Business context and reporting period
Mexco Energy Corporation explores, develops and produces oil, natural gas, condensate and natural gas liquids, primarily in West Texas, with interests in 12 states. The supplied filing is a Form 10-Q for the quarter ended December 31, 2011 (the third quarter of fiscal 2012), not 2010 Q3 as indicated in the request metadata. Comparisons below are with the periods ended December 31, 2010.
Financial results and position
- Quarter: Oil and gas revenue was $753,789, essentially unchanged year over year; total operating revenue was $757,560. Net income rose 89% to $50,961, or $0.03 per diluted share. Operating profit was $63,837 versus $68,100.
- Nine months: Oil and gas revenue increased 4% to $2,469,784; total operating revenue was $2,482,415. Net income increased 128% to $234,618, or $0.12 per diluted share. Operating profit rose to $331,983 from $87,924.
- Revenue mix and production: For the quarter, oil revenue increased 29.6% to $432,968 as volume and realized price rose; gas revenue fell 23.4% to $320,821 as both volume and price declined. For nine months, oil revenue rose 31.3% to $1,295,952 while gas revenue declined 15.0% to $1,173,832.
- Expenses and margins: Quarterly production costs rose 16% to $233,317, primarily from workovers and repairs; nine-month production costs fell 15% to $697,548. Nine-month G&A increased 6% to $723,489, reflecting higher stock-option compensation and accounting fees. Approximate operating margin was 8.4% for the quarter and 13.4% for nine months, versus 9.0% and 3.7%, respectively, in the comparable periods.
- Cash flow: Nine-month operating cash flow was $1,000,832, up from $912,776. Investing activities used $156,833, including $627,562 of oil and gas property additions, partly offset by $470,729 of property-sale proceeds. Financing activities used $947,900, mainly to repay $1,050,000 of debt. Cash declined $103,901 to $75,170.
- Debt and liquidity: Long-term debt fell to $750,000 from $1.8 million at March 31, 2011; the balance was $675,000 on February 14, 2012. The $4.9 million revolving facility had $4.15 million available at December 31, 2011 and matures November 30, 2013. Working capital was $362,844, down from $470,253 at fiscal year-end. The company reported covenant compliance.
- Other balance-sheet items: Total assets were $15.28 million and stockholders’ equity was $12.92 million at December 31, 2011. Asset retirement obligations totaled $617,592, including a $50,000 current portion.
Material changes and management commentary
- Nine-month earnings improved substantially as oil revenue rose and production costs and DD&A declined; lower gas revenue partially offset those gains. Quarterly earnings also increased despite higher production costs, aided by lower interest and tax expense.
- The company repaid $1.05 million of revolving debt during the nine months. It also received $450,000 for assigning a five-year leasehold interest, retaining an 8.33% royalty.
- Capital activity included participation in infill and development drilling in Texas and New Mexico. Management said it expects operating cash flow and available financing to provide adequate liquidity for the next fiscal year, but gave no numerical earnings, production or capital-spending guidance.
- The board authorized up to $250,000 for share repurchases; 4,000 shares had been repurchased for $22,780 by December 31, 2011. The credit agreement prohibits cash dividends.
Risks, contingencies and unusual items
- Oil and gas prices are the company’s primary market risk; it had no commodity hedges. Management warned that price declines could reduce cash flow, reserves, borrowing capacity and financing access, and could trigger a noncash full-cost ceiling write-down. The company says its results are more sensitive to gas prices because most production and reserves are natural gas.
- Debt bears floating-rate interest at BBA LIBOR plus 2.50 percentage points (2.80% at December 31, 2011). A one-percentage-point rate change would affect annual pretax income by approximately $7,500 at the period-end balance.
- Oil and gas receivables are generally unsecured. The largest single-purchaser exposure was $79,599, or 21% of oil and gas receivables; the largest working-interest-partner exposure was $9,473, or 40% of trade receivables. No significant credit losses were reported.
- Nine-month tax expense was $74,771 versus a $40,101 tax benefit in the prior-year period; management attributed the effective-rate difference primarily to intangible development costs. The company reported approximately $550,000 of unrecognized tax benefits, an approximately $1.8 million regular-tax net operating loss carryforward, and a $4 million statutory depletion carryforward.
- Management reported no material changes to previously disclosed risk factors, no known material environmental proceedings, and no subsequent events requiring disclosure. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting period: the filing covers the quarter ended December 31, 2011, despite the request metadata stating 2010 Q3.
- Track commodity prices and realized production volumes, particularly gas volumes and prices, and their effect on cash flow and reserves.
- Review the remaining credit-facility availability, maturity, covenant compliance and effect of any further debt repayment or borrowing.
- Assess drilling outcomes and spending commitments for the disclosed Texas and New Mexico projects, as well as the sustainability of operating cash flow and the share-repurchase program.
- Monitor tax attributes and uncertain tax positions, including the disclosed unrecognized tax benefits and limitations on use of carryforwards.