Mexco Energy Corporation — Form 10-Q Summary
Business context and period: Mexco explores, develops and produces oil, natural gas, condensate and natural gas liquids, primarily in West Texas, with properties in 12 states. This unaudited report covers the three months ended June 30, 2014, the first quarter of fiscal 2015; comparisons are with the three months ended June 30, 2013 unless otherwise noted.
Key financial results
| Metric | Quarter ended June 30, 2014 | Prior-year quarter |
|---|---|---|
| Total operating revenue | $1.018 million | $996,525 |
| Operating income | $51,069 | $70,469 |
| Net income | $19,054 | $16,131 |
| Basic and diluted EPS | $0.01 | $0.01 |
| Cash from operations | $425,159 | $409,988 |
| Capital additions to oil and gas properties | $284,223 | $463,324 |
- Oil and gas sales rose 2% to $1.007 million. Oil revenue increased 1.2%; gas revenue increased 4.2%. Higher realized prices offset lower production volumes, particularly for gas.
- Operating expenses increased 4% to $966,765. Production costs were nearly flat; DD&A rose 2%, and general and administrative expense rose 12% to $350,337, primarily from accounting, salary and insurance costs. Operating margin declined to approximately 5.0% from 7.1%.
- Net income increased 18% despite lower operating income, principally because the quarter included a $17,381 deferred tax benefit versus a $6,818 tax expense a year earlier. Management attributed the tax change to an increase in statutory depletion carryforward. Net margin was approximately 1.9%, compared with 1.6%.
- Derivative losses were $33,628, including $19,489 realized and $14,139 unrealized, compared with $27,392 in the prior-year quarter. Interest expense fell 22% to $15,770 as borrowings declined.
Financial position and liquidity
- At June 30, 2014, cash was $152,498, current assets were $823,002 and current liabilities were $384,208. Working capital was $438,794, down $83,422 from March 31, 2014.
- Total assets were $17.90 million and stockholders’ equity was $13.44 million. Long-term debt was $2.30 million, down $125,000 during the quarter. The revolving facility had a $4.9 million borrowing base and reported availability of $2,444,333; the company was in compliance with its covenants.
- Operating cash flow increased about 4%. Investing activities used $303,743, including $284,223 for oil and gas property additions; financing activities used $125,000 for debt repayment. Cash decreased $3,584 to $152,498.
- The credit facility matures November 30, 2015; no principal payments were anticipated through that date. It bears interest at daily floating BBA LIBOR plus 2.50 percentage points (2.6495% at quarter-end), and prohibits cash dividends.
Changes, outlook, risks and notable items
- Mexco reported active drilling and development participation in Texas and New Mexico, including Wolfcamp, Bone Spring, Penn Detrital, Grayburg and San Andres projects. Several wells were producing, while others were being drilled, completed or planned. Management’s strategy emphasizes acquiring and developing properties with potential for long-lived, low-cost production.
- Management stated that operating cash flow and available financing should provide adequate liquidity for the next fiscal year. The company expects to fund projects, to the extent possible, from cash and operating cash flow, with credit-facility borrowings or equity sales as potential additional sources. No numerical earnings, production or capital-spending guidance was provided.
- Commodity-price volatility is the principal business risk. Mexco warned that lower oil and gas prices could reduce cash flow, reserves, liquidity, borrowing capacity and access to capital, and could trigger a full-cost property write-down. The company said its results are more sensitive to gas prices because most production and reserves are natural gas.
- At quarter-end, crude-oil swaps covered 4,500 barrels for July 2014–March 2015 at $90 per barrel. The swaps are not designated as accounting hedges, so fair-value changes affect earnings. The derivative position was a $59,121 net liability. Management estimated that a 10% change in forward curves would change that liability by about $46,000.
- The floating-rate debt exposes pretax income to an estimated $23,000 annual change for a one-percentage-point interest-rate move. A $1 per barrel oil-price move would change quarterly pretax income by $6,743; a $1 per Mcf gas-price move by $88,061, based on quarter production.
- There were no material changes to previously disclosed risk factors, no reported material legal proceedings, and no defaults. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether current well completions and planned 2014 drilling deliver production and cash flow consistent with expectations, and what additional capital commitments may arise.
- Whether gas and oil prices, production volumes and reserve estimates support operating cash flow, borrowing-base availability and the carrying value of oil and gas properties.
- How the $90-per-barrel swaps affect realized prices and earnings through March 2015, including the exposure if production differs from contracted volumes.
- The company’s ability to meet debt obligations at the November 2015 facility maturity, maintain covenant compliance and fund projects while preserving liquidity.
- The sustainability of reported net income, given that the year-over-year increase depended on a deferred tax benefit while operating income declined.