Risk Factors - Risks Related to Our Business - Legislative and regulatory initiatives related to global warming and climate change could have an adverse effect on our operations and the demand for oil and gas
. In addition to the effects of regulation, the meteorological effects of global climate change could pose additional risks to our operations, including physical damage risks associated with more frequent, more intensive storms and flooding, and could adversely affect the demand for our products.
Endangered species. The federal Endangered Species Act and analogous state laws regulate activities that could have an adverse effect on threatened or endangered species. Some of our well drilling operations are conducted in areas where protected species are known to exist. In these areas, we may be obligated to develop and implement plans to avoid potential adverse impacts to protected species, and we may be prohibited from conducting drilling operations in certain locations or during certain seasons, such as breeding and nesting seasons, when our operations could have an adverse effect on the species. It is also possible that a federal or state agency could order a complete halt to drilling activities in certain locations if it is determined that such activities may have a serious adverse effect on a protected species. The presence of a protected species in areas where we perform drilling activities could impair our ability to timely complete well drilling and development and could adversely affect our future production from those areas.
National Environmental Policy Act. Oil and natural gas exploration and production activities on federal and Indian lands are subject to the National Environmental Policy Act (the "NEPA"). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment that assesses the potential direct, indirect, and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our current exploration and production activities, as well as proposed exploration and development plans, on federal and Indian lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay development of some of our oil and natural gas projects.
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OSHA and other laws and regulation. We are subject to the requirements of the federal Occupational Safety and Health Act ("OSHA"), and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under the Title III of CERCLA, and similar state statutes require that we organize and/or disclose information about hazardous materials used or produced in our operations. Also, pursuant to OSHA, the Occupational Safety and Health Administration has established a variety of standards relating to workplace exposure to hazardous substances and employee health and safety. We believe that we are in substantial compliance with the applicable requirements of OSHA and comparable laws.
Hydraulic fracturing. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons from tight formations. While we do not routinely utilize hydraulic fracturing techniques in our drilling and completion programs, that may change in the future if we embark on a successful Bakken/Three Forks play in Poplar. The process involves the injection of water, sand, and chemicals under pressure into the formation to fracture the surrounding rock and stimulate production. The process is typically regulated by state oil and natural gas commissions. However, the EPA recently asserted federal regulatory authority over hydraulic fracturing involving diesel additives under the Safe Drinking Water Act's Underground Injection Control Program. The federal Safe Drinking Water Act protects the quality of the nation's public drinking water through the adoption of drinking water standards and controlling the injection of waste fluids into below-ground formations that may adversely affect drinking water sources.
Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to oil and gas activities using hydraulic fracturing techniques which could potentially cause a decrease in the completion of new oil and gas wells, increased compliance costs, and delays which could adversely affect our financial position, results of operations, and cash flows. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations. In addition, if hydraulic fracturing becomes regulated at the federal level as a result of federal legislation or regulatory initiatives by the EPA, our fracturing activities could become subject to additional permitting requirements, and also to attendant permitting delays and potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that we are ultimately able to produce from our reserves.
We believe that it is reasonably likely that the trend in environmental legislation and regulation will continue toward stricter standards. We believe that we are in substantial compliance with existing environmental laws and regulations applicable to our current operations and that our continued compliance with existing requirements will not have a material adverse impact on our financial condition and results of operations. We cannot give any assurance that we will not be adversely affected in the future.
AVAILABLE INFORMATION
Our internet website address is www.magellanpetroleum.com. We routinely post important information for investors on our website, including updates about us and our operations. Within our website's investor relations section, we make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed with or furnished to the SEC under applicable securities laws. These materials are made available as soon as reasonably practical after we electronically file such materials with or furnish such materials to the SEC. We also make available within our website's corporate governance section the by-laws, code of conduct, and charters for the Audit Committee and the Compensation, Nominating and Governance Committee of the Board of Directors of Magellan Petroleum Corporation. Information on our website is not incorporated by reference into this report and should not be considered part of this document.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATION
Adjusted EBITDAX
We define Adjusted EBITDAX as net income (loss) attributable to Magellan, plus (i) depletion, depreciation, amortization, and accretion expense, (ii) exploration expense, (iii) stock based compensation expense, (iv) foreign transaction loss (gain), (v) impairment expense, (vi) loss on Evans Shoal, (vii) gain on sale of assets, (viii) warrant expense, (ix) net interest income, (x) other income, (xi) income tax benefit (provision), and net (loss) income attributable to non-controlling interest in subsidiaries. Adjusted EBITDAX is not a measure of net income or cash flow as determined by accounting principles generally accepted in the United States ("GAAP"), and excludes certain items that we believe affect the comparability of operating results.
Our Adjusted EBITDAX measure provides additional information which may be used to better understand our operations. Adjusted EBITDAX is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net income (loss) as an indicator of
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our operating performance. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company's financial performance, such as the historic cost of depreciable and depletable assets. Adjusted EBITDAX, as used by us, may not be comparable to similarly titled measures reported by other companies. We believe that Adjusted EBITDAX is a widely followed measure of operating performance and is one of many metrics used by our management team and by other users of our consolidated financial statements. For example, Adjusted EBITDAX can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure, and to assess the financial performance of our assets and our company without regard to historical cost basis and items affecting the comparability of period to period operating results.
The following table provides a reconciliation of net income (loss) to Adjusted EBITDAX for the years ended:
June 30,
2012
2011
2010
(In thousands)
Net income (loss) attributable to Magellan Petroleum Corporation
$
26,498
(32,432
)
(1,446
Depletion, depreciation, amortization, and accretion expense
1,744
2,890
5,428
Exploration expense
6,291
2,854
1,273
Stock based compensation expense
1,560
1,670
2,305
Foreign transaction (gain) loss
(475
951
677
Impairment expense
328
173
2,050
Loss on Evans Shoal
—
15,893
Gain on sale of assets
(40,413
(969
(6,817
Warrant expense
4,276
Net interest income
(749
(923
(1,038
Other income
(9
(1,975
Income tax (benefit) provision
(5,951
5,141
2,646
Net (loss) income attributable to non-controlling interest in subsidiaries
(15
(5
(11
Adjusted EBITDAX
(11,191
(4,757
7,368
ITEM 1A: RISK FACTORS
In addition to the other information included in this report, the following risk factors should be carefully considered when evaluating an investment in us. These risk factors and other uncertainties may cause our actual future results to differ from those expressed or implied in the forward-looking statements contained in this report and in other public statements we make. In addition, because of these risks and uncertainties, as well as other variables affecting our operating results, our past financial performance should not be considered to be indicative of future performance.
RISKS RELATING TO OUR BUSINESS
Our principal producing oil and gas properties in the Poplar and Palm Valley fields may stop producing oil and gas.
Our principal producing properties are located in the Poplar field in Montana and the Palm Valley field in Australia, and are subject to risks associated with regional supply and demand factors and potential delays or interruptions of production from wells in these areas resulting from governmental regulations, processing or transportation capacity constraints, and the availability of equipment, facilities, personnel, or services. Due to the relatively concentrated nature of our portfolio of producing properties, a number of our properties could experience any of the same conditions at the same time, resulting in relatively greater impact on our results of operations and cash flows than they might have on other companies that have a more diversified portfolio of properties. As a result of these risks, our producing properties may stop producing oil and gas, or there could be a material decrease in production levels at these fields. Since these properties are currently our principal revenue producing properties, any decline in production levels at these properties could have a material adverse effect on our revenues, results of operations, and cash flows. Any such adverse impact on our revenues and cash flows may restrict our ability to explore and develop oil and gas properties in the future and cause our stock price to decline.
Our Palm Valley production revenues and cash flows depend on a long-term gas sales agreement.
In 2012, we entered into a long-term sales agreement with Santos to sell up to approximately 23 Bcf of natural gas from our properties in the Palm Valley field over the next 17 years to Santos, who on-sells the gas to third party customers. As of June 30, 2012, there were two customers receiving gas from Palm Valley. In the event this agreement becomes uneconomic or is unexpectedly breached or terminated or designated quantities are decreased as permitted under the contract terms, our revenues and cash flows could be adversely impacted, and our current niche strategy of marketing Amadeus Basin gas to the mining industry in central Australia may not be successful.
Our Poplar production revenues and cash flows depend on one purchaser, and the inability of the purchaser to meet its payment obligations to us may adversely affect our financial results.
Currently, we rely on an agreement with Plains Marketing, LP as the sole purchaser of our oil production at Poplar. If this purchaser reduces or discontinues its business with us, or if we are unable to successfully negotiate a replacement agreement with this purchaser, who can terminate services with a 90 day notice period, or if the replacement agreement is on less favorable terms, the effect on us could be adverse if we are unable to obtain new purchasers for the oil produced at Poplar. In addition, if this purchaser were to experience financial difficulties or any deterioration in its ability to satisfy its obligations to us, our revenues and cash flows from Poplar could be adversely affected.