Quarterly report pursuant to Section 13 or 15(d)

Corporate Restructuring

v2.4.0.6
Corporate Restructuring
 9 Months Ended
Mar. 31, 2012
Restructuring and Related Activities [Abstract]  
Restructuring and Related Activities Disclosure [Text Block]
Acquisition of minority interest in Nautilus Poplar LLC and acquisition of additional working interests
Poplar is composed of a 100% working interest in the oil and gas leases within the East Poplar Unit (“EPU”) in Roosevelt County, Montana, and the working interests in various oil and gas leases that are adjacent to or near EPU (“Northwest Poplar” or “NWP”) with the working interests varying between 63% and 100% in such leases (the Company’s combined working interests in EPU and NWP are herein referred to as “Poplar”). Prior to September 2, 2011, Poplar was owned entirely by NP (69%), the Company (28%), and Nautilus Technical Group, LLC (“NT”) (3%). NP was owned by the Company (83%), NT (10%), and Eastern Rider, LLC (“ER”) (7%).
On September 2, 2011, effective September 1, 2011, the Company entered into a series of transactions resulting in the Company becoming the 100% owner of the membership interest in NP and NP becoming the owner of 100% of Poplar (the “Nautilus Restructuring Transaction”). The Nautilus Restructuring Transaction enabled the Company to gain greater economic exposure to Poplar and to simplify processes and procedures relating to accounting, reporting, and capital funding. The Nautilus Restructuring Transaction consisted of (i) Magellan acquiring all of the membership interests of NT and ER, (ii) Magellan assigning its 28% share of Poplar to NP, (iii) Magellan creating a new, wholly owned Delaware LLC, Magellan Petroleum North America (“MPNA”), and assigning, effective October 1, 2011, its 100% membership interest in NP to MPNA, and (iv) NT assigning its 3% share of Poplar to MPNA. On March 30, 2012, MPNA was merged into Magellan, and as a result 100% of the interests in NP are now directly owned by Magellan.
The terms of the Nautilus Restructuring Transaction are set forth in the September 2, 2011, Purchase and Sale Agreement (the “Nautilus PSA”) between the Company and the owners of the interests in NT and ER (the “Nautilus Sellers”). The Nautilus Sellers included J. Thomas Wilson (a Magellan director and now its President and CEO), a second individual who has served as a consultant to NP, and a third individual who was an employee of NP at the time of the Nautilus Restructuring Transaction (each a “Related Seller”), as well as certain other persons. The Company negotiated the consideration and terms of the Nautilus Restructuring Transaction with the intention of transacting with the Nautilus Sellers on fair value terms. The approach to valuation was consistent with this goal.
Due to the potentially conflicting interests of the Related Sellers, the Board appointed a Special Transaction Committee (the “STC”) to provide an independent forum for the consideration of the terms of the Nautilus Restructuring Transaction as set forth in the Nautilus PSA and the related Registration Rights Agreement (See Note 3). The STC commissioned a fairness opinion from an independent investment bank to independently validate the fairness of the consideration underlying the Nautilus Restructuring Transaction. On August 24, 2011, the STC approved and recommended that the Board approve the Nautilus Restructuring Transaction. On August 26, 2011, the Board approved the Nautilus Restructuring Transaction.
The Nautilus PSA provided for the Company’s purchase of all membership interests in NT and ER in return for (i) $4.0 million in cash (the “Cash Consideration”), (ii) $2.0 million less certain costs and certain debt owed to Magellan by NP, NT, and ER in privately issued shares of Magellan’s common stock, par value $0.01 (the “Net Share Consideration”), and (iii) the potential for future production payments, payable in cash to the Nautilus Sellers, collectively, of up to $5.0 million under certain conditions. The shares were sold pursuant to Section 4(2) of the Securities Act of 1933. The Cash Consideration was transferred on September 2, 2011. Consistent with the terms of the Nautilus PSA, 1,182,742 of shares in the Net Share Consideration were issued on September 23, 2011. J. Thomas Wilson’s interest in the Nautilus Restructuring Transaction approximated 52% of the consideration paid to the Nautilus Sellers.
The potential for future production payments is contingent upon achieving certain levels of production from Poplar. The first payout of $2.0 million is payable to the Nautilus Sellers when the sixty (60) day rolling average for production from Poplar has reached 1,000 barrels of oil equivalent per day as set forth in NP’s Reports of Production to the Board of Oil and Gas Conservation of the State of Montana (the “Reports”). The second payout in the amount of $3.0 million will be paid to the Nautilus Sellers when the sixty (60) day rolling average for production from Poplar has reached 2,000 barrels of oil equivalent per day as per the Reports. The fair value of these contingent payments is calculated at the end of each fiscal quarter using a consistent methodology. Magellan estimates the timing of the two production payouts with reference to both the projections used to value the Company's reserves at the end of the prior fiscal year and management's current outlook on future drilling plans.  Magellan discounts the value of the two production payouts back to the end of the relevant fiscal quarter using a credit adjusted risk free rate.  The credit adjusted risk free rate is the same rate Magellan uses to calculate the fair value of its asset retirement obligations at a given valuation date.  As of March 31, 2012, the contingent consideration payable was valued at $4.3 million.
The buy-out of the minority interests in NP from NT and ER was accounted for as an equity transaction with the impact reflected directly in equity at estimated fair value.
The acquisition of NT’s direct working interests in the affected leases within Poplar was treated as a business combination for accounting purposes. The fair value of assets acquired and liabilities assumed were recorded at estimated fair value. This estimate was made based on significant unobservable (Level 3) inputs and based on the best information available at the time (See Note 13). A de minimis amount of revenues and earnings related to the working interests acquired are included in the accompanying unaudited condensed consolidated statements of operations for the nine months ended March 31, 2012. No pro forma financial results are provided for the nine months ended March 31, 2012, or 2011, due to the immaterial effect.
The table below summarized the consideration paid to NT and ER under the Nautilus PSA and the estimated fair value of the assets acquired and liabilities assumed for the working interests acquired from NT, effective September 1, 2011.

 
NT non-
controlling
 interest in NP
 
NT working
 interest in
 Poplar
 
ER non-
controlling
 interest in NP
 
Total
 
(In thousands)
Consideration paid to Sellers (1):
 
 
 
 
 
 
 
Cash consideration
$
1,920

 
$
823

 
$
1,257

 
$
4,000

Share consideration (2)
907

 
389

 
526

 
1,822

Fair value of contingent consideration payable
1,993

 
854

 
1,304

 
4,151

 
$
4,820

 
$
2,066

 
$
3,087

 
$
9,973

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
(In thousands)
Recognized amount of identifiable assets acquired and liabilities assumed for Business combination:
 
 
 
 
 
 
 
Oil and gas assets (proved)
 
 
 
 
 
 
$
1,462

Oil and gas assets - Deep Intervals (unproved)
 
 
 
 
 
 
679

ARO liability
 
 
 
 
 
 
(75
)
 
 
 
 
 
 
 
$
2,066


(1) Excludes transaction costs
(2) Common stock valued at $1.54 per share closing price on the date of the transaction.