Business Context and Reporting Period
Company: Mexco Energy Corporation (Mexco)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended June 30, 2010
Operations: Exploration, development, and production of natural gas, crude oil, condensate, and NGLs, primarily in West Texas with interests in ten states. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 |
|---|---|---|
| Total Operating Revenues | $836,393 | $658,177 |
| Net Income (Loss) | $5,776 | $(68,003) |
| Operating Cash Flow | $444,942 | $293,379 |
| Cash and Equivalents (End of Period) | $141,457 | $130,920 |
| Total Debt (Current + Long-term) | $325,000 | $700,000 |
| Working Capital | $(75,354) | $478,394 (Q1 2010) |
Production Data (Q2 2010 vs Q2 2009):
- Oil Revenue: $335,057 (4,516 bbls @ $74.19/bbl) vs $232,935 (4,331 bbls @ $53.78/bbl).
- Gas Revenue: $496,953 (120,058 mcf @ $4.14/mcf) vs $420,875 (138,418 mcf @ $3.04/mcf).
Material Changes
- Profitability: The company reported a net income of $5,776, a significant improvement from a net loss of $68,003 in the prior year period. This was driven by a 27% increase in operating revenues.
- Revenue Drivers: Oil revenue increased 44% due to higher prices and volume; gas revenue increased 18% due to higher prices, despite a 13% decline in gas production volume.
- Expenses: Production costs rose 53% to $368,227, primarily due to $113,000 in workover and repair costs on an operated well in Hutchinson County, Texas. General and administrative expenses increased 7% due to higher engineering service costs.
- Debt Reduction: Long-term debt was reduced by $375,000 during the quarter. The current portion of long-term debt is now $325,000, due April 30, 2011.
- Liquidity: Working capital shifted from a surplus of $478,394 in Q1 2010 to a deficit of $75,354 in Q2 2010, largely due to the reclassification of debt to current liabilities and increased payables.
Outlook, Risks, and Management Commentary
Management Commentary: Management believes cash flow from operations and available financing will provide adequate liquidity for the next fiscal year. The company continues to focus on acquiring royalties in areas with development potential and participating in joint ventures in Reagan County, Texas, and Eddy County, New Mexico.
Risks and Contingencies:
- Commodity Price Volatility: Financial results are highly sensitive to oil and gas prices. The company has no hedging arrangements. A $1 change in oil price impacts pretax income by ~$4,500; a $1 change in gas price impacts it by ~$120,000.
- Interest Rate Risk: The revolving credit facility bears interest at LIBOR + 2.5%. A 1% rate change would impact annual pretax income by $3,250.
- Credit Facility: The company has a $5.0 million revolving credit line with a borrowing base of $4.9 million. Availability was $4.575 million as of June 30, 2010. The agreement prohibits cash dividends.
- Asset Retirement Obligations (ARO): Total ARO liability is $548,180, with $50,000 classified as current.
Investor Verification Checklist
- Debt Maturity: Verify the ability to repay or refinance the $325,000 current debt portion due April 30, 2011.
- Working Capital Deficit: Assess the sustainability of operations given the shift to a negative working capital position.
- Production Costs: Confirm if the $113,000 workover expense was a one-time event or indicative of ongoing maintenance needs.
- Reserve Estimates: Review the impact of current commodity prices on the full cost amortization base and potential future write-downs.
- Joint Venture Exposure: Evaluate the financial health of working interest partners in the Reagan County and Dodd Federal Unit projects.