MXC

MEXCO ENERGY CORP - 10-K Summary (Fiscal Year Ended March 31, 2009)

Business Context and Reporting Period

Mexco Energy Corporation is an independent oil and gas company incorporated in Colorado, primarily engaged in the acquisition, exploration, and development of properties in the United States, with a focus on West Texas. The company operates under the full cost method of accounting. This report covers the fiscal year ended March 31, 2009. The company is classified as a smaller reporting company. Nicholas C. Taylor, the President and CEO, beneficially owns approximately 47% of the outstanding common stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 26% to $4.93 million, driven by a 25% increase in oil and gas sales. This was primarily due to a 7% increase in average oil prices ($82.22/bbl vs. $77.05/bbl) and a 43% increase in gas production volumes, partially offset by a 4% decrease in average gas prices.
• Profitability: Net income increased 64% to $1.17 million. Operating profit rose to $1.78 million. Production costs decreased 4% despite higher production volumes, largely due to reduced repairs and maintenance in the El Cinco field.
• Debt Reduction: Total debt decreased significantly from $2.6 million to $1.4 million as the company used cash from operations to pay down its revolving credit facility.
• Reserve Valuation: While physical gas reserves increased, the standardized measure of discounted future net cash flows dropped 65% to $11.5 million. This decline is attributed to a significant decrease in the weighted average oil and gas prices used for valuation ($42.12/bbl and $3.13/mcf in 2009 vs. $96.61/bbl and $8.70/mcf in 2008).
• Quarterly Volatility: The company reported a net loss of $10,835 in the fourth quarter of fiscal 2009, contrasting with profitability in the preceding three quarters, reflecting the impact of falling commodity prices late in the year.

Guidance, Outlook, and Risks

Outlook: Management believes cash flow from operations and available financing will be sufficient to fund operations for the next fiscal year. The company continues to focus on acquiring royalties in areas with significant development potential, specifically in the Newark East (Barnett Shale) field.

Risks and Contingencies:

• Commodity Price Volatility: The company's financial condition is highly sensitive to oil and gas prices. A decline in prices reduces cash flow, reserve values, and borrowing capacity. The filing notes that prices trended downward in the second half of fiscal 2009.
• Ceiling Test Risk: As a full cost company, Mexco is subject to quarterly ceiling tests. Significant price declines could trigger non-cash write-downs of capitalized costs, reducing earnings and equity.
• Liquidity and Credit: The company relies on a $5 million revolving credit facility (with $3.5 million available as of March 31, 2009). The facility prohibits cash dividends and requires compliance with financial covenants. Tight credit markets could restrict access to capital.
• Concentration Risk: Two customers accounted for 32% of total revenues in fiscal 2009. Additionally, the CEO owns 47% of the stock, giving him significant control over corporate matters.
• Undeveloped Reserves: Approximately 38% of total proved reserves are undeveloped, requiring significant capital expenditure to realize.

Investor Verification Checklist

• Verify the current borrowing base and availability under the $5 million revolving credit facility with Bank of America, N.A.
• Confirm the impact of current oil and gas spot prices on the company's quarterly ceiling test and potential for future write-downs.
• Review the status of the Newark East (Barnett Shale) acquisitions and their contribution to production volumes.
• Assess the company's ability to fund the development of 38% of its reserves that are currently undeveloped.
• Monitor the concentration of revenue from top customers (Chesapeake Operating and Conoco Phillips) and any changes in their purchasing patterns.