Business Context and Reporting Period
MEXCO ENERGY CORPORATION, a Colorado corporation engaged in oil and gas exploration and production, filed this Form 10-Q for the quarterly period ended December 31, 1996. The company operates primarily in Texas fields including Lazy JL (Garza County) and Viejos (Pecos County). The financial statements are unaudited but include all normal recurring adjustments.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Dec 31, 1996)
- Total Revenues: $653,841 (Net revenues from oil and gas: $650,084).
- Net Income: $260,553 (EPS: $0.18).
- Income Before Tax: $328,062.
- Net Cash Provided by Operating Activities: $879,185.
Balance Sheet Position (As of Dec 31, 1996)
- Total Assets: $3,279,498 (Cash: $148,870).
- Total Liabilities: $473,800 (Current Liabilities: $378,949).
- Stockholders' Equity: $2,805,698.
- Working Capital: Negative $86,589 (Current Assets $292,360 less Current Liabilities $378,949).
Capital Expenditures
- Capital Expenditures (9 months): $945,687.
- Net Cash Used in Investing Activities: ($902,427).
Material Changes vs. Prior Period
Revenue Growth
Operating revenues increased 70% ($364,733) for the nine months ended December 31, 1996, compared to the same period in 1995. This was driven by a 69% increase in oil revenues and a 69% increase in gas revenues, attributed to higher commodity prices and increased production volumes from new wells and acquisitions.
- Average Oil Price (9 months): $22.21/barrel (1996) vs. $17.14/barrel (1995).
- Average Gas Price (9 months): $2.16/MCF (1996) vs. $1.44/MCF (1995).
Expense Increases
- Depreciation, Depletion, and Amortization (DD&A): Increased 37% to $246,633 due to property additions.
- General and Administrative (G&A): Increased 31% to $85,813 due to higher accounting, engineering, and salary costs.
- Production Costs: Increased 18% to $238,782, primarily due to higher production taxes.
Liquidity and Working Capital
Working capital decreased by 146% compared to March 31, 1996, turning negative due to significant property acquisitions and drilling costs. Accounts payable increased significantly to $372,977 from $32,584, reflecting drilling expenses incurred at period-end.
Outlook, Risks, and Management Commentary
Operational Activity
During the nine-month period, the company successfully drilled and completed nine wells across the Viejos and Lazy JL fields. However, the company also incurred approximately $57,000 in dry hole costs from an unsuccessful drilling attempt in Howard County, Texas.
Debt and Liquidity
In August 1996, the company secured a $500,000 revolving line of credit collateralized by a deed of trust on substantially all properties. The loan requires monthly installments of $15,000 plus interest, with full repayment due April 15, 1997. On January 7, 1997 (post-period), the company borrowed $100,000 against this line to fund drilling costs.
Risks and Contingencies
- Market Risk: Operations are sensitive to fluctuations in oil and gas prices.
- Exploration Risk: Continued drilling activity carries the risk of dry holes, as evidenced by the $57,000 loss in Howard County.
- Liquidity Risk: The company has negative working capital and relies on a short-term credit facility maturing in April 1997 to fund operations.
Investor Verification Checklist
- Debt Maturity: Verify the company's ability to repay the $500,000 line of credit in full by April 15, 1997, given the current negative working capital position.
- Accounts Payable: Confirm the nature and payment schedule of the $372,977 in trade accounts payable, which represents a significant increase from the prior period.
- Production Volumes: Validate the reported production increases and the specific contribution of the newly acquired Lazy JL and Viejos field interests to revenue growth.
- Capital Allocation: Assess the return on the $945,687 in capital expenditures relative to the incremental cash flow generated.