Mexco Energy Corporation — Form 10-Q Summary
Business and period: Mexco explores, develops and produces oil, natural gas, condensate and natural gas liquids, primarily in West Texas, with interests in 12 states. This report covers the quarter and six months ended September 30, 2013—the second quarter and first half of fiscal 2014. The financial statements are unaudited.
Financial performance and position
- Second-quarter revenue: $1.121 million, up 51% from $743,601. Oil and gas sales rose 51% to $1.108 million.
- Second-quarter earnings: Operating profit was $212,368, versus an operating loss of $17,004 a year earlier. Net income was $194,051, or $0.10 per diluted share, versus $763, or $0.00 per share. The quarter included a $59,295 derivative loss and a $59,075 deferred tax benefit.
- First-half revenue and earnings: Revenue was $2.118 million, up 55% from $1.371 million. Operating profit was $282,837, compared with an operating loss of $139,076; net income was $210,182, or $0.10 per diluted share, compared with a net loss of $62,454, or $0.03 per share.
- Margins: Calculated from reported results, second-quarter operating and net margins were approximately 18.9% and 17.3%, respectively, compared with negative 2.3% and approximately 0.1% in the prior-year quarter. First-half operating and net margins were approximately 13.3% and 9.9%, versus negative 10.1% and negative 4.6% a year earlier.
- Cash flow: First-half operating cash flow was $855,036, up from $388,290. Investing activities used $73,812, including $786,097 in oil and gas property additions, offset in part by $743,287 in property-sale proceeds. Financing activities used $725,000 to repay debt. Cash increased $56,224 to $222,630.
- Liquidity and debt: Working capital was $637,809, versus $309,180 at March 31, 2013; current assets were $1.015 million and current liabilities $377,173. Long-term debt was $2.225 million, down from $2.950 million. The $4.9 million revolving facility had $2.675 million available at September 30. The company reported compliance with its financial covenants.
- Balance sheet: Total assets were $17.434 million and stockholders’ equity was $13.229 million at September 30, compared with $17.935 million and $12.937 million at March 31. Derivative liabilities totaled $56,616; asset retirement obligations totaled $845,203, including a $50,000 current portion.
Changes, operations and management commentary
- Management attributed higher sales to increased oil production and higher oil and gas prices; first-half gas production was nearly flat year over year, while oil volumes rose 36%. In the quarter, oil volumes rose 38% and gas volumes declined 4%.
- Production costs, depreciation/depletion/amortization and general and administrative expenses all increased year over year. Management cited higher production taxes and operating costs, additional working-interest wells associated with the TBO acquisition, increased production, and higher insurance, salaries and professional-service costs.
- Interest expense increased to $38,332 for the first half from $21,626, which management attributed to increased borrowings. Derivative losses were $86,687 for the first half, consisting of $30,071 realized losses and $56,616 unrealized losses.
- The company reported drilling and development participation across Texas, New Mexico, Oklahoma and North Dakota. Several wells were producing or being completed; additional drilling activity was planned. It also assigned leasehold interests in Upton and Reagan counties, Texas, receiving reported payments of $625,995 and $116,299, respectively, while retaining a 1% royalty on the Upton County acreage.
Outlook, risks and notable items
- Management stated that operating cash flow and financing availability should provide adequate liquidity for the next fiscal year. No specific earnings, production or capital-spending guidance was provided.
- The revolving credit agreement was amended and renewed on October 25, 2013, extending maturity to November 30, 2015. No principal payments were anticipated through that date. The rate was floating BBA LIBOR plus 2.50 percentage points; the reported rate at September 30 was 2.68%. The agreement prohibits cash dividends.
- Commodity-price volatility is a principal risk: lower prices could reduce cash flow, reserve values, borrowing capacity and liquidity, and could trigger a full-cost impairment. Management said results are more sensitive to natural-gas prices than oil prices. A $1 change in first-half average gas price per Mcf was estimated to change net income by $192,584; the equivalent $1-per-barrel oil change was estimated at $14,139.
- The company had oil swaps at a fixed price of $90 per barrel. Swaps reduce some price volatility but can require payments, limit gains if oil prices rise, and expose the company to counterparty risk. A 10% change in forward curves was estimated to change the September 30 net derivative liability by approximately $85,000.
- The company reported approximately $677,000 of unrecognized tax benefits and said disallowance could require additional tax payments. Management did not expect changes in the next 12 months to have a significant effect on results.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no known material legal or governmental proceedings and no material changes to previously disclosed risk factors other than derivative-related risks.
Important facts for investors to verify
- Whether production growth and new-well performance can sustain revenue and cash flow, particularly given the small working interests and ongoing development costs.
- How much of the reported earnings improvement reflects operating performance versus the deferred tax benefit, and how derivative fair-value changes affect future reported earnings and cash settlements.
- The current borrowing-base availability, covenant headroom and debt repayment needs under the renewed credit facility, especially if commodity prices or reserves decline.
- The production volumes and price exposure covered by the oil swaps, and the associated counterparty and settlement risks.
- The status and potential use of tax attributes, including the approximately $677,000 of unrecognized tax benefits and the net operating loss carryforward.