Quarterly report pursuant to Section 13 or 15(d)

Sale Agreement Santos

v2.4.0.6
Sale Agreement Santos
 9 Months Ended
Mar. 31, 2012
Transfers and Servicing [Abstract]  
Sale Agreement between Santos and MPNT [Text Block]
Lease Purchase and Sale and Participation Agreement with VAALCO ENERGY (USA), INC.
On September 6, 2011 (the “Closing Date”), the Company and NP entered into a Lease Purchase and Sale and Participation Agreement (the “VAALCO PSA”) with VAALCO ENERGY (USA), INC (“VAALCO”).
Pursuant to the VAALCO PSA, the Company received $5.0 million in cash (the “VAALCO Purchase Price”) on September 7, 2011. VAALCO also agreed to drill three new wells (the “Obligation Wells”), at its sole expense as operator, to the Bakken formation and to formations below the Bakken (the “Deep Intervals”) in Poplar. Upon completion of the Obligation Wells in the Deep Intervals of Poplar, VAALCO will have earned an undivided 65% of the Company’s working interest in the Deep Intervals within Poplar. One well is required to be spud on or before June 1, 2012, and the second and third are required to be spud on or before December 31, 2012. On January 4, 2012, VAALCO spudded the first well in Poplar. One well will be drilled horizontally to test the Bakken/Three Forks formation, one well will be drilled vertically to test the Red River formation, and a third will be targeted within the Deep Intervals at VAALCO’s discretion. All production from an Obligation Well that is completed and the revenue from the sale of such production attributable to applicable leases shall be owned by NP and VAALCO consistent with their working interests of 35% and 65%, respectively, subject to all applicable burdens and taxes. Under the VAALCO PSA, if VAALCO fails to drill and, if applicable, complete, any of the Obligation Wells in accordance with the VAALCO PSA: (i) VAALCO will not be entitled to the assignment of the Deep Intervals; (ii) VAALCO shall have no further right to earn any interest in the Deep Intervals; (iii) the Company shall be entitled to retain the VAALCO Purchase Price; (iv) VAALCO shall relinquish, effective as of the date of the failure, all of VAALCO’s rights, title, and interest in any Obligation Well that has been drilled and, if applicable, completed; and (v) the Company and NP shall have the right to terminate the VAALCO PSA. However, VAALCO shall be entitled to retain any production and the sale proceeds therefrom attributable to a relinquished Obligation Well that has accrued to VAALCO’s credit prior to the effective date of the relinquishment.
The VAALCO PSA also provides a process for the resolution of title defects reported through December 31, 2011. As of that date, VAALCO did not claim any refund against the VAALCO Purchase Price in relation to title defects.
Magellan has agreed to indemnify VAALCO from all liabilities relating to the property to the extent such liabilities are attributable to the period prior to September 6, 2011, and have arisen from the inaccuracy of any representations by Magellan in the agreement. Such indemnity shall be subject to a $50 thousand deductible amount and is capped at $3.0 million in the aggregate.
Magellan and VAALCO have agreed that should either party during the two years subsequent to September 6, 2011, agree to acquire an interest in oil and gas leases within a specified area of mutual interest, then such acquiring party shall offer to the non-acquiring party the right to purchase its proportionate share of such newly acquired interest (65% for VAALCO, 35% for Magellan) by paying its proportionate share of the acquisition price.
The accounting for this transaction is set forth in the table below:

 
March 31, 2012
 
(In thousands)
Cash consideration received
$
5,000

Net book value allocated to Deep Intervals
(829
)
Transaction costs
(162
)
Gain on sale recognized
$
4,009

Sale Agreement between Magellan Petroleum (N.T.) Pty Ltd and Santos QNT Pty Ltd and Santos Limited
On September 14, 2011, Magellan Petroleum (N.T.) Pty Ltd (“Magellan NT”), a wholly owned subsidiary of MPAL, and Santos QNT Pty Ltd (“Santos QNT”) and Santos Limited (collectively the “Santos Entities”) entered into a Sale Agreement (the “Santos SA”), dated September 14, 2011 (such transaction referred to herein as the “Santos Transaction”). On the date the Santos Transaction is completed (“Completion”), the Company will become the sole owner of the Palm Valley Interests (as defined below) and of the Dingo Interests (as defined below), while Santos will become the sole owner of the Mereenie Interests (as defined below). In accordance with the terms of the Santos SA, upon completion, the Santos Transaction is deemed to be effective as of July 1, 2011 (the “Effective Date”), a net cash consideration of AUD $25.0 million shall be payable to the Company, subject to adjustments for the period from the Effective Date to Completion, and for a period of 20 years following the Effective Date, the Company shall be entitled to a series of contingent payments, based on meeting certain threshold volumes, adding a potential total payment of AUD $17.5 million.
The Santos SA provides for the transfer of the following assets:
•
Magellan NT's 35% interest in each of the Mereenie Operating Joint Venture (Petroleum Leases 4 and 5 (“Mereenie Titles”) and associated property interests, related joint venture contracts (including a crude oil sales contract) and plant and equipment, subject to royalty obligations) and the Mereenie Pipeline Joint Venture (Pipeline License 2 and associated property interests, related joint venture contracts and plant and equipment) (collectively, the “Mereenie Interests”) to Santos QNT, giving the Santos Entities a combined 100% interest in the assets of each of the Mereenie Operating Joint Venture and the Mereenie Pipeline Joint Venture;
•
The Santos Entities' combined interests of 48% in the Palm Valley Joint Venture (Petroleum Lease 3 and associated property interests, related joint venture contracts (including a Santos Gas Contract defined below, see Note 7) and plant and equipment, subject to royalty obligations) (“Palm Valley Interests”) and combined interests of 66% in the Dingo Joint Venture (Retention License 2, associated joint venture contracts and plant and equipment, subject to royalty obligations) (“Dingo Interests”) to Magellan NT, giving Magellan NT a 100% interest in the assets of each of the Palm Valley Joint Venture and the Dingo Joint Venture.
The cash consideration payable for the sale of the Mereenie Interests by Magellan NT is AUD $28.0 million. The cash consideration payable for the sale of the Palm Valley Interests by the Santos Entities is AUD $2.9 million. The cash consideration payable for the sale of the Dingo Interests by the Santos Entities is AUD $0.1 million.
In addition, during the period from Completion until 20 years after the Effective Date, the Santos Entities will pay Magellan NT a series of contingent payments (the “Bonus Amounts”), based on meeting certain threshold volumes of net sales of petroleum from the Mereenie Titles (“Threshold Levels”) set out in the Santos SA. If, over a period of 90 consecutive days, the average daily net sales volumes exceed a Threshold Level, then the corresponding Bonus Amount shall be paid. Each Bonus Amount is only payable once and is payable on the first occasion the relevant Threshold Level is achieved. If all Threshold Levels are achieved, the cumulative Bonus Amount shall be AUD $17.5 million.
The Santos SA is subject to the satisfaction of certain customary conditions, which must be met by June 22, 2012. These conditions include approval of the Santos SA (and related transfers and dealings) under relevant petroleum legislation; approval by the Foreign Investment Review Board (which has been obtained); execution of the Santos Gas Contract defined below, (which has been executed and is only subject to Completion of the Santos SA, see Note 7); and obtaining certain third party approvals of the assignment of property interests, joint venture contracts, and royalty obligations (“Conditions”), which have now been obtained. Completion will occur five business days after the Conditions have been satisfied (or as otherwise agreed between the parties).
Because this transaction has not yet been finalized, our consideration of the accounting implications of this transaction is not complete as of this filing, and for this reason we are not in a position to provide an estimate of the financial effect of the transaction on the Company. The Company does not expect to report discontinued operations related to the proposed Santos Transaction.
The book value of the assets and liabilities related to the Mereenie Interests, including goodwill, have been separated and classified as held for sale in the unaudited condensed consolidated balance sheet at March 31, 2012, as set forth in the table below:

 
March 31, 2012
 
(In thousands)
Assets
 
Inventories
$
287

Prepaid assets
35

Proved oil and gas properties
101,166

Less accumulated depletion and depreciation and amortization
(99,831
)
Land, buildings and equipment, net
98

Total assets held for sale
$
1,755

Liabilities
 
Asset retirement obligation
$
6,773

Accounts payable
429

Liability related to assets held for sale
$
7,202

The assets held for sale exclude goodwill. The Company intends to allocate the relative fair value of the goodwill to the assets
being sold at Completion.