Business context and reporting period
Mexco Energy Corporation and its subsidiaries explore, develop, and produce oil, natural gas, condensate, and natural gas liquids, primarily in West Texas, with properties in 12 states. This Form 10-Q covers the quarter and six months ended September 30, 2012 (the first half of fiscal 2013), compared with the corresponding 2011 periods. This differs from the request metadata’s “2011 Q2.” The interim statements are unaudited.
Financial results and position
- Quarter: Total operating revenue was $743,601, down 9% from $815,761. Operating loss was $17,004 versus operating income of $111,466; net income was $763 versus $79,272. Basic and diluted earnings per share were reported as $0.00, versus $0.04.
- Six months: Total operating revenue was $1,370,722, down 21% from $1,724,855. Mexco recorded an operating loss of $139,076 and a net loss of $62,454, compared with operating income of $268,146 and net income of $183,657 in the prior-year period. Loss per share was $0.03, versus earnings per share of $0.09.
- Revenue drivers: Six-month oil and gas sales fell 21% to $1,358,183. Oil revenue rose 4% as volume increased, while gas revenue fell 46% as both volume and average price declined; the average gas price fell 41% to $2.41 per mcf. In the quarter, oil and gas sales fell 9%, primarily due to a 32% decrease in average gas price.
- Costs and margins: Six-month production expense was $470,363, depreciation, depletion, and amortization (DD&A) was $491,316, and general and administrative expense was $528,977. Production costs rose 1%, DD&A rose 3%, and G&A rose 7% year over year. The filing does not state a net profit margin.
- Cash flow and investment: Six-month operating cash flow was $388,290, down 39%. Oil and gas property additions were $852,390; cash declined by $402,906 to $95,775. Investing cash outflow was $866,196, partly offset by $75,000 net financing inflow.
- Liquidity and debt: Working capital was $266,645 at September 30, down from $476,960 at March 31, 2012. Long-term debt was $1,775,000, up from $1,700,000; the $4.9 million revolving facility had $3,125,000 available. The floating rate was 2.72% at quarter-end, and the facility was renewed in October 2012 through November 30, 2014. Mexco reported covenant compliance and no principal payments anticipated through that maturity date.
- Other balance-sheet items: Total assets were $16,482,673 and stockholders’ equity was $12,996,644. The asset retirement obligation totaled $700,858, including a $50,000 current portion.
Material changes, outlook, and risks
- The deterioration in year-to-date results chiefly reflected lower oil and gas revenue, particularly lower gas prices and production. Higher G&A, DD&A, and interest expense also weighed on results. A deferred tax benefit partly offset the losses; management attributed the change in effective tax rate mainly to increased statutory depletion carryforward.
- Capital activity included drilling and development across several properties. Mexco’s share of costs through September 30 included approximately $1.029 million for an operated Pecos County well being completed and tested, and approximately $198,000 for three Lea County wells then being drilled. Five additional drill sites were planned for fiscal 2013 at the Fuhrman-Mascho property. On October 1, 2012, Mexco sold its 31.25% interest in the Brown #1 SWD wellbore for $46,875.
- Management expected operating cash flow and available financing to provide adequate liquidity for the current fiscal year. It also said project costs would be funded, to the extent possible, from cash and operating cash flow, with possible additional facility borrowing or equity issuance.
- Commodity prices are the principal market risk; Mexco had no oil or gas hedges at September 30. Management warned that falling prices could reduce cash flow, reserves, borrowing capacity, and financing availability, and could trigger a noncash full-cost property write-down. Results are more sensitive to gas prices: a $1-per-mcf change in the six-month average gas price would have changed net income by $190,506, according to the filing. A one-percentage-point interest-rate change would change annual pretax income by $17,750 at quarter-end debt levels.
- Other disclosed exposures include customer and working-interest-partner credit risk, and approximately $677,000 of unrecognized tax benefits. The company reported no material change in previously disclosed risk factors, no known material legal proceedings, and effective disclosure controls; no material internal-control changes occurred during the quarter.
Important facts for investors to verify
- Whether gas prices and production stabilize, given the sharp year-over-year decline in gas revenue and the company’s greater sensitivity to gas prices.
- Production, completion results, and remaining capital requirements for the Pecos County well and other ongoing development projects.
- Cash needs and borrowing availability under the revolving facility, including covenant compliance and the effect of reserve or commodity-price changes on the borrowing base.
- Potential effects of reserve estimates, commodity prices, and full-cost accounting on future DD&A, impairment, and reported earnings.
- The use and timing of the board-authorized share repurchase program, which allowed up to $250,000 but had no repurchases during the six-month period.
- The filing’s period: it reports the quarter ended September 30, 2012, not a 2011 second quarter.