Note 4 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 such working interests varying between 63% and 100% in such leases (the Company's combined working interests in EPU and NWP is 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” or the “Transaction”). The 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 Transaction consisted of (i) MPC acquiring all of the membership interests of NT and ER, (ii) MPC assigning its 28% share of Poplar to NP, (iii) NT assigning its 3% share of Poplar to NP, and (iv) MPC 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.

The terms of the Nautilus Restructuring are set forth in the September 2, 2011 Purchase and Sale Agreement (the “PSA”) between the Company and the owners of the interests in NT and ER (the “Nautilus Sellers”). The Nautilus Sellers included J. Thomas Wilson (an MPC 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 Transaction (each a “Related Seller”), as well as certain other persons. The Company negotiated the consideration and terms of the Nautilus Restructuring 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 conflicting interests of the Related Sellers, the Board appointed a Special Transaction Committee (the “Committee”) to provide an independent forum for the consideration of the terms of the Nautilus Restructuring as set forth in the PSA and the related Registration Rights Agreement (Note 5). The Committee commissioned a fairness opinion from an independent investment bank to independently validate the fairness of the consideration underlying the Nautilus Restructuring. On August 24, 2011, the Committee approved and recommended that the Board approve the Transaction. On August 26, 2011, the Board approved the Transaction.

The PSA provided for the Company's purchase of all membership interests in NT and ER in return for (i) $4,000,000 in cash (the “Cash Consideration”), (ii) $2,000,000 less certain costs and certain debt owed to MPC by NP, NT, and ER in privately issued shares of MPC's common stock, par value $0.01 ("Common Stock") (“Net Share Consideration”), and (iii) the potential for future production payments, payable in cash to the Nautilus Sellers, collectively, of up to $5,000,000 under certain conditions. The shares were sold pursuant to Section 4(2) of the Securities Act. The Cash Consideration was transferred on September 2, 2011. Consistent with the terms of the PSA, 1,182,742 shares of Common Stock were issued on September 23, 2011 (the “Issuance Date”). J. Thomas Wilson's interest in the Nautilus 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 was based on the estimated timing of the production payouts, which was based on the projections used in valuing MPC's proved reserves as of June 30, 2011. The Company utilized a discount rate of 8% which is consistent with the rate used in valuing its asset retirement obligations and reflects the Company's credit adjusted incremental borrowing rate. Management has applied assumptions to estimate the fair value of the liability related to the contingent payments consistently, which was valued at $4,232,000 and $0 as of December 31, 2011 and June 30, 2011, respectively.

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 Level 3 or unobservable inputs (see Note 15). Unobservable inputs are defined in authoritative guidance as inputs that reflect the Company's assumptions of what market participants would use in pricing the asset or liability based on the best information available at the time. 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 six months ended December 31, 2011. No pro forma financial results are provided for the six months ended December 31, 2011, or 2010, due to the immaterial effect.

The table below summarized the consideration paid to NT and ER under the PSA and the estimated fair value of the assets acquired and liabilities assumed for the working interests acquired from NT.