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Document and Entity Information (USD $)
12 Months Ended
Jun. 30, 2012
Sep. 17, 2012
Dec. 30, 2011
Document Information [Line Items]
Document Type 10-K
Document Period End Date Jun 30, 2012
Amendment Flag false
Document Fiscal Period Focus FY
Document Fiscal Year Focus 2012
Current Fiscal Year End Date --06-30
Entity Central Index Key 0000061398
Entity Current Reporting Status Yes
Entity Filer Category Smaller Reporting Company
Entity Registrant Name MAGELLAN PETROLEUM CORP /DE/
Entity Voluntary Filers No
Entity Well-known Seasoned Issuer Yes
Entity Common Stock Shares Outstanding 53,885,594
Entity Public Float $ 41,241,284
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Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2012
Jun. 30, 2011
Current Assets:
Cash and cash equivalents $ 41,215 $ 20,417
Accounts receivable — trade (net of allowance for doubtful accounts of $0 and $66 as of June 30, 2012 and 2011, respectively) 1,152 4,357
Accounts receivable - working interest partners 231 454
Deposit On Evans Shoal 0 10,745
Inventories 499 732
Prepaid assets 498 517
Other assets 13 62
Total current assets 43,608 37,284
Property and equipment, net (succesful efforts method):
Proved oil and gas properties 33,927 136,094
Less accumulated depletion, depreciation and amortization (5,740) (115,917)
Unproved oil and gas properties 7,091 3,368
Wells in progress 3,744 4,315
Land, buildings and equipment (net of accumulated depreciation of $2,077 and $3,985 as of June 30, 2012 and 2011, respectively) 1,422 1,293
Net property and equipment 40,444 29,153
Other Non-current Assets:
Securities available for sale 155 238
Goodwill 2,174 4,695
Deferred income taxes 5,951 0
Other long term assets 242 204
Total other non-current assets 8,522 5,137
Total assets 92,574 71,574
Current liabilities:
Short term line of credit 50 1
Current portion of note payable 480 552
Current portion of asset retirement obligations 329 0
Accounts payable 3,672 3,861
Accrued and other liabilities 3,000 2,055
Total current liabilities 7,531 6,469
Long term liabilities:
Note payable 390 870
Asset retirement obligations 7,455 11,397
Contingent consideration payable 4,072 0
Other long term liabilities 218 310
Total long term liabilities 12,135 12,577
Commitments and contingencies (Note 10)      
Equity:
Common stock (par value $.01 per share): Authorized 300,000,000 shares, outstanding, 53,835,594 and 52,455,977 as of June 30, 2012 and 2011, respectively 538 525
Capital in excess of par value 90,753 93,617
Preferred stock (par value $.01 per share): Authorized 50,000,000 and 0 shares, outstanding, 0 and 0 as of June 30, 2012 and 2011, respectively 0 0
Accumulated deficit (29,590) (56,073)
Accumulated other comprehensive income 11,207 12,470
Total equity attributable to Magellan Petroleum Corporation 72,908 50,539
Non-controlling interest in subsidiaries 0 1,989
Total equity 72,908 52,528
Total liabilities and equity $ 92,574 $ 71,574
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Consolidated Balance Sheets (Parentheticals) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2012
Jun. 30, 2011
Allowance for doubtful accounts $ 0 $ 66
Accumulated depreciation $ 2,077 $ 54,985
Common stock, par value $ 0.01 $ 0.01
Common stock, authorized 300,000,000 300,000,000
Common stock, outstanding 53,835,594 52,455,977
Preferred stock, par value $ 0.01 $ 0.01
Preferred Stock, authorized 50,000,000 0
Preferred stock, outstanding 0 0
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Consolidated Statement of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2010
REVENUES:
Oil production $ 12,405 $ 11,815 $ 9,887
Gas production 1,353 1,796 13,616
Other (46) 4,565 5,022
Total revenues 13,712 18,176 28,525
OPERATING EXPENSES:
Lease operating 12,897 9,247 10,116
Depletion, depreciation, amortization, and accretion 1,744 2,890 5,428
Exploration 6,291 2,854 1,273
General and administrative 13,091 16,307 14,023
Impairment 328 173 2,050
Loss on Evans Shoal 0 15,893 0
Gain on sale of assets (40,413) (969) (6,817)
Total operating (income) expense (6,062) 46,395 26,073
Income (loss) from operations 19,774 (28,219) 2,452
Other income (expense)
Warrant expense 0 0 (4,276)
Net interest income 749 923 1,038
Other income 9 0 1,975
Total other income (expense) 758 923 (1,263)
Income (loss) before income tax 20,532 (27,296) 1,189
Income tax benefit (provision) 5,951 (5,141) (2,646)
Net income (loss) after income tax 26,483 (32,437) (1,457)
Net loss attributable to non-controlling interest in subsidiaries 15 5 11
Net income (loss) attributable to Magellan Petroleum Corporation $ 26,498 $ (32,432) $ (1,446)
Earnings per common share (Note 8):
Weighted average number of basic shares outstanding (in shares) 53,592,958 52,398,936 51,410,596
Weighted average number of diluted shares outstanding (in shares) 54,041,227 52,398,936 51,410,596
Net income (loss) per basic share outstanding (dollars per share) $ 0.49 $ (0.62) $ (0.03)
Net income (loss) per diluted share outstanding (dollars per share) $ 0.49 $ (0.62) $ (0.03)
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Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2010
Net income (loss) attributable to Magellan Petroleum Corporation $ 26,498 $ (32,432) $ (1,446)
Foreign currency translation adjustments (1,180) 9,308 1,358
Unrealized holding (losses) gains on securities available for sale, net of deferred tax of $0 (83) 46 (222)
Total comprehensive income (loss) 25,235 (23,078) (310)
Net loss attributable to non-controlling interest in subsidiary (15) (5) (11)
Comprehensive income (loss) attributable to Magellan Petroleum Corporation $ 25,220 $ (23,083) $ (321)
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Consolidated Statements of Comprehensive Income (Loss) (Parentheticals) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2010
Statement of Other Comprehensive Income [Abstract]
Unrealized holding (losses) gains on securities available for sale, tax $ 0 $ 0 $ 0
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Consolidated Statement of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Capital in Excess of Par Value
Accumulated Deficit
Accumulated Other Comprehensive Income
Non-Controlling Interest
Amount, Beginning Balance at Jun. 30, 2009 $ 53,512 $ 416 $ 73,311 $ (22,195) $ 1,980 $ 0
Shares, Beginning Balance at Jun. 30, 2009 41,500,325
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss) (1,457) (1,446) (11)
Foreign currency translation adjustments 1,358 1,358
Unrealized holding gain (loss) on securities available for sale, net of taxes (222) (222)
Stock and stock based compensation (in shares) 440,000
Stock and stock based compensation 2,305 4 2,301
Equity investment by YEP (in shares) 8,695,652
Equity investment by YEP 7,615 87 7,528
Warrants issued 6,402 6,402
Acquisition of controlling interest (in shares) 1,700,000
Acquisition of controlling interest 4,305 17 2,363 1,925
Stock options exercised (in shares) 0
Capital contribution 0
Amount, Ending Balance at Jun. 30, 2010 73,818 524 91,905 (23,641) 3,116 1,914
Shares, Ending Balance at Jun. 30, 2010 52,335,977
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss) (32,437) (32,432) (5)
Foreign currency translation adjustments 9,308 9,308
Unrealized holding gain (loss) on securities available for sale, net of taxes 46 46
Stock and stock based compensation (in shares) 90,000
Stock and stock based compensation 1,670 1 1,669
Stock options exercised (in shares) 30,000 30,000
Stock options exercised 43 0 43
Capital contribution 80 80
Amount, Ending Balance at Jun. 30, 2011 52,528 525 93,617 (56,073) 12,470 1,989
Shares, Ending Balance at Jun. 30, 2011 52,455,977 52,455,977
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss) 26,483 26,498 (15)
Foreign currency translation adjustments (1,180) (1,180)
Unrealized holding gain (loss) on securities available for sale, net of taxes (83) (83)
Stock and stock based compensation (in shares) 175,000
Stock and stock based compensation 1,560 2 1,558
Stock options exercised (in shares) 21,875 21,875
Stock options exercised 35 0 35
Acquisition of non-controlling interest (in shares) 927,352
Acquisition of non-controlling interest (6,824) 9 (4,844) (15) (1,974)
Capital contribution 0
Acquisition of working interest (in shares) 255,390
Acquisition of working interest 389 2 387
Amount, Ending Balance at Jun. 30, 2012 $ 72,908 $ 538 $ 90,753 $ (29,590) $ 11,207 $ 0
Shares, Ending Balance at Jun. 30, 2012 53,835,594 53,835,594
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Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2010
Net income (loss) after income tax $ 26,483 $ (32,437) $ (1,457)
Adjustments to reconcile net loss to net cash used in operating activities
Foreign transaction (gain) loss (1,038) 499 732
Write off of the Evans Shoal deposit 0 15,893 0
Depletion, depreciation and amortization 1,744 2,890 5,428
Interest earned on restricted deposits (24) (150) 0
Fair value increase of contingent consideration payable (79) 0 0
Deferred income taxes (5,951) 5,355 922
Gain on disposal of assets (40,413) (969) (6,817)
Gain on sale of investments 0 0 (1,975)
Exploration costs previously capitalized 2,930 (124) 0
Stock based compensation 1,560 1,670 6,582
Related party withholding tax (Note 11) 1,082 0 0
Impairment loss 328 239 2,050
Net changes in operating assets and liabilities:
Accounts receivable 3,021 625 2,733
Inventories 142 143 647
Prepayments and other current assets (36) 213 (106)
Accounts payable and accrued liabilities (138) 613 (1,689)
Other long term liabilities (113) 0 0
Income taxes payable 61 1,045 (3,098)
Net cash (used in) provided by operating activities (10,441) (4,495) 3,952
INVESTING ACTIVITIES:
Additions to property and equipment (9,577) (4,568) (2,843)
Proceeds from sale of assets 35,089 1,481 7,280
Purchase of working interest in Poplar (823) (380) (4,090)
Cash acquired from controlling interest purchase - Nautilus Poplar LLC 0 0 315
Increase in restricted cash 0 0 (75)
Refund (Payment) of Deposit for Purchase of Evans shoal (includes interest) 10,940 (10,014) (13,752)
Proceeds from sale of securities 0 0 465
Securities matured or sold 5,687 7,000 16,809
Securities purchased (5,687) (7,000) (13,456)
Net cash provided by (used in) investing activities 35,629 (13,481) (9,347)
FINANCING ACTIVITIES:
Proceeds from issuance of stock 35 43 10,000
Short term debt issuances 6,075 5,027 570
Short term debt repayments (6,025) (4,589) (845)
Purchase of non-controlling interest - Nautilus Poplar LLC (3,461) 0 (7,309)
Non-controlling capital contribution Nautilus Poplar LLC 0 80 0
Long term debt repayments (552) 0 0
Net cash (used in) provided by financing activities (3,928) 561 2,416
Effect of exchange rate changes on cash and cash equivalents (462) 4,240 1,882
Net increase (decrease) in cash and cash equivalents 20,798 (13,175) (1,097)
Cash and cash equivalents at beginning of period 20,417 33,592 34,689
CASH AND CASH EQUIVALENTS AT END OF PERIOD 41,215 20,417 33,592
Income taxes 0 (1,259) 4,822
Interest Paid, net of amount capitalized 109 141 62
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized holding gain (loss) (83) 46 0
Revision to estimate of asset retirement obligations (603) (129) (2,232)
Accounts payable related to property plant and equipment 155 8 48
Purchase of non-controlling interest for Stock and contingent consideration 4,729 0 0
Purchase of 3% working interest for stock and contingent consideration $ 1,243 $ 0 $ 0
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Basis of Presentation
12 Months Ended
Jun. 30, 2012
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:
 
June 30,
2012
 
(In thousands)
Fiscal year ended June 30, 2011
$
4,695

Sale of Mereenie interests (see Note 2)
2,521

Fiscal year ended June 30, 2012
$
2,174


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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Acquisitions and Divestitures
12 Months Ended
Jun. 30, 2012
Acquisitions and Divestitures [Abstract]
Acquisitions and Divestitures
Note 2 - Acquisitions and Divestitures
Evans Shoal Agreement. During the year ended June 30, 2010, MPAL entered into an agreement with Santos Offshore Pty Ltd to purchase Santos’ 40% interest in the Evans Shoal natural gas field (NT/P48). On July 22, 2011, this agreement was terminated, and MPAL received a deposit refund from Santos of AUD $10.0 million, plus interest, pursuant to the terms of the agreement.
Sale Agreement between Magellan Petroleum (N.T.) Pty Ltd and Santos QNT Pty Ltd and Santos Limited. On May 25, 2012, 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") completed a Sale Agreement (the "Santos SA"), referred to herein as the "Santos Transaction" and became the sole owner of the Palm Valley Interests (as defined below) and of the Dingo Interests (as defined below), while Santos became the sole owner of the Mereenie Interests (as defined below). In accordance with the terms of the Santos SA, the Santos Transaction is deemed to be effective as of July 1, 2011. The Santos SA resulted in net cash proceeds of $26.6 million, including adjustments of $1.1 million, and a gain on sale of assets in the amount of $36.2 million. The Santos SA provided for the transfer of the following assets:
Magellan NT's 35% interest in each of the Mereenie Operating Joint Venture and the Mereenie Pipeline Joint Venture (collectively, the "Mereenie Interests") to Santos QNT;
The Santos Entities' combined interests of 48% in the Palm Valley Joint Venture ("Palm Valley Interests") and combined interests of 66% in the Dingo Joint Venture ("Dingo Interests") to Magellan NT.
Pursuant to the Santos SA, Magellan NT is also entitled to a series of contingent payments. The Company has not recognized a contingent asset related to the series of contingent payments, as such amounts are not reasonably assured. The Company accounted for the Santos SA using the relative fair value method of accounting, which allocates the fair value of the assets received in the asset transfer to the Palm Valley Interests and the Dingo Interests. No goodwill or other intangible assets were recorded as a result of the Santos SA. However, goodwill in the amount of $2.5 million was recorded as a component of the gain on sale of assets. The purchase price allocation was considered final as of June 30, 2012.
The following table summarizes the allocation of the consideration received for the assets transferred as a result of the Santos SA as of June 30, 2012.
 
Total
 
(In thousands)
Consideration received
 
Net purchase price per Santos SA
$
25,493

Purchase price adjustments
1,138

Total
$
26,631

 
 
Allocation of the consideration received to fair value of assets
 
Proved oil and gas properties (Palm Valley)
$
3,403

Unproved oil and gas properties (Dingo)
2,957

Land, buildings, and equipment (Palm Valley)
370

Total allocation of the fair value received
6,730

Mereenie liabilities given up, net
2,805

Gain on sale of assets
(36,166
)
Total
$
(26,631
)

The Santos SA is deemed to be effective as of July 1, 2011. The following unaudited pro forma financial information presents combined results of the Santos SA, and assumes a transaction date of July 1, 2010. The pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at July 1, 2010. The unaudited pro forma results can be summarized as follows for the years ended:
 
Magellan as Reported
 
Pro Forma
 
 
Acquisition (a)
 
Disposition (b)
 
Combined
 
(In thousands, except per share amounts)
June 30, 2012
 
 
 
 
 
 
 
Sales
$
13,712

 
$
1,025

 
$
(5,891
)
 
$
8,846

Net income (loss) attributable to Magellan Petroleum Corporation
$
26,498

 
$
(223
)
 
$
835

 
$
27,110

Net income per basic share outstanding
$
0.49

 
 
 
 
 
$
0.51

Net income per diluted share outstanding
$
0.49

 
 
 
 
 
$
0.50

 
 
 
 
 
 
 
 
June 30, 2011
 
 
 
 
 
 
 
Sales
$
18,176

 
$
4,492

 
$
(8,813
)
 
$
13,855

Net (loss) income attributable to Magellan Petroleum Corporation
$
(32,432
)
 
$
2,471

 
$
(1,144
)
 
$
(31,105
)
Net (loss) per basic share outstanding
$
(0.62
)
 
 
 
 
 
$
(0.59
)
Net (loss) per diluted share outstanding
$
(0.62
)
 
 
 
 
 
$
(0.59
)
(a) Reflects the pro forma results from operations related to the Palm Valley Interests and the Dingo Interests.
(b) Reflects the pro forma results from operations related to the Mereenie Interests.
Lease Purchase and Sale and Participation Agreement with VAALCO Energy (USA), Inc. ("VAALCO"). On September 6, 2011, the Company entered into a Lease Purchase and Sale and Participation Agreement (the "VAALCO PSA") with VAALCO. Pursuant to the VAALCO PSA, the Company received $5.0 million in cash, and VAALCO received an undivided 65% of the Company’s working interest in formations below the top of the Bakken/Three Forks (the "Deep Intervals") in Poplar.
The accounting for this transaction is set forth in the table below:
 
Total
 
(In thousands)
Cash consideration received
$
5,000

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


Acquisition of Non-Controlling Interest in Nautilus Poplar LLC and Acquisition of Additional Working Interests. On September 2, 2011, the Company entered into a Purchase and Sale Agreement (the "Nautilus PSA") between the Company and the non-controlling interest owners of NP, being the Nautilus Technical Group, LLC ("NT") and Eastern Rider, LLC ("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 transaction, as well as certain other persons.
The Nautilus PSA provided for the Company’s purchase of all membership interests from the Nautilus Sellers 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 the Nautilus Sellers, in unregistered shares of Magellan’s common stock, par value $0.01 (the "Net Share Consideration"), and (iii) the potential for future production payments ("Contingent Production Payments"), payable in cash to the Nautilus Sellers, collectively, of up to $5.0 million if certain increased average daily production milestones are achieved. 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 this transaction approximated 52% of the consideration paid to the Nautilus Sellers.
The discounted fair value of the future contingent consideration payable is calculated at the end of each fiscal quarter using consistent assumptions and methodology. As of June 30, 2012, the contingent consideration payable was valued at $4.07 million and is reported in the consolidated balance sheet as contingent consideration payable.
The acquisition of NT’s direct working interests 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 5). A de minimis amount of revenues and earnings related to the working interests acquired is included in the accompanying consolidated statements of operations for the year ended June 30, 2012.
The table below summarizes the consideration paid to the Nautilus Sellers under the Nautilus PSA and the estimated fair value of the assets acquired and liabilities assumed for the working interests acquired from NT.
 
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

Total
$
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
)
Total
 
 
 
 
 
 
$
2,066

(1) Excludes transaction costs.
(2) Common stock valued at $1.54 per share closing price on the date of the transaction.
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Debt
12 Months Ended
Jun. 30, 2012
Debt Disclosure [Abstract]
Debt
Note 3 - Debt
Long term debt relates to a $1.7 million note payable re-issued in January 2011. This note will be fully amortized in June 2014, and the outstanding principal consisted of the following for the years ended:
 
June 30,
 
2012
 
2011
 
(In thousands)
Note payable
$
870

 
$
1,422

Less current portion of note payable
(480
)
 
(552
)
Long term debt, excluding current portion
$
390

 
$
870


As of June 30, 2012, the minimum future principal maturities of long term debt were as follows:
 
June 30,
2012
 
(In thousands)
One year
$
480

Two years
390

Total
$
870


The variable rate of the note is based upon the Wall Street Journal Prime Rate (the "Index") plus 1.00%, subject to a floor rate of 6.25%. The Index was 3.25% at June 30, 2012, resulting in an interest rate of 6.25% per annum as of June 30, 2012. Under the note payable, NP is required to maintain certain customary financial and restrictive covenants. As of June 30, 2012, NP was in compliance with all financial and restrictive covenants.
In addition, the Company has a $1.0 million working capital line of credit classified as short term debt. The amount due on the line of credit was $0.1 million as of June 30, 2012. The line of credit bears interest at a variable rate, which was 6.25% as of June 30, 2012. The line of credit also secures both a letter of credit in the amount of $25 thousand in favor of the Bureau of Land Management and business credit cards in the amount of $25 thousand. As of June 30, 2012, $0.9 million was available under this line of credit.
The note payable, letters of credit, and business credit cards are collateralized by a first mortgage and an assignment of production for Poplar and are guaranteed by Magellan up to $6.0 million, not to exceed the amount of the principal owed.
The carrying amount of the Company’s long term debt approximates its fair value, due to its variable interest rate, which resets based on the market rates.
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Asset Retirement Obligations
12 Months Ended
Jun. 30, 2012
Asset Retirement Obligation Disclosure [Abstract]
Asset Retirement Obligations
Note 4 - Asset Retirement Obligations
The estimated valuation of asset retirement obligations ("AROs") are based on management's historical experience and best estimate of plugging and abandonment costs by field. Assumptions and judgments by management include determination of the existence of a legal obligation for an ARO; estimated probabilities, amounts, and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates. Accretion expense is recorded under depletion, depreciation, amortization, and accretion in the consolidated statement of operations.
The following table summarizes the asset retirement obligation activity for the years ended:
 
June 30,
 
2012
 
2011
 
(In thousands)
Balance at beginning of year
$
11,397

 
$
9,292

Liabilities assumed
3,035

 

Liabilities incurred
398

 
50

Accretion expense
568

 
564

Sale of assets
(6,773
)
 

Revision to estimate
(603
)
 
(129
)
Effect of exchange rate changes
(238
)
 
1,620

Balance at end of year
7,784

 
11,397

Less current asset retirement obligation
329

 

Long term asset retirement obligation
$
7,455

 
$
11,397

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Fair Value Measurements
12 Months Ended
Jun. 30, 2012
Fair Value Disclosures [Abstract]
Fair Value Measurements
Note 5 - Fair Value Measurements
The Company follows authoritative guidance related to fair value measurement and disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1: Quoted prices in active markets for identical assets – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Significant other observable inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Significant unobservable inputs – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s policy is to recognize transfers in and/or out of a fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed for all periods presented.
Items required to be measured at fair value on a nonrecurring basis include the assets acquired and liabilities assumed related to the acquisition of an additional 3% working interest in Poplar, assets acquired as a result of the Santos SA (see Note 2), and liabilities related to AROs.
Items required to be measured at fair value on a recurring basis include securities available for sale, classified as Level 1, and the contingent consideration payable (see Note 2), classified as Level 3.
As of June 30, 2012, the Company had$41.2 million in cash and cash equivalents, with $2.7 million held in cash and $38.6 million classified as cash equivalents. The cash equivalents were held in time deposit accounts in several Australian banks with maturities of 90 days or less.
The following table presents the amounts of assets and liabilities carried at fair value by the level in which they are classified within the valuation hierarchy for the years ended:
 
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
41,215

 
$

 
$

 
$
41,215

Securities available for sale
155

 

 

 
155

 
$
41,370

 
$

 
$

 
$
41,370

Liabilities
 
 
 
 
 
 
 
Contingent consideration payable
$

 
$

 
$
4,072

 
$
4,072

 
 
 
 
 
 
 
 
 
June 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
20,417

 
$

 
$

 
$
20,417

Securities available for sale
238

 

 

 
238

 
$
20,655

 
$

 
$

 
$
20,655


During the years ended June 30, 2012, and 2011, there have been no transfers in and out of Level 1, Level 2, or Level 3.
The following table presents a roll forward of liabilities measured at fair value using significant unobservable inputs (Level 3) as of:
 
June 30,
2012
 
(In thousands)
Balance at beginning of year
$

Contingent consideration payable addition
4,072

Balance at end of year
$
4,072

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Income Taxes
12 Months Ended
Jun. 30, 2012
Income Tax Disclosure [Abstract]
Income Taxes
Note 6 - Income Taxes
The domestic and foreign components of our income (loss) before income taxes are as follows for the years ended:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Domestic
$
(6,646
)
 
$
(6,780
)
 
$
(8,456
)
Foreign
27,178

 
(20,516
)
 
9,645

Net income (loss) after income tax
$
20,532

 
$
(27,296
)
 
$
1,189


The following reconciles the Company's effective tax rate to the federal statutory tax rate for the years ended:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Tax provision computed per federal statutory rate
$
6,160

 
$
(8,088
)
 
$
356

State taxes, net of federal benefit
190

 
(201
)
 
244

Foreign rate differential
76

 
(271
)
 
(338
)
Non taxable Australian revenue
(8
)
 
(822
)
 
(953
)
Non deductible warrant and stock related compensation

 

 
2,203

Goodwill write off
756

 

 

Decreases related to lapse of applicable statute of limitations
1,571

 

 

Change in valuation allowance
9,352

 
17,135

 
(346
)
Australian petroleum resource rent tax
(5,951
)
 

 

Australian petroleum resource rent tax - income tax effect
1,785

 

 

Magellan capitalized facilitation costs

 
106

 
201

Taxable dividends from subsidiaries, net of foreign tax credits
(1,152
)
 
932

 
1,690

Foreign tax credit adjustment
649

 
(3,411
)
 

Capital loss adjustment
(3,006
)
 

 

Additional basis related to the Santos SA
(18,118
)
 

 

Impact of rate change
457

 

 

Foreign currency translation differential
1,375

 

 

Other
(87
)
 
(239
)
 
(411
)
Consolidated income tax (benefit) provision
$
(5,951
)
 
$
5,141

 
$
2,646


Components of our income tax provision can be summarized as follows:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Current income tax
 
 
 
 
 
United States
 
 
 
 
 
Federal tax
$

 
$

 
$

State tax (benefit) provision

 
(127
)
 
375

Foreign tax (benefit) provision

 
(87
)
 
1,349

Total current income tax (benefit) provision

 
(214
)
 
1,724

 
 
 
 
 
 
Deferred income tax
 
 
 
 
 
United States deferred tax (benefit) provision

 
(195
)
 
195

Foreign tax provision (benefit)
(5,951
)
 
5,550

 
727

Total deferred income tax (benefit) provision
(5,951
)
 
5,355

 
922

Consolidated income tax (benefit) provision
$
(5,951
)
 
$
5,141

 
$
2,646

 
 
 
 
 
 
Effective tax rate
(29
)%
 
(19
)%
 
223
%

The Company's effective tax rate was reduced to negative 29% primarily due to the recognition of the onshore Australian Petroleum Resource Rent Tax ("PRRT") deferred tax asset.
Significant components of the Company's deferred tax assets and liabilities can be summarized as follows for the years ended:
 
June 30,
 
2012
 
2011
 
(In thousands)
Deferred tax liabilities
 
 
 
Land, buildings and equipment
$
(2,767
)
 
$

Stepped up basis of oil and gas properties
(550
)
 
(690
)
Australian petroleum resource rent tax - income tax effect
(1,785
)
 

Other
(261
)
 
(901
)
Total deferred tax liabilities
(5,363
)
 
(1,591
)
 
 
 
 
Deferred tax assets
 
 
 
Acquisition and development costs

 
3,234

Asset retirement obligations
2,210

 
2,993

Net operating losses, capital losses, and foreign tax credit carry forwards
28,139

 
12,188

Australian petroleum resource rent tax
5,951

 

United Kingdom exploration costs and net operating losses
3,224

 
2,358

Stock option compensation
1,851

 
1,673

Interest
539

 
539

Australian capitalized legal costs
514

 
426

Other
579

 
521

Total deferred tax asset
43,007

 
23,932

Valuation allowance
(31,693
)
 
(22,341
)
Net long term deferred tax asset
$
5,951

 
$


For the fiscal year ended June 30, 2012, the valuation allowance increased by $9.4 million, primarily due to additional capital losses available for MPAL related to the Santos SA.
During the fiscal year ended June 30, 2011, the Company did not expect to remit undistributed earnings of our foreign subsidiaries to the U.S. in the foreseeable future. Federal and State Income Taxes were therefore not provided on accumulated but undistributed earnings of foreign subsidiaries, because such earnings were considered permanently reinvested in the business. During the fiscal year ended June 30, 2012, the Company changed its position with respect to permanently reinvesting its undistributed earnings. The Company determined that $20.0 million of undistributed earnings of its wholly-owned foreign subsidiary, MPAL, would be remitted to the U.S. in the foreseeable future. The Company does not anticipate any future Federal or State Income Tax effect as a result of this repatriation of foreign earnings due to the utilization of available foreign tax credit carry forwards.
The tax benefit recorded for fiscal year 2012 totals $6.0 million. In addition to corporate income tax, the income tax benefit includes the tax effect of the Company's obligation related to the Australian PRRT. The extension of PRRT to onshore projects was enacted during fiscal year 2012 and effective from July 1, 2012. As a consequence of the extension of the Australian PRRT regime to onshore petroleum products, a deferred tax benefit related to the Palm Valley gas field of $6.0 million in respect of the starting base of $16.6 million (which is net of AROs, and claimable against future PRRT liabilities) was recorded.
The United States gross deferred tax asset at June 30, 2012, consists primarily of foreign tax credits. The Australian gross deferred tax asset at June 30, 2012, consists primarily of acquisition and development costs, asset retirement obligations, net operating and capital loss carry forwards, and other assets which will result in tax deductions when paid. Australian net operating and capital losses carry forward indefinitely.
After reviewing all positive and negative evidence, a valuation allowance is still recorded against all the deferred tax assets, with exception of the $6.0 million deferred tax asset based on the Australian PRRT noted above.
As of June 30, 2012, the Company remains subject to examination in the following major tax jurisdictions for the tax years indicated below:
Jurisdiction
 
Tax Years Subject to Exam:
U.S. Federal
 
2011
Montana
 
2010 - 2011
Australia
 
2008 - 2011

Subsequent to June 30, 2012, the IRS completed an examination of the Company's 2009 and 2010 annual return forms which resulted in no additional tax due and a reduction in the Company's foreign tax credit carry forward of $0.5 million.
At June 30, 2012, the Company had net operating loss and foreign tax credit carry forwards for U.S. Federal and State Income Tax purposes, respectively, which are scheduled to expire periodically as follows:
 
Net Operating Losses
 
Federal Foreign Tax Credit
 
Paroo USA Federal
 
State
 
 
(In thousands)
Expires
 
 
 
 
 
2013
$
230

 
$

 
$

2017

 

 
310

2018

 
1,271

 

2019
96

 

 
1,411

2020

 

 
144

2021
25

 

 
886

2022
74

 

 
4,494

2023
3

 

 

2024
2

 

 

2025
1

 

 

Total
$
431

 
$
1,271

 
$
7,245


The Company estimates that it has sufficient foreign tax credits to repatriate significant earnings and profits over and above the $20.0 million already repatriated from its foreign subsidiaries subsequent to the fiscal year ended June 30, 2012, without incurring additional U.S. income tax due to the utilization of available foreign tax credits.
During fiscal year 2012, the Company recorded a cumulative out of period adjustment in connection with U.S. Federal Tax Withholdings and related penalties and interest (see Note 11). The adjustment related to fiscal year 2010 and increased general and administrative expense in fiscal year 2012 by $0.9 million. Had this amount been reflected in fiscal year 2010, the period in which it arose, general and administrative expense, and accumulated deficit would have increased by $0.9 million. The impact on net loss per basic and diluted share attributable to Magellan Petroleum Corporation common shareholders would have been less than $0.02 had the amount been reflected in the period in which it arose. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering SEC Staff Accounting Bulletins Nos. 99 and 108, management believes that any amounts attributable to the years ended June 30, 2010, and 2011, and the impact of correcting such amounts in the year ended June 20, 2012, are not material to any of the Company's consolidated financial statements presented herein
There are no material uncertain tax positions for either fiscal 2012 or 2011.
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Stock Based Compensation
12 Months Ended
Jun. 30, 2012
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Stock Based Compensation
Note 7 - Stock Based Compensation
The Stock Plan
On December 8, 2010, shareholders approved an amendment to the Company’s 1998 Stock Incentive Plan (the "Stock Plan") to increase the number of authorized common stock shares reserved for awards under the Stock Plan to a total of 7,205,000 shares. These authorized shares can take the form of non-qualified stock options, stock appreciation rights, restricted share awards, annual awards of stock to directors, and performance based awards ("PBOs").
Stock Option Grants
Stock option grants contain both time based and performance based vesting provisions. The time based options are expensed on a straight-line basis over the vesting period. Performance based options are recognized when the achievement of the performance conditions is considered probable. Management re-assesses whether satisfaction of performance conditions are probable at the end of each reporting period. If changes in the estimated outcome of the performance conditions affect the quantity of the awards expected to vest, the cumulative effect of the change is recognized in the period of change. As of June 30, 2012, management believes the achievement of the performance conditions related to the performance based stock options is probable. Accordingly, the Company has begun to recognize expense on these awards over the period of time the performance condition is expected to be achieved.
As of June 30, 2012, 435,000 shares were available for future issuance under the Stock Plan. Of the 1,675,000 options granted during the current fiscal year, 295,750 were issued as PBOs and 825,000 options were issued outside of the Stock Plan. Options outstanding have expiration dates ranging from November 28, 2015, through January 10, 2022.
The following table summarizes the stock option activity for the years ended:
 
June 30,
 
2012
 
2011
 
2010
 
Number of
Shares
 
WAEPS (1)
 
Number of
Shares
 
WAEPS (1)
 
Number of
Shares
 
WAEPS (1)
Balance at beginning of year
5,200,000

 
$1.49
 
3,880,000

 
$1.26
 
3,242,500

 
$1.25
Granted
1,675,000

 
$1.10
 
1,750,000

 
$2.08
 
637,500

 
$1.33
Exercised
(21,875
)
 
$1.60
 
(30,000
)
 
$1.45
 

 
$0.00
Forfeited
(100,000
)
 
$1.72
 
(400,000
)
 
$1.84
 

 
$0.00
Options outstanding at year end
6,753,125

 
$1.44
 
5,200,000

 
$1.49
 
3,880,000

 
$1.26
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average remaining contractual term
 
 
6.8 years
 
 
 
7.6 years
 
 
 
8.1 years
(1) Weighted average exercise price per share
At June 30, 2012, there was a total of $0.7 million in unrecognized stock compensation expense related to stock options granted. This cost is expected to be recognized over a weighted-average period of 1.4 years. The amount of unrecognized compensation expense noted above does not necessarily represent the amount that will ultimately be realized by the Company in its consolidated statement of operations. During the fiscal year ending June 30, 2013, it is expected that an additional 1,100,002 stock options will vest.
Cash received from the exercise of stock options for the years ended June 30, 2012, and 2011, was less than $0.1 million. No stock options were exercised during 2010.
The following table summarizes options outstanding and exercisable as of June 30, 2012:
 
 
 
 
Options outstanding and exercisable
Range of
exercise
prices
 
Number
of
shares
 
Weighted average remaining contractual life
 
Weighted average exercise price
$1.01
-
$1.16
 
549,999

 
8.7 years
 
$1.12
$1.20
-
$1.20
 
3,100,000

 
6.5 years
 
$1.20
$1.40
-
$1.60
 
528,125

 
4.5 years
 
$1.54
$1.72
-
$2.41
 
683,330

 
7.9 years
 
$2.18
 
 
 
 
4,861,454

 
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate intrinsic value
$
(1,851,313
)
 
 
 
 

The fair value of shares issued under the Stock Plan was estimated using the following weighted-average assumptions for the years ended:
 
June 30,
 
2012
 
2011
 
2010
Number of options
1,675,000
 
1,750,000
 
637,500
Weighted-average grant date fair value per share
$0.66
 
$1.10
 
$0.85
Expected dividend
$0.00
 
$0.00
 
$0.00
Risk free interest rate
1.0
%
-
1.3
%
 
1.6
%
-
2.4
%
 
2.4
%
-
2.6
%
Expected life
5.3

-
6.0
 years
 
5.0

-
6.0
 years
 
5.8

-
5.8
 years
Expected volatility (based on historical price)
61.2
%
-
62.8
%
 
55.2
%
-
61.5
%
 
6.2
%
-
62.5
%

Stock Compensation Expense
The Company recorded $1.6 million, $1.7 million, and $2.3 million of stock compensation expense for the years ended June 30, 2012, 2011, and 2010, respectively. Stock based compensation is included under general and administrative expense in the consolidated statements of operations.
The Company's compensation policy is designed to provide the Company's directors with a portion of their annual Board compensation in the form of equity. The number of shares for each director award is subject to an annual maximum of 15,000 shares. The Company issued 75,000 shares during 2012 pursuant to this policy.
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Earnings Per Share
12 Months Ended
Jun. 30, 2012
Earnings Per Share [Abstract]
Earnings Per Share
Note 8 - Earnings Per Share
The following table summarizes the computation of basic and diluted earnings per share:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands, except share and per share amounts)
Net income (loss) attributable to Magellan Petroleum Corporation
$
26,498

 
$
(32,432
)
 
$
(1,446
)
 
 
 
 
 
 
Basic weighted-average shares outstanding
53,592,958

 
52,398,936

 
51,410,596

Add: dilutive effects of stock options and unvested stock grants (1)
448,269

 

 

Diluted weighted-average common shares outstanding
$
54,041,227

 
$
52,398,936

 
$
51,410,596

 
 
 
 
 
 
Basic net loss per common share
$
0.49

 
$
(0.62
)
 
$
(0.03
)
Diluted net loss per common share
$
0.49

 
$
(0.62
)
 
$
(0.03
)
(1) There is no dilutive effect on earnings per share in periods with net losses.
Potentially dilutive securities excluded from the calculation of diluted shares outstanding include the following:
 
June 30,
 
2012
 
2011
 
2010
Stock options
100,000

 

 

Non-vested restricted stock

 
104,167

 
208,334

Total potentially dilutive securities
100,000

 
104,167


208,334

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Segment and Geographical Data
12 Months Ended
Jun. 30, 2012
Segment Reporting [Abstract]
Segment and Geographic Data
Note 9 - Segment and Geographic Data
The Company conducts its operations through two wholly owned subsidiaries, NP, which operates in the United States, and MPAL, which is primarily active in Australia. The following table presents segment and geographic data for years ended:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Revenues
 
 
 
 
 
NP
$
6,173

 
$
3,804

 
$
2,291

MPAL
7,533

 
12,775

 
25,908

Corporate
646

 
2,722

 
2,826

Inter-segment eliminations
(640
)
 
(1,125
)
 
(2,500
)
Consolidated revenues
$
13,712

 
$
18,176

 
$
28,525

 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
NP
$
2,154

 
$
(23
)
 
$
(55
)
MPAL
24,192

 
(25,968
)
 
7,569

Corporate
(5,416
)
 
(6,429
)
 
(263
)
Inter-segment eliminations
5,568

 
(12
)
 
(8,697
)
Consolidated net (loss) income
$
26,498

 
$
(32,432
)
 
$
(1,446
)
 
 
 
 
 
 
Assets
 
 
 
 
 
NP
$
10,833

 
$
16,985

 
$
5,427

MPAL
67,748

 
49,291

 
63,131

Corporate
59,099

 
83,323

 
90,345

Inter-segment eliminations
(45,106
)
 
(78,025
)
 
(68,197
)
Consolidated assets
$
92,574

 
$
71,574

 
$
90,706

 
 
 
 
 
 
Expenditures for additions to long lived assets
 
 
 
 
 
NP
$
(4,857
)
 
$
(2,095
)
 
$
(328
)
MPAL
(4,575
)
 
(1,679
)
 
(2,209
)
Corporate
(145
)
 
(794
)
 
(306
)
Consolidated expenditures for long lived assets
$
(9,577
)
 
$
(4,568
)
 
$
(2,843
)
The following table summarizes other significant items for years ended:
 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Depletion, depreciation, amortization, and accretion
 
 
 
 
 
NP
$
819

 
$
919

 
$
448

MPAL
695

 
1,653

 
4,834

Corporate
230

 
318

 
146

Consolidated depletion, depreciation, amortization, and accretion
$
1,744

 
$
2,890

 
$
5,428

 
 
 
 
 
 
Lease operating
 
 
 
 
 
NP
$
5,232

 
$
2,227

 
$
1,373

MPAL
7,665

 
6,270

 
8,585

Corporate

 
750

 
158

Consolidated lease operating
$
12,897

 
$
9,247

 
$
10,116

 
June 30,
 
2012
 
2011
 
2010
 
(In thousands)
Exploration
 
 
 
 
 
NP
$
1,495

 
$
151

 
$

MPAL
4,796

 
2,378

 
1,273

Corporate

 
325

 

Consolidated exploration
$
6,291

 
$
2,854

 
$
1,273

 
 
 
 
 
 
Income tax benefit (expense)
 
 
 
 
 
MPAL
$
5,951

 
$
(5,463
)
 
$
(2,076
)
Corporate

 
322

 
(570
)
Consolidated income tax benefit (expense)
$
5,951

 
$
(5,141
)
 
$
(2,646
)
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Commitments
12 Months Ended
Jun. 30, 2012
Commitments and Contingencies Disclosure [Abstract]
Commitments
Note 10 - Commitments
Operating Leases. The following table summarizes the Company's future minimum rental commitments under non-cancelable operating leases, net of guaranteed sublease income, as of:
 
June 30,
2012
 
(In thousands)
Amounts payable in:
 
2013
$
97

2014
162

2015
262

2016
268

2017 and thereafter
363

Total
$
1,152


Rental expenses for each of the years ended June 30, 2012, 2011, and 2010, were $0.6 million, $0.5 million, and $0.4 million, respectively.
Purchase obligations. Although the Company is committed to certain exploration and capital expenditures related to MPAL, some of these expenses may be farmed out to third parties. Amounts payable under these firm commitments for fiscal year 2013 were $5.4 million as of June 30, 2012.
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Related Party Transactions
12 Months Ended
Jun. 30, 2012
Related Party Transactions [Abstract]
Related Party Transactions
Note 11 - Related Party Transactions
Transactions with Young Energy Prize S.A. ("YEP") and Related Entities
First Private Investment in a Public Entity ("First PIPE"). The Company entered into a Securities Purchase Agreement (the "First Purchase Agreement") to finalize the terms of the First PIPE, dated February 9, 2009, with its largest stockholder, YEP, under which the Company agreed to sell, and YEP agreed to purchase, 8,695,652 shares (the "Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock") at a purchase price of $1.15 per share, or an aggregate of AUD $10.0 million. YEP is a Luxembourg corporation. Mr. Nikolay Bogachev, a director of the Company since July 2009, is the President and CEO of YEP as well as an equity owner of YEP.
The First Purchase Agreement was amended on April 3, 2009, and June 30, 2009. On July 9, 2009, the Company and YEP completed the issuance and sale of the Shares to YEP in accordance with the First PIPE. The Company received gross proceeds of AUD $10.0 million, which was used for acquisitions, general corporate, and working capital purposes. On July 9, 2009, the Company also executed and delivered to YEP a Warrant Agreement entitling YEP to purchase an additional 4,347,826 shares of the Company's Common Stock (the "Warrant Shares") at an exercise price of $1.20 per Warrant Share, subsequently reduced to $1.15 per share on July 30, 2009. The shares sold to YEP in the First PIPE and the Warrant Shares were not registered under the Securities Act or state securities laws and may not be resold in the United States in the absence of an effective registration statement filed with the U.S. Securities and Exchange Commission ("SEC") or an available exemption from the applicable federal and state registration requirements.
Initially, the Warrant Agreement contained anti-dilutive provisions that reduced the exercise price of the warrants based on certain trigger events such as the issuance of additional shares at a discount from the then current warrant exercise price. Since the provisions permitted the warrant holder to avoid bearing some of the risks and rewards normally associated with equity share ownership, the warrants were initially classified as liabilities and marked to market each reporting date with the change in value flowing through earnings. On March 11, 2010, YEP and the Company agreed to amend the Warrant Agreement to remove certain anti-dilution provisions. As a result, the Warrants were reclassified as equity and no revaluations were required subsequent to March 11, 2010. For the year ended June 30, 2010, non-cash charges of $4.3 million were recorded in the consolidated statement of income.
U.S. Federal Tax Withholdings. During the third quarter of fiscal year 2012, the Company identified a potential liability of approximately $2.0 million related to the Company's failure to make the required U.S. Federal tax withholding in the course of its initial acquisition of NP. In October 2009, Magellan acquired 83.5% of the membership interests in NP (the "Poplar Acquisition"), from the two majority owners of NP, White Bear LLC ("White Bear") and YEP I, SICAV-FES ("YEP I"). Both of these entities are affiliated with Mr. Bogachev, a Director of Magellan and a foreign national. Due to the status of YEP I as foreign entity and the members of White Bear being foreign nationals, Magellan was required to make U.S. Federal tax withholdings from the payments to or for the benefit of White Bear and YEP I. Of the $2.0 million liability, $1.3 million was estimated to relate to the interest sold by White Bear, $0.6 million to the interest sold by YEP I, and $0.1 million to Magellan's interest on late payment of the U.S. Federal tax withholdings.
Upon the filing of U.S. income tax returns in relation to the Poplar Acquisition and payment of corresponding income taxes by White Bear and YEP I, Magellan is deemed to be relieved of its liability for the U.S. Federal tax withholdings as well as related penalties and interest except for Magellan's interest on late payment of the U.S. Federal tax withholdings. With regards to White Bear, Magellan has confirmed that as of the date of this filing, Mr. Bogachev has filed his U.S. income tax return and paid taxes due on the Poplar Acquisition, which were estimated at $0.3 million. Magellan has agreed to pay Mr. Bogachev $0.3 million in additional compensation. Had Mr. Bogachev not filed and paid his tax return, Magellan's liability in relation to its U.S. Federal tax withholdings requirements was estimated at $1.3 million as of June 30, 2012. With regards to YEP I, Magellan continues to seek from YEP I or, because YEP I is a now defunct entity, from its successor entities, the filing of its U.S. income tax return.
As of June 30, 2012, we have recorded a total liability of $1.0 million under accrued and other liabilities in the consolidated balance sheets related to this matter. That amount is comprised of the $0.3 million payment to Mr. Bogachev, $0.6 million in withholdings, penalties, and interest related to YEP I, and $0.1 million related to Magellan's interest on late payment of the U.S. Federal tax withholdings. The effect on the consolidated statements of operations for the year ended June 30, 2012, is an expense of $0.9 million recorded under general and administrative expense and an interest expense of $0.1 million.
Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering SEC Staff Accounting Bulletins Nos. 99 and 108, management believes that any amounts attributable to the years ending June 30, 2010, and 2011, and the impact of correcting such amounts in the year ending June 20, 2012, is not material to any of the Company's consolidated financial statements presented herein.
Second Private Investment in a Public Entity ("Second PIPE"). On August 5, 2010, the Company executed a Securities Purchase Agreement (the "Second Purchase Agreement"), an Investor's Agreement, and a Memorandum of Agreement to finalize the terms of its Second PIPE with YEP.
The Purchase Agreement involves the issuance and sale of up to 5.2 million new Shares to YEP and/or one or more of its affiliates in return for $3.00 per new share issued and sold for an aggregate purchase price of $15.6 million ("Investment Transaction"). Pursuant to the terms of the Second Purchase Agreement, the Company is required to use the proceeds from the Investment Transaction to close the Evans Shoal Transaction. Since the Amended Asset Sales Agreement has been terminated and MPAL has received back the additional $10.0 million deposit, the Investment Transaction has not closed. The Company and YEP subsequently terminated the Second Purchase Agreement.
Investment Agreement and Related Amendment. On February 11, 2011, the Company and YEP executed an Investment Agreement to document the terms of additional financing to be provided by YEP to the Company in order to facilitate the closing of the Evans Shoal Transaction. On February 17, 2011, the Company and YEP executed an amendment to the Investment Agreement in the form of a side letter ("Side Letter"). Under the Investment Agreement, YEP shall provide funding to the Company required for the completion of the Evans Shoal Transaction in the amount of approximately AUD $85.5 million, which shall include the proceeds of the $15.6 million provided by the Investment Transaction. The Investment Agreement states that the funding of the AUD $85.5 million by YEP is contingent upon the requirements and conditions of the Evans Shoal Agreement being satisfied or waived. The Company and YEP has terminated the Investment Agreement, as amended by the Side Letter.
Other Related Party Transactions
The Company leased its prior Denver office space from an entity owned, in part, by J. Thomas Wilson, President and CEO of the Company and a member of the Company's Board of Directors. The total lease expense paid under this arrangement was $72 thousand for the fiscal years ended June 30, 2012, and 2011, and $52 thousand for the fiscal year ended June 30, 2010. Following the relocation of the Company's headquarters to Denver, Colorado, a lease agreement for new office space was entered into with an unrelated party in August 2012. Consulting services of $59 thousand, $100 thousand, and $36 thousand for the fiscal years ended 2012, 2011, and 2010 was paid to Mr. Wilson.
J. Robinson West, the Chairman of the Board of Directors of the Company, is also Chairman, Founder, and CEO of PFC Energy ("PFC"). PFC has served as a consultant for the Company on various Australian projects. As of June 30, 2012, there were no consulting arrangements between the Company and PFC in place or planned. The total consulting fees paid to PFC during the fiscal year ended June 30, 2012, was $64 thousand for work performed primarily in fiscal year 2011. As of June 30, 2011, an amount of $49 thousand remained unpaid for consulting fees related to fiscal 2011, which has since been paid. PFC was paid $0.4 million in fiscal year 2011, of which $0.2 million was expensed in fiscal year 2010.
See Note 2 for information related to transactions the Company entered into with NT and ER, effective September 1, 2011.
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Subsequent Events
12 Months Ended
Jun. 30, 2012
Subsequent Events [Abstract]
Subsequent Events
Note 12 - Subsequent Events
As of June 30, 2012, $38.6 million of the Company's cash and cash equivalents was held in several Australian banks in time deposit accounts that have terms of 90 days or less. As of September 24, 2012, the Company has repatriated $20.0 million of these Australian held funds to the U.S. The Company does not anticipate that U.S. Federal Income Tax will be owed on this amount, due to the expected utilization of foreign tax credits carried forward from June 30, 2012, and foreign tax credits expected to be generated during the fiscal year ending June 30, 2013 (see Note 6). The intended use for the repatriated monies is the funding of Magellan's U.S. based operations, including part of its drilling activity at Poplar.
On July 16, 2012, William H. Hastings resigned from the Board of Directors of Magellan. Pursuant to the terms and conditions of the Employment Agreement between Mr. Hastings and the Company dated February 3, 2009, as amended by the addendum thereto dated September 27, 2011, the Company is required to pay Mr. Hastings two years' severance compensation as a result of the Company's decision to discontinue his employment with the Company and Mr. Hastings' decision to resign from the Board of Directors.
On August 28, 2012, Stratex Oil & Gas Holdings, Inc. ("Stratex") announced an unsolicited proposal for the acquisition of each outstanding share of the Company's common stock for $0.65 in cash and one share of Stratex common stock, the closing price for which as reported by the OTCQB on August 27, 2012 was $1.65 per share. On September 10, 2012, the Company announced that its Board of Directors, after carefully considering the unsolicited proposal and consulting with its financial and legal advisors, had determined not to pursue the Stratex proposal. On September 12, 2012, the Company received a subpoena from the U.S. Securities and Exchange Commission (the "SEC") for the production of documents in connection with these announcements. On September 14, 2012, the Company received a letter from the Financial Industry Regulatory Authority ("FINRA") indicating that FINRA is conducting a review of trading in the Company's common stock surrounding the August 28, 2012 announcement by Stratex, and requesting information and documents from the Company in connection therewith. The Company is cooperating fully with the SEC and FINRA in these matters.
On September 24, 2012, the Company announced that its Board of Directors had approved a new stock repurchase program whereby the Company is authorized to repurchase up to a total of $2.0 million in shares of its common stock. This authorization supersedes the prior plan and will expire on August 21, 2014. The shares may be repurchased from time to time in open market transactions or privately negotiated transactions, subject to market conditions and other factors, including compliance with securities laws. Stock repurchases may be funded with existing cash balances or internal cash flow. The stock repurchase program may be suspended or discontinued at any time.
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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