Annual report pursuant to Section 13 and 15(d)

Supplemental Oil and Gas Information

v2.4.0.6
Supplemental Oil and Gas Information
 12 Months Ended
Jun. 30, 2012
Oil and Gas Exploration and Production Industries Disclosures [Abstract]  
Supplementary Oil and Gas Information
Note 13 - Supplemental Oil and Gas Information (Unaudited)
Supplemental Oil and Gas Reserve Information
The Company relies upon a combination of internal technical staff and third party consulting arrangements for reserve estimation and review. The reserve information presented below is based on estimates of net proved reserves as of June 30, 2012, 2011, and 2010, and was prepared in accordance with guidelines established by the SEC.
In the United States, reserves estimates were prepared by the Company's Operations Manager, Blaine Spies, in 2012, and were audited by the Company's independent petroleum engineering firm, Allen & Crouch Petroleum Engineers ("A&C"), in 2012, 2011, and 2010. A copy of the summary reserve audit report of A&C is provided as Exhibit 99.1 to this Annual Report on Form 10-K. A&C does not own an interest in any of Magellan's oil and gas properties and is not employed by Magellan on a contingent basis.
In Australia, reserve estimates were prepared by the Ryder Scott Company ("RS"), an independent petroleum engineering firm, in 2012, and 2011. In 2010, reserve estimates were prepared by the RISC Pty Ltd ("RISCS"), an independent petroleum engineering firm. Reserve estimates were prepared in accordance with the Company's internal control procedures, which include the verification of input data used by RS and RISC, as well as management review and approval. A copy of the summary reserve report of RS is provided as Exhibit 99.2 to this Annual Report on Form 10-K. RS does not own an interest in any of Magellan's oil and gas properties and is not employed by Magellan on a contingent basis.
Proved reserves are the estimated quantities of oil, gas, and natural gas liquids, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined and the price to be used is the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. All of the Company's estimated proved reserves are located in North America and Australia.
Analysis of Changes in Proved Reserves
The following table sets forth information regarding the Company's estimated proved oil and gas reserve quantities. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries and undeveloped locations are more imprecise than estimates of established producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available.
 
United States
 
Australia (1)
 
Total
 
Oil
(Mbbls)
 
Gas
(MMcf)
 
Oil
(Mbbls)
 
Gas
(MMcf)
 
Oil
(Mbbls)
 
Gas
(MMcf)
 
 
 
 
 
 
 
 
 
 
 
 
Proved Reserves:
 
 
 
 
 
 
 
 
 
 
 
2009
—

 
—

 
996.0

 
3.3

 
996.0

 
3.3

Extensions and discoveries
6,963.0

 
—

 
—

 
—

 
6,963.0

 
—

Revision of previous estimates
(74.0
)
 
—

 
(694.0
)
 
1.6

 
(768.0
)
 
1.6

Purchase of minerals in place
2,631.0

 
—

 
—

 
—

 
2,631.0

 
—

Sales of minerals in place
—

 
—

 
(205.0
)
 
—

 
(205.0
)
 
—

Production
(42.0
)
 
—

 
(97.0
)
 
(3.4
)
 
(139.0
)
 
(3.4
)
2010
9,478.0

 
—

 
—

 
1.5

 
9,478.0

 
1.5

Extensions and discoveries
6.0

 
—

 
—

 
—

 
6.0

 
—

Revision of previous estimates
(404.0
)
 
—

 
64.0

 
(0.2
)
 
(340.0
)
 
(0.2
)
Purchase of minerals in place
178.0

 
—

 
—

 
—

 
178.0

 
—

Production
(68.0
)
 
—

 
(64.0
)
 
(0.9
)
 
(132.0
)
 
(0.9
)
2011
9,190.0

 
—

 
—

 
0.4

 
9,190.0

 
0.4

Extensions and discoveries
186.4

 
—

 
—

 
—

 
186.4

 
—

Revision of previous estimates
(1,643.8
)
 
—

 
—

 
6.0

 
(1,643.8
)
 
6.0

Purchase of minerals in place
1,246.8

 
—

 
—

 
5.5

 
1,246.8

 
5.5

Production
(74.2
)
 
—

 
—

 
(0.4
)
 
(74.2
)
 
(0.4
)
2012
8,905.2

 
—

 
—

 
11.5

 
8,905.2

 
11.5

(1) The amount of proved reserves applicable to Australia gas reflects the amount of gas committed to specific contracts and is net of royalties.
 
United States
 
Australia (1)
 
Total
 
Oil
(Mbbls)
 
Gas
(MMcf)
 
Oil
(Mbbls)
 
Gas
(MMcf)
 
Oil
(Mbbls)
 
Gas
(MMcf)
 
 
 
 
 
 
 
 
 
 
 
 
Proved Developed Reserves:
 
 
 
 
 
 
 
 
 
 
 
June 30, 2010
2,515.0

 
—

 
—

 
1.5

 
2,515.0

 
1.5

June 30, 2011
2,249.0

 
—

 
—

 
0.4

 
2,249.0

 
0.4

June 30, 2012
1,646.7

 
—

 
—

 
11.5

 
1,646.7

 
11.5

 
 
 
 
 
 
 
 
 
 
 
 
Proved Undeveloped Reserves:
 
 
 
 
 
 
 
 
 
 
 
June 30, 2010
6,963.0

 
—

 
—

 
—

 
6,963.0

 
—

June 30, 2011
6,941.0

 
—

 
—

 
—

 
6,941.0

 
—

June 30, 2012
7,258.4

 
—

 
—

 
—

 
7,258.4

 
—

(1) The amount of proved reserves applicable to Australia gas reflects the amount of gas committed to specific contracts and is net of royalties.
Extensions and discoveries. Extensions and discoveries are additions to reserve amounts either by drilling a well to extend the limits of a known reservoir or by drilling a well in a reservoir that was not included in previous reserves estimates, respectively. During the year ended June 30, 2012, in the United States, there was one discovery well, EPU 117, drilled in the Amsden formation at Poplar, which added 186 Mbbls to our reserves total. During the year ended June 30, 2011, in the United States, there were minor extensions related to Poplar. During the year ended June 30, 2010, in the United States, there were 6,963 Mbbls of extensions recorded at Poplar as a result of petrophysical, geophysical, and petrographic data based on our current proved developed wells which identified certain locations as proved undeveloped reserves.
Revision of previous estimates. Revisions of estimates represent upward (downward) changes in previous estimates attributable to new information gained primarily from development activity, production history, and changes to the economic conditions present at the time of each estimate. During the year ended June 30, 2012, in the United States, there was a 1,644 Mbbls downward revision of estimates as a result of modifications to projected production profiles from new wells. During the same period in Australia, there was a 6.0 Bcf upward revision of gas estimates related to the signing of a new gas sales contract with Santos in May 2012. During the period ended June 30, 2011, in the United States, there was a 404 Mbbls downward revision of oil estimates. During the same period in Australia, there was a 64 Mbbls upward revision of oil estimates and a 0.2 Bcf downward revision of gas estimates. During the period ended June 30, 2010, in the United States, there was a 74 Mbbls downward revision of oil estimates. During the same period in Australia, there was a 694 Mbbls downward revision of oil estimates and a 1.6 Bcf upward revision of gas estimates.
Purchase of minerals in place. During the year ended June 30, 2012, in the United States, there were 1,247 Mbbls of purchases of minerals in place related to the Company's consolidation of its ownership in NP and Poplar in September 2011. During the same period in Australia, there were 5.5 Bcf of purchases of minerals in place related to the consolidation of Magellan's ownership in Palm Valley as part of the Santos SA in the Amadeus Basin completed in May 2012. These minerals in place have been recorded as proved reserves because they have been contracted for sale under the Santos Gas Contract. During the year ended June 30, 2011, there were 178 Mbbls of purchases of minerals in place related to the Company's acquisition of non-controlling working interests in the leases of Poplar. During the year ended June 30, 2010, there were 2,631 Mbbls of purchases of minerals in place related to the Company's majority acquisition of NP in October 2009 and the Company's acquisition of Hunter's working interests in the leases of Poplar in March 2010.
Sales of minerals in place. Sales of minerals in place during 2010 relate to the Cooper basin asset sales. There were no adjustments to reserves quantities relating to sales of minerals in place for the years ended June 30, 2012, and 2011.
Standardized Measure of Oil and Gas
The Company computes a standardized measure of future net cash flows and changes therein relating to estimated proved reserves in accordance with authoritative accounting guidance. Certain information concerning the assumptions used in computing the valuation of proved reserves and their inherent limitations are discussed below. The Company believes such information is essential for a proper understanding and assessment of the data presented.
The "standardized measure" is the present value of estimated future cash inflows from proved natural gas and oil reserves, less future development and production costs and future income tax expenses, using prices and costs as of the date of estimation without future escalation, without giving effect to hedging activities, non-property related expenses such as general and administrative expenses, debt service, and depreciation, depletion, and amortization or tax, and are discounted using an annual discount rate of 10% to reflect timing of future cash flows.
The assumptions used to calculate estimated future cash inflows do not necessarily reflect the Company's expectations of actual revenues or costs, nor their present worth. In addition, variations from the expected production rate also could result directly or indirectly from factors outside of the Company's control, such as unexpected delays in development, changes in prices, or regulatory or environmental policies. The reserve valuation further assumes that all reserves will be disposed of by production. However, if reserves are sold in place, additional economic considerations could also affect the amount of cash eventually realized.
Prices. All prices used in calculation of our reserves are based upon a twelve month unweighted arithmetic average of the first day of the month price for the period July 2011 through June 2012, unless prices were defined by contractual arrangements. Prices are adjusted for local differentials and gravity and, as required by the SEC, held constant for the life of the projects (i.e., no escalation). The resulting prices used for proved reserves for the year ended June 30, 2012 are:
 
United States
 
Australia
Year ended June 30, 2012
 
 
 
Oil
$
84.94

 
NA

Gas
NA

 
$
4.64


Costs. Future development and production costs are calculated by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions.
Income taxes. Future income tax expenses are calculated by applying the appropriate year-end statutory tax rates, with consideration of future tax rates already legislated, to the future pre-tax net cash flows relating to the Company's proved oil and gas reserves. Permanent differences in oil and gas related tax credits and allowances are recognized.
Discount. The present value of future net cash flows from the Company's proved reserves is calculated using a 10% annual discount rate. This rate is not necessarily the same as that used to calculate the current market value of our estimated oil and natural gas reserves.
The following table presents the standardized measure of discounted future net cash flows related to proved oil and gas reserves:
 
United States
 
Australia
 
Total
 
(In thousands)
Fiscal year ended June 30,
 
 
 
 
 
2012
 
 
 
 
 
Future cash inflows
$
756,405

 
$
53,296

 
$
809,701

Future production costs
(291,212
)
 
(34,729
)
 
(325,941
)
Future development costs
(34,416
)
 
(4,107
)
 
(38,523
)
Future income tax expense
(152,314
)
 
(3,667
)
 
(155,981
)
Future net cash flows
278,463

 
10,793

 
289,256

10% annual discount
(156,967
)
 
(2,214
)
 
(159,181
)
Standardized measures of discounted future net cash flows
$
121,496

 
$
8,579

 
$
130,075

 
 
 
 
 
 
2011
 
 
 
 
 
Future cash inflows
$
734,592

 
$
972

 
$
735,564

Future production costs
(303,005
)
 
(700
)
 
(303,705
)
Future development costs
(28,849
)
 
—

 
(28,849
)
Future income tax expense
(155,701
)
 
—

 
(155,701
)
Future net cash flows
247,037

 
272

 
247,309

10% annual discount
(137,021
)
 
(8
)
 
(137,029
)
Standardized measures of discounted future net cash flows
$
110,016

 
$
264

 
$
110,280

 
 
 
 
 
 
2010
 
 
 
 
 
Future cash inflows
$
627,842

 
$
3,031

 
$
630,873

Future production costs
(251,335
)
 
(1,870
)
 
(253,205
)
Future development costs
(27,293
)
 
(1,780
)
 
(29,073
)
Future income tax expense
(132,843
)
 
(297
)
 
(133,140
)
Future net cash flows
216,371

 
(916
)
 
215,455

10% annual discount
(131,163
)
 
1,062

 
(130,101
)
Standardized measures of discounted future net cash flows
$
85,208

 
$
146

 
$
85,354


A summary of changes in the standardized measure of discounted future net cash flows is as follows:
 
United States
 
Australia
 
Total
 
(In thousands)
Standardized measure of discounted future net cash flows for Fiscal year ended June 30,
 
 
 
 
 
2009
$
—

 
$
20,055

 
$
20,055

Extensions and discoveries
115,092

 
—

 
115,092

Acquisitions of reserves
29,656

 
—

 
29,656

Revisions of previous quantity estimates
(8,258
)
 
1,850

 
(6,408
)
Divestiture of reserves
—

 
(11,687
)
 
(11,687
)
Sales and transfers of oil and gas produced
(1,064
)
 
(12,299
)
 
(13,363
)
Accretion of discount
1,725

 
—

 
1,725

Net change in income taxes
(53,722
)
 
2,227

 
(51,495
)
Net change in timing and other
1,779

 
—

 
1,779

2010
85,208

 
146

 
85,354

Net change in prices and production costs
24,899

 
38

 
24,937

Extensions and discoveries
117

 
—

 
117

Acquisitions of reserves
3,486

 
—

 
3,486

Revisions of previous quantity estimates
(7,041
)
 
1,094

 
(5,947
)
Changes in estimated future development costs
(798
)
 
536

 
(262
)
Sales and transfers of oil and gas produced
(2,406
)
 
(1,940
)
 
(4,346
)
Accretion of discount
13,893

 
41

 
13,934

Net change in income taxes
(16,125
)
 
297

 
(15,828
)
Net change in timing and other
8,783

 
52

 
8,835

2011
110,016

 
264

 
110,280

Net change in prices and production costs
18,517

 
—

 
18,517

Extensions and discoveries
6,785

 
—

 
6,785

Acquisitions of reserves
26,584

 
4,872

 
31,456

Revisions of previous quantity estimates (1)
(37,846
)
 
6,144

 
(31,702
)
Changes in estimated future development costs
(2,275
)
 
(555
)
 
(2,830
)
Sales and transfers of oil and gas produced
(941
)
 
(264
)
 
(1,205
)
Previously estimated development cost incurred during the period
5,841

 
—

 
5,841

Accretion of discount (2)
—

 
—

 
—

Net change in income taxes
(1,657
)
 
(1,576
)
 
(3,233
)
Net change in timing and other
(3,528
)
 
(306
)
 
(3,834
)
2012
$
121,496

 
$
8,579

 
$
130,075

(1) The downward revision of previous quantity estimates of 1,644 Mbbls resulted from a reduced well count which was impacted by higher operating costs.
(2) For the year ended June 30, 2012, Magellan assumed no benefit from the accretion of the beginning of year value of its proved oil reserves in the United States. Accretion, with respect to measuring the changes in the standardized measure of reserves values, represents the value benefit of being closer in time, relative to the prior year's standardized measure, to future cash flows in the reserves projections. During the year ended June 30, 2012, Magellan did not develop its United States proved oil reserves in accordance with its reserve plan as of June 30, 2011, and instead postponed its reserves development plan by one year. Therefore, the benefit of accretion of last year's reserves should not factor into the value of the current standardized measure.