MXC

Business Context and Reporting Period

Company: Mexco Energy Corporation (MXC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended June 30, 2024
Business Overview: Mexco is engaged in the acquisition, exploration, development, and production of crude oil, natural gas, condensate, and NGLs. Operations are primarily centered in West Texas and Southeastern New Mexico, with interests in fourteen states. All oil and gas interests are operated by third parties.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased slightly by 1.2% to $1.73 million. While oil revenue increased 5.6% due to higher average prices ($79.87/bbl vs. $73.21/bbl), natural gas revenue dropped 37.7% to $177,752 due to lower volumes and a significant price decrease ($1.30/mcf vs. $2.02/mcf).
• Profitability Decrease: Net income fell 37.5% to $291,039. This was driven by a 33.6% decrease in operating income, resulting from higher operating expenses offsetting the revenue mix shift.
• Expense Increases:
  • Production costs rose 25.2% to $437,420, attributed to increased gathering, processing, and transportation expenses on new wells.
  • Depreciation, depletion, and amortization (DD&A) increased 11% to $539,697.
  • General and administrative expenses increased 7.6% to $367,045.
• Cash Flow Reduction: Net cash provided by operating activities decreased $537,581 (33.3%) to $1.08 million, primarily due to lower net income and a smaller decrease in accounts receivable compared to the prior year.
• Capital Allocation: The company repurchased 13,766 shares of treasury stock for $188,637 and paid dividends of $209,000. Investing activities used $717,387, including $517,387 for property additions and a $200,000 investment in a limited liability company.

Outlook, Risks, and Management Commentary

• Development Plans: Management plans to participate in the drilling and completion of 30 horizontal wells in fiscal 2025 at an estimated cost of $1.9 million. Most wells are in the Delaware Basin (New Mexico), with four in Reagan County, Texas.
• Investment Activity: The company has committed to a $2 million equity investment in an LLC focused on mineral interests in Ohio's Utica and Marcellus areas. $1.2 million has been funded as of July 2024.
• Commodity Price Risk: The company faces significant exposure to volatile oil and gas prices. Realized gas prices were negatively impacted by temporary pipeline constraints in the Permian Basin. A $10/bbl change in oil price would impact sales by approximately $189,090.
• Liquidity and Debt: The company maintains a $2.5 million credit facility with West Texas National Bank, with $1.5 million available. No principal payments are due until maturity in March 2026. The facility requires a Senior Debt/EBITDA ratio of 4.00 or less and an Interest Coverage ratio of 2.00 or more.
• Dividends and Buybacks: A regular annual dividend of $0.10 per share was paid in June 2024. The Board authorized a $1 million stock repurchase program in April 2024; approximately $811,363 remains available under this program.

Investor Verification Checklist

• Gas Price Volatility: Verify the impact of Permian Basin pipeline constraints on future natural gas realizations and the potential for negative pricing.
• Capital Expenditure Execution: Monitor the progress and costs of the planned 30 horizontal wells for fiscal 2025 to ensure they align with the $1.9 million budget.
• Ohio Investment Returns: Track the performance of the new LLC investment in Ohio mineral interests, which has returned 8% to date on funded capital.
• Debt Covenants: Confirm continued compliance with the Senior Debt/EBITDA and Interest Coverage covenants, especially given the decline in operating income.
• Reserve Estimates: Review the full cost pool amortization base and reserve estimates, as price fluctuations can materially affect the borrowing base and potential non-cash write-downs.