Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2020. This is Mexco’s fiscal 2021 second quarter and first half; the filing was signed November 5, 2020. The company explores for and produces oil and natural gas, primarily through non-operated interests.
Financial performance
| Metric | Three months ended September 30, 2020 | Six months ended September 30, 2020 |
|---|---|---|
| Operating revenue | $636,042, up 2% year over year | $1,006,498, down 24% |
| Operating loss | $16,806 | $298,186 |
| Net loss | $41,970; $0.02 per share | $341,640; $0.17 per share |
| Cash from operations | Not reported separately for the quarter | $164,237, down 52% |
| Cash and cash equivalents | $62,678 at September 30, versus $34,381 at March 31, 2020 |
For the first half, oil and gas sales were $994,143, down 25%. Oil revenue fell 30% as average realized oil prices declined 41% to $31.91 per barrel, partly offset by 19% higher oil volumes. Gas revenue rose 5% as volumes increased 17%, offsetting a 10% decline in average price to $1.23 per Mcf. The second-quarter net loss narrowed from $82,787 a year earlier, while the first-half loss widened from $136,973.
First-half production expense declined 13% to $388,783 and general and administrative expense declined 22% to $441,238. Depreciation, depletion and amortization rose 10% to $460,239. Interest expense increased 65% to $24,570, and the company recorded $19,200 of realized derivative losses. No income tax expense was recorded; a $1.39 million deferred tax asset was fully offset by a valuation allowance.
Liquidity, debt and cash flows
Working capital was $240,743 at September 30, up from $186,785 at March 31. First-half investing cash outflow was $593,949, including $714,079 of oil and gas property additions, partly offset by $106,285 in property-sale proceeds and $42,060 in drilling refunds. Financing provided $458,009; cash increased by $28,297.
Gross credit-facility borrowings were $1,175,000 at September 30, with $325,000 available under the stated borrowing base; balance-sheet long-term debt, net of issuance costs, was $1,143,686. The facility bears interest at prime plus 0.5%, matures March 2023, and is secured by substantially all oil and gas properties and subsidiary stock. Mexco reported compliance with its covenants. On October 16, it repaid $75,000, reducing the line balance to $1,100,000. The company also had a $68,574 PPP loan payable and $777,704 in total asset retirement obligations.
Developments, outlook and risks
- Management planned approximately $1.2 million of participation in 20 horizontal wells for the fiscal year ending March 31, 2021; $538,000 had been spent by September 30. It also planned about $280,000 in completion costs for 22 wells drilled in fiscal 2020, with $97,000 spent to date.
- Mexco reported completing or participating in Delaware Basin wells and described initial production rates for certain wells. Its working interests in the described projects were generally small.
- Management said COVID-19, reduced energy demand, oversupply and price volatility could adversely affect operations, liquidity, financing and reserves. Lower prices may also reduce the borrowing base or require a noncash full-cost property write-down. The duration and financial impact remained uncertain.
- The company said it was applying financial discipline and could sell non-core assets to meet obligations. No quantified earnings or production guidance was provided.
- Mexco received approximately $68,600 in PPP proceeds and had applied for forgiveness; forgiveness remained subject to SBA approval. It said proceeds were used to partially subsidize payroll and office rent.
- Commodity and interest-rate exposures are material. A $10 per-barrel change in average oil price would change first-half pretax income by approximately $246,770; a $1 per-Mcf change in average gas price by approximately $168,406. A one-percentage-point interest-rate change would affect annual pretax income by about $11,750 at the period-end debt balance.
Important facts for investors to verify
- Whether the planned well and completion spending can be funded from operating cash flow, remaining facility availability, or asset sales.
- Subsequent borrowing-base availability, covenant compliance, and the effect of commodity-price or reserve changes on facility capacity.
- Actual production, realized prices and cash generation relative to the reported initial well rates and management’s development plans.
- The outcome of the PPP forgiveness application and the remaining repayment obligation if forgiveness is denied.
- Potential impairment exposure and the assumptions supporting oil and gas reserve estimates and the fully valued deferred tax asset.
- Customer concentration: one purchaser represented $212,549, or 66%, of oil and gas receivables at September 30.