MEXCO ENERGY CORP - 10-Q Summary (Q2 2012)
Business Context and Reporting Period
Mexco Energy Corporation is a smaller reporting company engaged in the exploration, development, and production of natural gas, crude oil, condensate, and natural gas liquids (NGLs). Operations are primarily centered in West Texas, with interests in twelve states. This report covers the quarterly period ended June 30, 2012.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 |
|---|---|---|
| Total Operating Revenues | $627,121 | $909,094 |
| Net Income (Loss) | $(63,217) | $104,385 |
| Operating Cash Flow | $254,486 | $383,152 |
| Cash and Equivalents (End of Period) | $53,655 | $123,513 |
| Long-Term Debt | $1,475,000 | $1,700,000 |
| Working Capital | $75,123 | $476,960 (Mar 31, 2012) |
| EPS (Basic) | $(0.03) | $0.05 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 31% to $627,121. This was driven by a 58.6% drop in gas revenue (due to lower prices and volumes) and a 2.5% drop in oil revenue (lower prices offset by higher volumes).
- Profitability Shift: The company reported a net loss of $63,217, compared to net income of $104,385 in the prior year. Operating loss was $122,072 versus an operating profit of $156,680 previously.
- Expense Trends: General and administrative expenses increased 8% to $292,269, primarily due to higher stock-based compensation ($43,779 vs $27,237). Production costs decreased 5% due to lower production taxes.
- Liquidity: Cash and cash equivalents decreased by $445,026 to $53,655. This reduction was caused by capital expenditures of $474,512 (primarily additions to oil and gas properties) and debt repayments of $225,000.
- Debt Reduction: Long-term debt was reduced by $225,000 to $1,475,000. The company maintains a $4.9 million credit facility with $3,425,000 available.
Outlook, Risks, and Management Commentary
- Capital Strategy: Management focuses on acquiring royalties and developing low-cost reserves. Recent activities include purchasing additional working interests in the Fuhrman-Mascho Field and participating in drilling projects in New Mexico and Texas.
- Market Risk: The company is highly sensitive to commodity price fluctuations. It has no hedging arrangements. A $1.00 change in oil price impacts pretax gain by ~$5,069, while a $1.00 change in gas price impacts it by ~$89,049.
- Liquidity Outlook: Management believes cash flow from operations and available credit facilities will provide adequate liquidity for the next fiscal year.
- Stock Repurchase: On June 29, 2012, the board authorized a $250,000 share repurchase program. No shares were repurchased during the quarter.
- Tax Position: The company recorded a deferred income tax benefit of $69,584, resulting in an effective tax rate of (52%). Significant statutory depletion and net operating loss carryforwards exist.
Investor Verification Checklist
- Verify the impact of declining natural gas prices on future cash flows, given the company's high sensitivity to gas pricing.
- Confirm the status of the $4.9 million credit facility and compliance with financial covenants, as this is the primary source of liquidity.
- Monitor the progress and costs of the new drilling projects in the Fuhrman-Mascho Field and other joint ventures to assess capital efficiency.
- Review the utilization of the newly authorized $250,000 stock repurchase program.
- Assess the sufficiency of current cash balances ($53,655) relative to upcoming capital expenditure requirements.