Mexco Energy Corporation — FY2012 Form 10-K
Period note: The filing covers the fiscal year ended March 31, 2012, not calendar-year 2010 Q4. It also reports quarterly results for FY2012, including the quarter ended March 31, 2012.
Business context and reporting period
Mexco is a small independent U.S. oil and gas company, with most activity in West Texas and interests across 12 states. It acquires, explores, develops and produces oil and gas, and shifted its emphasis from natural gas toward oil in 2011. Most properties are operated by third parties. Nicholas C. Taylor, chairman and CEO, beneficially owned approximately 44% of the common stock.
Financial and operating results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total operating revenue | $3.240 million | $3.162 million |
| Operating profit | $330,678 | $176,101 |
| Net income | $329,993 | $155,696 |
| Net income per diluted share | $0.16 | $0.08 |
| Cash flow from operations | $1.573 million | $1.335 million |
| Oil and gas capital additions | $1.642 million | $2.435 million |
- Operating margin increased to approximately 10.2% from 5.6%; net margin rose to approximately 10.2% from 4.9%.
- Oil and gas sales were $3.224 million, up 2%. Oil revenue increased 36% as production rose 14% and average price rose 19% to $93.12/bbl. Gas revenue declined 22% as volume fell 14% and average price fell 10% to $3.57/Mcf.
- Oil production increased to 19,442 barrels; gas production decreased to 395,649 Mcf. Production costs fell 10% to $926,215, while general and administrative expense increased 8% to $950,690, partly due to higher stock-based compensation.
- Cash and equivalents were $498,681; working capital was $476,960, versus $470,253 a year earlier. Current assets were $879,058 and current liabilities $402,098.
- Long-term debt was $1.7 million, down from $1.8 million; the $4.9 million revolving facility had $3.2 million available. Interest rate was 2.74% at year-end, with maturity November 30, 2013. The company reported compliance with its covenants.
- Cash increased $319,610. Investing cash use was $1.171 million, including $1.642 million of property additions and $471,543 of proceeds primarily from a leasehold-interest sale. Financing cash use was $82,780.
Reserves and material changes
- Proved reserves were 346,350 barrels of oil and 8.445 Bcf of gas, totaling 10.523 million Mcfe, compared with 10.498 million Mcfe in FY2011. Gas represented approximately 80% of proved reserves.
- PV-10 was $24.95 million, up from $22.65 million; the after-tax standardized measure was $19.36 million, up from $17.65 million. These reserve measures are estimates, not fair market value.
- Proved undeveloped reserves were approximately 4.0 Bcfe, or 38% of proved reserves. FY2012 reserve additions included extensions and discoveries, acquisitions and revisions; development converted about 974,000 Mcfe of PUD reserves to developed reserves.
- Reserve estimates used average prices of $93.75/bbl oil and $3.83/Mcf gas, compared with $77.27/bbl and $3.88/Mcf in FY2011. The higher oil price supported reserve value, while gas pricing was slightly lower.
- Net income more than doubled, aided by higher oil sales and lower production costs and DD&A. The $27,960 income tax benefit also contributed; FY2011 had a $15,596 tax benefit.
Outlook, risks and unusual items
- Management expected cash flow from operations and financing availability to provide adequate liquidity for the next fiscal year. It planned continued development and acquisitions, including six potential Fuhrman-Mascho drilling sites in FY2013 and further operated and third-party PUD drilling. No quantified earnings or revenue guidance was provided.
- FY2012 fourth-quarter oil and gas revenue was $753,875, operating loss was $1,305, net income was $95,375 and diluted EPS was $0.04. The comparable FY2011 quarter had revenue of $776,469, operating profit of $88,177 and net income of $52,982.
- Key exposures include volatile commodity prices, particularly natural gas; reserve-estimate uncertainty; the risk of full-cost ceiling-test write-downs; financing and borrowing-base changes; development execution and third-party operator decisions; and environmental, hydraulic-fracturing and other regulatory requirements. Mexco had no commodity hedges at year-end.
- One purchaser accounted for 22% of FY2012 oil and gas revenue and 24% of oil and gas receivables. The company said it did not expect losing an individual customer to materially impair its ability to sell production.
- Asset retirement obligations were $663,279, including a $50,000 current portion. Unrecognized tax benefits were $677,000; disallowance could require additional tax payments. No material environmental capital expenditures or known material environmental claims were reported.
- The company repurchased 4,000 shares for $22,780 during FY2012. It paid no cash dividends and said none were anticipated; the credit agreement restricts dividends. Management judged internal control over financial reporting effective, but the auditor did not attest to that assessment.
Important facts for investors to verify
- Confirm the filing period: FY2012 ended March 31, 2012; the request metadata’s “2010 Q4” does not match this 10-K.
- Review the independent reserve report, PUD development schedule and the assumptions underlying PV-10 and standardized-measure estimates, especially gas prices and development costs.
- Check the credit agreement’s borrowing-base redeterminations, covenants, availability and subsequent debt balance; the filing reports $1.475 million outstanding at June 29, 2012.
- Assess whether production declines in gas and the concentration of reserves and revenue in natural gas affect future cash generation, and monitor the major purchaser concentration.
- Review the $677,000 unrecognized tax-benefit exposure, asset-retirement obligations and any subsequent developments in environmental or regulatory matters.