Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019, the first quarter of fiscal 2020 (comparative quarter ended June 30, 2018). The unaudited statements consolidate Mexco and its wholly owned subsidiaries. The company explores for, develops and produces oil, natural gas, condensate and natural gas liquids, primarily in West Texas and southeastern New Mexico.
Key financial results
| Metric | Q1 fiscal 2020 | Q1 fiscal 2019 |
|---|---|---|
| Total operating revenue | $699,591 | $749,011 |
| Operating income (loss) | $(47,850) | $21,328 |
| Net income (loss) | $(54,186) | $14,420 |
| Basic and diluted EPS | $(0.03) | $0.01 |
| Cash provided by operating activities | $185,956 | $154,501 |
| Cash used in investing activities | $(388,847) | $(12,019) |
| Cash at quarter-end | $150,361 | $435,092 |
- Operating margin was approximately negative 6.8%, compared with positive 2.8% in the prior-year quarter, calculated as operating income or loss divided by operating revenue.
- Oil and gas sales were $691,694, down 6% from $735,353. Oil revenue increased 3.2% to $588,436 as volume rose 13% to 10,609 barrels, partly offset by an 8.7% decrease in average price to $55.47 per barrel. Natural gas revenue fell 37.5% to $103,258, reflecting a 36% decrease in average price to $1.44 per Mcf and a 2.1% volume decline.
- Production expense decreased 15% to $219,395; DD&A decreased 3% to $210,238; general and administrative expense increased 25% to $311,061, primarily due to engineering and contract services.
- Quarter-end working capital was $342,348, down $53,547 from March 31, 2019. Current assets were $560,245 and current liabilities were $217,897.
- The company reported $225,000 outstanding on a new $1 million credit facility at quarter-end, with $775,000 then available. The balance sheet reports long-term debt net of issuance costs of $189,062. Subsequent borrowings of $75,000 on July 8 and $25,000 on August 7 raised the facility balance to $325,000. The facility matures December 28, 2021, bears interest at prime plus 0.5%, and is secured by subsidiary stock and substantially all oil and gas properties.
- Oil and gas property additions were $314,945 and the company funded a $75,000 cost-basis investment. Operating cash flow included receipt of $30,894 as the final settlement of a lawsuit-related promissory note.
Changes, outlook and risks
- The company moved from prior-year quarterly profit to a loss as oil and gas revenue declined and operating expenses increased. Management attributed the revenue decrease mainly to lower oil and gas prices and lower gas production, partly offset by higher oil production.
- Mexco adopted lease accounting Topic 842 on April 1, 2019, recognizing a $141,385 operating-lease right-of-use asset and associated liability. The office lease expires in May 2021.
- For the fiscal year ending March 31, 2020, management planned to participate in approximately 50 horizontal wells at estimated aggregate cost of about $1.4 million. The company reported participating in the first 13 wells during the quarter, with about $100,000 in aggregate costs; it subsequently spent another $191,000 on completion of seven wells. It also spent $186,000 during the quarter completing four wells drilled in fiscal 2019. These are plans and reported project costs, not earnings guidance.
- In April 2019, the company committed up to $250,000 to a limited-liability-company investment in Ohio mineral interests; $75,000 had been funded by June 30. Management said future projects may be funded through cash, operating cash flow, credit-facility borrowings and, if appropriate, sales of non-core properties. It cited financial discipline amid the commodity-price environment.
- Management highlighted oil and gas price volatility and Permian Basin natural-gas pipeline capacity constraints. Price declines could reduce cash flow, reserves and the credit-facility borrowing base, impair access to capital, or trigger a full-cost-accounting property write-down. The company does not hedge commodity prices under its credit agreement.
- The credit agreement requires specified leverage and interest-coverage ratios; the company reported compliance at June 30 and expected to remain compliant over the next fiscal year. Cash dividends require lender consent. A one-percentage-point change in the floating rate would change annual pretax income by about $2,250 based on quarter-end debt.
- One purchaser represented $159,321, or 43%, of oil and gas receivables. The company reported no significant credit losses. The deferred tax asset was $1,276,572, fully offset by a valuation allowance; no income tax expense was recorded in either comparative quarter.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting. It reported no material changes to previously disclosed risk factors and no known legal or governmental proceedings beyond ordinary-course matters.
Important facts for investors to verify
- Whether actual well participation, completion spending and production results align with the approximately 50-well, $1.4 million fiscal 2020 plan.
- Quarterly cash generation, working-capital needs, remaining credit availability and compliance with debt covenants, particularly after the disclosed post-quarter borrowings.
- Oil and gas prices, gas-market constraints, production volumes, reserve estimates and any resulting effect on the borrowing base or full-cost ceiling-test impairment risk.
- The status and funding schedule of the $250,000 Ohio mineral-interest investment commitment and any planned non-core asset sales.
- The recoverability of the fully reserved deferred tax asset and the effect of purchaser concentration on receivable collection risk.