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Basis of Presentation
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Jun. 30, 2012
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| Basis Of Presentation And Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||
| Basis Of Presentation |
Note 1 - Basis of Presentation
Description of Operations
Magellan Petroleum Corporation (the "Company" or "Magellan" or "we" or "us") is an independent energy company engaged in the acquisition, exploration, exploitation, development, production, and sale of crude oil and natural gas. As of June 30, 2012, Magellan had two reporting segments: (i) a 100% membership interest in Nautilus Poplar LLC ("NP"), based in Denver, Colorado, and (ii) a 100% equity interest in its subsidiary, Magellan Petroleum Australia Limited ("MPAL"), headquartered in Brisbane, Australia, which includes our operations in the United Kingdom.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Magellan and its wholly owned subsidiaries, NP and MPAL, and have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and the instructions to Form 10-K and Regulation S-X. All intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. The Company has evaluated events or transactions through the date of issuance of this report in conjunction with the preparation of these consolidated financial statements.
All amounts presented are in United States dollars, unless otherwise noted. Amounts expressed in Australian currency are indicated as "AUD."
Reclassification
As of December 31, 2011, we have changed the presentation of our financial statements to conform them to industry-specific norms and to improve our reporting to shareholders and stakeholders. Specifically, we have modified the presentation of expenses in the consolidated statements of operations and the presentation of property and equipment in the consolidated balance sheets. As a result, certain reclassifications have been made to the prior period financial statements to align them with this revised presentation format, there was no impact on previously reported results (see Note 16).
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of oil and gas reserves, assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of our foreign subsidiaries is their local currency. Assets and liabilities of foreign subsidiaries are translated to United States dollars at period-end exchange rates, and our consolidated statements of operations and cash flows are translated at average exchange rates during the period. Resulting translation adjustments are recorded as a separate component of stockholders' equity as accumulated other comprehensive income (loss).
Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in foreign currency transaction gains and losses that are reflected in results of operations as unrealized (based on period end translation) or realized (upon settlement of the transactions) and reported under general and administrative expenses.
Cash and Cash Equivalents and Concentration of Credit Risk
The Company considers all highly liquid short term investments with original maturities of three months or less at the date of acquisition to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short term nature of these instruments.
The Company's financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Large balances of cash and cash equivalents were held in several Australian banks in time deposit accounts that have terms of 90 days or less. The Company regularly assesses the level of credit risk we are exposed to and whether there are better ways of managing credit risk. The Company invests its cash and cash equivalents with reputable financial institutions. At times, balances deposited may exceed FDIC insured limits. The Company has not incurred any losses related to these deposits.
Accounts Receivables and Allowance for Doubtful Accounts
Trade accounts receivable consist mainly of receivables from oil and gas purchasers. For receivables from working interest partners, the Company typically has the ability to withhold future revenue disbursements to recover non-payment of joint interest billings. Generally, oil and gas receivables are collected within two months. We continuously monitor collectability of accounts receivables and use our judgment in establishing a provision for allowance for doubtful accounts based upon our historical experience and any specific customer collection issues we identify.
Inventories
Our inventories consist of oil and gas drilling or repair items such as tubing, casing, chemicals, operating supplies and ordinary maintenance materials, and parts and production equipment for use in future drilling operations or repair operations. All inventories are carried at the lower of cost or net realizable value.
Oil and Gas Exploration and Production Activities
The Company follows the successful efforts method of accounting for its oil and gas exploration and production activities. Under this method, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense and included within the consolidated statement of cash flows and reported as capital expenditures under investing activities. The costs of development wells are capitalized whether those wells are successful or unsuccessful.
Geological and geophysical costs and the costs of carrying and retaining unproved properties are expensed as incurred to exploration expense. Depreciation, depletion, and amortization ("DD&A") of capitalized costs related to proved oil and gas properties is calculated on a property-by-property basis using the units-of-production method based upon proved reserves. The computation of DD&A takes into consideration restoration, dismantlement, and abandonment costs as well as the anticipated proceeds from salvaging equipment. The Company records its proportionate share in joint venture operations in the respective classifications of assets, liabilities, and expenses.
The sale of a partial interest in a proved oil and gas property is accounted for as normal retirement, and no gain or loss is recognized as long as the treatment does not significantly affect the units-of-production depletion rate. A gain or loss is recognized for all other sales of producing properties and is included in the accompanying consolidated statements of operations.
The Company reviews its proved oil and gas properties for impairment whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. The Company estimates the expected undiscounted future cash flows of its oil and gas properties and compares such undiscounted future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will adjust the carrying amount of the oil and gas properties to fair value. The factors used to determine fair value include, but are not limited to, recent sales prices of comparable properties, the present value of estimated future cash flows, net of estimated operating and development costs, using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected.
Land, Buildings, and Equipment
Land, buildings, and equipment and field equipment are recorded at cost. Costs of renewals and improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repair costs are expensed when incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets which range from three to fifteen years.
Securities Available for Sale
Securities available for sale are comprised of investments in publicly traded securities and are carried at quoted market prices. Unrealized gains and losses are excluded from earnings and recorded as a component of accumulated other comprehensive income in shareholders' equity, net of deferred income taxes, until realized.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the assets acquired net of the fair value of liabilities assumed in an acquisition. GAAP requires goodwill to be evaluated on an annual basis for impairment, or more frequently if events occur or circumstances change that could potentially result in impairment. We adopted the new guidance for our annual impairment test in 2012 as allowed by ASU 2011-08, and therefore performed an assessment of qualitative factors for our annual impairment test in 2012 resulting in the conclusion that there is no impairment of goodwill. The qualitative factors used in our assessment include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance.
The Company has determined that it has two reporting units, NP and MPAL. Historical goodwill in the amount of $0.7 million relates to the acquisition of a majority ownership stake in NP and $4.0 million relates to the acquisition of and additional ownership interest in MPAL. The decrease in goodwill during fiscal 2012 relates to the disposition of a portion of the MPAL reporting segment associated with the Santos SA (see Note 2). As of June 30, 2012, $1.5 million of recorded goodwill related to MPAL, and $0.7 million related to NP.
The change in the carrying amount of goodwill can be summarized as follows:
Asset Retirement Obligations
The Company recognizes an estimated liability for future costs associated with the plugging and abandonment of its oil and gas properties. A liability for the fair value of an asset retirement obligation and corresponding increase to the carrying value of the related long-lived asset are recorded at the time a well is acquired or the liability to plug is legally incurred. The increase in carrying value is included in proved oil and gas properties in the accompanying balance sheets. The Company depletes the amount added to proved oil and gas property costs, net of estimated salvage values, and recognizes expense in connection with the accretion of the discounted liability over the remaining estimated economic lives of the respective oil and gas properties (see Note 4).
Revenue Recognition
The Company derives revenue primarily from the sale of produced oil and gas. Oil and gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if the collectability of the revenue is probable. Other production related revenues correspond primarily to the Company's share of gas pipeline tariff revenues which are recorded on a gross basis at the time of sale. Transportation costs are included in production costs.
Major Customers
For our NP reporting segment, revenue from a single customer accounted for approximately 45%, 30%, and 8% of the Company's consolidated oil and gas production revenue for the years ended June 30, 2012, 2011, and 2010, respectively. For our MPAL reporting segment, revenue from one customer accounted for approximately 45%, 35% , and 25% of consolidated oil and gas production revenues for the years ended June 30, 2012, 2011, and 2010, respectively; revenue from another customer accounted for approximately 8%, 11%, and 10% of consolidated oil and gas production revenues in the same periods, respectively.
Preferred Stock
The Company has 50.0 million shares of preferred stock authorized, par value $0.01 per share, issuable from time to time in one or more series issuable at the discretion of the Company's Board of Directors. As of June 30, 2012, and 2011, no preferred stock was outstanding.
Stock Based Compensation
The Company records compensation expense for time based options on a straight-line basis over the vesting period. Performance based options are recognized when the achievement of the performance conditions is considered probable. We estimate the fair value of all performance and non-performance based stock options using the Black-Scholes-Merton pricing model. The fair value of the stock options is determined on the grant date and is affected by our stock price, and other assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, risk free interest rates, expected dividends, and the expected option exercise term. The lack of historical data related to the exercise of options leads the Company to use the simplified method to estimate the expected term of options.
Accounting for Income Taxes
The Company follows 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. The Company records a valuation allowance for deferred tax assets when it is more likely than not that such assets will not be recovered.
GAAP prescribes a comprehensive model for recognizing, measuring, presenting, and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its tax returns. Under GAAP, the Company recognizes tax positions when it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company has presumed that its positions will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The next step consists of measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. A tax position is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. An uncertain income tax position will not be recognized if it does not meet the more-likely-than-not threshold. To appropriately account for income tax matters, the Company is required to make significant judgments and estimates regarding the recoverability of deferred tax assets, the likelihood of the outcome of examinations of tax positions that may or may not be currently under review, and potential scenarios involving settlements of such matters. Changes in these estimates could materially impact the consolidated financial statements. There are no significant uncertain tax positions for either fiscal year 2012 or 2011.
The Company has adopted an accounting policy to record all tax related interest under the interest expense and tax related penalties under general and administrative expense in the consolidated statement of operations.
Financial Instruments
The carrying value for cash and cash equivalents, accounts receivable, marketable securities, accounts payable, and debt approximates fair value based on the timing of the anticipated cash flows and current market conditions.
Business Combinations
The Company applies the acquisition method of recording business combinations. Under this method, the Company recognizes and measures the identifiable assets acquired from, the liabilities assumed from, and any non-controlling interest in the acquiree. Any goodwill or gain is identified and recorded. We engage independent valuation consultants to assist us in determining the fair values of crude oil and natural gas properties acquired and other third party specialists as needed to assist us in assessing the fair value of other assets and liabilities assumed. These valuations require management to make significant estimates and assumptions, especially with respect to the oil and gas properties.
The fair value of contingent considerations are calculated using production projections and the estimated timing of production payouts. The Company also utilized a discount which is consistent with the rate used in valuing its asset retirement obligation and reflective of the Company’s credit adjusted incremental borrowing rate.
Segment Information
Prior to September 30, 2011, our reportable segments included Magellan ("Corporate"), NP, and MPAL. During the quarter ended September 30, 2011, Magellan completed a restructuring of its North American assets (see Note 2) resulting in a change to its reportable segments. Certain prior period groupings for the fiscal years ended June 30, 2011, and 2010, have been reclassified to conform to the current year segment presentation.
As of June 30, 2012, the Company had two reportable segments, NP and MPAL, as well as a head office which is treated as a cost center. The Company’s chief operating decision maker is J. Thomas Wilson (President and CEO of the Company) who reviews the results of the Australian and North American businesses on a regular basis. Both segments engage in business activities from which each may earn revenues and incur expenses. MPAL and its subsidiaries, which include our operations in the United Kingdom, are considered one segment.
Earnings (Loss) per Share
Income and losses per common share are based upon the weighted average number of common and common equivalent shares outstanding during the period. The reconciling items in the calculation of diluted earnings per share are the dilutive effect of stock options, warrants, and restricted non-vested shares. The potential dilutive impact of non-vested shares is determined using the treasury stock method. The dilutive impact of stock options and warrants is also determined using the treasury stock method.
For the years ended June 30, 2012, 2011, and 2010, the Company had 7,522,826, 9,297,826, and 8,127,826 options and warrants outstanding, respectively, that had an exercise price below the average stock price that would have resulted in 448,269, 3,460,331, and 1,634,797, incremental dilutive shares, respectively. The Company also had 100,000, 104,167, and 208,334 non-vested options for shares of Company stock that would have resulted in zero incremental dilutive shares for the years ended June 30, 2012, 2011, and 2010. There were no other potentially dilutive items for the years ended June 30, 2012, 2011, and 2010. There was no dilutive effect on earnings per share for years ended June 30, 2011, and 2010, as a result of net losses.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) is presented net of income taxes in the accompanying consolidated statements of stockholders’ equity and comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under GAAP are reported as separate components of stockholders' equity instead of net income (loss).
Recently Issued Accounting Standards
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRS ("ASU 2011-04"), which provides amendments to FASB ASC Topic 820, Fair Value Measurement. The objective of ASU 2011-04 is to create common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments clarify existing fair value measurement and disclosure requirements and make changes to particular principles or requirements for measuring or disclosing information about fair value measurements. These amendments did not have a significant impact on companies applying GAAP. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard did not have an impact on the Company’s consolidated financial statements other than additional disclosures (see Note 5).
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (amended further under ASU No. 2011-12 in December 2011). This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives: present items in net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income; or present items in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is is effective for interim and annual periods beginning after December 15, 2011. Full retrospective application is required under both sets of accounting standards. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles – Goodwill and Other: Testing Goodwill for Impairment ("ASU 2011-08"), which provides amendments to FASB ASC Topic 350, Intangibles – Goodwill and Other. The objective of ASU 2011-08 is to simplify how entities test goodwill for impairment. The amendment provides an entity with the option to first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. ASU 2011-08 is effective for interim and annual goodwill impairment tests performed for annual periods beginning after December 15, 2011. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
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