Mexco Energy Corporation — Form 10-Q Summary
Business context and period. Mexco explores, develops, and produces oil, natural gas, condensate, and NGLs, primarily in the Permian Basin, with interests in 13 states. This unaudited report covers the quarter and nine months ended December 31, 2015, in fiscal 2016; comparisons are to the same periods of 2014 unless noted.
Financial performance and position
| Metric | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2015 |
|---|---|---|
| Total operating revenue | $544,870 | $1,976,308 |
| Oil and gas revenue | $537,771 | $1,951,228 |
| Operating loss | $2,549,990 | $4,079,749 |
| Net loss | $2,445,536 | $3,546,209 |
| Loss per share, basic and diluted | $1.20 | $1.74 |
| Cash provided by operating activities | $365,179 for nine months |
The quarter’s operating expenses included a $2.15 million oil and gas property impairment; the nine-month impairment was $2.98 million. The impairment reflected lower estimated realized commodity prices and downward adjustments to economically recoverable proved reserves. No formal profit margin is stated; the impairment was the principal driver of the substantial operating and net losses.
- Cash and liquidity: Cash was $35,423 at December 31, down from $96,084 at March 31, 2015. Working capital was negative $118,065, versus positive $166,650 at March 31.
- Debt: Long-term debt was $5.85 million under a $6.3 million revolving facility; reported availability was $400,000. The floating rate was 2.92% at quarter-end, and the facility matures November 30, 2020. The company reported covenant compliance. A $50,000 principal payment in January 2016 reduced debt to $5.8 million.
- Cash flows and investment: Operating cash flow fell 61% year over year. Nine-month investing cash outflow was $325,840, including $1.08 million of oil and gas property additions and $782,363 of property sale proceeds. Financing used $100,000 net, and cash declined $60,661.
- Balance sheet: Total assets were $17.28 million, down from $21.47 million at March 31; stockholders’ equity was $9.76 million, down from $13.21 million. Deferred tax liabilities declined from $660,870 to zero; management reported a $655,551 deferred tax asset fully offset by a valuation allowance.
Material changes versus prior period
- Nine-month oil and gas revenue declined 30%; total operating revenue declined 30%. Lower oil and gas prices more than offset higher production volumes. For the quarter, oil revenue fell 27% and gas revenue fell 39%; oil and gas volumes rose 21% and 12%, respectively.
- For the nine months, oil’s average realized price fell 44% to $45.04 per barrel and gas’s fell 46% to $2.05 per Mcf. Production expense declined 14%, but DD&A rose 27% and interest expense rose 111% to $127,693.
- The prior-year periods included derivative gains of $80,120 for the quarter and $97,871 for the nine months; Mexco had no open crude oil derivative positions at December 31, 2015.
- In November, Mexco assigned a leasehold interest in 320 net acres in Upton County for $640,000 and retained a 1% overriding royalty interest. In January 2016 it sold 18.75 net acres of Howard County mineral interests for $145,000, effective February 1.
Outlook, commentary, and risks
Management said cash from operations and financing availability should provide adequate liquidity for the next fiscal year. It emphasized cost discipline, balancing capital expenditures with cash flow, and pursuing low-cost, long-lived reserves. Combined production and G&A costs declined to $3.50 per Mcfe for the quarter and $3.71 per Mcfe for the nine months, compared with $4.87 and $4.85, respectively, a year earlier. No specific earnings or production guidance was provided.
Management described drilling and development activity, including royalty wells in Upton and Reagan counties and planned working-interest wells in Lea County, New Mexico. It said project costs would be funded, to the extent possible, from cash and operating cash flow, with borrowing or equity issuance potentially used for the remainder; asset sales and farmouts were also under evaluation.
- Commodity prices are the main market risk. Management reported WTI at $33.50 per barrel and Henry Hub gas at $2.28 per MMBtu on December 31. A $10-per-barrel oil-price change would have affected nine-month pretax results by $291,600; a $1-per-Mcf gas-price change would have affected them by $310,994.
- Lower prices may reduce cash flow, reserves and the borrowing base, constrain capital spending and financing, and trigger further full-cost property write-downs. Mexco noted greater sensitivity to natural gas prices because most production and reserves are gas.
- Interest-rate risk: a one-percentage-point change in rates would change annual pretax income by approximately $58,500 at the reported debt balance. The credit agreement prohibits cash dividends and secures borrowings with substantially all oil and gas properties.
- Management stated there were no material changes to previously disclosed risk factors, no material changes in internal control during the period, and no known material legal proceedings. Results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether commodity prices and reserve estimates lead to additional impairments or changes in the bank borrowing base.
- Liquidity and covenant headroom, particularly given negative working capital, low cash, and only $400,000 of reported facility availability.
- Production, realized prices, operating costs, and cash returns from the identified drilling, royalty, and leasehold projects.
- Timing and proceeds from asset sales, including the reported $145,000 subsequent mineral-interest sale, and intended use of proceeds.
- Whether the fully valued deferred tax asset can ultimately be realized; management said realization was more likely than not not to occur at the reporting date.