Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the first quarter of fiscal 2014. The company explores, develops and produces oil, natural gas, condensate and NGLs, with most interests in West Texas and properties in twelve states. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 FY2014 | Comparable prior-year quarter |
|---|---|---|
| Total operating revenue | $996,525 | $627,121 |
| Operating profit (loss) | $70,469 | $(122,072) |
| Net income (loss) | $16,131 | $(63,217) |
| Basic and diluted EPS | $0.01 | $(0.03) |
| Cash provided by operations | $409,891 | $254,486 |
| Capital additions to oil and gas properties | $463,324 | $471,063 |
- Oil and gas sales rose 58% to $984,269. Oil revenue increased 43.7%, reflecting 33.4% higher volume and a 7.7% higher average price. Gas revenue increased 89.6%, reflecting 7.4% higher volume and a 76.3% higher average price.
- Operating margin was approximately 7.1% of revenue; net margin was approximately 1.6%. The prior-year quarter had an operating loss and net loss.
- Production costs rose 43% to $308,636, primarily due to higher production taxes and lease operating costs from acquired TBO properties. DD&A increased 27% to $295,033; general and administrative expense was $311,470, up 7%. Interest expense increased 85% to $20,130.
- The quarter included a $27,392 derivative loss: $21,057 unrealized and $6,335 realized. No derivatives were reported in the prior-year quarter. Income tax expense was $6,818, versus a $69,584 benefit.
- Cash declined $60,632 to $105,774, as operating cash flow did not cover investing outflows of $470,523. Working capital was $434,794, up from $309,180 at March 31, 2013.
- Long-term debt was $2.95 million, unchanged from March 31. The $4.9 million revolving facility had $1.95 million of availability; its stated rate was 2.695% at quarter-end and maturity was November 30, 2014. The company reported compliance with covenants and no required principal payments anticipated through November 2014.
- Total assets were $17.97 million and stockholders’ equity was $12.99 million at June 30, 2013. Asset retirement obligations totaled $827,127, including a $50,000 current portion; deferred tax liabilities were $860,017.
Changes, operations and outlook
- Management attributed the return to profitability mainly to higher oil and gas revenue, partly offset by higher operating costs. Operating cash flow increased 61% year over year.
- Drilling and completion activity continued across multiple formations and states. Several wells were producing, while others remained in drilling or completion. Four additional Grayburg/San Andres drill sites were planned for fiscal 2014.
- On August 13, 2013, Mexco agreed to assign a three-year leasehold interest in 417.33 net acres in Upton County, Texas, for $625,995, retaining a 1% royalty. The acreage has potential for Horizontal Wolfcamp production.
- Management stated that operating cash flow and available financing should provide adequate liquidity for the next fiscal year. No specific earnings or production guidance was provided. The company’s stated strategy is to pursue reserves with low-cost operations, particularly acquisitions and development of royalties and non-operated interests.
- Commodity-price volatility is a key risk: lower prices could reduce cash flow, reserve values, borrowing capacity and capital spending, and could trigger a full-cost ceiling write-down. The company said results are more sensitive to gas prices because most production and reserves are gas. A $1/Mcf gas-price change was estimated to change quarterly pretax results by $95,596; a $1/barrel oil-price change by $6,761.
- The company had an oil swap covering 11,000 barrels at $90 per barrel for June 2013–March 2015, with a net derivative liability of $21,057 at quarter-end. Swaps can create losses or limit gains when prices rise, and expose the company to counterparty risk. Floating-rate debt also creates exposure: a 1 percentage-point rate change was estimated to affect annual pretax income by $29,500.
- Oil and gas receivables are generally unsecured; the largest purchaser exposure was $148,974, or 23% of oil and gas receivables. Management reported no significant credit losses. The filing disclosed no known environmental or other legal proceedings against the company and no material changes to previously reported risk factors other than derivative-related risks.
- The credit facility prohibits cash dividends. The company reported no off-balance-sheet debt or guarantees of another party’s debt. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported during the quarter.
Key facts for investors to verify
- Whether higher oil and gas volumes and prices persist, and how production costs and DD&A evolve.
- Production and completion outcomes for the disclosed drilling program, and the economics and funding of planned activity and the Upton County acreage transaction.
- Cash generation relative to capital spending, available credit, facility maturity and covenant compliance.
- Derivative valuation, settlement effects, hedge volumes and exposure to commodity-price movements and counterparty performance.
- Reserve estimates, borrowing-base sensitivity to prices, and potential full-cost ceiling impairment.
- Use and limitations of approximately $4.0 million in regular-tax net operating loss carryforwards and $4.3 million in statutory depletion carryforwards, plus approximately $677,000 of unrecognized tax benefits.