Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
 12 Months Ended
Jun. 30, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Note 5 - Fair Value Measurements
The Company follows authoritative guidance related to fair value measurement and disclosure, which establishes a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement using market participant assumptions at the measurement date. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
•
Level 1: Quoted prices in active markets for identical assets.
•
Level 2: Significant other observable inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3: Significant inputs to the valuation model are unobservable inputs.
The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company's policy is to recognize transfers in and/or out of a fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed for all periods presented. During the years ended June 30, 2013, and 2012, there have been no transfers in and/or out of Level 1, Level 2, or Level 3.

Assets and liabilities measured on a recurring basis
The Company's financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short term maturity of these instruments. The recorded value of the Line of Credit and Note Payable (see Note 3), approximates fair value due their variable rate structure. The Company's other financial and non-financial assets and liabilities measured on a recurring basis are measured and reported at fair value.
The following table presents items required to be measured at fair value on a recurring basis by the level in which they are classified within the valuation hierarchy for the fiscal years ended:
 
June 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents (1)
$
26,270

 
$
—

 
$
—

 
$
26,270

Securities available for sale (2)
44

 
—

 
—

 
44

 
$
26,314

 
$
—

 
$
—

 
$
26,314

Liabilities:
 
 
 
 
 
 
 
Contingent consideration payable
$
—

 
$
—

 
$
3,940

 
$
3,940

 
 
 
 
 
 
 
 
 
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents (1)
$
38,565

 
$
—

 
$
—

 
$
38,565

Securities available for sale (2)
155

 
—

 
—

 
155

 
$
38,720

 
$
—

 
$
—

 
$
38,720

Liabilities:
 
 
 
 
 
 
 
Contingent consideration payable
$
—

 
$
—

 
$
4,072

 
$
4,072


(1) Cash equivalents have maturities of 90 days or less. In the US cash equivalents were held in US Treasury notes and in Australia cash equivalents were held in several time deposit accounts.
(2) Included in the consolidated balance sheets under prepaid and other assets.
The contingent consideration payable is a standalone liability that is measured at fair value on a recurring basis for which there is no available quoted market price, principal market, or market participants. The inputs for this instrument are unobservable and therefore classified as Level 3 inputs. The calculation of this liability is a significant management estimate and uses drilling and production projections, consistent with the Company's reserve report for NP, to estimate future production bonus payments, and a discount rate that is reflective of the Company's credit adjusted borrowing rate. Inputs are reviewed by management on an annual basis and the liability is estimated by converting estimated future production bonus payments to a single net present value using a discounted cash flow model. Payment of future production bonuses are sensitive to the Company's 60 day rolling production average. The contingent consideration payable would increase with significant production increases, and or a reduction in the discount rate.
The following table presents information about significant unobservable inputs to the Company's Level 3 financial liability measured at fair value on a recurring basis for the fiscal years ended:
 
 
 
 
 
 
June 30,
Description
 
Valuation technique
 
Significant unobservable inputs
 
2013
 
2012
Contingent consideration payable
 
Discounted cash flow model
 
Discount rate
 
8.0%
 
8.0%
 
 
 
 
First production payout
 
December 31, 2015
 
December 31, 2013
 
 
 
 
Second production payout
 
December 31, 2016
 
December 31, 2015

Adjustments to the fair value of the contingent consideration payable is recorded in the consolidated statements of operations under net interest income. The following table presents a roll forward of the contingent consideration payable for the fiscal years ended:
 
June 30,
 
2013
 
2012
 
(In thousands)
Fiscal year beginning balance
$
4,072

 
$
—

Liability assumed
—

 
4,151

Accretion expense
326

 
247

Revision to estimate
(458
)
 
(326
)
Fiscal year closing balance
$
3,940

 
$
4,072


Assets and liabilities measured on a nonrecurring basis
Due to the unobservable nature of the significant inputs required to measure these items at fair value, they are classified within Level 3. The following table presents information about significant unobservable inputs to the Company's Level 3 financial assets and liabilities measured at fair value on a nonrecurring basis: fiscal years ended:
Description
 
Fair value
 
Valuation technique
 
Significant unobservable inputs
 
Range of inputs
 
 
(In thousands)
 
 
 
 
 
 
Acquisition of oil and gas properties under the Nautilus PSA
 
$
2,141

 
Combination of discounted cash flow model and market value approach
 
Adjusted oil price
 
$95/bbl
Discount rate
10.0%
 
 
 
 
 
 
 
 
 
Palm Valley oil and gas properties acquired in Santos SA
 
$
3,403

 
Discounted cash flow model
 
Contract period
 
17 to 19 years
Discount rate
10.0% to 11.5%
 
 
 
 
 
 
 
 
 
Issuance of preferred stock to One Stone
 
$
23,502

 
Market value approach
 
Issuance price
 
$1.22149381

The Company also utilizes fair value to perform impairment tests as required on its oil and gas properties. The inputs used to determine such fair value are primarily based upon internally developed cash flow models and is also classified within Level 3.