Mexco Energy Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2017. The filing also reports fourth-quarter results; it is not a standalone calendar 2016 Q4 report.
Business context
Mexco is a small independent oil and gas producer, focused primarily on the Permian Basin and holding interests in properties across 13 states. Most properties are operated by others. At year-end it had interests in approximately 6,000 gross wells (28 net) and 4,202 net acres. Chairman and CEO Nicholas C. Taylor beneficially owned approximately 46% of common shares.
Key financial and operating metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total operating revenue | $2.525 million | $2.422 million |
| Oil and gas revenue | $2.337 million | $2.384 million |
| Operating loss | $543,000 | $4.470 million |
| Net loss | $695,000; $0.34 per share | $3.980 million; $1.95 per share |
| Cash from operating activities | $312,000 | $176,000 |
| Cash and cash equivalents | $73,000 | $34,000 |
| Working capital | $368,000 | $23,000 |
| Long-term debt | $2.900 million | $5.580 million |
FY2017 operating and net margins were approximately negative 21% and negative 28%, respectively, based on total operating revenue. Oil production fell 11% to 34,689 barrels and gas production fell 13% to 356,268 Mcf. Average realized oil price rose 7% to $43.75 per barrel and gas price rose 20% to $2.30 per Mcf. Production cost per BOE declined to $7.63 from $8.84.
At March 31, 2017, proved reserves were 3.238 million BOE, up from 2.051 million BOE. Approximately 67% were proved undeveloped. PV-10 was $25.266 million; the standardized measure of discounted future net cash flows was $19.083 million. These reserve measures rely on SEC pricing assumptions and are not estimates of market value.
Changes versus the prior period
- Net loss narrowed by $3.285 million, principally because FY2016 included a $2.984 million impairment charge; no ceiling-test impairment was recorded in FY2017.
- Oil and gas sales declined 2% as lower production outweighed improved realized prices. Total operating revenue increased 4%, including $188,000 of other revenue, primarily a royalty-underpayment settlement.
- Production expense fell 23%, DD&A fell 25%, general and administrative expense fell 15%, and interest expense fell 11%.
- Operating cash flow increased 78%. Property-sale proceeds and drilling refunds totaled approximately $3.314 million; Mexco used $2.680 million to repay its credit line. Year-end debt declined to $2.900 million.
- Reserve growth reflected extensions and discoveries and upward revisions, including revisions attributed to pricing and successful development in the Delaware and Midland Basins. Mexco added 1.192 million BOE through extensions and discoveries, recorded upward revisions of 363,000 BOE, and sold 274,000 BOE of reserves.
Outlook, risks and unusual items
Management said operating cash flow and property or share sales were expected to provide adequate liquidity for the next fiscal year. FY2018 priorities were cost reduction, divestiture of non-core assets, balancing capital spending with cash flow, reducing debt and maintaining liquidity. The company planned further Permian Basin participation but noted that project funding may depend on asset sales or equity issuance. No formal earnings or production guidance was provided.
- The Bank of America facility had a $2.900 million balance against a $2.950 million borrowing base at year-end, with no remaining availability. It matured November 30, 2020, bore floating LIBOR plus 3 percentage points (3.983% at year-end), and was secured by substantially all oil and gas properties. Mexco reported covenant compliance.
- Commodity-price declines could reduce revenues, reserves and the borrowing base, constrain spending, or trigger a noncash full-cost impairment. A one-dollar-per-Mcf change in average gas price would change annual oil and gas revenue by approximately $356,000; a five-dollar-per-barrel oil-price change by approximately $175,000.
- Development risk is significant: the company estimated $28.8 million of future development costs for year-end PUDs. Recoverability depends on development execution, operator decisions, prices and financing.
- Asset sales included interests in Glasscock County, Pecos County and Oklahoma. A $148,614 royalty-underpayment settlement contributed to other revenue. The company also reported $978,000 of asset-retirement obligations and noted environmental, plugging, non-operated-property and customer-concentration risks.
- The company had no open oil-price swaps at year-end. It recorded a full valuation allowance against its $1.138 million net deferred tax asset and stated it was more likely than not the deferred tax assets would not be realized.
- Auditors issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting and disclosure controls were effective; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Current borrowing-base availability, covenant headroom and subsequent debt repayment; the filing reports the credit-line balance was $2.476 million as of June 23, 2017.
- Whether the substantial PUD inventory can be developed on schedule and funded, and how much of the projected development activity is controlled by third-party operators.
- Whether production, realized prices and operating costs sustain the reported improvement in cash generation, given FY2017 cash flow depended in part on asset-sale proceeds for debt reduction.
- The reserve estimates, pricing assumptions, and reconciliation between reported reserve additions, sales and revisions; reserve estimates are inherently uncertain.
- Potential effects of unrecognized tax benefits of $745,000, environmental and plugging obligations, and the company’s concentrated ownership and customer exposure.