MEXCO ENERGY CORPORATION — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2014. The interim financial statements are unaudited. Mexco explores, develops and produces oil and natural gas, primarily in West Texas, with properties in 13 states.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Total operating revenue | $799,684 | $962,026 | $2,823,616 | $3,079,997 |
| Operating income (loss) | $(240,224) | $106,078 | $(129,027) | $388,916 |
| Net income (loss) | $(175,321) | $88,659 | $(70,011) | $298,841 |
| Basic and diluted EPS | $(0.09) | $0.04 | $(0.03) | $0.15 |
| Operating margin (calculated) | (30.0%) | 11.0% | (4.6%) | 12.6% |
| Net cash from operating activities | Not presented by quarter | $908,521 | $1,137,157 |
Quarterly oil and gas sales fell 17% to $790,335. Oil revenue declined 26.1% as the average oil price fell 31.8% to $63.06 per barrel, partly offset by higher oil volume. Gas revenue rose 1.9% as volume increased 6.6%, partly offset by a lower average price. For the nine months, oil and gas sales declined 8%: lower oil prices and gas production were partly offset by higher gas prices and oil production.
Production expense increased 29% in the quarter and 11% over nine months, primarily due to recently acquired working interests. DD&A rose 27% and 12%, respectively, reflecting a larger full-cost pool and, for the quarter, higher production. General and administrative expense increased 9% for the quarter and 8% for nine months. Derivative gains partly cushioned operating weakness: $80,120 for the quarter and $97,871 for nine months in 2014, versus $7,404 and a $79,284 loss, respectively, in 2013. The 2014 nine-month gain included $102,830 unrealized gains and $4,959 realized losses.
Liquidity, debt and investment
At December 31, 2014, cash was $105,133, working capital was approximately $354,702, and total assets were $21.68 million. Long-term debt was $5.75 million, up from $2.425 million at March 31, 2014; the company had $500,000 of stated facility availability. The revolving facility is $6.3 million, secured by substantially all oil and gas properties and subsidiary stock, and carried a 2.669% interest rate at quarter-end. Mexco reported compliance with all covenants. The agreement prohibits cash dividends.
For the nine months, operating cash flow was $908,521; investing activities used $4.28 million, including $4.29 million of oil and gas property additions; and financing provided $3.325 million net, primarily through credit-facility borrowings. Cash declined $50,949. The filing reports no off-balance-sheet debt or guarantees of another party’s debt. A February 13, 2015 amendment extended the facility maturity from November 30, 2016 to November 30, 2020.
Material changes, outlook and risks
Mexco completed several property acquisitions during the period, including royalty interests and non-operated working interests; the listed purchase prices total approximately $3.145 million. It also continued or planned horizontal drilling and development projects in Texas and New Mexico. Management’s stated strategy is to acquire and develop properties aimed at long-lived production and lower operating costs. It expects operating cash flow and financing availability to provide adequate liquidity for the next fiscal year, but gave no specific earnings, production or capital-spending guidance.
Commodity prices are a major risk: management reported WTI ranging from $49.75 to $103.75 per barrel and Henry Hub gas from $2.74 to $8.15 per MMBtu in the prior 12 months. The filing states that price declines could reduce cash flow, reserves, facility borrowing capacity and the ability to fund investment, and could trigger a noncash full-cost ceiling write-down. Mexco also faces floating-rate debt exposure; a one-percentage-point rate change would change annual pretax income by approximately $57,500 at the reported balance. Its open hedge position covered 1,500 barrels for January–March 2015 at $90 per barrel; derivative changes are recognized in earnings and may limit gains from rising oil prices. Management cautions that estimates, including reserves, may differ materially from actual results. No material change to previously disclosed risk factors was reported, and the company reported no known material legal proceedings.
Important facts for investors to verify
- Whether lower oil and gas prices, production costs and acquisition-related DD&A continue to pressure operating results and cash flow.
- Facility borrowing-base capacity, covenant compliance, liquidity and the terms and effect of the maturity extension.
- Production, cash returns and future development obligations associated with the acquired properties and drilling projects.
- The impact of derivative fair-value changes and the remaining swap position, including exposure if production differs from expectations.
- Reserve estimates and whether commodity-price declines could lead to a full-cost ceiling impairment.