Business context and reporting period
Mexco Energy Corporation is an independent U.S. oil and gas exploration, development and production company, focused primarily on the Permian Basin and holding interests in 13 states. This Form 10-K covers the fiscal year ended March 31, 2016; it is not a calendar-year or standalone fourth-quarter filing. Most properties are operated by third parties.
Financial and operating results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total operating revenue | $2.422 million | $3.390 million |
| Net loss | $3.980 million | $341,000 |
| Operating loss | $4.470 million | $541,000 |
| Cash from operations | $175,502 | $1.177 million |
| Cash and cash equivalents at year-end | $34,013 | $96,084 |
| Working capital | $23,150 | $166,650 |
| Long-term debt | $5.580 million | $5.950 million |
- Oil and gas sales fell 29% to $2.384 million. Oil production rose 32% to 38,930 barrels and gas production rose 11% to 407,939 Mcf, but average realized prices declined 41% for oil to $41.07/bbl and 44% for gas to $1.92/Mcf.
- Production expense was $1.144 million; production cost per equivalent Mcf decreased to $1.47 from $1.87, while production cost per sales dollar increased to $0.40 from $0.31.
- A $2.984 million noncash impairment of oil and gas properties, driven by lower estimated realized prices and reserve economics, was the principal unusual charge. DD&A was $1.573 million and interest expense increased 73% to $171,375.
- Operating cash flow declined 85%. Investing activities provided $132,427, including property-sale proceeds; financing activities used $370,000 net to reduce debt. Cash declined $62,071 during the year.
- At March 31, the $5.63 million revolving facility was effectively fully drawn, with no availability. It is secured by substantially all oil and gas properties and matures November 30, 2020; no principal payments were anticipated before maturity. The stated rate is floating LIBOR plus 3 percentage points.
- Proved reserves were 2.051 million Boe, up from 1.708 million Boe; 47% were proved undeveloped. PV-10 fell to $16.1 million from $23.7 million, and the standardized measure fell to $13.9 million from $18.9 million. Reserve pricing assumptions declined 44% year over year for both oil and gas.
Material changes versus prior period
Despite higher production and a larger proved reserve estimate, sharply lower commodity prices reduced sales and reserve values. The impairment drove the net loss substantially higher than FY2015. The company also recorded a valuation allowance against its net deferred tax asset, citing cumulative losses and uncertainty that the asset would be realized. Debt declined by $370,000 net, but cash, working capital and operating cash flow weakened.
Fiscal 2016 fourth-quarter oil and gas revenue was $432,723 and net loss was $433,476; the third quarter included the largest quarterly loss, principally reflecting the impairment charge.
Outlook, risks and unusual items
- Management’s FY2017 priorities are operating efficiencies and cost reductions, divestiture of non-core assets, and matching capital spending to cash flows to limit new borrowing, reduce debt and preserve liquidity. Management believed operating cash flow would provide adequate liquidity for the next fiscal year; no quantified revenue, earnings or production guidance was provided.
- Management reported covenant compliance at March 31, 2016. The amended facility imposes minimum EBITDA and interest-coverage tests beginning in FY2017; failure could permit acceleration and foreclosure. Commodity-price or reserve declines could also reduce the borrowing base.
- Oil and gas prices, reserve-estimation uncertainty, future development funding, reliance on third-party operators and transportation infrastructure, and full-cost ceiling-test impairments are key risks. Environmental and hydraulic-fracturing rules may raise costs; management reported no known environmental claims expected to require material FY2017 capital expenditures.
- Two customers represented 18% and 14% of FY2016 oil and gas revenue. The company had no open oil swap positions at year-end and did not hedge FY2016 oil production.
- After year-end, Mexco reported non-core property sales of $518,760, effective April 1, 2016, with $270,000 applied to debt; it also reported a separate April property sale of $60,000, with proceeds applied to the credit line. A royalty-underpayment lawsuit settlement was expected to provide $154,289: $123,394 cash and a $30,894 interest-free note due in three years.
- The company reported no known material legal proceedings. Its independent auditor gave an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether Mexco can meet the facility’s stepped-up EBITDA and interest-coverage covenants while the credit line remains nearly fully drawn.
- How commodity prices, production and the next reserve-based borrowing-base review affect liquidity, impairment risk and the ability to fund development.
- The timing and economics of planned PUD drilling, including the 67 projected wells and the reported $9.6 million of future development costs.
- Proceeds, debt reductions and any remaining obligations from the post-year-end asset sales, plus collection and payment terms for the royalty settlement.
- Whether management’s liquidity expectation is supported by subsequent operating cash flow, working-capital trends and actual commodity prices.