Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended December 31, 2021 (fiscal Q3 2022); comparative periods ended December 31, 2020. The filing is unaudited. Mexco explores, develops, and produces oil and natural gas, primarily through non-operated interests.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Operating revenue | $1.595 million | $0.700 million | $4.413 million | $1.706 million |
| Operating income (loss) | $756,379 | $26,073 | $1.880 million | $(272,113) |
| Net income (loss) | $753,302 | $80,497 | $1.857 million | $(261,143) |
| Diluted earnings (loss) per share | $0.35 | $0.04 | $0.87 | $(0.13) |
| Operating margin | Approximately 47% | Approximately 4% | Approximately 43% | Approximately (16)% |
Quarterly oil and gas sales rose 127% to $1.574 million; nine-month sales rose 159% to $4.371 million. Mexco attributed the increases to higher realized prices and production volumes. For the quarter, oil volume increased 8.8% and average price rose 89.7% to $75.88 per barrel; gas volume increased 10.7% and average price rose 163% to $5.47 per mcf. For nine months, oil volume rose 21.7% and average price rose 100.7% to $69.64 per barrel; gas volume rose 9.2% and average price rose 184.1% to $4.29 per mcf.
Operating expenses for the nine months were $2.533 million, up from $1.979 million. Production costs increased 45%, DD&A increased 16%, and general and administrative expense increased 25%; lower interest expense partly offset these increases. No income tax expense was recorded. The company reported a deferred tax asset of $887,701 with a full valuation allowance, reflecting management’s view that realization is more likely than not not to occur.
Cash flow, liquidity, and obligations
- Nine-month operating cash flow was $2.729 million, versus $373,000 a year earlier. Investing used $1.022 million, mainly for oil and gas properties; financing used $884,360, largely reflecting $1.455 million of credit-facility repayments.
- Cash increased to $880,190 from $57,813 at March 31, 2021. Working capital was $1.444 million, up $824,718 from fiscal year-end.
- No credit-facility debt was outstanding at December 31, 2021. The facility had $1.5 million available to borrow and matures March 28, 2023; borrowings are secured by substantially all oil and gas properties and subsidiary stock and subject to financial covenants.
- Other recorded obligations included $143,182 of operating lease liabilities and $737,457 of noncurrent asset retirement obligations. The filing reports no off-balance-sheet debt or guarantees of another party’s debt.
Changes, outlook, and risks
- Results improved substantially year over year, moving from a nine-month loss to profit, mainly on higher commodity prices and production. Management also cited higher production taxes and operating costs, pandemic-related cost comparisons, and increased compensation and professional fees.
- Mexco planned to participate in drilling and completion of 43 horizontal wells for an estimated aggregate fiscal-2022 cost of approximately $1.2 million. Management expected to fund projects primarily with cash and operating cash flow, with possible use of credit-facility borrowings or sales of non-core properties.
- After quarter-end, the company spent $25,000 in January 2022 on an optional cash call for a small-cost-basis investment in an Ohio mineral-interest partnership. On February 1, 2022, it agreed to acquire overriding royalty interests in approximately 75 Eagle Ford-area wells for $567,000, effective January 1, 2022.
- Commodity prices are the principal market risk; Mexco had no derivative contracts at December 31, 2021. For the first nine months, a $10-per-barrel change in average oil price would have changed pretax income by $458,570, and a $1-per-mcf gas-price change by $274,204. One purchaser represented 71% of oil and gas receivables ($530,696); receivables were generally unsecured.
- Management stated that oil and gas prices remain volatile and results are sensitive to price and demand. No formal earnings guidance was provided. The filing cautions that forward-looking statements are subject to risks and are not necessarily indicative of full-year results.
- The company reported effective disclosure controls, no material changes to internal control during the period, no material changes to previously disclosed risk factors, and no known material legal or environmental proceedings.
Important facts for investors to verify
- Whether higher oil and gas prices and production volumes persist, and how they affect realized prices, margins, and cash flow.
- Actual costs, completion timing, and production results for the planned 43-well program and other development projects.
- Availability and covenant capacity of the $1.5 million credit facility, particularly if capital spending exceeds internally generated cash.
- Execution and economics of the $567,000 royalty-interest acquisition and the expected performance of the acquired wells.
- Purchaser concentration, receivable collection, reserve estimates, and the assumptions behind the full valuation allowance on deferred tax assets.