MXC

MEXCO ENERGY CORP - 10-Q Summary

Business Context and Reporting Period

Mexco Energy Corporation is an independent oil and gas exploration and production company with interests primarily in West Texas and ten other states. This Form 10-Q covers the quarterly period ended December 31, 2009, and the nine-month period ended on the same date. The company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenue for the nine months ended Dec 31, 2009, decreased 46% to $2.27 million from $4.21 million in the prior year. This was driven by a significant drop in commodity prices (average gas price fell from $7.45 to $3.34 per mcf; average oil price fell from $96.89 to $63.44 per bbl), despite a 7% increase in gas production and 3% increase in oil production.
• Profitability: Net income dropped 78% to $257,492 for the nine-month period, compared to $1.18 million in the prior year. However, the company reported a net income of $167,145 for the quarter ended Dec 31, 2009, an increase from $131,501 in the same quarter of 2008.
• Expense Management: Production costs decreased 16% year-over-year for the nine-month period due to lower production taxes. Interest expense decreased 62% due to reduced borrowings and lower interest rates.
• Tax Benefit: The company recorded a significant deferred income tax benefit of $259,753 for the nine months ended Dec 31, 2009, largely due to a change in the statutory depletion carryforward following the completion of the 2008 tax return.
• Liquidity: Working capital increased to $377,348 from $221,989 at the beginning of the fiscal year, primarily due to a reduction in accounts payable. Cash on hand decreased by $55,730 during the period.

Outlook, Risks, and Management Commentary

• Capital Strategy: Management continues to focus on acquiring royalties in areas with development potential and participating in joint ventures. Capital expenditures for the nine months were $630,241 ($621,870 for oil and gas properties).
• Debt Facility: The company maintains a $5.0 million revolving credit facility with Bank of America. As of Dec 31, 2009, the outstanding balance was $990,000 with $3.91 million available. The facility matures on January 31, 2011, and prohibits cash dividends.
• Market Risks: The company is highly sensitive to fluctuations in oil and natural gas prices. It has no hedging arrangements in place. A $1 decrease in gas price would reduce revenue by approximately $422,343 for the nine-month period.
• Future Projects: The company plans to drill three additional wells in Reagan County, Texas, in January 2010, with an estimated cost of $96,000 for its working interest.
• Controls: Management concluded that disclosure controls and procedures were effective as of December 31, 2009.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current WTI and Henry Hub prices against the company's production mix to assess immediate revenue impact.
• Debt Covenants: Confirm continued compliance with the $5.0 million credit facility covenants, specifically regarding the borrowing base and dividend restrictions.
• Reserve Valuation: Review the impact of the new SEC "Modernization of Oil and Gas Reporting" rules on the company's reserve disclosures and valuation.
• Tax Attributes: Validate the utilization of the $3.4 million statutory depletion carryforward and $1.68 million net operating loss carryforward.
• Joint Venture Costs: Monitor the capital calls and production results from the new wells in Andrews and Reagan Counties.