Mexco Energy Corporation — Form 10-Q Summary
Business context and period. Mexco explores for, develops, and produces oil, natural gas, condensate, and natural gas liquids, primarily in West Texas, with interests in 13 states. This unaudited report covers the three months ended June 30, 2015, the first quarter of Mexco’s fiscal 2016, and compares results with the three months ended June 30, 2014. The filing’s financial results are interim and are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Quarter ended June 30, 2015 | Comparable 2014 period |
|---|---|---|
| Oil and gas revenue | $692,582 | $1,006,656 |
| Total operating revenue | $702,609 | $1,017,834 |
| Operating income (loss) | $(435,481) | $51,069 |
| Net income (loss) | $(324,366); $(0.16) per share | $19,054; $0.01 per share |
| Cash provided by operating activities | $280,393 | $425,159 |
| Capital additions to oil and gas properties | $419,325 | $284,223 |
Oil and gas revenue fell 31%. Oil revenue declined 23.4% as average oil price fell 44.3% to $51.97 per barrel, despite a 37.5% increase in oil volume. Gas revenue declined 44.1% as average price fell 49.9% to $2.15 per mcf, despite an 11.3% increase in volume. Production expense decreased 4% to $297,578; depreciation, depletion and amortization increased 39% to $417,982; and general and administrative expense rose 18% to $413,746. Interest expense increased 159% to $40,865. The $151,947 deferred tax benefit partially offset the pretax loss.
Cash increased $60,461 to $156,545. Operating cash flow and $200,000 of additional borrowing funded most of the $419,932 investing cash outflow. Working capital moved from positive $166,650 at March 31, 2015 to negative $288,243 at June 30, 2015. Total assets were $21.8 million and stockholders’ equity was $12.9 million at quarter-end. Long-term debt was $6.15 million, up from $5.95 million at March 31. The company had $100,000 available under its $6.3 million revolving facility, including the effect of a $50,000 letter of credit. The facility matures November 30, 2020; no principal payments are anticipated through maturity, and the company reported compliance with its covenants.
Changes, outlook, risks, and notable items
- The shift from modest net income to a net loss reflected lower commodity prices and revenue, higher DD&A, general and administrative expense, and interest expense. Increased production partly offset price declines.
- Management said cash flow from operations and available financing should provide adequate liquidity for the next fiscal year. It provided no specific numerical revenue, earnings, or production guidance. Planned project spending may be funded by cash, operating cash flow, facility borrowings, and, if appropriate, common-stock issuance.
- Mexco reported participation in multiple horizontal drilling and completion projects in Texas and New Mexico. Reported initial well test rates are not necessarily indicative of future production or reserves.
- On July 29, 2015, Mexco assigned a six-month leasehold interest in 320 net acres in Upton County, Texas, for $112,000 and retained a 1% overriding royalty. The assignee may extend the assignment for three years for an additional $640,000.
- Mexco had no open crude-oil derivative positions at June 30, 2015. The filing identifies commodity prices as its principal market risk: a $10-per-barrel change in average oil price or a $1-per-mcf change in average gas price would have changed quarterly pretax loss by $92,700 or $98,015, respectively. A one-percentage-point change in the variable rate on quarter-end debt would change annual pretax income by approximately $61,500.
- Management warned that lower prices can reduce cash flow, reserves, borrowing capacity, and liquidity, and may trigger a noncash full-cost ceiling write-down. The filing also cites reserve-estimation uncertainty and dependence on working-interest partners and purchasers. Management reported effective disclosure controls, no material changes in internal control, no material risk-factor changes from the prior annual report, and no known material legal proceedings.
Important facts for investors to verify
- Whether oil and gas prices, realized prices, and production trends improve or further pressure revenue and operating cash flow.
- Liquidity and borrowing capacity: working capital was negative $288,243, facility availability was only $100,000 at quarter-end, and debt was $6.15 million.
- Actual costs, completion timing, production, and reserve contribution from the reported drilling projects; initial test rates are not forecasts.
- Potential full-cost impairment exposure and the sensitivity of reserves and borrowing base to commodity prices.
- Whether the Upton County assignee exercises its extension option and the resulting cash proceeds.