Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2020. Although the request labels this “2020 Q3,” the filing presents the December quarter as the third quarter of Mexco’s fiscal 2021, which ends March 31. Amounts are in U.S. dollars.
Business context
Mexco explores, develops and produces oil, natural gas, condensate and NGLs. Its interests are concentrated in West Texas and southeastern New Mexico, with properties in 14 states; all interests are operated by others. The company emphasizes acquisitions and development of non-operated properties and royalties.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Operating revenue | $699,894 | $769,778 | $1,706,392 | $2,095,253 |
| Operating income (loss) | $26,073 | $44,788 | $(272,113) | $(77,833) |
| Net income (loss) | $80,497 | $35,196 | $(261,143) | $(101,777) |
| Net income (loss) per share, diluted | $0.04 | $0.02 | $(0.13) | $(0.05) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $372,863 | $543,584 |
Quarterly oil and gas sales were $692,243, down 10%. Oil revenue fell 19.1% as the average realized price declined 28.4% to $40.01 per barrel, partly offset by 13.0% higher oil volume. Gas revenue rose 39.7% as price increased 29.2% to $2.08 per Mcf and volume increased 8.0%. For the nine months, oil and gas sales declined 19% to $1,686,386: oil revenue fell 25.8% amid a 36.6% lower realized price, while gas revenue increased 18.0%.
Quarterly operating expenses declined to $673,821 from $724,990, including lower production and general and administrative costs; quarterly operating income nevertheless fell to $26,073. For nine months, operating expenses decreased 9% to $1,978,505, but revenue fell more sharply and the operating loss widened. G&A was down 21% to $634,526 for the nine months; depreciation, depletion and amortization rose 8% to $697,698. The quarter’s net income included $68,957 of PPP loan forgiveness. Nine-month results also included a $19,200 realized derivative loss and higher interest expense.
Cash, liquidity and debt
- At December 31, 2020, cash was $41,016, working capital was $296,172, and current assets and current liabilities were $429,237 and $133,065, respectively. Working capital was $186,785 at March 31, 2020.
- Nine-month operating cash flow was $372,863. Investing cash use was $818,597, principally for oil and gas properties; financing provided $452,369. Cash increased $6,635 from the fiscal-year opening balance.
- Long-term debt, net of issuance costs, was $1,071,817, compared with $757,423 at March 31, 2020. The credit facility had $1.1 million outstanding and $400,000 available within the $1.5 million borrowing base. It bears floating interest at prime plus 0.5%, matures March 28, 2023, and is secured by substantially all oil and gas properties and subsidiary stock.
- Management reported compliance with credit covenants and expected to remain compliant for the next fiscal year. The agreement restricts cash dividends and requires lender approval for hedging. Interest-rate sensitivity was estimated at an $11,000 annual pretax impact for a one-percentage-point rate change.
Changes, outlook and risks
- Management attributed weaker nine-month sales and operating results chiefly to lower oil prices, partly offset by increased production volumes and higher gas prices. COVID-19 disruption and energy-market oversupply had depressed demand and prices; management said the duration and financial effects remained uncertain.
- The company planned to participate in 20 horizontal wells for approximately $1.2 million during fiscal 2021; $600,000 had been spent through December 31. The filing describes additional drilling and completion activity and roughly $1.295 million of capital expenditures across 42 wells through February 10, 2021. Funding may include operating cash, existing cash, credit-facility borrowings and sales of non-core assets.
- Mexco sold deep rights in a Martin County, Texas property for $100,000, effective July 1, 2020. It had no derivative contracts outstanding at December 31; its crude-oil put options had expired in July and August. A $19,200 realized hedge loss was recorded for the nine months.
- Management warned that falling commodity prices could reduce cash flow, reserves and the borrowing base, constrain financing and capital spending, and trigger a noncash full-cost property write-down. A single purchaser accounted for 65% ($235,604) of oil and gas receivables. The company also reported that its $1,312,129 deferred tax asset was fully offset by a valuation allowance.
- No specific earnings or production guidance was provided. Management stated a strategy of improving margins and pursuing low-cost, long-lived reserves. No material changes to previously disclosed risk factors were reported; the company said it was unaware of material legal proceedings. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Investor verification points
- Confirm the quarterly net income figure: the statements of operations report $80,497, while the EPS reconciliation note prints $80,047 for the same quarter.
- Assess whether operating cash generation and available credit can support planned drilling and completion spending amid commodity-price volatility and limited cash on hand.
- Review credit-facility borrowing-base and covenant headroom, including the effects of reserve or price declines and floating-rate debt.
- Evaluate the sustainability of production and realized prices, the concentration of receivables with one purchaser, and the company’s exposure to COVID-19-related market disruption.
- Check subsequent well costs, production performance and option exercises: the filing reports additional January 2021 drilling expenditures and exercises of 19,800 options after quarter-end.