Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2017. The filing is unaudited and reports results against the comparable 2016 periods. Mexco explores, develops, and produces oil, gas, condensate, and NGLs, primarily in West Texas, with interests in 13 states.
Financial performance
- Quarter revenue: $619,088, up 6.6% from $580,842. Oil and gas revenue rose 12% to $610,451; higher realized prices more than offset lower production volumes. Net loss narrowed to $189,170 from $237,902; loss per share was $0.09 versus $0.12.
- Six-month revenue: $1,286,772, up 2.9% from $1,251,025. Oil and gas revenue increased 17% to $1,261,893. Net loss narrowed to $484,722 from $531,358; loss per share was $0.24 versus $0.26.
- Expenses and margins: Six-month operating expenses increased 1.5% to $1,717,555, and operating loss was $430,783 versus $440,523. Production expense rose 16% to $564,705; G&A fell 7% to $539,528; depreciation, depletion, and amortization declined 1.5% to $596,765. Interest expense fell 41% to $53,950. No income tax expense was recorded.
- Cash flow: Six-month operating cash flow was $326,435, compared with $51,025 in the prior-year period. Investing activities provided $88,002, including $549,507 of property-sale proceeds, offset in part by $481,005 of property additions. The company repaid $432,000 of debt; cash declined $17,563 to $55,888.
- Liquidity and debt: Working capital was $57,964 at September 30, versus $367,675 at March 31. Long-term debt was $2,468,000, down from $2,900,000; the borrowing base was $2,518,000, with no remaining availability. The facility matures November 30, 2020, bears interest at floating BBA LIBOR plus 3 percentage points (4.24% at quarter-end), and prohibits cash dividends. Mexco reported compliance with its financial covenants.
- Balance sheet: Total assets were $11,991,230, compared with $12,708,065 at March 31; stockholders’ equity was $8,231,375, down from $8,702,322. Asset retirement obligations totaled $935,301, including a $10,000 current portion.
Material changes and operating developments
- Quarter oil and gas sales growth reflected higher prices: average oil price rose 8.3% to $45.10 per barrel and gas price rose 27.7% to $2.72 per mcf. Oil volume edged down 0.5%; gas volume declined 6.5%.
- For the six months, oil revenue increased 8.6% and gas revenue 33.8%; oil volume was approximately flat while gas volume fell 2.8%. Higher prices drove much of the growth.
- Other operating revenue fell to $24,879 for six months from $168,458, primarily because the prior-year period included a $148,614 royalty-underpayment lawsuit settlement.
- Management said production costs included an approximately $67,000 marketing and transportation refund from XTO Energy that was incorrectly provided and is being reversed through netting over the next 8–10 months.
- Mexco sold leasehold interests in 137 net acres in Oklahoma for $460,461; $410,000 was applied to debt and $50,461 to working capital. The cash-flow statement reports $549,507 of proceeds from property and equipment sales for the six-month period.
Outlook, risks, and other matters
- Mexco expected to participate in approximately 30 horizontal wells during fiscal 2018 at an estimated aggregate cost of approximately $1.2 million. Fourteen were in drilling or completion stages at quarter-end, with approximately $486,000 expended. The filing does not provide a broader earnings or production forecast.
- Two final wells in a 17-well Delaware Basin program were completed during the quarter. Their reported combined average flow was 1,231 barrels of oil equivalent per day; Mexco’s working interest in each was 0.18%.
- Management cited depressed and volatile commodity prices, which can reduce cash flow, reserves, liquidity, and the borrowing base, and may trigger a noncash full-cost ceiling-test write-down. A $10-per-barrel change in average oil price would have changed six-month pretax loss by $179,690; a $1-per-mcf gas-price change by $179,016.
- The company relies on asset sales and operating cash flow to fund obligations and planned projects. Management stated it may continue selling non-core assets. It also reported no credit-facility availability at quarter-end and floating-rate exposure: a one-percentage-point rate change would affect annual pretax income by $24,680 at the outstanding balance.
- Deferred tax assets of $1,333,489 were fully covered by a valuation allowance; management believed realization was more likely than not not to occur. The company reported no material changes to previously disclosed risk factors, no material litigation known to it, and no subsequent events requiring disclosure.
Important facts for investors to verify
- Reconcile the $549,507 cash-flow proceeds from property sales with management’s $460,461 Oklahoma transaction disclosure, including any other dispositions.
- Track the XTO refund reversal, its effect on production costs, and the timing of the stated 8–10-month netting.
- Assess liquidity and covenant headroom given $57,964 working capital, no unused facility availability, planned well spending, and the borrowing-base terms.
- Monitor oil and gas prices, production volumes, reserve estimates, and potential full-cost impairment exposure.
- Evaluate execution and funding of the approximately $1.2 million fiscal 2018 horizontal-well program and the contribution attributable to Mexco’s small working interests.