MXC

Business Context and Reporting Period

Mexco Energy Corporation is an independent oil and gas company incorporated in Colorado, primarily engaged in the acquisition, exploration, and development of properties in the United States, with a concentration in West Texas. The company focuses on natural gas and crude oil resources, aiming to increase production and profit margins through cost reductions. This Form 10-K covers the fiscal year ended March 31, 2001.

Key Financial Metrics

Production and Pricing: Oil production decreased slightly to 18,545 barrels, while gas production decreased to 503,773 Mcf. However, average sales prices increased significantly: oil rose to $28.67 per barrel (from $21.54) and gas rose to $5.08 per Mcf (from $2.33).

Material Changes Versus Prior Period

• Revenue Surge: Operating revenues increased by 84% ($1.41 million) compared to fiscal 2000. This was driven primarily by a 33% increase in average oil prices and a 118% increase in average gas prices, which offset a 4% decline in oil production and a 7% decline in gas production.
• Profitability: Net income increased by 291% to $1.54 million. Operating income rose from $498,384 to $1.88 million.
• Debt Reduction: Total debt was reduced by 50% to $600,000, as the company used operating cash flow to repay $600,000 in bank debt.
• Expense Increases: General and administrative expenses increased by 44% ($95,406), attributed to higher salaries, stock option compensation for consultants, and engineering costs.
• Reserve Growth: Proved reserves increased significantly, with the present value of estimated future net revenues rising from $6.14 million in 2000 to $15.99 million in 2001, largely due to higher commodity prices and property acquisitions.

Guidance, Outlook, and Risks

Management Commentary and Outlook: Management believes the company can maintain adequate liquidity for the next fiscal year. The company continues to focus on acquiring producing properties and re-entry prospects. A shortage of workover rigs has recently impeded the ability to increase production on some properties. The board has authorized up to $250,000 for share repurchases in fiscal 2002.

Risks and Contingencies:

• Price Volatility: Revenues are highly dependent on volatile oil and gas prices. A 1-cent decrease in gas price would reduce pretax income by approximately $5,038.
• Concentration Risk: One customer, Sid Richardson Energy Services, Co., accounted for 39% of revenues in fiscal 2001.
• Legal Proceedings: The company is a plaintiff in two class action lawsuits regarding contract price disputes. While recoveries could be substantial, the outcome is uncertain.
• Operational Risks: Drilling activities carry risks of blowouts, fires, and unsuccessful wells. The company recently abandoned a well in Coke County, Texas, at a cost of approximately $34,400.
• Regulatory Environment: Operations are subject to extensive federal, state, and local regulations regarding environmental protection and production rates.

Investor Verification Checklist

• Verify the sustainability of current oil and gas prices, as the 2001 profit surge was driven primarily by price increases rather than production volume growth.
• Confirm the status of the two pending class action lawsuits regarding contract price disputes and potential recovery amounts.
• Review the impact of the shortage of workover rigs on the company's ability to execute its development plans and maintain production levels.
• Assess the concentration risk associated with Sid Richardson Energy Services, Co., which represents nearly 40% of total revenue.
• Monitor the company's ability to replace depleting reserves through acquisitions or drilling, given the reliance on purchased properties for reserve growth.