MXC

Business Context and Reporting Period

Mexco Energy Corporation is a Colorado corporation engaged in the acquisition, exploration, and development of oil and gas properties, primarily in Texas. This Form 10-K covers the fiscal year ended March 31, 1998. The Company operates as a single segment business with no foreign operations. As of the reporting date, the Company held leasehold rights covering over 214,000 gross acres (3,871 net acres) with 1,537 producing wells.

Key Financial Metrics

Production Data (1998): 63,800 barrels of oil and 432,343 MCF of gas.
Average Sales Prices (1998): Oil at $17.70/bbl; Gas at $2.22/MCF.
Reserves: Proved reserves valued at $3,892,533 (discounted at 10%) as of March 31, 1998.

Material Changes vs. Prior Period

• Net Loss: The Company reported a net loss of $1.32 million in 1998, a reversal from a net income of $377,867 in 1997. This was primarily driven by a $2.33 million increase in depreciation, depletion, and amortization (DD&A), which included a full cost ceiling write-down of approximately $1.74 million due to declining oil prices and downward reserve adjustments.
• Revenue Growth: Oil and gas revenue increased 44% to $2.09 million, driven by a significant increase in production volumes from acquisitions and development, despite a drop in the average crude oil price from $22.09 (1997) to $17.70 (1998).
• Cost Increases: Production costs rose 91% to $663,525 due to higher operating expenses from new wells. General and administrative expenses increased 70% to $192,395.
• Capital Structure: The Company issued 200,000 shares of common stock in a private placement for $1.0 million. Proceeds were used to reduce debt and fund acquisitions. Total debt increased to $1.822 million.

Outlook, Risks, and Management Commentary

• Liquidity: The Company maintains a $3.0 million revolving line of credit with a borrowing base of $2.1 million (as of March 31, 1998). Principal payments on the line of credit are due to begin in September 1998. Management believes cash flows and borrowings will be sufficient to meet obligations.
• Market Risks: The Company is highly sensitive to fluctuations in crude oil and natural gas prices. A sharp decline in prices in 1998 directly caused the impairment charge and reduced reserve valuations.
• Operational Risks: Drilling activities carry high risks, including dry holes and equipment shortages. The Company relies on third-party operators for the majority of its wells (1,536 of 1,542).
• Year 2000 Issue: Management expects no material impact from Year 2000 issues as software updates are included in existing support contracts.
• Concentration: Approximately 74% of the present value of future net revenues is concentrated in three fields: Lazy JL, Viejos, and Gomez.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the bank loan covenants, particularly given the recent net loss and the upcoming principal payment schedule starting September 1998.
• Reserve Estimates: Confirm the accuracy of the proved reserve estimates (245,860 bbls oil, 3.2M MCF gas) and the impact of the $1.74 million ceiling write-down on future asset values.
• Price Sensitivity: Assess the Company's ability to maintain profitability if oil prices remain near the 1998 average of $17.70/bbl versus the 1997 average of $22.09/bbl.
• Related Party Transactions: Review the $50,097 in billings to the majority stockholder for lease operating expenses to ensure arm's-length pricing.
• Capital Expenditures: Monitor the $2.09 million in capital expenditures for oil and gas properties to ensure they align with the reduced borrowing base.