Mexco Energy Corporation — Form 10-Q Summary
Business and period: Mexco explores for, develops, and produces oil, natural gas, and natural gas liquids, principally in West Texas, with interests in 13 states. This report covers the quarter and six months ended September 30, 2015 (the second quarter and first six months of fiscal 2016). Dollar amounts below are U.S. dollars.
Financial performance and position
| Metric | Three months ended Sept. 30, 2015 | Six months ended Sept. 30, 2015 |
|---|---|---|
| Total operating revenue | $728,829 | $1,431,438 |
| Operating income (loss) | ($1,094,279) | ($1,529,760) |
| Net income (loss) | ($776,307) | ($1,100,673) |
| Loss per share, basic and diluted | ($0.38) | ($0.54) |
| Net cash provided by operating activities | Not provided for the quarter | $315,397 |
- Six-month oil and gas revenue was $1,413,456. Oil and gas sales declined 29% from the comparable 2014 period; total operating revenue declined 29%.
- The six-month operating loss included an $833,789 noncash oil and gas property impairment. The impairment arose because capitalized costs exceeded the full-cost ceiling following lower estimated realized commodity prices.
- Six-month cash flow from operations fell 55% year over year. Investing activities used $651,653 net, including $786,625 of oil and gas property additions and $137,532 of property-sale proceeds. Financing provided $300,000 through additional credit-facility borrowings. Cash declined $36,256 to $59,828.
- At September 30, total assets were $20.40 million, total liabilities $8.22 million, and stockholders’ equity $12.18 million. Long-term debt was $6.25 million, up from $5.95 million at March 31.
- Current assets were $496,308 and current liabilities $576,168; management reported negative working capital of $79,860, versus positive working capital of $166,650 at March 31. The filing does not provide a clear reported gross or operating margin.
Changes versus the comparable period
- For the quarter, oil and gas sales fell 27% to $720,874; oil and gas production volumes increased, but lower prices more than offset the volume growth. Oil volume rose 44% and gas volume 18%, while average realized prices fell 47% for oil and 43% for gas.
- For the six months, oil and gas volumes increased 41% for oil and 15% for gas, but average prices declined 46% for oil and 47% for gas. Management attributed lower revenue to prices, partly offset by increased production.
- The company moved from net income of $86,256 for the prior-year quarter and $105,310 for the prior-year six-month period to losses in 2015, primarily due to the property impairment, lower revenue, and higher depreciation, depletion, and amortization.
- Six-month DD&A increased 39% to $868,630. Interest expense rose 167% to $84,280, reflecting higher borrowings. Production costs declined 9% to $582,573.
Liquidity, outlook, risks, and unusual items
- The $6.3 million revolving credit facility had $6.25 million outstanding and no availability at September 30. It matures November 30, 2020; the floating rate was 2.69% at period-end. The company was in compliance with its financial covenants, and the agreement prohibits cash dividends.
- Management said operating cash flow and financing resources should provide adequate liquidity for the current year. The company’s stated strategy is to pursue acquisitions and development, emphasizing low-cost operations and non-operated interests. No specific earnings or production guidance was provided.
- Commodity-price risk is significant. Management noted that lower prices can reduce cash flow, reserve values, borrowing capacity, and liquidity, and can trigger further full-cost impairments. The company reported greater sensitivity to gas prices; a $1/Mcf change in average gas price would have changed the six-month pretax loss by $204,578, while a $10/barrel oil-price change would have changed it by $202,250.
- There were no open crude-oil derivative positions at September 30. The company had used swaps in the prior-year period, but reported no derivative gain or loss in the 2015 periods.
- Subsequent to quarter-end, on November 11, 2015, Mexco assigned a three-year term interest in 320 net acres in Upton County for $640,000 and retained a 1% overriding royalty. In July, it had received $112,000 for a six-month assignment of the same acreage, with an option for the assignee to extend for three years at the stated $640,000 price.
- The filing reports no material change to previously disclosed risk factors, no known material legal proceedings, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- How lower oil and gas prices and reserve estimates affect future ceiling tests, impairment charges, and the credit facility borrowing base.
- Liquidity and covenant headroom given negative working capital, $59,828 in cash, $6.25 million of debt, and no facility availability at period-end.
- Whether the November acreage assignment proceeds were received and how management expects to use them.
- Production volumes, realized prices, and operating costs in subsequent periods, particularly given the company’s stated sensitivity to natural gas prices.
- Actual results versus management’s current-year liquidity assessment; the filing provides no quantified earnings or production outlook.