MXC

MEXCO ENERGY CORP - 10-K Summary (Fiscal Year Ended March 31, 2008)

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, 2008. Nicholas C. Taylor, the President and CEO, beneficially owns approximately 50% of the outstanding common stock.

Key Financial Metrics

Production Data: Oil production averaged 48 barrels per day (17,504 total bbls) at an average price of $77.05/bbl. Gas production averaged 1,038 Mcf per day (379,048 total Mcf) at an average price of $6.70/Mcf.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 31% to $3.90 million, driven by a 30% increase in average oil prices and a 15% increase in average gas prices, alongside a 5% increase in oil production and 12% increase in gas production.
• Profitability: Net income rose 17% to $713,644. Operating income increased 73% to $1.03 million.
• Cost Increases: Production costs rose 42% to $1.24 million due to increased repairs in the El Cinco field and higher production taxes. Interest expense surged 338% to $105,312 due to higher average borrowings.
• Debt Expansion: Total debt increased from $700,000 to $2.60 million to fund acquisitions and development. The company utilized $1.47 million from operations and borrowed additional funds to finance $3.06 million in property acquisitions and development.
• Reserve Additions: Proved reserves increased significantly, with the PV-10 value rising from $26.2 million to $40.9 million, largely due to a $1.85 million acquisition of royalty interests in the Newark East (Barnett Shale) field in late 2007.

Outlook, Risks, and Management Commentary

Management Commentary: Management believes cash flow from operations and available credit facilities will provide adequate liquidity for the next fiscal year. The company continues to focus on acquiring low-cost gas properties and developing reserves in West Texas. A significant exploratory well in Loving County, Texas, tested at a high flow rate, though commercial production rates remain to be determined.

Risks and Contingencies:

• Commodity Price Volatility: The company is highly sensitive to natural gas prices, which constitute 86% of proved reserves. Price declines could trigger ceiling test writedowns under full cost accounting.
• Concentration Risk: Two customers, Chesapeake Operating (14%) and Conoco Phillips (13%), accounted for significant revenue in 2008.
• Legal Proceedings: The company is a party to a lawsuit against a drilling company regarding a failed well in Lea County, New Mexico, seeking to recover approximately $237,000 in costs.
• Environmental Liability: Operations are subject to extensive federal and state environmental regulations, including potential liabilities under CERCLA and OPA '90.

Investor Verification Checklist

• Verify the commercial production rates and economic viability of the new Loving County exploratory well, as test rates may not reflect long-term performance.
• Monitor the status of the lawsuit against the drilling company in New Mexico regarding the failed well and potential recovery of $237,000.
• Assess the impact of the $2.6 million debt load on future liquidity, noting the borrowing base is subject to redetermination based on commodity prices.
• Review the concentration of revenue from Chesapeake Operating and Conoco Phillips and the stability of these customer relationships.
• Confirm the valuation assumptions used for the $1.85 million Barnett Shale royalty acquisition and its contribution to future cash flows.