Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2022. This is the second quarter of Mexco’s fiscal 2023, although the request metadata labels it 2022 Q2. Financial statements are unaudited.
Business context
Mexco acquires, explores, develops and produces oil and natural gas, primarily through non-operated interests in West Texas and southeastern New Mexico, with properties in 14 states. The company’s properties are operated by others.
Financial performance
| Metric | Three months ended Sept. 30, 2022 | Prior year quarter | Six months ended Sept. 30, 2022 | Prior-year six months |
|---|---|---|---|---|
| Total operating revenue | $2.325 million | $1.553 million | $4.775 million | $2.818 million |
| Operating income | $1.215 million | $716,346 | $2.517 million | $1.124 million |
| Net income | $1.212 million | $708,828 | $2.510 million | $1.104 million |
| Diluted earnings per share | $0.55 | $0.33 | $1.13 | $0.52 |
| Operating margin | 52.3% | 46.1% | 52.7% | 39.9% |
For the quarter, oil and gas sales were $2.282 million, up 48% year over year. Oil revenue rose 23% as average price increased 38% to $96.27 per barrel, partially offset by a 10.8% decline in oil volumes. Gas revenue rose 117% with a 28.1% volume increase and a 68.9% average-price increase to $7.45 per Mcf. For the six months, oil and gas sales rose 68%; average oil price increased 53.9% and gas price increased 89.5%, while oil volume declined 9.4% and gas volume increased 35.9%.
Operating expenses increased to $1.110 million for the quarter and $2.258 million for the six months. Production costs, depreciation/depletion/amortization and general and administrative expense all increased. Management attributed higher production costs mainly to production taxes and marketing charges, and higher G&A to salaries, contract services, legal fees, stock compensation and shareholder services. No income tax expense was recorded; the company maintains a full valuation allowance against its $313,582 deferred tax asset.
Cash flow, liquidity and debt
- Six-month operating cash flow was $3.418 million, up from $1.585 million a year earlier.
- Investing cash outflow was $4.253 million, principally for oil and gas property additions, versus $554,787 in the prior-year period.
- Cash declined $805,187 during the six months, to $565,579 at September 30, 2022.
- Current assets were $2.082 million and current liabilities $217,344. The balance-sheet amounts imply working capital of $1.864 million. However, MD&A reports working capital of $2,298,977; the filing does not explain this difference.
- No line-of-credit balance was outstanding at quarter-end. The company reported $1.5 million available under its WTNB facility; the facility’s maturity date is March 28, 2023. Borrowings are secured by substantially all oil and gas properties and subsidiary stock. The agreement restricts cash dividends and requires lender approval for hedging.
- Total liabilities were $1.010 million, including $745,052 of long-term asset retirement obligations and operating lease liabilities. No cash dividends were reported.
Material changes, outlook and risks
- Management planned participation in 48 horizontal wells for fiscal 2023 at an estimated aggregate cost of approximately $4.3 million, with 57% allocated to the Delaware Basin and the balance to the Midland Basin.
- The company acquired royalty interests in 22 wells and additional potential locations in Texas for $939,000, effective April 1, 2022.
- After quarter-end, Mexco reported spending approximately $698,000 on drilling and completion of seven New Mexico wells and $147,600 on completion of four additional wells. It also committed approximately $2.0 million for an approximately 2% interest in an LLC acquiring Ohio Utica and Marcellus mineral interests. These commitments are notable relative to quarter-end cash.
- Commodity-price volatility is a principal risk. Management estimated that a $10-per-barrel change in average oil price would change six-month pretax income by approximately $287,440; a $1-per-Mcf change in average gas price would change it by approximately $248,313.
- One purchaser represented $677,030, or 57%, of oil and gas receivables at quarter-end. Receivables are generally unsecured.
- Management reported no material changes to previously disclosed risk factors, no known material legal proceedings, and effective disclosure controls as of September 30, 2022. Forward-looking results remain subject to commodity prices, reserves, production and project execution; the filing provides no earnings guidance.
Key facts for investors to verify
- Reconcile reported working capital of $2,298,977 in MD&A with $1,864,289 calculated from the September 30 balance-sheet current asset and liability totals.
- Review the funding, timing and terms of the $2.0 million post-quarter-end investment commitment against cash of $565,579 and the planned fiscal-year drilling program.
- Confirm the current borrowing base, remaining availability and refinancing or repayment plan ahead of the March 28, 2023 credit-facility maturity.
- Assess exposure to commodity prices and the concentration of receivables with the largest purchaser.
- Track actual well costs, production and returns against the planned 48-well program and the filing’s reported production and price trends.