Business Context and Reporting Period
Company: Mexco Energy Corporation (MEXCO)
Reporting Period: Fiscal year ended March 31, 2000
Industry: Independent oil and gas exploration and development
Operations: Primarily focused on West Texas, with interests in 11 states. The company emphasizes natural gas reserves (85% of proved reserves) and cost reduction strategies.
Key Financial Metrics
| Metric | Fiscal 2000 | Fiscal 1999 |
|---|---|---|
| Total Operating Revenues | $1,686,266 | $1,510,005 |
| Net Income (Loss) | $393,647 | $(425,774) |
| Earnings Per Share (Basic) | $0.24 | $(0.26) |
| Cash Provided by Operations | $722,088 | $532,171 |
| EBITDA | $927,326 | $635,260 |
| Total Debt | $1,200,000 | $1,784,000 |
| Working Capital | $307,706 | $(307,819) |
| Stockholders' Equity | $2,567,228 | $2,173,581 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 12% to $1.69 million, driven by a 78% increase in average oil prices ($12.11 to $21.54/bbl) and a 25% increase in average gas prices ($1.87 to $2.33/mcf).
- Production Shift: Oil production decreased 61% (49,573 to 19,334 bbls) due to the sale of Lazy JL field properties. Gas production increased 12% (482,948 to 540,793 mcf) due to acquisitions and development.
- Profitability Turnaround: The company returned to profitability with a net income of $393,647, reversing a net loss of $425,774 in the prior year. This was aided by a 53% decrease in depreciation, depletion, and amortization (DD&A) and a 29% reduction in interest expense.
- Debt Reduction: Total debt decreased by $584,000 (33%) as proceeds from asset sales and operating cash flow were used to pay down the revolving credit facility.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes the company can maintain adequate liquidity for the next fiscal year. The company has a $3.0 million revolving credit facility with a borrowing base of $1.954 million as of March 31, 2000, with $1.2 million outstanding.
- Future Projects: The company is pursuing a 3-D seismic survey in Pecos County, Texas, with plans to drill two test wells at an estimated cost of $60,000 each. Up to 21 wells may be drilled depending on results.
- Risk Factors:
- Price Volatility: Revenues are highly sensitive to oil and gas prices. A $0.01 change in gas price impacts pretax income by approximately $5,408.
- Reserve Uncertainty: Reserve estimates are imprecise; there is no assurance reserves will be realized.
- Concentration Risk: One customer (Koch Midstream Services Company) accounted for 35% of revenues in fiscal 2000.
- Legal Proceedings: The company is a plaintiff in two class action lawsuits regarding contract price disputes; outcomes are uncertain.
- Dividends: The company has not paid dividends and currently retains earnings for growth, restricted further by loan covenants.
Investor Verification Checklist
- Verify the accuracy of the 85% gas reserve composition and the impact of the Lazy JL property sale on future oil production volumes.
- Confirm the status and projected costs of the Pecos County seismic survey and subsequent drilling program.
- Monitor the revolving credit facility borrowing base redetermination scheduled for August 1, 2000, and the scheduled monthly reductions.
- Assess the potential financial impact of the two pending class action lawsuits against gas purchasers.
- Review the concentration risk associated with Koch Midstream Services Company representing 35% of total revenues.