MEXCO ENERGY CORP - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for MEXCO ENERGY CORPORATION for the period ended June 30, 2007. The Company is engaged in the exploration, development, and production of natural gas, crude oil, condensate, and natural gas liquids (NGLs), with primary operations in West Texas and interests in ten states. As of August 9, 2007, there were 1,776,366 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 |
|---|---|---|
| Total Operating Revenues | $850,317 | $777,579 |
| Net Income | $34,806 | $227,290 |
| Net Income Per Share (Basic) | $0.02 | $0.13 |
| Operating Cash Flow | $194,956 | $319,785 |
| Cash and Equivalents (End of Period) | $106,933 | $77,057 |
| Long-Term Debt | $875,000 | $700,000 |
| Working Capital | $380,686 | $446,831 |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased by $192,484 (85%) compared to the prior year quarter. This was driven by a 54% increase in production costs and a 15% increase in depreciation, depletion, and amortization (DD&A), which offset a 9% increase in oil and gas revenues.
- Revenue Drivers: Oil and gas sales rose to $850,144 due to a 15% increase in average gas prices ($6.74/mcf vs $5.86/mcf) and a 7% increase in gas production. However, oil prices fell 8% ($59.32/bbl vs $64.66/bbl) and oil production dropped 5%.
- Expense Increases: Production costs surged to $333,050 primarily due to increased maintenance and repairs on operated wells in Pecos County, Texas. Interest expense rose 52% to $15,348 due to higher borrowings.
- Cash Flow: Operating cash flow decreased to $194,956, largely due to a $79,388 increase in accounts receivable.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The Company spent $311,820 on additions to oil and gas properties. Active drilling projects include wells in Crane County, Borden County, and Lea County (New Mexico), with costs incurred ranging from $124,000 to $180,000. One re-entry in Andrews County was unsuccessful.
- Liquidity: Management believes cash flow from operations and available credit will be sufficient for working capital and capital expenditures for the fiscal year. The Company has a $5.0 million revolving credit facility with a borrowing base of $4,225,000; $875,000 was outstanding as of June 30, 2007.
- Market Risks: The Company has no hedging arrangements. Results are highly sensitive to commodity price volatility. A $1.00 change in oil price would impact pretax income by approximately $4,392, while a $1.00 change in gas price would impact it by $87,539.
- Legal: No material legal proceedings are currently pending.
Investor Verification Checklist
- Production Cost Spikes: Verify the sustainability of the 54% increase in production costs and the specific maintenance requirements in Pecos County.
- Drilling Success Rates: Monitor the results of the testing wells in Crane and Borden Counties and the evaluation of the unsuccessful Lea County well.
- Commodity Price Exposure: Assess the impact of potential declines in natural gas prices given the Company's lack of hedging and high sensitivity to gas price fluctuations.
- Debt Covenants: Review the borrowing base determination process (evaluated annually around August 1) to ensure the $4.225 million limit remains adequate given current production levels and prices.
- Accounts Receivable: Investigate the reasons for the significant increase in accounts receivable, which negatively impacted operating cash flow.