Mexco Energy Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019, compared with the year ended March 31, 2018. Although the request identifies “2018 Q4,” this filing is an annual report; the supplied text does not provide standalone fourth-quarter financial results.
Business context
Mexco is a small independent oil and gas company, focused primarily on the Permian Basin. Most of its approximately 6,100 well interests are operated by third parties. Oil and gas royalty interests generated about 27% of FY2019 revenue. At year-end, proved reserves were 1.937 million BOE, 54% oil and NGLs and 46% natural gas.
Financial and operating metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total operating revenue | $2.687 million | $2.705 million |
| Oil and gas sales | $2.648 million | $2.650 million |
| Operating income (loss) | $8,346 | ($232,238) |
| Net income (loss) | ($12,946) | ($321,489) |
| Operating cash flow | $1.012 million | $441,024 |
| Capital additions to oil and gas properties | $812,140 | $1.093 million |
- Oil revenue increased 7.4% to $1.921 million as realized price rose 5.5% to $54.34 per barrel and reported volume increased 1.8%. Gas revenue fell 15.6% to $726,486 as price declined 8.9% to $2.46 per Mcf and volume fell 7.4%.
- Production and exploration costs declined 13% to $936,400; DD&A fell 9% to $802,425; G&A declined 5% to $911,927; and interest expense decreased 76% to $21,931. Management attributed the narrower net loss mainly to lower operating and interest expenses.
- Operating margin was approximately 0.3% of revenue. Production cost was $8.85 per BOE, down from $9.91. No income tax expense was recorded; the company fully reserved its net deferred tax assets.
- Cash and equivalents were $128,252, down from $492,610. Working capital was $395,895, versus $925,618. Operating cash flow rose 130%; cash was used for property investment and debt repayment, resulting in a $364,358 decrease in cash.
- Long-term debt was zero at March 31, 2019, following repayment of the prior $700,000 balance. The replacement WTNB facility provides up to $1 million and matures December 28, 2021; substantially all oil and gas properties secure the facility. The company reported covenant compliance.
- PV-10 was $22.317 million, compared with $22.002 million; the standardized measure of discounted future net cash flows was $19.252 million, compared with $18.876 million. These reserve measures are not estimates of fair market value.
Material changes and operating developments
- Total proved reserves declined 8.2% to 1.937 million BOE. Extensions and discoveries added 275 MBOE, while downward revisions subtracted 365 MBOE, primarily due to restructuring development plans for an operated Ector County, Texas property; pricing and Delaware and Midland Basin development partly offset the revisions.
- Proved undeveloped reserves were 923 MBOE, about 48% of total proved reserves. The company converted about 64 MBOE of PUDs to producing reserves, with approximately $828,000 of development costs. Estimated future development costs for ending PUDs were $9.138 million.
- Mexco participated in 48 development wells during the year and reported approximately $900,000 of participation costs. It sold non-core assets for approximately $156,000 in total cash proceeds, with other immaterial dispositions and adjustments of about $6,000. FY2018 property sales had generated approximately $3.2 million.
- The company adopted revenue standard ASC 606 on April 1, 2018; management said adoption had no material effect on net loss or retained earnings.
Outlook, risks and contingencies
- Management’s FY2020 priorities are to improve cash flow through efficiencies and cost reductions, sell non-core assets, and balance capital spending with cash flow to limit borrowing, reduce debt and preserve liquidity. No numerical production, revenue or earnings guidance is provided.
- Commodity prices and Permian pipeline constraints are key uncertainties. Management cited a FY2019 WTI range of $39.25–$73.00 per barrel and noted that local price differentials, transportation access, reserve values and the borrowing base may affect cash flow and capital availability. The WTNB agreement does not permit commodity hedging.
- After year-end, the company committed $250,000 to a partnership investing in Ohio mineral interests; $75,000 had been funded through June 21, 2019. It also borrowed $225,000 on its credit facility during FY2020’s first quarter.
- Customer concentration is material: one customer accounted for 42% of FY2019 oil and gas revenue and 40% of oil and gas receivables. The largest single-purchaser receivable was $138,508.
- Other disclosed risks include reserve-estimate uncertainty, development and replacement-reserve needs, reliance on third-party operators and transportation infrastructure, environmental obligations, and full-cost accounting impairment risk. No ceiling-test impairment was recorded in FY2019 or FY2018. The company reported no known material environmental capital needs for FY2020 and no material legal proceedings.
- Nicholas C. Taylor, Chairman and CEO, beneficially owned approximately 47% of shares and has significant influence over shareholder matters. The company reported effective internal and disclosure controls; the independent auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Important facts for investors to verify
- Standalone FY2019 fourth-quarter results, which are not clearly provided in the filing text.
- Liquidity after the subsequent $225,000 draw, and available borrowing capacity and covenant headroom under the WTNB facility.
- Execution, cost and funding schedule for the $9.138 million PUD development program and whether planned third-party drilling proceeds.
- Drivers and potential persistence of the reserve revisions, particularly the Ector County development-plan changes.
- Customer concentration and the reported difference in oil production volume: one table gives 35,359 barrels while the results discussion gives 35,357.
- Funding and expected returns for the Ohio partnership commitment, including the remaining unfunded amount.