Business Context and Reporting Period
Company: Mexco Energy Corporation (formerly Miller Oil Company)
Reporting Period: Fiscal year ended March 31, 1996
Industry: Oil and gas exploration, development, and production.
Operations: The company operates exclusively in the United States, with a primary concentration in Texas. It holds leasehold rights covering over 59,928 gross acres (2,207 net acres) and operates 7 of its 875 producing wells, while third parties operate the remainder. The company has two part-time employees and no foreign operations.
Key Financial Metrics
| Metric | 1996 | 1995 | 1994 |
|---|---|---|---|
| Total Revenues | $834,073 | $573,921 | $1,579,879 |
| Oil & Gas Income | $798,589 | $543,267 | $374,322 |
| Net Income | $200,606 | $104,843 | $1,028,718 |
| Earnings Per Share | $0.15 | $0.09 | $0.88 |
| Net Cash from Operating Activities | $396,409 | $255,649 | $1,302,760 |
| Total Assets | $2,612,039 | $1,951,896 | $1,868,369 |
| Total Liabilities | $66,894 | $107,357 | N/A |
| Long-Term Debt | $0 | $0 | $0 |
| Cash and Equivalents | $172,112 | $220,974 | $739,453 |
Production Data (1996): 29,058 barrels of oil and 186,419 MCF of gas.
Reserves (Proved): 424,737 barrels of oil and 1,920,107 MCF of gas (Standardized measure of discounted future net cash flows: $4,181,000).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 45% to $834,073, driven by a 47% increase in oil and gas income ($255,322 increase). This was due to a 33% increase in production volumes and higher average sales prices (Oil: $17.45/bbl vs. $16.40/bbl; Gas: $1.57/MCF vs. $1.32/MCF).
- Profitability: Net income nearly doubled to $200,606 compared to $104,843 in 1995. The 1994 net income of $1.03 million was anomalously high due to a one-time litigation settlement of $1.16 million.
- Costs: Production costs rose 31% to $272,892 due to new wells. Depreciation, depletion, and amortization (DD&A) increased 54% to $262,392 reflecting increased asset base.
- Capital Structure: The company completed a private placement in July 1995, issuing 250,000 shares for $500,000. This capital was used for property acquisition and development. The company maintains no long-term debt.
- Reserves: Proved reserves more than doubled from 1995 levels, primarily due to purchases of producing properties and development activities.
Outlook, Risks, and Contingencies
- Liquidity: The company generated positive cash flow from operations ($396,409) but used significant cash for investing activities ($945,271) to acquire properties. It holds a $50,000 unsecured line of credit for plugging bonds.
- Market Risks: The company is highly sensitive to oil and gas price fluctuations. Management notes the industry is speculative and competitive, with risks including blowouts, fires, and uninsured losses.
- Legal Proceedings: The company is a plaintiff in a lawsuit regarding a gas contract set for trial in July 1996. Counsel cannot predict the outcome, but success could result in significant income. A previous environmental lawsuit was settled in 1995 with no liability to the company.
- Related Party Transactions: The majority shareholder (Nicholas C. Taylor, owning ~75%) owns interests in wells operated by Mexco. Mexco bills the shareholder for operating expenses ($106,198 in 1996).
- Dividends: No dividends have been paid; future payments depend on earnings and capital needs.
Investor Verification Checklist
- Reserve Estimates: Verify the independent engineer's reserve report (T. Scott Hickman & Associates) as the company's valuation relies heavily on these projections.
- Related Party Concentration: Confirm the extent of the majority shareholder's control and the terms of the administrative service agreements.
- Litigation Outcome: Monitor the July 1996 trial regarding the gas contract dispute for potential upside or downside impact.
- Capital Expenditure Sustainability: Assess whether operating cash flows are sufficient to fund the aggressive acquisition strategy without further equity dilution.
- Customer Concentration: Note that Navajo Crude Oil Marketing Company purchased 66% of crude oil production in 1996.