the retirement of tangible long-lived
assets and expands the scope to include obligations that are identifiable by the
entity upon acquisition, construction and during the operating life of a
long-lived asset. The statement requires asset retirement obligations (AROs) to
be initially measured at fair value at the time the obligation is incurred. SFAS
No. 143 is effective for the Company's 2003 fiscal year. The Company is
currently assessing SFAS No. 143 and the accounting for future site restoration
costs to determine whether there will be any significant effect on earnings or
the financial condition of the Company.
(xiii) Number of Persons Employed by Company.
-------------------------------------
At June 30, 2002, MPC had one part-time employee in the United
States and MPAL had 30 employees in Australia. MPC relies to a great extent on
consultants for legal, accounting, administrative and geological services.
(d) Financial Information About Foreign and Domestic
Operations and Export Sales.
(1) Financial Information Relating to Foreign and
Domestic Operations.
-----------------------------------------------------
See Note 12 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.
Since 1992, there has been an ongoing controversy regarding the
Aborigines and the ownership of their traditional lands. There has been
legislation aimed at resolving this controversy. The Company does not believe
that this issue will have a material adverse impact on MPAL's properties.
(3) Data Which are Not Indicative of Current or Future
Operations.
--------------------------------------------------
None.
Item 2. Properties.
(a) MPC has interests in properties in Australia through its 52% equity
interest in MPAL which holds interests in the Northern Territory, Queensland,
South Australia and Western Australia. MPAL also has interests in New Zealand
and the United Kingdom. In Canada, MPC has a direct interest in one lease. 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:
AUSTRALIAN MAP WITH MPAL PROJECTS SHOWN
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 Basin interests in the
Northern Territory of Australia. The following items are identified:
Palm Valley Gas Field
Mereenie Oil & Gas Field
Dingo Gas Field
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
Pointed Mountain Gas Field
Beaver River Gas Field
(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,
--------
2002 2001 2000
---- ---- ----
Australia:
Gas (per mcf) A.$ 2.53 A.$ 2.53 A.$ 2.51
Crude oil (per bbl) A.$41.70 A.$54.64 A.$39.14
The average production cost per unit of production
for the following fiscal years has been impacted by transportation costs on
Mereenie oil in Australia. During fiscal 2002 and 2001, the cost of remedial
work on various wells in the Mereenie field and lower production levels
increased production costs.
June 30,
--------
2002 2001 2000
---- ---- ----
Australia:
Gas (per mcf) A.$ .46 A.$ .43 A.$ .46
Crude oil (per bbl) A.$ 25.09 A.$ 21.24 A.$ 17.91
(4) Productive Wells and Acreage.
Productive wells and acreage at June 30, 2002:
Productive Wells
-----------------------------------
Oil Gas Developed Acreage
--- --- -----------------
Gross Net Gross Net Gross Acres Net Acres
----- --- ----- --- ----------- ---------
Australia 25.0 8.8 16.0 6.37 72,025 30,001
Canada - - 2.0 .05 3,350 89
----- ----- ---- ----- ------- ---------
25.0 8.8 18.0 6.42 75,375 30,090
==== === ==== ==== ====== ======
(5) Undeveloped Acreage.
The Company's undeveloped acreage (except as
indicated below) is set forth in the table below:
GROSS AND NET ACREAGE AS OF JUNE 30, 2002
MPAL has interests in the following properties (before royalties).
MPC has an interest in these properties through its 52% interest in MPAL.
MPAL The Company
----------------------------------------- -----------------------
Net Interest Net Interest
Gross Acres Acres % Acres %
----------- ----- - ----- -
Australia
Northern Territory:
Amadeus Basin:
Mereenie (OL4&5)(1) 69,407 24,292 35.00 12,632 18.20
Palm Valley (OL3)(2) 151,905 79,026 52.00 41,094 27.05
Dingo (RL2) 115,596 39,696 34.34 20,642 17.86
---------- ----------- ----------
Total Amadeus Basin 336,908 143,014 74,368
---------- ---------- ----------
Queensland:
Maryborough Basin (ATP 613P) 342,836 335,979 98.00 174,709 50.96
Maryborough Basin (ATP 674P) 1,942,161 1,942,161 100.00 1,009,924 52.00
--------- --------- ---------
2,284,997 2,278,140 1,184,633
--------- --------- ---------
South Australia:
Cooper Basin (PEL94/95) 1,621,802 810,902 50.00 421,669 26.00
Cooper Basin (PELA110/116) 1,058,395 529,198 50.00 275,183 26.00
--------- ------- -------
2,680,197 1,340,100 696,852
--------- --------- -------
Western Australia:
Carnarvon WA-291-P 2,205,710 2,205,710 100.00 1,146,969 52.00
Browse WA-287-P 515,736 515,736 100.00 268,183 52.00
Browse WA-288-P 513,266 513,266 100.00 266,898 52.00
Browse WA-311-P 492,765 492,765 100.00 256,238 52.00
Canning WA-306/307 1,986,621 744,983 37.50 387,391 19.50
--------- --------- ---------
5,714,098 4,472,460 2,325,679
--------- --------- ---------
United Kingdom
PEDL098/099 96,083 28,825 30.00 14,989 15.60
PEDL112 98,800 32,933 33.33 17,125 17.33
PEDL113 29,640 8,892 30.00 4,624 15.60
-------- ------- -------
224,523 70,650 36,738
------- ------ ------
New Zealand
PEP38222 3,015,870 3,015,870 100.00 1,568,252 52.00
PEP38746/48/53 53,599 13,400 25.00 6,968 13.00
PEP 38256 1,372,332 102,925 7.50 53,521 3.90
--------- --------- ----------
4,441,801 3,132,195 1,628,741
--------- --------- ---------
Total MPAL 15,682,524 11,436,559 5,947,011
---------- ---------- ---------
Properties held directly by MPC:
Canada
Yukon and Northwest Territories:
Carried interest(3) 31,885 850 2.67
---------- ----------
Total 15,714,409 5,947,861
========== =========
- ----------------------------
(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) 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/New Zealand
---------------------
Year ended Exploration Development
----------- -----------
June 30, Productive Dry Productive Dry
-------- ---------- --- ---------- ---
2002 - .35 - -
2001 - .12 - -
2000 - - .70 -
Americas
--------
Year ended Exploration Development
----------- -----------
June 30, Productive Dry Productive Dry
-------- ---------- --- ---------- ---
2002 - .50 - -
2001 - - - -
2000 - - - -
(7) Present Activities.
------------------
There were no wells being drilled at June 30, 2002.
See Item 1 - Cooper Basin for a discussion of the present activities of MPAL.
(8) Delivery Commitments.
--------------------
See discussion under Item 1 concerning the Palm
Valley and Mereenie fields.
Item 3. Legal Proceedings.
Kotaneelee Gas Field
MPC'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 MPC (the plaintiffs) believe
that the working interest owners in the Kotaneelee gas field had not adequately
pursued the attainment of contracts for the sale of Kotaneelee gas.
In October 1989 and 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. MPC
was subsequently added as a Plaintiff in the action. 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., Mobil Oil Canada Ltd.
("Mobil") and Esso Resource of Canada Ltd. (collectively the defendants).
The plaintiffs claim that the defendants breached a contractual
obligation and a fiduciary duty owed to the Plaintiffs to market gas from the
Kotaneelee gas field when it was possible. The plaintiffs assert that marketing
the Kotaneelee gas was possible in 1984 and that the defendants deliberately
failed to do so. The plaintiffs seek monetary damages and the forfeiture of the
Kotaneelee gas field. The plaintiffs presented evidence at trial that the
monetary damages sustained by the plaintiffs were approximately Cdn.$110 million
(MPC share-U.S.$5.5 million).
In addition, the Plaintiffs claimed that the Plaintiffs' 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 charges, 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.
On September 14, 2001, the trial court rendered its decision. The court
ruled that:
(a) Although the defendants had an affirmative contractual obligation
(but not a fiduciary obligation) to market the gas from the Kotaneelee gas field
when it was possible to do so, the defendants had not breached their contractual
obligation.
(b) The defendants made improper charges to the carried interest
account in the amount of approximately U.S.$3.4 million (MPC share - $91,000) in
connection with the repair and rebuilding of the field's dehydration facilities.
(c) Defendant Amoco Canada was not entitled to make gas processing fee
charges to the carried interest account. The Company estimates that MPC's share
of charges made to date is approximately U.S.$1.5 million including interest.
The court made no ruling on the issue of taxable costs of the
litigation, saying only that "Costs may be spoken to if and when necessary". The
defendants appealed the trial court's decision in December 2001. Therefore, the
final outcome remains uncertain.
On January 19, 2001, MPC's carried interest account in the Kotaneelee
gas field reached undisputed payout status. During the 4th quarter of the
fiscal year 2001, the Company began accruing its share of Kotaneelee net
proceeds as income.
Prior to the Kotaneelee field reaching undisputed payout status, the
operator of the Kotaneelee field had been reporting and depositing in escrow
its share of the disputed amount of MPC's share of net revenues. Based on the
reported data, the Company believes the total amount due MPC at June 30, 2002
(including interest) was at least $1.5 million. The disputed amount, which has
not been included in income, represents gas processing fees claimed by the
working interest partners. The trial court ruled in favor of the Company on
this issue. However, in December 2001, the defendants filed a notice of appeal
of the trial court's decision. Due to the uncertainty of the litigation, the
Company will not accrue the $1.5 million estimated amount due until the
uncertainty is resolved.
The trial was lengthy, complicated and costly to all parties. The court
has very broad discretion as to whether to award costs and disbursements and as
to the calculation of the amount to be awarded. Accordingly, MPC is unable to
determine whether costs will be assessed against MPC or in what amount. However,
since the costs incurred by the defendants have been substantial, and since the
court has broad discretion in the awarding of costs, an award to the defendants
potentially could be material. Costs may be assessed jointly and severally
against nonprevailing parties. MPC has not agreed to share any costs that might
be assessed against Canada Southern and would seek to be indemnified by Canada
Southern for any such costs.
MPC believes that the outcome of the Kotaneelee litigation is not
reasonably likely to have a material adverse effect on MPC'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 Registrant
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 61 President and Since 1993 Director
Chief Financial Officer Since 1990
T. Gwynn Davies 56 General Manager - MPAL Since October 30, 2001 None
All officers of MPC are elected annually by the Board of Directors and
serve at the pleasure of the Board of Directors.
MPC 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.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder
Matters.
(a) Principal Market
The principal market * for MPC's common stock is the NASDAQ SmallCap
market symbol [MPET]. The stock is also traded on the Boston Stock Exchange with
the symbol [MPC]. The quarterly high and low prices and the number of shares
traded on the most active market, NASDAQ, during the calendar quarterly periods
indicated were as follows:
2002 1st Qtr. 2nd Qtr. 3rd Qtr.** 4th Qtr.
- ---- -------- -------- ---------- --------
High.................. .95 1.11 1.07
Low................... .64 .80 .63
Number of shares traded 1,624,249 2,130,154 1,679,588
2001 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ---- -------- -------- --------- --------
High.................. 1.19 1.65 1.12 1.10
Low................... .81 .76 .79 .79
Number of shares traded 2,081,855 2,745,248 1,250,958 2,039,599
2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ---- -------- -------- -------- --------
High.................. 1.97 1.50 1.38 1.28
Low................... 1.16 1.11 .97 .72
Number of shares traded 5,558,966 3,394,720 3,274,059 5,142,813
- ---------------------------------
* On September 20, 2002, the PCXE Equities, Inc. (PCXE) notified the Company
that the Company's common stock had been delisted from trading on the Pacific
Stock Exchange effective September 20, 2002. The PCXE based its decision upon
the Company's failure to meet the minimum share price bid ($1.00) component of
the PCXE's listing maintenance requirements [PCXE Rule 5.5(h)(4)].
** Through September 23, 2002, on which date the closing price was $.80 .
(b) Approximate Number of Holders of Common Stock at September 23,
2002
--------------------------------------------------------------
Title of Class Number of Record Holders
-------------- ------------------------
Common stock, par
value $.01 per share 8,200
(c) Frequency and Amount of Dividends
---------------------------------
MPC has never paid a cash dividend on its common stock.
Recent Sales of Unregistered Securities
---------------------------------------
None.
Item 6. Selected Consolidated Financial Information.
The following table sets forth selected data (in thousands) and other
operating information of the Company. The selected consolidated financial data
in the table are derived from the consolidated financial statements of the
Company. This data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
Years ended June 30,
--------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Financial Data $ $ $ $ $
Operating revenues 13,700 14,008 16,330 13,398 15,235
====== ====== ====== ====== ======
Total revenues 14,352 14,900 17,147 14,115 15,340
====== ====== ====== ====== ======
Net income 92 1,072 1,490 945 1,037
====== ===== ===== ====== =====
Net income per share (basic and diluted) - .04 .06 .04 .04
====== ===== ===== ====== =====
Working capital 17,862 15,398 15,046 12,772 13,452
====== ====== ====== ====== ======
Cash provided by operating activities 4,013 3,044 6,149 4,993 6,737
===== ===== ===== ===== =====
Property and equipment (net) 17,046 16,482 21,741 26,725 23,019
====== ====== ====== ====== ======
Total assets 40,166 37,498 43,976 44,234 39,779
====== ====== ====== ====== ======
Long-term liabilities 3,974 3,982 5,190 6,910 6,512
===== ====== ===== ====== =====
Minority interests 13,933 12,701 14,696 15,318 13,123
====== ====== ====== ====== ======
Stockholders' equity:
Capital 43,332 43,426 43,838 43,838 43,782
Accumulated deficit (15,751) (15,843) (16,914) (18,405) (19,350)
Accumulated other comprehensive loss (8,965) (10,410) (7,827) (5,699) (7,013)
------- -------- ------- --------- ---------
Total stockholders' equity 18,616 17,173 19,097 19,734 17,419
====== ====== ====== ====== ======
Exchange rate A.$=U.S. at end of period .56 .51 .60 .67 .62
====== ====== ======= ====== ======
Common stock outstanding shares 24,607 24,698 25,108 25,108 24,982
====== ====== ====== ====== ======
Book value per share .76 .70 .76 .79 .70
====== ====== ====== ====== ======
Quoted market value per share .88 1.07 1.28 2.50 2.28
====== ====== ====== ====== ======
Operating Data
Standard measure of discounted future cash
flow relating to proved oil and gas
reserves.(approximately 48% attributable to
minority interests)
26,000 33,000 44,000 53,000 48,000
====== ====== ====== ====== ======
Annual production (Net of royalties)
Gas (bcf) 6.0 5.7 6.0 5.9 5.8
=== === === === ===
Oil (bbls)(In thousands)(net of royalties) 141 148 172 205 248
=== === === === ===
Item 7. 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.
Recently Issued Statements Of Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, which is effective for the Company's fiscal year 2003. 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 should be
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.
Due to the extensive number of documents that must be reviewed and estimates
that must be made to assess the effects of the statement, the expected impact of
adoption of SFAS 143 on the Company's financial position or results of
operations has not yet been determined.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS 144 is required to be adopted prospectively
for the Company's 2003 fiscal year. SFAS 144 supercedes previous guidance
related to the impairment or disposal of long-lived assets. For long-lived
assets to be held and used, it resolves certain implementation issues of the
former standards, but retains the basic requirements of recognition and
measurement of impairment losses. For long-lived assets to be disposed of by
sale, it broadens the definition of those disposals that should be reported
separately as discontinued operations. There will be no impact on the Company in
adopting SFAS 144.
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. Estimated future
abandonment and site restoration costs, net of anticipated salvage values, are
accrued based on units of production. 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 reserves, except in circumstances where it is
probable that additional resources will be developed and contribute to cash
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.
Site Restoration Costs
Future site restoration costs are accrued over the period required to
produce all the proved reserves of petroleum in the various areas of interest
for the estimated future restoration obligations in respect of such areas. The
estimated restoration obligations recognized include removal of facilities,
abandoning of wells and restoring the disturbed areas and are based upon current
undiscounted costs, current legal requirements and current technology. Estimates
of future restoration obligations are reviewed and reassessed regularly and if
revisions to estimates arise, they are made on a prospective basis. In fiscal
year 2003, the Company will adopt SFAS 143 as discussed above.
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.
(1) Liquidity and Capital Resources
During the quarter ended June 30, 2001, MPC began accruing its share
(2.67%) of Kotaneelee net proceeds as income. MPC began receiving regular
payments of its share of Kotaneelee gas revenues during December 2001. During
fiscal 2002, MPC recorded $483,000 of Kotaneelee gas sales compared to $392,000
of gas sales in fiscal 2001.
Prior to the Kotaneelee field reaching undisputed payout status, the
operator of the Kotaneelee field had been reporting and depositing in escrow its
share of the disputed amount of MPC's share of net revenues. Based on the
reported data, the Company believes the total amount due MPC at June 30, 2002
(including interest) was at least $1.5 million. The disputed amount, which has
not been included in income, represents gas processing fees claimed by the
working interest partners. The trial court ruled in favor of the Company on this
issue. However, in December 2001, the defendants filed a notice of appeal of the
trial court's decision. The court also made no ruling on the issue of taxable
costs of the litigation (See Item 3. Legal Proceedings). Due to the uncertainty
of the litigation, the Company will not accrue the $1.5 million estimated amount
due until the uncertainty is resolved.
Consolidated
At June 30, 2002, the Company on a consolidated basis had approximately
$17.5 million of cash and cash equivalents and marketable securities.
A summary of the major changes in cash and cash equivalents during the
period is as follows:
Cash and cash equivalents at beginning of period $12,792,000
Cash provided by operations 4,013,000
Dividends to MPAL minority shareholders (586,000)
Net additions to property and equipment (1,752,000)
Effect of exchange rate changes 1,298,000
Marketable securities which matured 114,000
Repurchases of common stock (94,000)
------------
Cash and cash equivalents at end of period $15,785,000
===========
As to MPC (unconsolidated)
At June 30, 2002, MPC, on an unconsolidated basis, had working capital
of approximately $2.4 million. MPC's current cash position, its annual MPAL
dividend and the anticipated revenue from the Kotaneelee field should be
adequate to meet its current cash requirements. MPC has in the past invested and
may in the future invest substantial portions of its cash to maintain its
majority interest in its subsidiary, MPAL. During fiscal 2002, MPC purchased
approximately 337,000 shares of MPAL's stock at a cost of approximately
$337,000.
During fiscal 2002, MPC received a dividend from MPAL of $621,000 which
was added to MPC's working capital.
During the fiscal year 2001, MPC announced a stock repurchase plan to
purchase up to one million shares of its common stock in the open market. At
June 30, 2002, MPC had purchased 500,850 of its shares at a cost of
approximately $506,000.
As to MPAL
At June 30, 2002, MPAL had working capital of approximately $15.5
million. MPAL has budgeted approximately $3.5 million for specific exploration
projects in the fiscal year 2003 as compared to the $4.1 million expended during
fiscal 2002. However, the total amount to be expended may vary depending on when
various projects reach the drilling phase. The current composition of MPAL's oil
and gas reserves are such that MPAL's future revenues in the long term are
expected to be derived from the sale of gas in Australia. MPAL's current
contracts for the sale of Palm Valley and Mereenie gas will expire during fiscal
year 2009. Unless MPAL is able to obtain additional contracts for its remaining
gas reserves or be successful in its current exploration program, its revenues
will be materially reduced after 2009.
The following is a summary of MPAL's required and contingent
commitments for exploration expenditures for the five year period ending June
30, 2007. The contingent amounts will be dependent on such factors as the
results of the current program to evaluate the exploration permits, drilling
results and MPAL's financial position.
Fiscal Year Required Expenditures Contingent Expenditures Total
----------- --------------------- ----------------------- -----
2003 $ 2,323,000 $ 84,000 $ 2,407,000
2004 879,000 7,945,000 8,824,000
2005 963,000 14,113,000 15,076,000
2006 616,000 2,454,000 3,070,000
2007 - 1,421,000 1,421,000
---------- ----------- -----------
Total $4,781,000 $26,017,000 $30,798,000
========== =========== ===========
MPAL expects to fund its exploration costs through its cash and cash
equivalents and cash flow from Australian operations. MPAL also expects that it
will seek partners to share the above exploration costs. If MPAL's efforts to
find partners are unsuccessful, it may be unable or unwilling to complete the
exploration program for some of its properties. In addition to the above
commitments, MPAL has commitments of approximately $924,000 with respect to the
Palm Valley and Mereenie fields which have not been included in the consolidated
financial statements.
(2) Results of Operations
2002 vs. 2001
The components of consolidated net income for the fiscal years 2002 and
2001 were as follows:
Year ended June 30,
-------------------
2002 2001
---- ----
MPC unconsolidated pretax loss $ (236,629) $ (220,599)
MPC income tax expense (112,000) (108,888)
Share of MPAL pretax income 402,411 1,897,096
Share of MPAL benefit of (provision for) income taxes 37,939 (495,845)
--------- -----------
Consolidated net income $ 91,721 $ 1,071,764
========= ===========
Net income per share (basic and diluted) $ - $.04
==== ====
Revenues
Oil sales decreased 30% in 2002. Oil sales in Australia in 2002
amounted to $3,259,000 as compared to $4,639,000 in 2001 because of a 24%
decrease in oil prices, a 5% decrease in the number of units produced and the 3%
Australian foreign exchange decrease discussed below. Oil unit sales (before
deducting royalties) in barrels (bbls) and the average price per barrel sold
during the periods indicated were as follows:
Fiscal 2002 Sales Fiscal 2001 Sales
----------------- -----------------
Average Price Average Price
Bbls per bbl Bbls per bbl
---- ------- ---- -------
Australia - Mereenie 161,650 A.$41.70 170,037 A.$54.64
Gas sales increased 2% in fiscal 2002. Gas sales increased from $8,537,000 in
2001 to $8,667,000 in 2002 primarily because of the 2% increase in the volume of
gas sold in Australia which was offset by the 3% Australian foreign exchange
decrease discussed below. Effective December 1, 2001, MPAL acquired the 1.248%
interest in the Palm Valley field held by Kufpec Australian Ltd. Gas sales in
2002 include $483,000 ($392,000 in 2001) of gas sales from the Kotaneelee gas
field in Canada. The volumes in billion cubic feet (bcf) (before deducting
royalties) and the average price of gas per thousand cubic feet (mcf) sold in
Australia during the periods indicated were as follows:
Fiscal 2002 Sales Fiscal 2001 Sales
----------------- -----------------
Average Price Average Price
Bcf per mcf Bcf per mcf
--- ------- --- -------
Australia: (A.$) (A.$)
Palm Valley
Alice Springs contract 0.959 3.15 0.970 3.12
Darwin contract 2.285 2.08 2.251 2.07
Mereenie
Darwin contract 3.233 2.55 3.025 2.56
Other 0.368 3.56 0.461 3.29
----- -----
Total 6.845 6.707
===== =====
Other production income increased 113% to $1,774,000 in 2002 from
$833,000 in 2001. Other production income includes royalties and MPAL's share of
gas pipeline tariffs. During fiscal 2002, MPAL recorded an additional amount of
gas pipeline tariff revenue of approximately $855,000 included in other
production related revenues to reflect a resolution of a dispute regarding the
calculation of the pipeline tariffs.
Interest income in 2002 decreased 27%. Interest income in 2002 amounted
to $652,000 as compared to $891,000 in 2001. Although more funds were available
for investment, interest rates were substantially lower in 2002.
Costs and Expenses
Production costs increased 8% in 2002 to $3,770,000 from $3,492,000 in
2001 primarily because remedial work was performed in 2002 in the Mereenie
field.
Exploratory and dry hole costs increased 155% to $4,143,000 in 2002 from
$1,624,000 in 2001. The 2002 and 2001 costs relate primarily to the exploration
work being performed on MPAL's offshore Western Australian properties. In
addition, the costs in 2002 include the dry hole costs (a total of $2.7 million
incurred primarily in the second quarter of fiscal 2002) of the Carbine-1 and
the Maribou-1 wells which were drilled in the Browse Basin offshore Western
Australia. The costs (in thousands) for MPC and MPAL were as follows:
2002 2001
----------------------------- ---- --------------------------------
Location MPAL MPC Total MPAL MPC Total
- -------- ---- --- ----- ---- --- -----
United States/Belize $ 62 - $ 62 $ 2 - $ 2
Australia/New Zealand 4,081 - 4,081 1,622 - 1,622
------- -------- ------- ------- ------- ------
$4,143 - $4,143 $1,624 - $ 1,624
====== ======== ====== ====== ======== ======
Salaries and employee benefits decreased 26% to $1,248,000 in 2002 from
$1,694,000 in 2001 primarily because of a reduction in MPAL personnel.
Depreciation, depletion and amortization decreased 1% in 2002 to
$3,447,000 from $3,474,000 in 2001. The decrease in depreciation, depletion and
amortization is primarily the result of the 3% Australian foreign exchange
decrease discussed below.
Auditing, accounting and legal expenses increased 10% from $252,000 in
2001 to $278,000 in 2002 primarily because of an increase in MPAL's legal costs
to resolve various disputes.
Shareholder communications costs decreased 12% to $152,000 in 2002
compared to $172,000 in 2001 primarily because of the Company's efforts to
reduce costs.
Other administrative expenses increased 8% from $717,000 in 2001 to
$776,000 in 2002 primarily because of a reduction in the amount of overhead that
MPAL, as operator, charged its partners during 2002.
Income Taxes
Income tax expense decreased from $1,075,000 in 2001 to $39,000 in
2002. The effective income tax rate for 2002 was 7% compared to 31% in 2001. The
components of income tax expense (benefit) in thousands were as follows:
2002 2001
-------- -------
Pretax consolidated income $ 537 $ 3,476
MPC's losses not recognized 237 221
Permanent differences (873) (471)
------- -----------
Book taxable income (loss) $(99) $ 3,226
===== ======
Australian tax rate 30% 34%
=== ===
Australian income tax provision (benefit) $ (30) $ 1,097
Tax (benefit) attributable to reconciliation of
year end deferred tax liability (43) (131)
------ -------
MPAL Australian (benefit) provision for income tax
(73) 966
MPC income tax provision 112 109
------ -------
Consolidated income tax provision $ 39 $ 1,075
====== =======
MPC's 2002 and 2001 income tax represents the 25% Canadian withholding
tax on its Kotaneelee net proceeds. In addition, Australia enacted corporate tax
rate reductions for 2002 (34% to 30%) which reduced the provision by $131,000 in
2001. The utilization of prior year losses not previously taken into account
also reduced the 2002 and 2001 provisions.
Exchange Effect
The value of the Australian dollar relative to the U.S. dollar
increased to $.5635 at June 30, 2002 compared to $.5104 at June 30, 2001. This
resulted in a $1,729,000 credit to accumulated translation adjustments for
fiscal 2002. The 10% increase in the value of the Australian dollar increased
the reported asset and liability amounts in the balance sheet at June 30, 2002
from the June 30, 2001 amounts. The annual average exchange rate used to
translate MPAL's operations in Australia for fiscal 2002 was $.5238, which is a
3% decrease compared to the $.5379 rate for fiscal 2001.
2001 vs. 2000
The components of consolidated net income for the fiscal years 2001 and
2000 were as follows:
Year ended June 30,
-------------------
2001 2000
---- ----
MPC unconsolidated pretax loss $ (220,599) $ (709,939)
MPC income tax expense (108,888) (113,989)
Share of MPAL pretax income 1,897,096 2,347,857
Share of MPAL income taxes (495,845) (33,525)
------------ ------------
Consolidated net income $ 1,071,764 $ 1,490,404
=========== ===========
Net income per share (basic and diluted) $.04 $.06
==== ====
Revenues
Oil sales in 2001 remained essentially the same as 2000. Oil sales in
Australia in 2001 amounted to $4,639,000 as compared to $4,637,000 in 2000
because of a 40% increase in oil prices which was partially offset by a 14%
decrease in the number of units produced and the 14% Australian foreign exchange
decrease discussed below. Oil unit sales (before deducting royalties) in barrels
(bbls) and the average price per barrel sold during the periods indicated were
as follows:
Fiscal 2001 Sales Fiscal 2000 Sales
----------------- -----------------
Average Price Average Price
Bbls per bbl Bbls per bbl
---- ------- ---- -------
Australia - Mereenie 170,037 A.$54.64 198,272 A.$39.14
Gas sales decreased 19% in fiscal 2001. Gas sales decreased from $10,510,000 in
2000 to $8,537,000 in 2001 primarily because of the 10% decrease in the volume
of gas sold and the 14% Australian foreign exchange decrease discussed below
which was partially offset by a 1% increase in the average price of gas sold.
The decrease in the volume of gas sold is primarily the result of a customer
discontinuing its operations. Gas sales in 2001 include $392,000 of gas sales
from the Kotaneelee field for the production period January 19, 2001 through
April 30, 2001. The volumes in billion cubic feet (bcf) (before deducting
royalties) and the average price of gas per thousand cubic feet (mcf) sold in
Australia during the periods indicated were as follows:
Fiscal 2001 Sales Fiscal 2000 Sales
----------------- -----------------
Average Price Average Price
Bcf per mcf bcf per mcf
--- ------- --- -------
Australia: (A.$) (A.$)
Palm Valley
Alice Springs contract 0.970 3.12 0.922 2.97
Darwin contract 2.251 2.07 2.216 2.02
Mereenie
Darwin contract 3.025 2.56 2.497 2.33
Other 0.461 3.29 1.817 3.13
----- -----
Total 6.707 7.452
===== =====
Other production income decreased 30% to $833,000 in 2001 from
$1,184,000 in 2000. Other production income includes royalties and MPAL's share
of gas pipeline tariffs. In addition, MPAL, as a Palm Valley producer, had been
receiving an additional share of revenues from the Mereenie field which ended in
August 2000.
Interest income in 2001 increased 9%. Interest income in 2001 amounted
to $891,000 as compared to $817,000 in 2000. Although more funds were available
for investment and interest rates were higher, the increase was partially offset
by the 14% decrease in the Australian foreign exchange rate discussed below.
Costs and Expenses
Production costs decreased 22% in 2001 to $3,492,000 from $4,492,000 in
2000 primarily because of the 14% decrease in the Australian foreign exchange
rate discussed below. The decrease in costs also relates primarily to the
Mereenie field where substantial remedial work was performed in 2000.
Exploratory and dry hole costs totaled $1,624,000 during 2001 compared to
$2,089,000 in 2000. The 2001 costs relate primarily to the work being performed
on MPAL's offshore Australian properties. The cost ($336,000 incurred primarily
in the second quarter of fiscal 2001) of the Ealing-1 exploration well in New
Zealand, which was a dry hole, is also included in 2001. The 2000 costs also
relate primarily to the work being performed on MPAL's offshore Western
Australian properties. The costs (in thousands) for MPC and MPAL were as
follows:
2001 2000
-------------------------------- -------------------------------
Location MPAL MPC Total MPAL MPC Total
- -------- ---- --- ----- ---- --- -----
United States/Belize $ 2 - $ 2 $ 32 $ 124 $ 156
Australia/New Zealand 1,622 - 1,622 1,933 - 1,933
------ ------ ------- ------ ------ -------
$1,624 - $1,624 $1,965 $ 124 $2,089
====== ====== ====== ====== ====== ======
Salaries and employee benefits decreased 5% to $1,694,000 in 2001 from
$1,780,000 in 2000 primarily because of the 14% Australian foreign exchange
decrease discussed below.
Depreciation, depletion and amortization decreased 5% in 2001 to
$3,474,000 from $3,670,000 in 2000. The decrease in depreciation, depletion and
amortization is primarily the result of the 14% Australian foreign exchange
decrease discussed below. The decrease was partially offset by a 25% net
decrease in reserves used to calculate the 2001 depletion rate. As of June 30,
2001, the remaining estimated proved reserves at Palm Valley were reduced by
approximately 46% to reflect the inability of the field to deliver the amount of
gas that has been contracted.
Auditing, accounting and legal expenses decreased 22% from $323,000 in
2000 to $252,000 in 2001 primarily because of the 14% Australian foreign
exchange rate decrease discussed below.
Shareholder communications costs decreased 10% to $172,000 in 2001
compared to $191,000 in 2000 primarily because of the 14% Australian foreign
exchange rate decrease discussed below.
Other administrative expenses decreased 1% from $721,000 in 2000 to
$717,000 in 2001 primarily because of the 14% Australian foreign exchange rate
decrease discussed below. The decrease was offset by a reduction in the amount
of overhead that MPAL, as operator, charged its partners during 2001.
Income Taxes
Income tax expense increased from $180,000 in 2000 to $1,075,000 in
2001. The effective income tax rate for 2001 was 31% compared to 5% in 2000. The
components of income tax expense (benefit) in thousands were as follows:
2001 2000
---- ----
Pretax consolidated income $ 3,476 $ 3,879
MPC's losses not recognized 221 710
Permanent differences (471) (1,534)
-------- --------
Book taxable income $ 3,226 $ 3,055
======== ========
Australian tax rate 34% 36%
=== ===
Australian income tax provision $ 1,097 $ 1,100
Tax (benefit) attributable to reconciliation of
year end deferred tax liability (131) (1,034)
-------- ---------
MPAL Australian income tax provision 966 66
MPC income tax provision 109 114
------- -------
Consolidated income tax provision $ 1,075 $ 180
======= ========
MPC's 2001 income tax represents the 25% Canadian withholding tax on
its Kotaneelee net proceeds. MPC's 2000 income tax represents the 15% Australian
withholding tax on the dividend it received from MPAL. The 2000 income tax
provision also reflects the effect of permanent tax benefits ($552,000). In
addition, Australia enacted corporate tax rate reductions for 2001 (36% to 34%)
and for 2002 (34% to 30%) which reduced the provision by $131,000 in 2001 and
$656,000 in 2000. The utilization of prior year losses ($378,000) not previously
taken into account also reduced the provision.
Exchange Effect
The value of the Australian dollar relative to the U.S. dollar
decreased to $.5104 at June 30, 2001 compared to $.5968 at June 30, 2000. This
resulted in a $2,817,000 charge to accumulated translation adjustments for
fiscal 2001. The 14% decrease in the value of the Australian dollar decreased
the reported asset and liability amounts in the balance sheet at June 30, 2001
from the June 30, 2000 amounts. The annual average exchange rate used to
translate MPAL's operations in Australia for fiscal 2001 was $.5379, which is a
14% decrease compared to the $.6289 rate for the comparable 2000 period.
Item 7A. 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, as the only
market risk sensitive instruments are its investments in marketable securities.
At June 30, 2002, the carrying value of such investments including those
classified as cash and cash equivalents was approximately $17.2 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 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 sheets of Magellan
Petroleum Corporation as of June 30, 2002 and 2001 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 2002. 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 auditing standards generally accepted
in the United States. 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, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2002, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Stamford, Connecticut
September 18, 2002
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
------------------------------
2002 2001
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $15,784,851 $12,792,191
Accounts receivable 4,162,821 4,580,809
Marketable securities 899,619 846,063
Inventories 377,847 537,138
Other assets 280,537 283,372
----------- -----------
Total current assets 21,505,675 19,039,573
----------- -----------
Marketable securities 794,070 961,514
Property and equipment:
Oil and gas properties (successful efforts method) 44,155,824 37,723,278
Land, buildings and equipment 1,669,330 1,590,322
Field equipment 1,189,093 1,054,060
----------- -----------
47,014,247 40,367,660
Less accumulated depletion, depreciation and amortization (29,967,865) (23,885,240)
------------ ------------
Net property and equipment 17,046,382 16,482,420
----------- -----------
Other assets 820,189 1,014,578
----------- -----------
Total assets $40,166,316 $37,498,085
=========== ===========
LIABILITIES, MINORITY INTERESTS
-------------------------------
AND STOCKHOLDERS' EQUITY
------------------------
Current liabilities:
Accounts payable $ 2,323,781 $ 1,907,672
Accrued liabilities 1,086,193 741,972
Income taxes payable 233,339 991,571
----------- ----------
Total current liabilities 3,643,313 3,641,215
---------- ----------
Long term liabilities:
Deferred income taxes 2,731,221 3,029,180
Reserve for future site restoration costs 1,242,398 953,210
----------- ----------
Total long term liabilities 3,973,619 3,982,390
----------- ----------
Minority interests 13,932,928 12,701,000
Commitments (Note 2) - -
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 200,000,000 shares
Outstanding 24,607,376 and 24,698,220 shares 246,074 246,982
Capital in excess of par value 43,085,841 43,179,475
----------- ------------
Total capital 43,331,915 43,426,457
Accumulated deficit (15,750,935) (15,842,656)
Accumulated other comprehensive loss (8,964,524) (10,410,321)
------------ ------------
Total Stockholders' equity 18,616,456 17,173,480
----------- ------------
Total liabilities, minority interests and stockholders' equity $40,166,316 $37,498,085
=========== ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30,
------------------------------------------
2002 2001 2000
---- ---- ----
Revenues:
Oil sales $ 3,259,213 $ 4,638,782 $ 4,636,595
Gas sales 8,667,431 8,537,064 10,509,600
Other production related revenues 1,773,808 832,516 1,183,570
Interest income 651,653 891,489 817,066
----------- ---------- ----------
14,352,105 14,899,851 17,146,831
---------- ---------- ----------
Costs and expenses:
Production costs 3,770,438 3,492,045 4,492,443
Exploratory and dry hole costs 4,143,449 1,623,914 2,088,871
Salaries and employee benefits 1,248,136 1,693,998 1,780,076
Depletion, depreciation and amortization 3,447,444 3,473,758 3,670,417
Auditing, accounting and legal services 278,045 251,567 323,353
Shareholder communications 151,897 171,710 191,057
Other administrative expenses 776,077 716,777 721,255
---------- ---------- ----------
13,815,486 11,423,769 13,267,472
---------- ---------- ----------
Income before income taxes and minority interests 536,619 3,476,082 3,879,359
Income tax provision 39,099 1,075,091 179,520
---------- ---------- ----------
Income before minority interests 497,520 2,400,991 3,699,839
Minority interests 405,799 1,329,227 2,209,435
---------- ----------- -----------
Net income $ 91,721 $ 1,071,764 $ 1,490,404
========== =========== ===========
Average number of shares:
Basic 24,622,980 24,979,572 25,108,226
========== ========== ==========
Diluted 24,622,980 24,979,572 25,227,519
========== ========== ==========
Per share, based on average number of shares
outstanding during the period:
Net income (basic and diluted) $ - $.04 $.06
==== ==== ====
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Three years ended June 30, 2002
Accumulated Total
Capital in other comprehensive
Number Common excess of Accumulated Comprehensive income
of shares stock par value deficit Loss Total (loss)
--------- ----- --------- ------- ---- ----- ------
July 1, 1999 25,108,226 $251,082 $43,586,606 $(18,404,824) $(5,699,068) $19,733,796
Net income - - - 1,490,404 - 1,490,404 $1,490,404
Foreign currency
translation
adjustments - - - - (2,127,634) (2,127,634) (2,127,634)
-----------
Total
comprehensive loss - - - - - - $ (637,230)
---------- ------- ---------- ----------- ---------- ---------- ===========
June 30, 2000 25,108,226 251,082 43,586,606 (16,914,420) (7,826,702) 19,096,566
Net income - - - 1,071,764 - 1,071,764 $1,071,764
Foreign currency
translation
adjustments - - - - (2,816,765) (2,816,765) (2,816,765)
Unrealized gain on
available-for-sale
securities - - - - 233,146 233,146 233,146
---------
Total
comprehensive loss - - - - - - $(1,511,855)
============
Repurchases of
common stock (410,000) (4,100) (407,131) - - (411,231)
------------ ---------- ---------- ------------- ------------ -----------
June 30, 2001 24,698,226 246,982 43,179,475 (15,842,656) (10,410,321) 17,173,480
Net income - - - 91,721 - 91,721 $91,721
Foreign currency
translation
adjustments - - - - 1,729,157 1,729,157 1,729,157
Unrealized loss on
available-for-sale
securities - - - - (283,360) (283,360) (283,360)
----------
Total
comprehensive
income - - - - - - $1,537,518
==========
Repurchases of
common stock (90,850) (908) (93,634) - - (94,542)
----------- ---------- ------------ -------------- ------------ ---------
June 30, 2002 24,607,376 $ 246,074 $ 43,085,841 $(15,750,935) $(8,964,524) $18,616,456
---------- ---------- ------------ ------------- ------------ -----------
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
-----------------------------------------
2002 2001 2000
---- ---- ----
Operating Activities:
Net income $ 91,721 $ 1,071,764 $ 1,490,404
Adjustments to reconcile net income to
net cash provided by operating activities:
Exploratory and dry hole costs - - 70,634
Depletion, depreciation and amortization 3,447,444 3,473,758 3,670,417
Deferred income taxes (608,454) (609,897) (1,805,306)
Minority interests 405,799 1,329,227 2,209,435
Increase (decrease) in operating assets and liabilities:
Accounts receivable (244,207) (1,153,637) (1,888,247)
Other assets (204,813) (182,457) 87,695
Inventories 85,178 (307,681) (33,385)
Accounts payable and accrued liabilities 1,249,511 (660,252) 1,250,716
Income taxes payable (675,909) (72,437) 1,096,845
Reserve for future site restoration costs 467,030 156,069 -
---------- ---------- ---------
Net cash provided by operating activities 4,013,300 3,044,457 6,149,208
---------- ---------- ---------
Investing Activities:
Additions to property and equipment (1,751,643) (2,345,577) (2,512,483)
Marketable securities matured 2,540,151 3,109,544 2,015,875
Marketable securities purchased (2,426,263) (1,858,942) (2,971,626)
----------- ----------- -----------
Net cash used in investing activities (1,637,755) (1,094,975) (3,468,234)
----------- ----------- -----------
Financing Activities:
Dividends to MPAL minority shareholders (586,379) (593,034) (730,709)
Repurchases of common stock (94,542) (411,231) -
----------- ----------- -----------
Net cash used in financing activities (680,921) (1,004,265) (730,709)
----------- ----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 1,298,036 (2,043,860) (1,440,130)
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,992,660 (1,098,643) 510,135
Cash and cash equivalents at beginning of year 12,792,191 13,890,834 13,380,699
---------- ---------- ----------
Cash and cash equivalents at end of year $15,784,851 $12,792,191 $13,890,834
=========== =========== ===========
See accompanying notes.
MAGELLAN PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
1. Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of Magellan Petroleum Corporation (MPC) and its majority owned subsidiary,
Magellan Petroleum Australia Limited (MPAL), or collectively as the Company. At
June 30, 2002 and 2001, MPC owned a 52% and 51.3% interest in MPAL,
respectively. During fiscal 2002, MPC increased its interest in MPAL by
purchasing an additional 337,000 MPAL shares for approximately $337,000. All
intercompany transactions have been eliminated.
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.
Oil and Gas Properties
Oil and gas properties are located in Australia, New Zealand, Canada and
the United Kingdom. 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. Estimated future abandonment and site restoration costs, net of
anticipated salvage values, are accrued based on units of production. 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 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.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, which is effective for the Company's fiscal year 2003. 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 should be
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.
Due to the extensive number of documents that must be reviewed and estimates
that must be made to assess the effects of the statement, the expected impact of
adoption of SFAS 143 on the Company's financial position or results of
operations has not yet been determined.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 is required to be adopted
prospectively for the Company's 2003 fiscal year. SFAS 144 supercedes previous
guidance related to the impairment or disposal of long-lived assets. For
long-lived assets to be held and used, it resolves certain implementation issues
of the former standards, but retains the basic requirements of recognition and
measurement of impairment losses. For long-lived assets to be disposed of by
sale, it broadens the definition of those disposals that should be reported
separately as discontinued operations. There will be no impact on the Company in
adopting SFAS 144.
1. Summary of significant accounting policies (Cont'd)
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. Actual results could differ
from those estimates.
Land, buildings and equipment and field 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. The estimated useful lives are: buildings - 40 years,
equipment and field equipment - 3 to 15 years.
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.
Foreign currency translations
The accounts of MPAL, whose functional currency is the Australian
dollar, 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 and comprehensive income (loss), 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,
2002 and 2001, the Australian dollar was equivalent to U.S.$.56 and $.51,
respectively. The annual average exchange rate used to translate MPAL's
operations in Australia for the fiscal years 2002, 2001 and 2000 was $.52, $.54
and $.63, respectively.
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.
Cash and cash equivalents
The Company considers all highly liquid short term investments with
maturities of three months or less at the date of acquisition 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,
--------
2002 2001
---- ----
Cash $ 269,523 $ 17,269
U.S. marketable securities 995,936 842,172
Australian money market accounts and
short-term commercial paper 14,519,392 11,932,750
------------ ------------
$15,784,851 $12,792,191
=========== ===========
1. Summary of significant accounting policies (Cont'd)
Marketable securities
At June 30, 2002 and 2001, MPC had the following marketable securities
which are expected to be held until maturity:
June 30, 2002
------------- Amortized
Par value Maturity Date Cost Fair value
--------- ------------- ---- ----------
Short-term securities
---------------------
U.S. Treasury Bill $ 350,000 Oct. 10, 2002 $ 348,428 $ 348,331
State of Connecticut bond 550,000 Jan. 15, 2003 551,191 560,214
---------- ---------- -----------
Total short-term $ 900,000 $ 899,619 $ 908,545
========== ========== ==========
Long-term securities
Lewiston, Maine Pension bond $ 390,000 Dec. 15, 2005 $ 390,000 $ 397,277
State of Connecticut bond 400,000 Jul.1, 2003 404,070 414,724
---------- ---------- ----------
Total long-term $ 790,000 $ 794,070 $ 812,001
========== ========== ==========
Amortized
June 30, 2001 Par value Maturity Date Cost Fair value
------------- --------- ------------- ----- ----------
Short-term securities
---------------------
Federal Home Loan Bank Note $ 350,000 Jul. 9, 2001 $ 343,327 $ 343,697
State of Connecticut bond 500,000 Dec.15, 2001 502,736 507,475
---------- ---------- ----------
$ 850,000 $ 846,063 $ 851,172
========== ========== ==========
Long-term securities
State of Connecticut Bond $ 550,000 Jan. 15, 2003 $ 553,374 $ 558,707
State of Connecticut Bond 400,000 Jul.1, 2003 408,140 408,784
---------- ---------- ----------
Total long-term $ 950,000 $ 961,514 $ 967,491
========== ========== ==========
Unrealized Gain (loss) on Available-for-Sale Securities
During August 1999, MPC sold its interest in the Tapia Canyon,
California heavy oil project for its approximate cost of $101,000 and received
shares of stock in the purchaser. During late December 2000, the purchaser
became a public company (Sefton Resources, Inc) which is listed on the London
Stock Exchange. At June 30, 2002 and 2001, MPC owned approximately 2.8% and
3.3%, respectively of Sefton Resources, Inc. with a fair market value of $43,120
at June 30, 2002 and $326,480 at June 30, 2001 and a cost of $93,334 which is
included in other assets. The $50,214 difference between the fair value at June
30, 2002 and the cost has been recorded as unrealized loss on available-for-sale
securities.
Earnings per share
Earnings per common share is based upon the weighted average number of
common and common equivalent shares outstanding during the period. The only
reconciling item in the calculation of diluted EPS is the dilutive effect of
stock options which was computed using the treasury stock method. The Company's
basic and diluted calculations of EPS are the same in 2002 and 2001 because the
exercise of options is not assumed in calculating diluted EPS, as the result
would be anti-dilutive. The exercise price of the outstanding stock options
exceeded the average market price of the common stock during the years 2002 and
2001.
Financial instruments
The carrying value for cash and cash equivalents, accounts receivable,
marketable securities and accounts payable approximates fair value based on
anticipated cash flows and current market conditions.
1. Summary of significant accounting policies (Cont'd)
Segment Disclosure
FASB Statement No. 131 requires the disclosure of certain financial
data based on an entity's operating segments. The Company's two operating
segments are MPC and MPAL. Condensed financial statements of these segments are
included in Notes 3 and 4 and additional segment data are included in Note 11.
Accumulated other comprehensive loss
Accumulated other comprehensive loss at June 30, 2002 and 2001 was as
follows:
2002 2001
---- ----
Foreign currency translation adjustments $(8,914,310) $(10,643,467)
Unrealized gain (loss) on available-for-sale securities (50,214) 233,146
------------ ------------
Total $(8,964,524) $(10,410,321)
============ =============
Reclassifications
Certain amounts in the prior year balance sheet have been reclassified
to conform to the presentation in the current period.
2. Oil and gas properties
(a) Australia
Mereenie
MPAL (35%) and Santos (65%), the operator, (together known as the
Mereenie Producers) own the Mereenie field which is located in the Amadeus Basin
of the Northern Territory. MPAL's share of the Mereenie field proved developed
oil reserves was approximately 520,000 barrels and 14.4 billion cubic feet (bcf)
of gas at June 30, 2002. During fiscal 2002, MPAL's share of oil sales was
162,000 barrels and 3.6 bcf of gas sold which is subject to net overriding
royalties aggregating 3.0625% and the statutory government royalty of 10%. The
oil is 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. The
cost of transporting the oil to the refinery is being borne by the producers.
The Mereenie Producers are providing Mereenie gas in the Northern Territory to
the Power and Water Authority (PAWA) and Gasgo Pty. Ltd., a company PAWA wholly
owns, for use in Darwin and other Northern Territory centers. See "Gas Supply
Contracts" below.
The leases covering the Mereenie field are due to expire in November
2002 and applications have been made to the Northern Territory governmental
authorities to renew the leases. Concurrently, negotiations have commenced with
the Aboriginal land owners. MPAL expects that the leases will be renewed.
Palm Valley
MPAL has a 52% interest in, and is the operator, of the Palm Valley gas
field which is also located in the Amadeus Basin of the Northern Territory.
Santos, the operator of the Mereenie field, owns the remaining 48% interest in
Palm Valley which provides gas to meet the Alice Springs and Darwin supply
contracts with PAWA. See "Gas Supply Contracts" below. MPAL's share of the Palm
Valley proved developed reserves was 14.7 bcf at June 30, 2002. Effective
December 1, 2001, MPAL acquired the 1.248% interest in the Palm Valley field
held by Kufpec Australia Pty, Ltd. for approximately $270,000 and increased its
interest from 50.8% to 52%. During fiscal 2002, MPAL's share of gas sales was
3.2 bcf which is subject to a 10% statutory government royalty and net
overriding royalties aggregating 5%. As of June 30, 2001, the remaining
estimated proved reserves at Palm Valley were reduced by approximately 46% to
reflect the inability of the field to deliver the amount of gas that has been
contracted. Under the terms of the sales contract, PAWA is obligated to pay for
the capital costs of maintaining production levels to meet the annual contract
volumes. For more than five years, PAWA has been on notice that additional
drilling would be necessary to meet the contract supply requirements. The Palm
Valley producers and PAWA have executed a Heads of Agreement to resolve these
matters with the likely drilling of a well at Palm Valley in the second quarter
of calendar year 2003.
PAGE>
2. Oil and gas properties (Cont'd)
Gas Supply Contracts
At June 30. 2002, MPAL's commitment to supply gas under the above
agreements as revised under the Heads of Agreement discussed above was as
follows:
Period Bcf
------ ---
Less than one year 6.91
Between 1-5 years 25.38
Greater than 5 years 15.02
-----
Total 47.31
=====
At June 30, 2002, the Company had accrued $1,242,000 for future site
restoration costs for the Mereenie, Palm Valley and Dingo fields. The balance of
the estimated liability was $2,806,000 at June 30, 2002. In fiscal 2003, the
Company will adopt SFAS 143 as discussed in Note. 1.
Dingo Gas Field
MPAL has a 34.3% interest in the Dingo gas field which is subject to
renewal in 2003. The Dingo gas field, which is located in the Amadeus Basin in
the Northern Territory, has approximately 25 bcf of presently proved and
recoverable reserves based on four delineation wells. MPAL's share of potential
production from these permit areas is subject to a 10% statutory government
royalty and overriding royalties aggregating 2.5043%.
Browse Basin
During fiscal year 1999, MPAL (17.5%) and its partners were granted
exploration permits WA-281-P, WA-282-P and WA-283-P in the Browse Basin offshore
Western Australia. After a three year program of 2D and 3D seismic acquisition
to define drilling prospects in the permits, two wells were drilled during
fiscal year 2002. Both wells were dry holes at a total cost of $2.7 million to
MPAL and the cost is included in exploratory and dry hole costs. MPAL has
withdrawn from all of these permits.
During fiscal year 2000, MPAL was granted exploration blocks WA-287-P
and WA-288-P in the Eastern Browse Basin. During fiscal 2001, MPAL applied for a
permit over area WA-311-P which is adjacent to WA-288-P and the permit was
granted on September 3, 2001. At June 30, 2002, MPAL's share (100%) of the work
obligations of the three permits totaled $9,887,000 ($112,000 obligatory and
$9,775,000 discretionary). MPAL has reached an agreement in principle with INPEX
Corporation, a Japanese company, to farm out permits WA-288-P and WA-311-P.
INPEX will earn a 65% interest in each permit by paying for the cost of drilling
a well, Strumbo-1, in early 2003. MPAL will retain a 35% interest in the
permits.
Carnarvon Basin
During fiscal year 1999, MPAL was awarded permit WA-291-P, offshore
Western Australia in the Carnarvon Basin. At June 30, 2002, MPAL's share (100%)
of the work obligations of the permit totaled $4,074,000 all of which is
discretionary. Tap Oil, an Australian company, has agreed to participate in the
drilling of a well on the permit and will earn a 15% interest in the permit.
MPAL is seeking additional partners to share the cost of drilling a well.
Maryborough Basin
MPAL holds a 98% interest in exploration permit ATP 613P, in the
Maryborough Basin in Queensland, Australia. MPAL (100%) also has an application
pending for permit ATP 674P which is adjacent to ATP 613P. MPAL is seeking
partners to drill a well to test the gas potential of the block in exchange for
an interest in the permit. At June 30, 2002, MPAL's share of the work
obligations of the two permits totaled $1,128,000 ($423,000 obligatory and
$705,000 discretionary).
Cooper Basin
During fiscal year 1999, MPAL (50%) and its partner Beach Petroleum NL
were successful in bidding for two exploration blocks (PEL 94 and PEL 95) in
South Australia's Cooper Basin. At June 30, 2002, MPAL's share of the work
obligations of the two permits totaled $2,903,000 ($2,086,000 obligatory and
$817,000 discretionary). During August 2002, Maslins-1, the first of a three
well program, was drilled. The well was a dry hole. The second well, Aldinga-1
was completed in September 2002. The well has been cased and suspended for
future completion for oil production. Production testing is scheduled for the
fourth quarter of 2002. The third well, Henley-1, which was drilled in early
September 2002, was a dry hole. Each well is estimated to cost approximately
$550,000 (MPAL share - $275,000).
2. Oil and gas properties (Cont'd)
During fiscal year 2001, MPAL (50%) and its partner Beach Petroleum NL
were also successful in bidding for two additional exploration blocks (PELA 110
and PELA 116) in the Cooper Basin. At June 30, 2002, MPAL's share of the work
obligations of the two permits totaled $1,959,000 ($1,043,000 obligatory and
$916,000 discretionary).
Canning Basin
During fiscal year 2001, MPAL acquired a 37.5% working interest in each of
exploration permits WA-306-P and WA-307-P in the Barcoo Sub-basin of the
offshore Canning Basin adjacent to the Browse Basin. Antrim Energy, a Canadian
company, is the operator of the joint venture. At June 30, 2002, MPAL's share of
the work obligations of the two permits totaled $254,000 all of which is
obligatory.
(b) New Zealand
During fiscal year 2001, MPAL earned a 7.5% interest in permit PEP
38256 in the Canterbury Basin of New Zealand by funding part of the cost of
drilling the Ealing-1 exploration well which was plugged and abandoned. The cost
of approximately $336,000 was included in exploratory and dry hole costs during
fiscal year 2001. There are no work obligations at June 30, 2002.
During fiscal 2002, MPAL (100%) was granted exploration permit PEP
38222 offshore south of the South Island of New Zealand. At June 30, 2002,
MPAL's share of the work obligations of the permit totaled $10,131,000 ($142,000
obligatory and $9,989,000 discretionary).
(c) United Kingdom
During fiscal year 2001, MPAL acquired a 30% interest in two licenses
in southern England in the Weald-Wessex basin. The two licenses; PEDL 098 in the
Isle of Wight and PEDL 099 in the Portsdown area of Hampshire, were each granted
for a period of six years. At June 30, 2002, MPAL's share of the work
obligations of the permit total $622,000, all of which is obligatory.
During fiscal year 2002, MPAL acquired two additional licenses in
southern England. The two licenses; PEDL 113 (30%) in the Isle of Wight and PEDL
112 (33 1/3%) in the Kent area on the margin of the Weald-Wessex basin were each
granted for a period of six years. At June 30, 2002, MPAL's share of the work
obligations of the permit totaled $611,000, ($99,000 obligatory and $512,000
discretionary).
2. Oil and gas properties (Cont'd)
(d) Canada
MPC has a 2.67% carried interest in the Kotaneelee gas field in the
Yukon Territory which has been on production since February 1991 with two
producing wells. For financial statement purposes in fiscal 1987 and 1988, MPC
wrote down its costs relating to 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. Since October 1989,
the field has been the subject of litigation, because the carried interest
owners (including MPC) believe the working interest parties had not adequately
pursued the attainment of contracts for the sale of Kotaneelee gas. A decision
in the litigation was rendered on September 14, 2001. The decision of the trial
court was generally favorable to the Company, however, the issue of court costs
has not yet been decided. The trial was lengthy, complicated and costly to all
parties. The court has very broad discretion as to whether to award costs and
disbursements and as to the calculation of the amount to be awarded.
Accordingly, MPC is unable to determine whether costs will be assessed against
MPC or in what amount. However, since the costs incurred by the defendants have
been substantial, and since the court has broad discretion in the awarding of
costs, an award to the defendants potentially could be material. Costs may be
assessed jointly and severally against nonprevailing parties. MPC believes that
the outcome of the Kotaneelee litigation is not reasonably likely to have a
material adverse effect on MPC's future consolidated financial condition or
results of operations.
On January 19, 2001, MPC's carried interest account in the Kotaneelee gas
field reached undisputed payout status. During the 4th quarter of the fiscal
year 2001, the Company began accruing its share of Kotaneelee net proceeds as
income. MPC began receiving regular payments of its share of Kotaneelee gas
revenues during December 2001. During fiscal 2002, MPC recorded $483,000 of
Kotaneelee gas sales compared to $392,000 of gas sales in fiscal 2001.
Prior to the Kotaneelee field reaching undisputed payout status, the
operator of the Kotaneelee field had been reporting and depositing in escrow
its share of the disputed amount of MPC's share of net revenues. Based on the
reported data, the Company believes the total amount due MPC at June 30, 2002
(including interest) was at least $1.5 million. The disputed amount, which has
not been included in income, represents gas processing fees claimed by the
working interest partners. The trial court ruled in favor of the Company on
this issue. However, in December 2001, the defendants filed a notice of appeal
of the trial court's decision. Due to the uncertainty of the litigation, the
Company will not accrue the $1.5 million estimated amount due until the
uncertainty is resolved.
(e) United States
Baca County, Colorado
During fiscal 2002, MPAL held leases in Baca County, Colorado, in which
an exploration company drilled two wells during late 2001. MPAL elected to
participate (25%) in the completion of the wells for production, both of which
were dry holes. MPAL has now withdrawn from the area. The cost of approximately
$62,000 is included in exploratory and dry hole costs.
2. Oil and gas properties (Cont'd)
Stephens County, Texas
During fiscal 1999, MPC participated (20%) in the drilling of the
Puckett No. 1 well. During late June 1999, MPC also participated (21.4%) in the
drilling of the Smith No. 1 well. During the fiscal year 2000, the $119,000 cost
of both wells was written off because the project was deemed to be uneconomic.
(f) Belize
Southern Offshore Block PSA
During July 2000, MPC (3%) and MPAL (20%) withdrew from the joint
venture which was formed to explore the Southern Offshore Blocks in Belize,
Central America. Most of the costs related to this project had been written off
in prior years except for $33,000 written off in fiscal 2000.
(g) Exploratory and dry hole costs
The 2002, 2001 and 2000 costs relate primarily to the exploration work
being performed on MPAL's offshore Western Australian properties. In addition,
the costs in 2002 include the dry hole costs (a total of $2.7 million) of the
Carbine-1 and the Maribou-1 wells which were drilled in the Browse Basin
offshore Western Australia. The costs (in thousands) for MPC and MPAL by
location were as follows:
2002 MPC MPAL Total
---------------------- --- ---- -----
U.S. / Belize $ - $ 62 $ 62
Australia/New Zealand - 4,081 4,081
--- ----- -----
Total $ - $4,143 $ 4,143
=== ====== =======
2001
U.S. / Belize $ - $ 2 $ 2
Australia/New Zealand - 1,622 1,622
--- ----- -------
Total $ - $1,624 $ 1,624
=== ====== =======
2000
U.S. / Belize $ 124 $ 32 $ 156
Australia - 1,933 1,933
----- ----- -----
Total $ 124 $ 1,965 $ 2,089
===== ======= =======
The following is a summary of MPAL's required and contingent
commitments for exploration expenditures for the five year period ending June
30, 2007. The contingent amounts will be dependent on such factors as the
results of the current program to evaluate the exploration permits, drilling
results and MPAL's financial position.
Fiscal Year Required Expenditures Contingent Expenditures Total
----------- --------------------- ----------------------- -----
2003 $2,323,000 $ 84,000 $ 2,407,000
2004 879,000 7,945,000 8,824,000
2005 963,000 14,113,000 15,076,000
2006 616,000 2,454,000 3,070,000
2007 - 1,421,000 1,421,000
----------- ----------- ------------
Total $4,781,000 $26,017,000 $30,798,000
========== =========== ===========
MPAL expects to fund its exploration costs through its cash and cash
equivalents and cash flow from Australian operations. MPAL also expects that it
will seek partners to share the above exploration costs. If MPAL's efforts to
find partners is unsuccessful, it may be unable or unwilling to complete the
exploration program for some of its properties. In addition to the above
commitments, MPAL has commitments of approximately $924,000 with respect to the
Palm Valley and Mereenie fields which have not been included in the consolidated
financial statements.
3. MPC condensed financial statements
The following are unconsolidated condensed balance sheets and
statements of income and cash flows of MPC (in thousands).
Magellan Petroleum Corporation
Condensed Balance Sheets
------------------------
June 30,
-------------------------
2002 2001
---- ----
Assets
Current assets $ 2,184 $ 2,485
Other assets 1,117 1,276
Investment in MPAL 14,863 13,536
------- -------
Total assets $18,164 $17,297
======= =======
Liabilities And Stockholders' Equity
Current liabilities $ 104 $ 124
------ -------
Stockholders' equity:
Capital 43,332 43,426
Accumulated deficit (15,751) (15,843)
Accumulated other comprehensive loss (9,521) (10,410)
-------- --------
Total stockholders' equity 18,060 17,173
------- -------
Total liabilities and stockholders' equity $18,164 $17,297
======= =======
Magellan Petroleum Corporation
Condensed Statements Of Income
Years ended June 30,
-------------------------------------
2002 2001 2000
---- ---- ----
Revenues $ 598 $ 564 $ 220
Costs and expenses 834 785 930
------- ------- -------
Loss before income taxes (236) (221) (710)
Income tax provision 112 109 114
------- ------- -------
Loss before equity in MPAL (348) (330) (824)
Equity in MPAL net income 440 1,402 2,314
------- ------- -------
Net income $ 92 $ 1,072 $ 1,490
======= ======= =======
3. MPC condensed financial statements (Cont'd)
Magellan Petroleum Corporation
Condensed Statements Of Cash Flows
Years ended June 30,
-----------------------------------------
2002 2001 2000
---- ---- ----
Operating Activities:
Net income $ 92 $ 1,072 $ 1,490
Adjustments to reconcile net income
to net cash used in operating activities:
Dry hole costs - - 71
Equity in MPAL net income (440) (1,402) (2,314)
Change in operating assets and liabilities:
Accounts receivable and other assets 362 (366) (6)
Accounts payable and accrued liabilities (20) 106 (52)
------- ------- --------
Net cash used in operating activities (6) (590) (811)
------- ------- --------
Investing Activities:
Additions to property and equipment - 7 -
Marketable securities matured 2,540 1,250 (956)
Marketable securities purchased (2,426) - -
Purchase of MPAL shares (337) (79) (110)
------- ------- --------
Net cash used in investing activities (223) 1,178 (1,066)
------- ------- -------
Financing Activities:
Dividends from MPAL 624 621 760
Repurchases of common stock (95) (411) -
------- ------- --------
Net cash provided by financing activities 529 210 760
------- ------- --------
Net increase (decrease) in cash and
cash equivalents: 300 798 (1,117)
Cash and cash equivalents at beginning of year 880 82 1,199
------ ------- -------
Cash and cash equivalents at end of year $ 1,180 $ 880 $ 82
====== ======= ========
4. MPAL transactions and condensed financial statements
The following are the condensed consolidated balance sheets and
consolidated statements of income of MPAL (in thousands). At June 30, 2002,
Santos Ltd. held 18.2% of MPAL and Origin Energy Limited held 17.1% with the
balance of 12.7% held by approximately 1,800 shareholders in Australia.
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include all of MPAL's subsidiaries.
Magellan Petroleum Australia Limited
Condensed Consolidated Balance Sheets
June 30,
----------------------------
2002 2001
---- ----
Assets
Current assets $19,041 $16,566
Other assets 777 688
Oil and gas properties - net 15,888 15,485
Land, building and equipment - net 767 757
-------- -------
Total assets $36,473 $33,496
======= =======
Liabilities And Stockholders' Equity
Current liabilities $ 3,538 $ 3,517
-------- -------
Long term liabilities 4,069 4,077
-------- -------
Stockholders' equity:
Capital 34,408 34,408
Retained earnings 11,075 11,440
Accumulated other comprehensive loss (16,617) (19,946)
--------- -------
28,866 25,902
-------- -------
Total liabilities and stockholders' equity $36,473 $33,496
======= =======
4. MPAL transactions and condensed financial statements (Cont'd)
Magellan Petroleum Australia Limited
Condensed Consolidated Statements of Income
Years ended June 30,
-------------------- --------------------
2002 2001 2000
---- ---- ----
Revenues $13,754 $ 14,336 $ 16,927
Costs and expenses 12,981 10,639 12,337
------- ------- --------
Income before income taxes 773 3,697 4,590
Income tax benefit (provision) 73 (966) (66)
-------- -------- --------
Net income $ 846 $ 2,731 $ 4,524
======== ======== ========
MPC and Minority Equity in MPAL
MPC equity interest in MPAL:
MPC equity in net income $ 440 $ 1,402 $ 2,314
======== ======== ========
Minority equity interest in MPAL:
Minority interest in net income $ 406 $ 1,329 $ 2,210
Other comprehensive income (loss) 1,596 (2,682) (2,023)
Other (184) (49) (77)
Dividends paid (586) (593) (731)
--------- --------- -----------
Total minority interest
increase (decrease) $ 1,232 $ (1,995) $ (621)
======== ========= ==========
5. Capital and stock options
MPC'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 December 8, 2000, MPC announced a stock repurchase plan to purchase
up to one million shares of its common stock in the open market. At June 30,
2002, MPC had purchased 500,850 of its shares at a cost of approximately
$506,000.
On October 5, 1989, MPC adopted a Stock Option Plan covering one
million shares of its common stock. The plan provided for options to be granted
at a price of not less than fair value on the date of grant and for a term of
not greater than ten years. On December 3, 1997, the Board of Directors approved
a new stock option plan for an additional one million shares with similar terms.
At June 30, 2002, 792,666 of the stock options outstanding were vested
and exercisable. During fiscal 2000, options to purchase 745,000 shares were
granted of which 235,000 of the shares are being vested 1/3rd at the end of each
year after the grant and the remaining options were vested at the date of grant.
The following is a summary of option transactions for the three years ended June
30, 2002:
Expiration Number of shares
Options outstanding Dates Exercise Prices ($)
- ------------------- ----- ----------------- -------------------
June 30, 1999 196,000 1.57
Granted Feb. 2005 745,000 1.28
-------
June 30, 2000 941,000 1.28-1.57
Expired (20,000) 1.57
--------
June 30, 2001 921,000 1.28-1.57
Expired (50,000) 1.57
--------
June 30, 2002 871,000 1.28-1.57
=======
($1.32 weighted average)
------------------------
Summary of Options Outstanding at June 30, 2002
-----------------------------------------------
Total Vested
Granted 1999 Oct. 2003 126,000 126,000 1.57
Granted 2000 Feb. 2005 745,000 666,666 1.28
------- -------
Total 871,000 792,666
======= =======
Options reserved for future grants 255,000
=======
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.
5. Capital and stock options (Cont'd)
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, 2002.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model.
Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The assumptions used
in the 2000 valuation model were: risk free interest rate - 6.65%, expected life
- - 5 years, expected volatility - .419, expected dividend - 0. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
For the purpose of pro forma disclosures, the estimated fair value of
the stock options is generally expensed in the year of grant since most of the
options are vested and immediately exercisable. The Company's pro forma
information follows:
Net income as reported - June 30, 2000 $1,490,000 $ .06
Stock option expense (336,000) (.01)
---------- -------
Pro forma net income - June 30, 2000 $1,154,000 $ 05
========== =====
Net income as reported - June 30, 2001 $1,072,000 $ .04
Stock option expense (69,000) -
---------- ------
Pro forma net income - June 30, 2001 $1,003,000 $ .04
========== =====
Net income as reported - June 30, 2002 $ 92,000 $ -
Stock option expense (31,000) -
--------- -----
Pro forma net income - June 30, 2002 $ 61,000 $ -
========= =====
6. Income taxes
(a) Components of pretax income (loss) by geographic area (in thousands)
--------------------------------------------------------------------
are as follows:
---------------
Years ended June 30,
-------------------------------------------
2002 2001 2000
---- ---- ----
United States $ (313) $ (247) $ (686)
Foreign 850 3,723 4,565
------- ------- ------
Total $ 537 $3,476 $3,879
====== ====== ======
(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:
Years ended June 30,
--------------------
2002 2001 2000
---- ---- ----
Pretax consolidated income $ 537 $3,476 $3,879
MPC's losses not recognized 236 221 710
Permanent differences (872) (471) (1,534)
------ ------ --------
Book taxable income (loss) - Australia $ (99) $3,226 $3,055
======= ====== ======
Australian tax rate 30 % 34 % 36 %
==== ==== ====
Australian income tax provision (benefit) $ (30) $1,097 $1,100
Tax (benefit) attributable to reconciliation of
year end deferred tax liability (43) (131) (1,034)
------ ------- -------
MPAL Australian tax provision (benefit) (73) 966 66
MPC income tax provision 112 109 114
----- ------ -----
Consolidated income tax provision $ 39 $1,075 $ 180
====== ====== =====
Current income tax provision $ 648 $ 1,682 $ 1,343
Deferred income tax benefit (609) (607) (1,163)
------- -------- -------
Consolidated income tax provision $ 39 $ 1,075 $ 180
====== ======= =======
Effective tax rate 7% 31% 5%
== === ==
The amounts of $2,731,000 and $3,029,000 in deferred income tax
liability at June 30, 2002 and June 30, 2001, respectively, relate primarily to
the deduction of acquisition and development costs which are capitalized for
financial statement purposes. The 2002 credit of $43,000 represents the tax
benefit of prior years' losses previously not taken into account. The 2001
credit of $131,000 represents the tax benefit of the reduction in the Australian
income tax rate. The 2000 credit of $1,034,000 represents the tax benefit of
$378,000 of prior years' losses previously not taken into account and the tax
benefit of $656,000 from the reduction in the Australian income tax rate.
6. Income taxes (Cont'd)
(c) United States
At June 30, 2002, the Company had approximately $14,627,000 and
$2,906,000 of net operating loss carry forwards for federal and state income tax
purposes, respectively, which are scheduled to expire periodically between the
years 2003 and 2022. Of this amount, MPC has federal loss carry forwards that
expire as follows: $209,000 in 2003, $915,000 in 2004, $570,000 in 2005,
$865,000 in 2007, $2,055,000 in 2008, $408,000 in 2020, $52,000 in 2021 and
$230,000 in 2022. MPAL's U.S. subsidiary has federal loss carry forwards that
expire as follows: $220,000 in 2005, $2,392,000 in 2006, $1,669,000 in 2010,
$1,764,000 in 2011, $2,855,000 in 2012, $229,000 in 2013, $96,000 in 2019,
$25,000 in 2021 and $73,000 in 2022. MPC also has approximately $441,000 of
foreign tax credit carryovers, which are scheduled to expire periodically
between the years 2004 and 2007. MPC's state loss carry forwards expire
periodically between the years 2003 and 2022. For financial reporting purposes,
a valuation allowance has been recognized to offset the deferred tax assets
related to those carry forwards and other deductible temporary differences.
Significant components of the Company's deferred tax assets were as follows:
June 30, June 30,
2002 2001
---- ----
Net operating losses $3,554,000 $3,741,000
Foreign tax credits 441,000 603,000
Interest 214,000 214,000
------- -------
Total deferred tax assets 4,209,000 4,558,000
Valuation allowance (4,209,000) (4,558,000)
----------- ----------
Net deferred tax assets $ - $ -
=========== ==========
7. Bank loan
MPAL had a A.$10 million line of credit with an Australian bank at the
bank's prime rate of interest (5.2% at June 30, 2001) plus .5% which was subject
to renewal annually, was unsecured and expired on December 31, 2001. MPAL did
not renew the line of credit because of the annual cost and because the line had
not been utilized for many years.
8. Related party and other transactions
G&O'D INC, a firm that provides accounting and administrative services,
office facilities and support staff to MPC, was paid $34,120, $38,900 and
$138,953 in fees for fiscal years 2002, 2001 and 2000 respectively. James R.
Joyce, the President and Chief Financial Officer of MPC, is the owner of G&O'D
INC. Effective January 1, 2000, Mr. Joyce became a paid officer of MPC and
received an annual salary of $160,000 for calendar year 2002 ($155,000 for 2001
and $150,000 for 2000). Mr. Timothy L. Largay, a director of the Company is a
member of the law firm of Murtha Cullina LLP, which firm was paid fees of
$36,597, $33,054 and $29,943 for fiscal years 2002, 2001 and 2000, respectively.
9. Leases
At June 30, 2002, future minimum rental payments applicable to MPAL's
noncancelable operating (office) lease were as follows:
Fiscal Year Amount
2003 $109,000
2004 115,000
---------
Total $224,000
========
The information regarding the rental expense for all operating leases
is included in Note 13.
10. Pension Plan
MPAL maintains a defined benefit pension plan and 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. MPAL is currently
reviewing the effectiveness of the plan and no new employees will be added to
the plan until the review has been completed.
The following table sets forth the actuarial present value of benefit
obligations and funded status for the MPAL pension plan:
June 30,
---------------------
2002 2001
---- ----
Change in Benefit Obligation
Benefit obligation at beginning of year $2,227,884 $2,281,366
Service cost 185,256 156,846
Interest cost 132,530 114,610
Actuarial gains and losses 31,815 79,053
Benefits paid (1,240,563) (4,977)
Taxes on contributions (25,129) (25,474)
Expenses (36,128) (43,263)
Foreign currency effect 231,780 (330,277)
--------- -----------
Benefit obligation at end of year $1,507,445 $2,227,884
========== ==========
Change in Plan Assets
Fair value of plan assets at beginning of year $2,613,307 $2,812,230
Actual return on plan assets (119,749) 118,536
Contributions by employer 142,467 163,387
Benefits paid (1,240,563) (4,977)
Foreign currency effect 271,878 (407,132)
Other (expenses) (61,257) (68,737)
----------- ----------
Fair value of plan assets at end of year $1,606,083 $2,613,307
========== ==========
Reconciliation of Funded Status
Funded Status $ 98,638 $ 385,423
Unamortized transition asset (50,135) (68,116)
Unamortized loss 728,565 370,791
-------- ----------
Prepaid benefit costs $777,068 $ 688,098
======== ==========
10. Pension Plan (Cont'd)
The net pension expense for the MPAL pension plan was as follows:
Years ended June 30,
---------------------------------
2002 2001 2000
---- ---- ----
Service cost $185,256 $156,846 $194,154
Interest cost 132,530 114,610 125,634
Expected return on plan assets (175,691) (158,893) (167,133)
Net amortization and deferred items (17,011) (22,705) (26,549)
---------- ----------- -----------
Net pension cost $125,084 $ 89,858 $126,106
======== ========= ========
Plan contributions by MPAL $142,467 $163,387 $170,907
======== ======== ========
Significant assumptions used in determining pension cost and the
related obligations were as follows:
2002 2001 2000
---- ---- ----
Assumed discount rate 5.5% 5.5% 6.0%
Rate of increase in future compensation levels 4.0% 4.0% 4.5%
Expected long term rate of return on plan assets 5.0% 6.0% 6.5%
Australian exchange rate $.56 $.51 $.60
11. Segment information
The Company has two reportable segments, MPC and its majority owned
subsidiary, MPAL. Although 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:
Years ended June 30,
----------------------------------
2002 2001 2000
---- ---- ----
Revenues:
MPC $ 1,222 $ 1,185 $ 980
MPAL 13,754 14,336 16,927
Elimination of intersegment dividend (624) (621) (760)
------- ------- --------
Total consolidated revenues $14,352 $14,900 $17,147
======= ======= =======
11. Segment information (Cont'd)
Years ended June 30,
--------------------
2002 2001 2000
---- ---- ----
Interest income:
MPC $ 115 $ 171 $ 174
MPAL 537 720 643
---------- ---------- -----------
Total consolidated $ 652 $ 891 $ 817
========== ========== ==========
Net income (loss):
MPC $ 276 $ 291 $ (64)
Equity in earnings of MPAL 440 1,402 2,314
Elimination of intersegment dividend (624) (621) (760)
---------- ---------- -----------
Consolidated net income $ 92 $ 1,072 $ 1,490
========== ========= =========
Assets:
MPC $ 18,164 $ 17,297 $ 19,115
MPAL 36,473 33,496 40,153
Equity elimination (14,471) (13,295) (15,292)
--------- --------- ----------
Total consolidated assets $ 40,166 $ 37,498 $ 43,976
========= ======== ========
Other significant items:
Depletion, depreciation and amortization:
MPC $ - $ - $ -
MPAL 3,447 3,474 3,670
--------- -------- ---------
Total consolidated $ 3,447 $ 3,474 $ 3,670
======== ======== ========
Exploratory and dry hole costs:
MPC $ - $ - $ 124
MPAL 4,143 1,624 1,965
--------- -------- ---------
Total consolidated $ 4,143 $ 1,624 $ 2,089
======== ======== ========
Income tax expense (benefit):
MPC $ 112 $ 109 $ 114
MPAL (73) 966 66
-------- ------- ----------
Total consolidated $ 39 $ 1,075 $ 180
======== ======= =========
12. 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:
Years ended June 30,
------------------------------------------
2002 2001 2000
---- ---- ----
Revenue:
Australia $13,757 $14,336 $16,927
United States 113 172 177
Canada 482 392 43
------- -------- -------
$14,352 $14,900 $17,147
======= ======= =======
Operating income (loss):
Australia $ 396 $ 3,350 $ 4,038
New Zealand (64) (321) -
Belize (2) (7) (80)
United States 409 365 94
------- -------- -------
739 3,387 4,052
Corporate overhead and interest,
net of other income (expense) (202) 89 (173)
------- ------- -------
Consolidated operating income before
income taxes and minority interests $ 537 $ 3,476 $ 3,879
======= ======== =======
Net income (loss):
Australia $ 504 $ 1,535 $ 2,332
Belize (1) (4) (42)
New Zealand (23) (116) -
United States (388) (343) (800)
-------- -------- -------
$ 92 $ 1,072 $ 1,490
======== ======== =======
Identifiable assets:
Australia $36,475 $33,498 $40,152
United States - - 100
------- ------- -------
36,475 33,498 40,252
Corporate assets 3,691 4,000 3,724
------- ------- -------
$40,166 $37,498 $43,976
======= ======= =======
Substantially all (92%) of MPAL's gas sales were to the Power and
Water Authority (PAWA) of the Northern Territory of Australia (NTA). All of
MPAL's crude oil production was sold to the Mobil Port Stanvac Refinery near
Adelaide.
13. Other financial information
Years ended June 30,
-------------------------------------------
2002 2001 2000
---- ---- ----
Other administrative expenses:
Consultants $ 55,681 $ 84,569 $ 91,524
Directors' fees and expense 178,906 166,862 210,449
Insurance 182,592 163,666 166,004
Interest expense 9,808 16,531 19,093
Rent 188,494 183,780 193,098
Taxes 210,050 174,333 195,305
Travel 129,808 129,118 97,110
Other (net of overhead reimbursements) (179,262) (202,082) (251,328)
---------- ---------- -----------
$ 776,077 $ 716,777 $ 721,255
========== ========== ===========
Royalty payments $1,170,088 $1,326,455 $1,508,146
========== ========== ==========
Interest payments $ 9,808 $ 16,531 $ 19,093
========== ========== =========
Income tax payments $1,360,776 $1,752,371 $ 239,750
========== ========== =========
14. Selected quarterly financial data (unaudited)
The following is a summary (in thousands) except for per share amounts
of the quarterly results of operations for the years ended June 30, 2002 and
2001: See Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2002 QTR 1 QTR 2 QTR 3 QTR 4
- ---- ----- ----- ----- -----
($) ($) ($) ($)
Total revenues 3,924 3,138 3,369 3,921
Costs and expenses (2,680) (4,953) (3,262) (2,920)
Income tax (provision) benefit (309) 506 (26) (210)
Minority interests (513) 577 (78) (392)
-------- ------ ------- ---------
Net income (loss) 422 (732) 3 399
======= ======= ===== ========
Per share (basic & diluted) .01 (.03) - .02
=== ===== ===== ===
Average number of shares outstanding 24,658 24,607 24,607 24,607
====== ====== ====== ======
2001 QTR 1 QTR 2 QTR 3 QTR 4
- ---- ----- ----- ----- -----
($) ($) ($) ($)
Total revenues 3,868 3,823 3,529 3,680
Costs and expenses (2,460) (3,574) (2,092) (3,298)
Income tax (provision) benefit (478) (114) (489) 6
Minority interests (538) (157) (527) (107)
-------- ------- -------- ---------
Net income (loss) 392 (22) 421 281
======= ======= ======= ========
Per share (basic & diluted) .01 - .02 .01
=== ===== === ===
Average number of shares outstanding 25,108 25,091 24,967 24,772
====== ====== ====== ======
MAGELLAN PETROLEUM CORPORATION
SUPPLEMENTARY OIL AND GAS INFORMATION
June 30, 2002
(unaudited)
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 there from, 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) (1,000 Bbls)
---------------------------------------- ------------
Proved Reserves: Australia Canada Australia
- ---------------- --------- ------ ---------
(*) (**)
June 30, 1999 80.538 - 730
Revision of previous estimates (3.902) - (62)
Production (6.047) - (172)
------- -----
June 30, 2000 70.589 - 496
Revision of previous estimates (16.788) .724 175
Extensions and discoveries 3.963 - -
Production (5.595) (.137) (148)
------- ------ -----
June 30, 2001 52.169 .587 523
Revision of previous estimates (5.828) - 138
Extensions and discoveries - - -
Purchase of reserves .353 - -
Production (5.914) (.053) (141)
------- ------ -----
June 30, 2002 40.780 .534 520
====== ==== =====
Proved Developed Reserves:
June 30, 1999 80.538 - 730
====== ======= ===
June 30, 2000 70.589 - 496
====== ======= ===
June 30, 2001 52.169 .587 496
====== ====== ===
June 30, 2002 29.102 .534 520
======= ==== ===
(*) The amount of proved reserves applicable to the Palm Valley and Mereenie
fields only reflects the amount of gas committed to specific contracts.
Approximately 48% of reserves are attributable to minority interests at
June 30, 2002 (48.7% for 2001 and 48.8% for 2000).
(**) On January 19, 2001, MPC's carried interest account in the Kotaneelee
reached undisputed payout status.
Costs of oil and gas activities (in thousands):
- -----------------------------------------------
Australia/New Zealand
---------------------
Exploration Development Acquisition
Fiscal Year Costs Costs Costs
----------- ----------------- ----------- ---------
2002 $ 4,082 $ 1,288 $ 270
2001 1,622 2,266 -
2000 2,001 2,080 -
Americas
Exploration
Fiscal Year Costs
----------- -----
2002 $ 62
2001 2
2000 17
Capitalized costs subject to depletion, depreciation and amortization (DD&A)
(in thousands):
June 30, 2002
-------------
Australia Americas Total
--------- -------- -----
Costs subject to DD&A $47,014 $ - $47,014
Costs not subject to DD&A - - -
Less accumulated DD&A (29,968) - (29,968)
--------- -------- ---------
Net capitalized costs $17,046 $ - $17,046
======= ======= =======
June 30, 2001
-------------
Australia Americas Total
--------- -------- -----
Costs subject to DD&A $40,367 $ - $40,367
Costs not subject to DD&A - - -
Less accumulated DD&A (23,885) - (23,885)
--------- -------- ---------
Net capitalized costs $16,482 $ - $16,482
======= ======= =======
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, 2002. For the fiscal year 2000, Australia was the
only cost center with proved reserves. At June 30, 2002, approximately 48%
(48.7% for 2001 and 48.8% for 2000) of the reserves and the respective
discounted future net cash flows are attributable to minority interests.
Australia
---------
2002 2001 2000
---- ---- ----
Future cash inflows $74,503 $90,984 $120,385
Future production costs (13,481) (15,339) (16,696)
Future development costs (11,735) (9,421) (7,896)
Future income tax expense (12,421) (17,740) (26,482)
-------- -------- --------
Future net cash flows 36,866 48,484 69,311
10% annual discount for estimating timing of cash flows (11,079) (16,837) (25,261)
---------- -------- --------
Standardized measures of discounted future net cash flows $25,787 $31,647 $44,050
======= ======= =======
Canada
------
2002 2001 2000
---- ---- ----
Future cash inflows $1,029 $1,831 None
Future production costs (229) (444)
Future development costs - (40)
Future income tax expense (200) (337)
------ -----
Future net cash flows 600 1,010
10% annual discount for estimating timing of cash flows (76) (134)
---- -----
Standardized measures of discounted future net cash flows $ 524 $ 876
===== =====
Total
-----
2002 2001 2000
---- ---- ----
Future cash inflows $75,532 $92,815 $120,385
Future production costs (13,710) (15,783) (16,696)
Future development costs (11,735) (9,461) (7,896)
Future income tax expense (12,621) (18,077) (26,482)
-------- -------- --------
Future net cash flows 37,466 49,494 69,311
10% annual discount for estimating timing of cash flows (11,155) (16,971) (25,261)
-------- -------- --------
Standardized measures of discounted future net cash flows $26,311 $32,523 $ 44,050
======= ======= ========
The following are the principal sources of changes in the above
standardized measure of discounted future net cash flows (in thousands):
2002 2001 2000
---- ---- ----
Net change in prices and production costs $ 581 $ 725 $ 1,123
Extensions and discoveries - 4,895 -
Revision of previous quantity estimates (6,850) (9,997) 929
Changes in estimated future development costs (2,868) (3,968) (8,831)
Sales and transfers of oil and gas produced (7,763) (7,254) (7,990)
Previously estimated development cost incurred during the period 1,327 2,266 -
Accretion of discount 2,975 4,134 4,372
Net change in income taxes 3,958 3,028 6,344
Net change in exchange rate 2,428 (5,356) (5,218)
------- ------- -------
$(6,212) $(11,527) $(9,271)
======== ========= ========
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
has been limited to the quantities of gas committed to specific contracts and
the ability of the fields to deliver the gas in the contract years.
Reserves and Costs - Oil
At June 30, 2002, 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, 2002. All of the crude oil reserves are
developed reserves. Undeveloped proved reserves have not been estimated since
there are only tentative plans to drill 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. $13,982,000,
A.$13,892,000 and A.$13,248,000 in unrecouped capital expenditures at June 30,
2002, 2001 and 2000, respectively. The tax rate in computing Australian future
income tax expense was 30% for the fiscal years 2002 and 2001 and 34% for 2000.
Canada
For financial statements purposes in fiscal 1987 and 1988, MPC wrote
down its costs relating to 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. On January 19, 2001,
MPC's carried interest account in the Kotaneelee gas field reached undisputed
payout status. During the 4th quarter of the fiscal year 2001, MPC began
accruing its share of Kotaneelee net proceeds as income.
Reserves and Costs
Future net cash flows from net proved gas reserves in Canada were based
on MPC's share of reserves in the Kotaneelee gas field which was prepared by
independent petroleum consultants, Paddock Lindstrom & Associates Ltd., Calgary,
Canada. The estimates were based on the selling price of gas Can. $2.92 at June
30, 2002 (Can. $4.70 - 2001) and estimated future production and development
costs at June 30, 2002.
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,
2002:
Americas Australia/New Zealand
-------- ---------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Revenues:
Oil sales $ - $ - $ 2 $3,259 $4,639 $4,634
Gas sales 482 392 43 8,185 8,144 10,466
Other production income - - - 1,781 835 1,225
--- ---- -- ------- ------- ------
Total revenues 482 392 45 13,225 13,618 16,325
--- --- -- ------ ------ ------
Costs:
Production costs - 2 2 3,770 3,490 4,490
Depletion, exploratory and dry
hole costs 62 2 88 7,419 4,973 5,264
-- - -- ----- ----- -----
Total costs 62 4 90 11,189 8,463 9,754
-- - -- ------ ----- -----
Income (loss) before taxes and
minority interest 420 388 (45) 2,036 5,155 6,571
Income tax provision* (121) (98) - (611) (1,753) (2,365)
----- ---- - ----- ------- -------
Income before minority interests 299 290 (45) 1,425 3,402 4,206
Minority interests** 30 1 17 (684) (1,657) (2,054)
-- - -- ----- ------- ----------
Net income (loss) from operations $329 $291 $ (62) $ 741 $ 1,745 $ 2,154
===== ===== ======= ===== ======= =======
Depletion per unit of production - - - A.$5.35 A.$5.33 A.$4.27
======= ======= =======
* Income tax provision Australia 30% in 2002, 34% in 2001 and 36 % in
2000. Americas 25% in 2002 and 2001 due to a 25% Canadian withholding
tax on Kotaneelee gas sales.
**Minority interests 48% in 2002, 48.7% in 2001 and 48.8 % in 2000.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
For information concerning Item 10 - Directors and Executive Officers
of the Company, Item 11 - Executive Compensation, Item 12 - Security Ownership
of Certain Beneficial Owners and Management and Item 13 - Certain Relationships
and Related Transactions, see the Proxy Statement of Magellan Petroleum
Corporation relative to the Annual Meeting of Stockholders for the fiscal year
ended June 30, 2002, to be filed with the Securities and Exchange Commission,
which information is incorporated herein by reference. For information
concerning the Executive Officers of the Company, see Part I.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about the Company's common
stock that may be issued upon the exercise of options and rights under all of
the Company's existing equity compensation plans as of June 30, 2002, including
the 1989 and 1998 Stock Option Plans.
- ------------------------------------ -------------------------- --------------------- --------------------------------
Number of Securities to Weighted average
be issued upon exercise exercise price of Number of securities remaining
of outstanding options, outstanding available for issuance under
warrants and rights options, warrants equity compensation plans
(a) (#) and rights (excluding securities
(b) ($) reflected in column (a))
(c) (#)
Plan Category
- ------------------------------------ -------------------------- --------------------- --------------------------------
Equity compensation plans approved
by security holders (1)
745,000 $1.28 255,000
- ------------------------------------ -------------------------- --------------------- --------------------------------
Equity compensation plans not
approved by security holders (2)
126,000 $1.57 -
- ------------------------------------ -------------------------- --------------------- --------------------------------
Total: 871,000 $1.32 255,000
- ------------------------------------ -------------------------- --------------------- --------------------------------
(1) 1998 Stock Option Plan.
(2) 1989 Stock Option Plan.
The Company's 1989 Stock Option Plan was adopted by the Board of
Directors of the Company in October 1989. 1,000,000 shares of the Company's
common stock were authorized for issuance under the terms of the plan. Options
under the plan may be granted only to directors, officers, key employees of, and
consultants and consulting firms to, (i) the Company, (ii) subsidiary
corporations of the Company from time to time and any business entity in which
the Company from time to time has a substantial interest. The
exercise price of each option to be granted under the plan shall not be less
than the fair market value of the stock subject to the option on the date of
grant of the option. A total of 1,000,000 options were granted under the plan
and no further options will be granted under the terms of the plan.
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 37
Consolidated balance sheets as of June 30, 2002 and 2001 38
Consolidated statements of income for each of the three years
in the period ended June 30, 2002 39
Consolidated statements of changes in stockholders' equity for each
of the three years in the period ended June 30, 2002 40
Consolidated statements of cash flows for each of the three years
in the period ended June 30, 2002 41
Notes to consolidated financial statements 42-67
Supplementary oil and gas information (unaudited) 68-72
(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.
(b) Reports on Form 8-K.
-------------------
None.
(c) 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.
-------------------------------------
(a) 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 4(b) to Form
S-8 Registration Statement, filed on January 14,
1999, are incorporated herein by reference.
(b) Copy of the By-Laws, as amended filed as exhibit
4(c) to Form S-8 Registration Statement, filed on
January 14, 1999 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(a) to Annual Report on Form 10-K for the
year ended June 30, 1999 (File No. 001-5507) 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(b) to Annual Report on Form
10-K for the year ended June 30, 1999 (File No.
001-5507) 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(c) to Annual Report on Form 10-K for the year
ended June 30, 1999 (File No. 001-5507) is
incorporated herein by reference.
..
(d) Palm Valley Petroleum Lease (OL3) dated November
9, 1982 filed as Exhibit 10(d) to Annual Report on
Form 10-K for the year ended June 30, 1999 (File No.
001-5507) 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(e) to Annual Report on
Form 10-K for the year ended June 30, 1999
(File No. 001-5507) is incorporated herein by
reference.
..
(2) Copies of Supplementary Documents to May
28, 1959 Agreement (see (e)(1) above), dated
June 24, 1959, consisting of Guarantee by Home
Oil Company Limited and Pipeline Promotion
Agreement filed as Exhibit 10(e) to Annual
Report on Form 10-K for the year ended June
30, 1999 (File No. 001-5507) is incorporated
herein by reference.
..
(3) Copy of Modification to Agreement dated
May 28, 1959 (see (e)(1) above), made as of
January 31, 1961. Filed as Exhibit 10(e) to
Annual Report on Form 10-K for the year ended
June 30, 1999 (File No. 001-5507) 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 as Exhibit
10(e) to Annual Report on Form 10-K for the
year ended June 30, 1999 (File No. 001-5507)
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(f) to Annual Report on Form 10-K for
the year ended June 30, 1999 (File No. 001-5507)
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 and Amendment of October 3,
1984 to the above agreement filed as Exhibit
10(g) to Annual Report on Form 10-K for the year
ended June 30, 1999 (File No. 001-5507) 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(h) to Annual Report on Form 10-K for
the year ended June 30, 1999 (File No. 001-5507) 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 is the
Guarantee of the Northern Territory of Australia
dated June 28, 1985. All of the above were filed as
Exhibit 10(i) to Annual Report on Form 10-K for the
year ended June 30, 1999 (File No. 001-5507) 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(j) to Annual Report on Form 10-K for the year
ended June 30, 1999 (File No. 001-5507) is
incorporated herein by reference.
(k) Agreement between the Mereenie Producers and the
Palm Valley Producers dated June 28, 1985 filed as
Exhibit 10(k) to Annual Report on Form 10-K for the
year ended June 30, 1999 (File No. 001-5507) 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 filed as Exhibit 10(l) to
Annual Report on Form 10-K for the year ended June
30, 1999 (File No. 001-5507) is incorporated herein
by reference.
..
(m) 1998 Stock Option Plan, filed as exhibit 4(a) to
Form S-8 Registration Statement on January 14, 1999,
is incorporated filed as Exhibit 10(m) to Annual
Report on Form 10-K for the year ended June 30, 1999
(File No. 001-5507) is incorporated herein by
reference.
(n) Employment Agreement between James R. Joyce and
Magellan Petroleum Corporation dated January 1, 2000
filed as Exhibit 10(N) to Annual Report on Form 10-K
for the year ended June 30, 2001 (File No. 001-5507)
is incorporated herein by reference.
(o) 1989 Stock Option Plan is filed herein.
11. Statement re computation of per share earnings.
-----------------------------------------------
Not applicable.
12. Statement re computation of ratios.
-----------------------------------
None.
13. Annual report to security holders, Form 10-Q or
------------------------------------------------
quarterly report to security holders.
-------------------------------------
Not applicable.
16. Letter re change in certifying accountant.
-----------------------------------------
None.
18. Letter re change in accounting principles.
------------------------------------------
None.
21. Subsidiaries of the registrant.
------------------------------
Filed herein.
22. Published report regarding matters submitted to vote
----------------------------------------------------
of security holders.
-------------------
Not applicable.
23. Consent of experts and counsel.
------------------------------
1. Consent of Ernst & Young LLP filed herein
2. Consent of Paddock Lindstrom & Associates, Ltd.
iled herein.
24. Power of attorney.
-----------------
None.
99. Additional Exhibits.
-------------------
1. Section 906 Certification
(d) Financial Statement Schedules.
-----------------------------
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
(Registrant)
/s/ James R. Joyce
------------------------
James R. Joyce, President
Dated: September 24, 2002
-----------------------
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/ Donald V. Basso /s/ James R. Joyce
- ------------------------ -------------------------------
Donald V. Basso James R. Joyce
Director Director, President and Chief Executive Officer,
Chief Financial and Accounting Officer
Dated: September 24, 2002 Dated: September 24, 2002
------------------- ------------------
/s/ Timothy L. Largay /s/ Ronald P. Pettirossi
- ------------------------ --------------------------
Timothy L. Largay Ronald P. Pettirossi
Director Director
Dated: September 24, 2002
-------------------
/s/ Walter McCann
- -------------------------
Walter McCann
Director
Dated: September 24, 2002
-------------------
Form 10-K
MAGELLAN PETROLEUM CORPORATION
Certification
CERTIFICATIONS
I, James R. Joyce, certify that:
1. I have reviewed this annual report on Form 10-K of Magellan
Petroleum Corporation; and
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Dated: September 24, 2002 \s\ James R. Joyce
--------------------------
James R. Joyce
President and Chief Executive Officer,
Chief Financial and Accounting Officer
INDEX TO EXHIBITS
10. (O) 1989 Stock Option Plan is filed herein.
21. Subsidiaries of the Registrant.
23. 1. Consent of Ernst & Young LLP
2. Paddock Lindstrom & Associates, Ltd.
99.1 Section 906 Certification