Mexco Energy Corporation — Form 10-Q Summary
Business context and period. Mexco explores, develops and produces oil, natural gas, condensate and natural gas liquids, primarily through non-operated interests. Its interests are concentrated in West Texas and southeastern New Mexico, with properties in 14 states. This unaudited report covers the three and nine months ended December 31, 2022, the third quarter and first nine months of fiscal 2023; comparisons are with the corresponding 2021 periods.
Financial performance and position
| Metric | Three months ended Dec. 31, 2022 | Prior year | Nine months ended Dec. 31, 2022 | Prior year |
|---|---|---|---|---|
| Operating revenue | $2.581 million | $1.595 million | $7.356 million | $4.413 million |
| Operating income | $1.310 million | $0.789 million | $3.880 million | $1.936 million |
| Net income | $1.245 million | $0.753 million | $3.755 million | $1.857 million |
| Diluted EPS | $0.56 | $0.35 | $1.70 | $0.89 |
| Operating cash flow | Not provided separately | Not provided separately | $4.351 million | $2.729 million |
- Quarterly revenue increased 62%; quarterly net income rose 65%. For the nine-month period, revenue increased 67% and net income rose 102%.
- Operating margin was approximately 50.8% for the quarter versus 49.5% a year earlier, and 52.7% for nine months versus 43.9%. The filing attributes stronger results mainly to higher production volumes and commodity prices.
- Nine-month oil and gas sales were $7.184 million, up 64%. Oil volumes rose 9% and average realized price rose 35% to $94.06 per barrel. Gas volumes rose 44% and average realized price rose 46% to $6.28 per Mcf.
- Costs also increased: nine-month production expense rose 45% to $1.308 million; depreciation, depletion and amortization rose 56% to $1.268 million; and general and administrative expense rose 19% to $0.877 million. Management cited higher production taxes and marketing charges, production and amortization, and compensation and other administrative costs.
- Nine-month investing cash outflow was $4.969 million, principally $4.761 million of oil and gas property additions. Cash declined $0.740 million to $0.631 million. Working capital was $2.468 million, approximately unchanged from March 31, 2022.
- There was no credit-facility balance at December 31, 2022; $1.5 million remained available under the facility. The facility’s stated maturity was March 28, 2023. Total liabilities were $1.002 million, including $0.736 million of asset retirement obligations and $0.089 million of lease liabilities. No conventional funded debt was outstanding at period-end.
Changes, outlook and notable items
- Oil and gas property additions increased substantially from the prior-year nine-month period ($4.761 million versus $1.214 million). Mexco reported participation in multiple horizontal drilling and completion projects in the Delaware and Midland Basins, as well as a $0.939 million acquisition of royalty interests in Eagle Ford-area wells.
- Management planned to participate in 50 horizontal wells for fiscal 2023 at an estimated aggregate cost of approximately $4.0 million. This is a company plan, not a stated earnings or production forecast. The filing says remaining project costs may be funded from cash flow, cash balances, credit-facility borrowings or sales of non-core properties.
- In October 2022, Mexco committed to an approximately 2% interest in an LLC investing in Ohio mineral interests, for a $2.0 million commitment; $0.2 million had been funded by December 31, 2022.
- The board authorized up to $250,000 for share repurchases. Mexco repurchased 12,416 shares for $168,260 during the nine months; it reported an additional 1,300 shares purchased for $16,359 in January 2023.
- Commodity prices are a major risk. Management reported that a $10-per-barrel change in average oil price would have changed nine-month pretax income by about $500,520, and a $1-per-Mcf change in average gas price by about $394,293. One purchaser accounted for 61% of oil and gas receivables ($1.255 million); receivables generally are not collateralized.
- Federal deferred tax assets of $202,543 were fully offset by a valuation allowance because management concluded they were more likely than not not to be realized. Income-tax expense reported for the periods consisted of state income tax.
- The company reported no material change in risk factors, no known material environmental or other legal proceedings, and effective disclosure controls as of December 31, 2022. Its oil and gas interests are operated by others, and reserve estimates and related depletion calculations involve significant judgment.
Important facts for investors to verify
- Whether the credit facility was renewed, replaced or repaid at its March 28, 2023 maturity, and whether borrowing-base availability or covenants changed.
- Actual spending, completion timing and production results versus the 50-well, approximately $4.0 million fiscal 2023 plan; reported initial well rates are not necessarily indicative of sustained production.
- Funding and expected returns for the $2.0 million Ohio mineral-interest commitment, including amounts funded after December 31, 2022.
- Subsequent cash, working-capital and receivables trends, particularly given the decline in cash and the large single-purchaser receivable concentration.
- Commodity-price exposure, reserve estimates, production trends, and the effect of higher production and DD&A costs on margins and cash generation.
- Repurchase-program activity and remaining authorization after the reported January 2023 purchases.