Mexco Energy Corporation — Form 10-Q Summary
Business context and reporting period
Mexco explores, develops and produces oil, natural gas, condensate and natural gas liquids, principally in the Permian Basin. This unaudited filing covers the three months ended June 30, 2016, the first quarter of fiscal 2017, and compares results with the quarter ended June 30, 2015. The balance sheet compares June 30, 2016 with March 31, 2016.
Key financial results
| Metric | Quarter ended June 30, 2016 | Prior-year quarter | Change or context |
|---|---|---|---|
| Oil and gas revenue | $536,403 | $692,582 | Down 23%; lower prices and gas production partly offset by higher oil production |
| Other operating revenue | $133,780 | $10,027 | Increase primarily related to royalty-litigation settlement |
| Total operating revenue | $670,183 | $702,609 | Down about 5% |
| Operating expenses | $922,368 | $1,138,090 | Down about 19% |
| Operating loss | $(252,185) | $(435,481) | Loss narrowed |
| Net loss | $(293,456) | $(324,366) | Loss narrowed; prior year included a $151,947 deferred tax benefit |
| Loss per share, basic and diluted | $(0.14) | $(0.16) | Weighted-average shares were 2,037,266 in both periods |
| Cash flow from operations | $(24,243) | $279,598 | Negative, partly reflecting $88,168 of asset-retirement settlements and higher receivables |
| Cash and equivalents | $37,229 | $34,013 at March 31, 2016 | Quarterly increase of $3,216 |
Oil revenue fell 19.7% as average realized price declined 21.0% to $41.08 per barrel, despite a 1.6% increase in oil volume. Gas revenue declined 29.2%; gas volume fell 9.0% and average price fell 21.9% to $1.68 per Mcf. Production expense was down 12%, DD&A down 26%, and general and administrative expense down 17% year over year.
Financial position, liquidity and debt
- At June 30, total assets were $16.35 million, total liabilities $7.28 million and stockholders’ equity $9.07 million. Working capital was $16,935, down $6,215 from March 31.
- Long-term debt was $5.52 million, down $60,000 during the quarter. The Bank of America facility bears interest at daily floating LIBOR plus 3.0 percentage points (3.4533% at quarter-end), matures November 30, 2020, and had no borrowing availability at June 30.
- The company reported compliance with its credit covenants at June 30. The agreement includes minimum EBITDA and interest-coverage tests, collateralizes substantially all oil and gas properties, and prohibits cash dividends.
- Investing cash flow was positive $87,459, including a $75,808 drilling refund and $60,212 of property-sale proceeds, partly offset by $48,561 of property additions. Financing cash flow was negative $60,000 from debt repayment.
- The company reported no off-balance-sheet debt or guarantees of another party’s debt. Contractual obligations included $5.52 million of credit-facility principal, due beyond three years under the table’s assumptions, plus office lease obligations.
Outlook, commentary, risks and unusual items
- Management said depressed and volatile commodity prices constrain operating cash flow, capital spending and debt service. It may sell non-core assets if needed and is applying financial discipline. The company’s strategy is to pursue reserves with low operating costs, including royalties and non-operated properties with development potential.
- Planned fiscal 2017 drilling participation included three one-mile Lower Avalon wells in Lea County, New Mexico, with estimated company spending of approximately $95,000, of which $65,000 had been paid. Further planned wells were estimated at $74,000 beginning October 2016 and $78,000 in February 2017.
- In the quarter, Mexco sold a non-core Martin County, Texas property for $60,000 and used the proceeds to reduce its credit line. A royalty-underpayment lawsuit settlement with Chesapeake Energy and Total E&P USA was expected to provide $154,289: $123,394 in cash by September 1, 2016 and a $30,894 interest-free note due in three years. The filing cites $123,394 as the settlement-related amount primarily driving quarterly other revenue.
- After quarter-end, on July 15, 2016, Pioneer Natural Resources exercised a two-year extension on 60 net acres in Upton County, Texas, paying $90,000; Mexco retained a 1% overriding royalty interest.
- Commodity prices and reserve values are key risks. Management noted that price declines can reduce liquidity and borrowing capacity and may trigger a noncash full-cost ceiling write-down. A one-percentage-point interest-rate change would change annual pretax income by approximately $55,200 at the quarter-end debt balance. The filing estimated that a $10-per-barrel oil-price change or a $1-per-Mcf gas-price change would change quarterly pretax loss by $94,208 or $89,170, respectively.
- The company had a fully valued deferred tax asset of $954,657 at June 30 and believed it was more likely than not that the asset would not be realized. Management said disclosure controls were effective and reported no material changes in internal control or risk factors.
Important facts for investors to verify
- Whether cash flow improves enough to fund planned drilling, debt service and ongoing operations, given only $37,229 of cash and no facility availability at quarter-end.
- Future compliance with the facility’s EBITDA and interest-coverage covenants, including the scheduled thresholds disclosed in the filing.
- Receipt and accounting treatment of the royalty-litigation settlement proceeds and note, and the post-quarter $90,000 Pioneer payment.
- Actual well participation costs, production outcomes and commodity-price exposure relative to management’s plans and sensitivities.
- Whether reserve values, deferred tax asset realizability or the full-cost ceiling test change as commodity prices and operating results evolve.