United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1998
----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _______
Commission file number 1-5507
MAGELLAN PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-0842255
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
149 Durham Road, Madison, Connecticut 06443
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 245-8380
----------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common stock par value $.01 per share Nasdaq SmallCap Market
- ------------------------------------- Boston Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K |X|
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was $34,140,000 at September 15, 1998
(based on the last sale price of such stock as quoted on the Pacific Stock
Exchange).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock, par value $.01 per share, 25,032,495 shares outstanding
as of September 15, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the Annual Meeting of
Stockholders for the fiscal year ended June 30, 1998, are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business. 4
Item 2. Properties. 17
Item 3. Legal Proceedings. 22
Item 4. Submission of Matters to a Vote of Security Holders. 25
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters. 27
Item 6. Selected Financial Data. 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data. 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 72
PART III
Item 10. Directors and Executive Officers of the Company. 72
Item 11. Executive Compensation. 72
Item 12. Security Ownership of Certain Beneficial Owners and
Management. 72
Item 13. Certain Relationships and Related Transactions 72
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. 73
--------------------
Unless otherwise indicated, all dollar figures set forth herein are in
United States currency. Amounts expressed in Australian currency are indicated
as "A.$00". The exchange rate at September 15, 1998 was approximately A.$1.00
equaled U.S.$.60.
<PAGE>
PART I
Item 1. Business.
Magellan Petroleum Corporation (the "Company" or "MPC") is engaged,
directly and through its majority-owned subsidiary, in the sale of oil and gas
and the exploration for and development of oil and gas reserves. At June 30,
1998, the Company's principal asset was a 50.7% equity interest in its
subsidiary, Magellan Petroleum Australia Limited ("MPAL"), which has one class
of stock that is publicly held and traded in Australia.
MPAL owns interests in various oil and gas properties in Australia, the
United States and Belize, Central America. MPAL's major Australian assets are
two petroleum production leases covering the Mereenie oil and gas field (35%
working interest) and one petroleum production lease covering the Palm Valley
gas field (50.775% working interest). Both fields are located in the Amadeus
Basin in the Northern Territory of Australia ("NTA"). Santos Ltd. ("Santos"), an
Australian company, which owns a 48% interest in the Palm Valley field and a 65%
interest in the Mereenie field, also owns 18.2% of MPAL's outstanding stock.
Boral Limited, an Australian company, held a 17.1% interest in MPAL's
outstanding stock at June 30, 1998.
The Company has a direct 2.67% carried interest in the Kotaneelee gas
field in the Yukon Territory of Canada. The Company has not received any
revenues from this field to date. See Item 3 - Legal Proceedings. In addition,
the Company also has a 2 1/2% working interest in a Belize project (in which
MPAL has a 20% working interest) and a 20% interest in a California heavy oil
recovery project.
<PAGE>
The following chart illustrates the various relationships between the
Company and the various companies discussed above.
The following graphic presentation has been omitted, but the following
is a tabular presentation of the omitted material:
MPC - MPAL RELATIONSHIPS CHART
MPC owns 50.7% of MPAL.
MPAL owns 50.8% of the Palm Valley Field, Australia.
MPAL owns 35% of the Mereenie Field, Australia.
BORAL owns 17.1% of MPAL.
SANTOS owns 18.2% of MPAL.
SANTOS owns 48% of the Palm Valley Field, Australia.
SANTOS owns 65% of the Mereenie Field, Australia.
<PAGE>
(a) General Development of Business.
Operational Developments Since the Beginning of the Last
Fiscal Year.
AUSTRALIA
Mereenie
Field Operations
MPAL (35%) and Santos (65%), the operator, (together known as the
Mereenie Participants or "MP") own the Mereenie field which is located in the
Amadeus Basin of the NTA. MPAL's share of production from the field is subject
to net overriding royalties aggregating 3.0625% and the statutory government
royalty of 10%. MPAL's share of the Mereenie field proved oil reserves was
approximately one million barrels at June 30, 1998.
The field was producing about 2,145 (MPAL share - 751) barrels of crude
oil per day ("bpd") from approximately 40 wells at June 30, 1998. During 1998,
MPAL's share of oil sales was 285,000 barrels and 3.6 billion cubic feet ("bcf")
of gas sold. The oil is transported by means of a 167 mile eight-inch oil
pipeline from the field to the Brewer Estate industrial park near Alice Springs.
Most of the oil is then shipped south approximately 950 miles by rail and road
to a refinery in the Adelaide area. The cost of transporting the oil to the
refinery is being borne by the producers. On August 2, 1998, there was an
explosion at the Adelaide refinery which is now shut down for repairs. At the
present time, the Company's crude oil is still being purchased and stored at the
refinery. If the repairs are not completed in a timely manner, it may be
necessary to sell the crude oil to another facility at a slightly lower net
price.
The operator of the field has currently scheduled five wells for
remedial work. This work which is expected to cost approximately $600,000 (MPAL
share - $210,000) will increase production costs in fiscal 1999. In addition,
production will decrease in the short term while these wells are shut-in.
The MP are negotiating for the sale of Liquid Petroleum Gas ("LPG")
from the field to a purchaser. The agreement would require the MP to install an
LPG plant to produce 5,000 tons of LPG per year for a five year period. The
plant, which is scheduled for completion by mid 1999, would utilize some of the
field gas that is presently being flared.
The MP is also providing Mereenie gas to the Power and Water Authority
("PAWA") of the NTA for use in Darwin and other NTA centers. See "Gas Supply
Contracts".
<PAGE>
Palm Valley
Field Operations
MPAL has a 50.775% interest in the Palm Valley gas field which is
located in the NTA. Ten wells have been drilled in the field, six of which are
currently connected to the gas treatment plant and are flowed at maximum
deliverability levels to meet the Alice Springs and Darwin supply contracts with
PAWA. During fiscal 1998, MPAL's share of gas sales was 3.5 bcf. In order to
increase deliverability, field compression began in November 1996 and two 400 HP
compressors have been operating in parallel since March 1998. A third 800 HP
compressor is scheduled to be installed by March 1999. MPAL has recommended that
two additional wells be drilled at Palm Valley to improve the field's production
capacity. Under the agreement with PAWA, the costs of these wells are reimbursed
by PAWA; consequently, the recommendation is under review by PAWA's consultants.
The Palm Valley Participants ("PVP") are providing Palm Valley gas for
use in Darwin and other NTA centers. See "Gas Supply Contracts".
MPAL's share of Palm Valley production revenues is subject to a 10%
statutory government royalty and net overriding royalties aggregating 4.2548%.
Gas Supply Contracts
In 1983, the PVP commenced the sale of gas to Alice Springs. In 1985,
the PVP and MP signed agreements for the sale of gas to PAWA for use in PAWA's
Darwin generating station and at a number of other generating stations in the
Northern Territory. The gas is being delivered via the 922 mile Amadeus Basin to
Darwin gas pipeline which was built by an Australian consortium. Since 1985,
there have been additional contracts for the sale of Mereenie Gas. The following
is a summary of MPAL's interest in the Palm Valley and the Mereenie gas supply
contracts:
<TABLE>
<CAPTION>
Maximum contract Take or pay Percentage of
(Before/after (Before/after contract completed
royalties) royalties) Maximum Take or Pay Contract Period
(bcf) (bcf)
Palm Valley:
<S> <C> <C> <C> <C> <C> <C> <C>
Alice Springs 24.4 21.0 14.2 12.3 49 65 25 years (1983-2008)
Darwin 88.9 76.6 68.0 58.6 40 52 25 years (1987-2012)
----- ----- ----- -----
113.3 97.6 82.2 70.9
----- ----- ----- -----
Mereenie:
Darwin (1985) 19.6 17.0 14.0 12.2 44 63 25 years (1987-2012)
Darwin (1995) 7.5 6.5 6.0 5.2 78 98 10 years (1995-2005)
Darwin (1997) 20.2 17.6 16.3 14.1 - - 10 years (1999-2009)
Other .5 .5 .5 .5 - - Various
----- ----- ----- -----
47.8 41.6 36.8 32.0
----- ----- ----- -----
Total 161.1 139.2 119.0 102.9
===== ===== ===== =====
</TABLE>
There is a difference in price between Palm Valley gas and Mereenie gas
for the first 20 years of the 25 year contract which takes into account the
additional cost to the pipeline consortium to build a spur line to the Mereenie
field and increase the size of the pipeline from Palm Valley to Mataranka.
<PAGE>
In consideration for the PVP forgoing 20% of the Amadeus Basin to
Darwin gas supply contract during the first twenty contract years, the MP made a
payment to the PVP to partially compensate the PVP for the reduced net present
value of the future gas sales revenues which were postponed from contract years
1 to 20 to contract years 21 to 26. The agreement also provides that when the MP
sell any additional gas from the Mereenie field, the PVP are entitled, as
additional consideration, to 35% of the revenues from the first 38 bcf (MPAL
share - 19.5 bcf) of gas sold. At June 30, 1998, the balance of the MP gas
subject to this entitlement was 15.2 bcf (MPAL share - 7.7 bcf).
Dingo Gas Field
MPAL has a 34% interest in the Dingo gas field which is held under
Retention License 2 which is subject to renewal in 2003. The Dingo gas field,
which is located in the Amadeus Basin in the NTA, has approximately 25 bcf of
presently proved and recoverable reserves based on four delineation wells. Dingo
2 and Dingo 3 wells are estimated to have the capacity of producing a combined
rate of 5 million cubic feet ("mmcf") per day. The Dingo field participants have
been negotiating for the sale of gas (.7 bcf per annum) from the field. MPAL's
share of potential production from these permit areas is subject to a 10%
statutory government royalty and overriding royalties aggregating 2.5043%.
Ngalia Basin
MPAL has a 40% interest in permit EP-15 in the Ngalia basin in the NTA
which covers 1.9 million acres. During July 1998, the Newhaven well was plugged
and abandoned. MPAL's share of the drilling costs incurred through June 30, 1998
is included in exploratory and dry hole costs. The costs to drill the well
subsequent to June 30, 1998 in the amount of $316,000 will be included in the
1999 fiscal year.
Northern Surat Basin
During March 1998, MPAL agreed to sell its 15.625% interest in ATP 378P
Queensland, Australia to its partner, Santos Limited. The $636,000 difference
between the carrying cost and the sale price is included in loss on the sale of
assets.
Eastern Surat Basin
MPAL has earned a 17% interest in Block D of ATP 244P in Queensland by
completing a pilot seismic reprocessing program. MPAL has a $2,500 commitment
through February 1999 on the permit and the right to withdraw prior to the
beginning of the next permit year, which has a $15,000 commitment.
<PAGE>
Southern Surat Basin
MPAL earned a 15% interest in ATP 626P in Queensland. The operator is
attempting to farmout MPAL's interest in connection with the planned drilling of
two wells on the permit which would reduce MPAL's interest to 8.7%. MPAL has no
obligation to participate in the drilling program.
Timor Sea
MPAL earned a 10% interest in WA-74-P offshore Western Australia by
funding 20% of the cost of drilling the Schilling-1 well which was plugged and
abandoned during September 1997. MPAL's share of the Schilling-1 well was
written off during the first quarter of fiscal 1998 and is included in
exploratory and dry hole costs. MPAL relinquished its interest in the permit
during December 1997.
During April 1998, MPAL acquired a 5% interest in Exploration Permit
WA-199-P in the Bonaparte Basin in the Timor Sea offshore Western Australia.
MPAL earned its interest in the permit by funding 10% of the cost of drilling
the Kittiwake-1 well. The Kittiwake well was drilled to its projected total
depth without encountering any commercial hydrocarbons. MPAL's cost of the well
was written off in the fourth quarter of fiscal 1998 and is included in
exploratory and dry hole costs. MPAL expects that it will relinquish its
interest in the permit by September 30, 1998.
Browse Basin
During July 1998, MPAL acquired a 17 1/2% interest in exploration
permits WA-281-P, WA-282-P and WA-283-P in the Browse Basin offshore Western
Australia. MPAL's share of the work obligations for the three permits is as
follows:
WA-281-P WA-282-P WA-283-P
Year 1 $ 341,000 $266,000 $ 266,000
Year 2 661,000 103,000 103,000
Year 3 1,225,000 22,000 1,116,000
---------- -------- ----------
Total $2,227,000 $391,000 $1,485,000
========== ======== ==========
Northwest Shelf
MPAL earned a 15% interest in exploration permits TP/12 and EP398 in
the Carnarvon Basin offshore Western Australia by funding 30% of the cost of
drilling the Springbok-1 well. Drilling of the Springbok-1 well began on August
21, 1998 and was plugged and abandoned on August 31, 1998. MPAL's estimated cost
of drilling the well ($650,000) will be written off during the first quarter of
fiscal 1999.
<PAGE>
Maryborough Basin
MPAL is seeking partners for exploration permit ATP 613P, a 670,000
acre block, in the Maryborough Basin in Queensland, Australia. During fiscal
1998, additional seismic surveys were completed on the permit. Processing and
analysis of the data has been completed. A well is expected to be drilled in
fiscal 1999 at an estimated cost of $700,000.
UNITED STATES
Baca County, Colorado
MPC (10%) and MPAL (90%) participated in an exploration program in
Colorado. During late April 1995, MPAL commenced an initial three well
exploration drilling program. All three wells were dry holes. Based on the data
derived from the appraisal program during fiscal 1995 and 1996, the Company
wrote off $809,000 and $1,691,000 in costs, respectively. During fiscal 1997,
the Company drilled a fourth well which was a dry hole and all of the remaining
costs of the project, which totaled $3,008,000, were written off. MPC has
withdrawn from the venture. On August 14, 1998, the Schmidt #15-1 well was
spudded on the Maple prospect by a third party at no cost to the Company. The
well was plugged and abandoned on August 31, 1998.
Tapia Canyon, California
Effective December 1, 1997, MPC acquired a 18% interest in a heavy oil
recovery project in Tapia Canyon, California. The field is estimated to have
approximately 12 million barrels of oil in place with only 13% of the oil
recovered to date. The reserve study was prepared in 1986 by a major oil
company, the field owner at that time. MPC's initial purchase price for its
interest in the project was approximately $79,000. There is also a commitment to
spend $600,000 to perform remedial work on the field and to complete a pilot
stream flood program during the first year of the project (MPC share -
$120,000). The field was producing approximately 30 bpd (MPC share - 6 bpd) at
June 30, 1998.
BELIZE
Southern Offshore Block PSA
On March 16, 1998, MPC (2 1/2%), MPAL (20%) and the other joint venture
participants entered into a new Production Sharing Agreement ("PSA") with the
Government of Belize. The new Southern Offshore Block PSA ("SOB PSA") combines
most of the blocks previously included in the Gladden PSA and the Block 13 PSA,
and totals approximately 893,000 acres. The work obligations of the new PSA are
as follows: Year 1 - $100,000, Year 2 - $300,000, Year 3 - $3,000,000 and Year 4
- - $150,000. The participants in the PSA are seeking partners in the venture.
<PAGE>
Gladden Basin PSA
During January 1996, MPAL acquired a 20% working interest in a
Production Sharing Agreement ("Gladden PSA") which covers approximately 351,000
acres offshore Belize, Central America. On May 30, 1996, MPC acquired a 2 1/2%
working interest in the Gladden PSA. During 1997, the Gladden No. 1 well was
plugged and abandoned and the Company's cost of the well was written off. During
March 1998, this block was consolidated into the SOB PSA.
Block 13 PSA
MPC (2 1/2%) and MPAL (20%) were also participants in a Production
Sharing Agreement ("Block 13 PSA") offshore Belize adjoining the western and
southern boundaries of the Gladden PSA. The Block 13 PSA covers approximately
788,000 acres. During March 1998, this block was consolidated into the SOB PSA.
CANADA
The Company owns a 2.67% carried interest in a lease (31,885 gross
acres, 850 net acres) in the southeast Yukon Territory, Canada, which includes
the Kotaneelee gas field. Anderson Oil & Gas, Inc., ("Anderson") is the operator
of this partially developed field which is connected to a major pipeline system.
Two wells are currently producing gas from the field.
Production at the Kotaneelee field commenced in February 1991. Total
production from the field, according to government reports, has been as follows:
Calendar Year Production (bcf)
------------- ----------------
1991 8.1
1992 18.0
1993 17.5
1994 16.7
1995 15.7
1996 15.2
1997 14.4
1998 (5 months) 5.9
In a 1989 application to the National Energy Board, a reserve study by
the then operator estimated gas in place at 1.6 trillion cubic feet with proved
and probable recoverable reserves of 781 bcf.
<PAGE>
The operator has not permitted the Company access to detailed pricing
and volume information, citing the litigation regarding the field. See Item 3 -
Legal Proceedings for a discussion of litigation relating to the Kotaneelee
field which may affect the status of the carried interest and the amount of the
carried interest account.
The Company is not entitled to any revenue from the field until the
working interest owners recover their costs. The operator last reported to the
Company unrecovered development costs totaling approximately Cdn. $18,227,000
(Company share - Cdn. $486,000) at April 30, 1998. It is expected that the
Company will begin to receive proceeds from the field in 2000 based upon present
prices. The period before payment to the Company begins may be shorter or
longer, depending on prevailing market conditions, gas volumes sold and the
results of the litigation. Under ordinary circumstances, increased natural gas
prices or increased volumes would result in a shorter period to payout.
Recently, remedial work was performed by the operator on one of the wells in the
Kotaneelee field at a cost (through July 31, 1998) of approximately Cdn. $6
million. This amount is not reflected in the above amounts. Initial indications
are that the remedial work on the well could significantly increase production
from the field. This remedial work is continuing and additional costs may be
incurred.
For financial statement purposes in fiscal 1987 and 1988, the Company
wrote down its Canada cost center which included the Kotaneelee field to a
nominal value because of the uncertainty as to the date when sales of Kotaneelee
gas might begin and the immateriality of the carrying value of the investment.
Although the field is now producing, the Company has not yet classified its
share of the Kotaneelee gas reserves as proved because the gas field is still
the subject of litigation. The Company will reclassify the reserves at the
Kotaneelee field as proved when there is greater assurance as to the timing and
assumptions regarding the investment.
(b) Financial Information about Industry Segments.
Since the Company is engaged in only one industry, namely, oil
and gas exploration, development, production and sale, this item is not
applicable to the Company.
(c) (1) Narrative Description of the Business.
The Company was incorporated in 1957 under the laws of Panama
and was reorganized under the laws of Delaware in 1967. The Company is engaged
in the exploration for, and the development and production and sale of oil and
gas reserves in the United States, Canada, and Belize and, through its
subsidiary MPAL, in Australia, the United States and Belize.
<PAGE>
(i) Principal Products.
MPAL has an interest in the Palm Valley gas field and in the
Mereenie oil and gas field. See Item 1(a) - Australia - for a discussion of the
oil and gas production from the Mereenie and Palm Valley fields. The Company has
a direct 2.67% carried interest in the Kotaneelee gas field in Canada.
(ii) Status of Product or Segment.
See Item 1(a) - Australia - for a discussion of the current
and future operations of the Mereenie and Palm Valley fields in Australia.
(iii) Raw Materials.
Not applicable.
(iv) Patents, Licenses, Franchises and Concessions
Held.
In Australia, the Company has interests directly and
indirectly through its subsidiaries in the following permits. Permittees are
required to carry out agreed work and expenditure programs.
<TABLE>
<CAPTION>
Permit Expiration Date Location
<S> <C> <C> <C>
Retention License 2 (Dingo) May 2003 Northern Territory
Exploration Permit 15 (Ngalia) May 1999 Northern Territory
Authority to Prospect 613P (Maryborough) March1999 Queensland
Authority to Prospect 244P (Eastern Surat) February 2000 Queensland
Authority to Prospect 626P (Southern Surat) August 1999 Queensland
Western Australia WA-281-P July 2004 Offshore Western Australia
Western Australia WA-282-P July 2004 Offshore Western Australia
Western Australia WA-283-P July 2004 Offshore Western Australia
Western Australia WA-199-P March 1999 Offshore Western Australia
TP12 & EP398 January 2002 Offshore Western Australia
</TABLE>
<PAGE>
In 1981, the NTA issued Petroleum Leases No. 4 and No. 5 which
cover the Mereenie oil and gas field to MPAL's subsidiaries. As part of the
lease conditions, MPAL and its Mereenie partners agreed to construct an oil
refinery near Alice Springs, if it were determined that such a refinery is
economically feasible. MPAL believes that the oil refinery would not be
economically viable under current market conditions, and the NTA has not raised
any current objection to this conclusion. In the event that a refinery becomes
economically viable and the MJV does not construct the refinery, MPAL and its
partners will be required to pay the NTA liquidated damages based on the value
of the crude oil produced from the lands under lease. The amount to be paid to
the Territory is an amount per barrel which is the greater of (a) A.$3.00 per
barrel or (b) A.$2.00 per barrel plus 10% of the amount by which the market
price of Mereenie crude oil exceeds A.$27.50. Production is subject to a
statutory 10 percent royalty payable to the NTA.
In 1982 the NTA granted Petroleum Lease No. 3 for the Palm
Valley gas field to a MPAL subsidiary. Production is subject to a statutory 10
percent royalty payable to the NTA.
The above leases are subject to the Petroleum (Prospecting and
Mining) Act of the Northern Territory. Lessees have the exclusive right to
produce petroleum from the land subject to a lease upon payment of a rental and
a royalty at the rate of 10% of the wellhead value of the petroleum produced.
Rental payments may be offset against the royalty paid. The term of a lease is
21 years, and leases may be renewed for successive terms of 25 years each.
Since 1992, there has been an ongoing controversy regarding
the Aborigines and the ownership of their traditional lands. Recently, there has
been legislation to resolve this controversy. The Company does not consider that
this issue will have a material adverse impact on MPAL's properties.
In Belize, Central America, the Company has interests directly
and indirectly through a subsidiary in the following Production Sharing
Agreement ("PSA"). PSA's in Belize are issued for eight years but work and
expenditure obligations are calculated in two year blocks. Application is made
ninety days prior to the two year block expiration.
PSA Expiration Date
Southern Offshore Block March 15, 2002
(v) Seasonality of Business.
Although the Company's business is not seasonal, the demand
for oil and especially gas is subject to fluctuations in the Australian weather.
<PAGE>
(vi) Working Capital Items.
See Item 7 - Liquidity and Capital Resources for a discussion
of this information.
(vii) Customers.
Although the majority of the Company's oil and gas properties
are located in a relatively remote area in central Australia (See Item 1 -
Business and Item 2 - Properties), the completion in January 1987 of the Amadeus
Basin to Darwin gas pipeline has provided access to and expanded the potential
market for the Company's gas production.
Natural Gas Production
MPAL's principal customer and the most likely major customer
for future gas sales is PAWA, a governmental authority of the Northern Territory
Government, which also has substantial regulatory authority over MPAL's oil and
gas operations.
Oil Production
There is presently a small local market for the Mereenie crude
oil in the Alice Springs area. Most of the crude oil production is being shipped
and sold to a refinery in Adelaide.
(viii) Backlog.
Not applicable.
(ix) Renegotiation of Profits or Termination of
Contracts or Subcontracts at the Election
of the Government.
Not applicable.
(x) Competitive Conditions in the Business.
The exploration for and production of oil and gas are highly
competitive operations. The ability to exploit a discovery of oil or gas is
dependent upon such considerations as the ability to finance development costs,
the availability of equipment, and engineering and construction delays and
difficulties. The Company also must compete with major companies which have
substantially greater resources than the Company.
<PAGE>
Furthermore, competitive conditions may be substantially
affected by various forms of energy legislation which have been or may be
proposed in Australia, Canada, the United States and Belize; however, it is not
possible to predict the nature of any such legislation which may ultimately be
adopted or its effects upon the future operations of the Company.
At the present time, the Company's principal income producing
operations are in Australia and for this reason, current competitive conditions
in Australia are material to the Company's future. Currently, most indigenous
crude oil is consumed within Australia. In addition, imports of crude oil are
made by refiners and others to meet the overall demand in Australia. The PVP and
the MP are developing and separately marketing the production from each field.
Because of the relatively remote location of the Amadeus Basin and the inherent
nature of the market for gas, it would be impractical for each working interest
partner to attempt to market its respective share of production from each field.
(xi) Research and Development.
Not applicable.
(xii) Environmental Regulation.
The Company is subject to the environmental laws and
regulations of the jurisdictions in which it carries on its business, and
existing or future laws and regulations could have a significant impact on the
exploration for and development of natural resources by the Company. However, to
date, the Company has not been required to spend any unusual material amounts
for environmental control facilities. The federal and state governments in
Australia strictly monitor compliance with these laws but compliance therewith
has not had any adverse impact on the Company's operations or its financial
resources.
(xiii) Number of Persons Employed by Company.
At June 30, 1998, the Company had no full time employees in
the United States and MPAL had 34 employees in Australia. The Company relies to
a great extent on consultants for legal, accounting and administrative services.
(d) Financial Information About Foreign and Domestic
Operations and Export Sales.
(1) Financial Information Relating to Foreign and
Domestic Operations.
See Note 12 to the Consolidated Financial Statements.
<PAGE>
(2) Risks Attendant to Foreign Operations.
Most of the properties in which the Company has
interests are located outside the United States and are subject to certain risks
involved in the ownership and development of such foreign property interests.
These risks include but are not limited to those of: nationalization;
expropriation; confiscatory taxation; changes in foreign exchange controls;
currency revaluations; price controls or excessive royalties; export sales
restrictions; limitations on the transfer of interests in exploration licenses;
and other laws and regulations which may adversely affect the Company's
properties, such as those providing for conservation, proration, curtailment,
cessation, or other limitations of controls on the production of or exploration
for hydrocarbons. Thus, an investment in the Company represents a speculation
with risks in addition to those inherent in domestic petroleum exploratory
ventures.
(3) Data Which are Not Indicative of Current
or Future Operations.
MPAL and its co-venturer in the Mereenie field have
been negotiating with PAWA and other parties to sell production out of the
field's uncommitted gas reserves. A new gas supply contract for the uncommitted
reserves in the Mereenie field could increase revenue from gas sales in the
future.
Item 2. Properties.
(a) The Company has interests in properties in Australia, United
States, Canada and Belize. In Australia, it has interests through its 50.7%
equity interest in MPAL in exploration permits, a retention license and
production leases in the Northern Territory, Queensland and Western Australia.
In Canada, the Company has a direct interest in one lease. The Company also has
direct interests in properties in the United States and Belize and indirectly
through MPAL's interests in these areas. For additional information regarding
the Company's properties, See Item 1 - Business.
(b) (1) The information regarding reserves, costs of oil and gas
activities, capitalized costs, discounted future net cash flows and results of
operations is contained in Item 8 - Financial Statements and Supplementary Data.
<PAGE>
The following graphic presentation has been omitted, but the following
is a description of the omitted material:
AMADEUS BASIN PROJECTS MAP
The map indicates the location of the Amadeus and Ngalia Basin
interests in the Northern Territory of Australia. The following items are
identified:
Palm Valley Gas Field
Mereenie Oil & Gas Field
Dingo Gas Field
Ngalia Basin
Palm Valley - Alice Springs Gas Pipeline
Palm Valley - Darwin Gas Pipeline
Mereenie Spur Gas Pipeline
<PAGE>
The following graphic presentation has been omitted, but the following
is a description of the omitted material:
CANADIAN PROPERTY INTERESTS MAP
The map indicates the location of the Kotaneelee Gas Field in the Yukon
Territories of Canada. The map identifies the following items:
Kotaneelee Gas Field
Wells drilled on the permit
Pointed Mountain Gas Field
Beaver River Gas Field
Westcoast Transmission Pipeline
<PAGE>
(2) Reserves reported to other agencies.
None
(3) Production
The average sales price per unit of production for
the following fiscal years are as follows:
June 30,
1998 1997 1996
-------- -------- --------
Australia:
Gas (per mcf) A.$ 2.32 A.$ 2.30 A.$ 2.24
Crude oil (per bbl) A.$18.94 A.$27.71 A.$23.85
The average production cost per unit of production
for the following fiscal years has been impacted by transportation costs on
Mereenie oil in Australia:
June 30,
1997 1996 1995
-------- -------- --------
Australia:
Gas (per mcf) A.$ .26 A.$ .28 A.$ .32
Crude oil (per bbl) A.$12.28 A.$8.20 A.$6.68
(4) Productive Wells and Acreage.
Productive wells and acreage at June 30, 1998:
Productive Wells
Oil Gas Developed Acreage
--- --- -----------------
Gross Net Gross Net Gross Acres Net Acres
----- --- ----- --- ----------- ---------
Australia 40 14.00 26 9.99 72,025 30,001
Americas 11 1.98 2 .05 3,630 139
-- ----- -- ----- ------ ------
51 15.98 28 10.04 75,655 30,140
== ===== == ===== ====== ======
<PAGE>
(5) Undeveloped Acreage.
The Company's undeveloped acreage (except as
indicated) is set forth in the table below:
GROSS AND NET ACREAGE AS OF JUNE 30, 1998
(i) MPAL has interests in the following properties (before royalties).
The Company has an interest in these properties through its 50.7% interest in
MPAL.
Properties held by MPAL:
<TABLE>
<CAPTION>
MPAL The Company
------------------------------------------ --------------------------
Net Interest Net Interest
Gross Acres Acres % Acres %
----------- --------- -------- ----------- --------
Australia
Northern Territory:
Amadeus Basin:
<S> <C> <C> <C> <C> <C>
Mereenie (OL4&5)(1) 69,407 24,292 35.00 12,316 17.74
Palm Valley (OL3)(2) 151,905 77,130 50.78 39,105 25.74
Dingo (RL2) 115,596 39,601 34.26 20,078 17.37
--------- --------- ---------
Total Amadeus Basin 336,908 141,023 71,499
--------- --------- ---------
Ngalia Basin (EP-15) 1,914,497 765,799 40.00 388,260 20.28
Queensland:
Surat Basin (ATP 626P) 726,674 109,001 15.00 55,264 7.61
Surat Basin (ATP 244P) 59,280 10,078 17.00 5,110 8.62
Maryborough Basin (ATP 613P) 344,318 337,432 98.00 171,078 49.69
--------- --------- ---------
Total Queensland 1,130,272 456,511 231,452
--------- --------- ---------
Western Australia:
Browse WA-281-P 1,147,315 200,780 17.50 101,795 8.87
Browse WA-282-P 1,468,662 257,016 17.50 130,307 8.87
Browse WA-283-P 1,060,618 185,608 17.50 94,103 8.87
Carnarvon TP12 & EP398 146,224 21,934 15.00 11,121 7.61
Bonaparte WA-199-P 662,454 33,123 5.00 16,793 2.53
--------- --------- ---------
Total Western Australia 4,485,273 698,461 354,119
--------- --------- ---------
Total Australia 7,866,950 2,061,794 1,045,330
--------- --------- ---------
United States
Colorado - Baca County 78,299 46,494 59.38 23,572 30.11
--------- --------- ---------
Belize, C.A.
Southern Offshore Block 892,543 178,509 20.00 90,504 10.14
--------- --------- ---------
Total MPAL 8,837,792 2,286,797 1,159,406
--------- --------- ---------
Properties held directly by MPC:
United States
California(3) 280 50 18.00
--------- ---------
Belize, C.A.
Southern Offshore Block(4) - 22,314 2.50
--------- ---------
Canada
Yukon and Northwest Territories:
Carried interest(5) 35,076 935 2.67
--------- ---------
Total 8,873,148 1,182,705
========= =========
</TABLE>
- ----------------------------
(1) Includes 41,644 gross developed acres and 14,575 net acres.
(2) Includes 30,381 gross developed acres and 15,426 net acres.
(3) Developed acres.
(4) Gross acres shown above.
(5) Includes 3,350 gross developed acres and 89 net acres.
<PAGE>
(6) Drilling activity.
Productive and dry net wells drilled during the
following years (data concerning Canada is insignificant):
Australia
Exploration Development
Year ended ------------------------- --------------------------
June 30, Productive Dry Productive Dry
-------- ---------- --- ---------- ---
1998 - .55 .70 .35
1997 - - - -
1996 .16 - 1.75 -
Americas
Exploration Development
Year ended ------------------------- --------------------------
June 30, Productive Dry Productive Dry
-------- ---------- --- ---------- ---
1998 - - - -
1997 - 1.23 - -
1996 - 1.00 - -
(7) Present Activities.
At June 30, 1998, the Newhaven No. 1 well was
drilling in the Ngalia Basin in the Northern Territory of Australia. On July 19,
1998, the well was plugged and abandoned.
(8) Delivery Commitments.
See discussion under Item 1 concerning the Palm
Valley and Mereenie fields.
Item 3. Legal Proceedings.
Kotaneelee Gas Field
The Company's 2.67% carried interest in the Kotaneelee gas field is
held in trust by Canada Southern Petroleum Ltd. ("Canada Southern") which has a
30% carried interest in the field. Canada Southern and the Company (the
"Plaintiffs") believe that the working interest owners in the Kotaneelee gas
field have not adequately pursued the attainment of contracts for the sale of
Kotaneelee gas; accordingly, legal action in the United States was commenced by
Canada Southern in 1987 against Allied Signal Inc. and Allied Corporation
(collectively, Allied Signal). This suit was ultimately dismissed in December
1988.
<PAGE>
In October 1989 and in March 1990, Canada Southern filed statements of
claim in the Court of Queens Bench of Alberta, Judicial District of Calgary,
Canada, against the working interest partners in the Kotaneelee gas field. The
named defendants were Amoco Canada Petroleum Corporation, Ltd., Dome Petroleum
Limited (now Amoco Canada Resources Ltd.), and Amoco Production Company
(collectively the "Amoco Dome Group"), Columbia Gas Development of Canada Ltd.
("Columbia"), Mobil Oil Canada Ltd. ("Mobil") and Esso Resource of Canada Ltd.
("Esso") (collectively the "Defendants").
The Plaintiffs claim that the Defendants breached either a contract
obligation or a fiduciary duty owed to the Plaintiffs to market gas from the
Kotaneelee gas field when it was possible to so do. The Plaintiffs assert that
marketing the Kotaneelee gas was possible in 1984 and that the Defendants
deliberately failed to do so. The Company seeks money damages and the forfeiture
of the Kotaneelee gas field. The Plaintiffs presented evidence at trial that the
money damages sustained by the Plaintiffs were approximately Cdn. $110 million
(Company share-Cdn. $8.8 million).
In addition, the Plaintiffs have claimed that the Plaintiff's carried
interest account should be reduced because of the negligent operation of the
field and improper charges to the carried interest account by the Defendants.
The Plaintiffs claim that when the Defendants in 1980 suspended production from
the field's gas wells, they failed to take precautionary measures necessary to
protect and maintain the wells in good operating condition. The wells thereafter
deteriorated, which caused unnecessary expenditures to be incurred, including
expenditures to redrill one well. In addition, the Plaintiffs claim that
expenditures made to repair and rebuild the field's dehydration plant should not
have been necessary had the facilities been properly constructed and maintained
by the Defendants. The expenditures, the Plaintiffs claim, were inappropriately
charged to the field's carried interest account. The effect of an increased
carried interest account is to extend the period before payout begins to the
carried interest account owners.
The Plaintiffs claim that production from the field should have
commenced in 1984. At that time the field's carried interest account was
approximately Cdn. $63 million. The Company claims that by 1993 at least Cdn.
$34 million of unnecessary expenses had been wrongfully charged to the carried
interest account. The Company's 2.6% share of these expenses would be
approximately Cdn. $.9 million. The Plaintiffs further claim that, if production
had commenced in 1984, the carried interest account would have been paid off in
approximately two years and the Company would have begun to receive revenues
from the field in 1986. At present, the Company is unable to determine the time
when it will receive any revenues from the field.
<PAGE>
Columbia has filed a counterclaim against the Plaintiffs seeking, if
the Plaintiffs are successful in its claim for the forfeiture of the field,
repayment from the Plaintiffs of all sums Columbia has expended on the
Kotaneelee lands before the Plaintiffs are entitled to their interest.
The parties to the litigation have conducted extensive discovery since
the filing of the claims. The trial which started on September 3, 1996, is still
in progress. The trial was adjourned during the period December 1996-April 1997,
July-August 1997, and July-August 1998. The trial resumed on September 8, 1998
and the Plaintiff's case was completed on September 16, 1998. The Defendants
began their case on September 16, 1998.
Matters Ancillary to Kotaneelee Litigation
In its 1989 statement of claim, the Plaintiffs sought a declaratory
judgment regarding two issues:
(1) whether interest accrued on the carried interest account; and
(2) whether expenditures for gathering lines and dehydration
equipment are expenditures chargeable to the carried interest
account or whether the Plaintiff will be assessed a processing
fee on gas throughput.
With respect to the first issue, the Plaintiffs maintain that no
interest should accrue on the account and the Defendants have not contested this
position. With regard to the second issue, the Plaintiffs maintain that the
expenditures are chargeable to the carried interest account. Mobil, Esso and
Columbia have essentially agreed to the Company's position while the Amoco Dome
Group continues to contest this issue.
On January 22, 1996, the Plaintiffs settled two claims outstanding
against the Company in the Court of Queens Bench, Calgary, Alberta, which
related to a suit brought against AlliedSignal Inc. ("AlliedSignal") in Florida
which was dismissed on the basis that Canada was the appropriate forum for the
litigation. AlliedSignal had sought additional relief against the Company in
Canada to preclude other types of suits by the Company and to recover the costs
of the defense of the initial action. The settlement bars Allied Signal from
making a claim against the Plaintiffs for any costs in connection with the
Kotaneelee Litigation. The Plaintiffs agreed not to bring any action against
AlliedSignal in connection with the Kotaneelee gas field. Neither party made any
monetary payment to the other party.
<PAGE>
In 1991, Anderson Exploration Ltd. acquired Columbia and changed its
name to Anderson Oil & Gas Inc. ("Anderson"). Anderson is now the sole operator
of the field and is a direct defendant in the Canada Court lawsuits. Columbia's
previous parent, The Columbia Gas System, Inc., which was reorganized in a
bankruptcy proceeding in the United States, is contractually liable to Anderson
in the legal proceeding described above.
The working interest owners have reported that they have been selling
Kotaneelee gas since February 1991. The Company is uncertain as to what impact,
if any, these sales may have on the status of the litigation.
Under Canadian law, certain costs of the litigation are assessed
against the nonprevailing party. These costs consist primarily of attorney and
expert witness fees during trial. The trial is presently scheduled to last
twelve months, therefore, these costs could be substantial. While the costs are
not now determinable, the Company estimates that such costs, assuming a twelve
month trial, would not exceed Cdn. $1.5 million (Company share - Cdn. $120,000).
There are no assurances however, that such costs will not exceed this amount or
that the duration of the trial will not exceed twelve months. The actual trial
time through August 1998 is approximately eight months.
Canada Southern has been advancing and paying all the legal and other
expenses of the Kotaneelee litigation. The Company has not received an
accounting of the amounts spent to date and understands that Canada Southern
will recover its costs only from any judgment in favor of the Plaintiffs. The
Company believes that the outcome of the Kotaneelee litigation is not reasonably
likely to have a material adverse effect on the Company's future consolidated
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
Executive Officers of the Company
The following information with respect to the executive officers of the
Company is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
<TABLE>
<CAPTION>
Length of Service Other Positions Held
Name Age Office Held as an Officer with Company
<S> <C> <C> <C> <C>
James R. Joyce 57 President and Chief Financial President since Director
Officer July 1, 1993
Dennis D. Benbow 59 General Manager - MPAL Since 1993 Director
</TABLE>
The Company is not aware of any arrangements or understandings between
any of the individuals named above and any other person pursuant to which any
individual named above was selected as an officer.
All officers of MPC are elected annually by the Board of Directors and
serve at the pleasure of the Board of Directors.
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder
Matters.
(a) Principal Market
The principal markets for the Company's common stock is the Pacific
Stock Exchange [MPC] and the NASDAQ SmallCap market [MPET]. The stock is also
traded on the Boston Stock Exchange. The quarterly high and low closing prices
on the Pacific Stock Exchange during the calendar quarterly periods indicated
were as follows:
1998 1st quarter 2nd quarter 3rd quarter*
- ---- ----------- ----------- ------------
High....... 3 1/8 2 15/16 2 3/8
Low........ 2 1/2 2 1/4 1 3/8
1997 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High....... 3 15/16 2 5/8 3 13/16 3 5/8
Low........ 2 7/16 2 3/16 2 5/16 2 1/2
1996 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High....... 2 7/16 3 3 3 7/8
Low........ 1 15/16 2 3/8 2 3/16 2 9/16
- ---------------------------------
* Through September 15, 1998, on which date the closing price was $1 3/8.
(b) Approximate Number of Holders of Common Stock at
September 15, 1998
Title of Class Number of Record Holders
Common stock, par
value $.01 per share 11,900
(c) Frequency and Amount of Dividends
The Company has never paid a cash dividend on its common stock. The
Company will consider the payment of dividends when it has the ability to make
such payments.
<PAGE>
(d) Recent Sales of Unregistered Securities
None.
Item 6. Selected Consolidated Financial Information.
The following table sets forth selected data (in thousands) of the
Company insofar as it relates to each of the five fiscal years in the period
ended June 30, 1998. This data should be read in conjunction with Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Financial Data $ $ $ $ $
<S> <C> <C> <C> <C> <C>
Operating revenues 15,235 19,936 17,027 14,154 12,528
====== ====== ====== ====== ======
Total revenues 15,340 20,758 18,073 15,424 13,318
====== ====== ====== ====== ======
Net income 1,037 694 1,411 684 651
====== ====== ====== ====== ======
Net income per share (Basic and Diluted) .04 .03 .06 .03 .03
====== ====== ====== ====== ======
Working capital 13,452 14,219 9,858 8,806 8,559
====== ====== ====== ====== ======
Cash provided by operating activities 6,737 11,181 9,185 8,587 4,376
====== ====== ====== ====== ======
Property and equipment (net) 23,019 28,623 32,912 37,361 35,378
====== ====== ====== ====== ======
Total assets 39,779 46,230 47,816 39,575 36,430
====== ====== ====== ====== ======
Long-term liabilities 6,512 7,738 6,981 6,312 4,393
====== ====== ====== ====== ======
Minority interests 13,123 16,147 16,682 14,366 14,180
====== ====== ====== ====== ======
Stockholders' equity:
Capital 43,782 43,659 43,492 43,358 43,227
Accumulated deficit (19,350) (20,387) (21,080) (22,491) (23,176)
Foreign currency translation adjustments (7,013) (3,729) (2,785) (4,833) (4,474)
-------- -------- -------- -------- ------
Total stockholders' equity 17,419 19,543 19,627 16,034 15,577
====== ====== ====== ====== ======
Exchange rate A.$=U.S. at end of period .6194 .7538 .7875 .7097 .7287
====== ====== ====== ====== ======
Common stock outstanding shares 24,982 24,851 24,691 24,544 24,387
====== ====== ====== ====== ======
Book value per share .70 .78 .79 .65 .64
====== ====== ====== ====== ======
Quoted market value per share 2.28 2.38 2.50 1.94 .69
====== ====== ====== ====== ======
Operating Data
Annual production (Net of royalties)
Gas (BCF) 5.844 5.673 5.422 5.066 5.141
====== ====== ====== ====== ======
Oil (BBLS) (In thousands) (net of royalties) 248 307 318 369 374
====== ====== ====== ====== ======
Standard measure of discounted future cash
flow relating to proved oil and gas reserves.
(49.3% attributable to minority interests) 48,000 68,000 44,000 38,000 47,000
====== ====== ====== ====== ======
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(1) Liquidity and Capital Resources - June 30, 1998
-----------------------------------------------
Consolidated
At June 30, 1998, the Company on a consolidated basis had approximately
$14,904,000 of cash and securities. A summary of the major changes in cash and
cash equivalents during the period is as follows:
Cash and cash equivalents at beginning of period $12,943,000
Cash provided by operations 6,511,000
Dividends to MPAL minority shareholders (1,506,000)
Additions to property and equipment (2,998,000)
Exchange loss on cash (2,381,000)
Other (133,000)
------------
Cash and cash equivalents at end of period $12,436,000
===========
As to the Company (unconsolidated)
At June 30, 1998, Magellan Petroleum Corporation ("MPC"), on an
unconsolidated basis, had working capital of approximately $3.8 million. MPC's
annual operating budget is approximately $700,000 and its current cash position
and annual MPAL dividend should be adequate to meet its current cash
requirements. During fiscal 1999, MPC has budgeted approximately $300,000 for
oil and gas exploration compared to the $111,000 expended during 1998. MPC has
in the past invested and may in the future invest substantial portions of its
cash to maintain its majority interest in its subsidiary company, Magellan
Petroleum Australia Limited ("MPAL").
During December 1997, MPC received a dividend from MPAL of $1,546,000
which was added to MPC's working capital.
As to MPAL
At June 30, 1998, MPAL had working capital of approximately $9.7
million. MPAL has budgeted approximately $2.4 million for specific exploration
projects in fiscal 1999 and allocated $1.2 million for potential new projects as
compared to the $3.3 million expended during fiscal 1998. The current
composition of MPAL's oil and gas reserves are such that MPAL's future revenues
in the long term are expected to be derived from the sale of gas in Australia.
<PAGE>
MPAL expects to fund its exploration costs through its cash flow from
Australian operations and any balance from its A.$10 million bank line of
credit.
The Company has assessed its Year 2000 readiness and has implemented a
plan to be compliant by December 1998. The cost to implement this plan of
approximately $120,000 is not considered material and would have been incurred
in the normal course of equipment replacement. The Year 2000 change should have
no material impact on the Company's internal operations or financial results.
However, the Company will be dependent on its suppliers, partners and customers
to make their systems year 2000 compliant.
(2) Results of Operations
1998 vs. 1997
The Company had consolidated net income of $1,036,513 for fiscal 1998
compared to net income of $693,987 for fiscal 1997. The components of
consolidated net income for the comparable periods were as follows:
Year ended June 30,
---------------------------------
1998 1997
MPC unconsolidated pretax loss $ (688,596) $(1,254,223)
MPC income tax expense (1,000) (276,117)
Share of MPAL pretax income 1,798,595 2,815,193
Share of MPAL income tax (72,486) (590,866)
----------- ------------
Consolidated net income $1,036,513 $ 693,987
========== ===========
Net income per share (basic & diluted) $.04 $.03
==== ====
Revenues
Oil sales decreased 39% in fiscal 1998. Oil sales in Australia
decreased in 1998 to $4,098,000 from $6,740,000 in 1997 because of a 32%
decrease in oil prices, the 13% Australian foreign exchange rate decrease
discussed below and a 19% decrease in the number of units produced. Oil unit
sales (before deducting royalties) in barrels ("bbls") and the average price per
barrel sold during the periods indicated were as follows:
Fiscal 1998 Sales Fiscal 1997 Sales
------------------------ ------------------------
Average Price Average Price
bbls per bbl bbls per bbl
------- ------------- ------- -------------
Australia - Mereenie 284,757 A.$18.94 352,783 A.$27.71
<PAGE>
On August 2, 1998, there was an explosion at the Adelaide refinery
which is now shut down for repairs. At the present time, the Company's crude oil
is still being purchased and stored at the refinery. If the repairs are not
completed in a timely manner, it may be necessary to sell the crude oil to
another facility at a slightly lower net price.
The operator of the field has currently scheduled five wells for
remedial work. This work which is expected to cost approximately $600,000 (MPAL
share - $210,000) will increase production costs in fiscal 1999. In addition,
production will decrease in the short term while these wells are shut-in.
Gas sales in Australia decreased 9% in fiscal 1998. Gas sales
decreased from $11,552,000 in 1997 to $10,485,000 in 1998 because of the 13%
Australian foreign exchange rate decrease discussed below which was partially
offset by a 3% increase in the volume of gas sold. The volumes in billion cubic
feet ("bcf") (before deducting royalties) and the average price of gas per
thousand cubic feet ("mcf") sold during the periods indicated were as follows:
Fiscal 1998 Sales Fiscal 1997 Sales
----------------------- -----------------------
Average Price Average Price
bcf per mcf bcf per mcf
Australia: (A.$) (A.$)
Palm Valley
Alice Springs contract 1.147 2.96 1.072 2.95
Darwin contract 2.395 2.02 2.496 2.02
Mereenie
Darwin contract 2.171 2.02 1.963 1.99
Other 1.416 2.74 1.373 2.76
----- -----
Total 7.129 6.904
===== =====
Other production income decreased 60% to $652,000 in 1998 compared to
$1,644,000 in 1997. The primary reason for this decrease was that MPAL's share
of gas pipeline tariffs decreased to $531,000 in 1998 compared to $1,498,000 in
1997. The 1998 amount decreased because of a dispute regarding the producers'
share of the tariffs.
Interest income decreased 10% to $741,000 in 1998 from $822,000 in
1997. Although additional funds were available for investment, substantially
lower interest rates and the 13% Australian foreign exchange rate decrease
discussed below offset the increase.
Loss on sale of assets. During March 1998, MPAL agreed to sell its
15.625% interest in ATP 378P Queensland, Australia to its partner, Santos,
Limited. The $636,000 difference between the carrying cost and the sale price is
included in loss on the sale of assets.
<PAGE>
Costs and Expenses
Production costs decreased 24% to $3,647,000 in 1998 from $4,811,000 in
1997. The decrease relates to a decrease in costs at Mereenie and Palm Valley
and the 13% Australian foreign exchange rate decrease discussed below.
Depreciation, depletion and amortization increased 3% in 1998 to
$2,205,000 from $2,140,000 in 1997. The increase was the result of the
additional costs added to the depletion calculation which was partially offset
by the 13% Australian foreign exchange rate decrease discussed below.
Exploratory and dry hole costs totaled $3,346,000 during 1998 compared
to $6,243,000 in 1997. In 1998, the Schilling-1 well was abandoned offshore
Western Australia and the Kittiwake-1 well was also abandoned offshore Western
Australia. In 1997, the Baca County, Colorado project was abandoned. In Belize,
the Gladden No. 1 well was also plugged and abandoned in 1997. The costs (in
thousands) in 1998 and 1997 for MPC and MPAL are as follows:
1998 1997
------------------------ -------------------------
Location MPAL MPC Total MPAL MPC Total
- --------------------- ------ --- ------ ------ ---- ------
Baca County, Colorado $ 46 $ - $ 46 $2,693 $315 $3,008
Belize, C.A. 72 32 104 2,372 283 2,655
Australia 3,196 - 3,196 580 - 580
------ --- ------ ------ ---- ------
$3,314 $32 $3,346 $5,645 $598 $6,243
====== === ====== ====== ==== ======
Bad debts increased to $239,000 during the 1998 period. MPAL
established a reserve for the amount due from Pegasus Gold Australian Pty. Ltd.
because of its bankruptcy filing.
Income Taxes
Income tax expense decreased from $1,442,000 in 1997 to $144,000 in
1998. The effective income tax rate for 1998 was 5% compared to 34% in 1997. The
components of income tax expense between MPC and MPAL were as follows:
1998 1997
-------- ----------
MPC $ 1,000 $ 276,000
MPAL 143,000 1,166,000
-------- ----------
Consolidated $144,000 $1,442,000
======== ==========
In 1998, there was no 15% Australian withholding tax on the dividend
paid by MPAL to MPC. In addition, MPAL's income tax expense in 1998 was lower
due to the effect of permanent tax benefits under Australian tax law.
<PAGE>
Exchange Effect
The value of the Australian dollar relative to the U.S. dollar
decreased to $.6194 at June 30, 1998 compared to the value of $.7538 at June 30,
1997. This resulted in a $3,284,000 charge to accumulated translation
adjustments for fiscal 1998. The 18% decrease in the value of the Australian
dollar decreased the reported asset and liability amounts in the balance sheet
at June 30, 1998 from the June 30, 1997 amounts. The annual average exchange
rate used to translate MPAL's operations in Australia for fiscal 1998 was
$.6810, which is a 13% decrease compared to a $.7830 rate for the comparable
1997 period.
1997 vs. 1996
The Company had consolidated net income of $693,987 for fiscal 1997
compared to net income of $1,410,533 for fiscal 1996. The components of
consolidated net income for the comparable periods were as follows:
Year ended June 30,
--------------------------------
1997 1996
------------ -----------
MPC unconsolidated pretax loss $(1,254,223) $ (816,304)
MPC income tax expense (276,117) (251,888)
Share of MPAL pretax income 2,815,193 3,287,327
Share of MPAL income tax (590,866) (808,602)
------------ -----------
Consolidated net income $ 693,987 $1,410,533
=========== ==========
Net income per share (basic & diluted) $.03 $.06
==== ====
Revenues
Oil sales increased 14% in fiscal 1997. Oil sales in Australia
increased to $6,740,000 from $5,922,000 in 1996 because of a 16% increase in oil
prices and a 3% increase in the average value of the Australian dollar which was
partially offset by a 3% decrease in the number of units produced. Oil unit
sales (before deducting royalties) in barrels ("bbls") and the average price per
barrel sold during the periods indicated were as follows:
Fiscal 1997 Sales Fiscal 1996 Sales
------------------------ ------------------------
Average Price Average Price
bbls per bbl bbls per bbl
------- ------------- ------- -------------
Australia - Mereenie 352,783 A.$27.71 365,325 A.$23.85
<PAGE>
Gas sales in Australia increased 19% in fiscal 1997. Gas sales
increased from $9,746,000 in 1996 to $11,552,000 in 1997 because of increases in
gas prices under long term contracts, an 11% increase in the volume of gas sold
and a 3% increase in the average value of the Australian dollar. Total gas sales
increased primarily because of the 1995 Mereenie gas contract. The volumes in
billion cubic feet ("bcf") (before deducting royalties) and the average price of
gas per thousand cubic feet ("mcf") sold during the periods indicated were as
follows:
Fiscal 1997 Sales Fiscal 1996 Sales
----------------------- -----------------------
Average Price Average Price
bcf per mcf bcf per mcf
Australia: (A.$) (A.$)
Palm Valley
Alice Springs contract 1.072 2.95 1.070 2.89
Darwin contract 2.496 2.02 2.328 2.01
Mereenie
Darwin contract 1.963 1.99 1.917 1.97
Other 1.373 2.76 .908 2.65
----- -----
Total 6.904 6.223
===== =====
Other production income increased 21% to $1,644,000 in 1997 compared to
$1,360,000 in 1996. The primary reason for this increase was that MPAL's share
of gas pipeline tariffs increased to $1,498,000 in 1997 compared to $1,229,000
in 1996.
Interest income increased 18% to $822,000 in 1997 from $696,000 in
1996. The combination of additional funds available for investment and higher
interest rates was the reason for this increase.
Costs and Expenses
Production costs increased 9% to $4,811,000 in 1997 from $4,409,000 in
1996. The increase was also the result of development activities being
undertaken in the Mereenie field.
Depreciation, depletion and amortization decreased 13% in 1997 to
$2,140,000 from $2,488,000 in 1996. The decrease was the result of the
additional reserves of the new Mereenie contracts which increased total reserves
by 19%. The decrease in depletion was partially offset by a 3% increase in the
value of the Australian dollar.
<PAGE>
Exploratory and dry hole costs totaled $6,243,000 during 1997 compared
to $1,858,000 in 1996. In 1997, the Baca County, Colorado project was completely
abandoned. In Belize, the Gladden No. 1 well was plugged and abandoned in 1997
after the well was drilled without any indications of commercially recoverable
hydrocarbons.
The costs (in thousands) in 1997 and 1996 for MPC and MPAL are as follows:
1997 1996
------------------------ ------------------------
Location MPAL MPC Total MPAL MPC Total
- --------------------- ------ ---- ------ ------ ---- ------
Baca County, Colorado $2,693 $315 $3,008 $1,565 $126 $1,691
Belize, C.A. 2,372 283 2,655 - - -
Australia 580 - 580 167 - 167
------ ---- ------ ------ ---- ------
$5,645 $598 $6,243 $1,732 $126 $1,858
====== ==== ====== ====== ==== ======
Other administrative expenses decreased 9%. In 1997 other costs
decreased to $935,000 from $1,027,000. The decrease is primarily due to lower
travel costs.
Income Taxes
Income tax expense decreased from $1,848,000 in 1996 to $1,442,000 in
1997. The effective income tax rate for 1997 was 34% compared to 33% in 1996.
The components of income tax expense between MPC and MPAL were as follows:
1997 1996
---------- ----------
MPC $ 276,000 $ 252,000
MPAL 1,166,000 1,596,000
---------- ----------
Consolidated $1,442,000 $1,848,000
========== ==========
MPC's income tax is primarily the 15% Australian withholding tax on the
dividend paid by MPAL.
Exchange Effect
The value of the Australian dollar relative to the U.S. dollar
decreased to $.7538 at June 30, 1997 compared to the value of $.7875 at June 30,
1996. This resulted in a $945,000 charge to accumulated translation adjustments
for fiscal 1997. The 4% decrease in the value of the Australian dollar decreased
the reported asset and liability amounts in the balance sheet at June 30, 1997
from the June 30, 1996 amounts. The annual average exchange rate used to
translate MPAL's operations in Australia for fiscal 1997 was $.7830, which was a
3% increase compared to a $.7593 rate for the comparable 1996 period.
<PAGE>
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, adoption in fiscal 1999 will have no impact on the Company's net income
or shareholders' equity. Statement 130 requires foreign currency translation
adjustments, which currently are reported in shareholders' equity, to be
included in other comprehensive income and the disclosure of total comprehensive
income.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The Statement supercedes the
disclosure requirements in SFAS No 87, Employers' Accounting for Pensions, SFAS
No. 88, Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits, and SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. SFAS No. 132 addresses disclosure
issues only and does not change the measurement or recognition provisions
specified in those Statements. SFAS No. 132 is effective for the Company's 1999
fiscal year. The adoption of this standard will not have an effect on earnings
or the financial condition of the Company.
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The statement requires all derivatives to be
recognized on the balance sheet at fair value and establishes standards for the
recognition of changes in such fair value. SFAS No. 133 is effective for the
Company's 2000 fiscal year. Because the Company does not currently use
derivatives, the adoption of SFAS No. 133 will not have a significant effect on
earnings or the financial condition of the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The information required by this item is not applicable to the Company
because the Company does not own any market risk sensitive instruments. See Note
1 to the consolidated financial statements for a description of the securities
held by the Company. During fiscal 1998, the value of the Australian dollar
relative to the U.S. dollar decreased 18% and reduced the reported asset amounts
at June 30, 1998 from the June 30, 1997 amounts.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Magellan Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Magellan
Petroleum Corporation as of June 30, 1998, and 1997 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Magellan Petroleum Corporation at June 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
September 11, 1998
<PAGE>
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1998 1997
----------- -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $12,436,297 $12,942,862
Accounts receivable 567,175 1,249,945
Marketable securities 1,265,495 2,211,205
Reimbursable development costs 191,266 260,553
Inventories 218,359 250,069
Other assets 296,933 106,967
----------- -----------
Total current assets 14,975,525 17,021,601
----------- -----------
Marketable securities 1,201,890 -
----------- -----------
Property and equipment:
Oil and gas properties (successful efforts method) 39,196,101 45,891,237
Land, buildings and equipment 1,510,666 1,837,114
Field equipment 1,262,464 1,598,387
----------- -----------
41,969,231 49,326,738
Less accumulated depletion, depreciation and amortization (18,949,917) (20,704,121)
----------- -----------
Total property and equipment 23,019,314 28,622,617
----------- -----------
Other assets 582,251 585,889
----------- -----------
$39,778,980 $46,230,107
=========== ===========
LIABILITIES, MINORITY INTERESTS
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,918,880 $ 1,869,818
Accrued liabilities 806,150 933,256
----------- -----------
Total current liabilities 2,725,030 2,803,074
----------- -----------
Long term liabilities:
Deferred income taxes 5,854,261 7,087,224
Reserve for future site restoration costs 657,288 650,311
----------- -----------
Total long term liabilities 6,511,549 7,737,535
----------- -----------
Minority interests 13,123,313 16,146,564
----------- -----------
Commitments (Note 2) - -
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized 50,000,000 shares
Outstanding 24,982,495 (1998), 24,851,245 (1997) shares 249,825 248,512
Capital in excess of par value 43,532,238 43,410,176
----------- -----------
Total capital 43,782,063 43,658,688
Accumulated deficit (19,350,036) (20,386,549)
Foreign currency translation adjustments (7,012,939) (3,729,205)
----------- -----------
17,419,088 19,542,934
----------- -----------
$39,778,980 $46,230,107
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------
1998 1997 1996
----------- ------------ -----------
Revenues:
<S> <C> <C> <C>
Oil sales $ 4,097,570 $ 6,739,663 $ 5,921,529
Gas sales 10,485,380 11,551,546 9,745,520
Other production related revenues 651,706 1,644,457 1,360,403
Interest income 741,011 821,941 695,613
Gain (loss) on sale of assets (635,882) - 349,953
----------- ------------ -----------
15,339,785 20,757,607 18,073,018
----------- ------------ -----------
Costs and expenses:
Production costs 3,647,135 4,810,931 4,409,440
Exploratory and dry hole costs 3,346,329 6,243,211 1,858,271
Salaries and employee benefits 1,434,868 1,667,678 1,741,721
Depletion, depreciation and amortization 2,205,127 2,140,066 2,448,210
Auditing, accounting and legal services 479,623 446,336 703,833
Bad debts 239,201 - -
Shareholder communications 168,715 179,111 181,039
Interest expense 24,468 32,005 30,690
Other administrative expenses 932,464 935,262 1,026,889
----------- ------------ -----------
12,477,930 16,454,600 12,400,093
----------- ------------ -----------
Income before income taxes and minority interests 2,861,855 4,303,007 5,672,925
Income taxes 144,087 1,442,495 1,848,079
----------- ------------ -----------
Income before minority interests 2,717,768 2,860,512 3,824,846
Minority interests 1,681,255 2,166,525 2,414,313
----------- ------------ -----------
Net income $ 1,036,513 $ 693,987 $ 1,410,533
=========== ============ ===========
Average number of shares
Basic 24,949,322 24,782,360 24,599,899
========== ========== ==========
Diluted 25,126,523 25,029,561 24,919,609
========== ========== ==========
Per share, based on average number of shares
outstanding during the period:
Net income (Basic and Diluted) $.04 $.03 $.06
==== ==== ====
</TABLE>
See accompanying notes.
<PAGE>
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Three years ended June 30, 1998
<TABLE>
<CAPTION>
Foreign
Capital in currency
Number Common excess of Accumulated Translation
of shares stock par value Deficit adjustments Total
---------- -------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
July 1, 1995 24,543,745 $245,437 $43,112,376 $(22,491,069) $(4,833,133) $16,033,611
Net income - - - 1,410,533 - 1,410,533
Currency translation
adjustments - - - - 2,048,537 2,048,537
Exercise of stock
options 147,500 1,475 132,525 - - 134,000
---------- -------- ----------- ------------ ----------- -----------
- -
June 30, 1996 24,691,245 246,912 43,244,901 (21,080,536) (2,784,596) 19,626,681
Net income - - - 693,987 - 693,987
Currency translation
adjustments - - - - (944,609) (944,609)
Exercise of stock
options 160,000 1,600 165,275 - 166,875
---------- -------- ----------- ------------ ----------- -----------
June 30, 1997 24,851,245 248,512 43,410,176 (20,386,549) (3,729,205) 19,542,934
Net income - - - 1,036,513 - 1,036,513
Currency translation
Adjustments - - - - (3,283,734) (3,283,734)
Exercise of stock
Options 131,250 1,313 122,062 - - 123,375
---------- -------- ----------- ------------ ----------- -----------
June 30, 1998 24,982,495 $249,825 $43,532,238 $(19,350,036) $(7,012,939) $17,419,088
========== ======== =========== ============= ============ ===========
</TABLE>
See accompanying notes.
<PAGE>
MAGELLAN PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Operating Activities:
<S> <C> <C> <C>
Net income $ 1,036,513 $ 693,987 $ 1,410,533
Adjustments to reconcile net income to
net cash provided by operating activities:
Exploratory and dry hole costs 775,150 6,243,211 1,858,271
Depletion, depreciation and amortization 2,205,127 2,140,066 2,448,210
Deferred income taxes (1,232,963) 637,130 683,668
Minority interests 1,681,255 2,166,525 2,414,313
Increase (decrease) in operating assets
and liabilities:
Accounts receivable 1,058,967 1,082,939 (991,763)
Reimbursable development costs 145,024 (31,784) (122,153)
Other assets (97,483) (84,665) (217,509)
Inventories 109,923 111,429 (203,575)
Accounts payable and accrued liabilities 829,314 169,687 (75,766)
Income taxes payable - (1,947,610) 1,980,817
----------- ----------- -----------
Net cash provided by operating activities 6,510,827 11,180,915 9,185,046
----------- ----------- -----------
Investing Activities:
Additions to property and equipment (2,997,791) (5,305,699) (5,596,156)
Marketable securities purchased (256,180) (2,211,205) -
----------- ----------- -----------
Net cash used in investing activities (3,253,971) (7,516,904) (5,596,156)
----------- ----------- -----------
Financing Activities:
Dividends to MPAL minority shareholders (1,506,103) (1,778,622) (1,619,104)
Exercise of stock options 123,375 166,875 134,000
----------- ----------- -----------
Net cash used in financing activities (1,382,728) (1,611,747) (1,485,104)
----------- ----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (2,380,693) (388,359) 192,589
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (506,565) 1,663,905 2,296,375
Cash and cash equivalents at beginning of year 12,942,862 11,278,957 8,982,582
----------- ----------- -----------
Cash and cash equivalents at end of year $12,436,297 $12,942,862 $11,278,957
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
MAGELLAN PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of Magellan Petroleum Corporation ("MPC") and its subsidiaries, hereafter
referred to collectively as the Company. All intercompany transactions have been
eliminated. At June 30, 1998 and 1997, MPC owned a 50.7% interest in Magellan
Petroleum Australia Limited ("MPAL").
Revenue Recognition
The Company recognizes oil and gas revenue from its interests in
producing wells as oil and gas is produced and sold from those wells. Oil and
gas sold is not significantly different from the Company's share of production.
Revenues from the purchase, sale and transportation of natural gas are
recognized upon completion of the sale and when transported volumes are
delivered.
Oil and Gas Properties
Oil and gas properties are located in Australia, Canada, Belize, C.A.
and the United States. The Company follows the successful efforts method of
accounting for its oil and gas operations. Under this method, the costs of
successful wells, development dry holes and productive leases are capitalized
and amortized on a unit-of-production basis over the life of the related
reserves. Cost centers for amortization purposes are determined on a
field-by-field basis. Estimated future abandonment and site restoration costs,
net of anticipated salvage values, are accrued based on units of production.
Unproved properties with significant acquisition costs are periodically assessed
for impairment in value, with any impairment charged to expense. The successful
efforts method also imposes limitations on the carrying or book value of proved
oil and gas properties and requires an impairment provision or noncash charge
against earnings for any quarter in which their carrying value exceeds the
standardized measure of undiscounted future net cash flows from proved oil and
gas reserves based on prices received for oil and gas production as of the end
of that quarter or a subsequent date prior to publication of financial results
for the quarter.
<PAGE>
MAGELLAN PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. Summary of significant accounting policies (Cont'd)
Exploratory drilling costs are initially capitalized pending
determination of proved reserves but are charged to expense if no proved
reserves are found. Other exploration costs, including geological and
geophysical expenses, leasehold expiration costs and delay rentals, are expensed
as incurred.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Land, buildings and equipment and field equipment
Land, buildings and equipment and field equipment are carried at cost.
Depreciation and amortization are provided on a straight-line basis over their
estimated useful lives. The estimated useful lives are: buildings - 40 years,
equipment and field equipment - 3 to 15 years.
Inventories
Inventories consist of crude oil in various stages of transit to the
point of sale and are valued at the lower of cost (determined on an average cost
basis) or market.
Foreign currency translations
The accounts of the Company's Australian subsidiaries are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52. The translation adjustment is included as a component of stockholders'
equity, whereas gain or loss on foreign currency transactions is included in the
determination of income. All assets and liabilities are translated at the rates
in effect at the balance sheet dates. Revenues, expenses, gains and losses are
translated using a quarterly weighted average exchange rate for the period. At
June 30, 1998 and 1997, the Australian dollar was equivalent to U.S. $.6194, and
$.7538, respectively.
<PAGE>
1. Summary of significant accounting policies (Cont'd)
Recently issued accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, adoption in fiscal 1999 will have no impact on the Company's net income
or shareholders' equity. Statement 130 requires foreign currency translation
adjustments, which currently are reported in shareholders' equity, to be
included in other comprehensive income and the disclosure of total comprehensive
income.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. The Statement
supercedes the disclosure requirements in SFAS No 87, Employers' Accounting for
Pensions, SFAS No. 88, Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 132
addresses disclosure issues only and does not change the measurement or
recognition provisions specified in those Statements. SFAS No. 132 is effective
for the Company's 1999 fiscal year. The adoption of this standard will not have
an effect on earnings or the financial condition of the Company.
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The statement requires all derivatives to be
recognized on the balance sheet at fair value and establishes standards for the
recognition of changes in such fair value. SFAS No. 133 is effective for the
Company's 2000 fiscal year. Because the Company does not currently use
derivatives, the adoption of SFAS No. 133 will not have a significant effect on
earnings or the financial condition of the Company.
Accounting for income taxes
The Company follows FASB Statement 109, 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.
<PAGE>
1. Summary of significant accounting policies (Cont'd)
Cash and cash equivalents
The Company considers all highly liquid short term investments with
maturities of three months or less at the date of acquisition to be cash
equivalents. Cash and cash equivalents are carried at cost which approximates
market value. The components of cash and cash equivalents are as follows:
June 30,
-----------------------------
1998 1997
----------- -----------
Cash $ 23,460 $ 480,963
U.S. Government securities 1,085,137 197,573
Australian money market accounts and short
term commercial paper 11,327,700 12,264,326
----------- -----------
$12,436,297 $12,942,862
=========== ===========
Marketable securities
At June 30, 1998 and 1997, the Company has the following marketable
securities which are expected to be held until maturity:
<TABLE>
<CAPTION>
Amortized
June 30, 1998 Par value Maturity Date Cost Fair value
------------- ---------- ------------- ---------- ----------
Short-term securities
<S> <C> <C> <C> <C>
Federal Home Loan Bank $1,300,000 Nov. 10, 1998 $1,265,495 $1,265,496
========== ========== ==========
Long-term securities
Federal National Mortgage Association $ 375,000 May 3, 2000 $ 375,000 $ 374,063
Federal National Mortgage Association 465,000 Aug. 25, 2000 465,000 463,256
Federal Home Loan Mortgage Corporation 360,000 Apr. 2, 2001 361,890 361,688
---------- ---------- ----------
$1,200,000 $1,201,890 $1,199,007
========== ========== ==========
Amortized
June 30, 1997 Par value Maturity Date Cost Fair value
------------- ---------- ------------- ---------- ----------
Security
U.S. Treasury Bill $1,000,000 Aug. 21, 1997 $ 946,946 $ 992,280
Federal National Mortgage Association 1,300,000 Nov. 24, 1997 1,264,259 1,270,539
---------- ---------- ----------
$2,300,000 $2,211,205 $2,262,819
========== ========== ==========
</TABLE>
Earnings per share
Earnings per common share is based upon the weighted average number of
common and common equivalent shares outstanding during the period. In February
1997, the FASB issued Statement No. 128 Earnings per Share ("EPS"), which the
Company adopted for the year ended June 30, 1998. Accordingly, all prior year
amounts have been restated to conform to FASB No. 128. The only reconciling item
in the calculation of diluted EPS is the dilutive effect of stock options which
was computed using the treasury stock method. The Company's basic and diluted
calculations of EPS are the same.
<PAGE>
1. Summary of significant accounting policies (Cont'd)
Financial instruments
The carrying value for cash and cash equivalents, accounts receivable,
marketable securities and accounts payable approximates fair value based on
anticipated cash flows and current market conditions.
Segment Disclosure
FASB Statement No. 131 requires the disclosure of certain financial
data based on an entity's operating segments. The Company's two operating
segments are MPC and MPAL. Condensed financial statements of these segments are
included in Notes 3 and 4 and additional segment data are included in Note 11.
2. Oil and gas properties
(a) Australia
Mereenie
Field Development and Oil Production
MPAL has a 35% working interest in the Mereenie oil and gas field in
the Northern Territory of Australia ("NTA"). MPAL's share of production from the
field is subject to net overriding royalties aggregating 3.0625% and the
statutory government royalty of 10%.
The field was producing about 2,145 (MPAL share 751) barrels of crude
oil per day ("bpd") from 40 wells at June 30, 1998. During 1998, MPAL's share of
oil sales was 285,000 barrels and 3.6 billion cubic feet ("bcf") of gas sold.
The oil is transported by means of a 167 mile eight-inch oil pipeline from the
field to the Brewer Estate industrial park near Alice Springs. Most of the oil
is then shipped south approximately 950 miles by rail and road to a refinery in
the Adelaide area. The cost of transporting the oil to the refinery is being
borne by the producers. On August 2, 1998, there was an explosion at the
Adelaide refinery which is now shut down for repairs. At the present time, the
Company's crude oil is still being purchased and stored at the refinery. If the
repairs are not completed in a timely manner, it may be necessary to sell the
crude oil to another facility at a slightly lower net price.
The operator of the field has currently scheduled five wells for
remedial work. This work is expected to increase production costs in fiscal
1999. In addition, production will decrease in the short term while these wells
are shut-in.
<PAGE>
2. Oil and gas properties (Cont'd)
The MJV is negotiating for the sale of Liquid Propane Gas ("LPG") from
the field to a potential purchaser. The agreement would require the MJV to
install an LPG plant to produce 5,000 tons of LPG per year. The plant would
utilize some of the field gas that is presently being flared. The project is
expected to generate a modest profit.
MPAL and its partner (the Mereenie Joint Venture - MPAL share 35%) are
providing Mereenie gas for use in Darwin and other NTA centers. (See Gas Supply
Contracts below). During 1998, the MJV agreed to supply 57.7 bcf of gas to PAWA
over a 10 year period.
Refinery Obligation
Under the terms of the Mereenie petroleum leases, the Mereenie Joint
Venture ("MJV") is obligated to construct a refinery in the Alice Springs area
if it is determined that such a refinery is economically viable. The MJV
submitted a study in early 1986 which concluded that a refinery was not
economically viable at that time, and under the terms of the leases, an updated
study may be required at any time. The Company believes a refinery in Alice
Springs would not be economically viable under current market conditions. The
Northern Territory Government has not raised any current objection to this
conclusion.
Palm Valley
Field Development and Gas Production
MPAL has a 50.775% interest in the Palm Valley gas field which is
located in the NTA. Ten wells have been drilled in the field, six of which are
currently connected to the gas treatment plant and are flowed at maximum
deliverability levels to meet the Alice Springs and Darwin supply contracts with
PAWA. During fiscal 1998, MPAL's share of gas sales was 3.5 bcf. In order to
increase deliverability, field compression began in November 1996 and two 400 HP
compressors have been operating in parallel since March 1998. A third 800 HP
compressor is scheduled to be installed by March 1999. MPAL has recommended that
two additional wells be drilled at Palm Valley to improve the field's production
capacity. Under the agreement with PAWA, the costs of these wells are reimbursed
by PAWA; consequently, the recommendation is under review by PAWA's consultants.
The Palm Valley Participants ("PVP") are providing Palm Valley gas for
use in Darwin and other NTA centers. See "Gas Supply Contracts".
MPAL's share of Palm Valley production revenues is subject to a 10%
statutory government royalty and net overriding royalties aggregating 4.2548%.
<PAGE>
2. Oil and gas properties (Cont'd)
Gas Supply Contracts
In 1981, the PVJV commenced the sale of gas to Alice Springs. In 1985,
MPAL signed an agreement as a participant in the PVJV and also signed an
agreement as a participant in the MJV for the sale of gas to PAWA for use in
PAWA's Darwin generating station and at a number of other generating stations in
the Northern Territory. The gas is being delivered via the 922 mile Amadeus
Basin to Darwin gas pipeline which was built by an Australian consortium. Since
1985, there have been additional contracts for the sale of Mereenie Gas. The
following is a summary of MPAL's interest in the Palm Valley Joint Venture and
the Mereenie Joint Venture gas supply contracts:
<TABLE>
<CAPTION>
Maximum contract Take or pay Percentage of
(Before/after (Before/after contract completed
royalties) royalties) ----------------------
(bcf) (bcf) Maximum Take or Pay Contract Period
------------------ ----------------- ------- ----------- ---------------
Palm Valley:
<S> <C> <C> <C> <C> <C> <C> <C>
Alice Springs 24.4 21.0 14.2 12.3 49 65 25 years (1983-2008)
Darwin 88.9 76.6 68.0 58.6 40 52 25 years (1987-2012)
----- ----- ----- -----
113.3 97.6 82.2 70.9
----- ----- ----- -----
Mereenie:
Darwin (1985) 19.6 17.0 14.0 12.2 44 63 25 years (1987-2012)
Darwin (1995) 7.5 6.5 6.0 5.2 78 98 10 years (1995-2005)
Darwin (1997) 20.2 17.6 16.3 14.1 - - 10 years (1999-2009)
Other .5 .5 .5 .5 - - Various
----- ----- ----- -----
47.8 41.6 36.8 32.0
----- ----- ----- -----
Total 161.1 139.2 119.0 102.9
===== ===== ===== =====
</TABLE>
There is a difference in price between Palm Valley gas and Mereenie gas
for the first 20 years of the 25 year contract which takes into account the
additional cost to the pipeline consortium to build a spur line to the Mereenie
field and increase the size of the pipeline from Palm Valley to Mataranka.
In consideration for the PVJV forgoing 20% of the Amadeus Basin to
Darwin gas supply contract during the first twenty contract years, the MJV made
a payment to the PVJV to partially compensate the PVJV for the reduced net
present value of the future gas sales revenues which were postponed from
contract years 1 to 20 to contract years 21 to 26. The agreement also provides
that if the MJV sells any additional gas from the Mereenie field, the PVJV is
entitled, as additional consideration, to 35% of the revenues from the first 38
bcf (MPAL share - 19.5 bcf) of gas sold. At June 30, 1998, the balance of the
MJV gas subject to this entitlement was 22 bcf (MPAL share - 11 bcf).
At June 30, 1998, the Company had accrued $657,000 for future site
restoration costs for the Mereenie and Palm Valley fields. The balance of the
estimated liability is $2,687,000 at June 30, 1998 which will be accrued over
the remaining life of the related reserves based on units of production.
<PAGE>
2. Oil and gas properties (Cont'd)
Dingo Gas Field
MPAL has a 34% interest in the Dingo gas field which is held under
Retention License 2 which is subject to renewal in 2003. The Dingo gas field,
which is located in the Amadeus Basin in the NTA, has approximately 25 bcf of
presently proved and recoverable reserves based on four delineation wells. Dingo
2 and Dingo 3 wells are estimated to have the capacity of producing a combined
rate of 5 million cubic feet ("mmcf") per day. The Dingo field participants have
been negotiating for the sale of gas (.7 bcf per annum) from the field. MPAL's
share of potential production from these permit areas is subject to a 10%
statutory government royalty and overriding royalties aggregating 2.5043%.
Ngalia Basin
MPAL has a 40% interest in permit EP-15 in the Ngalia basin in the NTA
which covers 1.9 million acres. During July 1998, the Newhaven well was plugged
and abandoned. MPAL's share of the drilling costs incurred through June 30, 1998
is included in exploratory and dry hole costs. The costs to drill the well
subsequent to June 30, 1998 in the amount of $316,000 will be included in the
1999 fiscal year.
Northern Surat Basin
During March 1998, MPAL agreed to sell its 15.625% interest in ATP 378P
Queensland, Australia to its partner, Santos Limited. The $636,000 difference
between the carrying cost and the sale price is included in loss on the sale of
assets.
Eastern Surat Basin
MPAL has earned a 17% interest in Block D of ATP 244P in Queensland by
completing a pilot seismic reprocessing program. MPAL has a $2,500 commitment
through February 1999 on the permit and the right to withdraw prior to the
beginning of the next permit year, which has a $15,000 commitment.
Southern Surat Basin
MPAL earned a 15% interest in ATP 626P in Queensland. The operator is
attempting to farmout MPAL's interest in connection with the planned drilling of
two wells on the permit which would reduce MPAL's interest to 8.7%. MPAL has no
obligation to participate in the drilling program.
<PAGE>
2. Oil and gas properties (Cont'd)
Timor Sea
MPAL earned a 10% interest in WA-74-P offshore Western Australia by
funding 20% of the cost of drilling the Schilling-1 well which was plugged and
abandoned during September 1997. MPAL's share of the Schilling-1 well was
written off during the first quarter of fiscal 1998 and is included in
exploratory and dry hole costs. MPAL relinquished its interest in the permit
during December 1997.
During April 1998, MPAL acquired a 5% interest in Exploration Permit
WA-199-P in the Bonaparte Basin in the Timor Sea offshore Western Australia.
MPAL earned its interest in the permit by funding 10% of the cost of drilling
the Kittiwake-1 well. The Kittiwake well was drilled to its projected total
depth without encountering any commercial hydrocarbons. MPAL's cost of the well
was written off in the fourth quarter of fiscal 1998 and is included in
exploratory and dry hole costs. MPAL expects that it will relinquish its
interest in the permit by September 30, 1998.
Browse Basin
During July 1998, MPAL acquired a 17 1/2% interest in exploration
permits WA-281-P, WA-282-P and WA-283-P in the Browse Basin offshore Western
Australia. MPAL's share of the work obligations for the three permits is as
follows:
WA-281-P WA-282-P WA-283-P
Year 1 $ 341,000 $266,000 $ 266,000
Year 2 661,000 103,000 103,000
Year 3 1,225,000 22,000 1,116,000
---------- -------- ----------
Total $2,227,000 $391,000 $1,485,000
========== ======== ==========
Northwest Shelf
MPAL earned a 15% interest in exploration permits TP/12 and EP398 in
the Carnarvon Basin offshore Western Australia by funding 30% of the cost of
drilling the Springbok-1 well. Drilling of the Springbok-1 well began on August
21, 1998 and was plugged and abandoned on August 31, 1998. MPAL's estimated cost
of drilling the well ($650,000) will be written off during the first quarter of
fiscal 1999.
<PAGE>
2. Oil and gas properties (Cont'd)
Maryborough Basin
MPAL is seeking partners for exploration permit ATP 613P, a 670,000
acre block, in the Maryborough Basin in Queensland, Australia. During fiscal
1998, additional seismic surveys were completed on the permit. Processing and
analysis of the data has been completed. A well is expected to be drilled in
fiscal 1999 at an estimated cost of $700,000.
(b) Canada
The Company has a 2.67% carried interest in the Kotaneelee gas field
in the Yukon Territory which has been on production since February 1991. There
are two wells capable of production in the field which is part of a permit
covering 31,885 gross acres. For financial statement purposes in fiscal 1987 and
1988, the Company wrote down its Canada cost center, which included the
Kotaneelee field to a nominal value because of the uncertainty as to the date
when sales of Kotaneelee gas might begin and the immateriality of the carrying
value of the investment. Although the field is now producing, the Company has
not yet classified its share of the Kotaneelee gas reserves as proved because
the gas field is still the subject of litigation. The Company will reclassify
the reserves at the Kotaneelee field as proved when there is greater assurance
as to the timing and assumptions regarding the investment. The Company is unable
to determine at this time when it will receive any revenue from the field.
(c) United States
Baca County, Colorado
MPC (10%) and MPAL (90%) participated in an exploration program in
Colorado. During late April 1995, MPAL commenced an initial three well
exploration drilling program. All three wells were dry holes. Based on the data
derived from the appraisal program during fiscal 1995 and 1996, the Company
wrote off $809,000 and $1,691,000 in costs, respectively. During fiscal 1997,
the Company drilled a fourth well which was a dry hole and all of the remaining
costs of the project, which totaled $3,008,000, were written off. MPC has
withdrawn from the venture. On August 14, 1998, the Schmidt #15-1 well was
spudded on the Maple prospect by a third party at no cost to the Company. The
well was plugged and abandoned on August 31, 1998.
<PAGE>
2. Oil and gas properties (Cont'd)
Tapia Canyon, California
Effective December 1, 1997, MPC acquired a 18% interest in a heavy oil
recovery project in Tapia Canyon, California. The field is estimated to have
approximately 12 million barrels of oil in place with only 13% of the oil
recovered to date. The reserve study was prepared in 1986 by a major oil
company, the field owner at that time. MPC's initial purchase price for its
interest in the project was approximately $79,000. There is also a commitment to
spend $600,000 to perform remedial work on the field and to complete a pilot
stream flood program during the first year of the project (MPC share -
$120,000). The field was producing approximately 30 bpd (MPC share - 6 bpd) at
June 30, 1998.
(d) Belize
Southern Offshore Block PSA
On March 16, 1998, MPC (2 1/2%), MPAL (20%) and the other joint venture
participants entered into a new Production Sharing Agreement ("PSA") with the
Government of Belize. The new Southern Offshore Block PSA ("SOB PSA") combines
most of the blocks previously included in the Gladden PSA and the Block 13 PSA,
and totals approximately 893,000 acres. The work obligations of the new PSA are
as follows: Year 1 - $100,000, Year 2 - $300,000, Year 3 - $3,000,000 and Year 4
- - $150,000. The participants in the PSA are seeking partners in the venture.
Gladden Basin PSA
During January 1996, MPAL acquired a 20% working interest in a
Production Sharing Agreement ("Gladden PSA") which covers approximately 351,000
acres offshore Belize, Central America. On May 30, 1996, MPC acquired a 2 1/2%
working interest in the Gladden PSA. During 1997, the Gladden No. 1 well was
plugged and abandoned and the Company's cost of the well was written off. During
March 1998, this block was consolidated into the SOB PSA.
Block 13 PSA
MPC (2 1/2%) and MPAL (20%) were also participants in a Production
Sharing Agreement ("Block 13 PSA") offshore Belize adjoining the western and
southern boundaries of the Gladden PSA. The Block 13 PSA covers approximately
788,000 acres. During March 1998, this block was consolidated into the SOB PSA.
<PAGE>
3. MPC condensed financial statements
The following are unconsolidated condensed balance sheets and
statements of income and cash flows of MPC (in thousands).
MAGELLAN PETROLEUM CORPORATION
BALANCE SHEETS
June 30,
----------------------
1998 1997
------- -------
ASSETS
Current assets $ 2,691 $ 2,913
Other assets 1,202 -
Oil and gas properties - net 126 47
Investment in MPAL 13,497 16,601
------- -------
Total assets $17,516 $19,561
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 97 $ 18
------- -------
Stockholders' equity:
Capital 43,782 43,659
Accumulated deficit (19,350) (20,387)
Foreign currency translation adjustments (7,013) (3,729)
------- -------
Total stockholders' equity 17,419 19,543
------- -------
Total liabilities and stockholders' equity $17,516 $19,561
======= =======
MAGELLAN PETROLEUM CORPORATION
STATEMENTS OF INCOME
Year ended June 30,
-----------------------------------------
1998 1997 1996
------ ------- ------
Revenues $ 175 $ 122 $ 84
Costs and expenses (863) (1,376) (900)
------ ------- ------
Loss before income taxes (688) (1,254) (816)
Income tax provision 1 276 252
------ ------- ------
Loss before equity in MPAL (689) (1,530) (1,068)
Equity in MPAL net income 1,726 2,224 2,479
------ ------- ------
Net income $1,037 $ 694 $1,411
====== ======= ======
<PAGE>
3. MPC condensed financial statements (Cont'd)
MAGELLAN PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Year ended June 30,
----------------------------
1998 1997 1996
------ ------ ------
Operating Activities:
Net income $1,037 $ 694 $1,411
Adjustments to reconcile net income
to net cash used in operating activities:
Abandonments - 598 127
Equity in MPAL income (1,726) (2,224) (2,479)
Change in operating assets and liabilities:
Accounts receivable (59) (57) (62)
Accounts payable and accrued liabilities 79 (73) 29
------ ------ ------
Net cash used in operating activities (669) (1,062) (974)
------ ------ ------
Investing Activities:
Additions to property and equipment (79) (363) (288)
Marketable securities purchased (256) (2,211) -
------ ------ ------
(335) (2,574) (288)
------ ------ ------
Financing Activities:
Dividends from MPAL 1,546 1,826 1,662
Sales of common stock 122 167 134
------ ------ ------
1,668 1,993 1,796
------ ------ ------
Net increase (decrease) in cash and
cash equivalents 664 (1,643) 534
Cash and cash equivalents at
beginning of year 424 2,067 1,533
------ ------ ------
Cash and cash equivalents at
end of year $1,088 $ 424 $2,067
====== ====== ======
4. MPAL transactions and condensed financial statements
The following are the condensed consolidated balance sheets and
consolidated statements of income of MPAL (in thousands). At June 30, 1998,
Santos Ltd. held 18.2% of MPAL and Boral Limited held 17.1% with the balance of
14% held by approximately 2,100 shareholders in Australia.
<PAGE>
4. MPAL transactions and condensed financial statements (Cont'd)
The condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles and include all of
MPAL's subsidiaries.
Magellan Petroleum Australia Limited
Consolidated Balance Sheets
June 30,
------------------------
1998 1997
------- -------
ASSETS
Current assets $12,866 $14,526
Oil and gas properties - net 21,887 27,469
Land, building and equipment - net 885 1,154
------- -------
Total $35,638 $43,149
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 2,628 $ 2,785
------- -------
Long term liabilities 6,606 7,833
------- -------
Stockholders' equity:
Capital 34,408 34,408
Retained earnings 4,865 4,510
Foreign currency translation adjustments (12,869) (6,387)
------- -------
26,404 32,531
------- -------
Total $35,638 $43,149
======= =======
<PAGE>
4. MPAL transactions and condensed financial statements (Cont'd)
Magellan Petroleum Australia Limited
Consolidated Statements of Income
Year ended June 30,
--------------------------------------
1998 1997 1996
-------- -------- --------
Revenues $15,165 $20,636 $17,989
Costs and expenses 11,615 15,079 11,500
-------- -------- --------
Income before income taxes 3,550 5,557 6,489
Income tax provision 143 1,166 1,596
-------- -------- --------
Net income $ 3,407 $ 4,391 $ 4,893
======== ======== ========
Magellan and Minority Equity in MPAL
Magellan equity interest in MPAL:
Magellan equity in net income $ 1,726 $ 2,224 $ 2,479
======== ======== ========
Minority equity interest in MPAL:
Minority interest in net income $ 1,681 $ 2,166 $ 2,414
Foreign currency translation (3,198) (922) 1,999
Dividends paid (1,506) (1,779) (1,619)
--------- ---------- ---------
Total minority interest increase (decrease) $ (3,023) $ (535) $ 2,794
========= ========== ========
<PAGE>
5. Capital and stock options
The Company's Certificate of Incorporation provides that any matter to
be voted upon must be approved not only by a majority of the shares voted, but
also by a majority of the stockholders casting votes present in person or by
proxy and entitled to vote thereon.
On October 5, 1989, the Company adopted a Stock Option Plan covering
one million shares of the Company's common stock. The plan provides for options
to be granted at a price of not less than fair value on the date of grant and
for a term of not greater than ten years. On December 3, 1997, the Board of
Directors approved a new stock option plan for an additional one million shares
which is subject to approval at the 1998 Annual Meeting of Stockholders.
At June 30, 1998, all of the stock options outstanding were vested and
exercisable. Options to purchase 225,000 shares expire on January 31, 1999 and
options to purchase 50,000 shares expire on September 25, 2001. Following is a
summary of option transactions for the three years ended June 30, 1998:
Options outstanding Number of shares Exercise Prices ($)
- ------------------- ---------------- -------------------
June 30, 1995 663,750 .75 - 1.125
Exercised (25,000) .75
Exercised (35,000) 1.125
Exercised (87,500) .75 - .94
--------
June 30, 1996 516,250 .75 - 1.0625
--------
Granted 50,000 2.75
Exercised (150,000) 1.0625
Exercised (10,000) .75
--------
June 30, 1997 406,250 .8125-2.75
Exercised (131,250) .94
June 30, 1998 275,000 .8125 - 2.75
========
($1.16 weighted average)
Options reserved for future grants 146,250
========
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock options because the alternative fair
value accounting provided under FASB Statement No. 123, "Accounting for Stock
Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
<PAGE>
5. Capital and stock options (Cont'd)
Upon exercise of options, the excess of the proceeds over the par value
of the shares issued is credited to capital in excess of par value. No charges
have been made against income in accounting for options during the three year
period ended June 30, 1998.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model.
Option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The assumptions used
in the valuation model were: risk free interest rate - 6.55%, expected life - 5
years and expected volatility - .579, expected dividend - 0. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
For the purpose of pro forma disclosures, the estimated fair value of
the stock options is expensed in the year of grant since the options are
immediately exercisable. The Company's pro forma information follows:
Amount Per Share
-------- ---------
Net income as reported - June 30, 1997 $694,000 $.03
Stock option expense 78,000 -
-------- ----
Pro forma net income $616,000 $.03
======== ====
6. Income taxes
(a) Components of pretax income (loss) by geographic area (in thousands)
are as follows:
Year ended June 30,
--------------------------------------------
1998 1997 1996
------ ------- -------
United States $ (850) $(4,547) $(3,229)
Foreign 3,712 8,850 8,902
------ ------- -------
Total $2,862 $ 4,303 $ 5,673
====== ======= =======
<PAGE>
6. Income taxes (Cont'd)
(b) Reconciliation of the provision for income taxes (in thousands)
computed at the Australian statutory rate to the reported provision for
income taxes is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Pretax consolidated income $2,862 $4,303 $5,673
Losses not recognized:
MPC's operations 689 1,254 816
MPAL's nonAustralian operations - (145) 831
Permanent differences (2,443) (2,040) (1,615)
------- ------ ------
Book taxable income - Australia $1,108 $3,372 $5,705
====== ====== ======
Australian tax rate 36% 36% 36%
=== === ===
Australian income tax provision $399 $1,214 $2,054
Tax provision attributable to reconciliation of
year end deferred tax liability (255) (48) (458)
------- ------ ------
MPAL Australian tax provision 143 1,166 1,596
MPC income tax provision 1 276 252
------- ------ ------
Consolidated income tax provision $ 144 $1,442 $1,848
======= ====== ======
Current income tax provision $ 1 $ 276 $1,848
Deferred income tax 143 1,166 -
------- ------ ------
$ 144 $1,442 $1,848
======= ====== ======
Effective tax rate 5% 34% 33%
== === ===
</TABLE>
The amount of $5,854,000 and $7,087,000 in deferred income tax
liability at June 30, 1998 and June 30, 1997, respectively, relates primarily to
the deduction of acquisition and development costs which are capitalized for
financial statement purposes.
<PAGE>
6. Income taxes (Cont'd)
(c) United States
On June 30, 1998, the Company had approximately $15,659,000 and
$4,602,000 of net operating loss carryforwards for federal and state income tax
purposes, respectively, which are scheduled to expire periodically between 2000
and 2013. The Company also has approximately $1,004,000 of foreign tax credit
carryovers, which are scheduled to expire periodically between 1998 and 2003.
For financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to those carryforwards and other
temporary differences. Significant components of the Company's deferred tax
assets were as follows:
June 30 June 30
1998 1997
----------- -----------
Net operating losses $4,075,000 $4,183,000
Foreign tax credits 1,004,000 1,120,000
Interest 214,000 212,000
Subpart F deemed dividend 1,311,000 1,476,000
Intangible drilling costs 7,000 21,000
----------- -----------
Total deferred tax assets 6,611,000 7,012,000
Valuation allowance (6,611,000) (7,012,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
7. Bank loan
MPAL has a A.$10 million line of credit with an Australian bank at the
bank's prime rate of interest (5.2% at June 30, 1998, and 5.7% at June 30, 1997)
plus .5%. This line of credit is unsecured and expires December 31, 1998. In
addition, there is an annual fee of A.$30,000 payable with respect to the line
of credit. At June 30, 1998 and 1997, the line of credit was not being utilized.
<PAGE>
8. Related party and other transactions
Mr. C. Dean Reasoner was a director of the Company until his
resignation on March 11, 1997. He was also a member of the law firm of Reasoner
& Fox, which firm was paid fees of $39,000 and $109,000 for fiscal years 1997
and 1996, respectively. G&O'D INC, a firm that provides accounting and
administrative services, office facilities and support staff to the Company, was
paid $248,174, $211,088 and $187,898 in fees for fiscal years 1998, 1997 and
1996, respectively. James R. Joyce, the President and Chief Financial Officer,
is the owner of G&O'D INC. Mr. Timothy L. Largay, a director of the Company
since February 1996, is a member of the law firm of Murtha, Cullina, Richter and
Pinney LLP, which firm was paid fees of $36,366, $29,004 and $28,449 for fiscal
years 1998, 1997 and 1996, respectively. In addition, Mr. Heath, a director, has
overriding royalty interests which were granted between 1957 and 1968 on certain
of the Company's oil and gas properties prior to any discoveries. The following
gross royalty amounts represent payments by all of the owners of the fields, not
just the Company's share. The payments to Mr. Heath with respect to these
royalties in fiscal 1998 were $46,044, in fiscal 1997 were $54,252 and in fiscal
1996 were $45,657.
9. Leases
At June 30, 1998, future minimum rental payments applicable to MPAL's
noncancelable operating (office) lease were as follows:
Fiscal Year Amount
1999 $ 88,000
2000 92,000
2001 97,000
2002 102,000
2003 120,000
2004 126,000
--------
Total $625,000
The information regarding the rental expense for all operating leases
is included in Note 13.
<PAGE>
10. Pension Plan
A defined benefit pension plan is operated by MPAL. All salaried
employees are eligible to become participants of the plan. MPAL contributes to
the plan at rates which (based on actuarial determination) are sufficient to
meet the cost of employees' retirement benefits. No employee contributions are
required. MPAL is committed to make up any shortfall in the plan's assets to
meet payments to employees as they become due.
Plan participants are entitled to defined benefits on normal
retirement, death or disability. The retirement benefits are dependent on years
of participation and the highest average salary over three consecutive years. In
the event of termination of employment within ten years of participation,
employees are entitled to a partial vesting of their equitable share of the plan
based on the number of years of participation. After ten years of participation,
there is full vesting of benefits.
The investments of the plan at June 30, 1998 and 1997 are comprised of
units of NMFM Superannuation Fund, a managed growth fund. The fund's assets are
invested primarily in growth assets such as Australian and international shares.
The following table sets forth the actuarial present value of benefit
obligations and funded status for the MPAL pension plan:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Plan assets at fair value $2,974,283 $3,311,309
---------- ----------
Actuarial value of accumulated benefit obligation (vested) $2,693,571 $3,072,750
Effect of assumed future compensation increases (281,218) (433,034)
---------- ----------
Projected benefit obligation for service to date 2,412,353 2,639,716
---------- ----------
Plan assets in excess of projected benefit obligation 561,930 671,593
Unrecognized net loss 185,646 149,025
Unrecognized net asset at transition (165,324) (234,730)
---------- ----------
Prepaid pension expense $ 582,252 $ 585,888
========== ==========
</TABLE>
<PAGE>
10. Pension Plan (Cont'd)
The net pension expense for the MPAL pension plan was as follows:
Year ended June 30,
------------------------------------
1998 1997 1996
-------- -------- --------
Service cost $186,819 $242,014 $247,010
Interest cost 135,945 200,995 204,554
Actual return on plan assets (192,079) (246,904) (259,695)
Net amortization and deferred items (27,554) (18,472) (19,298)
-------- -------- --------
Net pension cost $103,131 $177,633 $172,571
======== ======== ========
Plan contributions by MPAL $224,000 $275,000 $279,000
======== ======== ========
Significant assumptions used in determining pension cost and the
related obligations were as follows:
1998 1997 1996
------ ------ ------
Assumed discount rate 5.5% 6.5% 8.0%
Rate of increase in future compensation levels 4.0% 5.0% 6.5%
Expected long term rate of return on plan assets 6.5% 7.0% 8.5%
Australian exchange rate $.6194 $.7538 $.7875
11. Segment information
The Company has two reportable segments, MPC and its 50.7% subsidiary,
MPAL. Although each company is in the same business, MPAL is also a publicly
held company with its shares traded on the Australian Stock Exchange. MPAL
issues separate audited consolidated financial statements and operates
independently of MPC.
Segment information (in thousands) for the Company's two operating
segments is as follows:
Year ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
Revenues:
MPC $ 1,721 $ 1,948 $ 1,746
MPAL 15,165 20,636 17,989
Elimination of intersegment dividend (1,546) (1,826) (1,662)
------- ------- -------
Total consolidated revenues $15,340 $20,758 $18,073
======= ======= =======
<PAGE>
11. Segment information (Cont'd)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1998 1997 1996
--------- -------- --------
Interest income:
<S> <C> <C> <C>
MPC $ 171 $ 122 $ 84
MPAL 570 700 612
--------- -------- --------
Total consolidated $ 741 $ 822 $ 696
========= ========= ========
Net income:
MPC $ 857 $ 296 $ 594
MPAL 1,726 2,224 2,479
Elimination of intersegment dividend (1,546) (1,826) (1,662)
--------- -------- --------
Consolidated income $ 1,037 $ 694 $ 1,411
========= ========= ========
Assets:
MPC $ 17,052 $ 19,561 $ 19,718
MPAL 35,638 43,149 45,127
Equity elimination (12,911) (16,480) (17,029)
--------- -------- --------
Total consolidated assets $ 39,779 $ 46,230 $ 47,816
========= ======== ========
Other significant items:
Depletion, depreciation and amortization:
MPC $ - $ - $ -
MPAL 2,205 2,140 2,448
--------- -------- --------
Total consolidated $ 2,205 $ 2,140 $ 2,468
========= ======== ========
Exploratory and dry hole costs:
MPC $ 32 $ 598 $ 126
MPAL 3,314 5,645 1,732
--------- -------- --------
Total consolidated $ 3,346 $ 6,243 $ 1,858
========= ======== ========
Income tax expense:
MPC $ 1 $ 276 $ 252
MPAL 143 1,166 1,596
--------- -------- --------
Total consolidated $ 144 $ 1,442 $ 1,848
========= ======== ========
</TABLE>
<PAGE>
12. Geographic information
As of each of the stated dates, the Company's revenue, operating
income, net income or loss and identifiable assets (in thousands) were
geographically attributable as follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------
1998 1997 1996
------- ------- -------
Revenue:
<S> <C> <C> <C>
Australia $15,148 $20,618 $17,639
United States 192 140 434
------- ------- -------
$15,340 $20,758 $18,073
======= ======= =======
Operating income (loss):
Australia $ 3,979 $10,195 $ 8,526
Belize (195) (2,584) -
United States (163) (2,862) (2,982)
------- ------- -------
3,621 4,749 5,544
Corporate overhead and interest
net of other income (759) (446) 129
------- ------- -------
Consolidated operating income before
income taxes and minority interests $ 2,862 $ 4,303 $ 5,673
======= ======= =======
Net income (loss):
Australia $ 1,911 $ 5,212 $ 3,835
Belize (103) (1,320) -
United States (771) (3,198) (2,424)
------- ------- -------
$ 1,037 $ 694 $ 1,411
======= ======= =======
Identifiable assets:
Australia $35,236 $42,516 $42,295
Belize 433 563 -
United States 17 70 2,831
------- ------- -------
35,686 43,149 45,126
Corporate assets 4,093 3,081 2,690
------- ------- -------
$39,779 $46,230 $47,816
======= ======= =======
</TABLE>
Substantially all of MPAL's gas sales were to the Power and Water
Authority ("PAWA") of the Northern Territory of Australia ("NTA"). Most of
MPAL's crude oil production was sold to the Mobil Port Stanvac Refinery near
Adelaide.
<PAGE>
13. Other financial information
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Costs and expenses - Other
<S> <C> <C> <C>
Consultants $ 52,741 $ 108,552 $ 135,135
Directors' fees and expense 181,466 173,832 167,002
Insurance 217,503 284,532 272,275
Rent 271,241 326,665 283,954
Taxes 218,467 234,960 220,968
Travel 219,172 233,044 337,132
Other (net of overhead reimbursements) (228,126) (426,323) (389,577)
---------- ---------- ----------
$ 932,464 $ 935,262 $1,026,889
========== ========== ==========
Royalty payments $1,464,478 $1,930,011 $1,544,508
========== ========== ==========
Interest payments $ 24,468 $ 32,005 $ 30,690
========== ========== ==========
Income tax payments $ 1,000 $2,256,934 $ 251,888
========== ========== ==========
</TABLE>
14. Selected quarterly financial data (unaudited)
The following is a summary (in thousands) of the quarterly results of
operations for the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 QTR 1 QTR 2 QTR 3 QTR 4
-------- -------- -------- --------
($) ($) ($) ($)
<S> <C> <C> <C> <C>
Total revenues 4,552 4,497 3,184 3,107
Costs and expenses (3,943) (2,858) (2,442) (3,235)
Income tax provision (benefit) (251) (520) (246) 873
Minority interests (288) (653) (324) (417)
------- ------- ------- -------
Net income 70 466 172 328
======= ======= ======== =======
Per share (basic & diluted) - .02 .01 .01
== === === ===
1997 QTR 1 QTR 2 QTR 3 QTR 4
-------- -------- -------- --------
($) ($) ($) ($)
Total revenues 5,110 5,458 5,176 5,014
Costs and expenses (3,019) (2,915) (5,678) (4,842)
Income tax provision (benefit) (768) (1,227) 95 458
Minority interests (762) (894) 10 (521)
------- ------- ------- -------
Net income (loss) 561 422 (397) 109
======= ======= ======= =======
Per share (basic & diluted) .02 .02 (.01) -
=== === ===== ==
</TABLE>
<PAGE>
MAGELLAN PETROLEUM CORPORATION
SUPPLEMENTARY OIL AND GAS INFORMATION
(unaudited)
June 30, 1998
The consolidated data presented herein include estimates which should
not be construed as being exact and verifiable quantities. The reserves may or
may not be recovered, and if recovered, the cash flows therefrom, and the costs
related thereto, could be more or less than the amounts used in estimating
future net cash flows. Moreover, estimates of proved reserves may increase or
decrease as a result of future operations and economic conditions, and any
production from these properties may commence earlier or later than anticipated.
Estimated net quantities of proved developed and proved oil and gas reserves:
Natural Gas Oil
(BCF) (Thousand Bbls)
Proved Reserves: Australia Australia
(*)
------ ---
June 30, 1995 83.574 1,496
Revision of previous estimates - -
Extensions and discoveries 1.518 23
Production (5.422) (318)
------ ---
June 30, 1996 79.670 1,201
Revision of previous estimates (.861) 65
Extensions and discoveries 22.946 -
Production (5.673) (307)
------ ---
June 30, 1997 96.082 959
Revision of previous estimates (5.071) 204
Extensions and discoveries - -
Production (5.844) (248)
------ ---
June 30, 1998 85.167 915
====== ===
Proved Developed Reserves:
June 30, 1995 83.574 1,496
====== =====
June 30, 1996 79.670 1,201
====== =====
June 30, 1997 96.082 959
====== ===
June 30, 1998 85.167 915
====== ===
- -------------------
(*) The amount of proved reserves applicable to the Palm Valley and Mereenie
fields only reflects the amount of gas committed to specific contracts.
Approximately 49.3% of reserves are attributable to minority interests.
<PAGE>
Costs of oil and gas activities (in thousands):
Australia
----------------------------------
Exploration Development
Fiscal Year Costs Costs
----------- ----------- -----------
1998 $3,196 $3,474
1997 580 678
1996 335 2,989
Americas
Exploration Acquisition
Fiscal Year Costs Costs
----------- ----------- -----------
1998 $ 150 $ 79
1997 3,138 47
1996 2,138 426
Capitalized costs subject to depletion, depreciation and amortization ("DD&A")
(in thousands):
June 30, 1998
----------------------------------------
Australia Americas Total
--------- -------- -------
Costs subject to DD&A $41,470 $ - $41,470
Costs not subject to DD&A - 499 499
Less accumulated DD&A (18,950) - (18,950)
------- ------- -------
Net capitalized costs $22,520 $499 $23,019
======= ======= =======
June 30, 1997
----------------------------------------
Australia Americas Total
--------- -------- -------
Costs subject to DD&A $48,130 $ - $48,130
Costs not subject to DD&A 776 421 1,197
Less accumulated DD&A (20,704) - (20,704)
------- ------- -------
Net capitalized costs $28,202 $ 421 $28,623
======= ======= =======
<PAGE>
Discounted future net cash flows:
The following is the standardized measure of discounted (at 10%) future
net cash flows (in thousands) relating to proved oil and gas reserves during the
three years ended June 30, 1998. Australia was the only cost center with proved
reserves. Approximately 49.3% of the reserves and the respective discounted
future net cash flows are attributable to minority interests.
Total
--------------------------------
1998 1997 1996
-------- -------- --------
Future cash inflows $136,828 $198,406 $138,797
Future production costs (17,441) (22,204) (21,065)
Future development costs 893 - -
Future income tax expense (40,429) (60,926) (41,824)
-------- -------- --------
Future net cash flows 78,065 115,276 75,908
10% annual discount for estimating timing
of cash flows (29,813) (46,963) (31,695)
-------- -------- --------
Standardized measures of discounted future
net cash flows $ 48,252 $ 68,313 $ 44,213
======== ======== ========
The following are the principal sources of changes in the above
standardized measure of discounted future net cash flows (in thousands):
1998 1997 1996
-------- ------- ------
Net change in prices and production costs $ (4,318) $18,300 $6,330
Extensions and discoveries - 29,530 87
Revision of previous quantity estimates (6,675) (341) -
Changes in estimated future development costs (1,087) - -
Sales and transfers of oil and gas produced (8,849) (11,264) (9,583)
Previously estimated development cost
incurred during the period - - 1,493
Accretion of discount 5,623 3,535 3,180
Net change in income taxes 5,716 (12,604) (43)
Net change in exchange rate (10,471) (3,056) 4,368
-------- ------- ------
$(20,061) $24,100 $5,832
======== ======= ======
<PAGE>
Additional information regarding discounted future net cash flows:
Australia
Reserves - Natural Gas
Future net cash flows from net proved gas reserves in Australia were
based on MPAL's share of reserves in the Palm Valley and Mereenie fields which
have been limited to the quantities of gas committed to specific contracts.
Reserves and Costs - Oil
At June 30, 1998, future net cash flows from the net proved oil
reserves in Australia were calculated by the Company. Estimated future
production and development costs were based on current costs and rates for each
of the three years ended at June 30, 1998. All of the crude oil reserves are
developed reserves. Undeveloped proved reserves have not been estimated since
there are only tentative plans to drill additional wells.
Income taxes
Future Australian income tax expense applicable to the future net cash
flows has been reduced by the tax effect of approximately A.$9,995,000,
A.$9,236,000 and A.$9,448,000 in unrecouped capital expenditures at 1998, 1997
and 1996, respectively. The tax rate in computing Australian future income tax
expense was 36%.
For financial statements purposes in fiscal 1987 and 1988, MPC wrote
down its Canada cost center which included the Kotaneelee gas field to a nominal
value because of the uncertainty as to the date when sales of Kotaneelee gas
might begin and the immateriality of the carrying value of the investment.
Although the field is now producing, the Company has not yet classified its
share of the Kotaneelee gas reserves as proved because the gas field is still
the subject of litigation. The Company will reclassify the reserves at the
Kotaneelee field as proved when there is greater assurance as to the timing and
assumptions of the investment.
<PAGE>
Results of Operations
The following are the Company's results of operations (in thousands)
for the oil and gas producing activities during the three years ended June 30,
1998:
<TABLE>
<CAPTION>
Americas Australia
------------------------------------ -----------------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------ ------- ------- -------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Oil sales $ 3 $ - $ - $ 4,095 $ 6,740 $ 5,922
Gas sales - - - 10,485 11,552 9,746
Other production income - - - 632 1,512 1,280
------- ------- ------ ------- ------- -------
Total revenues 3 - - 15,212 19,804 16,948
------- ------- ------ ------- ------- -------
Costs:
Production costs 5 - - 3,642 4,811 4,410
Depletion, exploratory
and dry hole costs 151 (3,008) (1,691) 5,937 2,605 2,040
------- ------- ------ ------- ------- -------
Total costs (156) (3,008) (1,691) 9,579 7,416 6,450
------- ------- ------ ------- ------- -------
Income before taxes and
minority interest (153) (3,008) (1,691) 5,633 12,388 10,498
Income tax provision (36%) - - - (2,028) (4,460) (3,779)
------- ------- ------ ------- ------- -------
Income before minority interests (153) (3,008) (1,691) 3,605 7,928 6,719
Minority interests (49.3%) 74 1,327 772 (1,779) (3,909) (3,312)
------- ------- ------ ------- ------- -------
Net income (loss) from
Operations $ (79) $(1,681) $ (919) $ 1,826 $ 4,019 $ 3,407
======== ======== ======= ======= ======= =======
Depletion per unit of
production - - - A.$2.30 A$ 1.86 A$ 2.35
======== ======== ======= ======= ======= =======
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
For information concerning Item 10 - Directors and Executive Officers
of the Company, Item 11 Executive Compensation, Item 12 - Security Ownership of
Certain Beneficial Owners and Management and Item 13 Certain Relationships and
Related Transactions, see the Proxy Statement of Magellan Petroleum Corporation
relative to the Annual Meeting of Stockholders for the fiscal year ended June
30, 1998, which will be filed with the Securities and Exchange Commission, which
information is incorporated herein by reference. For information concerning Item
10 - Executive Officers of the Company, see Part I.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
The financial statements listed below and included under
Item 8, are filed as part of this report.
Page
Reference
Report of Independent Auditors 37
Consolidated balance sheets as of June 30, 1998
and 1997 38
Consolidated statements of income
for each of the three years in the period
ended June 30, 1998 39
Consolidated statements of changes in stockholders'
equity for each of the three years in the period
ended June 30, 1998 40
Consolidated statements of cash flows for each of
the three years in the period ended June 30, 1998 41
Notes to consolidated financial statements 42-66
Supplementary oil and gas information (unaudited) 67-71
(2) Financial Statement Schedules.
All schedules have been omitted since the required information
is not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and the notes thereto.
<PAGE>
(3) Exhibits.
The following exhibits are filed as part of this
report:
Item Number
2. Plan of acquisition, reorganization, arrangement,
liquidation or succession.
None.
3. Articles of Incorporation and By-Laws.
Restated Certificate of Incorporation as filed on May
4, 1987 with the State of Delaware and Amendment of
Article Twelfth as filed on February 12, 1988 with
the State of Delaware filed as exhibit 3 to
Registration Statement No. 33-21311, filed on June
24, 1988, are incorporated herein by reference.
Copy of the By-Laws, as amended filed as exhibit 3 to
Form 8-K filed on December 10, 1992 is incorporated
herein by reference.
4. Instruments defining the rights of security holders,
including indentures.
None.
9. Voting Trust Agreement.
None.
10. Material contracts.
(a) Petroleum Lease No. 4 dated November 18, 1981
granted by the Northern Territory of Australia to
United Canso Oil & Gas Co. (N.T.) Pty Ltd., filed as
exhibit 10(c) to Report on Form 10-K for the fiscal
year ended April 30, 1982 is incorporated herein by
reference.
(b) Petroleum Lease No. 5 dated November 18, 1981
granted by the Northern Territory of Australia to
Magellan Petroleum (N.T.) Pty. Ltd., filed as exhibit
10(d) to Report on Form 10-K for the fiscal year
ended April 30, 1982 is incorporated herein by
reference.
<PAGE>
(c) Gas Sales Agreement between The Palm Valley
Producers and The Northern Territory Electricity
Commission dated November 11, 1981, filed as exhibit
10(e) to Report on Form 10-K for the fiscal year
ended April 30, 1982 is incorporated herein by
reference.
(d) Palm Valley Petroleum Lease (OL3) dated November
9, 1982 filed as exhibit 10(h) to Report on Form 10-K
for the fiscal year ended April 30, 1983 is
incorporated herein by reference.
(e) Agreements relating to Kotaneelee.
(1) Copy of Agreement dated May 28, 1959
between the Company et al and Home Oil
Company Limited et al and Signal Oil and Gas
Company filed as exhibit 10(d) to Report on
Form 10-K filed by Canada Southern Petroleum
Ltd. for the fiscal year ended June 30, 1987
is incorporated herein by reference.
(2) Copies of Supplementary Documents to May
28, 1959 Agreement (see (1) above), dated
June 24, 1959, consisting of Guarantee by
Home Oil Company Limited and Pipeline
Promotion Agreement filed as exhibit 10(d) to
Report on Form 10-K filed by Canada Southern
Petroleum Ltd. for the fiscal year ended June
30, 1987 is incorporated herein by reference.
(3) Copy of Modification to Agreement dated
May 28, 1959 (see (1) above), made as of
January 31, 1961 filed as exhibit 10(d) to
Report on Form 10-K filed by Canada Southern
Petroleum Ltd. for the fiscal year ended June
30, 1987 is incorporated herein by reference.
(4) Copy of Letter Agreement dated February 1,
1977 between the Company and Columbia Gas
Development of Canada, Ltd. for operation of
the Kotaneelee gas field filed by Canada
Southern Petroleum Ltd. as Exhibit 10(d) to
Report on Form 10-K for the fiscal year ended
June 30, 1981 is incorporated herein by
reference.
(f) Palm Valley Operating Agreement dated April 2,
1985 between Magellan Petroleum (N.T.) Pty. Ltd.,
C. D. Resources Pty. Ltd., Farmout Drillers N.L.,
Canso Resources Limited, International Oil
Proprietary, Pancontinental Petroleum Limited,
I.E.D.C. Australia Pty. Ltd., Southern Alloys
Ventures Pty. Limited and Amadeus Oil N.L. filed
as exhibit 10(i) to Report on Form 10-K for the
fiscal year ended April 30, 1985 is incorporated
herein by reference.
<PAGE>
(g) Mereenie Operating Agreement dated April 27,
1984 between Magellan Petroleum (N.T.) Pty., United
Oil & Gas Co. (N.T.) Pty. Ltd., Canso Resources
Limited, Oilmin (N.T.) Pty. Ltd., Krewliff
Investments Pty. Ltd., Transoil (N.T.) Pty. Ltd. and
Farmout Drillers NL filed as exhibit 10(l) to Report
on Form 10-K for the fiscal year ended April 30, 1984
and Amendment of October 3, 1984 to the above
agreement filed as exhibit 10(j) to Report on Form
10-K for the fiscal year ended April 30, 1985 is
incorporated herein by reference.
(h) Palm Valley Gas Purchase Agreement dated June 28,
1985 between Magellan Petroleum (N.T.) Pty. Ltd., C.
D. Resources Pty. Ltd., Farmout Drillers N.L., Canso
Resources Limited, International Oil Proprietary,
Pancontinental Petroleum Limited, IEDC Australia Pty
Limited, Amadeus Oil N.L., Southern Alloy Venture
Pty. Limited and Gasgo Pty., Limited. Also included
are the Guarantee of the Northern Territory of
Australia dated June 28, 1985 and Certification
letter dated June 28, 1985 that the Guarantee is
binding. All of the above were filed as exhibit 10(p)
to Report on Form 10-K for the fiscal year ended
April 30, 1985 and are incorporated herein by
reference.
(i) Mereenie Gas Purchase Agreement dated June 28,
1985 between Magellan Petroleum (N.T.) Pty. Ltd.,
United Oil & Gas Co. (N.T.) Pty. Ltd., Canso
Resources Limited, Moonie Oil N.L., Petromin No
Liability, Transoil No Liability, Farmout Drillers
N.L., Gasgo Pty. Limited, The Moonie Oil Company
Limited, Magellan Petroleum Australia Limited and
Flinders Petroleum N.L. Also included are the
Guarantee of the Northern Territory of Australia
dated June 28, 1985 and Certification letter dated
June 28,1985 that the Guarantee is binding. All of
the above were filed as exhibit 10(q) to Report on
Form 10-K for the fiscal year ended April 30, 1985
and are incorporated herein by reference.
(j) Agreements dated June 28, 1985 relating to
Amadeus Basin -Darwin Pipeline which include Deed of
Trust Amadeus Gas Trust, Undertaking by the Northern
Territory Electric Commission and Undertaking from
the Northern Territory Gas Pty Ltd. filed as exhibit
10(r) to Report on Form 10-K for the fiscal year
ended April 30, 1985 are incorporated herein by
reference.
(k) Agreement between the Mereenie Producers and the
Palm Valley Producers dated June 28, 1985, filed as
exhibit 10(s) to Report on Form 10-K for the fiscal
year ended April 30, 1985 is incorporated herein by
reference.
<PAGE>
(l) Form of Agreement pursuant to Article SIXTEENTH
of the Company's Certificate of Incorporation and the
applicable By-Law to indemnify the Company`s
directors and officers is filed as exhibit 10(s) to
Registration Statement No. 33-21311 filed June 24,
1988, is incorporated herein by reference.
11. Statement re computation of per share earnings.
Not applicable.
12. Statement re computation of ratios.
None.
13. Annual report to security holders, Form 10-Q or
quarterly report to security holders.
Not applicable.
16. Letter re change in certifying accountant.
None.
18. Letter re change in accounting principles.
None.
21. Subsidiaries of the registrant.
Filed herein.
22. Published report regarding matters submitted to vote
of security holders.
Not applicable.
23. Consent of experts and counsel.
Consent of Ernst & Young LLP filed herewith.
24. Power of attorney.
None.
<PAGE>
27. Financial Data Schedule.
Filed herein.
99. Additional Exhibits.
None.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAGELLAN PETROLEUM CORPORATION
/s/ James R. Joyce
James R. Joyce, President
Dated: September 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Benjamin W. Heath /s/ James R. Joyce
Benjamin W. Heath James R. Joyce
Director Director, President and Chief Executive
Officer, Chief Financial and Accounting
Officer
Dated: September 25, 1998 Dated: September 25, 1998
------------------------ ------------------------
/s/ Dennis D. Benbow /s/ Walter McCann
Dennis D. Benbow Walter McCann
Director Director
Dated: September 25, 1998 Dated: September 25, 1998
------------------------ ------------------------
/s/ Timothy L. Largay /s/ Ronald P. Pettirossi
Timothy L. Largay Ronald P. Pettirossi
Director Director
Dated: September 25, 1998 Dated: September 25, 1998
------------------------ ------------------------
Subsidiaries of the Registrant
Subsidiary State of Incorporation Ownership
Magellan Petroleum Australia Limited Queensland, Australia 50.7%
The following subsidiaries are owned by Magellan Petroleum Australia Limited:
Magellan Petroleum (N.T.) Pty. Ltd. Queensland, Australia 100%
Paroo Petroleum Pty. Ltd. Queensland, Australia 100%
Paroo Petroleum (Holdings), Inc. Delaware, U.S.A. 100%
Paroo Petroleum (USA), Inc. Delaware, U.S.A. 100%
Magellan Petroleum (W.A.) Pty. Ltd. Queensland, Australia 100%
Magellan Petroleum (Belize) Limited Belize, C.A. 100%
Magellan Petroleum (Eastern) Pty. Ltd. Queensland, Australia 100%
Magellan Petroleum (Burunga) Pty. Ltd. Queensland, Australia 100%
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-38429) pertaining to the Stock Option Plan of Magellan Petroleum
Corporation of our report dated September 11, 1998 with respect to the
consolidated financial statements of Magellan Petroleum Corporation included in
the Annual Report (Form 10-K) for the year ended June 30, 1998.
/s/ Ernst & Young LLP
Stamford, Connecticut
September 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 12,436,297
<SECURITIES> 1,265,495
<RECEIVABLES> 758,441
<ALLOWANCES> 0
<INVENTORY> 218,359
<CURRENT-ASSETS> 14,975,525
<PP&E> 41,969,231
<DEPRECIATION> 18,949,917
<TOTAL-ASSETS> 39,778,980
<CURRENT-LIABILITIES> 2,725,030
<BONDS> 0
0
0
<COMMON> 249,825
<OTHER-SE> 17,169,263
<TOTAL-LIABILITY-AND-EQUITY> 39,778,980
<SALES> 14,582,950
<TOTAL-REVENUES> 15,339,785
<CGS> 0
<TOTAL-COSTS> 12,453,462
<OTHER-EXPENSES> 1,681,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,468
<INCOME-PRETAX> 1,180,600
<INCOME-TAX> 144,087
<INCOME-CONTINUING> 1,036,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,036,513
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
