MEXCO Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2013; filed February 13, 2014. Mexco explores, develops and produces oil and natural gas, with most interests in West Texas and properties in 12 states. Financial statements are unaudited.
Financial performance and position
- Quarter: Revenue was $962,026, up 22% from $790,604. Net income was $88,659, or $0.04 per basic and diluted share, compared with a net loss of $39,580, or $0.02 per share, a year earlier. Operating income was $106,078 versus an operating loss of $78,469.
- Nine months: Revenue was $3.080 million, up 43% from $2.161 million. Net income was $298,841, or $0.15 per share, versus a net loss of $102,034, or $0.05 per share. Operating income was $388,916 versus an operating loss of $217,545.
- Oil and gas sales: Nine-month sales rose 42% to $3.041 million. Oil revenue increased 47%, reflecting higher volumes and prices; gas revenue rose 33% as higher prices more than offset lower volumes.
- Costs and margins: Nine-month production costs rose 15% to $913,418; depreciation, depletion and amortization rose 12% to $871,079; and general and administrative expense rose 12% to $873,573. Operating margin was approximately 12.6% of revenue, compared with a negative margin in the prior-year period.
- Cash flow: Operating activities provided $1.137 million, versus $503,359 in the prior-year period. Investing activities used $68,090, including $988,955 of oil and gas property additions and $963,344 of property-sale proceeds. Financing activities used $1.025 million, primarily to repay debt. Cash increased $44,067 to $210,473.
- Liquidity and debt: Working capital was $776,729, up from $309,180 at March 31, 2013. Long-term debt was $1.925 million, down from $2.950 million; the $4.9 million revolving facility had $2.819 million available at December 31. The facility matures November 30, 2015, and the company reported covenant compliance. No principal payments were anticipated through November 2015.
- Other balance-sheet items: Total assets were $17.147 million and stockholders’ equity was $13.355 million. Asset retirement obligations totaled $856,245, including a $50,000 current portion. Derivative liabilities totaled $38,023.
Changes, outlook, risks and unusual items
- Improved results reflected stronger oil and gas prices and increased oil production. Lower gas production partially offset the sales gains. Nine-month production expense also rose with production taxes and costs associated with additional working-interest wells.
- Mexco sold or assigned leasehold interests in Texas during the period, receiving $625,995 for an Upton County interest and $330,958 for its share of deeper rights in Reagan County. It retained royalty interests. The company also participated in drilling and development projects across Texas, New Mexico, Oklahoma and North Dakota; several wells were producing, while others remained under drilling or completion.
- Management said operating cash flow and available financing should provide adequate liquidity for the next fiscal year. It gave no quantified earnings, production or capital-spending guidance. Its stated strategy is to pursue acquisitions and development with a focus on reserves and low-cost operations.
- The company had an oil swap covering 8,000 barrels at $90 per barrel for December 2013–March 2015. Derivatives were not designated as accounting hedges: the nine-month derivative loss was $79,284, including $41,261 realized and $38,023 unrealized. The quarter recorded a $7,404 derivative gain. Swaps can create cash losses, limit benefit from higher oil prices, and expose the company to counterparty risk.
- Commodity prices are the principal market risk. Management warned that lower prices could reduce cash flow, reserves, borrowing capacity and access to capital, and could trigger a noncash full-cost impairment. The company said its results are more sensitive to gas prices because most production and reserves are natural gas. It also has floating-rate debt; a one-percentage-point rate change would affect annual pretax income by about $19,250 at the period-end balance.
- No material changes to previously disclosed risk factors were reported apart from derivative-related risks. The filing reported no material legal proceedings, no subsequent events requiring disclosure, and no material changes in internal control.
Important facts for investors to verify
- Whether stronger prices and oil production can sustain profitability, particularly given declining gas volumes and Mexco’s stated gas-price sensitivity.
- Current production, reserves, development costs and expected returns from the drilling projects described; the filing does not provide a clear project-level production or return forecast.
- Revolving-credit availability, borrowing-base terms, covenant compliance and debt maturity as operating and capital needs evolve.
- Oil-swap settlements, fair-value changes and counterparty exposure, including how actual production compares with hedged volumes.
- Potential effects of reserve revisions or commodity-price declines on full-cost impairment testing and future liquidity.