Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, the first quarter of fiscal 2018. Comparisons are with the three months ended June 30, 2016, unless otherwise noted. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Oil and gas revenue | $651,442 | $536,403 |
| Other operating revenue | $16,242 | $133,780 |
| Total operating revenue | $667,684 | $670,183 |
| Operating loss | $(268,345) | $(252,185) |
| Net loss | $(295,552) | $(293,456) |
| Loss per share, basic and diluted | $(0.15) | $(0.14) |
| Net cash provided by (used in) operating activities | $211,849 | $(24,243) |
Oil and gas revenue rose 21%, largely as realized prices increased: oil revenue grew 9.4% and gas revenue 52.6%, while reported oil and gas volumes each increased about 0.8%. Other revenue fell because the 2016 quarter included a $123,394 royalty-underpayment lawsuit settlement. Total revenue was nearly unchanged, but operating loss widened as operating expenses increased. The company reported no income tax expense or benefit.
Operating expenses were $936,029, including $309,863 of production costs, $311,258 of depreciation, depletion and amortization, and $306,659 of general and administrative expense. Production costs increased 19%; management attributed this primarily to an approximately $67,000 marketing and transportation fee refund from XTO that was incorrectly provided and is being reversed through netting over 8–10 months. G&A decreased 11%, and interest expense decreased 34% to $27,216.
Cash, liquidity and debt
- Cash was $121,199 at June 30, 2017, up $47,748 from March 31. Operating activities provided $211,849; investing activities provided $260,399, including $460,461 of property-sale proceeds and $200,062 of property additions; financing activities used $424,500 to repay debt.
- Working capital was $239,641, down $128,034 from March 31. Current assets were $520,041 and current liabilities were $280,400.
- Long-term debt was $2,475,500, down from $2,900,000 at March 31. The credit facility matures November 30, 2020, bears interest at daily floating LIBOR plus 3 percentage points (4.22% at June 30), and had no remaining availability at quarter-end. The borrowing base was $2,525,500; the bank set that base following a July 31 review.
- The company reported compliance with its credit covenants at June 30 and expected to remain compliant over the next fiscal year. Covenants include trailing-four-quarter minimum EBITDA of $650,000 and a quarterly minimum interest coverage ratio of 2.00 to 1.00. The agreement prohibits cash dividends.
- Total assets were $12.1 million and stockholders’ equity was $8.4 million. Asset retirement obligations were $983,419, including a $10,000 current portion. The filing reports no off-balance-sheet debt or guarantees of another party’s debt.
Operations, outlook and risks
- Mexco explores, develops and produces oil, natural gas, condensate and natural gas liquids, primarily in the Permian Basin; it also holds producing properties and undeveloped acreage in thirteen states.
- Management said it was applying financial discipline amid depressed commodity prices and selling, or potentially continuing to sell, non-core assets. Its stated strategy is to improve margins through low-cost, long-lived reserves, acquisitions and development.
- For fiscal 2018, the company expected to participate in approximately 30 horizontal wells at an estimated aggregate cost of about $1.1 million; approximately $230,000 had been spent to date. This is an expectation, not formal earnings guidance. Two of the remaining wells in a 17-well Delaware Basin program were still undergoing completion at quarter-end.
- The quarter’s $460,461 sale involved leasehold interests in 137 net acres in Oklahoma. The company applied $410,000 of proceeds to bank debt and the remainder to working capital. The filing says property dispositions can reduce the borrowing base unless the bank approves otherwise.
- Commodity prices are the principal market risk. Management warned that lower prices could reduce cash flow, reserves, liquidity and borrowing capacity, and could trigger a full-cost accounting impairment. A $10-per-barrel change in average oil price would change quarterly pretax results by about $94,990; a $1-per-Mcf gas-price change would change them by about $89,896. A one-percentage-point change in the borrowing rate would change annual pretax income by about $24,755 at the quarter-end debt balance.
- The company also disclosed purchaser and working-interest-partner credit exposure. Its largest purchaser exposure was $79,084, or 24% of oil and gas receivables. Management reported no significant credit losses. It stated there were no known legal or governmental proceedings against the company and no subsequent events requiring disclosure; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the expected drilling program proceeds on schedule and within the approximately $1.1 million estimate, and whether production from recently completed wells translates into Mexco’s realized revenue.
- How the XTO fee refund reversal affects production costs and cash receipts over the stated 8–10-month period.
- Whether commodity prices, reserve estimates or further asset sales affect the borrowing base, liquidity or compliance with the facility’s EBITDA and interest-coverage covenants.
- Whether the company can sustain positive operating cash flow, given the quarter’s increase in accounts payable and accrued expenses and its continued dependence on asset-sale proceeds to fund debt reduction and investment.
- The realizability of the $1,253,526 deferred tax asset; the company recorded a full valuation allowance and said it was more likely than not the asset would not be realized.