Business Context and Reporting Period
Mexco Energy Corporation filed its Form 10-Q for the quarterly period ended September 30, 2010. The Company is engaged in the exploration, development, and production of natural gas, crude oil, condensate, and natural gas liquids (NGLs), with primary operations in West Texas and interests in twelve states. The Company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Six Months Ended Sep 30, 2010 |
|---|---|---|
| Total Operating Revenue | $788,639 | $1,625,032 |
| Net Income | $70,040 | $75,816 |
| Earnings Per Share (Diluted) | $0.04 | $0.04 |
| Operating Cash Flow (6 months) | $597,867 | |
| Cash and Cash Equivalents | $142,760 (as of Sep 30, 2010) | |
| Long-Term Debt | $2,150,000 (outstanding balance) | |
| Working Capital | ~$421,647 |
Material Changes vs. Prior Period
- Revenue Growth: Oil and gas revenue increased 6% for the quarter and 16% for the six-month period compared to the prior year, driven by higher oil and gas prices and increased oil production volumes.
- Production Volume: While oil volumes increased (2.1% QoQ, 3.2% YoY), natural gas volumes declined significantly (21.6% QoQ, 17.6% YoY) due to natural decline and non-operated wells shut-in for repairs.
- Profitability: Net income decreased to $70,040 for the quarter (from $158,350) and $75,816 for the six months (from $90,347). This decline was primarily due to a reduction in deferred income tax benefits compared to the prior year.
- Acquisitions: The Company acquired Southwest Texas Disposal Corporation (STDC) on September 30, 2010, for $478,000, and purchased overriding royalty interests in the Haynesville trend area for approximately $1.65 million.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash flow from operations and available financing will provide adequate liquidity for the next fiscal year. The Company has a $5.0 million revolving credit facility with $2.75 million available as of September 30, 2010.
- Capital Allocation: The Company continues to focus on acquiring royalties with low-cost operations, specifically in the Haynesville Shale area, which is expected to be a major gas resource.
- Market Risk: The Company is highly sensitive to commodity price fluctuations. It has no hedging arrangements in place. A $1.00 change in the average gas price would impact net income by approximately $235,944 for the six-month period.
- Debt Covenants: The credit agreement prohibits the payment of cash dividends. The Company is currently in compliance with all financial covenants.
Investor Verification Checklist
- Gas Production Decline: Verify the reasons for the 21.6% drop in gas production volumes and the timeline for the return of shut-in wells to production.
- Acquisition Integration: Confirm the revenue contribution from the newly acquired Southwest Texas Disposal Corporation and Haynesville royalties in the upcoming quarter.
- Commodity Price Sensitivity: Assess the impact of current WTI and Henry Hub price trends on the Company's borrowing base and future capital expenditure plans.
- Debt Maturity: Note the credit facility maturity date was extended to November 30, 2012, but verify any potential future amendments or refinancing needs.