TELLURIAN INC. /DE/ - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

For the quarterly period ended September 30, 2011

For the transition period from            to            

Commission files number 1-5507

MAGELLAN PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

(207) 619-8500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of shares outstanding of the issuer’s single class of common stock as November 10, 2011 was 53,735,594

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MAGELLAN PETROLEUM CORPORATION

FORM 10-Q

September 30, 2011

TABLE OF CONTENTS

Unless otherwise indicated, all dollar figures set forth herein are in United States currency. Amounts expressed in Australian currency are indicated as (“AUD”, “AUS”, “A$”).

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MAGELLAN PETROLEUM CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements

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MAGELLAN PETROLEUM CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements

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MAGELLAN PETROLEUM CORPORATION

FORM 10-Q

ITEM 1 FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements

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MAGELLAN PETROLEUM CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

See accompanying notes to consolidated financial statements

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MAGELLAN PETROLEUM CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(unaudited)

See accompanying notes to consolidated financial statements

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MAGELLAN PETROLEUM CORPORATION

FORM 10-Q

PART I - FINANCIAL INFORMATION

ITEM 1 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

Magellan Petroleum Corporation (the “Company” or “Magellan” or “MPC” or “we” or “us”) is engaged in the sale of oil and gas and the exploration for and development of oil and gas reserves. At September 30, 2011, MPC had two reporting segments: (1)100.00% equity interest in its subsidiary, Magellan Petroleum Australia Limited (“MPAL”) and (2) 100% member interest in Magellan Petroleum North America (“MPNA”), based in Denver, Colorado. Please refer to Note 4 for more details on corporate restructuring.

The accompanying unaudited condensed consolidated financial statements include the accounts of MPC and its subsidiaries, MPAL and MPNA. All intercompany transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the three months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011. All amounts presented are in United States dollars, unless otherwise noted.

Goodwill

The aggregate amount of goodwill at September 30, 2011 and at June 30, 2011 was $4,695,204. Of this amount, $674,498 is related to the October 15, 2009 acquisition of Nautilus Poplar, LLC (“NP”) and $4,020,706 of our goodwill is related to the fiscal 2006 acquisition of the 44.87% interest of MPAL that we did not own at the time. Goodwill is not amortized but is tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may be impaired. Our annual impairment testing date is June 30 for the MPAL goodwill and October 1^st for the Nautilus goodwill. No impairment was recorded during the three months ended September 30, 2011 and September 30, 2010, respectively.

Note 2 Evans Shoal Agreement

On March 25, 2010, MPAL entered into an agreement with Santos Offshore Pty Ltd (“Asset Sales Deed”), to purchase Santos’ 40% interest in the Evans Shoal natural gas field (NT/P48) (“Evans Shoal Transaction”). On January 31, 2011, the Asset Sales Deed was amended pursuant to a Deed of Variation between the parties.

Please refer to Note 12 to the condensed consolidated financial statements included in Item 8 of our annual report on Form 10-K for the fiscal year ended June 30, 2011, for information on the termination of the Asset Sales Deed, as amended by the Deed of Variation, that occurred on July 22, 2011.

On July 22, 2011, MPAL received from Santos a refund of the AUD $10,000,000 additional deposit, plus interest, on the Evans Shoal Agreement.

Note 3 Restatement of Financial Information

Subsequent to the issuance of our 2010 annual report on Form 10-K, we determined that our consolidated statement of cash flows for the year ended June 30, 2010, reflected a foreign currency exchange loss in the line item “effect of exchange rate changes on cash and cash equivalents”, rather than including it with the adjustments to reconcile net income (loss) to net cash provided by operating activities. Because this is a non-cash expense included in net income, it should have been added back to net income in order to properly reconcile net income to cash provided by operating activities within the statement of cash flows. The exclusion of this adjustment to reconcile net income resulted in understating the net cash provided by operating activities and overstating the effect of exchange rate changes on our cash and cash equivalents line items within the consolidated statement of cash flows.

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This error also affected our condensed consolidated statements of cash flows for the nine month period ended March 31, 2010, the six month period ended December 31, 2010, and the three month period ended September 30, 2010. This error did not affect our condensed consolidated balance sheet or condensed consolidated statements of operations for any of the prior periods, nor did it affect the total cash increase or decrease reported for any of the periods.

The statement of cash flows for the three months ended September 30, 2010 as contained herein has been adjusted for the restatement discussed above. The following is a summary of the items reclassified on the originally issued condensed consolidated statements of cash flows for the three months ended September 30, 2010:

CONSOLIDATED STATEMENT OF CASH FLOWS

Note 4 Acquisition of minority interest in Nautilus Poplar LLC and acquisition of additional working interests

Prior to September 2, 2011, the Company was the parent company and 83.46% owner of NP, a Montana Limited Liability Company. NP in turn was the 68.75% owner of oil and gas working interests in the East Poplar Unit (“EPU”) and Northwest Poplar field (“NWP”) in Roosevelt County, Montana (together, the “Poplar Field”). MPC also owned a direct 28.3% working interest in the Poplar Field.

To simplify the holding structure of the Poplar Field and for reasons relating to accounting, reporting, capital calls, investors and partners, and conflicts of interest, MPC, effective September 1, 2011, assigned its direct working interest in the Poplar Field to NP. In addition, MPC management thought it desirable to acquire all of the membership interests in Eastern Rider LLC (“ER”) and Nautilus Technical Group LLC (“NT”) (ER and NT, collectively, the “Nautilus Sellers”) (the “Nautilus Restructuring” or the “Transaction”). Prior to the Transaction, Nautilus Tech maintained a 10% membership interest in NP and 2.9% oil and gas working interest (“WI”) in the Poplar Field while ER maintained a 6.5% membership interest in NP.

The terms of the Nautilus Restructuring are set forth in the September 2, 2011 Purchase and Sale Agreement between the Company and the members of NT and ET (the members of NT and ER, collectively, the “Sellers”) (the “PSA”). The Sellers included John Thomas Wilson, (MPC director and now President and CEO) and a consultant to and an employee of NP (each a “Related Seller”) as well as certain other persons. The effective date for the Nautilus Restructuring was September 1, 2011. The Company negotiated the consideration and terms of the Nautilus Restructuring with the intention of transacting with the Sellers on fair value terms. The approach to valuation was consistent with this goal.

Due to the conflicting interests of Mr. Wilson resulting from his position with and financial interest in the Nautilus Sellers, the Board appointed a Special Transaction Committee (“Committee”) to provide an independent forum for the consideration of the terms of the Nautilus Restructuring as set forth in the PSA and the related Registration Rights Agreement (discussed below). To independently validate the fairness of the consideration underlying the Nautilus Restructuring, the Committee commissioned a fairness opinion from an independent investment bank. At the August 24, 2011 Committee meeting, the Committee approved, and recommended that the Board approve, the transactions. On August 26, 2011, the Board approved the transactions.

The PSA provided for the Company’s purchase of all membership interests in NT and ER in return for $4,000,000 in cash (“Cash Consideration”), $2,000,000, less certain debt owed to MPC by NP, NT and ER and certain costs (“Total Share Consideration”), in privately issued shares of MPC’s common stock, par value $0.01 (“Common Stock”) and the potential for future production payments, payable in cash, to the Sellers, collectively, of up to $5,000,000 under certain conditions. The shares were sold pursuant to Section 4(2) of the Securities Act.

The Cash Consideration was transferred on September 2, 2011. Consistent with the terms of the PSA, 1,182,742 shares of Common Stock were issued on September 23, 2011 (“Issuance Date”), the earlier of (i) the third business day following September 20,

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2011, the date on which MPC’s Form 10-K for the year ending June 30, 2011 (“Form 10-K”) was filed with the Securities and Exchange Commission (“SEC”) and (ii) September 30, 2011. Consistent with the terms of the PSA, on the Issuance Date, MPC delivered to a Seller shares of Common Stock as determined by dividing the Total Share Consideration allocated to the Seller by, in the case of Related Seller, the greater of (i) the NASDAQ consolidated closing bid price of a share of Common Stock on the business day immediately preceding the execution of the PSA and (ii) the NASDAQ official closing price of a share of Common Stock on September 22, 2011, the earlier of the second business day following September 20, 2011, the date on which the Form 10-K was with the SEC and September 22, 2011 (“NASDAQ Closing Price”). In the case of a Seller that was not a Related Seller, MPC delivered shares of Common Stock as determined by dividing the Total Share Consideration allocated to that Seller by the NASDAQ Closing Price. Mr. Wilson’s interest in the Nautilus Transaction approximated 51% of the consideration paid for the Nautilus Tech and ER interests.

The potential for future production payments is contingent upon achieving certain levels of production at Poplar. The first payout of $2.0 million is payable to the Sellers when the sixty (60) day rolling average for production of the Poplar Field has reached 1,000 barrels of oil equivalent per day as set forth in Nautilus’ Reports of Production to the Board of Oil and Gas Conservation of the State of Montana (“Reports”). The second payout in the amount of $3.0 million will be paid to the Sellers when the sixty (60) day rolling average for production of the Poplar Field has reached 2,000 barrels of oil equivalent per day as per the Reports. The fair value of these contingent payments was estimated.

The production projections used in valuing its proved reserves as of June 30, 2011 were used as the basis for identifying the timing of the production payouts. The Company utilized a discount rate of 8% which is consistent with the rate used in valuing its asset retirement obligation and reflects the Company’s credit adjusted incremental borrowing rate.

At September 30, 2011, the Transaction between MPC and NP was complete. As a result of the Transaction,

The buy-out of the minority interest in NP from NT and ER was accounted for as an equity transaction with the impact reflected directly in equity at estimated fair value.

The acquisition of the 2.95% direct working interest in Poplar Field from NT was treated as a business combination for accounting purposes. The fair value of assets acquired and liabilities assumed were recorded at estimated fair value. This estimate was made based on Level 3 or unobservable inputs. Unobservable inputs are defined in authoritative guidance as inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability based on the best information available at the time.

A deminimus amount of revenues and earnings related to the 2.95% WI acquired are included in the accompanying unaudited condensed consolidated statements of operations for the three months ended September 30, 2011. No pro forma financial results are provided for the three months ended September 30, 2011 or 2010, due to the immaterial effect.

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

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Note 5 Registration Rights Agreement between the Company and the Nautilus Sellers

On September 2, 2011, in connection with the purchase of the non-controlling interest in NP (Note 4), the Company and the Nautilus Sellers entered into a Registration Rights Agreement (“RRA”), pursuant to which the Company granted to the Nautilus Sellers certain registration rights with respect to the shares owned by each Nautilus Seller and issued under the Nautilus PSA and, any securities issued or distributed in connection with such shares by way of stock dividend or stock split or other distribution or in connection with a combination of shares, recapitalization, reorganization, merger, consolidation, reclassification or otherwise and any other securities into which or for which shares of any other successor securities are received in respect of any of the foregoing (“Registrable Securities”).

The Company agreed to pay all expenses associated with the registration of the Registrable Securities except the fees and disbursements of counsel to the Nautilus Sellers. The Company also agreed to indemnify each Nautilus Seller whose Registrable Securities are covered by a Registration Statement or Prospectus (each as defined in the RRA), each Nautilus Seller’s officers, directors, general partners, managing members and managers, each person who controls (within the meaning of the Securities Act)) the Nautilus Seller and the officers, directors, general partners, managing members and managers of each such controlling person from and against any losses, claims, damages, or liabilities, expenses, judgments, fines, penalties, charges and amounts paid in settlement, as incurred, arising out of or based on certain untrue statements of material fact or certain omissions of material facts in any applicable Registration Statement and/or certain related documents. The agreement does not allow for liquidated damages.

On October 14, 2011, the Company filed a registration statement on Form S-3 with the SEC to register for public resale 1,182,742 shares of the Company’s Common Stock acquired in the Nautilus Transaction by the Sellers (“Registration Statement”). On November 4, 2011, the Company filed a pre-effective amendment to the Registration Statement.

Note 6 Sale Agreement between Magellan Petroleum (N.T) Pty Ltd and Santos QNT Pty Ltd and Santos Limited

On September 14, 2011, Magellan Petroleum (N.T.) Pty Ltd (“Magellan NT”), a wholly owned subsidiary MPAL, entered into a Sale Agreement (“Santos SA”), dated September 14, 2011 with the Santos QNT Pty Ltd (“Santos QNT”) and Santos Limited (“Santos Entities) (such transaction referred to herein as the “Santos Transaction”). The Santos SA is subject to the satisfaction of certain conditions by June 22, 2012. These conditions include approval of the Santos SA (and related transfers and dealings) under relevant petroleum legislation; Foreign Investment Review Board approval (which has now been obtained); execution of the GSPA (defined below); and certain third party approvals of the assignment of property interests, joint venture contracts and royalty obligations (“Conditions”).

The Santos SA provides for the transfer of the following assets with effect as of July 1, 2011 (the “Effective Date”):

The cash consideration payable for the sale of the Mereenie Interests by Magellan NT is AUD $28.0 million (plus or minus adjustments for the period from the Effective Date to the date on which the Transaction is completed (“Completion”), which will occur five business days after the Conditions have been satisfied (or as otherwise agreed between the parties). In addition, during the

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period from Completion until 20 years after the Effective Date, the Santos Entities will pay Magellan NT a series of contingent payments (the “Bonus Amounts”), based on meeting certain threshold volumes of net sales of petroleum from the Mereenie Titles (“Threshold Levels”) set out in the Santos SA. If over a period of 90 consecutive days the average daily net sales volumes exceed a Threshold Level, then the corresponding Bonus Amount shall be paid. Each Bonus Amount is only payable once and is payable on the first occasion the relevant Threshold Level is achieved. If all Threshold Levels are achieved the cumulative Bonus Amount shall be AUD $17.5 million.

The cash consideration payable for the sale of the Palm Valley Interests by the Santos Entities is AUD $2.9 million (plus or minus adjustments for the period from the Effective Date to Completion). The cash consideration payable for the sale of the Dingo Interests by the Santos Entities is AUD $0.1 million (plus or minus adjustments for the period from the Effective Date to Completion).

Because this transaction has not yet been finalized, our consideration of the accounting implications of this transaction is not complete as of this filing, and for this reason we are not in a position to provide an estimate of the financial effect of the transaction on the Company. The Company does not expect to report discontinued operations related to the proposed Santos Transaction.

The book value of the assets and liabilities related to the Mereenie Interests have been separated and classified as held for sale in the unaudited condensed consolidated balance sheet at September 30, 2011 as set forth below in the table below:

The assets held for sale (“AHFS”) exclude goodwill. The Company intends to allocate the relative fair value of the goodwill to the assets being sold at the completion of the sale.

Note 7 Lease Purchase and Sale and Participation Agreement with VAALCO ENERGY (USA), INC.

On September 6, 2011 (the “Closing Date”), the Company and NP entered into a Lease Purchase and Sale and Participation Agreement (the “VAALCO PSA”) with VAALCO ENERGY (USA), INC (“VAALCO”).

Pursuant to the VAALCO PSA, the Company received $5.0 million in cash on September 7, 2011. VAALCO also agreed to drill three new wells (the “Obligation Wells”), at its sole expense as operator, to the Bakken formation and to formations below the Bakken (the “Deep Intervals”) in Poplar Field. Upon completion of the Obligation Wells in the Deep Intervals of the Poplar Field, VAALCO will have earned a 65% working interest in the Deep Intervals within the Poplar Field. One well is required to be spud on or before June 1, 2012 and the second and third are required to be spud on or before December 31, 2012. One well will be drilled horizontally to test the Bakken Formation, one well will be drilled vertically to test the Red River Formation, and a third will be targeted at VAALCO’s discretion. All production from an Obligation Well that is completed and the revenue from the sale thereof attributable to applicable leases shall be owned by Nautilus and VAALCO consistent with their working interests of 35% and 65%, respectively, subject to all applicable burdens and taxes. Under the VAALCO PSA, if VAALCO fails to drill and, if applicable, complete, any of the Obligation Wells in accordance with the agreement: (i) VAALCO will not be entitled to the assignment of the Deep Intervals; (ii) VAALCO shall have no further right to earn any interest in the Deep Intervals; (iii) the Company shall be entitled to retain the purchase price; (iv) VAALCO shall relinquish, effective as of the date of the failure, all of VAALCO’s rights, title, and interest in any Obligation Well that has been drilled and, if applicable, completed; and the Company and NP shall have the right to terminate the VAALCO PSA. However, VAALCO shall be entitled to retain any production and the sale proceeds therefrom attributable to a relinquished Obligation Well that has accrued to VAALCO’s credit prior to the effective date of the relinquishment.

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The VAALCO PSA also provides a process for the resolution of title defects reported through December 31, 2011. If such title defects are reported and relate to a preferential right to greater than 10% of the leased assets, then VAALCO may cancel the agreement and shall be refunded the $5.0 million purchase price. If title defects result in a lower than the indicated acres in the contract, the Company shall be liable for such difference times $227 per acre. No material title defects have been reported to date, and the Company does not expect any title defects to be reported before December 31, 2011.

MPC has agreed to indemnify VAALCO from all liabilities relating to the property to the extent such liabilities are attributable to the period prior to September 6, 2011 and arose from the inaccuracy of any representations by MPC in the agreement. Such indemnity shall be subject to a $50,000 deductible amount and is capped at $3.0 million in the aggregate.

MPC and VAALCO have agreed that should either party during the two years subsequent to September 6, 2011 agree to acquire an interest in oil and gas leases within the area of mutual interest, then such acquiring party shall offer to the non-acquiring party the right to purchase its proportionate share of interest (65% for VAALCO, 35% for MPC) by paying its proportionate share of the acquisition price.

The accounting for this transaction is set forth in the table below:

Note 8 Gas Supply and Purchase Agreement between Magellan Petroleum (N.T) Pty Ltd and Santos QNT Pty Ltd

On September 14, 2011, Magellan NT entered into a Gas Supply and Purchase Agreement (the “GSPA”), dated September 14, 2011, with the Santos Entities (such transaction referred to herein as the “Santos Gas Contract”). See Note 6.

The GSPA is subject to Completion occurring under the September 14, 2011 Santos SA between the parties (“Sale Agreement”) and provides for the sale by Magellan NT to the Santos Entities of a total contract gas quantity of 25.65 Petajoules (“PJ”) over the 17 year term of the GSPA, subject to certain limitations regarding deliverability into the Amadeus Pipeline.

The term of the GSPA shall commence on the later of Completion under the Santos SA, the first delivery of gas under a Concession GSPA (defined below) or January 16, 2012 (when the existing gas sales agreement for the Palm Valley Gas Field expires) and will expire if the total contract quantity is reached before the expiry of 17 years. Under the GSPA, the Santos Entities are required to use reasonable endeavors to enter into one or more agreements with their customers for the sale of gas solely from the Mereenie Gas Field, the Palm Valley Gas Field or other permissible fields under GSPA and that collectively will require an average aggregate daily contract quantity for each day during the term of the GSPA of not less than 5.86 Terajoules (“TJ”) (“Concession GSPA”).

The price for gas supplied by Magellan NT shall be the weighted average of the price obtained for all gas sold or to be sold by the Santos Entities from the Mereenie Titles during the relevant contract year.

The GSPA provides a detailed procedure to be followed by the parties in determining the amount of gas that will provided daily during each contract year. The maximum daily contract quantities under the GSPA (“Maximum DQ”) are based on a maximum annual contract quantity, spread evenly over a year. In the last two (2) years of the term (known as the “Recovery Period”), the maximum annual contract quantity will be one half of the difference between the total contract quantity of 25.65PJ and what has been sold to the Santos Entities by Magellan NT up to that date. On any day, Magellan NT is obliged (subject to the usual exceptions for planned and unplanned maintenance and force majeure) to supply the lesser of the Maximum DQ, the daily contract forecast quantities provided by Magellan NT prior to the commencement of a contract year and 80% of the quantities nominated by the Santos Entities’ customers under the Concession GSPAs (“Supply Obligation”).

If the term of the GSPA does not commence by April 15, 2012 (90 days after the expiry of the existing gas sales agreement for the Palm Valley Gas Field):

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Because this transaction has not yet been finalized, our consideration of the accounting implications of this transaction is not complete as of this filing, and for this reason we are not in a position to provide an estimate of the financial effect of the transaction on the Company.

Note 9 Capital and Stock Based Compensation

On December 8, 2010, shareholders approved an amendment to the Company’s 1998 Stock Incentive Plan to increase the authorized shares of common stock reserved for awards under the Plan by 2,000,000 shares, to a total of 7,205,000 shares. These authorized shares can take the form of non-qualified stock options, stock appreciation rights (SARs), restricted share awards, annual awards of stock to non-employee directors and performance-based awards.

Options and non-vested shares

As of September 30, 2011, there were 1,285,000 shares available for future issuance under the Plan.

The following is a summary of option transactions for the three months ended September 30, 2011:

Total non-cash stock based compensation included in the consolidated statements of operations for the three months ended September 30, 2011 was $ 395,632, as discussed below.

Non-employee options

There were no non-employee options issued during the three months ended September 30, 2011. In February 2009, the Company granted 262,500 time-based options, with an exercise price of $1.20 per share to John T. Wilson, our President and CEO, who was then a non-employee consultant to the Company.

Since these options were issued to a non-employee, the Company determined their fair value at the end of each reporting period. The related option expense was recognized in the unaudited condensed consolidated statements of operations using the accelerated method. Effective September 27, 2011, Mr. Wilson became the President and CEO of the Company. This change in status from non-employee to employee triggered a re-measurement of the fair value of these awards.

The fair value of these time-based options at September 27, 2011 was determined based on the Black-Scholes valuation model using the following assumptions:

The expected life of the time-based options is the remaining contractual term. The Company recorded a non-cash charge of ($49,825) during the three months ended September 30, 2011 related to these non-employee time-based options for the period ended September 27, 2011. The credit entry was necessary to reverse previously recorded stock compensation expense related to the shares that were unvested as of the change in status from non-employee to employee. The unvested shares were then revalued as discussed above. Unrecognized compensation expense for these options is included below within the “employee option” section.

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The Company recorded non-cash charges of $32,830 related to these time based options for the three months ended September 30, 2010.

Employee and Director option and share compensation

The Company’s compensation policy is designed to provide the Company’s directors with a portion of their annual Board compensation in the form of equity. The number of shares for each director award is, however, subject to a maximum annual cap of 15,000 shares. The Company issued 75,000 shares in July 2011, pursuant to this policy.

During the three months ended September 30, 2011, no stock options were issued to employees. During the quarter ended September 30, 2010, 800,000 stock options were issued to an employee, of which 400,000 were forfeited.

Non-cash compensation expense of $445,459 was recorded for employees and directors options and non-vested shares for the three months ended September 30, 2011 and is included in the unaudited condensed consolidated statements of operations for the period then ended. The fair value of the grants is being recognized over the requisite service period using the accelerated method. Unrecorded compensation expense for employee options was $661,233 as of September 30, 2011.

Employee and director non-cash option and unvested share expense of $262,123 and $87,500 respectively for the three months ended September 30, 2010 was reflected in the unaudited condensed consolidated statements of operations for the period then ended.

Note 10 (Income) Loss per Share

Income and losses per common share are based upon the weighted average number of common and common equivalent shares outstanding during the period. The reconciling items in the calculation of diluted earnings per share earnings per share are the dilutive effect of stock options, warrants and non-vested shares. The potential dilutive impact of non-vested shares is determined using either the treasury stock method or the two-class method, whichever leads to higher dilution. The dilutive impact of stock options and warrants is determined using the treasury stock method.

For the three months ended September 30, 2011, the Company had 7,697,826 options and warrants outstanding that had an exercise price below the average stock price that would have resulted in 1,719,815 incremental dilutive shares. The Company also had 104,167 non-vested shares of Company stock that would have resulted in 85,102 incremental dilutive shares for the three months ended September 30, 2011. There were no other potentially dilutive items at September 30, 2011.

For the three months ended September 30, 2010, the Company had 8,227,826 options and warrants outstanding that had an exercise price below the average stock price for the period that resulted in 2,438,677 incremental dilutive shares. The Company also had 208,334 non-vested shares of Company stock for the three months ended September 30, 2010, that resulted in 24,595 incremental dilutive shares for the period. There were no other potentially dilutive items at September 30, 2010. However, as a result of the net loss for the period, there was no dilutive effect.

Note 11 Segment Information

Prior to the Form 10-Q for the three months ended September 30, 2011, our reportable segments included MPC, NP and MPAL. During the current period, MPC completed a restructuring of its North American assets (See Note 4) resulting in a change to its reportable segments. Segment groupings for the three months ended September 30, 2010 have been reclassified to conform with the current presentation.

The Company has two reportable segments, MPAL and MPNA, as well as a head office which is treated as a cost center. The Company’s chief operating decision maker is John Thomas Wilson (President and CEO) who reviews the results of the Australian and North American businesses on a regular basis. Both segments engage in business activities from which each may earn revenues and incur expenses. MPAL and its subsidiaries are considered one segment.

Segment information (in thousands) for the Company’s two operating segments is as follows:

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Note 12 Exploration and Dry Hole Costs

Exploration and dry hole costs relate to the exploration work performed on MPAL’s and MPNA’s properties. Components of these costs are as follows:

Note 13 Asset Retirement Obligations

A reconciliation of the Company’s asset retirement obligations for the three months ended September 30, 2011 was as follows:

Note 14 Income Taxes

The Company has estimated the effective tax rate expected to be applicable for the full fiscal year. The federal and Australian effective rate used in providing for income taxes on a current year-to-date basis for the three months ended September 30, 2011 is 0% compared to 8% for the three months ended September 30, 2010. For the current fiscal year, we anticipate that we will be providing a full valuation allowance against our Australian and U.K. deferred tax assets. Tax assets are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. A valuation allowance reduces deferred tax assets to estimated realizable value, which assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value. We review our deferred tax assets and valuation allowance on a quarterly basis. As part of our review, we consider positive and negative evidence, including cumulative results in recent years. As a result of our review for the quarter ended September 30, 2011, we provided for a full valuation allowance against our Australian deferred tax assets, in addition to a valuation allowance against our U.K. deferred tax assets. We have reversed the valuation allowance on our U.S. deferred tax assets as we anticipate that we will utilize U.S. net operating loss and foreign tax credit carry forwards to offset federal tax on U.S. taxable income. However, such losses and credits are not available to offset state taxable income, thus resulting in the reported tax provision of $196,600.

We anticipate we will continue to record a valuation allowance against the losses of these jurisdictions until such time as we are able to determine it is “more-likely-than-not” the deferred tax asset will be realized. Such position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets.

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Note 15 Investments

Marketable Securities

At September 30, 2011, MPC held the following marketable securities which are expected to be held until maturity:

At June 30, 2011, MPC did not have any marketable securities.

Securities Available-for-Sale

The Company classifies securities that have a readily determinable fair value and are not bought and held principally for the purpose of selling them in the near term as securities available-for-sale. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported in accumulated other comprehensive income until realized. Net unrealized loss related to these securities was $33,772 and is included in accumulated other comprehensive income. The Company held the following securities classified as available for sale at September 30, 2011 and June 30, 2011:

Note 16 Fair Value Measurements

The Company follows authoritative guidance related to Fair Value Measurement and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s policy is to recognize transfers in/and or out of a fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed for all periods presented.

Items required to be measured at fair value on a nonrecurring basis include the assets acquired and liabilities assumed related to the acquisition of an additional 2.95% working interest in Poplar Field and the contingent payments recorded pursuant to that transaction (see Note 4).

The Company’s items to which recurring fair value measurements apply are securities available-for-sale, which are classified as Level 1 in the fair value hierarchy. These investments are traded in active markets and quoted prices are available for identical investments.

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Cash balances were $9,033,547 as of September 30, 2011 and the remaining $16,689,669 was held in time deposit accounts in several Australian banks that have terms of 90 days or less, and are therefore classified as cash equivalents. The fair value of cash equivalents approximates carrying value due to the short term nature of those instruments.

The following table presents the amounts of assets carried at fair value at September 30, 2011 and June 30, 2011 by the level in which they are classified within the valuation hierarchy:

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Note 17 Debt

The Company’s long-term debt consists of the following:

The following is a summary of principal maturities of long-term debt:

The variable rate of the note is based upon the Wall Street Journal Prime Rate (the index) plus 3%, subject to a floor rate of 6.25%. The index was 3.25% at September 30, 2011, resulting in an interest rate of 6.25% per annum as of September 30, 2011. Under the note payable, NP is subject to both financial and non-financial covenants. The financial covenant is to maintain a debt service coverage ratio, as defined, of 1.2 to 1.0, which is calculated based on NP’s annual tax return. As of September 30, 2011, based upon the FY2010 tax return, NP was in compliance with the financial covenant.

The Company also has a $1,000,000 working capital line of credit with the same bank, classified as short term debt. The total amount due on the line at September 30, 2011 was $700,000. The line bears interest at a variable rate which was 6.50% as of September 30, 2011. A portion of this line of credit, $25,000, secures a letter of credit that is in favor of the Bureau of Land Management and another $25,000 of this revolving line of credit secures a business credit card used by NP. As of September 30, 2011, $250,000 is available under this line of credit.

The note payable to bank, letter of credit and the short term line of credit are collateralized by first mortgages and assignment of production for the Poplar Field and are guaranteed by MPC up to $6,000,000, not to exceed the amount of the principal owed.

The carrying amount of the Company’s long term debt approximates its fair value, because of the variable rate, which resets based on the market rates.

Note 18 Related Party Transactions

The Company leases its Denver office (the office of NP) from an entity owned, in part, by John Thomas Wilson, President and CEO of the Company. The lease expires February 2012. The total paid to such entity under this arrangement for the three months ended September 30, 2011 and 2010 was $18,074 and $18,074, respectively.

J. Robinson West, Chairman of the Board of Directors is Chairman, Founder and CEO of PFC Energy (PFC), which has served as a consultant on various Australian projects. MPC had accrued liabilities of $48,100 and $182,740 as of September 30, 2011 and September 30, 2010, respectively, for consulting services which expense is included in the statements of operations for the three months ended September 30, 2011 and 2010, respectively.

Please refer to Note 4 for more information on the transactions with NT and ER during the three months ended September 30, 2011.

Young Energy Prize SA (“YEP”), a Luxembourg corporation and the Company’s largest shareholder, was engaged by the Company to help assist in the funding of the Evans Shoal Transaction. Mr. Nikolay Bogachev, a director of the Company since July 2009, is the President and CEO of YEP as well as an equity owner of YEP.

On August 5, 2010, the Company executed a Securities Purchase Agreement (the “Second Purchase Agreement”), an Investor’s Agreement and Memorandum of Agreement with YEP to finalize the terms of its second Private Investment in a Public Equity (“PIPE”). Pursuant to the terms of the Second Purchase Agreement, the Company is required to use the proceeds from the PIPE to close the Evans Shoal Transaction. On February 11, 2011 and February 17, 2011, the Company and YEP executed amendments to the Second Purchase Agreement. On February 17, 2011 the Company and YEP also executed an Investment Agreement to document the terms of additional financing to be provided by YEP to the Company in order to facilitate the closing of the Evans Shoal Transaction as well as an amendment to the Investment Agreement.

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Since the Amended Asset Sales Agreement has been terminated and MPAL has received back the additional (AUD) $10 million deposit made in connection with the Evans Shoal Transaction, the transactions contemplated by the Second Purchase Agreement, as amended, and the Investment Agreement, as amended, have not closed. As of October 12, 2011, the Company and YEP terminated these agreements.

Note 19 Commitments & Contingencies

Please refer to Note 4 for information regarding the contingent payments to the “Sellers” of the non-controlling interest of NP. Please refer to the Commitments and Contingencies table in our Form 10-K as of June 30, 2011, for information on all other commitments and contingencies.

Note 20 Subsequent Events

The Company has evaluated subsequent events and noted no additional events that require recognition or disclosure at November 14, 2011.

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate”, “estimate”, “expect”, “believe”, “will likely result”, “outlook”, “project” and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Among these risks and uncertainties are: (1) the ability of Magellan and Santos to complete and implement the terms of the asset swap in the Amadeus Basis and the related gas sales agreement; (2) whether the Company can successfully achieve cost savings while delivering revenue growth; (3) whether the work-overs, recompletions and other drilling at Poplar will result in increased production and cash generation and/or will otherwise successfully assist in the development of the Poplar Field; and (4) the production levels from the properties in which Magellan, through its subsidiaries, have interests, the recoverable reserves at those properties and the prices that will ultimately be applied to the sale of such reserves. Any forward-looking information provided in this report should be considered with these factors in mind. Magellan assumes no obligation to update any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

Executive Summary

Overview

Magellan is engaged in the sale of oil and gas with a strategy focused on creating long-term value through the acquisition and redevelopment of “under-exploited” conventional reserves and through the exploration of unconventional reserves. We have high quality assets with strong development potential and a robust cash balance to fund these developments.

The financial results of the first quarter include the partial-period impact of two material transactions. Effective September 1, 2011, Magellan purchased the non-controlling interests in NP and in the Poplar Field such that Magellan now owns a 100% interest in the Poplar Field.

On September 2, 2011, Magellan executed a farm-out agreement with VAALCO for the Poplar Field deep rights. Under the terms of the VAALCO farm-out, we received $5.0 million in cash (roughly $227 per acre) and a commitment to drill three deep wells, at least one of which will be horizontal. These wells will be expensive, a consideration in our decision, but, more importantly, VAALCO is skilled and experienced in these deeper plays and brings significant operational capability.