Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 30, 2019; comparative periods ended September 30, 2018. The filing was signed November 13, 2019. Mexco explores, develops and produces oil, natural gas, condensate and NGLs, primarily in West Texas and southeastern New Mexico, with interests in 14 states.
Financial performance
| Metric | Three months 2019 | Three months 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $625,884 | $714,508 | $1,325,475 | $1,463,519 |
| Operating income (loss) | ($74,771) | $28,407 | ($122,621) | $49,735 |
| Net income (loss) | ($82,787) | $22,031 | ($136,973) | $36,451 |
| Basic and diluted EPS | ($0.04) | $0.01 | ($0.07) | $0.02 |
- For the quarter, oil sales rose 7.2% to $531,086 as volume increased 18.9%, but average oil price fell 9.8% to $52.61 per barrel. Gas sales fell 54.0% to $94,664, primarily as the average price dropped 53.6% to $1.30 per Mcf; gas volume was down 1.1%.
- For the six months, oil sales increased 5.1% to $1,119,522, with volume up 15.8% and average price down 9.2% to $54.08 per barrel. Gas sales declined 45.7% to $197,922, reflecting a 45.8% decrease in average price to $1.37 per Mcf and a 1.6% volume decline.
- Operating expenses were $700,655 for the quarter and $1,448,096 for six months. General and administrative expense increased 13% and 19%, respectively, with higher accounting, legal and other professional costs cited. Production expense decreased 9% and 12%, respectively.
- Operating margin was approximately negative 12.0% for the quarter and negative 9.3% for six months, versus positive 4.0% and 3.4% in the corresponding 2018 periods. No income tax expense was recorded; the company fully reserved its $1.30 million deferred tax asset on the basis that realization was not considered more likely than not.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $342,938, down 31% from $498,537. Investing cash outflow was $915,691, including $842,139 for oil and gas property additions and $100,000 for an investment. Financing provided $515,000, principally net credit-facility borrowings. Cash declined $57,753 to $70,499.
- At September 30, 2019, current assets were $458,810 and current liabilities $212,410, for working capital of $246,400, down $149,495 from March 31. Total assets were $9.88 million, total liabilities $1.57 million and shareholders’ equity $8.31 million.
- Long-term debt was $482,656 net of unamortized issuance costs, representing $515,000 outstanding on a $1 million secured revolving facility; $485,000 was available at September 30. The facility bears interest at prime plus 0.5%, matures December 28, 2021, and is secured by substantially all oil and gas properties and subsidiary stock. Mexco reported covenant compliance. The agreement restricts cash dividends without lender permission and prohibits hedging oil and gas prices.
- Subsequent credit-facility activity: a $50,000 payment on October 17 and a $60,000 borrowing on November 8 left $525,000 outstanding. Operating lease assets and liabilities of approximately $109,000 were recognized upon adoption of the lease accounting standard on April 1, 2019.
Developments, outlook and risks
- Mexco planned to participate in approximately 55 horizontal wells for fiscal 2020 at an estimated aggregate cost of approximately $1.7 million. It reported participation in the first 27 wells during the six-month period, with approximately $600,000 in costs, and a further $61,000 for four wells afterward. It also spent $186,000 completing four wells that began production in June 2019.
- The company committed up to $250,000 to a less-than-1% cost-basis investment in an LLC acquiring Ohio mineral interests; $100,000 had been funded by September 30. Management said projects may be funded by cash flow, credit-facility borrowings or sales of non-core assets, and noted that asset sales may be needed to meet obligations.
- Management cited lower natural-gas prices, including a 46% price decline as a driver of lower operating cash flow, and described commodity-price volatility as a key uncertainty. It said a new Permian-to-Gulf Coast gas pipeline began operating in September 2019, alleviating then-current capacity constraints, but future disruptions remain uncertain.
- Oil and gas price declines could reduce cash flow, reserves and borrowing capacity, impair financing and capital spending, or trigger a full-cost accounting write-down. The company does not hedge commodity prices. A 1 percentage-point change in the facility interest rate would change annual pretax income by approximately $5,150 at the September 30 balance.
- Management reported no material changes to previously disclosed risk factors, no known material legal proceedings, and effective disclosure controls. It provided no specific earnings or production guidance beyond the well-participation plan.
Important facts to verify
- Confirm the well program’s remaining fiscal-year cost and funding needs against cash, operating cash generation and current borrowing availability.
- Monitor the credit-facility balance, borrowing base, covenant compliance, floating interest rate and lender restrictions; note the reported November 8 balance of $525,000.
- Track realized oil and gas prices, production volumes, pipeline takeaway conditions and the impact on reserves, liquidity and potential impairment.
- Reconcile management’s six-month results narrative: it says oil prices increased, while the accompanying table reports average oil price of $54.08 per barrel versus $59.58 in 2018, a 9.2% decrease.
- Assess whether the fully valued deferred tax asset, planned investment commitment and lease obligations affect future liquidity or reported results.