Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended June 30, 2023; comparisons are with the three months ended June 30, 2022 unless otherwise noted. Mexco acquires, explores, develops, and produces oil and natural gas, primarily through non-operated interests. Its interests are concentrated in West Texas and southeastern New Mexico, with properties in 14 states.
Financial performance and position
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Total operating revenue | $1.748 million | $2.450 million |
| Operating income | $565,000 | $1.330 million |
| Net income | $466,000 | $1.299 million |
| Basic / diluted EPS | $0.22 / $0.21 | $0.60 / $0.59 |
| Operating cash flow | $1.616 million | $1.496 million |
| Capital spending on oil and gas properties | $543,000 | $2.321 million |
- Total revenue declined 29%; oil and gas sales were $1.715 million, down 29%. Oil revenue fell 8% and gas revenue fell 67%.
- Oil volumes increased 37% to 19,528 barrels, while realized oil price fell 33% to $73.21 per barrel. Gas volumes rose 9% to 141,578 Mcf, while realized gas price fell 69% to $2.02 per Mcf.
- Operating expenses rose 6% to $1.184 million. Production costs declined 20% to $349,000, but DD&A increased 26% to $486,000 and general and administrative expense rose 17% to $341,000.
- Operating margin was approximately 32% versus 54% a year earlier; net margin was approximately 27% versus 53% (calculated from reported figures).
- Cash increased $1.141 million to $3.376 million. Working capital was $4.091 million, up $615,000 from March 31, 2023. Total assets were $18.201 million and stockholders’ equity was $17.142 million.
- No credit-facility balance was outstanding at quarter-end; $1.5 million was available. The facility matures March 28, 2026. Total liabilities were $1.058 million, including lease liabilities and asset-retirement obligations.
Material changes and capital allocation
- Net income fell 64%, mainly reflecting lower oil and gas prices and higher operating expenses, partly offset by higher production volumes.
- Operating cash flow increased despite lower earnings, with management citing noncash expenses and reduced accounts receivable as key contributors. Investing cash outflow was much lower than the prior-year quarter, and the company received approximately $280,000 from property sales.
- The company paid a special dividend of $213,600, or $0.10 per share, in May 2023. In June it authorized up to $1 million for share repurchases; none occurred during the quarter. It repurchased 9,500 shares for $116,707 in July.
- In June, the company acquired small royalty interests in six wells for $20,000, effective July 1.
Outlook, risks, and other disclosures
- Management planned participation in 40 Delaware Basin horizontal wells during fiscal 2024 at an estimated aggregate cost of approximately $1.7 million. It also expected to spend approximately $450,000 to complete 21 wells drilled in fiscal 2023, with about $225,000 spent to date. Additional July drilling and completion expenditures are disclosed in the filing.
- Management says project costs are expected to be funded primarily from existing cash and operating cash flow, with possible use of the credit facility or sales of non-core properties.
- Commodity prices are the principal market risk. Management notes that lower prices could adversely affect earnings, liquidity, financing capacity, reserves, and capital spending, and could trigger a noncash full-cost ceiling write-down. The company reported no oil or gas hedges and states that entering hedging arrangements requires lender approval.
- One purchaser represented 59% of oil and gas receivables ($531,435) at June 30, 2023; receivables are generally unsecured. The company reports no significant credit losses.
- The credit agreement includes financial covenants and restricts cash dividends and certain hedging without lender approval. The lender approved the special dividend. No material change in previously disclosed risk factors or material legal proceedings was reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing cautions that interim results are not necessarily indicative of full-year results and that estimates, particularly oil and gas reserves, may differ from actual outcomes. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether planned drilling and completion spending proceeds as expected and how those projects affect production and cash flow.
- Whether realized oil and gas prices, production volumes, and margins stabilize or continue to weaken.
- The terms, lender availability, and covenant headroom of the $1.5 million undrawn credit facility, including the effect of any future borrowing.
- The impact of the July share repurchase and any subsequent capital returns on cash available for operations and development.
- Reserve estimates and potential full-cost impairment exposure, along with the concentration of receivables with the largest purchaser.