Mexco Energy Corporation — Form 10-Q Summary
Business and period: Mexco explores, develops and produces oil, natural gas, condensate and natural gas liquids, primarily through non-operated interests. This report covers the quarter and nine months ended December 31, 2019, the third quarter of Mexco’s fiscal 2020. All financial statements are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Operating revenue | $769,778 | $644,316 | $2,095,253 | $2,107,835 |
| Operating income (loss) | $44,788 | $(8,129) | $(77,833) | $41,606 |
| Net income (loss) | $35,196 | $(13,076) | $(101,777) | $23,375 |
| Basic and diluted EPS | $0.02 | $(0.01) | $(0.05) | $0.01 |
Quarterly operating revenue increased about 19% and Mexco returned to quarterly profitability; the operating margin was approximately 5.8% (derived from reported figures). For the nine-month period, revenue declined about 0.6% and the operating margin was approximately negative 3.7%. No separate gross margin is reported.
- Revenue mix and production: Third-quarter oil revenue rose 42% to $643,141, as volume increased 26% and average realized price rose 14% to $55.91/bbl. Gas revenue fell 34% to $123,082: volume increased 6%, but average price fell 38% to $1.61/Mcf. For nine months, oil revenue increased 16% to $1,762,663, while gas revenue declined 43% to $321,004, primarily reflecting a 43% drop in average gas price to $1.45/Mcf.
- Expenses: Nine-month production expense decreased 3% to $698,358; depreciation, depletion and amortization rose 5% to $648,729; general and administrative expense increased 13% to $805,701; and interest expense rose 37% to $25,054. The nine-month loss reflected higher operating expenses and lower total revenue.
- Cash flow: Nine-month operating cash flow was $543,584, down 34% from $820,501. Investing used $1,123,541, including $1,100,437 of oil and gas property additions and a $100,000 investment. Financing provided $515,000 net. Cash declined $64,957 to $63,295.
- Liquidity and debt: Working capital was $324,391 at December 31, 2019, versus $395,895 at March 31, 2019. The company reported $515,000 drawn on a $1 million bank facility, with $485,000 available at quarter-end; the balance-sheet debt, net of issuance costs, was $486,250. The facility matures December 28, 2021, bears interest at prime plus 0.5%, and is secured by substantially all oil and gas properties and subsidiary stock. Subsequent draws and repayments left the facility balance at $795,000 as of February 10, 2020.
- Balance sheet: Total assets were $9,782,700 and total liabilities $1,430,565. Stockholders’ equity was $8,352,135. Asset retirement obligations totaled $758,833, including a $7,500 current portion.
Material changes and operating activity
- Mexco adopted the lease accounting standard on April 1, 2019, recognizing an office-lease right-of-use asset and liability of $141,385 at adoption. At December 31, the reported asset was $92,444 and lease liabilities totaled $92,917.
- During the first nine months, Mexco participated in 36 horizontal Delaware Basin wells at an aggregate cost of approximately $850,000, in addition to four wells completed from the prior fiscal year and six vertical wells in Texas. The company reported approximately $1.2 million spent for 40 wells to date after subsequent expenditures; its discussion also describes additional well activity after quarter-end.
- The company made a $100,000 cost-basis investment in an LLC committed to purchasing Ohio royalty interests. It paid another $25,000 in January 2020; cumulative funding was then $125,000 of a $250,000 commitment.
- Oil and gas property additions were higher than the prior-year period, while cash fell and bank borrowing increased. The company reported no stock options granted or exercised during the nine months.
Outlook, risks and other disclosures
- Management planned to participate in approximately 50 horizontal wells for fiscal 2020 at an estimated aggregate cost of approximately $1.5 million. It expects to fund projects, as possible, with cash and operating cash flow, with borrowing and sales of non-core properties as potential additional sources. Management cited financial discipline in the current commodity-price environment and said it may continue selling non-core assets. No earnings or production guidance is provided.
- Commodity prices are the principal market risk. Management reported that a $10/bbl change in average oil price would have changed nine-month pretax results by approximately $322,060; a $1/Mcf change in gas price would have changed them by approximately $221,116. Mexco does not hedge and the credit agreement prohibits entering into commodity hedge agreements.
- Lower prices could reduce cash flow, reserves and the credit-facility borrowing base, constrain development financing, or require a noncash full-cost property write-down. The filing also cites pipeline capacity and disruption risks, although a new Permian-to-Gulf Coast pipeline began operating in September 2019.
- One purchaser represented $220,707, or 56%, of oil and gas receivables at quarter-end; receivables are generally unsecured. The company reported no significant credit losses.
- The credit facility requires specified leverage and interest-coverage ratios; Mexco reported compliance at December 31 and expected to remain compliant for the next fiscal year. Cash dividends require the lender’s prior written permission.
- The company had a $1,352,437 deferred tax asset fully offset by a valuation allowance, reflecting management’s view that realization was more likely than not not to occur. No income tax expense was recorded in the periods shown.
- Management stated that disclosure controls were effective and that no material change in internal control occurred during the nine months. It reported no material change to previously disclosed risk factors and no material legal proceedings known to it.
Important facts for investors to verify
- Whether subsequent well expenditures, well counts and remaining fiscal-2020 capital plans reconcile to the stated approximately 50-well plan and $1.5 million budget.
- The company’s cash needs and borrowing capacity after the facility balance rose to $795,000 after quarter-end, including covenant headroom and borrowing-base terms.
- Realized oil and gas prices, production volumes and purchaser concentration, given the sharply lower gas price and sensitivity of results to commodity prices.
- The status and expected funding schedule for the remaining $125,000 of the LLC investment commitment, as well as future liquidity for development.
- Reserve estimates, full-cost ceiling-test exposure and the recoverability assumptions underlying the fully reserved deferred tax asset; actual outcomes may differ from management estimates.