MEXCO ENERGY CORP quarterly report, Q2 FY2022

Business context and reporting period

Mexco Energy Corporation is an independent oil and gas exploration, development and production company, with most interests in West Texas and southeastern New Mexico. Its properties are operated by third parties. This Form 10-Q covers the quarter and six months ended September 30, 2021, the second quarter and first half of fiscal 2022; comparisons are with the same periods of fiscal 2021.

Financial performance and position

Six-month oil and gas sales were $2.797 million, up 181%; higher realized prices and increased production contributed. Oil and gas volumes rose 28.5% for oil and 8.5% for gas, while average realized prices increased 109.5% for oil and 200.8% for gas. Operating margins, calculated as operating income divided by total operating revenue, were approximately 46% for the quarter and 40% for the six-month period; the comparable 2020 periods had operating losses.

At September 30, cash was $93,574 and working capital was $744,882, compared with $618,960 at March 31. Current assets were $928,050 and current liabilities $183,168. The company had no credit-facility borrowings and reported $1.5 million available under its facility. Total liabilities were $1.018 million, including $156,318 of operating lease liabilities and $731,900 of noncurrent asset-retirement obligations. Six-month investing cash use was $554,787, primarily for oil and gas properties; financing cash use was $994,268, mainly reflecting net debt repayments. Stockholders’ equity was $10.149 million.

Material changes versus the prior comparable periods

• Results swung from losses to profits as oil and gas prices and production recovered from the prior-year period.
• Six-month operating expenses rose to $1.694 million from $1.305 million. Production expense increased 58%, DD&A increased 18%, and general and administrative expense increased 18%; management cited higher production taxes, lease operating expenses, bonuses, director fees and accounting costs.
• Interest expense declined to $20,249 for six months from $24,570, reflecting lower borrowings. The company repaid $1.455 million and ended the period debt-free.
• No derivative contracts were outstanding at September 30, 2021; the prior-year comparison included losses on oil put options.

Outlook, commentary and risks

Management planned to participate in drilling and completion of 39 horizontal wells during fiscal 2022 at an estimated aggregate cost of approximately $1 million. The company expects to fund projects primarily with cash and operating cash flow, with possible use of the credit facility or sales of non-core properties. This is a stated plan, not formal earnings guidance. After quarter-end, Mexco reported spending $84,600 to complete four wells and $126,000 to drill four wells in Lea County, New Mexico. Cash on hand was approximately $335,000 on November 1.

Commodity-price volatility is the principal market risk; Mexco reported no current hedges and noted the credit agreement requires lender approval for hedge agreements. For the first half of fiscal 2022, a $10 per barrel change in average oil price would change pretax income by approximately $317,150, and a $1 per Mcf change in average gas price by approximately $182,670. One purchaser represented $594,715, or 76%, of oil and gas receivables. The company also reported a $1.046 million deferred tax asset fully offset by a valuation allowance, so it recorded no income-tax expense. Management said disclosure controls were effective, no material internal-control changes occurred, and there were no material changes to previously disclosed risk factors; it reported no known material legal proceedings.

Important facts for investors to verify

• Whether stronger realized commodity prices and production persist, and how price movements affect earnings and cash generation.
• Progress, actual costs and production outcomes for the planned 39 wells, including the funding required for the program.
• Credit-facility availability, borrowing-base terms and covenant compliance; the facility is secured by substantially all oil and gas properties and subsidiary stock.
• Receivable collection and exposure to the largest purchaser, which accounted for 76% of oil and gas receivables.
• Reserve estimates and depletion assumptions, which management identifies as significant estimates; actual results may differ materially.
• After-quarter-end cash and spending updates, and the potential dilution from outstanding stock options.