Magellan Petroleum Shows Fundamental Weakness

| About: Tellurian Inc. (TELL)
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Magellan Petroleum (MPET) filed its 10-Q on February 11. Given the recent positive developments since the first of the year, one might have expected to have seen some exciting Q4 results. Unfortunately, the developments are quite worrisome.

Negative Cash Flow

Magellan initiated a substantial (17% of the outstanding shares of common stock) share buyback in January, despite having a negative cash flow. Not only did Magellan have a negative $9 million cash flow from operations in six months ending December 2012, but there was a net decrease of $9.5 million in cash over the same period.

While a share buyback is usually the sign of a healthy company returning value to shareholders, the circumstances suggest that management's decision was not the best use of available cash reserves.


Quarter over quarter, Magellan had a declining (and negative) EBITDAX. EBIDAX declined from negative $2.8 million in Q4 2011 to negative $3.0 million in Q4 2012. In addition, EBITDAX fell from a loss of $4.7 million in H2 2011 to a loss of $6.7 million in H2 2012. While one might expect a low or negative EBITDA from a primarily exploration based company, by taking out exploration expenses, one can see that a larger problem exists.

Declining Production Volumes

The change in production levels for both oil and gas has been startling year over year. Yearly sales volumes of oil have declined from 53.3 Mbbls in 2011 to 35.91 Mbbls in 2012 (a decrease of 33%). In addition, sales of gas declined from 403.03 MMcf to 102.32 MMcf (a decline of 75%). Baring a substantial divestiture of unprofitable operations, such dramatic decreases in production are intolerable. Without stable (or better, increasing) production volumes, the cash flows (which are already poor) will have nowhere to go but down if energy markets operate within reasonable price projections.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.