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PRESIDENT’S
MESSAGE
The
Company reports strong operational results, offset by tax
settlement disbursements. Going forward, significant change is
expected in operations, ownership, governance, and
sales.
Let me first introduce myself. I, William (Bill) Hastings, came
to Magellan in December 2008 with twenty-eight years management
experience in the international energy business. I saw Magellan,
then and today, as an excellent platform to apply that
experience toward a new, and much different, growth plan for
your Company. In these tough times, Magellan has unique and
favorable financial credentials. We can complement that with
access to new capital and ideas “tempered by
experience.” Our new team has had some past
success — but, even more importantly, has developed,
over time, strong knowledge of the business, good contacts in
that business, and a tested view toward what works versus what
doesn’t.
Our first order of business is to explain the reasons for the
five-month delay in holding our Annual Meeting. While 2008
produced strong operational cash flow, there were a number of
extraordinary events which required time and attention. First,
my entry into the Company occurred in December 2008. We followed
that with an initial, but significant, investment in your
Company by Young Energy Prize S.A. (YEP). This particular
transaction is subject to your affirmative vote. That investment
is significantly accretive to shareholders and bolsters our
strong balance sheet. Complex negotiations then started with the
YEP Group and certain of our shareholders with the objective of
creating positive momentum as we proceed forward. We’ve
achieved that momentum. The extra
5-months was
time well spent. I sincerely hope that, over time, you as
shareholders will appreciate the effort made so far and gain
value from consequences of that work in the future.
For the fiscal year ended June 30, 2008 results were good
and included a 33% increase in gross revenues to
$40.9 million. Although operating income increased to
$3.3 million, results included a one-time
$13.3 million ((AUS) $14.6 million) settlement of a
dispute with the Australian Tax Office (ATO). The ATO settlement
was the cause of the Company’s consolidated net loss of
$8.9 million ($.21 per share) as compared to net income of
$447,000 ($.01 per share) on revenues of $30.7 million in
fiscal 2007.
Magellan began fiscal 2009 with a total of $34.6 million of
cash and cash equivalents and $4.4 million of marketable
securities with no long-term debt. Cash balances remain strong,
but were affected, in U.S. dollar equivalent terms, by
extraordinary volatility in the Australian dollar to US dollar
exchange rate. The company has taken steps to retain U.S dollars
in Australia in an effort to cushion the impact of currency
fluctuations short of expensive hedging.
Our Mereenie contract with Gasgo Pty. Ltd (Gasgo) extends from
month-to-month with current long-term “planning”
nominations ending 1st April, 2010. Power and Water
Corporation (“PWC”) has contracted with Eni Australia
for the supply of PWC’s Northern Territory gas demand
requirement for twenty five years and was initially expected to
commence sales in January, 2009. Eni Australia is to supply the
gas from its Blacktip field offshore of the Northern Territory.
ENI Australia has encountered significant delay and operational
challenges associated with the development of
Blacktip — including plugging and abandoning of one
“step out” well. Gasgo, the purchaser of all Mereenie
gas production, has advised us that the development of the
Blacktip gas field has, indeed, been delayed and has extended
gas nominations into the third quarter of 2009 with planning
nominations made through 1st April, 2010.
The Mereenie Producers are continuing efforts to supply
PWC’s future gas demand and to augment Blacktip gas. There
is a possibility that all Amadeus Basin gas deliverability could
be combined with the distressed Blacktip flow to achieve
efficiencies and savings for all Parties (producers and buyers)
in the Darwin supply grid. There are significant unknowns with
regard to Blacktip capability, efficiency, and natural gas
deliverability. MPAL may, or may not, be able to contract for
the sale of the remaining uncontracted reserves. Negotiations on
this premise are active with ENI Australia, PWC, and with Darwin
LNG Operator, Conoco Phillips.
If MPAL is unable to obtain additional contracts for its
remaining gas reserves
and/or if it
is unsuccessful in its current exploration program, its revenues
will be materially reduced beginning in 2010.
In the United Kingdom, Magellan holds interests in various
exploration licenses in the Weald-Wessex Basins Magellan (40%
interest), will participate in the Markwells Wood-1 exploration
well in PEDL 126 and the Leigh Park-1 exploration well in PEDLs
155 and 099 of the Weald Basin of southern England.
Magellan’s first well at Markwells Wood has been delayed by
a U.K. court ruling (covering a field elsewhere in the Basin)
which redefines royalty ownership and structure. Planning
permission was received from the Hampshire County Council on
March 11, 2009 to drill the Havant-1 well in the Weald
Basin. No significant conditions were placed on the permission,
which will allow early construction of the site.
Nockatunga generated improved results over 2007. The
ten — well exploration, appraisal and development
drilling campaign in the Nockatunga oil fields completed in late
2007 proved very successful. Volume in these fields increased
71% over 2007. In 2009, due to the high-cost nature of this area
and the current price of oil, drilling activity will be reduced.
Looking
Ahead
While Magellan faces a number of challenges going forward, it is
not facing problems caused by the credit crunch and excessive
debt. In fact, Magellan is challenged to move existing
natural gas to market and to choose which growth idea is best.
Our strong balance sheet with ample cash and no long-term debt
gives us the opportunity to make high-value acquisitions of and
from once high-flying, now distressed, oil and natural gas
production companies.
To execute this plan, we have new, experienced management and a
new, world-scale Investor with strong technical and
transactional acumen. There is no shortage of opportunity and we
are comfortable that additional capital is available should it
be required.
One particularly exciting option for us involves the 82 TCF of
discovered but undeveloped natural gas reserve base in an
offshore area north and west of Darwin, NT — known as
the Bonaparte Basin. Offshore reserves here are valued currently
on Australian, European, and American stock exchanges at
less than 20 U.S. cents per mmbtu
equivalent — these are truly astonishing numbers.
Creative application of development expertise and commercial
relationships could build a position there; and develop key gas
holdings for a still energy-short Chinese market only
3,500 miles away.
Another example is the North Sea. There, in the Norwegian
sector, the Government has a program whereby up to 78% of
audit-confirmed “dry hole” costs, if incurred, are
reimbursed to new developers. Given the rich natural gas
province there and our past connections with that area, along
with the risk-reducing inducements of the Norwegian Government,
high-value natural gas development projects may be achievable.
With regard to current assets and business, we will continue our
active efforts to monetize MPAL’s significant remaining
Amadeus Basin reserves. We have been energetically pursuing a
number of possibilities in this area and remain hopeful of a
positive outcome. Discussions are being held with ENI Australia,
Santos, PWC, and with ConocoPhillips. Any outcome could include
a longer-term “traditional” gas sales agreement, an
outright property sale, a swap,
and/or a
purchase of another related property.
Also, and more importantly, we have embarked on a strong effort
to reduce unit production cost at our fields. While this work is
more tedious and difficult, we must do things more cheaply and
efficiently. Again, here, we are active with our partner,
Santos, to operate in a new, totally different manner.
Energy volatility will continue while we plan and execute. Where
will our new investment be targeted? Which technology makes the
most sense? Which outside Company has the highest value
reserves? Should we drill or
acquire? All of these questions are important and are being
pursued. At the moment, in the midst of a unique and deep
downturn, reserve acquisitions make more sense, in most cases,
than drilling new wells.
Lastly, Magellan will continue toward final resolution and
initial drilling of its unique onshore, U.K. position. As soon
as feasible, subject to rig scheduling and availability, we will
drill at least one well there. We are encouraged by the
geography and geology in this area — especially with
the first well site lying between two producing fields. While
there is a good chance the geology will be “tight”, we
remain optimistic.
In summary, we have no shortage of opportunity and have a strong
balance sheet. Going forward, only time will be in short supply.
We are doing our very best to increase value in the Company and
remain confident that the fruits from our current hard work will
be evident soon. Toward that end, at our annual meeting this
year, we are asking you to approve six critically important
resolutions. Please take the time to review that proxy material
and submit questions if there are any with regard to our current
position and strategy.
Respectfully submitted,
William H. Hastings
President, Chief Executive Officer
April 17, 2009
Portland, Maine
