Mexco Energy Corporation — Form 10-Q
Business and period: Oil and gas exploration, development and production company with most interests in West Texas and properties in 13 states. This report covers the three and six months ended September 30, 2016 (fiscal 2017 second quarter and first half); comparative periods ended September 30, 2015. Figures are unaudited.
Financial performance and position
| Metric | Three months 2016 | Three months 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total operating revenue | $580,842 | $728,829 | $1,251,025 | $1,431,438 |
| Operating loss | $(188,338) | $(1,094,279) | $(440,523) | $(1,529,760) |
| Net loss | $(237,902) | $(776,307) | $(531,358) | $(1,100,673) |
| Loss per share | $(0.12) | $(0.38) | $(0.26) | $(0.54) |
- Oil and gas revenue declined 24% in the quarter and 23% in the half year. For the half year, oil sales fell 24% and gas sales 22%; both lower prices and production contributed.
- Operating loss as a share of revenue was approximately 32% for the quarter and 35% for the half year. Net loss as a share of revenue was approximately 41% and 42%, respectively.
- Operating cash flow was $140,297 for the half year, down 55% from $315,397. Investing activities used $87,695 and financing activities used $60,000; cash declined $7,398 to $26,615.
- At September 30, cash was $26,615, current assets $425,225 and current liabilities $419,817, leaving working capital of $5,408, versus $23,150 at March 31, 2016. Total assets were $15.99 million and stockholders’ equity $8.84 million.
- Debt was $5.52 million, down $60,000 from March 31. The revolving facility had no remaining availability; its rate was floating BBA LIBOR plus 3 percentage points (3.522% at quarter-end). No principal payments were anticipated through the November 30, 2020 maturity. The company reported covenant compliance at September 30.
- Production costs and depreciation, depletion and amortization fell year over year in the half year; interest expense rose 8% to $91,007. No income tax benefit was recorded in fiscal 2017, versus a $513,331 benefit in the prior-year half.
Changes, outlook and risks
- Losses improved year over year, principally because the prior-year periods included an approximately $834,000 oil and gas property impairment; there was no impairment in the six months ended September 30, 2016. Lower revenue and the absence of the prior-year tax benefit partly offset this improvement.
- Other operating revenue included a royalty underpayment settlement with Chesapeake Energy and Total E&P USA: approximately $148,614 recognized in the half year, including $123,394 cash and a $30,894 interest-free note due in three years. Management cited the settlement as a principal reason for higher other revenue.
- Management said depressed commodity prices constrain cash available for capital expenditures and debt service, and that it may sell non-core assets if necessary. Its stated strategy is to pursue properties with potential for long-lived production and low operating costs. The filing provides no formal earnings or production guidance.
- After quarter-end, Mexco received approximately $2.187 million from a sale of working interests in Glasscock County, Texas, applying approximately $1.887 million to bank debt. Effective November 1, it sold non-core Pecos County interests for $405,000 and applied the proceeds to debt. Together, the sales reduced debt by $2.292 million, to $3.228 million as of November 10, 2016.
- Commodity prices are a significant risk: management says lower prices can reduce cash flow, reserves and the borrowing base, and potentially trigger a full-cost impairment. The company reported WTI at $44.75 per barrel and Henry Hub gas at $2.84 per MMBtu on September 30. It has floating-rate debt; a one-percentage-point rate change would change annual pretax income by approximately $55,200 at the quarter-end balance.
- Management reported effective disclosure controls and no material changes in internal control during the half year. It reported no material changes to the risk factors in its 2016 Form 10-K and no known material legal proceedings.
Key facts for investors to verify
- Whether the post-quarter asset sales and resulting debt reduction materially improve liquidity, borrowing capacity and compliance with future EBITDA and interest-coverage covenants.
- How oil and gas prices and production volumes affect operating cash flow, reserves, borrowing base and potential impairment risk.
- Whether the company can fund planned drilling and development while maintaining debt service, given minimal working capital and no unused credit availability at September 30.
- The expected production, costs and sustained performance of the reported new wells; the filing cautions that initial test results do not predict sustained production or results at other wells.
- The recoverability of the $1.043 million deferred tax asset, which was fully offset by a valuation allowance at September 30.