MEXCO ENERGY CORP annual report, FY2020

Business context and reporting period

Mexco Energy Corporation’s Form 10-K covers the fiscal year ended March 31, 2020, with fiscal 2019 as the comparable period; it is not a calendar-year 2019 Q4 report. Mexco is a small independent oil and gas company with non-operated interests across 14 states, concentrated in West Texas and southeastern New Mexico. It reported interests in approximately 6,300 gross wells and 3,402 net acres. Its principal executive, Nicholas C. Taylor, beneficially owned approximately 47% of common stock.

Financial and operating results

Operating expenses were $2.802 million, including production costs of $914,649, DD&A of $853,801 and general and administrative expense of $1.007 million. Mexco recorded an operating loss of $63,676, compared with operating income of $8,346 in FY2019; interest expense rose to $37,656 from $21,931. No income tax expense was recorded.

Oil production rose 25.3% to 44,301 barrels, while gas production was nearly flat at 294,007 Mcf. Average realized oil price fell 4.0% to $52.15 per barrel; gas price fell 43.1% to $1.40 per Mcf. Oil revenue increased 20.2% to $2.310 million, while gas revenue declined 43.5% to $410,226. Production cost per BOE improved to $7.51 from $8.85.

Investing cash outflow was $1.742 million, including $1.692 million of additions to oil and gas properties and a $150,000 cost-basis investment. Financing provided $782,734 net, including $1.285 million of credit-facility borrowings and $490,000 of repayments. The balance sheet reported total assets of $10.071 million, total liabilities of $1.706 million and equity of $8.364 million. The $795,000 facility balance is presented net of $37,577 of unamortized issuance costs as $757,423 of long-term debt.

Reserves and material changes

Year-end proved reserves were 1.816 million BOE, down from 1.937 million BOE, with oil and NGLs representing 55%. Approximately 50% of reserves were proved undeveloped. PV-10 was $21.637 million versus $22.317 million; the standardized measure after tax was $18.976 million versus $19.252 million. These reserve valuations use SEC-prescribed average prices, not forecasts or fair-market-value estimates. Gas reserve pricing fell 40% year over year under that methodology.

Reserve additions included 119 MBOE from extensions and discoveries, offset by 136 MBOE of downward revisions; the filing attributes most revisions to the five-year PUD development limit. Mexco converted approximately 96 MBOE of PUDs to developed producing reserves through participation in 57 wells. It participated in 50 horizontal wells at approximately $1.425 million and 8 vertical wells at approximately $30,000. At year-end, 13 Delaware Basin drilled-but-uncompleted wells were estimated to require about $300,000 in completion costs. Estimated future development costs for year-end PUDs were $6.632 million through March 31, 2023.

Outlook, risks and unusual items

• Management’s FY2021 priorities were to improve cash flow through efficiencies and cost reductions, sell non-core assets, and align capital spending with cash flow to limit borrowing, reduce debt and preserve liquidity. No quantified earnings or production guidance is provided.
• COVID-19, the early-2020 oil price collapse and market volatility were expected to adversely affect near-term revenues, costs and operating cash flow; management said the extent and duration could not be reasonably estimated. WTI was $16.75 per barrel on March 31, 2020. Permian gas pipeline constraints were also a risk.
• Operations depend on third-party operators, and the company has limited control over their spending and development timing. The Permian accounted for 92% of discounted future net cash flows and 78% of gross revenue; one customer represented 52% of FY2020 oil and gas revenue and 63% of year-end oil and gas receivables.
• The credit facility was amended in February 2020: commitment increased to $2.5 million, borrowing base to $1.5 million, and maturity extended to March 2023. It is secured by substantially all oil and gas properties and carries floating-rate interest. Mexco reported covenant compliance at year-end. A 1 percentage-point rate change would change annual pretax income by approximately $7,950 at the year-end balance.
• After year-end, the facility balance was $930,000 as of June 26, 2020. Mexco received a $68,574 PPP loan on May 5, 2020; forgiveness depends on satisfying program requirements. It also entered oil price floor contracts covering April–August 2020 production, at a $25 per barrel floor, and received an $8,200 settlement on the first contract.
• No ceiling-test impairment was recorded in FY2020 or FY2019. Environmental regulation, reserve-estimate uncertainty, future capital needs, reserve replacement, acquisition competition and possible future impairment remain material risks. The company paid no dividends and reported no material litigation or environmental claims requiring material capital expenditures.
• The independent auditor issued an unmodified opinion on the financial statements and highlighted uncertainty from COVID-19 without modifying its opinion. Management concluded internal control over financial reporting and disclosure controls were effective as of March 31, 2020; the auditor was not engaged to opine on internal-control effectiveness.

Important facts for investors to verify

• Whether post-year-end commodity prices, hedges and COVID-19 impacts materially changed realized prices, production, cash flow or reserve economics.
• Current borrowing-base availability, facility balance, covenant headroom, interest costs and any refinancing or repayment needs.
• Funding and timing for the $6.632 million PUD development program, including third-party operators’ drilling plans and the economic viability of undeveloped reserves.
• Exposure to the dominant purchaser and Permian Basin concentration, including the status of pipeline constraints and receivable collections.
• PPP loan forgiveness status and the continuing effect of the post-year-end oil price floor contracts.
• Reserve revisions, including the effects of the five-year PUD rule and the price assumptions underlying PV-10 and the standardized measure.